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https://www.courtlistener.com/api/rest/v3/opinions/8495329/ | MEMORANDUM OPINION and ORDER
BARRY S. SCHERMER, Bankruptcy Judge.
On July 11, 2012, this Court conducted its hearing in this miscellaneous proceeding to consider the United States Trustee’s Omnibus Motion For Examination Of Services Rendered And Fees Paid To The Dellutri Law Group And Motion To Compel The Filing Of Supplemental Disclosure Of Attorney Compensation, Fees And Expenses In Pre-Confirmed Chapter 13 Cases. (The “Omnibus Motion” (D.E. 1)). Trial Attorney J. Steven Wilkes appeared on behalf of the United States Trustee for Region 21, and The Dellutri Law Group’s (the “Firm”) principal, Carmen Dellutri, and the Firm’s counsel, Carlos L. de Za-yas, appeared for the Firm. The parties addressed the Court at the July 11, 2012 hearing on the Omnibus Motion, and the Court took the matter under advisement.
The issues presented in this miscellaneous proceeding concern whether the Firm violated either the no-look, soup-to-nuts presumptive compensation order, (the “No-Look Order”), currently governing Chapter 13 compensation, or the order establishing duties entered in each Chapter 13 case, (the “First Day Order”), in the Fort Myers Division of the Court by seeking and/or collecting: (1) undisclosed compensation; (2) undisclosed costs; and (3) fees or expenses in excess of those permitted to be charged to Chapter 13 debtors by the No-Look Order.1 Therefore, the issues raised in this miscellaneous proceeding arise from the confluence of three matters, the Court’s No-Look Order, the Court’s First Day Order, and the compensation of fees and expenses of the Firm in its Chapter 13 cases.
The portion of this Court’s No-Look Order that applies in this miscellaneous proceeding states that:
[A]ll services rendered by the debtor’s attorney and expenses incurred in connection therewith, except the expenses noted below in this paragraph, from the beginning of the representation through 36 or 60 (whichever the total length of the plan is) months after the date of the order confirming plan shall be fully compensated by the base Presumptively Reasonable Fee. An attorney may collect an additional pre-petition amount for the following expenses: the statutory filing fee and any fee charged by a third-party provider for credit counseling and the education course required by BAPC-PA.
*646See No-Look Order, Admin Order FTM-2010-1, pp. 2-3, para. 4.
Additionally, though not as directly applicable in this case, the No-Look Order also provides that:
After the petition is filed, a debtor’s attorney may not request cash or in any way condition providing any services to the debtor on a cash payment for any post-petition services ... Payment of the fees for such services shall be limited to the allowance of an administrative expense ...
See Id,., at pg. 3, para. 6. The No-Look Order will be discussed in more detail below.
The applicable provision of this Court’s First Day Order in this miscellaneous proceeding is:
Attorney’s Fees. Consistent with Rule 2016(b), the Debtor’s attorney must file supplemental disclosures for all payments received from the Debtor after this case is filed. Failure to file the required disclosures may result in the disgorgement of fees paid. Pursuant to Rule 2016(b), a pre-petition retainer paid to counsel for the Debtor, whether received from the Debtor or other person for the benefit of the Debtor, must be disclosed in writing to the Court and to the Trustee....
See First Day Order, e.g., In re Williams, 9:11-bk-05085-BSS, Doc. No. 10, pg. 5, para. 12, entered April 4, 2011. This Court enters a First Day Order, in substantially similar format, in every Chapter 13 case.
The parties presented this Court with stipulated facts and proposed conclusions of law. This Court now renders its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable by Federal Rule of Bankruptcy Procedure (Fed. R. Bankr.P.) 7052.
The Firm has expressly consented to jurisdiction by the Court for the entry of final orders and judgments by this Bankruptcy Court and has further waived any appeal from these proceedings.
Stipulated Findings of Fact
The Firm is a law firm of 2 — 8 attorneys whose managing partner is Carmen Dellu-tri. Mr. Dellutri is certified in consumer bankruptcy by the American Board of Certification. Each one of the Firm’s attorneys is duly admitted to practice in the United States District and Bankruptcy Courts for the Middle District of Florida. For over twelve years, the Firm, through its attorneys, has actively provided bankruptcy representation services to its clients in cases commenced under Chapters 7, 11, and 13.
This miscellaneous proceeding encompasses all Chapter 13 cases commenced by the Firm on behalf of its debtor-clients during the time period of January 2007 through May 2012 (the “Cases”). During that time period, the Firm commenced approximately 2,259 Chapter 13 cases, an overall average filing of 35 Chapter 13 cases per month.2 In the Cases, the Firm filed disclosures of attorney compensation statements. Additionally, the debtors filed Statements of Financial Affairs and Chapter 13 plans in the Cases. These filings all constitute judicial admissions in accordance with Fed. R. Bankr.P. 1008, 2016; 11 U.S.C. §§ 329, 521; and 28 U.S.C. § 1746.
*647Prior to the United States Trustee’s commencement of this miscellaneous proceeding, the Firm approached and reported the underlying issues to the Office of the United States Trustee. At that time, although the United States Trustee was investigating the matters that are the subject of this miscellaneous proceeding, the Firm was without knowledge of the Office of the United States Trustee’s ongoing investigation. After the commencement of this miscellaneous proceeding, the Firm prepared a thorough, complete, and exhaustive self-audit report.3 Together, these form the evidentiary basis for the Court’s stipulated findings of fact.
The United States Trustee asserts through his Omnibus Motion and memorandum in support thereof that the Firm has “failed to fully and completely disclose payments of all fees and expenses,” by having “failed to fully and accurately disclose all pre-petition payments as well as failed to provide supplemental disclosure of all post-petition request[s] for compensation made directly to the debtor and receipt of payment thereof.”
The Firm’s self-audit established that between mid-2008 and mid-2011 there were expenses collected from clients that were not fully and completely disclosed or authorized. Beginning in mid-May of 2008, the Firm began charging Chapter 13 debtors an additional pre-petition expense named a “miscellaneous fee” in the amount of $50 per individual case and $100 per joint case. This miscellaneous fee was collected from the debtors in order to recover recurring office overhead costs attributable to each file. The Firm increased the miscellaneous fee charge to $75 for individual cases and $150 for joint cases beginning in late July 2009.4 In August of 2011, the Firm stopped its practice of collecting a miscellaneous fee charge.5
The miscellaneous fee charges collected pre-petition by the Firm, although relatively small on a per-case basis, totaled $149,040.00 over the time period.6 In some cases, the addition of these office costs combined with the attorney’s fee charged were in excess of those allowed by the No-Look Order. Further, these costs were not disclosed by the Firm’s office in any filing with the Court.
Legal Analysis
Section 329(a) of Title 11 of the United States Code (the “Bankruptcy Code”), *648places an affirmative duty on debtors’ counsel to fully and completely disclose all fee arrangements and all payments, beginning one year before the date of the filing of the bankruptcy petition. Section 329(a) provides, in pertinent part:
(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall 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.
11 U.S.C. § 329(a). Further, pursuant to Fed. R. Bankr.P.2016(b), any payment to a debtor’s attorney for fees or costs must be disclosed:
(b) Disclosure of compensation paid or promised to attorney for debtor.
Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 14 days after the order for relief, or at another time as the court may direct, the statement required by § 329 of the Code, including whether the attorney has shared or agreed to share the compensation with any other entity. The statement shall include the particulars of any such sharing or agreement to share by the attorney, but the details of any agreement for the sharing of the compensation with a member or regular associate of the attorney’s law firm shall not be required. A supplemental statement shall be filed and transmitted to the United States trustee within 14 days after any payment or agreement not previously disclosed.
Fed. R. Bankr.P.2016(b) (emphasis added).
A. Required Disclosure of All Fees and Expenses: Time Period and Scope Compensation Must Be Disclosed From One Year Prior' to Petition to Closure of Case
Courts have uniformly interpreted Section 329(a) and Fed. R. Bankr.P. 2016(b) to require the attorney’s full and complete disclosure of any payment made by, for, or on behalf of a debtor as well as any agreement relating to compensation. See Brake v. Tavormina (In re Beverly Mfg. Corp.), 841 F.2d 365, 369-70 (11th Cir.1988); In re Becker, 469 B.R. 121 124-25 (Bankr.M.D.Fla.2012) (“Debtor’s attorneys are required to disclose all payments received from, or promised by, their debt- or clients, automatically and without reminding.”); In re Whaley, 282 B.R. 38, 41-42 (Bankr.M.D.Fla.2002); In re Century Plaza Associates, 154 B.R. 349, 352 (Bankr.S.D.Fla.1992) (Section 329(a) and Fed. R. Bankr.P.2016(b) “vests the Bankruptcy Court with the authority to review all professional fees paid to the debtor’s attorney.”). This disclosure mandate arises beginning one year pre-petition and is a continuing disclosure requirement while the bankruptcy case remains pending. See Fed. R. Bankr.P.2016(b) (last sentence); see also Fed. R. Bankr.P. 2017(b). This is due to Congress’ concern that such transactions with attorney may present “serious potential for evasion of creditor protection provisions of the bankruptcy laws,” and a “serious potential for overreaching by the debtor’s attorney,” and therefore such transactions are subjected to “careful scrutiny.” See H.R.Rep. No. 95-595, at 329 (1977), reprinted 1978 U.S.C.C.A.N. 5963, 6285.
*649The intent and responsibilities evidenced by these provisions are incorporated into the Court’s No-Look Order and First Day Order. These provisions protect the integrity of the bankruptcy system. The Court’s No-Look Order does not absolve debtor’s counsel from providing complete and accurate disclosures. “The disclosure system functions properly only when debtors’ attorneys automatically and voluntarily, without prompting from the Court or a party in interest, disclose all payments received.” In re Hackney, 347 B.R. 432, 442 (Bankr.M.D.Fla.2006). Likewise, the Court’s statutory obligation to review attorney compensation is not alleviated by entry of the No-Look Order. An attorney is required to “lay bare all of [his] dealings” concerning compensation so that the court and parties are not forced to “ferret out pertinent information.” In re Saturley, 131 B.R. 509, 517 (Bankr.D.Me.1991); see also, Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 881 (9th Cir.1995); Jensen v. U.S. Trustee (In re Smitty’s Truck Stop, Inc.), 210 B.R. 844, 848-49 (10th Cir. BAP 1997); In re Gay, 390, B.R. 562, 574 (Bankr.D.Md.2008)(citing In re Park-Helena Corp., 63 F.3d 877, 881 (9th Cir.1995)). “Coy or incomplete disclosures” are “less than the full measure of disclosure” required under the Bankruptcy Code and Rules, even if they arise merely by way of negligence or inadvertence. Saturley, 131 B.R. at 517; In re McTyeire, 357 B.R. 898, 904 (Bankr.M.D.Ga.2006).
B. All Compensation, Including Fees and Expenses, In Addition to All Compensation Agreements, Must Be Disclosed
Parties may argue that the disclosure requirements under § 329 and Rule 2016(b) only speak to the disclosure of compensation of attorney services, and do not require the disclosure of reimbursement of expenses. That argument is without merit. First, § 329 and Rules 2016(b) and 2017 require the disclosure of any agreement between the debtor and an attorney. Any fee agreement necessarily must address both compensation of attorney services as well as reimbursement of expenses. See R. Reg. Fla. Bar 4-1.5— Fees and Costs for Legal Services. This is further codified under Bankruptcy Code §§ 526-28 dealing with Assisted Persons in bankruptcy. See also 11 U.S.C. § 101(3). These requirements mandate that there shall be a fully executed written fee agreement, and that the terms and provisions of that fee agreement be fully and completely disclosed.
Second, § 329(a) provides what transactions between a debtor and an attorney must be disclosed. Those transactions are reviewable by the court through the magnifying lenses of § 330(a)(1), which in turn provides:
(a)(1) After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, a consumer privacy ombudsman appointed under section 332, an examiner, an ombudsman appointed under section 333, or a professional person employed under section 327 or 1103—
(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330 (emphasis added). Without full and complete disclosure of the fee agreement, including agreements and payment regarding expenses, debtor’s counsel *650would impermissibly force the court and parties to “ferret out pertinent information.” Saturley, 131 B.R. at 517.
Third, an attorney can only be reimbursed for actual and necessary expenses expended by the attorney on behalf of a debtor. Reimbursement of actual and necessary expenses may only be charged a client at the actual costs incurred by a professional under §§ 327-331; see also, Comment to R. Reg. Fla. Bar, 4-1.5 (“Filing fees, transcription, and the like should be charged to the client at the actual amount paid by the lawyer.”) (Emphasis added.); Matter of Connecticut Motor Lines, Inc., 336 F.2d 96, 108 (3rd Cir.1964) (recognizing that filing fees are necessary expenses). This is because, the attorney who collects more than the actual expense charged is creating an impermissible profit center in seeking reimbursement of expenses which are neither actual nor necessary under § 330(a)(1)(B).
Fourth, the debtor’s disclosure on the Statement of Financial Affairs, statement 9, requires the full and complete disclosure of all payments and transfers of property to an attorney for relief under the bankruptcy laws or for preparation of the petition in bankruptcy; not just payments for compensation of attorney services. These disclosures are generally prepared by debtors’ counsel for review and execution by the debtors under penalties of perjury. “The purpose of the requirement of filing a Statement of Financial Affairs is to furnish the [parties] with detailed information about the debtor’s financial condition, thereby saving the expense of long and protracted examination for the purpose of soliciting the information.” Garcia v. Coombs (In re Coombs), 193 B.R. 557, 563 (Bankr.S.D.Cal.1996). Neither a debtor nor debtor’s counsel is entitled to omit information or provide partial information simply because, in his view, the information provided is sufficient or the information omitted is of inconsequential value.
Finally, when a debtor’s transactions with an attorney are reviewed, they are reviewed by the court under Fed. R. Bankr.P.2017, which provides that: “If [the attorney’s] compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to — ...” (emphasis added). Rule 2017 further provides the court with the authority to review “any payment of money, or any transfer of property, or any agreement therefor.”.7 (emphasis added). Simply stated under §§ 329, 526-28, Fed. R. Bankr.P.2016(b) and 2017, it is beyond peradventure that debtors’ attorneys are mandated to disclose not only all of their fees and all of their expenses but also any and all agreements, be it with the debtor, for the debt- or, or on behalf of a debtor.
C. The No-Look Order “No Look Fee, ” and the First Day Order
A no look fee is a flat fee, usually adopted within a district by local rule or guideline, which permits counsel in a Chapter 13 case to receive a specific fee for a defined bundle of services without the requisite necessity of: (1) maintaining *651contemporaneous hourly time records; and (2) filing a fee application and giving notice under § 330 of the Bankruptcy Code and Fed.R. Bankr.P.2002 and 2016. Cossitt, James L., Chapter 13 No Look Fees, American Bankruptcy Institute, Proceedings of 28th Annual Spring Meeting, at 1121; see generally Professor Price “No Look” Attorneys’ Fees and the Attorneys tvho are Looking: An Empirical Analysis of Presumptively Approved Attorneys’ fees in Ch. 13 Bankruptcies and a Proposal for Reform, 20 ABI Law Rev. 291 (an analysis of no-look orders conducted on a national level). The United States Bankruptcy Court, Middle District of Florida, Tampa Division, initially entered the first No-Look Order in 2007. See, 8:07-mp-00002-MGW, (the “Tampa Order”).8 Attorneys in the Fort Myers Division operated under the Tampa Order until 2010. In 2010, Judge Paskay for the Fort Myers Division of the Middle District of Florida, adopted the findings of the Tampa Order, but with slightly modified terms, and entered the No-Look Order. See Admin. Order FTM-2010-1. Subsequently, Judge Adams for the Fort Myers Division entered an Amended No-Look Order to provide for recovery of “a la carte” compensa-ble items. See Admin. Order FTM-2010-2.9 The No-Look Order provides for a flat fee for compensation of services and the reimbursement of expenses associated with the filing fee, credit counseling and financial management courses.
A First Day Order is entered in every chapter 13 case in the Fort Myers Division. The First Day Order, consistent with Fed. R. Bankr.P.2016(b), requires disclosure of pre-petition payments, be they “from the debtor or other person for the benefit of the debtor.” Like Rule 2016(b), the First Day Order does not provide for any exceptions from compliance.
Conclusions
There are three issues to resolve in this miscellaneous proceeding. First, as highlighted through the above analysis, there is an obligation for disclosure. This Court concludes that the “Miscellaneous Fee” expense charged by the Firm should have been disclosed by the Firm on its § 329 disclosure of attorney compensation. This provides a coherent, cohesive, and consistent disclosure of the pre-petition transactions, property transfers, and payments mandated by the Bankruptcy Code and Rules. Only toward the end of the Firm’s practice of collecting the Miscellaneous Fee were the debtors disclosing such payments on their Statements of Financial Affairs. See generally, In re Williams, 9:11-bk-05085-BSS, contra In re Watson, 9:11-bk14958-FMD. This is likewise true with respect to the Firm’s § 329 disclosures. See generally, In re *652Williams, 9:11-bk-05085-BSS, contra In re Lucy, 9:11-bk-16667-BSS. This Court expressly rejects the proposition that the lack of space on AOC Form B208 10 is a license not to disclose expenses or agreements. It is relatively simple to provide a coherent, cohesive, and consistent disclosure of agreements and compensation in compliance with Fed. R. Bankr.P.2016(b) and 2017(b) that fully and accurately details these charges.
Second, expenses sought by an attorney must be not only actual but also necessary. The Firm instituted its collection of Miscellaneous Fee charges from debtors in order to recover recurring office overhead costs attributable to each file, but it did not disclose payment or receipt of Miscellaneous Fee charges until close to the end of this practice. “General overhead should be accounted for in a lawyer’s fee, whether the lawyer charges hourly, flat, or contingent fees.” See Comment to R. Reg. Fla. Bar 4-1.5; see also Stroock & Stroock & Lavan v. Hillsborough Holdings Corp. (In re Hillsborough Holdings Corp.), 127 F.3d 1398 (11th Cir.1997). “Overhead expenses” generally include: library expense, rent, utilities, secretarial/clerical expense, office supply expense, telephone expense, local commuting, and meal expenses of individual employees. See In re Global International Airways Corp., 38 B.R. 440, 444 (Bankr.W.D.Mo.1984) (disallowed secretarial expense claim); In re Rego Crescent Corp., 37 B.R. 1000, 1009, 1012, 1018 (Bankr.E.D.N.Y.1984) (disallowed request for allowance of local transportation, library, secretarial and in-town meal expense); In re Horn & Hardart Baking Co., 30 B.R. 938, 942 (Bankr.E.D.Pa.1983) (disallowed request for allowance of clerical, support staff expense). These expenses have a common characteristic in that they are incurred by a firm on a day-to-day basis, no matter whom it represents.
The No-Look Order and First Day Order together strive to provide Chapter 13 practitioners with a streamlined administration of Chapter 13 cases and their compensation for services and reimbursement of expenses. The No-Look Order is envisioned to provide the Chapter 13 practitioner with a total package of compensation that fairly reimburses attorneys for services and actual expenses. A practitioner may deviate from compliance with the No-Look Order by maintaining contemporaneous time records, preparing, filing and serving fee applications, and establishing the entitlement to compensation and reimbursement at a hearing. However, a practitioner is not free to deviate from the No-Look Order by collecting undisclosed additional fees, regardless of what moniker is used to identify those ‘fees.’
The third issue raised goes to the disclosure by debtors on them Statements of Financial Affairs. Statement 9 requires full and complete disclosure of each and every payment made to an attorney, regardless of whether paid by or on behalf of a debtor. Here, debtors failed to either disclose all pre-petition payments or the complete and total amount of the payments made to the Firm. Far worse than debtors’ false statement is that the Firm knew that, in fact, the amounts stated by debtors were not accurate and complete. However, the Firm prepared the inaccurate and incomplete statements for its clients, tendered them to the clients for *653execution, and filed the statements with this Court.
“The purpose of the requirement of filing a Statement of Financial Affairs is to furnish the trustee and creditors with detailed information about the debtor’s financial condition, thereby saving the expense of long and protracted examination for the purpose of soliciting the information.” See Garcia v. Coombs (In re Coombs), 193 B.R. 557, 563 (Bankr.S.D.Cal.1996). This requires full and complete disclosure of the precise nature of all of a debtor’s assets, liabilities, and financial affairs prior to and surrounding the commencement of the case. Neither a debtor nor debtor’s counsel is entitled to omit information or provide partial incomplete information simply because, in his view, the information provided is sufficient to allow the trustee to determine the value of a debtor’s estate or the debtor’s financial affairs. The Firm’s failure to ensure that its clients fully and accurately disclose their relationships, agreements, arrangements, payments, and dealings with bankruptcy counsel brings into strong question the veracity of debtors’ entire schedules and statements.
A. Disgorgement, Civil Penalties, and Sanctions
This Court addresses the sanctions for the Firm’s actions over the last five years in its Chapter 13 cases. An attorney’s disclosures under §§ 327(a) and 329(a) are “central to the integrity of the bankruptcy process,” and the failure to disclose is sanctionable. In re Andreas, 373 B.R. 864, 872 (Bankr.N.D.Ill.2007). An attorney who fails to comply with the requirements of § 329(a) and Rule 2016(b) is subject to “forfeiture of ‘any right to receive compensation for services rendered on behalf of the debtor,’ and the disgorgement of any funds already paid by the debtor.” McTyeire, 357 B.R. at 904, quoting In re Woodward, 229 B.R. 468, 473 (Bankr.N.D.Okla.1999); see also Henderson v. Kisseberth (In re Kisseberth), 273 F.3d 714, 721 (6th Cir.2001); Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir.1997), In re Investment Bankers, Inc., 4 F.3d 1556, 1565 (10th Cir.1993); and In re Fricker, 131 B.R. 932, 938-39 (Bankr.E.D.Pa.1991). “The sanctions can include partial or total denial of compensation as well as partial or total disgorgement of fees paid. ‘Many courts, perhaps the majority, punish defective disclosure by denying all compensation.’ ” Mapother & Mapother, P.S.C. v. Cooper, 103 F.3d 472, 477-78 (6th Cir.1996) (affirming disgorgement of retainer and noting “the courts have denied all fees” where an attorney failed to disclose his fee arrangement pursuant to Section 329 and Fed. R. Bankr.P.2016); Investment Bankers, 4 F.3d at 1565 (stating that “an attorney who fails to comply with the requirements of § 329 forfeits any right to receive compensation for services”); Smitty’s Truck Stop, 210 B.R. at 848 (failure to disclose justifies denial of all compensation).
In a typical bankruptcy case in which debtor’s counsel had failed to comply with the mandates of §§ 329, 526-28, Fed. R. Bankr.P.2016 and 2017, the case law cited above would provide a solid foundation for the Court to disgorge all fees paid and deny all future compensation as a sanction. This is not a typical bankruptcy case; this is a miscellaneous proceeding subsuming 2,259 cases filed over a five year time period. A general concept of sanction normally seen in a singular case would prove punitive in application as against a myriad of cases. A civil sanction is remedial in nature and intended to enforce compliance. See McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 69 *654S.Ct. 497, 499, 93 L.Ed. 599 (1949). Therefore, the Court must weigh the offense against the integrity of the system, and render a civil penalty sufficient to deter future non-compliance by the Firm and others, while not being so burdensome as to become punitive in nature.
A strong mitigating factor that this Court weighs in favor of the Firm is that without knowledge of the ongoing investigation, the Firm approached the United States Trustee to raise with him the underlying discrepancies which were ultimately demonstrated through this miscellaneous proceeding. This self-reporting is laudatory for the Firm and should present a clear message to the practicing bar. The legal community is a self-regulatory community. Although the adage that ‘no good deed goes unpunished’ appears true in this proceeding, the sanctions entered herein would likely have been much greater without the Firm’s self-report.
A second mitigating factor weighed by this Court in favor of the Firm is the fact that the Firm was forthright with these matters, affording this Court and the United States Trustee with its full cooperation. The Firm conducted a thorough and exhaustive audit of its own records, books, and compensation receipts. By preparing and providing these audit reports, the Firm streamlined the discovery and evi-dentiary hurdles which would have been evident in reviewing 2,259 individual cases.
A third mitigating factor in the Firm’s favor is that the Firm did not seek or collect the maximum compensation available to an attorney under the No-Look Order in numerous cases. Even when the Miscellaneous Fee is factored in to the total compensation, the Firm did not collect the maximum compensation in those cases. Although this does not absolve the Firm of its non-disclosures, it is a factor this Court weighs in determining the amount of civil penalty and sanction.
Additional mitigating factors considered by this Court are: (1) the Firm has already refunded post-petition compensation to the clients in those three Chapter 13 cases in which the Firm impermissibly sought and collected post-petition compensation for amending Chapter 13 plans; (2) the Firm is agreeing to the refund of the undisclosed Miscellaneous Fees charged in Chapter 13 cases; and (3) the Firm agrees that this Memorandum Opinion and Order should be published as an instructive and remedial means to the practicing bar. The publication of this Memorandum Opinion and Order provides its own public reprimand of the Firm’s actions, inactions, and omissions.11
Finally, the Firm conceded that the issues raised by the United States Trustee went to the central core of the integrity of the bankruptcy system. If the parties cannot rely upon the disclosures made by the officers of the court in their respective cases, then the very veracity of the debtors’ disclosures, as prepared by those professionals, would always be suspect. Both the Firm and its clients failed to provide disclosures that lay bare all agreements, transactions, payments, and transfers in a full and accurate coherent, cohesive, and consistent statements that could be relied upon by this Court and the parties. The Firm should not have found itself in this predicament and caused the clients to unwittingly submit inaccurate information in their schedules. See 11 U.S.C. § 526(a)(l-4), 521, see generally 11 U.S.C. *655§§ 707(b)(4), 727(a)(4), and Fed. R. Bankr.P. 9011.
There are factors that are either neutral or weigh against the Firm. First, the Firm did disclose the Miscellaneous Fee to the clients in its Chapter 13 fee agreements with the clients. As mandated by § 329(a) and Fed. R. Bankr.P.2016(b), full and complete disclosure of any and all agreements regarding compensation of fees and expenses are to be disclosed to this Court and the parties. It matters not that the client knew of the Miscellaneous Fee. To this extent, this factor is neutral. It becomes an aggravating factor when considered in light of the statutory duties both a debtor and the Firm hold to fully and accurately disclose all payments made by or on behalf of a debtor to the Firm. See 11 U.S.C. §§ 329, 526, and 521.
Second, there may be an argument that there is a lack of clarity with respect to certain applicable provisions of the No-Look Order and the First Day Order. This was addressed by this Court in Whit-comb, 479 B.R. at 144, and not wholly adopted by this Court. Likewise, this Court’s First Day Order was entered after a lengthy notice, comment time period, and a full day evidentiary hearing was conducted en banc.12 The No-Look and First Day Orders are clear with respect to what they provide, what is compensable, and what disclosures are required. However, if the Firm was unclear with respect to what an order meant or how it must operate in compliance with that order, the Firm should have sought clarification of the order, rather than unilaterally deciding to commence charging clients additional and undisclosed expenses contrary to the language of both the No-Look and First Day Orders. This admonition, though, should not be taken as an invitation to seek clarification at every turn.
The Firm is managed by an attorney certified in the consumer bankruptcy practice. The No-Look Order and the First Day Order are both clear on what an attorney may seek and may collect, as well as what is required to be disclosed. There is a lack of clarity in these orders regarding post-petition actual and necessary court filing fee expenses for amendments and conversions. Again, debtors’ counsel should not have found itself in this predicament.
After weighing the Firm’s mitigating, neutral, and aggravating factors, this Court finds and concludes that the Firm did not exercise a willful intent to deceive or intentionally seek to circumvent the No-Look Order or First Day Order. This Court further finds and concludes that neither the Firm nor any of its present or past attorneys committed any intentional unethical conduct with respect to the issues specifically raised in this miscellaneous proceeding.
However, the absence of willfulness does not relieve one of a violation. The Eleventh Circuit has defined the requisite burden of proof for willfulness in terms of violation of an order in bankruptcy. See Jove Engineering, Inc. v. IRS (In re Jove Engineering, Inc.), 92 F.3d 1539, 1555 (11th Cir.1996). Under Jove Engineering, a court order is violated upon a showing that: (1) the person knew of the order; and (2) intentionally committed an act in *656violation of the order, regardless of whether the violator specifically intended to violate the order. Id. The Firm has been operating its Chapter 13 practice under some iteration of the No-Look Order and First Day Order since the adoption of these orders. The Firm sought and collected from Chapter 13 debtors Miscellaneous Fees without disclosure. Under McComb, 336 U.S. at 191, 69 S.Ct. 497 “it matters not with what intent the defendant did the prohibited act.”
Therefore, this Court finds and concludes that it would be excessive, unjust, punitive, and unfair to order the disgorgement of all compensation received by the Firm in its 2,259 bankruptcy cases at issue. Likewise, under the facts in this miscellaneous proceeding covering an expanse of 2,259 cases, the disgorgement of $149,040.00, which amounts to all of the undisclosed and unauthorized Miscellaneous Fee charges, would also prove to be punitive.
The Firm has agreed to refund to the Chapter 13 trustee the undisclosed funds received by the Firm in all cases which remain pending, as identified by the Parties’ spreadsheet. This amounts to $42,675.00. These fees are to be paid in lump sum to the Chapter 13 trustee’s office as additional disbursements under § 1326 for the benefit of the estate creditors to the pending applicable Chapter 13 cases.13
These funds shall not change any payments from a debtor to the Chapter 13 trustee in his individual case but instead are to provide additional disbursements to holders of allowed unsecured claims, less any administrative fees of the Chapter 13 trustee. Because of the single case amount of $50-$200, the judgment entered in this miscellaneous proceeding shall constitute sufficient and adequate modification of those plans under §§ 102, 105(a), and 1329. To the extent, if any, that there remain surplus funds, due to a case closing in the interim, the Chapter 13 trustee is directed to pay such sums to the respective debtor(s).
As additional civil penalties, sanctions, and attorney fees, the Firm shall also pay unto the United States Trustee an amount of $8,750, in accordance with § 526-528. Further, the Firm shall also pay to a nonprofit pro bono legal services provider, as agreed to by the parties, servicing the Fort Myers Division an amount of $8,000 as civil penalties and sanctions under the Bankruptcy Code and Rules; or, at the pro bono legal services provider’s option, in lieu of the $8,000 payment, the Firm shall provide a total of forty-eight (48) hours of attorney time in bankruptcy cases filed by the pro bono legal services provider. In the pro bono cases, the debtor shall pay the associated court fees in such cases unless a fee waiver or in forma pauperis proceeding is available. The Firm shall have thirty (30) days from the entry of the judgment to provide the payment by certified funds of these additional civil penalties, sanctions, and attorney fees. Finally, the Firm shall provide pro bono Chapter 7 legal services in 24 individual or joint Chapter 7 cases filed in the Middle District of Florida over the next twelve (12) months, and provide proof of pro bono filing to the United States Trustee. The Court finds and concludes that such disgorgement, civil penalties, sanctions, and attorney fees are warranted in this miscellaneous proceeding, provided for under the Bankruptcy Code and Rules, not so burdensome as to be punitive, deter future non-compliance, ensure the integrity of the *657bankruptcy system, and maintain a fair and reasonable process for the bar. This Court shall enter a separate judgment in accordance with this Memorandum Opinion and Order.
It is so ordered.
DONE and ORDERED.
JUDGMENT
Before this Court is the miscellaneous proceeding to consider the United States Trustee’s Omnibus Motion for Examination of Services Rendered and Fees Paid to The Dellutri Law Group (Doc. No. 1). Carlos de Zayas and Carmen Dellutri appeared on behalf of the Dellutri Law Group and Trial Attorney J. Steven Wilkes appeared on behalf of the United States Trustee for Region 21. The Parties presented stipulated facts and proposed conclusions of law. This Court has contemporaneously entered a Memorandum Opinion and Order containing the Court’s findings of fact and conclusions of law.
Accordingly, upon the foregoing and for the reasons set forth in this Court’s Memorandum Opinion and Order, IT IS ORDERED, ADJUDGED, and DECREED that:
1. Judgment is hereby entered in favor of the United States Trustee for Region 21 and against The Dellutri Law Group, as follows:
2. The Dellutri Law Group is further ORDERED to PAY civil penalties, attorney fees, and sanctions under 11 U.S.C. §§ 105(a), 829, and 526-28, via THREE (3), (or FOUR (4) if cases are pending before both Standing Chapter 13 Trustees), CERTIFIED FUND checks, delivered to the United States Trustee, 501 East Polk Street, Suite 1200, Tampa, Florida 33602 within thirty (30) days of this judgment, the following:
a. $8,750 made payable to the United States Trustee;
b. $8,000 made payable to the pro-bono organization, Florida Rural Legal Services, Inc.; or in lieu of said payment, 48 hours of attorney time, at Florida Rural Legal Services’ option. On any cases filed on behalf of a debtor for clients of Florida Rural Legal Services, the debtor will pay court fees unless a fee waiver or proceeding in forma pauperis is available.
c. A total of $42,675, made payable to either Chapter 13 Standing Trustee Jon Waage, Chapter 13 Trustee Terry Smith, or either or both of them (as applicable to cases pending before each Standing Chapter 13 Trustee);
d. Upon receipt of these payments, the United States Trustee shall mail the payments to the recipients and file a certification of mailing in this miscellaneous proceeding;
3. The Dellutri Law Group shall contemporaneously deliver a spreadsheet to the United States Trustee (or two, as applicable) for delivery to the appropriate Chapter 13 Standing Trustee(s) that delineates all pending applicable Chapter 13 cases assigned to each Chapter 13 Trustee by case number, case name, and amount to be paid to each respective pending case from the $42,675 disgorgement ordered above;
4. Chapter 13 Standing Trustees Jon Waage and/or Terry Smith, as applicable, are hereby DIRECTED to accept the $42,675 disgorgement funds and the accompanying spreadsheet *658and disburse those funds in accordance with the spreadsheet;
a. These disbursements shall be additional disbursements under 11 U.S.C. § 1326 for the benefit of the estate creditors to the pending applicable Chapter 13 cases;
b. These funds shall not change any payments from a debtor to the Chapter 13 trustee in any individual case, but instead are providing additional disbursements to holders of allowed general unsecured claims, less any administrative fees of the Chapter 13 trustee;
c. To the extent that there any funds remaining in any individual case, due to either the allowed general unsecured claims already having been paid in full or there are extra funds after the allowed general unsecured claims are paid in full the remaining funds, if any will be disbursed in accordance with the confirmed plan less any administrative fees of the Chapter 13 trustee;
d. The Chapter 13 Standing Trustee shall pay the sums to the pending cases as provided for in the spreadsheet; and
e. To the extent, if any, that there remains funds, due to either creditors already having been paid in full or a ease closing in the interim, the Chapter 13 Standing Trustee is directed to pay those sums directly to the respective debtor(s) in those closed cases;
5.Due to the single case amount at issue being between $50-200, this judgment shall constitute sufficient and adequate motion, notice, and order of modification of those plans in accordance with 11 U.S.C. §§ 102, 105(a), 1323, and 1329 to the extent necessary, if any, to increase the amount of payments on claims of any particular class provided for by the plan;
6. Since the commencement of the miscellaneous proceeding, this Court has ordered that it is reserving ruling on attorney’s fees and costs to be awarded through the confirmed plan pending further order of this Court. This judgment shall constitute sufficient and adequate motion, notice and order of the modification of those plans in accordance with 11 U.S.C. §§ 102, 105(a), 1323, and 1329 and shall further constitute this Court’s further order allowing fees for compensation of services and reimbursement of expenses in those chapter 13 cases in accordance with this Court’s No-Look Fee and First Day Orders; as applied for by The Dellutri Law Group in each respective Chapter 13 Plan;
7. The Dellutri Law Group is further ORDERED and DIRECTED as additional civil penalties, in addition to any pro bono services provided in decretal paragraph 2.b, above, that The Dellutri Law Group shall provide pro bono legal assistance in TWENTY-FOUR (24) individual or joint chapter 7 bankruptcy cases filed in the United States Bankruptcy Court for the Middle District of Florida:
a. The Dellutri Law Group shall provide these pro bono case filings over the. next twelve (12) months after the entry of this judgment; and
b. The Dellutri Law Group shall provide proof of filing of each of these pro bono cases to the Office of the United States Trustee, Tampa, Florida;
*6598. The Clerk of this Bankruptcy Court shall maintain a copy of this Judgment in accordance with Fed. R. Bankr.P. 5003(c); and
9. Upon the filing of the United States Trustee’s certification of mailing, the Clerk of this Bankruptcy Court may close this miscellaneous proceeding.
DONE and ORDERED.
. The United States Trustee also raised allegations of seeking and receiving post-petition compensation without Court approval and contrary to the No-Look and First Day Orders for amendments to plans or schedules. The Firm did seek and collect post-petition compensation in three (3) cases for plan amendments. The Firm has already refunded those impermissible fees to the chapter 13 debtors. In light of that and the Court’s opinion of In re Whitcomb, 479 B.R. 133 (Bankr.M.D.Fla.2012), the United States Trustee is no longer raising this issue in this miscellaneous proceeding.
. This miscellaneous proceeding does not directly address any of the Firm's filings commencing cases originally under chapters 7 or 11. However, Mr. Dellutri has conducted the same self-audit and will comply on a going forward basis in Chapter 7 and 11 cases as well as in Chapter 13 cases.
. At the preliminary status conference, the parties agreed that the Firm would conduct a thorough and complete self-audit of all compensation and costs paid by, for, or on behalf of Chapter 13 debtors to the Firm, beginning in 2007 through the present time, and report such audit results to the United States Trustee. The Firm has completed that self-audit and the United States Trustee has had an opportunity to analyze the data. The parties and the Court are satisfied that formal discovery beyond the Firm's exhaustive self-audit report is not necessary to fully resolve the issues in this miscellaneous proceeding.
. The Firm's position is that, because of the additional costs required to comply with the BAPCPA amendments, it was faced with a decision to either lower the fees for legal services (and consequently, the value of the services received) or seek reimbursement of the costs associated with what it deemed to be proper representation of its client. In the Firm’s opinion, as a matter of policy, this is not a choice that Congress intended when BAPCPA was enacted, and may result in cost-saving measures that could adversely impact the value of services received.
. The Firm did reserve its argument that the costs were reasonable and necessary, and thus not inappropriate pursuant to its plain language interpretation of the Bankruptcy Code.
. The miscellaneous costs charged for all of 2012 totaled only $1,125.00. The Firm points out that the only reason any miscellaneous costs were charged in 2012 was because the Debtors had retained the firm prior to August 2011, when the costs were being charged.
. Fed. R. Bankr.P.2017(b) provides:
"(b) Payment or transfer to attorney after order for relief
On motion by the debtor, the United States trustee, or on the court’s own initiative, the court after notice and a hearing may determine whether any payment of money or any transfer of property, or any agreement therefor, by the debtor to an attorney after entry of an order for relief in a case under the Code is excessive, whether the payment or transfer is made or is to be made directly or indirectly, if the payment, transfer, or agreement therefor is for services in any way related to the case."
. For a more thorough history of the No-Look Order, see Whitcomb, 479 B.R. at 142-43,.
. The No Look Order, as Amended generally provides for the following:
1. A presumptively reasonable fee of $3,000 regardless of the length of the Chapter 13 plan;
2. A $275-$375 fee for certain “a la carte” motions, depending on whether a hearing is required (e.g., motion to amend or modify a plan);
3. Utilization of the lodestar method and contemporaneously kept time records as discussed in Newman, supra, only if the matter is an "extraordinary” matter;
4. Payment procedures to attorneys following the filing of the petition;
5. Payment procedures for payments to creditors pursuant to the Chapter 13 plan;
6. Authority for parties in interest to seek to disgorge excessive fees; and
7. Authority for parties, including the Chapter 13 Trustee, to object to fees despite presumptive reasonableness.
See No Look Order, at pp. 1-5, and Amended No Look Order, at p. 2.
. Form B203 is not an Official Form promulgated by the Judicial Conference under Fed. R. Bankr.P. 9009, but rather a court administrative form provided by the Administrative Office of the Courts.
. Although a copy of this Memorandum Opinion and Order will also be provided to the Florida State Bar, such shall not constitute a complaint or referral of the Firm or any past or present attorney practicing with the Firm. The copy of this Memorandum Opinion and Order is being provided solely for notice and compliance purposes only.
. This was "a result of additional requirements contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”), the passage of time, and efficiencies in the administration of chapter 13 cases created by this Court over the last several years, the Tampa Division Judges determined that it was appropriate to review their current procedures with respect to the presumptively reasonable fee for the attorneys for debtors in chapter 13 cases. See original No-Look Order (8:07-mp-00002) (en banc).
. The Firm shall provide a spreadsheet of the pending chapter 13 cases, delineating the case number, case name, and the amount to be paid to each case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495330/ | ORDER (I) SUSTAINING TRUSTEE’S OBJECTION TO CLAIM NO. 4-2, (II) DENYING FIRST CHOICE CREDIT UNION’S MOTION TO ALLOW LATE CLAIM. AND (III) DENYING TRUSTEE’S MOTION TO DISMISS CASE
ERIK P. KIMBALL, Judge, Bankruptcy Judge.
THIS MATTER came before the Court for hearing on October 11, 2012 upon the *661Amended Trustee’s Objection to Claim and Certificate of Service of Court Generated Notice of Hearing [ECF No. 76] (the “Objection”) filed by chapter 13 trustee Robin R. Weiner (the “Trustee”) and the Motion to Allow Claim No. 4-2 on Behalf of Creditor First Choice Credit Union [ECF No. 84] (the “Motion”) filed by First Choice Credit Union (“First Choice”). The Court also considered the Trustee’s ore tenus motion to dismiss this case. For the reasons stated more fully below, the Court will deny the Motion, sustain the Objection, strike First Choice’s Claim No. 4-2, and deny the Trustee’s motion to dismiss this case.
On May 3, 2011, Joseph Jackson, Sr. and Elizabeth B. Jackson (the “Debtors”) commenced this case by filing a voluntary petition for relief under chapter 13 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. First Choice was listed on the Debtors’ initial creditor matrix. ECF No. 1, p. 8. Counsel for First Choice filed a notice of appearance in this case on May 10,2011. ECF No. 8.
The Debtors’ filed their schedules on May 17, 2011. ECF No. 9. First Choice is listed twice on Schedule D, Creditors Holding Secured Claims, in connection with a loan secured by a vehicle and in connection with a loan (the “Mortgage Loan”) secured by a mortgage on a single family home located at 6160 S.E. Crooked Oak Avenue, Hobe Sound, Florida (the “Property”). The claim arising from the Mortgage Loan is the focus of the Motion and the Objection. Based on the Debtors’ valuation of the Property, the Debtors’ Schedule D indicates an unsecured deficiency claim of $214,713.00 on the Mortgage Loan. First Choice is not separately listed in the Debtors’ Schedule F, Creditors Holding Unsecured Nonpriority Claims.
The Debtors filed their initial chapter 13 plan on May 17, 2011. ECF No. 13. That plan provided for no payments to secured creditors through the plan. With regard to the Mortgage Loan, the Debtors’ initial plan stated as follows:
First Choice Credit Union (Account Number [redacted]): Debtors will pay claim directly at $3,000.00 per month. This amount represents a modified payment under HAMP toward the first and only mortgage on Debtors’ primary residence. In the event that the creditor denies the Debtors (sic) HAMP modification by filing a written notice of denial on the docket in this case, debtors shall modify their plan within 30 days of the date such notice is filed to include either a surrender of the property, or, to cure through the plan.
The provision in the Debtors’ initial plan addressing the Mortgage Loan is consistent with current practice among chapter 13 practitioners in this district. It permits First Choice to consider a pending request for loan modification under a federal program and, if the modification request is not approved, provides the Debtors an opportunity to amend the plan in a manner consistent with the requirements of chapter 13. In the meantime, the Debtors agreed to pay a monthly amount to First Choice consistent with an informal arrangement that has become common practice in this district (but is not specifically sanctioned by the Court).
On May 18, 2011, the Clerk of this Court issued a notice of the meeting of creditors pursuant to section1 341 which notice was provided to all creditors including First Choice. ECF Nos. 15 and 16. Consistent *662with Fed. R. Bankr.P. 3002(c), the notice informed creditors of the bar date for nongovernmental entities to file unsecured claims in this case, which was September 26, 2011.
On May 23, 2011, First Choice filed Claim No. 4-1. First Choice stated a secured claim in the amount of $514,533.37, secured by a mortgage on the Property. The proof of claim did not indicate any unsecured claim, nor did it indicate any intention of First Choice to amend or supplement its claim to include an unsecured deficiency claim at a later time. First Choice attached copies of the relevant note and mortgage to its proof of claim. Claim No. 4-1 was timely filed.
On June 6, 2011 and June 21, 2011, First Choice filed an objection and an amended objection to the Debtors’ initial chapter 13 plan. ECF Nos. 18 and 20. In each case First Choice challenged the Debtors’ initial chapter 13 plan as un-eonfirmable as a result of the Debtors’ failure to provide sufficient payments under section 1325(a) to First Choice on account of its secured claim.
On August 11, 2011, the Debtors filed their First Amended, Plan. ECF No. 29. Among other changes, the Debtors’ First Amended Plan provided that the Debtors would surrender the Property to First Choice. The First Amended Plan provided for no additional payment or distribution to First Choice on account of the Mortgage Loan.
On August 22, 2011, First Choice filed a motion for relief from the automatic stay, seeking to enforce its mortgage lien on the Property. ECF No. 39. First Choice’s motion for relief from stay was set for hearing on September 9, 2011. ECF No. 43. The Court granted First Choice’s motion for relief from stay by order entered September 26, 2011, providing First Choice with the ability to obtain in rem relief including possession of its collateral. ECF No. 55. The order granting First Choice’s motion for relief from stay does not address the possibility of a deficiency claim and, indeed, specifically prohibits First Choice from seeking an in personam judgment against the Debtors.
On November 15, 2011, the Debtors filed their Second Amended Plan [ECF No. 65] and on November 17, 2011 the Debtors filed their Third Amended Plan [ECF No. 66]. The Debtors’ Second and Third Amended Plans addressed First Choice’s Mortgage Loan in the same manner as their First Amended Plan. The Debtors stated their intent to surrender the Property to First Choice but provided no other distribution on account of the Mortgage Loan claim. The Third Amended Plan effectively treated the Mortgage Loan claim as fully secured, consistent with First Choice’s Claim No. 4-1.
The Debtors’ confirmation hearing was continued several times. Counsel for First Choice received electronic notification of each continued hearing and of each amended plan filed by the Debtors. The written confirmation objections previously filed by First Choice were moot as the Third Amended Plan did not provide for a stream of payments to First Choice on account of its Mortgage Loan. First Choice did not lodge an independent objection to confirmation of the Debtors’ Third Amended Plan. The Court confirmed the Debtors’ Third Amended Plan by order entered on December 7, 2011. ECF No. 68. The order confirming the Debtors’ Third Amended Plan was not stayed or appealed and became final in late December, 2011.
About two months after the confirmation order became final, on February 13, 2012, First Choice filed a so-called amended proof of claim designated Claim No. 4-2. For the first time First Choice presented *663part of its claim, $144,533.37, as an unsecured claim against the estate. As before, First Choice attached copies of the relevant note and mortgage to Claim No. 4-2.
On July 6, 2012, the Trustee filed her Objection to Claim No. 4-2. The Trustee argues that Claim No. 4-2 constitutes an attempt to change the status of First Choice’s claim from fully secured to partly unsecured and thus amounts to a new proof of claim rather than an amendment. The Trustee argues that this new claim is not timely as it was filed after the bar date.
First Choice filed a response and an amended response to the Trustee’s Objection. ECF Nos. 78 and 82. First Choice states that after the Debtors amended their plan to provide that the Property would be surrendered to First Choice, First Choice obtained possession of the Property but was unable to sell it. First Choice states that it estimated its unsecured deficiency claim and that Claim No. 4-2 represents that estimate. First Choice argues that Claim No. 4-2 represents a permissible amendment to Claim No. 4-1 because its original claim provided notice to the Court of the existence, nature, and amount of the entire claim and that it was First Choice’s intent to hold the estate liable. First Choice argues that its amended claim relates back to its timely-filed original claim because First Choice’s right to a deficiency arises from the same transaction and underlying debt reflected in its original proof of claim. First Choice states that “the Debtors, the Trustee, and all other parties in the case had sufficient reason to know from the original timely-filed proof of claim that the Creditor intended to pursue its claim under the note.” ECF No. 82, pp. 2-3.
In addition to its response and amended response, apparently at the suggestion of the Trustee, First Choice filed the Motion, seeking to obtain an order approving Claim No. 4-2 as a late filed claim. The Motion adds nothing to the Court’s analysis here. Indeed, in the Motion First Choice cites Fed. R. Bankr.P. 3003(c)(3) and 9006(b)(1), which are not applicable in this chapter 13 case. For this reason, the Motion will be denied.
In a chapter 13 case, Fed. R. Bankr.P. 3002(a) requires that an unsecured creditor file a proof of claim in order for the creditor’s claim to be allowed and paid through the chapter 13 plan.2 An unsecured claim of a creditor with notice of a chapter 13 case who fails to file a proof of claim is deemed disallowed under section 502(b)(9), is not entitled to any distribution under the plan pursuant to section 1325, and is subject to discharge under section 1328(a). Thus, failure to timely file an unsecured proof of claim is fatal to a creditor receiving anything on account of such claim in a chapter 13 case. If the debtor completes all of his or her plan payments, such an unfiled unsecured claim is discharged and the creditor may not recover on it. On the other hand, a creditor holding a claim secured by assets of a chapter 13 debtor need take no action to protect its interest in the collateral. Folendore v. United States Small Bus. Admin. (In re Folendore), 862 F.2d 1537, 1539 (11th Cir.1989); see also Fed. R. Bankr.P. 3002(a). A secured creditor’s lien rights are preserved in spite of the discharge of the debtor’s personal liability on the underlying claim.
In a chapter 11 or chapter 9 case, a creditor that fails to timely file a claim *664might argue that such failure was as a result of its excusable neglect. Fed. R. Bankr.P. 9006(b)(1); Pioneer Inv. Serv. Co. v. Brunswick Associates Ltd. P’ship, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). A creditor that fails to timely file an unsecured claim in a chapter 13, chapter 12, or chapter 7 case may not rely on such an argument. Fed. R. Bankr.P. 9006(b)(3) explicitly provides that the deadline for filing proofs of claim in a chapter 13 case may only be extended to the extent and under the conditions provided in Fed. R. Bankr.P. 3002(c). The exceptions listed in Rule 3002(c) are narrowly stated and none of them apply in this case.
It is possible for a creditor to amend a timely filed claim, even after the bar date. “[I]n a bankruptcy case, amendment to a claim is freely allowed where the purpose is to cure a defect in the claim as originally filed, to describe the claim with greater particularity or to plead a new theory of recovery on the facts set forth in the original claim.” United States v. Int’l Horizons, Inc. (In re Int’l Horizons, Inc.), 751 F.2d 1213, 1216 (11th Cir.1985). “Still, the court must subject post bar date amendments to careful scrutiny to assure that there was no attempt to file a new claim under the guise of an amendment.” In re Int’l Horizons, Inc., 751 F.2d at 1216; see also Highlands Ins. Co., Inc. v. Alliance Operating Corp. (In re Alliance Operating Corp.), 60 F.3d 1174, 1175 (5th Cir.1995) (“Bar dates ... are not to be vitiated by amendments.... Amendments to proofs of claim that change the nature of the claim ... set forth a new claim.”) (internal citation omitted). In general, “amendment is permitted only where the original claim provided notice to the court of the existence, nature, and amount of the claim and that it was the creditors’ intent to hold the estate liable.” In re Int’l Horizons, Inc., 751 F.2d at 1217.
Thus, the first question for the Court in connection with the Trustee’s Objection is whether Claim No. 4-2 is a permissible amendment to Claim No. 4-1. Claim No. 4-1 was timely. If Claim No. 4-2 is not an appropriate amendment to Claim No. 4-1, Claim No. 4-2 is not timely and must be stricken.
Under the test set out in In re International Horizons, First Choice’s Claim No. 4-2 does not constitute an amendment to Claim No. 4-1. Claim No. 4-2 does not cure a defect in the claim originally presented by First Choice, a wholly secured claim. Instead, it presents for the first time an unsecured claim against the estate. Nor does Claim No. 4-2 describe the claim with greater particularity or present a new theory of recovery. Indeed, it attaches the same documents that form the basis for Claim No. 4-1. First Choice’s original claim did not provide notice to the Court of the existence, nature, or amount of any unsecured claim, nor did it exhibit to the Court any intent on the part of First Choice to hold the estate liable for an unsecured claim. Claim 4-1 presented only a secured claim. By not presenting a timely unsecured claim, in spite of ample notice of this case and every document filed in it, First Choice elected not to participate as an unsecured creditor in any distribution from the estate.
To permit a re-classification of part of First Choice’s claim as an unsecured claim would have a significant impact in this case. The filing of Claim No. 4-1 as a fully secured claim has specific implications. While a secured creditor need not file a proof of claim to preserve its rights in collateral, doing so constitutes an admission of the amount of its secured claim for purposes of treatment under section 1325(a)(5). Assuming a debtor and credi*665tor have not reached agreement on the treatment of a secured claim, the debtor has the option of proposing deferred cash payments during the term of the plan under section 1325(a)(5)(B) or of surrendering the collateral to the creditor under section 1325(a)(5)(C). The Debtors selected the latter, including in their confirmed Third Amended Plan a provision that they would surrender the Property to First Choice. The Debtors’ Third Amended Plan was confirmed based in part on an analysis of the timely filed, allowed unsecured claims and appropriately did not take into account any potential deficiency claim that First Choice failed to file. Section 1325(a)(4) requires that the present value of distributions under the plan to unsecured creditors equal at least the amount they would receive in a chapter 7 liquidation. To apply this provision, the Court considers the value of all of a debt- or’s non-exempt assets that may be distributed in a chapter 7 case in light of all allowed claims. If a debtor has non-exempt assets of a value that would permit the payment in full of unsecured claims in chapter 7, section 1325(a)(4) could require the debtor to pay more than he or she is capable of paying on a monthly basis from regular income. The late addition of a large unsecured claim could result in a plan becoming infeasible and thus retroactively un-confirmable under section 1325(a)(6). The chapter 13 trustee and the Debtors agree that such would be the result here if First Choice’s tardy, unsecured claim is allowed.
Allowing a late-filed unsecured claim is detrimental to other unsecured creditors. In nearly all chapter 13 plans, the trustee receives a fixed monthly amount for distribution to the holders of allowed unsecured claims. In most cases unsecured claims will not be paid in full, and so the larger the universe of allowed unsecured claims, the smaller the distribution to each unsecured creditor. Section 1325(b)(1) empowers the holders of allowed unsecured claims to object to confirmation, thus forcing the debtor to pay a specified minimum amount on account of allowed unsecured claims. Holders of allowed unsecured claims are entitled to object to confirmation on other grounds, such as feasibility under section 1325(a)(6). But unsecured creditors are not compelled to object to confirmation. They necessarily decide whether to object to confirmation of a chapter 13 plan based in part on the aggregate amount of allowed unsecured claims in light of the debtor’s proposed plan payments. If a creditor can present an unsecured claim after the bar date, potentially adding a significant claim to the mix and thus reducing the pro rata distribution on account of unsecured claims, this places other unsecured creditors at a distinct disadvantage in responding to the debtor’s proposed plan. Unless they are allowed to rely on the universe of timely filed claims, unsecured creditors cannot determine whether to oppose confirmation of the plan.
Presentation of an unsecured claim in a chapter 13 case, including a deficiency claim on a secured obligation, is materially different from presentation of a wholly secured claim. The filing of an unsecured deficiency claim for the first time after the bar date cannot be an amendment to a timely filed, wholly secured claim; it is a completely new claim. In re Matthews, 313 B.R. 489, 494 (Bankr.M.D.Fla.2004) (“the attempt to change the status of a claim from secured to unsecured is not considered an amendment, in the traditional sense, that is to be freely allowed”).
In determining whether to allow a late filed claim as an amendment, some courts have considered certain equitable factors. See In re Matthews, 313 B.R. at 494 (and cases cited therein). In light of the specif*666ic provisions of Fed. R. Bankr.P. 3002(c), the fact that excusable neglect does not apply in this case pursuant to Fed. R. Bankr.P. 9006(b)(3), and the fact that confirmation of a chapter 13 plan bars the presentation of an amended claim inconsistent with that plan (see below), the Court does not believe such equitable factors are appropriately applied to late-filed claims in chapter 13 cases.3
The Trustee stressed that First Choice’s timely filed Claim No. 4-1 did not include a statement that First Choice reserved the right to amend its claim to add an unsecured deficiency claim at a later time. The Trustee argued that this, alone, was fatal to Claim No. 4-2. There is case law suggesting that such a reservation of rights is essential to enable the later amendment of a secured claim to add a deficiency claim. See In re Winters, 380 B.R. 855, 860 (Bankr.M.D.Fla.2007). But there is no basis in the Bankruptcy Code or the Bankruptcy Rules to support this position. Fed. R. Bankr.P. 3002(c) and 9006(b)(3) make it clear that the bar date for presentation of claims in chapter 13 is in most cases a bright line. A claim may be filed after the bar date only if it falls into one of the narrow exceptions presented in Fed. R. Bankr.P. 3002(c) or is an amendment of a previously filed claim under the narrow test addressed above. A statement- in a proof of claim that the creditor may amend its claim at a later time, whether to add a deficiency claim or otherwise, does not extend the deadline set in Fed. R. Bankr.P. 3002(c) or cause an otherwise impermissible addition or change to be deemed a proper amendment.4
The purpose of the bankruptcy claims process is to present to the court, the debtor, the trustee, and creditors, the nature and amount of each claim. The debtor and creditors appropriately rely on timely filed claims in formulating a plan and reacting to it. The court relies on timely filed claims to confirm the plan. Even in the limited circumstances where a creditor may present a claim other than by filing a timely formal proof of claim, the creditor must do so in an unequivocal fashion, exhibiting in a filed paper a present *667intent to hold the estate liable. In re Int’l Horizons, Inc., 751 F.2d at 1217. It is not enough that the debtor might know of a potential claim. Id. It is not enough to state in a timely filed claim that the creditor might present a different claim later.
Under section 502(a), a filed claim is deemed allowed unless objected to. Allowance of a claim establishes its priority as well as its amount. A party in interest may interpose an objection based on the amount, the priority, or even the existence of liability supporting the claim. A reservation of rights to present a claim is not itself a claim. It does not constitute pri-ma facie evidence of the validity and amount of a claim under Fed. R. Bankr.P. 3001(f) because it states no amount. It exhibits no present intent to hold the estate liable. It states only that the creditor might want to hold the estate liable later. There is no claim to object to. To hold that a reservation of the right to amend a timely filed claim is sufficient to permit the filing of a post-bar date claim would put the debtor and other parties in interest in the position of objecting to such proofs of claim and showing, in spite of the fact that no claim is actually presented, that it should not be allowed. Such a procedure places on its head the entire claims allowance process.
If a secured creditor wishes to preserve its unsecured deficiency claim for treatment in a chapter 13 case, it must formally file an unsecured claim in a timely manner. If the bar date falls after the date set for the confirmation hearing, and a secured creditor wishes to present a deficiency claim not already provided for in the plan, the secured creditor should seek a continuance of the confirmation hearing to a date after the bar date. If the value of the creditor’s collateral is at issue, the creditor may file a motion to value its collateral under Fed. R. Bankr.P. 3012 along with a timely proof of claim that reflects the creditor’s intention to hold the estate hable for any deficiency claim resulting from such valuation. In the alternative, a secured creditor may file a timely unsecured deficiency claim in an unliquidated amount and move for a continuance of the confirmation hearing to permit the court to liquidate the unsecured claim prior to confirmation. Unlike a reservation of the right to amend a claim in the absence of these measures, each of these actions exhibits the creditor’s present intention to hold the estate liable for an unsecured claim and relies on procedures in the Bankruptcy Code and Bankruptcy Rules to ascertain the amount of that claim. First Choice did none of these things.
Perhaps most importantly, under section 1327 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.” Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821, 829-30 (11th Cir.2003) (noting that section 1327 has broader impact than traditional claim preclusion) (internal quotation and citation omitted). Confirmation of the Debtors’ Third Amended Plan is res judicata with regard to each matter addressed therein. Even if Claim No. 4-2 could be considered a proper amendment to Claim No. 4-1, it would have no impact on confirmation of the Debtors’ Third Amended Plan or the eventual entry of a discharge order in this case. In the section of the Third Amended Plan addressing payments to unsecured creditors, the plan states: “Pro rata dividend will be calculated by the Trustee upon review of filed claims after bar date.” This language is verbatim from the Court’s Local Form 31 (Chapter 13 Plan). The *668intent of this language is to inform parties in interest that the payments made by a debtor on account of unsecured claims will be distributed by the chapter 13 trustee pro rata to those creditors who filed unsecured claims by the bar date and whose claims were allowed. This is consistent with sections 1325(a)(4) and 1325(b)(1) which provide for distributions only to holders of allowed unsecured claims. At the time this Court confirmed the Third Amended Plan, First Choice had filed no timely unsecured claim and thus did not have an allowed unsecured claim. The Third Amended Plan treated First Choice as fully secured, consistent with Claim No. 4-1, and did not provide for any payment to First Choice on account of its unstated deficiency claim. The Third Amended Plan was confirmed, the confirmation order was not stayed or appealed, and the order became final about two months prior to the filing of Claim No. 4-2. The power to revoke the confirmation order under section 1330 expired long ago and no such motion was filed (nor is there even a suggestion that the confirmation order was procured by fraud as required under section 1330). Thus, First Choice is bound by the terms of the Third Amended Plan. First Choice is not entitled to any distribution in this case on account of its unsecured deficiency claim.
Although not cited by any party, the Court notes that section 502(j) also provides no assistance to First Choice in this case. Because Claim No. 4-2 was not timely, it is deemed disallowed under section 502(a)(9). Under section 502(j), the Court may reconsider the allowance or disallowance of a claim for cause and a “reconsidered claim may be allowed or disallowed according to the equities of the case.” To permit allowance of an unsecured deficiency claim in this case would result in the need for the Debtors to modify their confirmed plan under section 1329. The Trustee and counsel for the Debtors argued that, in light of the requirements of sections 1325(a)(4) and 1325(a)(6), the Debtors would be unable to propose a modification that would satisfy the confirmation requirements and this case would be dismissed. Indeed, the Trustee went so far as to make an ore terms request for dismissal of this case as an alternative to disallowance of Claim No. 4-2. Dismissal of this case would only reward First Choice for its failure to protect its own rights consistent with the requirements of the Bankruptcy Code and Bankruptcy Rules, and would prejudice those creditors who filed timely unsecured claims and expect to receive the full amount payable under the Debtors’ confirmed Third Amended Plan. Thus, even if there was cause for reconsideration of First Choice’s claim, which has not been shown, and even if it is appropriate to apply section 502(j) in this context, which is questionable, the equities weigh against allowance of Claim No. 4-2.
Accordingly, it is ORDERED AND ADJUDGED that:
1. The Motion [ECF No. 84] is DENIED.
2. The Objection [ECF No. 76] is SUSTAINED. Claim No. 4-2 filed by First Choice Credit Union is STRICKEN.
3. The Trustee’s ore terms motion to dismiss this case is DENIED.
. Unless otherwise indicated, the terms “section” and "sections” used in this Order refer to sections of the United States Bankruptcy Code, 11 U.S.C. § 101 etseq.
. This is in contrast to chapter 9 and 11 cases where a claim scheduled by the debtor and not indicated as disputed, contingent, or un-liquidated is deemed allowed for purposes of voting and distribution. Fed. R. Bankr.P. 3003(c)(2).
. The Debtors cite In re International Horizons, Inc., 751 F.2d at 1216, which in turn cites In re Miss Glamour Coat Co. Inc., 80-2 U.S.T.C. ¶ 9737, 1980 WL 1668 (S.D.N.Y. Oct. 8, 1980), in support of the application of certain equitable factors here. The cited text in In re International Horizons, Inc. is a recitation of the analysis undertaken by the bankruptcy court which was not explicitly adopted by the 11th Circuit in its decision. The 11th Circuit goes on to apply the test outlined above in this Order to determine whether a post-bar date claim was a proper amendment to a timely claim, holding that it was not. It is important to note that In re International Horizons, Inc. addressed a chapter 11 case, where the court has more discretion to permit late-filed claims. See Fed. R. Bankr.P. 9006(b)(1); Pioneer Inv. Serv. Co., 507 U.S. 380 at 389 n. 4, 113 S.Ct. 1489. Even if such equitable factors apply here, First Choice would obtain no benefit from them. The facts presented in this case are essentially identical to those presented to the court in In re Matthews, and the Court adopts that court’s analysis in applying the Miss Glamour Coat Co., Inc. equitable factors. 313 B.R. at 495.
. At least one court has suggested that it would permit the filing — after the bar date but prior to chapter 13 plan confirmation — of a deficiency claim in connection with a timely filed secured claim. In re Matthews, 313 B.R. at 495. In light of the provisions of Fed. R. Bankr.P. 3002(c) and 9006(b)(3), a claim presented after the bar date is untimely, and thus disallowed under section 502(a)(9), whether filed prior to or after confirmation. It is possible that a claim presented after the bar date but prior to confirmation could be subject to allowance under section 502(j). Because First Choice did not file Claim No. 4-2 until after confirmation, the Court need not address this issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495334/ | MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
The matter before me is the “Defendants’ Motion to Dismiss the Complaint” (the “Motion to Dismiss”) filed by Bank of America, N.A. (“BAÑA”), as successor by merger to BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP, and Federal National Mortgage Association a/k/a Fannie Mae (“Fannie Mae”) (collectively, the “Defendants”) and the “Opposition to Defendants’ Motion to Dismiss” (the “Opposition”) filed by Gil-bertos Dos Anjos (the “Debtor”). The Defendants move to dismiss this adversary proceeding, though which the Debtor seeks a declaration that a post-petition foreclosure of certain real property violated the automatic stay, on the basis that the foreclosure was excepted from the stay pursuant to 11 U.S.C. § 362(b)(21) due to the Debtor’s ineligibility to file the present *699bankruptcy case. For the reasons set forth below, I will deny the Motion to Dismiss.
II. BACKGROUND
The facts of this case are undisputed.1 The present case is the Debtor’s third bankruptcy case filed under Chapter 13. On February 3, 2011, the Debtor filed his first bankruptcy petition (the “First Case”) pro se.2 The Court dismissed the First Case on February 25, 2011, for failure to comply with the Court’s order to update, directing him to file required schedules and documents.3 On September 21, 2011, the Debtor filed his second bankruptcy petition (the “Second Case”) pro se,4 which was subsequently dismissed on October 6, 2011, for failure to comply with an order to update.5
On January 31, 2012, BANA’s counsel, Harmon Law Offices (“Harmon”) notified the Debtor of BANA’s intent to foreclose on the mortgage with respect to the Debt- or’s residence located at 85 Spruce Street, Hyannis, Massachusetts (the “Property”).6 A foreclosure sale was scheduled for February 28, 2012.7 On February 28, 2012, the Debtor filed his third Chapter 13 petition with the assistance of counsel, commencing the present case (the “Present Case”).8 That same day, Debtor’s counsel faxed to Harmon a letter requesting that Harmon “put over today’s public auction scheduled for today at 2:00 p.m. at 85 Spruce Street, Hyannis, Massachusetts,” along with a copy of the bankruptcy petition 9 and confirmed that Harmon received the letter via email.10 At approximately 1:05 p.m., Harmon telephoned Debtor’s counsel to confirm that they would be proceeding with the foreclosure sale despite the bankruptcy petition.11 In response, the Debtor argued that Harmon misinterpreted 11 U.S.C. § 362 and was required to seek leave of the court to foreclose on the Property.12 Harmon repeated that it would be proceeding with the foreclosure.13
Later that day, the Property was sold at a public auction.14 Subsequently, a notice was placed on the door of the Property that read, “[t]he property was recently sold at a public foreclosure auction,” and it identified the foreclosing owner as Fannie Mae.15 Fannie Mae currently lists the *700Property for sale on the Internet.16
On April 5, 2012, the Debtor commenced the present adversary proceeding seeking that: (1) the Court declare the foreclosure as void on the grounds that the Defendants violated the automatic stay under 11 U.S.C. § 362; and (2) the Court award the Debtor punitive damages and attorney’s fees based upon BANA’s knowing violation of the stay.17 On June 7, 2012, the Defendants filed the Motion to Dismiss raising the issue of the Debtor’s alleged ineligibility for the first time.18 On July 2, 2012, the Debtor filed the Opposition.19 On July 11, 2012, the Defendants filed the “Reply Memorandum in Support of Defendants’ Motion to Dismiss the Complaint” (the “Reply”).20 On July 19, 2012, the Debtor filed the “Sur Reply Pursuant to Court Order of July 11, 2012” (the “Sur Reply”).21 On July 20, 2012,1 held a hearing on the Motion to Dismiss, and after oral argument by both parties, I took the matter under advisement.
III. POSITIONS OF THE PARTIES
The Defendants
The Defendants argue that the Debtor has failed to state a claim because BANA did not violate the automatic stay when it foreclosed on the Debtor’s mortgage.22 The Defendants argue that “as a legal matter, no automatic stay existed at [the] time” of filing because the Debtor was not an eligible “debtor” under the statute.23 The Defendants cite to 11 U.S.C. § 362(b)(21)(A) and 11 U.S.C. § 109(g), arguing that an individual is not a “debtor” entitled to the protections of an automatic stay if he has had another bankruptcy case pending within the last 180 days and the prior ease was dismissed because of the debtor’s “willful failure” to comply with court orders.24
The Defendants rely on In re Colon Martinez for the proposition that the “the First Circuit infers willfulness from a pattern of failure to abide by court orders,” and they analogize the present case to the facts in In re Colon Martinez.25 The Defendants believe that where the Debtor has “repeated many of the same errors and deficiencies identified by the Court” in his prior bankruptcy cases, his behavior requires an inference of willfulness under 11 U.S.C. § 109(g).26 Accordingly, the Defendants urge me to find that the Debtor did not qualify as a “debtor” as a matter of law and did not receive automatic stay protection when he filed the Present Case,27 entitling BANA to proceed with the scheduled foreclosure sale.28 The Debtor
The Debtor argues that the automatic stay takes effect until the Court rules on eligibility.29 The Debtor asserts that *701BANA “wants this court to conclude that a creditor can determine on its own if a bankruptcy petition is null and void at the time of filing or ab intitio.”30 To refute this argument, the Debtor emphasizes that 11 U.S.C. § 362(b)(21)(A) is not self-executing, but rather, there must be a preliminary determination that the debtor is ineligible under 11 U.S.C. § 109(g).31 The Debtor asserts that this court has rejected the ab intio argument32 and held that eligibility under 11 U.S.C. § 109(g) is not a jurisdictional bar to relief.33
The Debtor concedes that ineligibility requires a finding of “willfulness,” but he argues that such a finding should not be made absent an evidentiary hearing.34 The Debtor also explains that while “willful” is not defined in the Bankruptcy Code, it means “deliberate or intentional acts rather than accidental or beyond the debt- or’s control.”35 The Debtor maintains that it is the Defendants’ burden to prove the Debtor is ineligible, and he urges that a dismissal for failure to file schedules should not amount to “per se willful misconduct under 11 U.S.C. § 109(g)(1) absent any other evidence.”36 The Debtor analogizes the present case to In re Lundquist, in which the court held that a foreclosure sale was invalid because the debtors “had only one case pending within the preceding year, and therefore received the benefit of the automatic stay upon the filing of the [tjhird [bankruptcy petition.” 37
Finally, the Debtor contends that BANA cannot “unilaterally vacat[e] the automatic stay absent relief from the court.”38 Thus, the Debtor emphatically concludes that “[w]hat [BANA] could not do was implement an ‘ends justifies the means approach’ to the automatic stay process. [BANA] could not foreclose first and then justify its actions under [11 U.S.C.] § 109(g)(1).”39
IV. DISCUSSION
A. Standard of Review Under Fed. R.Civ.P. 12(b)(6)
In Ashcroft v. Iqbal, the Supreme Court of the United States set forth the current standard for dismissal under Fed.R.Civ.P. 12(b)(6), made applicable in adversary proceedings by Fed. R. Bankr.P. 7012(b):
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.” ... 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.... The plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully.... Where a complaint pleads facts that are “merely consistent with” a defendant’s liability, it “stops short of the line be*702tween possibility and plausibility of ‘entitlement to relief.’ ”
Two working principles underlie our decision in Twombly. First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.... Second, only a complaint that states a plausible claim for relief survives a motion to dismiss.40
The Supreme Court qualified this proclamation, however, explaining that:
Although for the purposes of a motion to dismiss we must take all of the factual allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual allegation.41
Along these same lines, “the First Circuit has explained that I need not ‘swallow the plaintiffs invective hook, line, and sinker; [and that] bald assertions, unsupportable conclusions, periphrastic circumlocutions, and the like need not be credited.’ ”42
B. Applicability of the Automatic Stay
The issue presented by this adversary proceeding is whether the Defendants violated the automatic stay when they foreclosed on the Property post-petition. Generally, 11 U.S.C. § 362 governs the imposition and effects of the automatic stay.43 The United States Court of Appeals for the First Circuit has summarized the nature of the automatic stay as follows:
The automatic stay is among the most basic of debtor protections under bankruptcy law. It is intended to give the debtor breathing room by stopping all collection efforts, all harassment, and all foreclosure actions.
The stay springs into being immediately upon the filing of a bankruptcy petition: because the automatic stay is exactly what the name implies — “automatic”—it operates without the necessity for judicial intervention. It remains in force until a federal court either disposes of the case ... or lifts the stay.44
The First Circuit has held that actions taken in violation of the automatic stay are void, which “places the burden of validating the action after the fact squarely on the shoulders of the offending creditor.”45
Section 362(b) of the Bankruptcy Code, however, excepts certain acts from the automatic stay. In particular, 11 U.S.C. § 362(b)(21) provides that:
(b) The filing of a petition under section 301, 302, or 303 of this title ... does not operate as a stay — ■
*703(21) under subsection (a), of any act to enforce any lien against or security interest in real property—
(A) if the debtor is ineligible under section 109(g) to be a debtor in a case under this title.46
Section § 109(g), in turn, provides that:
Notwithstanding any other provision of this section, no individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if—
(1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case;47
“Although the Bankruptcy Code does not prescribe what constitutes a ‘willful failure’ to abide by orders of the court, the First Circuit infers willfulness from ‘a pattern of failure to abide by court orders.’”48 Indeed, as recognized by the United States Bankruptcy Appellate Panel for the First Circuit in In re Colon Martinez, “[rjepeated conduct strengthens the inference that the conduct was deliberate.” 49 Bankruptcy courts agree that the debtor’s conduct must have been deliberate and intentional, as opposed to accidental or negligent.50 Specific conduct that other courts have found amounts to willful failure include, inter alia, the debtor’s failure to file schedules and statements of affairs, make plan payments to the Chapter 13 trustee, or attend the meetings of creditors.51
The party moving for dismissal under 11 U.S.C. § 109(g)(1) bears the burden of proving that the debtor willfully failed to comply with a court order or appear before the court.52 By its plain language, 11 U.S.C. § 109(g)(1) does not impose a timing requirement on when the court must make a determination regarding “willfulness.” Rather:
A finding of willfulness may be made at the time of a dismissal. However, it can also be made in a subsequent case when the bankruptcy court is called up to determine if the earlier dismissal renders the debtor ineligible under [11 U.S.C.] § 109(g) to proceed in the subsequent case.”53
If addressed in a subsequent case, eligibility is theoretically a threshold determination that must be made at the outset of the case.54 In practice, however, an eligibility *704determination often occurs later in the ease. The eligibility finding is then applied retroactively to any actions allegedly taken in violation of the automatic stay. “Thus, until the court rules on eligibility, the filing of a petition by an individual possibly ineligible under [11 U.S.C.] § 109(g) effectively commences a bankruptcy case.”55
There is no question that upon filing the present petition, the Debtor effectively commenced a bankruptcy case and invoked the protections of the automatic stay. Nevertheless, if the Debtor was ineligible to file this case as the Defendants say, then the foreclosure would have been excepted from the automatic stay by 11 U.S.C. § 362(b)(21)(A).56 In support, the Defendants rely substantially upon In re Colon Martinez to argue that the Debtor’s pattern of conduct resulting in the prior dismissals requires an inference of willfulness.
Nothing in In re Colon Martinez, however, requires that a court draw an inference of “willfulness from a pattern of failure to abide by court orders.”57 To the contrary, the First Circuit has simply stated that “an inference of willfulness [i]s justified ” where “[t]here was a pattern of failure to abide by court orders, as well as of failure to prosecute” and the debtor “did not introduce any evidence on the point.”58 Indeed, an inference of willfulness is only appropriate to the extent that the record does not compel an alternative conclusion. Therefore, whether the Debt- or willfully failed to comply with orders of this Court in his prior cases is a question of fact that requires evidence.
Ultimately, the Defendants are not contesting the plausibility of the allegations of the complaint, but instead are requesting an evidentiary ruling that would, despite those allegations, establish an affirmative defense entitling them to judgment as a matter of law. Such an affirmative defense is not appropriately brought as a motion to dismiss under Fed. R.Civ.P. 12(b)(6) and must be denied.
V. CONCLUSION
In light of the foregoing, I will enter an order denying the Motion to Dismiss.
. For purposes of the Motion to Dismiss, the Court must accept as true all allegations contained within the Debtor’s Complaint. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Still, while the parties are in agreement over what occurred, they disagree as to the legal import of those events.
. Case No. 11-10852, Docket No. 1.
. Case No. 11-10852, Docket No. 16.
. Case No. 11-18957, Docket No. 1.
. Case No. 11-18957, Docket No. 13.
. See Notice of Mortgage Foreclosure Sale and Notice of Intention to Foreclosure Mortgage and of Deficiency After Foreclosure of Mortgage, Debtor's Adversarial Proceeding for Violation of Automatic Stay (the "Complaint”), Case No. 12-01081, Docket No. 1, Exhibit "A”.
. See id.
. Complaint ¶ 10.
. Id. at ¶ 12. For a copy of the letter, see Complaint, Exhibit "B”.
. Id. at ¶ 13.
. Id. For a copy of the Debtor’s counsel's phone record with BANA’s counsel, see Complaint, Exhibit "C”.
. Id. at ¶ 14.
. Id.
. Id. at ¶ 15.
. Important Notice to Tenants, Complaint, Exhibit "D”.
. Complaint ¶ 17. For a copy of the online listing of the Property, see Complaint, Exhibit “E”.
. See Complaint.
. Case No. 12-01081, Docket No. 12.
. Case No. 12-01081, Docket No. 20.
. Case No. 12-01081, Docket No. 24.
. Case No. 12-01081, Docket No. 26.
. Motion to Dismiss at 4.
. Id.
. Id.
. Id. (quoting In re Colon Martinez, 472 B.R. 137, 146 (1st Cir. BAP 2012)).
. Id. at 6.
. Id.
. Reply at 4.
. See Opposition at 2.
. Id. at 4.
. Sur Reply at 2.
. Opposition at 4 (citing In re Durham, 461 B.R. 139 (Bankr.D.Mass.2011)).
. See id. (citing In re Williams, No. 1-09-44856-dem, 2010 WL 411108, at *2 (Bankr. E.D.N.Y. Jan. 27, 2010)).
. Id. at 5.
. Id. (citing In re Pappalardo, 109 B.R. 622, 625 (Bankr.S.D.N.Y.1990)).
. Id.
. Id. at 7-8 (citing In re Lundquist, 371 B.R. 183, 190 (Bankr.N.D.Tex.2007)).
. Id. at 8.
. Opposition at 8.
. Ashcroft v. Iqbal, 556 U.S. 662, 678-679, 129 S.Ct 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556-570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)) (citations omitted); see also DiVittorio v. HSBC Bank, USA, N.A. (In re DiVittorio), 430 B.R. 26, 42 (Bankr.D.Mass.2010), subsequently aff'd, 670 F.3d 273 (1st Cir.2012).
. Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (internal quotations omitted).
. In re DiVittorio, 430 B.R. at 42-43, subsequently aff'd, 670 F.3d 273 (1st Cir.2012) (quoting Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir.1996)).
. 11 U.S.C. § 362.
. Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 975 (1st Cir.1997) (internal citations and quotation marks omitted).
. In re Soares, 107 F.3d at 976 (distinguishing 'void” from "voidable,” and finding that characterizing violations as void "best harmonizes with the nature of the automatic stay and the important purposes it serves”).
. 11 U.S.C. § 362(b)(21)(A).
. 11 U.S.C. § 109(g)(1) (emphasis added).
. In re Colon Martinez, 472 B.R. at 146 (quoting Perez v. Fajardo Fed. Sav. Bank, 116 F.3d 464, No. 96-2116, 1997 WL 330410, at *1 (1st Cir. June 13, 1997)).
. Id. (quoting In re Lee, No. 11-8053, 2012 WL 1324234, at *9-10 (6th Cir. BAP Apr. 18, 2012)).
. In re Pappalardo, 109 B.R. at 625-626; In re Bono, 70 B.R. 339, 342 (Bankr.E.D.N.Y.1987); In re Correa, 58 B.R. 88, 90 (Bankr.N.D.Ill.1986); In re Ellis, 48 B.R. 178, 179 (Bankr.E.D.N.Y.1985); see also In re Fulton, 52 B.R. 627 (Bankr.D.Utah 1985) (finding the debtor's writing down the wrong date for a meeting of creditors under 11 U.S.C. § 341 was merely negligent and did not rise to the level of willfulness under 11 U.S.C. § 109(g)).
. See, e.g., In re King, 126 B.R. 777, 781 (Bankr.N.D.Ill.1991).
. In re Pike, 258 B.R. 876, 882 (Bankr.S.D.Ohio 2001) (citing In re Herrera, 194 B.R. 178, 188 (Bankr.N.D.Ill.1996)).
. Perez v. Fajardo Fed. Sav. Bank, 1997 WL 330410, at *1 (1st Cir.1997) (citing Montgomery v. Ryan (In re Montgomery), 37 F.3d 413, 415 (8th Cir.1994); In re Robinson, 198 B.R. 1017, 1023 n. 8 (Bankr.N.D.Ga.1996)).
. In re Durham, 461 B.R. at 141.
. Id.
. Under such circumstances, neither an evi-dentiary hearing on eligibility nor relief from stay would have been necessary to proceed with the foreclosure. This does not, as the Debtor argues, amount to permitting a creditor to unilaterally annul the automatic stay. A creditor is free to proceed with acts excepted from the stay pursuant to 11 U.S.C. § 362(b) without prior court approval, but is subject to strict liability for any mistakes regarding the applicability of any such exception.
. In re Colon Martinez, 472 B.R. at 146.
. Perez v. Fajardo Fed. Sav. Bank, 1997 WL 330410, at *1 (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495335/ | MEMORANDUM OF DECISION AND ORDER ON DEFENDANT’S MOTION TO DISMISS COMPLAINT AND ON PLAINTIFF’S MOTION FOR LEAVE TO FILE SECOND AMENDED COMPLAINT
FRANK J. BAILEY, Bankruptcy Judge.
By her amended complaint in this adversary proceeding, Leilani Zutrau, sister of debtor and defendant Eric Zutrau, seeks a determination that the balance he owes her on five promissory notes, totaling $427,522.90, is excepted from discharge under 11 U.S.C. § 523(a)(2)(A) as debt arising from fraud or false representations and under 11 U.S.C. § 523(a)(6) as debt for willful and malicious injury. The amended complaint also purports to assert objections to discharge under 11 U.S.C. § 727(a)(2), (3), and (4). Eric has now moved to dismiss the § 523 counts for failure to state a claim on which relief can be granted; and Leilani has moved for leave to amend her complaint to add facts that she contends would support her objections to discharge.
Procedural History
On March 3, 2011, Eric filed a petition for relief under chapter 7 of the Bankruptcy Code. The first date set for the first meeting of creditors was April 5, 2011, and accordingly the deadline for filing complaints to object to discharge or to determine the dischargeability of a debt was June 6, 2011. On that day, Leilani, acting pro se, filed the complaint commencing this adversary proceeding. The original complaint sought a determination of non-dischargeability under § 523(a)(2)(A) and (a)(6). It did not purport to constitute an objection to discharge, did not request a denial of discharge, and made no reference to § 727(a). Eric filed an answer on June 22, 2011. Thirteen days later, on July 5, 2011, Leilani filed an amended complaint (“Amended Complaint”) in which, for the first time, she purported to object to Eric’s discharge under § 727(a)(2), (3), and (4). The Amended Complaint included new allegations of fact but failed to specify which of the alleged facts constituted the factual basis for each objection to discharge.
Eric then filed a Rule 12(b)(6) motion to dismiss the complaint for failure to state a basis for excepting the debt from discharge under § 523(a)(2)(A) or (a)(6). The motion is directed at the original complaint, but, with respect to nondischarge-ability under § 523(a)(2)(A) and (a)(6), the original and amended complaints are the same.1 Leilani has opposed the motion. In her opposition and at a hearing on the motion, Leilani further specified her allegations under § 523(a)(2)(A) and (a)(6).
No objection to discharge having been filed by the deadline for doing so, the Court entered a discharge in favor of Eric on August 16, 2011.
On February 29, 2012, Leilani filed a second amended complaint and a motion for leave to file the same. The stated purpose of the second amendment is to cite facts and information in support of Leilani’s objections to discharge under § 727(a)(2), (3), and (4). Eric opposes the motion to amend, arguing that any objection to discharge that it amends is untime*708ly and therefore that the proposed amendment is futile.
Jurisdiction
The matters before the court concern a complaint to determine the dischargeability of a debt under 11 U.S.C. § 528(a) and to deny the debtor a discharge under 11 U.S.C. § 727(a). In both parts, the complaint concerns a discharge in bankruptcy, arises under the Bankruptcy Code and in a bankruptcy case, and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by standing order of reference,2 referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). The counts for determination of dischargeability and for denial of discharge are core proceedings within the meaning of 28 U.S.C. § 157(b)(1).3 The bankruptcy court accordingly has authority to enter final orders on them.
Motion to Dismiss Complaint for Determination that Debt is Excepted from Discharge
a. Standard of Review
When presented with a motion to dismiss under Fed.R.Civ.P. 12(b)(6), 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.
b. Facts
The Amended Complaint makes the following allegations of fact.
1. Leilani is Eric’s sister. By a deed recorded in 2003, they are the co-owners, as tenants in common, of property in Oak Bluffs, Massachusetts (the “Oak Bluffs Property”). They agreed to improve the property, a single family home, for personal and investment purposes and to share equally the costs of developing and carrying the property.
2. In 2006, Eric identified real property in Brookline, Massachusetts (“the Brookline Property”) that he believed would be a profitable condominium conversion venture. He approached Leilani for financing and told her that if she assisted *709with financing the property, he would be able to repay monies she advanced upon sale of the Brookline Property. He promised her that she would be paid immediately after the bank mortgages secured by the Brookline Property were satisfied and before any other debts were paid. He also promised to give gifts of $10,000 each to Leilani and her son upon sale of the Brookline Property. He agreed to sign a promissory note and execute a mortgage in Leilani’s favor and further suggested that a clause be included in the promissory note that would require Eric to sign over his right, title, and interest in the Oak Bluffs Property to Leilani if he defaulted. On September 22, 2006, Eric executed a promissory note in the amount of $241,000 in Leilani’s favor, due on April 22, 2007 (“Note A”). To secure Note A, Eric granted Leilani a mortgage on the Oak Bluffs Property. Based on Eric’s assurances that the proceeds of the sale of the Brookline Property would be used to repay Leilani, and that she would be further protected from any potential default by Note A’s loan acceleration clause, Leilani agreed to and did lend $241,000 to Eric.
3. On December 13, 2006, Eric requested an additional short-term loan of $30,000 to avoid lapses in work on the Brookline Property. On December 18, 2006, he executed a promissory note in Leilani’s favor in the amount of $30,000, with interest at the rate of 7.75% per annum and principal and interest due on February 18, 2007 (“Note B”). By payments of $20,000 on February 21 and $10,000 on March 19, 2007, Eric paid the principal amount of this note, but he has paid no interest on the note.
4. On January 9, 2007, Eric requested a second short-term loan of $30,000. On February 18, 2007, he executed a promissory note in Leilani’s favor in the amount of $30,000, with interest at the rate of 7.75% per annum and principal and interest again due on February 18, 2007 (“Note C”).
5. On April 23, 2007, Eric requested a third short-term loan of $30,000. On a date not specified, he executed a promissory note in Leilani’s favor in the amount of $30,000, with interest at the rate of 7.75% per annum and principal and interest due on June 14, 2007 (“Note D”).
6. On June 14, 2007, Eric told Leilani that he needed yet another short term loan to keep the Brookline project moving forward. On another date not specified, he executed a promissory note in Leilani’s favor in the amount of $20,000, with interest at the rate of 7.75% per annum and principal and interest due on July 15, 2007 (“Note E”).
7. Each of Notes B, C, D, and E contains a security clause pledging the Brook-line Property as collateral for the loans.
8. In late June 2007, Leilani, having recently lost her job, told Eric he needed to repay his debts to her. Around the same time, Eric advised Leilani that he would need additional funds to finish the Brookline Project and that his debt repayment to her remained at risk unless she made additional funds available to him. From June through November 2007, Leila-ni advanced an additional $150,296.41 to Eric. As a condition of this further loan, Eric agreed to pay Leilani an additional $15,000 upon repayment of the principal.
9. On November 30, 2007, Eric sold the first of three condominium units from the Brookline project for $550,000. Despite a promise to keep her apprised of any sale of the Brookline Property,4 Eric did not ad*710vise Leilani of this sale. Eric used the proceeds from this sale to pay off one or more commercial mortgages on the Brook-line Property.
10. On April 30, 2008, Eric sold a second condominium unit from the Brookline project for $369,000. From the proceeds of this sale, Eric paid Leilani $250,000. This payment satisfied (i) the $150,296.41 extension of credit identified in ¶ 8 above, (ii) the $15,000 payment that Eric agreed to in connection with that extension of credit, and (iii) repayment of $84,703.59 toward Eric’s obligation for maintenance and repairs of the Oak Bluffs Property. It did not satisfy any of Eric’s obligations on Notes A through E.
11. On June 17, 2008, Eric sold the third condominium from the Brookline project for the sum of $365,000. He did not apprise Leilani of this sale.
12. When, pursuant to the Loan Acceleration clause in Note A, Leilani later asked Eric to convey his interest in the Oak Bluffs Property to her, he refused. He said that he had plans to apply for financing and to liquidate other assets, including a parcel of land that he co-owned with his other sister (“the Dukes County Property”), the proceeds of which he said he would use to repay Leilani. On September 25, 2009, however, he conveyed his interest in the Dukes County Property to his and Leilani’s mother for $100.
13. On June 17, 2008, Leilani asked Eric to reserve one half of any proceeds he received from the estate of the parties’ great aunt (“the Waingrow Estate”) to repay her. Eric agreed. Between June 18, 2009 and May 2, 2010, Eric received distributions from the Waingrow Estate totaling $78,434, but he made no payments to Leil-ani from the proceeds.
14.In January 2009, a company known as Yellow Book of New York, Inc. (“Yellow Book”), which had obtained a judgment against Eric, levied on the Oak Bluffs Property by recording an execution in the amount of $22,243.84 against the property. The execution encumbers the only remaining equity in the Oak Bluffs Property, which belongs to Leilani. Later, Eric sued the attorney who had represented him against Yellow Book for legal malpractice and settled the action for proceeds of $12,000, but Eric made no effort to use the proceeds to pay down the Yellow Book lien.
c. Claims under § 523(a)(2)(A)
Subsection 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt “for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). Where an exception from discharge under § 523(a)(2)(A) is based on a false representation, the plaintiff must show that the debtor (1) made a false representation (2) with fraudulent intent (“scienter”) and (3) intent to induce reliance on the representation, and that the misrepresentation (4) did induce reliance, (5) which was justifiable and (6) caused damage, pecuniary loss. Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997); In re Burgess, 955 F.2d 134, 139 (1st Cir.1992) (as to elements other than reasonableness or justifiability of reliance). This basis of nondischarge-ability sounds in fraud and therefore must be pleaded with particularity. Fed. R.Civ.P. 9(b) (in alleging fraud, a party must state with particularity the circumstances constituting fraud), made applicable by Fed. R. Bankr.P. 7009.
*711Eric argues that thé complaint fails to state a claim for relief under this subsection because it alleges nothing more than various breaches of contractual obligations, nothing in the nature of fraud or misrepresentation. Eric is correct that the Amended Complaint fails to allege a false representation. Especially in light of the requirement that fraud be pleaded with particularity, Leilani was obligated to identify each representation on which she relies and, as to each, state that it was false and how it was false and that Eric knew it to be false when made and that he made it with intent to induce reliance. The Amended Complaint does none of these things for any representation. In essence, it alleges only that Eric made various promises of repayment and that he defaulted on these promises.
In her response to the motion and in her oral argument at the hearing on the motion to dismiss, Leilani explained that the complaint imperfectly stated the following bases for excepting the debt (or portions of it) from discharge. First, when she lent Eric money and Eric gave her promissory notes evidencing the resulting indebtedness, Eric made promises, memorialized in each of four promissory notes he gave her (Notes B through E), that he would execute mortgages on the Brookline Property to secure his obligations to her, but he did not execute any such mortgage, or (if he executed them) at least did not record mortgages that he did execute.5 She contends that his promise to give her mortgages and record them was a false statement of intent. Second, Eric knowingly made a false representation that she relied on when, in an email of September 11, 2006, he assured her that she would be repaid upon sale of the Brookline Properties and immediately after certain bank mortgages on those properties were satisfied; the promise was false because Eric made it without intent to honor it. Third, she contends that Eric committed fraud by failing to record the promised mortgages and by cheating her out of repayment after other mortgages on the properties were satisfied. Fourth, Eric further deceived her by using his promised repayment as leverage, telling her that he would be unable to repay her unless she first lent him further amounts. These are the allegations on which Leilani relies to establish nondischargeability under § 523(a)(2)(A). Leilani asks that, if the Court finds her pleading of these allegations in the Amended Complaint to be insufficient, she be afforded an opportunity to further amend the complaint. I will address each of the four causes of action in turn.
(i) Promises to Execute and Record Mortgages on Brookline Property
Leilani first states that the complaint states the following basis for nondis-chargeability under § 523(a)(2)(A): she made the loans evidenced by Notes B through E in reliance on promises by Eric, memorialized in each of four promissory notes, that he would execute mortgages on the Brookline Property to secure his obligations to her, but he did not execute any such mortgage, or (if he executed them) at least did not record mortgages that he did execute, and he made the promises without intent to honor them. At least implicitly, she alleges that she justifiably relied on this representation and was injured by that reliance in that she extended credit that has not been repaid. The basis alleged here is a false representation of intent, a promise made without intent to honor it.
*712A false representation of intent can, when pleaded, be a basis for nondischarge-ability under § 523(a)(2)(A), but this basis was not pleaded in the Amended Complaint. The Amended Complaint does not state that Eric promised to execute or record mortgages to secure Notes B through E, only that each of these Notes contained a clause that itself pledged the Brookline Property as collateral. Nor does the amended complaint allege reliance on a promise to execute or record a mortgage or that Eric made this promise without intent to keep it.
Leilani has moved for leave to further amend the complaint to correct any pleading deficiency the Court may find. At this point in the proceeding, amendment requires either the other party’s written assent or leave of court. Fed.R.Civ.P. 15(a)(2). Eric has not assented to amendment, so Leilani may amend only with leave of court. “The court should freely give leave when justice so requires.” Id. Here I find that justice does so require, and, as to amendments of the § 523 counts, I have not heard Eric to contend otherwise. The Court therefore grants leave to amend, and the Amended Complaint shall be deemed amended as articulated above. As so amended, the complaint states a claim on which relief can be granted under § 523(a)(2)(A) for statements of intent to execute and record mortgages on the Brookline Property.
(ii) Email Statement of Intent to Pay Immediately After Satisfaction of Mortgages
Second, Leilani contends that the complaint states, as a further basis for nondischargeability under § 523(a)(2)(A), that Eric knowingly made a false representation that she relied on when, in an email of September 11, 2006, he assured her that she would be repaid upon sale of the Brookline Properties and immediately after certain bank mortgages on those properties were satisfied, and that this promise was a false statement of intent because Eric made it without intent to honor it. Again, she has at least implicitly alleged that she justifiably relied on this representation and was injured by that reliance in that she extended credit that has not been repaid. The basis alleged here is again a false representation of intent.
This allegation is not in the Amended Complaint, which makes no reference to an email of September 11, 2006, or of the representation it allegedly contains. Still, the proposed amendment would state a basis on which relief could be granted under § 523(a)(2)(A), and leave to amend is appropriate. The Court therefore grants leave to amend, and the Amended Complaint shall be deemed amended as articulated above. As so amended, the complaint states a claim on which relief can be granted under § 523(a)(2)(A) for a false statement in the email of September 11, 2006, statements of intent to execute and record mortgages on the Brookline Property.
(iii) Failures to Record and to Pay Upon Satisfaction of Mortgages
Third, Leilani contends that the complaint states, as further grounds for nondischargeability under § 523(a)(2)(A), that Eric committed fraud (i) by failing to record the promised mortgages and (ii) by cheating her out of repayment after other mortgages on the properties were satisfied. Neither allegation would constitute a basis for nondischargeability under § 523(a)(2)(A). Neither alleges a misrepresentation or trickery of any kind. Both are simple allegations of nonperformance, failure to keep a promise; and use of the word “cheat,” by itself, adds nothing to the simple fact of nonperformance. Even if *713“fraud” in § 523(a)(2)(A) can be construed to include acts that do not fit within the Palmaeci six-element test reiterated above, it would require more than Leilani has articulated here. Eric’s failures to record and to pay are not by themselves grounds on which some or all of the debt in question can be excepted from discharge under § 523(a)(2)(A).
(iv) Need of Further Loan to Enable Repayment
Fourth, Leilani contends that the complaint states, as further grounds for nondischargeability under § 523(a)(2)(A), that Eric deceived her by using his promised repayment as leverage, telling her that he would be unable to repay her unless she first lent him further amounts. This allegation does not state a basis for nondischargeability under § 523(a)(2)(A) because Leilani has not alleged that the representation — that Eric would be unable to repay her unless she first lent him further amounts — was false and known by Eric to be false when he made it.
(v) Conclusion as to § 523(a)(2)(A)
For the reasons set forth above, I conclude that the Amended Complaint, as Leilani has proposed to further amend it, states grounds to except some or all of the debt from discharge under § 523(a)(2)(A), but only as specified in subsections (i) and (ii) above. The Amended Complaint does not otherwise state a basis on which relief can be granted under § 523(a)(2)(A).
d. Claims under § 523(a)(6)
Section 523(a)(6) excepts from discharge any debt “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). It requires injury to another “entity,” a defined term that includes a person,6 or to the property of another entity. The injury needs to have been both willful and malicious.
“Willfulness” requires a showing of intent to injure or at least of intent to do an act which the debtor is substantially certain will lead to the injury in question. Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). “Malicious” requires the injury to have been “wrongful,” “without just cause or excuse,” and “committed in conscious disregard of one’s duties.” Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, 859 (1st Cir.1997). Malice thus has both objective and subjective elements: the injury must have been objectively wrongful or lacking in just cause or excuse; and the debtor must have inflicted the injury in “conscious disregard” of her duties, meaning that she has to have been aware that the act was wrongful or lacking in just cause or excuse.
Burke v. Neronha (In re Neronha), 344 B.R. 229, 231-32 (Bankr.D.Mass.2006). Eric argues that Leilani has alleged no willful and malicious injury within the meaning of this subsection, only a simple breach of contract.
Though the Amended Complaint purports to state a basis for excepting some or all of Eric’s debt from discharge under § 523(a)(6), it nowhere specifies which of its alleged facts constitute the basis for this relief. In her response to the motion to dismiss and in her oral argument at the hearing on the motion, Leilani indicated that the Amended Complaint included three sets of operative facts. She states that Eric willfully and maliciously injured her (i) when he failed to pay her the proceeds he received from the sale of the Brookline Property after the mortgages were satisfied, (ii) when he conveyed his *714interest in the Dukes County Property to his mother for $100 instead of liquidating his interest in that property to pay down his debt to her, as he had indicated he would do, and (iii) when, in August 2009, he received proceeds from a law suit and refused to use the same to pay down the Yellow Book lien on the Oak Bluffs Property. The Amended Complaint does state the facts on which Leilani relies for these three causes of action.
The complaint recites that Eric pledged the Brookline Property to Leilani as collateral to secure his obligation on Notes B, C, D, and E. This pledge would have given her a property interest, a mortgage, on the Brookline Property and the proceeds of its sale. If Eric received proceeds in excess of what was needed to satisfy senior encumbrances, those proceeds belonged in the first instance to Leilani, and Eric’s use of them for his own purposes without her permission would constitute an injury to Leilani’s property within the meaning of § 523(a)(6). Eric does not argue that the Amended Complaint does not sufficiently allege that this injury was willful and malicious. I conclude that the first cause of action states a basis on which a portion of the debt, the portion attributable to conversion or misappropriation or her collateral, may be excepted from discharge.
The second and third causes of action do not state a basis for excepting the debt from discharge under § 523(a)(6). Each alleges only that Eric failed to use assets available to him to pay down his debt to her or to reduce an encumbrance on her interest in the Oak Bluffs Property. Neither alleges an injury to her property, only a failure to use his own property to improve her position. The funds he failed to use for her purposes are, unlike the proceeds of the Brookline Property, not funds in which she claims to have had a property interest. For these reasons, I conclude that the complaint states a claim under § 523(a)(6) only insofar as it alleges misappropriation of proceeds from the Brookline Property in which Leilani claims an interest.
Motion for Leave to File a Second Amended Complaint
On February 29, 2012, Leilani filed a second amended complaint and a motion for leave to file the same. The stated purpose of the second amendment is to cite facts and information in support of Leilani’s objections to discharge under § 727(a)(2), (3), and (4) and, with the same facts, to support a newly added request to revoke Eric’s discharge under § 727(e). Although Leilani nowhere indicates how the second amendment would alter the Amended Complaint, it appears from the Second Amended Complaint that it would simply (i) add five paragraphs concerning Eric’s alleged control over and postpetition disposition of certain land located on the Caribbean island of St. Vincent in the Grenadines (“the Saint Vincent Property”) and (ii) add a demand in the Wherefore clause that the Court “reverse the Bankruptcy Petition and subsequent Discharge of the Debtor if appropriate.” Eric opposes the motion on various grounds, including that any objection to discharge that may be stated in the proposed amendment is untimely and therefore futile, the deadline for objecting to discharge having passed on June 6, 2011, and discharge having already entered. Leilani filed a reply memorandum in which she argued that the Court, in its discretion, may revoke a discharge pursuant to 11 U.S.C. § 727(d) and (e). Eric filed a surreply, reiterating his argument that the objections to discharge are untimely. Leilani filed a response to the surreply, arguing that her proposed amendments would re*715late back to the date of the original complaint.
Except in the limited circumstances described in Fed.R.Civ.P. 15(a)(1), “a party may amend its pleading only with the opposing party’s written consent or the court’s leave.” Fed.R.Civ.P. 15(a)(2). Eric has not assented to the proposed amendment, so Leilani needs and has moved for leave to amend. “The court should freely give leave when justice so requires.” Id. When amendment is futile, however, a court is within its discretion in denying leave to amend. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir.1993).
“Futility” of amendment is shown when the claim or defense is not accompanied by a showing of plausibility sufficient to present a triable issue.... This does not require the parties to engage in the equivalent of substantive motion practice upon the proposed new claim or defense; this does require, however, that the newly asserted defense appear to be sufficiently well-grounded in fact or law that it is not a frivolous pursuit.
Harrison Beverage Co. v. Dribeck Importers, Inc., 133 F.R.D. 463, 468-69 (D.N.J.1990).
Eric argues that amendment here would be futile because Leilani did not timely object to entry of discharge in this case. She first objected to discharge only in the Amended Complaint, which was filed after the time for objecting to discharge had expired. Eric contends that even if this proposed amendment related back to the date of the Amended Complaint, it would be time-barred. Leilani responds with three arguments: that her amendment would relate back to the date of the original complaint; that on the record at a hearing on June 21, 2011, she placed Eric on notice that she was asserting objections to discharge, and therefore he is not now prejudiced by amendment of the complaint; and that even if the time has passed to object to discharge under § 727(a), she may nonetheless seek revocation of the discharge under § 727(d) and (e). '
I begin with the limitations period for objecting to discharge. “In a chapter 7 case a complaint ... objecting to the debt- or’s discharge shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a).” Fed. R. Bankr.P. 4004(a). There is no dispute here that the operative deadline was Monday, June 6, 2011. On motion of a party in interest, the court may for cause extend the time to file a complaint objecting to discharge, but “[t]he motion shall be filed before the time has expired,” Fed. R. Bankr.P. 4004(b); and “[t]he court may enlarge the time for taking action under Rule[ ] ... 4004(a) ... only to the extent and under the conditions stated in [that] rule.” Fed. R. Bankr.P. 9006(b)(3). Leila-ni has filed no motion to extend the time to object to discharge, the time has expired, and, by virtue of Rules 4004(b) and 9006(b)(3), it may no longer be extended.
Only the original complaint was filed before the June 6, 2011 filing deadline. In that complaint, Leilani did not, in form or in substance, voice or articulate an objection to discharge or even purport to do so. Only in her Amended Complaint, filed on July 5, 2011, did Leilani first indicate that she was objecting to entry of discharge, cite § 727(a), or set forth the facts on which her objection to discharge is predicated. The objection to discharge that she set forth at that time was therefore time-*716barred.7 And, as Eric argues, even if the amendments in the Second Amended Complaint were deemed to relate back to the date of the Amended Complaint, they would still be time-barred, no less so than the objection to discharge it seeks to amend.
Leilani’s last argument for salvaging the objection to discharge is the doctrine of relation back. Relation back is governed by Rule 15(c)(1).8 In relevant part, that rule provides that “[a]n amendment to a pleading relates back to the date of the original pleading when ... 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(c)(1)(B). Leilani contends that the amendments in the Amended Complaint and the Second Amended Complaint satisfy this requirement, but she fails to explain how they do so. In the Amended Complaint, Leilani for the first time included, as the basis for her objection to discharge, allegations that at the time of his bankruptcy filing, Eric had control of the St. Vincent Property and could use it for his purposes, even though title to that property was in his mother; Eric, she says, was the de facto equitable and beneficial owner of that property. In the Second Amended Complaint, Leilani would add a further allegation: that two months after he filed his bankruptcy petition, Eric sold the St. Vincent Property and was the beneficiary of the sale proceeds.9 The original complaint included no mention of the St. Vincent Property, much less of Eric’s alleged interest in or disposition of it. The allegations regarding the St. Vincent Property do not arise out of any conduct, transaction, or occurrence that was set out, or attempted to be set out, in the original complaint. These allegations therefore do not relate back. It follows that even if amendment were permitted, the objection to discharge they support would be untimely, and amendment would be futile. For that reason, the Court will not permit the amendment to support an objection to discharge under § 727(a), and the Court will dismiss as untimely the objection to discharge asserted in the Amended Complaint.
In the alternative, Leilani argues that even if objection to discharge is time-barred, revocation of discharge is not, and the proposed amendment would not be futile to support a count to revoke Eric’s *717discharge. The Court agrees. Section 727(e) permits a party to object to discharge “(1) under subsection (d)(1) of this section within one year after such discharge is granted; or (2) under subsection (d)(2) or (d)(3) of this section before the later of — (A) one year after the granting of such discharge; and (B) the date the case is closed.” 11 U.S.C. § 727(e). Leilani filed her motion for leave to amend and the Second Amended Complaint within one year after entry of discharge. Insofar as it asserts a count for revocation of discharge under § 727(d), the proposed amendment is timely.10 Leave to amend will therefore be granted for that purpose and that purpose only.
ORDER
For the reasons set forth above, the Court hereby ORDERS as follows:
1.With respect to the claims under § 523(a)(2)(A), the Second Amended Complaint is deemed amended to allege as follows:
a. When Leilani lent Eric money and Eric gave her promissory notes evidencing the resulting indebtedness, Eric made promises, memorialized in each of four promissory notes he gave her (Notes B through E), that he would execute mortgages on the Brookline Property to secure his obligations to her, but he did not execute any such mortgage, or (if he executed them) at least did not record mortgages that he did execute. His promise to give her mortgages and record them was a false statement of intent.
b. Eric knowingly made a false representation that Leilani relied on when, in an email of September 11, 2006, he assured her that she would be repaid upon sale of the Brookline Properties and immediately after certain bank mortgages on those properties were satisfied; the assurance was false because Eric made it without intent to honor it.
2. Eric’s Motion to Dismiss [doc. # 9] is granted in part and denied in part as follows: the Motion is denied as to the counts under § 523(a)(2)(A) that are articulated by virtue of the amendments set forth in paragraph 1 above and as to the count under § 523(a)(6) for Eric’s failure to pay Leilani the proceeds he received from the sale of the Brookline Property after the mortgages were satisfied; and as to all other counts that Leilani has articulated, the Motion to Dismiss is granted.
3. Plaintiffs Motion for Leave to File a Second Amended Complaint is granted in part and denied in part as follows: leave to file the Second Amended Complaint is granted, but the amendments are permitted only for purposes of a count for revocation of discharge under § 727(d), not for purposes of any objection to discharge under § 727(a).
4. The objections to discharge under § 727(a) that Leilani has purported to state in the Amended Complaint and the Second Amended Complaint are dismissed as untimely.
. The motion takes no issue with any objection to discharge.
. The order of reference is codified in the district court's local rules at L.R. 201, D. Mass.
. See 28 U.S.C. § 157(b)(2)(I) and (J) (core proceedings include objections to discharge and proceedings to determine the discharge-ability of a particular debt).
. The complaint does not indicate when Eric promised to keep Leilani apprised of any sale of the Brookline property; nor does the complaint indicate whether' — and, if so, how — she *710relied on it and whether she suffered damage on account of that reliance.
. In places, Leilani contends that Eric did not execute the mortgages in question, and in other places her complaint is that he did not record mortgages.
. See 11 U.S.C. § 101(15) (in title 11, "entity" includes person).
. It does not help that, on June 21, 2011, Leilani may have put Eric on notice that she was asserting or intending to assert an objection to discharge. Rule 4004(a) requires the timely filing of a complaint, not merely the timely giving of notice; and, in any event, June 21, 2012 was itself after the deadline.
. Citing to Morel v. DaimlerChrysler AG, 565 F.3d 20, 23 (1st Cir.2009), Leilani argues that the court should apply the relation back law of the Commonwealth of Massachusetts instead of that set forth in Fed.R.Civ.P. 15(c) if the state law is less restrictive, and therefore that this matter is governed by Mass. Gen Laws ch. 231, § 51, under which, she further contends, an amendment, once permitted, automatically relates back. Her reliance on Morel is misplaced. Morel involved a state law claim that was before the federal court in its diversity jurisdiction, and the argument for recourse to state law was dependent on the diversity nature of that case. The present adversary proceeding, on the other hand, involves an objection to discharge under federal bankruptcy law that is before the court in its bankruptcy jurisdiction. Morel simply does not apply. In any event, Morel did not hold as Leilani contends it did. Rather, it held precisely to the contrary, that Fed.R.Civ.P. 15(c) applies even in diversity matters.
.Nowhere has Leilani explained how these allegations, by themselves or in combination with other facts she perhaps neglected to plead, support an objection to discharge under § 727(a)(2), (3), or (4) or a complaint to revoke a discharge.
. I do not hold that the Second Amended Complaint states a claim for revocation on which relief can be granted; that issue is not before me. I hold only that the amendment is not futile on account of untimeliness. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495336/ | MEMORANDUM DECISION ON MOTIONS TO TRANSFER VENUE PURSUANT TO 28 U.S.C. § 1412
SHELLEY C. CHAPMAN, Bankruptcy Judge.
TABLE OF CONTENTS
PROCEDURAL HISTORY.722
FINDINGS OF FACT.726
I. The Commencement of the Cases .726
II.The Debtors Business and Operations .... •<! to 00
A. Formation and Domicile of the Debtors -q to 00
B. The Debtors’ Operations. to ZD
III. The Debtors Management and Board of Directors.730
A. The Debtors’ Management.730
B. Patriot’s Board of Directors.730
IV. The Debtors’ Prepetition and Postpetition Capital Structure.731
A. Prepetition Capital Structure.731
B. The DIP Facilities.731
V. Parties-in-Interest in the Debtors’ Chapter 11 Cases.732
A. The Debtors’ Material Contracts and Leases .732
B. The Debtors’ Current and Former Employees.734
C. The Debtors’ Creditors and Claimholders.734
VI.Commencement of the Debtors’ Chapter 11 Cases.735
DISCUSSION.736
*722I.The Bankruptcy Venue Statute — 28 U.S.C. § 1408.736
II.Transfer of Venue Pursuant to 28 U.S.C. § 1412.738
III. The Debtors’ Cases Must be Transferred from this District Pursuant to 28 U.S.C. § 1412.741
A. The Debtors Did Not Act in Bad Faith in Filing in this District.742
B. The Debtors’ Literal Compliance with Section 1408 .743
C. The Applicability of the Winn-Dixie Decision.745
D. Administrative Efficiency and the Convenience of the Parties.746
E. The Limited Scope of the Court’s Ruling.748
IV. Neither the Interest of Justice nor the Convenience of the Parties Compels Transfer of the Patriot Cases to the Southern District of West Virginia.749
V.The Patriot Cases Shall be Transferred to the United States Bankruptcy Court for the Eastern District of Missouri.753
CONCLUSION. .755
The narrow question before the Court is deceptively simple — should the chapter 11 cases of Patriot Coal Corporation and its ninety-eight affiliated debtors be transferred to another district? The broader question before the Court, however, is dauntingly complex — what is justice? In order to answer the narrow question the Court must attempt to answer the broader question and give meaning to the “interest of justice” test for venue transfer set forth in 28 U.S.C. § 1412. This decision will thus address not only the relatively scant case law on venue transfer in large bankruptcy cases but will also examine the historical basis of the concept of venue; the decades-old controversy surrounding the domicile/affiliate rule; and, last but not least, the meaning of justice in the context of the Patriot cases.
It is of utmost importance to note at the outset what is unquestionably not in dispute in these cases: the critical importance of Patriot Coal to its employees — union and non-union alike — and its retirees, as well as their thousands of dependents. The employees’ lives and livelihoods depend on the outcome of these cases. The retirees’ health and access to health care depend on the outcome of these cases. Indeed, without the dedication and sacrifice of the coal miners and their families, there would be no coal, and there would be no Patriot Coal. That being said, this chapter 11 proceeding is not a two-party dispute. It is not “UMWA v. Patriot.” It is not “us v. them.” It is a collective proceeding in which the Bankruptcy Court is charged with applying the Bankruptcy Code and other applicable law to achieve the overarching goal of chapter 11 — to maximize the value of the Debtors’ estates for the benefit of all stakeholders and guide the Debtors, if at all possible, through chapter 11 and beyond to emergence as a stronger company, financially and operationally. This decision will determine which bankruptcy court will have that privilege and responsibility.
PROCEDURAL HISTORY
We turn first to a description of the procedural history of these cases.
On July 9, 2012 (the “Petition Date”), Patriot Coal Corporation (“Patriot”) and ninety-eight of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Promptly thereafter, pursuant to 28 U.S.C. § 1412, the United Mine Workers of America (the “UMWA”) filed a motion *723to transfer the Patriot chapter 11 cases to the Southern District of West Virginia (the “UMWA Motion”), in the interest of justice and for the convenience of the parties.1 A month later, Argonaut Insurance Company, Indemnity National Insurance Company, U.S. Specialty Insurance, and Westchester Fire Insurance Company (collectively, the “Sureties”) filed a motion to transfer the above-captioned chapter 11 eases to the Southern District of West Virginia [Dkt. No. 287] (the “Sureties’ Motion”). The Sureties’ Motion also seeks transfer in the interest of justice and for the convenience of the parties.
Two joinders to the UMWA Motion and the Sureties’ Motion were subsequently filed, one by American Electric Power, Monongahela Power Company and Hope Gas, Inc., d/b/a Dominion Hope [Dkt. No. 178] and one by the West Virginia Attorney General [Dkt. No. 390]. In addition, the Commonwealth of Kentucky, Energy and Environmental Cabinet, Department for Natural Resources (the “Kentucky DNR”) filed a notice in which it expressed support for (but did not join) the request for transfer of the cases to the Southern District of West Virginia. [Dkt. No. 392.]
On August 22, 2012, two days after the deadline for filing joinders had passed, the United States Trustee (the “U.S. Trustee”) filed a separate motion (the “UST Motion,”) for entry of an order transferring the Debtors’ chapter 11 cases “to a district where venue is proper.” [Dkt. Nos. 406, 407.] The UST Motion seeks transfer in the interest of justice; it does not seek transfer to any specific district, nor does it seek transfer for the convenience of the parties. Two joinders were filed to the UST Motion shortly thereafter. On August 27, 2012, the United Mine Workers of America 1992 Benefit Plan, the United Mine Workers of America 1993 Benefit Plan, the United Mine Workers of America 1974 Pension Trust and the United Mine Workers of America Combined Benefit Fund (collectively, the “UMWA Health and Retirement Funds”) filed a joinder to the UST Motion only. [Dkt. No. 423.] On August 28, 2012, CompassPoint Partners, L.P., Frank Williams, and Eric Wagoner, an informal group of holders of common stock of Patriot (collectively, the “Interested Shareholders”)2 filed a joinder to the UST Motion only. [Dkt. No. 433.] The UST Motion and the joinders thereto were placed on the same briefing schedule as the earlier-filed motions, and all of the Motions3 were set for hearing on September 11, 2012.
On August 27, 2012, the Debtors filed an objection to the Motions [Dkt. No. 425] *724(the “Debtors’ Objection”) and a declaration from Patriot’s Senior Vice President and then-Chief Financial Officer, Mark N. Schroeder. (Declaration of Mark N. Schroeder in Opposition to (i) Motion of the United Mine Workers of America to Transfer the Case to the Southern District of West Virginia, (ii) Sureties’ Motion to Transfer Jointly Administered Cases to Southern District of West Virginia, and (iii) Motion of the United States Trustee to Transfer in the Interest of Justice, dated Aug. 27, 2012 [Dkt. No. 426] (“Schroeder Venue Decl.”).4) Two additional objections to the Motions were filed by (i) the Committee, together with the Declaration of Jordan Kaye in Support of the Committee Objection [Dkt. No. 424, 424-1]5 and (ii) Citibank, N.A., as administrative agent for the new money lenders and letter of credit issuers under that certain Superpriority Secured Debtor-in-Possession Credit Agreement, dated as of July 9, 2012 (the “First Out DIP Agent”). [Dkt. No. 427.]
In addition, joinders to the Debtors’ Objection were filed by thirty-five of the Debtors’ unsecured creditors, and an additional fourteen creditors authorized the Debtors to state that they supported the Debtors’ opposition to the Motions. (Declaration of Jacquelyn A. Jones, dated October 5, 2012 [Dkt. No. 931] (the “Jones Declaration”).)6 Complete lists of the parties who (i) filed joinders to the Debtors’ Objection or (ii) authorized the Debtors in writing to state that they supported the Debtors’ Objection to the Motions are included as Exhibits B and C to the Debtors’ Proposed Findings of Fact [Dkt. No. 938] and as Exhibits A and B to the Jones Declaration.
On August 31, 2012, the Sureties filed a reply memorandum in response to the Debtors’ Objection and in further support of the Sureties’ Motion [Dkt. No. 502], along with the Declaration of Roland B. Doss in support of their reply memorandum [Dkt. No. 502-1],
Also on August 31, 2012, (i) the UMWA filed an omnibus reply to the objections filed to the UMWA Motion [Dkt. No. 506], along with the Declaration of Michael Buckner in Support of Omnibus Reply to [sic] the United Mine Workers of America to Objections to Motion of the United Mine Workers of America to Transfer the Case to the Southern District of West Virginia [Dkt. No. 507] (“Buckner Decl.”) and (ii) the U.S. Trustee filed an omnibus reply to the objections filed to the UST Motion [Dkt. No. 509], along with the Supplemental Declaration of Andrea B. Schwartz [Dkt. No. 510].
On September 10, 2012, just one day prior to the scheduled September 11 hearing on the Motions (the “Hearing”), a *725“Stipulation of Facts for the Purposes of a Hearing on the Motions to Transfer Venue” was submitted to the Court for signature. (Stipulation of Facts for the Purposes of a Hearing on the Motions to Transfer Venue, dated Sept. 10, 2012 [Dkt. No. 546] (the “Stipulation”).) The parties to the Stipulation were (i) each of the Movants, (ii) the Debtors, and (iii) the Committee (collectively, the “Parties”). The UMWA Health and Retirement Funds were not parties to the Stipulation.
Pursuant to the Stipulation, the Parties agreed that “the declarations ... and exhibits submitted by the Parties in connection with the Motions and the responses thereto may be admitted into evidence.” The Parties also stipulated to the admission into evidence of (i) the Declaration of Mark N. Schroeder Pursuant to Local Bankruptcy Rule 1007-2, dated July 9, 2012 [Dkt. No. 4] (“Schroeder First Day Deck”), (ii) the voluntary petitions of PCX Enterprises, Inc. and Patriot Beaver Dam Holdings, LLC, (iii) the Revised List of Creditors Holding the 50 Largest Unsecured Claims, and (iv) the Debtors’ Form 10-Q filed with the Securities and Exchange Commission on August 9, 2012 (“Form 10-Q”). (Stipulation ¶ 1.) The Parties further “agreed to not examine (either through direct or cross) any of the declar-ants, including with respect to the: (i) Stipulation of Facts, (ii) documents listed in the Stipulation of Facts, or (iii) Declarations and exhibits annexed thereto, and the facts contained therein are stipulated to expressly by the Parties.” (Stipulation ¶ 2.)
As a consequence of the Stipulation, none of the facts submitted by any of the Parties was contested.7 There was no direct testimony or cross-examination of any witnesses at the Hearing. Notwithstanding the fact that no witnesses took the stand to testify, the Hearing on the Motions lasted approximately sixteen hours over two days.8 At the conclusion of the Hearing, the factual record closed. See Sept. 12, 2012 Hr’g. Tr. at 450:25-451:19.
On October 5, 2012, proposed findings of fact and conclusions of law and post-hearing memoranda were filed with the Court by ten parties. Those parties are as follows: (i) the Debtors [Dkt. Nos. 938, 950]; (ii) the Committee [Dkt. No. 908]; (iii) Bank of America, N.A., the Second Out DIP Agent [Dkt. No. 939]; (iv) Citibank, N.A., the First Out DIP Agent [Dkt. No. 952]; (v) Wilmington Trust Company [Dkt. No. 862]; (vi) Caterpillar Inc., Caterpillar Financial Services Corporation, and Caterpillar Global Mining LLC (collectively, “Caterpillar”) [Dkt. No. 860]; (vii) the UMWA [Dkt. Nos. 956, 958]; (viii) the Sureties [Dkt. Nos. 888, 902]; (ix) the U.S. Trustee [Dkt. Nos. 871, 873]; and (x) the *726UMWA Health and Retirement Funds [Dkt. No. 867]. The Committee; Bank of America, N. A.; Citibank, N.A.; the Ad Hoc Noteholders;9 and Caterpillar each joined in the proposed finding of fact filed by the Debtors.
On or about September 12, 2012, the Court began to receive letters from retiree members of the UMWA who had been employed by Patriot, and/or by Peabody, Magnum, or Arch. Approximately 386 letters have been received as of the date of this decision and all of them have been placed on the docket of these eases. Pursuant to the Court’s direction requiring the UMWA to disclose the facts and circumstances surrounding the outpouring of letters to the Court, the UMWA filed the Declaration of Robert J. Scaramozzino, dated October 24, 2012 [Dkt. No. 1469], which includes as an attachment thereto a copy of a September 28, 2012 letter sent by the UMWA to its members encouraging them to write letters to the Court. Because the record of the proceeding on the Motions was closed at the conclusion of the Hearing, the letters are not a part of the record with respect to the Motions. Nonetheless, each and every letter has been reviewed by the Court and is a part of the record of the Debtors’ cases.
For the reasons set forth in detail below, the UST Motion is granted. The UMWA Motion and the Sureties’ Motion are granted in part and denied in part. Having considered the Motions, the voluminous memoranda in support of and in opposition to the Motions, the arguments of counsel at the Hearing, and all of the evidence, including the Stipulation, the Declarations, and all documentary exhibits admitted into evidence, as well as the post-trial proposed findings of fact and memo-randa, and, mindful that a court should not blindly accept findings of fact and conclusions of law proffered by the parties (see St. Clare’s Hosp. and Health Ctr. v. Ins. Co. of North Am,., (In re St. Clare’s Hosp. and Health Ctr.), 934 F.2d 15 (2d Cir.1991) (citing United States v. El Paso Natural Gas Co., 376 U.S. 651, 656, 84 S.Ct. 1044, 12 L.Ed.2d 12 (1964))), and having conducted an independent analysis of the law and the facts, the Court makes the following findings of fact and conclusions of law.10
FINDINGS OF FACT
I. The Commencement of the Cases
1. On June 1, 2012, debtor PCX Enterprises, Inc. (“PCX”) was incorporated under the laws of the State of New York. (Stipulation ¶ 3(a).)11 PCX does not have any employees. (Schroeder Venue Decl. ¶ 37.) PCX does not have any business operations nor does it have an office in New York. (Transcript , of the Patriot Coal 341 Meeting on August 23, 2012 (“341 Mtg. Tr.”) at 21:1-2; 23:6-8 (attached to Omnibus Reply to the Objections to UMWA Motion [Dkt. No. 506] as Ex. A).) The principal asset of PCX is a business checking account in the amount of $97,985; the *727account was opened at a branch of Capital One Bank, located at 1432 Second Avenue, New York, New York, 10021. (Stipulation V3(c).)
2. On June 14, 2012, debtor Patriot Beaver Dam Holdings, LLC (“Patriot Beaver Dam”) was formed under the laws of the State of New York. (Stipulation ¶ 3(b).) Patriot Beaver Dam does not have any employees. (Schroeder Venue Deck ¶ 37.) Patriot Beaver Dam does not have an office in New York. (341 Mtg. Tr. at 36:16-17.) The principal asset of Patriot Beaver Dam is a certificate evidencing a 100% membership interest in Beaver Dam Coal Company, LLC; it is held in New York by counsel to the First Out DIP Agent. (Stipulation ¶ 3(c).)
3. Pursuant to an assumption agreement, effective as of June 1, 2012, PCX became a guarantor of Patriot’s obligations under the Credit Facility (as defined below). Pursuant to an assumption agreement, effective as of June 14, 2012, Patriot Beaver Dam became a guarantor of Patriot’s obligations under the Credit Facility. (Schroeder Venue Decl. ¶ 25.)
4. Pursuant to pledge supplements, effective as of June 1, 2012 and June 14, 2012, PCX and Patriot Beaver Dam, respectively, granted a security interest in all of their respective rights, titles, and interests in and to all of their personal property to secure their guarantee obligations. In connection with these secured guarantees, Bank of America, N.A., as administrative agent of the Credit Facility, filed UCC Financing Statements in June 2012 that cover “all of the assets ... whether now existing or hereafter arising” of PCX and Patriot Beaver Dam. (Schroeder Venue Deck ¶ 26.)
5. Pursuant to the Fourth Supplemental Indenture, dated as of June 22, 2012, PCX and Patriot Beaver Dam became guarantors of the obligations of Patriot, as issuer, to pay the principal of, premium (if any), and interest on the Senior Bonds (as defined below). (Schroeder Venue Deck ¶ 32.)
6. Pursuant to the Second Out DIP Facility (as defined below) and the Final Order (I) Authorizing Debtors (A) To Obtain Post-Petition Financing Pursuant to 11 U.S.C. §§ 105, 361, 362, 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) and 364(e), and (B) To Utilize Cash Collateral Pursuant to 11 U.S.C. § 363 and (II) Granting Adequate Protection to Prepetition Secured Lenders Pursuant to 11 U.S.C. §§ 361, 362, 363 and 364, dated August 3, 2012 [Dkt. No. 275], the agents under the DIP Facilities (as defined below) have su-perpriority liens on the assets of PCX and Patriot Beaver Dam. (Schroeder Venue Deck ¶ 53.)
7. On July 9, 2012, PCX filed a voluntary petition under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. Its petition lists the county of residence of PCX as “New York County, NY” and indicates that the principal assets of PCX are located in “New York, NY.” PCX filed in this District because the “[d]ebtor has been domiciled or has had a residence, principal place of business, or principal assets in this District for 180 days immediately preceding the date of this petition or for a longer part of such 180 days than in any other District” and because “[t]here is a bankruptcy case concerning debtor’s affiliate, general partner, or partnership pending in this District.” (In re PCX Enterprises, Inc., No. 12-12899-scc [Dkt. No. 1].)
8. On July 9, 2012, Patriot Beaver Dam filed a voluntary petition under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. Its petition lists the *728county of residence of Patriot Beaver Dam as “New York County, NY” and indicates that the principal assets of Patriot Beaver Dam are located in “New York, NY.” Patriot Beaver Dam filed in this District because the “[d]ebtor has been domiciled or has had a residence, principal place of business, or principal assets in this District for 180 days immediately preceding the date of this petition or for a longer part of such 180 days than in any other District.” (In re Patriot Beaver Dam Holdings, LLC, No. 12-12898-scc [Dkt. No. 1].)
9. The Petitions of PCX and Patriot Beaver Dam both list their mailing address as: c/o CT Corporation System, 111 8th Avenue, New York, N.Y. 10011. (In re Patriot Beaver Dam Holdings, LLC, No. 12-12898-scc [Dkt. No. 1] and In re PCX Enterprises, Inc., No. 12-12899-scc [Dkt. No. 1].)
10. Of particular significance to the Court’s decision and analysis is the fact that the Parties stipulated prior to the Hearing that the Debtors formed both PCX and Patriot Beaver Dam to ensure that the provisions of 28 U.S.C. § 1408(1)12 were satisfied, and for no other purpose. (Stipulation ¶ 3(d).)
11. On the Petition Date, Patriot filed a voluntary petition under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The petition lists the county of residence of Patriot as “Saint Louis County, MO” and indicates that the principal assets of Patriot are located in “New York, NY.” According to the petition, Patriot filed in this District because “[t]here is a bankruptcy case concerning debtor’s affiliate, general partner, or partnership pending in this District.” (In re Patriot Coal Corporation, No. 12-12900-scc [Dkt. No. 1].)
12. Patriot is the direct or indirect parent of each of the Debtors, including PCX and Patriot Beaver Dam. (Schroeder First Day Deck ¶ 16). Patriot’s corporate headquarters is located 'at 12312 Olive Boulevard, Suite 400, St. Louis, Missouri, 63141. (In re Patriot Coal Corporation, No. 12-12900-scc [Dkt. No. 1].)
13. On the Petition Date, the ninety-six other Debtors each filed a voluntary petition under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. According to their petitions, each of these Debtors filed in this District because “[t]here is a bankruptcy case concerning debtor’s affiliate, general partner, or partnership pending in this District.”
II. The Debtors’ Business and Operations
A. Formation and Domicile of the Debtors
14. Prior to October 31, 2007, Patriot and a number of its subsidiaries were wholly-owned subsidiaries of Peabody Energy Corporation (“Peabody”), the world’s largest private-sector coal company, and their operations were a part of Peabody’s operations. On October 31, 2007, Patriot was spun off from Peabody through a dividend of all outstanding shares of Patriot. (Schroeder Venue Decl. ¶ 5.)13 The agree*729ments relating to Patriot’s October 31, 2007 spin-off from Peabody included a Delaware choice of law provision. (Id.)
15. On July 23, 2008, Patriot acquired Magnum Coal Company. The agreements relating to Patriot’s acquisition of Magnum Coal Company included a Delaware choice of law provision. (Schroeder Venue Decl. ¶ 6.) Prior to its acquisition by Patriot, Magnum had acquired certain assets of Arch Coal, Inc. The agreements relating to Magnum’s acquisition of Arch included a New York choice of law provision. (Id.)
16. With respect to the domicile of the ninety-nine Debtors, thirty-seven were formed in West Virginia while sixty-two were formed in other states, including fifty in Delaware, five in Virginia, four in Kentucky, two in New York (PCX and Patriot Beaver Dam), and one in Indiana. (Schroeder Venue Decl. ¶ 7.)
B. The Debtors’ Operations
17. The Debtors’ principal business is the mining and preparation of metallurgical coal and thermal coal. (Schroeder First Day Decl. ¶ 6). The Debtors’ mining operations are located in Appalachia and the Illinois Basin, with the Appalachian operations located in West Virginia and the Illinois Basin operations located in Kentucky. (Form 10-Q at 43.) Nine of the Debtors’ twelve active mining complexes are located in West Virginia and three are located in Kentucky. (Stipulation ¶ 3(e).)
18. The states of residence listed on the Voluntary Petitions of the ninety-nine Debtors are as follows: West Virginia (where 54 entities are located); Missouri (where forty entities are located); Kentucky (where three entities are located); and New York (where two entities, Beaver Dam and PCX, are located). (Debtors’ Voluntary Petitions, Case Nos. 12-12898 to 12-12911, 12-12913, 12-12914, and 12-12916 to 12-12999, Dkt. No. 1 for each).
19. The Debtors own, lease, or hold under other arrangements coal reserves, surface property, and other real estate interests in various counties in many states, including Illinois, Indiana, Kentucky, Missouri, Ohio, Pennsylvania, and West Virginia. (Schroeder First Day Decl. ¶ 7.)
20. The Debtors’ operations include company-operated mines, contractor-operated mines, coal preparation facilities, and train, barge, and truck loading facilities. The Debtors also export coal under various throughput arrangements through ship loading terminals located in Baltimore, Maryland; Hampton Roads, Virginia; Newport News, Virginia; and New Orleans, Louisiana. (Schroeder Venue Decl. II15.)
21. In 2011, the Debtors sold a total of 31.1 million tons of coal. The Debtors supply coal to a diverse base of domestic and international customers, including electricity generators, industrial users, and steel and coke producers in various countries across North America, Europe, South America and Asia, including Belgium, Bosnia and Herzegovina, Brazil, Canada, China, France, Hungary, Italy, Japan, Mexico, South Korea, Spain, Sweden, the Ukraine, and the United Kingdom, and various states in the United States, including Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, West Virginia, and Wisconsin. (Schroeder Venue Decl. ¶ 4.) Nearly 95 percent of this coal was sold to customers *730outside of West Virginia. Roughly one million tons of coal — or approximately three percent of total sales volume — were sold to customers in New York and an additional twenty-nine percent of the total sales volume was exported to international customers. (Schroeder Venue Decl. ¶ 16.)
22. The Debtors are involved in lawsuits in many jurisdictions around the country, and have been named as defendants in cases commenced in Illinois, Indiana, Kentucky, Louisiana, Missouri, New York, North Carolina, and Pennsylvania. (Schroeder Venue Decl. ¶ 21.) The Debtors are also defendants in several pending lawsuits in West Virginia. (See generally Form 10-Q.)
23. The Debtors have been subject to litigation in West Virginia regarding selenium. (Form 10-Q, p. 20.)
24. The Debtors are parties to a court-approved consent decree in the U.S. District Court for the Southern District of West Virginia regarding allegations of selenium pollution from Debtors’ operations. (Sureties’ Motion, Exhibit B (Consent Decree in Ohio Valley Environmental Coalition v. Patriot Coal Corp., Case No. 3:11-00115, 2012 WL 895939 (S.D.W.V. March 15, 2012)).)
III. The Debtors’ Management and Board of Directors
A. The Debtors’ Management
25. The Debtors’ corporate headquarters and executive offices are located in St. Louis, Missouri. Many of the Debtors’ key corporate functions are based in St. Louis. These include the following departments: Accounting, Accounts Payable, Accounts Receivable, Financial Reporting, Treasury, Tax, Internal Audit, Legal, Sales and Market Research, Contract Management, Payroll, Corporate Development, Planning, Information Services, Human Resources, and Benefits. (Schroeder Venue Deck ¶ 8.) All of the Debtors’ books and records, including those established post-petition, are located in St. Louis, Missouri. (341 Mtg. Tr. at 14:13-21.)
26. At the time of the Hearing, Patriot’s executive management team was comprised of the following six members: Irl F. Engelhardt, Chairman and Chief Executive Officer; Bennett K. Hatfield, President and Chief Operating Officer; Robert W. Bennett, Senior Vice President and Chief Marketing Officer; Charles A. Ebe-tino, Jr., Senior Vice President — Global Strategy and Corporate Development; Joseph W. Bean, Senior Vice President of Law and Administration, General Counsel, and Assistant Secretary; and Mr. Schroeder. (Schroeder Venue Deck ¶ 10.)14
27. Three members of the Debtors’ executive management team — Mr. Engel-hardt, Mr. Bean, and Mr. Schroeder— work in St. Louis, Missouri and reside in Missouri or Illinois. A fourth member of the executive management team, Mr. Ebe-tino, resides in Ohio and has an office in Patriot’s corporate headquarters in St. Louis, Missouri and an office in Charleston, West Virginia. The two remaining members of the executive management team, Mr. Hatfield and Mr. Bennett, reside in West Virginia and have offices in (i) Charleston, West Virginia and (ii) Patriot’s corporate headquarters in St. Louis, Missouri. (Schroeder Venue Deck ¶ 11.)
B. Patriot’s Board of Directors
28. At the time of the Hearing, there were eight directors on Patriot’s board of *731directors (the “Board”): J- Joe Adorjan; Bobby R. Brown; Irl F. Engelhardt; Michael P. Johnson; Janiece M. Longoria; John E. Lushefski; Michael M. Scharf; and Robert O. Viets.15 (Schroeder Venue Decl. ¶ 12.) The directors reside in Arkansas, Florida, Illinois, Missouri, New Jersey, Oklahoma, and Texas. (Schroeder Venue Decl. ¶ 13.)
29. At the time of the Hearing, there had been approximately fifty-five meetings of the Board following Patriot’s spin-off from Peabody in October 2007. Thirty-two of the fifty-five meetings were held in person, including twenty-nine in Missouri, one in West Virginia, one in Texas, and one in Florida. The remaining twenty-three meetings were conducted telephoni-cally. (Schroeder Venue Decl. ¶ 14.)
IV. The Debtors’ Prepetition and Post-petition Capital Structure
A. Prepetition Capital Structure
30. Patriot, as borrower, and substantially all of the other Debtors, as guarantors, were parties to that certain $427.5 million Amended and Restated Credit Agreement, dated as of May 5, 2010 by and among substantially all of the Debtors, Bank of America, N.A., as administrative agent, and the lenders party thereto (as amended, supplemented, modified, or amended and restated from time to time, the “Credit Facility”). The Credit Facility provided for the issuance of letters of credit and direct borrowings, was governed by New York law, and included a New York forum selection clause. (Schroeder Venue Decl. ¶ 24.)
31. Patriot is also party to a $125 million accounts receivable securitization program, which provided for the issuance of letters of credit and direct borrowings. The operative agreement, dated as of March 2, 2010, is governed by New York law and includes a New York forum selection clause. This agreement is among (i) non-Debtor Patriot Coal Receivables (SPV) Ltd., (ii) Debtor Patriot Coal Corporation, as Servicer, (iii) various purchasers and LC participants, and (iv) Fifth Third Bank, as Administrator and as LC Bank. (Schroeder Venue Decl. ¶ 27; Stipulation at ¶ 3(f).)
32. Patriot has issued two series of unsecured notes: (a) $250 million in 8.25% senior unsecured notes due 2018 (the “Senior Bonds”); and (b) $200 million in 3.25% unsecured convertible notes due 2013 (the “Convertible Bonds”). The indenture trustees named in these debt instruments are located in Delaware and Minnesota, respectively [Dkt. No. 98 at 3] and the instruments are governed by New York law. (Schroeder Venue Decl. ¶ 28.)
33. As of July 11, 2012, entities based in New York appear to hold the largest amounts of Senior Bonds and Convertible Bonds. (Schroeder Venue Decl. ¶¶ 29-31.)
34. In 2005, Debtor Cleaton Coal Company issued unsecured promissory notes in conjunction with an exchange transaction involving the acquisition of Illinois Basin coal reserves. The promissory notes and related interest are payable in annual installments of $1.7 million and mature in January 2017. These instruments are governed by Kentucky law. (Schroeder Venue Deck ¶ 33.)
B. The DIP Facilities
35. The Credit Facility has been replaced by Debtor-in-Possession (“DIP”) facilities. (Schroeder Venue Decl. ¶ 24 *732n.l.) On July 9, 2012, Patriot entered into the Superpriority Secured Debtor-in-Possession Credit Agreement (the “First Out DIP Facility”). The First Out DIP Facility matures in October 2013, with a possible extension to December 2013. [Dkt. No. 78-1 at § 1.01.] On July 11, 2012, Patriot entered into the Amended and Restated Superpriority Secured Debtor-in-Possession Credit Agreement (the “Second Out DIP Facility”). The Second Out DIP Facility matures in October 2013, with a possible extension to December 2013. [Dkt. No. 78-1 at § 1.01.] The Court has authorized the financing contemplated by the First Out DIP Facility and the Second Out DIP Facility (together, the “DIP Facilities”) on a final basis, pursuant to which Patriot may borrow and obtain letters of credit up to an aggregate principal or face amount of $802 million. [Dkt. No. 275 at ¶ 6(a).] Three of the five agents under the DIP Facilities and joint lead arrangers are headquartered in New York. (Schroeder Venue Decl. ¶ 48.)
36. Both the First Out DIP Facility and the Second Out DIP Facility contain (a) a New York choice of law provision and a New York forum selection clause (Schroeder Venue Decl. ¶ 52; Dkt. No. 78-1 at § 12.14(a)-(b); Dkt. No. 78-3 at § 10.14(a)-(b)) and (b) a covenant that obligates the Debtors to comply with applicable environmental laws and regulations. [Dkt. No. 78-1 at § 6.13; Dkt. No. 78-3 at Article VI.]
37. As reflected on Schedule 2.01 to the Second Out DIP Facility, three of the four Sureties are beneficiaries of letters of credit in the outstanding principal amount of $32.4 million. Each Second Out DIP lender agreed to make advances to reimburse the issuers of those letters of credit for amounts, if any, drawn by the Sureties. (Schroeder Venue Decl. ¶ 54.)
V. Parties-in-Interest in the Debtors’ Chapter 11 Cases
A. The Debtors’ Material Contracts and Leases
38. The Debtors own, lease, or hold under other arrangements coal reserves, surface property, and other real estate interests in many states, including Illinois, Indiana, Kentucky, Missouri, Ohio, Pennsylvania, and West Virginia. (Schroeder Venue Decl. ¶ 34.)
39. Of the fifteen largest lessors from whom Debtors lease property, measured by coal reserves, six are headquartered in West Virginia. The other nine lessors are headquartered in other states, including Tennessee, Virginia, Kentucky, Pennsylvania, and Missouri. (Schroeder Venue Decl. ¶ 35.)
40. The Debtors have entered into a master equipment lease with each of their twenty equipment lessors. The twenty equipment lessors are headquartered in at least a dozen states, including California, Connecticut, Illinois, and New Jersey. Of the twenty master leases, four are governed by New York law. (Schroeder Venue Decl. ¶ 19.)
41. Approximately 78 percent of the Debtors’ 2011 coal sales were under term (one year or longer) coal supply agreements that specify the coal sources, quality and technical specifications, shipping arrangements, pricing, force majeure, and other provisions unique to agreements reached with each purchaser. (Schroeder Venue Decl. ¶ 17.) New York law governs forty-one of the Debtors’ sixty-five coal sales contracts. These contracts represent approximately forty-three percent of the Debtors’ committed sales. Two of the Debtors’ sales contracts are governed by West Virginia law, amounting to five percent of the Debtors’ committed sales volume. (Schroeder Venue Decl. ¶ 18.)
*73342. The Debtors entered into indemnity agreements with the sureties that issue surety bonds on the Debtors’ behalf. The indemnity agreement that governs the relationship between the Debtors and West-chester Fire Insurance Company — one of the four Sureties — is governed by New York law and includes a New York forum selection clause. None of the other three indemnity agreements is governed by West Virginia law. (Schroeder Venue Decl. ¶ 20.)
43. The issuers of the Debtors’ surety bonds are located in various states, including Tennessee, Minnesota, Pennsylvania, Connecticut, and New Jersey. (Schroeder First Day Deck, Ex. A, Sched. 5; UMWA Motion, Ex. D (Patriot Creditors).) The Debtors have a total of $238 million of outstanding surety bonds. (Schroeder First Day Deck, Ex. A. Sched. 5.) The bonds issued by the four Sureties who filed the Sureties’ Motion16 total approximately $69 million and comprise approximately 29 percent of the total surety bonds issued by the Debtors. See id.; Sept 12, 2012 Hr’g. Tr. at 131:19-132:7.
44. The Sureties have headquarters and have issued bonds in the Debtors’ cases as follows:17 (i) Indemnity National Insurance Company is based in Knoxville, Tennessee and has issued approximately $11 million in bonds; (ii) Westchester Fire Insurance Company is based in Philadelphia and has issued approximately $5 million in bonds; (iii) Houston Casualty, the parent of U.S. Specialty Insurance, is based in Houston and has issued approximately $24 million in bonds; and (iv) Argonaut Insurance Company is based in Houston and California and has issued approximately $26.5 million in bonds.18 More than 34 percent (over $23 million) of the approximately $69 million in total bonds issued by the Sureties consists of bonds in favor of state and local regulators outside of West Virginia.
45. Under the Second Out DIP Facility, Bank of America issued letters of credit in the aggregate principal amount of approximately $32 million as collateral for three of the four Sureties’ bond obligation. (FF ¶ 37). That collateral reduces the Sureties’ exposure by nearly 50 percent— to approximately $37 million in total.19 Of this contingent unsecured exposure, the maximum amount supporting the Sureties’ obligations to regulators in West Virginia is approximately $25 million. Indemnity National Insurance Company, one of the four Sureties, has zero West Virginia-related economic exposure, and another of the Sureties, Westchester Fire Insurance Company, has less than $1 million in West Virginia-related maximum economic exposure.20
46. None of the issuers of the Debtors’ letters of credit is located in New York; these issuers are located in North Carolina, Ohio, and Pennsylvania. (Schroeder First Day Deck, Ex. A, Sched. 5; UMWA Motion, Ex. D (Patriot Creditors).)
*734B. The Debtors’ Current and Former Employees
47. The Debtors collectively employ more than 4,000 people in active status, working in both full-time and part-time positions. These employees include miners, engineers, truck drivers, mechanics, electricians, administrative support staff, managers, directors, and executives. Approximately 42 percent of these employees are unionized and are represented by the UMWA under collective bargaining agreements; the majority of Patriot’s employees are not members of the UMWA. (Schroeder Venue Decl. ¶ 36).
48. As of July 2012, there were approximately 11,860 retirees covered as primary insureds under benefit plans administered by the Debtors (the “Retirees”). The Retirees reside in forty-one different states, with approximately thirty-eight percent living in West Virginia. Approximately fifty percent of the Retirees live in the Illinois Basin coal region, which includes Illinois, Indiana, and Kentucky. (Schroeder Venue Decl. ¶ 39.)
49. Of the 11,860 Retirees, 10,388 were UMWA members. The unionized Retirees reside in thirty-nine different states, with approximately thirty-nine percent living in West Virginia and approximately fifty percent in the Illinois Basin region. (Schroeder Venue Decl. ¶ 40.) There are approximately 4,000 retired UMWA members in Illinois, Indiana, and Western Kentucky. (Buckner Decl. ¶ 7.)
50. Nine of the ninety-nine Debtors are signatories to collective bargaining agreements: Highland Mining Company, LLC; Hobet Mining, LLC; Apogee Coal Company, LLC; Heritage Coal Company LLC; Pine Ridge Coal Company, LLC; Mountain View Coal Company, LLC; Colony Bay Coal Company; Eastern Associated Coal, LLC; and Gateway Eagle Coal Company, LLC. (Schroeder Venue Decl. ¶ 38.)
51. The UMWA’s headquarters are located in Triangle, Virginia. (Buckner Decl. ¶ 4.) The UMWA is represented in these cases by Kennedy, Jennik & Murray, P.C., with offices at 113 University Place, New York, New York.
52. A bargaining team has been established by the UMWA in order to conduct negotiations with the Debtors pursuant to section 1113 of the Bankruptcy Code. (Buckner Decl. ¶ 3.) The team is composed of three International District Vice Presidents who oversee jurisdictions in which Debtors conduct active mining operations. They are Joe Carter, Mike Caputo, and Steve Earle. The other member of the negotiating team is UMWA President Cecil Roberts. All of the members of the UMWA negotiating team currently reside and work in West Virginia with the exception of Steve Earle, who resides and works in Kentucky. (Buckner Decl. ¶¶ 3-7.)
53. At the end of August 2012, the UMWA held “mass membership” meetings in both Evansville, Indiana and Charleston, West Virginia for its active and retired members and their dependents in order to review developments in the Debtors’ cases to date and to provide information to members. (Buckner Decl. ¶ 9.)
C. The Debtors’ Creditors and Claimholders
54. According to the “List of Creditors Holding 5 Largest Secured Claims” [Dkt. No. 4, Schedule A], the Debtors’ five largest secured creditors are located in California, Illinois, Missouri, New Jersey, and Ohio. Several of these creditors have offices and operations across the country and throughout the world. (Schroeder Venue Decl. ¶ 41.)
55. There are seven members of the Committee. The members, who were appointed on July 18, 2012, are: (1) Wil*735mington Trust Company, located in Wilmington, Delaware; (2) U.S. Bank National Association, located in Boston, Massachusetts; (3) United Mine Workers of America, located in Triangle, Virginia; (4) UMWA Health and Retirement Funds, located in Washington, D.C.;21 (5) Gulf Coast Capital Partners, LLC, located in Naples, Florida; (6) Cecil Walker Machinery, located in Louisville, Kentucky; and (7) American Electric Power, located in Columbus, Ohio. (Schroeder Venue Decl. ¶ 42.)
56. The Debtors’ fifty largest unsecured creditors hold approximately $507 million in liquidated claims. This total does not include the value of unliquidated claims. (Schroeder Venue Decl. ¶ 44.)
57. Of the Debtors’ fifty largest unsecured creditors, ten are based in West Virginia, and their claims account for approximately $9.6 million of the approximately $507 million in liquidated unsecured claims against the Debtors. (Schroeder Venue Decl. ¶ 45.) None of the Debtors’ fifty largest unsecured creditors is located in New York. (Revised List of Creditors Holding the 50 Largest Unsecured Claims [Dkt. No. 98].)
58. The Debtors’ largest unsecured creditor from West Virginia ranks thirteenth on their list of the largest unsecured claims, with an unliquidated claim estimated at less than $3.2 million. The Debtors’ largest unsecured creditor, Wilmington Trust Company, which is located in Wilmington, Delaware, has a $250 million claim. (Schroeder Venue Decl. ¶ 46.)
59. The twenty top vendors of the Debtors for the first six months of 2012 have headquarters in twelve different states, with five located in West Virginia and two located in New York. (Schroeder Venue Decl. ¶ 47; Stipulation at ¶ 3(g).) Of the five located in West Virginia, two supported retaining venue in the Southern District of New York and the other three did not assert a position.
60. Twenty of the Debtors’ fifty largest unsecured creditors — including six of the ten creditors from West Virginia — filed timely joinders in support of the Debtors’ Objection. In addition, five of the remaining top-fifty creditors of the Debtors, including two from West Virginia, timely submitted letters or e-mails to the Debtors requesting that the Debtors represent to the Court that they oppose the Motions and support these cases remaining in the Southern District of New York. Two top-fifty creditors offered untimely support for the Debtors’ Objection, for a total of twenty-seven out of the top-fifty unsecured creditors supporting this Court retaining venue in New York. [Dkt. Nos. 423 and 433, respectively.]
61. American Electric Power (located in Canton, Ohio), Monongahela Power Company (located in Greensburg, Pennsylvania), and Hope Gas, Inc., d/b/a Dominion Hope (located in Carlsburg, West Virginia) filed a timely joinder in support of the Motions. [Dkt. No. 98.] The West Virginia Attorney General filed the other timely joinder in support of the Motions. [Dkt. No. 390.] Untimely joinders (to the UST Motion only) were filed by the UMWA Health and Retirement Funds, located in Washington, D.C., and the Interested Shareholders, located in Connecticut and Virginia.
VI. Commencement of the Debtors’ Chapter 11 Cases
62. A number of events led to the commencement of the Debtors’ chapter 11 *736cases, including reduced demand for coal, increased regulation of power plants and coal mining, and substantial legacy labor costs. (Schroeder First Day Decl. ¶¶ 21-39.)
63. In recent years, the demand for coal has decreased, in large part because alternative sources of energy have become increasingly attractive to electricity generators in light of declining natural gas prices and more burdensome regulation of the coal industry. At the same time, the Debtors’ liabilities have increased as the Debtors face sharply rising costs to comply with such regulations. (Schroeder First Day Decl. ¶ 21.)
64. The Debtors also have substantial legacy costs, primarily in the form of medical benefits and pension obligations. The Debtors currently provide benefits to more than three times the number of retirees and non-active employees and those parties’ dependents than to active employees. (Schroeder First Day Decl. ¶ 33.)
65. As a result of these factors, the Debtors’ financial performance has experienced a significant decline. For the twelve months ended March 31, 2012, the Debtors reported revenues of $2.33 billion and Adjusted EBITDA of $164 million from the sale of approximately 29.4 million tons of coal. The Debtors’ net loss during the same period was $198.5 million. (Schroeder First Day Decl. ¶ 13.)
66. The Debtors elected to commence their chapter 11 cases in New York because they determined that it was in the best interests of all stakeholders to do so. No evidence was submitted to the contrary. As Mr. Schroeder stated in his Declaration:
The Debtors determined that the Southern District of New York (the “SDNY”) is the optimal venue for the Debtors’ chapter 11 cases and in the best interests of the Debtors, their creditors and other stakeholders and these estates. The Debtors’ legal and financial advisors are all located in New York, and the Debtors’ significant financial creditors, along with their professional advisors, are also located in New York. Moreover, along with their advisors, the agent under the proposed “first out” DIP financing facility and two of the three arrangers under the proposed DIP financing facilities are New York-based institutions, and the DIP financing contemplates that the Debtors’ cases be venued in the SDNY. I believe that had we filed in one of the other jurisdictions that were also available to us (i) most of our domestic and foreign creditors would have been inconvenienced and (ii) the costs and inefficiency of administration of the estates would have materially increased.
(Schroeder First Day Decl. ¶ 43.) Pursuant to the Stipulation, the Debtors did not call Mr. Schroeder to testify as a witness, nor was he cross-examined by the UMWA or any other party.
DISCUSSION
Against the foregoing extensive factual backdrop, the Court now turns to the questions of law presented by the Motions. The analysis begins, as it must, with the applicable statutory provisions.
I. The Bankruptcy Venue Statute — 28 U.S.C. § 1408
Section 1408 of title 28 of the United States Code provides:
Except as provided in section 1410 of this title, a case under title 11 may be commenced in the district court for the district—
(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United *737States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or
(2) in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership.
28 U.S.C. § 1408.
The linkage between venue and particular geographic locations dates back hundreds of years. The original meaning of “venue” under English law was the neighborhood from which jurors were to be drawn because of their personal knowledge of the facts and the parties. The jurors’ personal knowledge formed the basis for the jurjf s decision in actions at law, including those involving title to land, trespass, and debt. The use of such a jury of so-called “recognitors” was well established by 1200 A.D. in the circuit courts that travelled throughout England. After the English law courts settled at Westminster after 1200 (in order to avoid the inconvenience of judges travelling and moving court records), the key factor in determining the place of trial continued to be the convenience of the courts, not that of the parties. The Statute of Westminster in 1285 thus specifically authorized the trial of cases at Westminster nisi prius — “unless before” that time a circuit court had arrived in the local community to conduct a trial, hence the name “Nisi Prius” courts. Otherwise, the jurors and litigants would travel to Westminster for the trial.22
As proof by sworn witnesses replaced proof by jurors, the necessity of using local jurors diminished. Nonetheless, there continued to be a requirement that a plaintiff “lay” an action in the county in which the claim arose, regardless of whether the action was local or transitory in nature. “Transitory” actions were those not identified with any particular location, including actions on contracts and debt, while “local” actions were those so closely connected with the place in which they arose that it was held they could only have arisen there. Trespass to land, ejectment, and replevin fell into the latter category.23 As the distinction between transitory and local actions developed in sixteenth and seventeenth century England, personal actions on debt and on contracts no longer had to be venued where they arose but could also be brought where the defendant and/or his chattels could be found.24
The rules and procedures of the English judicial system were in large measure continued in America with the enactment of the Federal Judiciary Act of 1789. Significantly, however, the fears and prejudices of the colonists led Congress and state legislatures to give increased emphasis to the need to protect the defendant’s inter*738ests in laying venue.25 Venue was generally required to be laid where the defendant resided. Local federal courts were established to ensure fairness and convenience to defendants.26 The principal factors we continue to look to today under applicable venue statutes and case law — convenience of the parties and witnesses, the location of the defendant, and the scope and type of jurisdiction required for enforcement of judgments — are thus deeply rooted in history. Notably, personal knowledge of the facts at issue in a case by the trier of fact ceased long ago to be a venue consideration.
Federal practice with respect to venue has continued to evolve to keep pace with the rapidly changing nature of our nation, from the development of interstate commerce to the rise of the corporation and national banks to the dawn of the digital age. Life and the law are decidedly more complex than they were when the very first federal court convened, here in the Southern District of New York in 1789. Nonetheless, the concept of venue remains one of fairness and convenience. To the extent that geography can be cited as a basis for venue rules, it is important to keep the foregoing history in mind, for it is fairness, rather than geography, that has been and should continue to be the key factor in determining the appropriateness of venue. See Note: Forum, Shopping Reconsidered, 108 Harv. L. Rev. 1677, 1688-89 (1990) (forum shopping violates “fair play by allowing parties to circumvent fate” and “highlights elements of randomness in the administration of justice”). While the Court agrees with the UMWA’s observation that venue based on domicile implies that there is “a nexus between a person and a place of such permanence as to control the creation of legal relations and responsibilities of the utmost significance,” Williams v. North Carolina, 325 U.S. 226, 65 S.Ct. 1092, 89 L.Ed. 1577 (1945),27 it does not necessarily follow that the only location that satisfies this test in these cases is West Virginia. The tenor of the Motions of both the UMWA and the Sureties reflects unfortunate remnants of the types of “geographic” fears and prejudices that are unfounded and have no place in this matter.
II. Transfer of Venue Pursuant to 28 U.S.C. § 1412
We turn next to the transfer of venue pursuant to section 1412 of title 28 of the United States Code, which provides that “[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.” 28 U.S.C. § 1412.28 Section 1412 is written in the disjunctive, meaning that each of the two prongs — “in the interest of justice” or “for the convenience of the *739parties”29 — constitutes an independent ground for transferring venue. See In re Asset Resolution LLC, 2009 WL 4505944, at *2, 2009 Bankr.LEXIS 3711 at *6 (Bankr.S.D.N.Y. Nov. 24, 2009). According to the Second Circuit:
The “interest of justice” component of § 1412 is a broad and flexible standard which must be applied on a case-by-case basis. It contemplates a consideration of whether transferring venue would promote the efficient administration of the bankruptcy estate, judicial economy, timeliness, and fairness....
Gulf States Exploration Co. v. Manville Forest Prod. Corp. (In re Manville Forest Prod. Corp.), 896 F.2d 1384, 1391 (2d Cir.1990). The decision of whether to transfer venue pursuant to section 1412 is within a court’s discretion according to “an individualized, case-by-case consideration of convenience and fairness.” Manville, 896 F.2d at 1391 (citations omitted).
A movant seeking transfer of a bankruptcy case to a different venue bears the burden of proof, and that burden must be carried by a preponderance of the evidence. Manville, 896 F.2d at 1390. Moreover, the Second Circuit has stated that the district in which the underlying bankruptcy case is pending “is presumed to be the appropriate district for hearing and determination of a proceeding in bankruptcy.” Id. at 1391. A debtor’s choice of forum is entitled to great weight if venue is proper pursuant to section 1408. See, e.g., In re Enron Corp., 284 B.R. 376 (Bankr.S.D.N.Y.2002) (‘Enron II”). As will be seen, the failure of certain of the Movants to' carry their burden of proof played a significant role at the Hearing and in the Court’s decision.
Courts in the Second Circuit have applied the flexible standard embodied in section 1412 in various ways, some using specified factors, see In re Dunmore Homes, Inc., 380 B.R. 663, 671-72 (Bankr.S.D.N.Y.2008) (citing Enron Corp. v. Arora (In re Enron Corp.), 317 B.R. 629, 638-39 (Bankr.S.D.N.Y.2004) (“Enron III”)), and some without applying a factor test, see Grumman Olson Indus. v. McConnell (In re Grumman Olson Indus.), 329 B.R. 411, 437 (Bankr.S.D.N.Y.2005). It has also been noted that it is “appropriate to add as an additional relevant factor, though it may rarely be applicable, the integrity of the Bankruptcy Court system.” In re Eclair Bakery Ltd., 255 B.R. 121, 142 (Bankr.S.D.N.Y.2000).30 While a court considering a transfer of venue must base its analysis on the facts underlying the particular case before the court, see, e.g., Enron III, 317 B.R. at 638, a number of decisions in this District, while factually distinguishable, are instructive.
In Dunmore Homes, the court granted a motion pursuant to section 1412 to transfer a chapter 11 case filed in the Southern District New York to the Eastern District of California, despite the fact that section *7401408 had been satisfied. After examining each of the factors courts have considered in evaluating the convenience of the parties 31 and the interest of justice32 prongs under section 1412, Judge Glenn identified numerous facts that weighed in favor of transfer of the Dunmore Homes case, including the location of the debtor’s management, employees, and office and the location of parties-in-interest in the case, all of which were based in California. Dunmore Homes, 380 B.R. at 677. The court also noted that the debtor lacked any ties to New York other than its recent incorporation and its efforts to secure financing there. While the court recognized that a debtor’s selection of venue is afforded great weight, it concluded that the “thin nexus” of the debtor to New York and the “overwhelming contacts” between the debtor and California, “combined with no overriding factors making it substantially more likely that the Debtor’s prospects for a successful reorganization would be enhanced if this Court were to retain jurisdiction” mandated a transfer of venue in the interest of justice. Id. at 675-76. The court also concluded that the moving parties had met their burden under the “convenience of the parties” prong of section 1412 as well as the “interest of justice” prong. Id. at 677.
In the first of three venue-related decisions in the Enron chapter 11 cases, Judge Gonzalez denied motions to transfer venue from the Southern District of New York to the Southern District of Texas pursuant to section 1412. In re Enron Corp., 274 B.R. 327 (Bankr.S.D.N.Y.2002) (‘‘Enron I”). Although all but three of the debtors had their principal place of business in Texas and some creditors were best served by the case being transferred to Texas, the court denied the motions to transfer venue filed by several creditors and parties-in-interest, finding that the movants did not show by a preponderance of the evidence that transfer of venue was in the interest of justice or for the convenience of the parties and that, after considering “matters of judicial economy, timeliness and fairness as well as the efficient administration of the estate, the interest of justice [was] best served by retaining jurisdiction.” Id. at 351. Among other things, facts that the court emphasized in its ruling included: (i) all of the parties “most essential” to the reorganization of the debtors were located in New York, (ii) the *741creditors’ committee strongly opposed transfer of venue, (iii) the debtors’ finances were “extremely complex” and they would need access to the capital markets and financial experts in New York, and (iv) a learning curve had already been established in the cases which, contributed to judicial economy. Id. at 350-51.
In Enron II, the court denied a motion to transfer venue of the chapter 11 case of one of Enron’s subsidiaries, San Juan Gas Company, Inc., to the District of Puerto Rico. The movant, an unsecured creditor of San Juan Gas, did not dispute that venue was proper pursuant to section 1408 but sought transfer, pursuant to section 1412, solely of the San Juan Gas chapter 11 case. Enron II, 284 B.R. at 385. After employing the CORCO factors and giving the most weight to the promotion of the economic and efficient administration of the estate, the court concluded that the creditor did not meet its burden to show that the transfer was warranted for the convenience of the parties or in the interest of justice. Id. at 406. The court found that centralizing parent and subsidiary debtors in the same district (as contrasted with the creditor’s request to “fragment” the case) furthers the objectives of the Bankruptcy Code and may be in the interest of justice. Id. at 404.33
The case in the bankruptcy context that comes closest to the facts here at issue is In re Winn-Dixie Stores, Inc., Case No. 05-11063(RDD) (Bankr.S.D.N.Y. April 12, 2005) (“Winn-Dixie ”). In Winn-Dixie, the debtors sought venue in New York by incorporating an entity shortly before their chapter 11 filing, admittedly solely to establish venue and meet the requirements of section 1408. See Winn-Dixie, Hr’g. Tr. at 166. After a creditor filed a motion to transfer venue to the Bankruptcy Court for the Middle District of Florida, where the debtors’ supermarket operations and management were primarily located, the debtors at first opposed the motion but later consented to the transfer. In a decision issued from the bench, the court found that transfer of the debtors’ cases was in the interest of justice under section 1412 and ordered their transfer, overruling the objection of the creditors’ committee. Id. Judge Drain stated that “[g]iven the circumstances here ... and really solely the following factor, that [the Winn-Dixie affiliate entity] was formed solely to establish venue in New York, I conclude that transfer of venue here would be in the interests of justice under Section 1412 and therefore will order the transfer of the cases to the Middle District of Florida.” See Winn-Dixie, Hr’g. Tr. at 166-167.
Having set forth the factual background as well as the applicable statutory and decisional framework, we turn next to the consideration of the Motions.
III. The Debtors’ Cases Must be Transferred from this District Pursuant to 28 U.S.C. § 1412
No party disputes that section 1408 of title 28 has been “satisfied” in these cases; the parties stipulated to this fact prior to the Hearing. By incorporating PCX and Patriot Beaver Dam in New York in the weeks prior to the Petition Date, the Debtors achieved literal and technical compliance with the venue statute and used these entities as a basis for filing all of the Patriot chapter 11 cases in New York. The Debtors argue that this fact is disposi-tive — and requires that the cases remain in this District. The U.S. Trustee has also *742argued that this fact is dispositive — and requires that the cases be transferred to another District. Stated differently, it is the Debtors’ position that the eve-of-filing steps taken by the Debtors to satisfy the venue statute should not be considered in the “interest of justice” analysis. The Court disagrees with the Debtors, for the following reasons.
A. The Debtors Did Not Act In Bad Faith in Filing in this District
No party has alleged, and there is no evidence in the record, that the Debtors acted in bad faith in filing their chapter 11 cases in New York. Indeed, it could be argued that doing so was entirely consistent with, or even required by, the Debtors’ fiduciary duties. In the Schroeder First Day Declaration, Mr. Schroeder stated that
The Debtors determined that the Southern District of New York (the “SDNY”) is the optimal venue for the Debtors’ chapter 11 cases and in the best interests of the Debtors, their creditors and other stakeholders and these estates .I believe that had we filed in one of the other jurisdictions that were also available to us (i) most of our domestic and foreign creditors would have been inconvenienced and (ii) the costs and inefficiency of administration of the estates would have materially increased.
(Schroeder First Day Deck ¶ 43, FF ¶ 66.) The Schroeder First Day Declaration was admitted into evidence, and none of the Movants elected to cross-examine Mr. Schroeder on this or any other statement in his two declarations. The evidence in the record thus establishes that the Debtors chose to file in this District in good faith, and several of the Movants acknowledged as much on the record.34
At the Hearing, there was speculation (but no evidence) by the Movants as to why the Debtors determined to file these cases in New York. The UMWA, when asked why the Debtors chose New York, said “venue was better for them in New York.”35 When questioned further by the Court, counsel for the UMWA stated that “them” referred to the 99 Debtors who filed chapter 11 petitions; counsel reluctantly conceded that, in a chapter 11 case, a debtor is comprised of its economic stakeholders and that the Debtors here may in fact have chosen New York to maximize value to their stakeholders.36 No allegations were made or evidence adduced that the Debtors improperly sought to avoid another district or to hinder another party in interest,37 although the Sureties *743did argue that filing in this District was motivated in part by Patriot’s attempt to “escape”38 its environmental obligations, implying that this Court would be less inclined to protect West Virginia’s land and natural resources, and by extension, the health and welfare of her citizens — or less capable of doing so — than a West Virginia court. As the Court indicated at the Hearing in the strongest possible terms, such arguments are without merit.39
B. The Debtors’ Literal Compliance with Section 1408
Notwithstanding the absence of bad faith on the part of the Debtors and the deference to which the Debtors’ venue choice is entitled, the Court concludes that the Debtors’ purposeful creation of the venue-predicate affiliates in New York on the eve of filing must be considered in the “interest of justice” analysis set forth in section 1412. To ignore it would be to condone the Debtors’ strategy and elevate form over substance in a manner that courts have found impermissible; it would run afoul of any reasonable application of the intent of the venue statute. While the Debtors did in fact comply with section 1408, how they complied with the statute must be taken into account when considering the “interest of justice” prong of section 1412.
The Court has searched extensively for analogues to the facts here presented, for situations in which courts have looked beyond “literal compliance” with a statute and declined to uphold a party’s course of conduct notwithstanding such compliance. In the bankruptcy context, “artificial impairment” cases come to mind, in which a plan proponent nominally impairs the claims of a class in order to achieve technical compliance with the cramdown provisions of section 1129(a)(10). See, e.g., Windsor on the River Assocs. v. Balcor Real Estate Fin. (In re Windsor on the River Assocs., Ltd.), 7 F.3d 127, 132-33 (8th Cir.1993) (rejecting manufacture of an impaired class for sole purpose of ensuring plan approval by at least one impaired class); In re Washington Assoc., 147 B.R. 827, 831 (E.D.N.Y.1992) (same); In re Dunes Hotel Assoc., 188 B.R. 174, 184 (Bankr.D.S.C.1995) (same). In the realm of tax law, another area of the law in which courts are called upon to interpret and apply the provisions of a complex statute, the “substance-over-form doctrine”40 provides a useful analytical framework in which to explore the notion that literal compliance with a statute may not be sustainable if the actions taken do not comport with the statute’s purpose.
In the landmark tax case of Helvering v. Gregory, 69 F.2d 809 (2d Cir.1934), the taxpayer Evelyn Gregory owned a corporation (United Mortgage) which in turn owned another corporation (Monitor). To minimize the taxes she would pay on United Mortgage’s sale of its valuable shares in Monitor, Mrs. Gregory formed another corporation and transferred the shares of Monitor from United Mortgage to the newly formed corporation as a “reorganization,” in literal compliance with the provisions of the tax code. She then wound up the new corporation (which was in existence for only a few days and had no business purpose), taking the Monitor *744shares as a liquidating dividend. After the government assessed a deficiency against her for using the “reorganization” to avoid the payment of taxes on the transaction, Mrs. Gregory filed a claim with the United States Board of Tax Appeals, which ruled in her favor and expunged the deficiency. The government appealed the Board’s decision to the Second Circuit. In a decision by Judge Learned Hand, the Second Circuit reversed the Board’s order, finding that the transaction undertaken by the taxpayer was not what was contemplated by the statute. As the Court observed, in words that are compellingly applicable here:
[I]f what was done here ... was what was intended by [the statute] it is of no consequence that it was all an elaborate scheme to get rid of income taxes, as it certainly was. Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition. It is quite true, as the Board has very well said, that as the articulation of a statute increases, the room for interpretation must contract; but the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create.
Id. at 810-811 (emphasis added).
The taxpayer appealed the Second Circuit’s decision to the Supreme Court, arguing that she had complied with all elements of the statute and that her motive should not make unlawful what the statute permits. The Supreme Court affirmed the Second Circuit’s ruling, pointing out that although a new corporation was created, it was for no purpose other than to avoid the payment of taxes, and when that function was fulfilled, it was wound up. The Court stated that:
The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.
Gregory v. Helvering, 293 U.S. 465, 470, 55 S.Ct. 266, 79 L.Ed. 596 (1935) (emphasis added). Simply put, what was done was not “the thing which the statute intended.” Id. at 469, 55 S.Ct. 266.41
So too here. Notwithstanding the absence of bad faith on the part of the Debtors in filing these cases in the Southern District of New York in literal compliance with section 1408, this Court cannot allow the Debtors’ venue choice to stand, as to do so would elevate form over substance in way that would be an affront to the purpose of the bankruptcy venue statute and the integrity of the bankruptcy system. Creating PCX and Patriot Beaver Dam solely for the purpose of establishing venue is not “the thing which the statute intended.”
*745C. The Applicability of the Winn-Dixie Decision
Although at the Hearing the Debtors advanced eleven separate arguments as to why Winn-Dixie is distinguishable from the instant case, the Court is convinced that Judge Drain’s straightforward rationale for transferring the Winn-Dixie cases in the interest of justice applies with equal force in these cases and is not at odds with the Second Circuit’s decision in Capitol Motor Courts v. LeBlanc Corp., 201 F.2d 356 (2d Cir.1953). As in the Patriot cases, the debtors in Winn-Dixie sought venue in New York by incorporating an entity shortly before their chapter 11 filing, admittedly solely to establish venue and meet the requirements of section 1408. In its decision, the court stated that “the interests of justice require transfer where ... the facts were created to fit the statute,” which is distinguishable from “applying the statute to fit the facts.” Winn-Dixie, Hr’g. Tr. at 169-170. The court emphasized that it was transferring the cases not because venue was established in bad faith or wrongfully, but “simply because I don’t believe it just to exploit the loophole in the statute to obtain venue here.” Id. at 167; see also In re Jitney Jungle, Case No. 99-3602(MFW) (Bankr.D.Del. Dec. 7, 1999), Hr’g. Tr. at 168:20-21 (“finding that [venue] is not illegal does not establish that it is fair”). Moreover, as Judge Drain aptly observed, “the interests of justice prong of [section 1412] will not always serve the convenience of the parties,” Winn-Dixie, Hr’g. Tr. at 167, an observation that can be traced to Judge Friendly in New York Central Railroad Co. v. U.S., 200 F.Supp. 944 (S.D.N.Y.1961), which was a decision on a section 1404(a) motion.
Whether one characterizes the creation of venue as exploiting a loophole or as simply not fair, one thing is clear: it is not the thing which the statute intended. While the Court agrees, at least as a general matter, with the Debtors’ observation that it is the province of Congress and not the courts to close loopholes in legislation,42 nothing in our jurisprudence requires the Court to condone every strategy devised by clever lawyers to outsmart statutory purpose and language, even where, as here, they do so with the best of intentions. To do so here would violate Judge Friendly’s oft-quoted maxim that “[t]he conduct of bankruptcy cases not only should be right but must seem right.” In re Ira Haupt & Co., 361 F.2d 164, 168 (2d Cir.1966). Since the integrity of the bankruptcy process is implicated, and in the absence of any evidence that upsetting the Debtors’ selected venue will have dire consequences for the Debtors’ stakeholders, these cases should and must be transferred.
In reaching its decision, the Court considered and rejected several additional arguments advanced by the Debtors, including the following. In the Debtors’ Objection, they note that for years Congress has declined to close the “loophole” and change the venue statute. Specifically, the Debtors point to the fact that a bill introduced in the House of Representatives in 2011 was not enacted, see H.R. 2533, 112th Cong. (2011), and argue that this demonstrates that Congress is aware of the purported venue “loophole” and has declined to remedy it.43 But the history of proposed venue “reforms” in Congress is a long and tortuous one that has generated much controversy among politicians, bankruptcy practitioners, and academics; given the current political eli-*746mate in Congress, its inaction on H.R. 2533 can hardly be viewed as a decision on the merits of the proposals to remove domicile as a predicate for venue and/or to abolish or modify the affiliate filing rule.
The Debtors quite correctly point out that if the Patriot corporate group already happened to have either (a) one or more affiliates incorporated in New York prior to the months leading up to the chapter 11 filing or (b) one or more affiliates with a principal place of business in New York, the Debtors could have taken advantage of those facts and properly filed these cases in New York. See, e.g., Enron I, 274 B.R. at 341 (finding that section 1408 was satisfied because debtor EMC maintained its principal place of business in New York). They question the logic of allowing the propriety of a venue selection to turn on such “happenstance.”44 The Court expresses no view as to whether the decision on the Motions would be different if those were the facts presented, except to echo Judge Drain’s observations in Winn-Dixie that the creation of facts to fit the statute is a far cry from taking advantage of the facts as they existed before the Debtors embarked on their path to a chapter 11 filing.45
Here, as in Winn-Dixie, the Debtors created facts in order to satisfy the statute, as opposed to taking advantage of the facts as they existed. Permitting the Debtors’ cases to remain in this District under these circumstances would all but render the venue statute meaningless. It would allow potential large corporate debtors to choose what they view as the optimal venue for their bankruptcy cases and, in preparation for filing chapter 11, incorporate an affiliate in that location for purposes of satisfying section 1408. If “past is prologue,” many major financial institutions in their capacities as post-petition lenders would use their influence on their borrowers to cause the debtors’ filings to occur in this District. Sept. 12, 2012 Hr’g. Tr. at 183-4; 312-314; see generally DIP Agreement at Article IV. Section 1408 should not be interpreted in a way that gives debtors a free pass to conduct their cases here, or in any other district they choose.
D. Administrative Efficiency and the Convenience of the Parties
Finally, the Debtors, citing Enron I and Enron II, argue that the “interest of justice” argument propounded by the U.S. Trustee cannot outweigh the convenience to all parties and the administrative efficiency of proceeding in this District. They maintain that it cannot be in the interest of justice to transfer these cases “where all parties concede that venue was properly laid, where the costs to the estates and the creditor community would be enormous, and where the U.S. Trustee does not even argue that another forum would be more convenient.” Debtors’ Objection at pp. 3-4, 36-40, 57-58. The Debtors argue in essence that since venue in this District will allow them to achieve the best chapter 11 outcome for the most of their stakeholders, the means (incorporating PCX and Patriot Beaver Dam) justify the ends and therefore the Motions should be denied. They assert that transferring these cases would eliminate “the tremendous efficiencies that are gained by proceeding in New York City, a global trans*747portation hub” and “undermine the goal of the Bankruptcy Code of maximizing the value of these estates.”46 There is some merit to the Debtors’ observations on this point. While such a utilitarian view of justice is compelling, and consistent with the Court’s finding that the Debtors have not acted in bad faith, it unfortunately cannot be squared with the venue statute. While it is true that under CORCO the factor given the most weight by courts is typically the promotion of the economic and efficient administration of the estate, 596 F.2d at 1247, this factor cannot be given the most weight in every case. If it were, a forum such as the Southern District of New York would invariably trump other venues in the section 1412 analysis relating to large corporate chapter 11 cases because of its convenient access to capital markets, its transportation accessibility, and its concentration of leading chapter 11 practitioners.
Finally, the Debtors argue that venue in this District is supportable because the Debtors do have connections to New York. New York entities hold the largest amount of the Senior Bonds and Convertible Bonds; virtually all of the Debtors’ prepetition debt instruments and both of their DIP agreements are governed by New York law or contain a New York forum selection clause; New York law governs forty-one of the Debtors’ sixty-five coal sales contracts; the key business information of Patriot and its subsidiaries is hosted in New York; and the Debtors’ professionals, the agents under the DIP Facilities (three of five) and their counsel, counsel for the Committee, and counsel for many of the Debtors’ key stakeholders (including the UMWA) are located in New York. It cannot be said, however, that Patriot has a meaningful presence in New York. The Debtors have no operations or assets or employees in New York. The fact that New York law governs many of the Debtors’ sales contracts is not disposi-tive, as the law of West Virginia or other states may apply in equal force to environmental and other issues that may arise during the pendency of the Debtors’ bankruptcy cases. While most of the key professionals in these cases are located in New York, allowing the cases to remain here because the professionals are here would be condoning a “bootstrap” venue selection strategy that is at odds with the purpose of the venue statute, and with the interest of justice.
To be clear, ordering the transfer of the Debtors’ cases is a particularly difficult call in light of the overwhelming support the Debtors have received from their stakeholders47 and the evidence that it would be administratively efficient to conduct the cases in this District. The Motions are opposed by the Committee,48 as well as by forty-nine individual creditors. Such creditors include (a) twenty-seven of the Debtors’ top-fifty creditors, including eight of the ten located in West Virginia;49 *748(b) the agents under the DIP Facilities, who have agreed to finance borrowings by the Debtors of up to an aggregate principal or face amount of $802 million; and (c) Wilmington Trust Company, the indenture trustee for $250 million in Senior Bonds and a creditor of all of the Debtors. These parties argue that the Movants failed to establish that a venue transfer would result in a better outcome for the Debtors’ stakeholders as a whole, “whether such stakeholders are calculated by counting heads or counting dollars.” (Post-Hearing Brief of First Out DIP Agent ¶ 6). These parties also contend that the Movants introduced little, if any, evidence that established that transfer of these cases from New York would serve the convenience of all parties in these cases, or that the Southern District of West Virginia is more convenient than New York. As discussed more fully below, the Court agrees, and for that reason, among others, the Patriot cases will not be transferred to the Southern District of West Virginia.
E. The Limited Scope of the Court’s Ruling
In directing transfer of these cases in the interest of justice, the Court is not establishing a per se or categorical rule; accordingly, the teaching of cases such as United States v. Noland, 517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996) is' not implicated. As the Court indicated at the Hearing, the result here may indeed have been different if the U.S. Trustee had been the only party-in-interest seeking to transfer the Debtors’ cases — that is, if no economic party-in-interest had sought to transfer venue.50 It may also have been different if there were any evidence in the record of substantial, let alone “catastrophic,” economic consequences of moving the cases in the form of increased costs of administration and thus lower economic recoveries to stakeholders.51
With respect to the former point, the Court wholeheartedly concurs with Judge Gerber’s observations in In re Houghton Mifflin Harcourt Publ’g Co., 474 B.R. 122, 124 (Bankr.S.D.N.Y.2012) regarding the importance of deferring to the collective wisdom of the parties with “money on the line.” If the entirety of the Debtors’ economic stakeholders had implored the Court to leave venue unchanged because a transfer of venue would have taken dollars from their pockets, it would be difficult to square the interest of justice with the purposeful infliction of economic harm on a debtor’s creditors. But that is not this case. While it is clear that there is vast creditor support for the Patriot Debtors’ venue choice, it is not the unanimous support that was present in Houghton Miff-lin.
With respect to the issue of the economic consequences of transferring the cases, although the Debtors did not have any burden to meet on this issue, there is nonetheless nothing in the record that leads the Court to believe that transfer will have significant let alone “enormous” economic consequences here. The Court recognizes that the transfer of these cases may well involve some increased costs for the estates, but the mere possibility that there will be such costs does not warrant a different result. The efficient administra*749tion of the cases is of course an important factor in the Court’s analysis, but it would not be appropriate to treat it as a disposi-tive factor. As discussed above, given the arguments of the Debtors and DIP Agents about the importance of New York in the financial world, adopting such an approach would lead to venue in this District more often than it otherwise should. Needless to say, the courts in this District stand ready to handle any and all cases that rightfully belong in this District. That has always been the case and will remain so hereafter.
Doing justice in a particular case can impose a cost, and we as a society have determined that we are prepared to pay that cost from time to time to ensure the integrity of our laws and our system of government. Indeed our jurisprudence is replete with examples of socially costly conflicts between differing notions of justice. One obvious example is the so-called “exclusionary rule,” which curtails the use of illegally obtained evidence in criminal trials. As the Supreme Court has noted, “[t]he exclusionary rules generates ‘substantial social costs,’ U.S. v. Leon, 468 U.S. 897, 907, 104 S.Ct. 3405, 82 L.Ed.2d 677 (1984), which sometimes include setting the guilty free and the dangerous at large.” Hudson v. Michigan, 547 U.S. 586, 591, 126 S.Ct. 2159, 165 L.Ed.2d 56 (2006). The cost to the Patriot estates of transferring these cases to another district is impossible to determine; it may be material or it may be de minimis.52 It is a cost that the estates will simply have to bear, and the Court is confident that the parties will work together to minimize it.
IV. Neither the Interest of Justice nor the Convenience of the Parties Compels Transfer of the Patriot Cases to the Southern District of West Virginia
While the UMWA Motion and the Sureties’ Motion request that the Court transfer the Debtors’ cases to the Southern District of West Virginia, the Court finds that the evidence in the record has not established that the “interest of justice” or the “convenience of the parties” supports or requires transfer of the cases to the Southern District of West Virginia. With respect to the latter prong of the section 1412 test, there is no evidence in the record that transferring the cases to West Virginia would meaningfully serve the convenience of the parties.53 With respect to the former prong, the arguments *750of the UMWA and the Sureties can be summarized quite simply. Rather than have the cases proceed here in “lower Manhattan”54 where “the financiers and the bankers”55 are, the cases should be heard in West Virginia, where the coal is and where there are judges who “understand,” who “live near coal miners, grew up with them, worship with them and break bread with them.”56 In other words, the UMWA and the Sureties would have this Court give them, rather than the Debtors’ lenders, what they perceive to be the home field advantage. But it is not in the interest of justice merely to swap one party’s perceived home field advantage for another. The Court categorically rejects such a parochial formulation of justice.
The UMWA has advanced an “interest of justice” argument based on its subjective perception of fairness (or advantage) to its members and them desire to have the Debtors’ cases transferred to West Virginia and West Virginia only. At the Hearing, counsel for the UMWA argued that if the cases were not transferred to West Virginia, any other result would not “seem right” to the UMWA’s members.57 To be clear, the UMWA represents approximately forty percent of the Debtors’ workforce; it does not speak for nearly sixty percent of the workforce.58 The UWMA views this fact as immaterial since, it argues, the Debtors are free to reduce nonunion employee costs without *751resort to the Court.59 This is a divisive and troubling viewpoint, to say the least. As observed by the First Out DIP Agent, “[t]he fact that a single constituency may prefer a particular venue over the Debtor’s chosen forum is patently insufficient to warrant a transfer of venue in the interest of justice. In fact, a transfer on such facts would be particularly unjust in the face of an impression that the transfer is being made to advantage such party over other stakeholders.”60 Or, as objecting creditor Caterpillar stated at the Hearing:
[W]hen you’re talking about the appearance of justice ... you have to take into account the flip side of that and that by moving this to West Virginia there will at least be the appearance or the suggestion that perhaps some party in this case believes that that court is more sympathetic whether they are or not. And I think we can all agree in the room today that one court is not going to be any more inclined to side with one party or another than another, but the point remains that the constituency of the union apparently believes that may be true and that leads us right into the appearance of what is just and what is right. And for that reason, frankly, we think it is more appropriate to keep the case in what may be a more neutral territory.
Sept. 12, 2012 Hr’g. Tr. at 396:14-397:5.
While the UMWA and the Sureties acknowledge that they believe that both this Court and the West Virginia court would be “fair” and “sympathetic,”61 the record leaves little doubt that the UMWA believes it would be fairer to them for the Debtors’ cases to be heard in West Virginia by a West Virginia judge whose experience living in “coal country” would help him better “understand” their concerns.62 Simply put, they wish to benefit from proceeding in what they perceive as a more empathetic forum, ruling out the possibility that a judge anywhere else could understand their concerns.63 Putting aside the debate over whether empathy should be a factor in judicial decision-making,64 granting such a request would not be in the interest of justice. As the UMWA itself urges, the “perception of justice” is just as important a concern as technical compli-*752anee with the law.65 Transferring these eases to West Virginia would create a perception problem of an even greater magnitude than would retention of them in this District. As appropriately summarized by Caterpillar,
[T]he UMWA [has] based its Motion not on what venue would better lead to an efficient and effective reorganization or on what venue would be better able to address the interests of all of the Debtors’ constituents, but rather on the unionized workers’ perception that the Southern District of West Virginia would be a more advantageous forum for them and for them alone.
Post-Hearing Submission of Caterpillar at p. 3. Despite conceding that the Debtors did not act in bad faith in filing in this District, the UMWA asks this Court to transfer the cases to West Virginia because to do anything else will not seem fair to the UMWA members and could have a negative impact on their willingness to engage in good faith negotiations with the Debtors. That is not a request for justice; that is an ultimatum. It is forum-shopping that is just as inappropriate as the forum selection strategy employed by the Debtors, if not worse.
The Sureties advance a similarly myopic argument.66 Noting, quite properly, that the location of the Debtors’ mining operations and the environmental obligations stemming from the mines have a “profound impact” on the people and the environment of West Virginia, the Sureties argue that the cases therefore should be heard there. They argue that the state regulatory authorities of Kentucky and West Virginia play the major role in governmental oversight of the Debtors’ environmental compliance, and because the “evidence” of enormous environmental liabilities is also there, the cases should be transferred to West Virginia.67
Particularly in light of the perception and convenience concerns discussed above, the Court finds that neither the location of certain of the Debtors’ mining operations nor the location of the Debtors’ regulators justifies transferring the Debtors’ cases to West Virginia, and it rejects the Sureties’ argument on this point. The Sureties have not met their burden under the law or the facts to show that the existence of such regulatory regimes mandate transfer to West Virginia or to any other particular location. Only two regulators (the West Virginia Attorney General and the Kentucky DNR) filed statements in support of the Motions, one of which specified that it was not a joinder. Notably, no one on behalf of the West Virginia Attorney General even appeared at the Hearing, either in-person or telephonically, to urge the transfer of the Debtors’ cases to West Virginia. Moreover, as the Sureties concede, bankruptcy courts routinely apply and interpret other states’ laws and regulatory regimes, and the applicable law pertaining to a particular environmental dispute arising in these cases could be an*753alyzed in either forum without issue.68 Consistent with well-established case law, see, e.g., Midlantic Nat’l Bank v. N.J. Dept. of Environmental Protection, 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986), bankruptcy courts wherever located are acutely aware of the role they must play as stewards of the environment. The citizens of West Virginia should rest assured that these cases and the interests of their state will be in capable and caring hands wherever they are heard.
For all of the foregoing reasons, the Court cannot conclude that it would be in the interest of justice to transfer the Debtors’ cases to West Virginia. The analysis regarding the appropriate venue for these cases must focus on the interests and convenience of all parties, not just those of the UMWA, notwithstanding the volume of the UMWA’s voice and how fervently it believes in its position. The Court must consider and give appropriate weight to the opposition of, among others, the Committee; twenty-seven of the Debtors’ fifty largest unsecured creditors, eight of whom are located in West Virginia; the agents under the DIP Facilities, who have agreed to finance borrowings by the Debtors of up to an aggregate principal or face amount of $802 million; and Wilmington Trust Company, the indenture trustee for $250 million in Senior Bonds and a creditor of all of the Debtors. The Court also gives weight to the fact that only a small portion of the total anticipated claims against the Debtors are held by parties based in West Virginia;69 the majority of the Debtors’ trade creditors and counterparties to leases and executory contracts are based elsewhere. The Court also notes that the UMWA Health and Retirement Funds did not join the request of the Sureties and the UMWA to transfer the cases to West Virginia; rather, the funds only joined the request of the U.S. Trustee to transfer venue of the cases to “an appropriate jurisdiction.”70 Finally, even apart from the serious perception issues discussed above, neither the UMWA nor the Sureties carried their burden of establishing that a transfer of these cases to West Virginia would be convenient for the parties as contemplated by the second prong of section 1412.
V. The Patriot Cases Shall Be Transferred to the United States Bankruptcy Court for the Eastern District of Missouri
If not to West Virginia, where then should the Patriot cases be transferred? The Southern District of West Virginia is only one of a number of possible venues that may be proper for the Debtors’ chapter 11 cases pursuant to section 1408,71 including districts in Delaware, Kentucky, Illinois, Missouri, Indiana, and Virginia.72
In light of the foregoing findings and conclusions and consistent with well-settled law that the location of a debt- *754or’s assets73 is not an important venue consideration, particularly when a debtor is reorganizing rather than liquidating,74 the Court concludes that transferring these cases to the Eastern District of Missouri will serve the interest of justice and, as among venue choices other than this District, best serve the convenience of the parties. The Debtors’ corporate headquarters and executive offices are located in St. Louis, Missouri and many of the Debtors’ key corporate functions are based there. All of the Debtors’ books and records, including those established post-petition, are located in St. Louis, Missouri. Several members of the Debtors’ executive management team work in St. Louis and reside in Missouri or Illinois, and the remaining members, despite residing elsewhere, have offices in Patriot’s corporate headquarters in St. Louis. Of the thirty-two in-person meetings that have been held by Patriot’s Board, twenty-nine were held in Missouri. Moreover, the corporate headquarters of Peabody are also in St. Louis; this fact is significant in light of the issues that have been raised by the UMWA with respect to its spin-off of Patriot and its responsibility to provide promised eradle-to-grave health care benefits to Patriot employees and retirees who worked for Peabody prior to the spin-off.
While the Court has declined to accept the argument that the physical location of the coal in West Virginia is a significant factor here, the Court notes that the proximity of St. Louis to the Illinois Basin region also supports the transfer of the cases to St. Louis. While the Court also does not accept the arguments advanced by the UMWA that the participation of its members as witnesses in hearings is a critical factor in these cases, the Court does agree with the UMWA that it is important to consider the desire of the UMWA members to attend and observe hearings in these cases, the outcome of which will fundamentally affect their lives. While St. Louis may not be as convenient as Charleston for some employees and retirees, it is by no means remote from coal country. Indeed, the evidence reflects that more Patriot retirees live in the Illinois Basin than in West Virginia or any other location. St. Louis is accessible by car or bus from southern Illinois, southern Indiana,75 and Kentucky. St. Louis is also a convenient and accessible transportation hub for the many parties-in-interest and professionals who will be required to travel to hearings.76 And, as was demonstrated *755by the video broadcast of the Hearing, technology can and should be utilized to allow unlimited real-time access to these proceedings for those who are unable to travel to St. Louis.
CONCLUSION
Although they are not part of the record on the Motions, hundreds of hand-written letters have been received by the Court from “the people whose hands mine the Debtors’ coal”77 and their widows and children. Many of them enclosed family pictures, or lists of ailments and medications. Some of them asked for a personal response. All of them were respectful, and compelling. This decision reflects the Court’s attempt to craft a just and balanced solution to the question of which bankruptcy court will become the next custodian not only of these eases but also of these letters.
As it would have been a great privilege to preside over these cases, it is with considerable regret that the Court concludes that the Patriot chapter 11 cases shall be transferred to the United States Bankruptcy Court for the Eastern District of Missouri, in the interest of justice pursuant to 28 U.S.C. § 1412.
IT IS SO ORDERED.
. On July 19, 2012, the UMWA filed a corrected version of its motion. [Dkt. Nos. 116, 127.] The UMWA Motion was initially scheduled to be heard on August 2, 2012. [Dkt. No. 127.] On July 25, 2012, by agreement among the Debtors, the Official Committee of Unsecured Creditors (the "Committee"), and the UMWA, the hearing to consider the UMWA Motion was adjourned to September 11, 2012. [Dkt. No. 183.] On July 26, 2012, the Debtors filed a notice of relevant deadlines set by the Court with respect to the UMWA Motion. Pursuant to that notice, all joinders to the UMWA Motion were to be filed by August 20, 2012; all objections to the UMWA Motion were to be filed by August 24, 2012; and any reply by the UMWA or joinder to any objection was to be filed by August 29, 2012. [Dkt. No. 196.]
. On August 24, 2012, the Interested Shareholders filed a motion to appoint an equity committee in the Debtors' cases. By agreement of the parties, this motion is currently scheduled to be heard on December 11, 2012. [Dkt. No. 416.]
. The UMWA Motion, the Sureties' Motion, and the UST Motion collectively will be referred to herein as the "Motions.” The UMWA, the Sureties, and the U.S. Trustee collectively will be referred to herein as the "Movants.”
. Mr. Schroeder’s present title is Senior Vice President of Financial Planning. Patriot’s new Chief Financial Officer is John E. Lushef-ski.
. As described infra at p. 23, the Committee is comprised of seven members; the Court understands that the Committee voted 4-3 to oppose the Motions. See Sept. 12, 2012 Hr'g. Tr. at 294:20-295:4.
. At the Hearing, the Court requested that the Debtors file a declaration explaining the process the Debtors employed in soliciting join-ders to their position. See Sept. 12, 2012 Hr'g. Tr. at 451:2-19. As set forth more fully in the Jones Declaration, twenty-nine of the thirty-five timely-filed joinders appear to have been prepared using a template provided by the Debtors. Timely joinders to the Debtors' Objection were timely filed by twenty of the top-fifty unsecured creditors, including six of the ten top-fifty creditors from West Virginia. One late joinder was filed by a top-fifty creditor. In total, the Debtors received support— in the form of both timely and untimely join-ders or support correspondence — from a total of forty-nine creditors, including twenty-seven of the top-fifty creditors and eight of the ten top-fifty creditors from West Virginia.
. No party-in-interest served a single document request or deposition subpoena or requested any discovery from the Debtors or from any other party. At the outset of the second day of the Hearing, counsel to the UMWA Health and Retirement Funds, without prior notice to any party or the Court, sought to call a witness. The Court denied the request, for the reasons set forth on the record. See Sept. 12, 2012 Hr’g. Tr. 94:23-95:25.
. The Hearing was made available by live video broadcast to courtrooms in the Southern District of West Virginia and the Eastern District of Missouri. The Court understands that hundreds of interested parties viewed the Hearing at these locations. The broadcast was made possible thanks to the efforts of Vito Genna, the Clerk of Court for the United States Bankruptcy Court for the Southern District of New York, and his counterparts in the Southern District of West Virginia and the Eastern District of Missouri, Matthew Hayes and Dana McWay. The Court expresses its gratitude to them for helping achieve the Court's goal of providing access to the Hearing to as many people as possible. See Sept. 11, 2012 Hr’g. Tr. at 40-41.
. The "Ad Hoc Noteholders" are comprised of institutions holding approximately $100.6 million (or 40.2%) of the Senior Bonds. See Joinder of Ad Hoc Noteholders to Debtors’ Objection and Creditors’ Committee's Objection [Dkt. No. 480].
. The findings of fact and conclusions of law herein shall constitute the Court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052, made applicable to this proceeding pursuant to Bankruptcy Rule 9014. To the extent any finding of fact later shall be determined to be a conclusion of law, it shall be so deemed, and to the extent any conclusion of law later shall be determined to be a finding of fact, it shall be so deemed.
. As discussed supra at pp. 5-6, the Parties stipulated to certain facts in the Stipulation. Such facts have been included in the Court’s Findings of Fact.
. Paragraph 3(d) of the Stipulation reads as follows: "The Debtors formed both PCX and Patriot Beaver Dam to ensure that the provisions of Section 1408(1) of the Bankruptcy Code were satisfied, and for no other purpose.” At the Hearing, it was clarified by the parties that the words "of the Bankruptcy Code” were erroneously included in this subsection, and Paragraph 3(d) should have instead stated "the provisions of Section 1408(1) of title 28 of the United States Code were satisfied, and for no other purpose.”
. Counsel for the Debtors remarked at the Hearing that the "circumstances surrounding *729Patriot’s spinoff from Peabody will most assuredly be looked at with extraordinary seriousness by both the Debtors and the Creditors' Committee.” Sept. 12, 2012 Hr'g. Tr. at 226:16-18.
. Mr. Lushefski was appointed Chief Financial Officer on September 21, 2012, increasing Patriot’s executive management team to seven members. Mr. Lushefski resides in New Jersey and works in Patriot's corporate headquarters in St. Louis, Missouri.
. Mr. Lushefski resigned from the Board when he was named Chief Financial Officer of Patriot.
. The Sureties issue reclamation bonds to bond the Debtors’ environmental reclamation obligations. These bonds are contingent debt. See Sept. 12, 2012 Hr'g. Tr. at 17:24-18:8.
. It is worth noting that when the Court first inquired at the Hearing about the location of the Sureties, counsel for the Sureties did not know where their clients were located. See Sept. 12, 2012 Hr’g. Tr. at 17:8-18:8.
.See Sept. 12, 2012 Hr’g. Tr. at 49:6-17.
. See Sept. 12, 2012 Hr'g. Tr. at 423:18-23 (Sureties’ counsel’s acknowledgement that the Sureties’ ‘‘uncollateralized exposure across the Debtors' obligations” is only approximately $37 million).
. See Sureties’ Motion, Exhibit C; Post-Hearing Memorandum of Bank of America at pp. 3-5.
. The UMWA Health and Retirement Funds are represented by (i) Morgan, Lewis & Bock-ius LLP, which is located in Philadelphia, Pennsylvania and New York, New York and (ii) Mooney, Green, Sandon, Murphy & Welch, P.C., which is located in Washington, D.C.
. See Shirley M. Sortor, Venue Problems in Wisconsin, 56 Marq. L. Rev. 87 (1972).
. Id. at 88.
. Id. at 89. Since the United States Bankruptcy Court is a court of equity, it is worth noting that the history of venue in English courts of equity, or Chancery courts, is altogether different from that of the law courts. Chancery was originally a religious court that sat only in Westminster; its subpoena power extended to all of England. Since its decisions were based on evidence given by witnesses under oath, there was no concept of laying venue in a particular locale for the purpose of forming a jury of local citizens with personal knowledge of the facts of a case. Id. at 90.
. Charles Warren, New Light on the History of the Federal Judiciary Act of 1789, 37 Harv. L. Rev. 49, 72 (1923).
. Sortor at 92. Kentuckians, then citizens of Virginia, threatened to secede from the Union unless provided with a local court. See William Wirt Blume, Place of Trial of Civil Cases — Early English and Modem Federal, 48 Mich. L. Rev. 1, 36 (1949).
. UMWA Post-Hearing Mem. of Law at p. 3.
.While section 1412 is applicable in bankruptcy cases in which venue is “proper,” section 1406 of title 28 is applicable to bankruptcy cases in which venue is improper. It provides that “the district court in a district in which a case is filed laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.” The Motions have been brought pursuant to section 1412 only.
. This formulation of the test for interfering with a party’s venue choice can be traced to the case of Holmes v. Wainwright, 102 Eng. Rep. 624 (K.B. 1803), in which Lord Ellen-borough, C.J., stated that venue should be changed only if "all the conveniences and justice of the case preponderates in favor of the application.” By 1803, Lord Ellenbor-ough had the benefit of some 700 years of learning on venue disputes in England, dating back to the reign of William II. See generally, Blume at 28.
. Bankruptcy courts in the District of Delaware have frequently articulated and applied a “center of gravity” test in determining whether to transfer bankruptcy cases. See, e.g., In re Ernst Home Center, Inc., Case No. 96-01088(PJW) (Bankr.D.Del. August 28, 1996) (transferring case to Washington because "center of gravity” of the case was on the West Coast, not in Delaware).
. The court in Dunmore Homes stated that the "convenience of the parties" prong has six factors: (i) proximity of creditors of every kind to the court, (ii) proximity of the debtor, (iii) proximity of witnesses necessary to the administration of the estate, (iv) location of the assets, (v) economic administration of the estate, and (vi) necessity for ancillary administration if liquidation should result. See Dunmore Homes, 380 B.R. at 676 (citations omitted). These factors are sometimes referred to in the caselaw as the "CORCO factors,” as they were set forth in the Fifth Circuit’s decision in In re Commonwealth Oil Refining Co., 596 F.2d 1239 (5th Cir.1979), cert. denied, 444 U.S. 1045, 100 S.Ct. 732, 62 L.Ed.2d 731 (1980) ("CORCO ”) which affirmed a decision of the bankruptcy court declining to transfer venue of oil refining debtors from Texas to Puerto Rico. The factor given the most weight is the promotion of the economic and efficient administration of the estate. CORCO, 596 F.2d at 1247.
. The court in Dunmore Homes listed the considerations regarding the interest of justice as whether: (i) transfer would promote the economic and efficient administration of the bankruptcy estate, (ii) the interests of judicial economy would be served by the transfer, (iii) the parties would be able to receive a fair trial in each of the possible venues, (iv) either forum has an interest in having the controversy decided within its borders, (v) the enforceability of any judgment would be affected by the transfer, and (vi) the plaintiff’s original choice of forum should be disturbed. See Dunmore Homes, 380 B.R. at 671-72 (citing Enron III, 317 B.R. at 638-39).
. The third Enron decision also denied transfer of venue pursuant to section 1412 after analyzing the CORCO factors based on the facts. See Enron III, 317 B.R. 629 (Bankr.S.D.N.Y.2004).
.See, e.g., Sept. 11, 2012 Hr'g. Tr. at 69:3-5 ("[Ms. Jennik]: I am not aware of evidence that [the filing] was made in bad faith.”); Sept. 12, 2012 Hr'g. Tr. at 12:5-6 ("[Ms. Schwartz]: The United States Trustee does not assert that there was bad faith; that wasn’t part of our motion.... ”); id. at 45:12-17 ("[Mr. Meldrum]: [W]e don’t — I think like everybody — doubt that the debtors attempted to do their best in selecting venue, and they obviously have a lot of considerations to balance. We don’t think there was any sort of inside gaming going on for the benefit of somebody who hasn’t been hurt.”); Sept. 11, 2012 Hr’g. Tr. at 113:23-114:4 ("[Ms. Schwartz]: I thought I understood the Court to say, would it be a breach of that duty if they didn’t try to file a case where the substantive law was better. THE COURT: Well, in good faith, in good faith, which — [Ms. Schwartz]: No one’s saying other than that.”); Sept. 12, 2012 Hr’g. Tr. at 119:12-14 ("[Mr. Goodchild, for UMWA Health and Retirement Funds]: I know everybody else has said that they don’t challenge bad — or challenge good faith, or anything like that.”)
. See Sept. 11, 2012 Hr’g. Tr. at 69:16-18.
. See Sept. 11, 2012 Hr’g. Tr. at 69:21-71:4.
. See e.g., In re EB Capital Management LLC, 2011 WL 2838115, 2011 Bankr.LEXIS 2764 (Bankr.S.D.N.Y. July 14, 2011); see also In re Eclair Bakery Ltd., 255 B.R. at 132 (transfer*743ring case after finding that the debtor had filed for bankruptcy in another district three previous times and was indisputably shopping for a different result).
.See Sureties’ Reply Memorandum at p. 7.
. See Sept. 12, 2012 Hr'g. Tr. at 30:25-32:1.
. See Allen D. Madison, The Tension Between Textualism and. Substance-Over-Form Doctrines in Tax Law, 43 Santa Clara L. Rev. 699 (2003).
. It is beyond the scope of this opinion to address, let alone attempt to resolve, the debate between strict textualists, such as Justice Antonin Scalia, and modern textualists who, like Hand and Sutherland, acknowledge that statutory language has meaning only in context. See generally, John F. Manning, What Divides Textualists from Purposivists, 106 Colum. L. Rev. 1 (2006); John M. Walker, Jr., Judicial Tendencies in Statutory Construction: Differing Views on the Role of the Judge, 58 N.Y.U. Ann. Surv. Am. L. 203 (2002).
. See Debtors' Objection, pp. 47-49.
. See id.
. See Sept. 12, 2012 Hr’g. Tr. at 280:9-23.
. See Winn-Dixie, Hr’g. Tr. at 169 ("I should note ... that my decision makes a critical distinction between creating the facts to fit the statute, which I believe is undeniable here, as opposed to applying the statute to fit the facts. Again, in the context of forum shopping, this is a very big distinction.”).
. Debtors’ Objection atp. 5.
. The Court notes that the U.S. Trustee took a position in Winn-Dixie which is contrary to its position in these cases; the U.S. Trustee opposed the transfer of the venue of the Winn-Dixie debtors' cases, urging the court to listen instead to the "true stakeholders” in the case who held almost $600 million in debt and who also opposed transfer of the cases. See Winn-Dixie, Hr’g. Tr. at 107.
. Courts have held that the position of the Committee on a motion to transfer venue, while not dispositive, should be given weight in light of its statutory role as a fiduciary to and representative body of the unsecured creditors. See Enron I, 274 B.R. at 345.
. Of the Debtors' fifty largest unsecured creditors, ten are based in West Virginia, and their claims account for approximately $9.6 million of the approximately $507 million in *748liquidated unsecured claims against the Debtors. (Schroeder Venue Decl. ¶ 45; FF ¶ 57.)
. See Sept. 12, 2012 Hr’g. Tr. at 429-444.
. In their joinder, the Ad Hoc Noteholders argue that the relief requested in the Motions "courts disaster in a variety of ways.” There is no evidence in the record of such disastrous consequences. See Joinder of Ad Hoc Note-holders to Debtors’ Objection and Creditors’ Committee’s Objection atp. 3.
. This is underscored by the UMWA’s view that the principle of having the cases heard in West Virginia is more important to them than the specter of increased costs to the stakeholders, including their members. At the Hearing, counsel for the UMWA stated that, even if all other things were equal but estate administration would cost less in this District than it would in West Virginia, “the mine workers — and I'm speculating here — but on that hypothetical, I believe the mine workers would want that case to be heard in West Virginia. That’s where they are. That's where they work. And they think the judges in that community should be deciding the bankruptcy case.” See Sept. 11, 2012 Hr'g. Tr. at 73:2-23, 74:16-22. Stated differently, the UMWA believes its members would rather receive a lower monetary recovery from a West Virginia judge than a higher monetary recovery from this Court. It is important to note in this context that the UMWA does not speak for the majority of Patriot’s employees or, of course, the Debtors' other creditors.
. As the Court observed at the Hearing, the Movants failed to provide evidence that the Debtors' cases could be handled more efficiently or more conveniently in West Virginia. See, e.g., Sept. 12, 2012 Hr’g. Tr. at 81:1-90:19 (“The Court: What’s the evidence for the very sweeping statement that it would be less costly to move the case to West Virginia? _[M]y point, Ms. Jennik is that you don't know, so ... you've made a claim that it would cost less in terms of professional fees, but there is no actual evidence.... there is no coherent cost model that’s been presented on which I can conclude that the statement you *750made is supported by the facts....”); Sept. 12, 2012 Hr’g. Tr. at 39:21-48:8.
. See UMWA Post Hearing Mem. of Law at p. 2 ("These issues are critical to the thousands of interested persons in West Virginia, and to the state of West Virginia, and it does not 'seem right’ to them that issues so important to their lives and to the state's economy will be resolved far away in lower Manhattan.”).
. See Sept. 11, 2012 Hr’g. Tr. at 71:24-72:2 ("[Ms. Jennik]: And I don’t know exactly where they held meetings, but I don’t think it is essential to the case that it be heard in New York because the financiers and the bankers are in New York.”); id. at 68:21-68:24 ("[Ms. Jennik]: [T]he debtors and the objectors have argued that these cases need to be in New York, because this is where the bankers are. This is the financial center of the world.”).
. See UMWA Reply at 24; see also Sept. 12, 2012 Hr’g. Tr. at 411:20-24 ("[Ms. Jennik]: ... but a judge in West Virginia understands the impact of this case, the decisions that are made in this case will be felt not in New York but in West Virginia. That’s the group of people that will be impacted by the decisions made in this case.”).
. See Sept. 12, 2012 Hr’g. Tr. at 410:21-411:1 ("[Ms. Jennik]: [I]t does not seem right to the miners and the retirees in West Virginia and Kentucky that a judge remote from them would decide their fate.”); see also id. at 415:5-14 ("[Ms. Jennik]: What I am saying is that the members, the members who make the ultimate decision on whether they will accept any negotiated agreement are very fearful and distrustful and would not — do not perceive that it would be fair to them if the case is not decided in West Virginia. And so when you asked me yesterday would the union oppose the — would the union make the same motion if the case was brought in St. Louis or Delaware or somewhere else, the union members believe that the case should be heard in West Virginia. That's what they believe. That's what they believe is fair treatment of them.”); id. at 416:19-21 ("[Ms. Jen-nik]: [I]t will not seem right to them. It will not seem right to them that a court very far away from them decides their fate.”). Counsel for the UMWA also stated that negotiations between the Debtors and the UMWA "will be that much more difficult if members think they are not being treated fairly,” which is how they will feel if the Debtors' cases are administered by a court other than the Bankruptcy Court for the Southern District of West Virginia. See id. at 414:6-16.
.In addition, only nine of the ninety-nine Debtors are signatories to the collective bargaining agreement with the UMWA; the remaining Debtors have no direct obligation to the UMWA or its members.
. See UMWA Reply at 5, fn. 5.
. Post-Hearing Brief of First Out DIP Agent at 8.
. See Sureties' Post-Hearing Memorandum at p. 4 ("The Sureties do not doubt that either forum will provide fairness in these bankruptcy proceedings.”); Sept. 11, 2012 Hr’g. Tr. 75:25-76:5 (“[Ms. Jennik]: I think judges in general are sympathetic to the plight of those who are not wealthy.... And I think that would be true in the Southern District of New York and the Southern District of West Virginia.”).
. See, e.g., Sept. 11, 2012 Hr'g. Tr. at 76:7, 77:2-77:4; Sept. 12, 2012 Hr’g. Tr. at 411:20-24.
. See generally, Martha L. Minow and Elizabeth V. Spelman, Passion for Justice, 10 Cardozo L. Rev. 37 (1988) (the ability to place yourself in someone’s shoes can be knowledge-based as well as experience-based); Sonia Sotomayor, A Latina Judge's Voice, 13 Berkeley La Raza L.J. 87, 92 (2002) ("[W]e should not be so myopic as to believe that others of different experiences or backgrounds are incapable of understanding the values and needs of people from a different group.”); see also President Barack Obama, Press Briefing by Press Secretary Robert Gibbs (May 1, 2009) ("[JJustice isn’t about some abstract legal theory or footnote in a case book; it is about how our laws affect the daily realities of people’s lives — whether they can make a living and care for their fami-lies_ that quality of empathy, of understanding and identifying with people’s hopes and struggles [is] an essential ingredient for arriving at just decisions and outcomes.”).
. See, e.g., Kathryn Abrams, Empathy and Experience in the Sotomayor Hearings, 36 Ohio N.U. L. Rev. 263 (2010).
. UMWA Post-Hearing Mem. of Law at p. 2.
. The Court notes that the Sureties represent 29 percent of the total face amount of surety bonds issued to the Debtors. See FF ¶ 43. Of this 29 percent, only approximately $25 million, or 10.5 percent, represents contingent unsecured exposure supporting the Sureties’ obligations to regulators in West Virginia. FF ¶ 45. No other surety bond issuers joined the Sureties' Motion.
.See Sept. 12, 2012 Hr’g. Tr. at 28:12-20 ("[Mr. Meldrum]: I want it to go to West Virginia because that's where the operations are, that’s where the evidence is, that's where the value is, that's where the enormous environmental liabilities are, that’s where the regulators are, that’s where the engineers are.”).
. See Sept. 12, 2012 Hr'g. Tr. at 37:11-23.
. Of the Debtors' fifty largest unsecured creditors, ten are based in West Virginia, and their claims account for approximately $9.6 million (or approximately 1.89 percent) of the approximately $507 million in liquidated unsecured claims against the Debtors. FF II57.
. See Joinder of UMWA Health and Retirements Funds to UST Motion [Dkt. No. 423].
. The language of section 1412 does not by its terms limit transfer of a bankruptcy case only to a district in which the case could have been commenced under section 1408; instead, section 1412 simply states that the court may transfer a case under title 11 to a court “for another district.” See 28 U.S.C. § 1412.
. See Debtors' Objection at p. 15, fn. 6.
. The Court also rejects the UMWA's argument that a particular court’s level of experience with coal cases is an important factor; neither the Bankruptcy Code nor the venue statute contemplates courts being specialized by industry or otherwise.
. See, e.g., CORCO, 596 F.2d at 1248 (denying motion to transfer venue and reasoning that the location of assets "is of little importance in a Chapter XI proceeding where the goal is financial rehabilitation, not liquidation”); Enron II, 284 B.R. at 390 (reasoning that "[t]he location of the assets is not as important when the ultimate goal of the bankruptcy case is rehabilitation rather than liquidation”). The Court also notes that although nine of the Debtors' twelve mining complexes are located in West Virginia, the Debtors have substantial assets in other jurisdictions as well.
. At the end of August 2012, the UMWA held "mass membership” meetings in Evansville, Indiana and Charleston, West Virginia for its active and retired members and their dependents in order to review developments in the Debtors’ cases to date and to provide information to members. (Buckner Decl. ¶ 9, FF ¶ 53.) The choice of the Evansville meeting location by the UMWA undoubtedly reflects the fact that there are a large number of UMWA members residing in the Illinois Basin area.
. In considering alternative venues, courts have considered transportation options, especially where parties-in-interest do not all re*755side in the same place. See, e.g., Enron I, 274 B.R. at 339, 351 (comparing accessibility of New York and Houston, Texas and declining to transfer debtors' cases to Houston).
. UMWA Post-Hearing Mem. of Law, p. 3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495338/ | MEMORANDUM OPINION AND ORDER DENYING MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSES PURSUANT TO 11 U.S.C. § 503
JUDITH K. FITZGERALD, Bankruptcy Judge.
Before the court is Spire Consulting Group, LLC’s (“Spire”) Motion for Allowance of Administrative Expenses. Spire previously filed a proof of claim alleging a “secured claim” in “quantum meruit” for services rendered to First Sealord Surety, Inc. (“First Sealord”), Debtor’s surety. The motion for payment of administrative expense is based on the same facts and essentially the same legal arguments. Doc. Nos. 215, 233 (Supplemental). Debt- or’s objection to the claim (Doc. No. 180) was sustained (Order of September 5, 2012, Doc. No. 245) inasmuch as Spire was not a prepetition creditor, had no contract with the Debtor and had no lien or security interest. At the hearing on September 5, 2012, the court ordered counsel for Spire to file a brief with respect to arguments raised in the application and supplemental application for allowance of administrative expense, specifically to address *767the question of whether admissible evidence existed to show that Debtor is a third-party beneficiary of the contract between Spire and First Sealord. However, Spire also contends that its claim should be allowed because the First Sealord/Debt- or General Indemnity Agreement was assigned to it by First Sealord and that it is entitled to payment because otherwise Debtor would be unjustly enriched by the work Spire performed for First Sealord. We find that no evidentiary hearing is necessary inasmuch as there are no facts in dispute. We further find that Spire’s application for allowance of administrative expense must be denied as no legal basis supports it.
A brief history is in order. In March of 2010 Debtor entered into an agreement with BE & K/Turner Joint Venture (“Joint Venture”) for the manufacture and installation of hangar doors at the Boeing, Charleston, South Carolina, Expansion and Site Development Project, (“Boeing Contract”). Pursuant to the requirements of the Boeing Contract, Debtor entered into an agreement in July of 2010 with First Sealord for the issuance of a surety bond to secure its performance and insure payment of subcontractors and suppliers. The General Indemnity Agreement provided that First Sealord had a security interest in the proceeds of the Boeing Contract, Doc. No. 233, Exhibit A, ¶ 11, but First Sealord did not file a financing statement until after this Chapter 11 was filed on April 11, 2011. Accordingly, First Sealord did not have a secured claim. Because it never paid on the bond, despite demand from Debtor’s subcontractors and suppliers, First Sealord did not have an unsecured claim.1
During the course of Debtor’s contract with the Joint Venture, Debtor “incurred unanticipated costs due to delays and acceleration caused and/or directed” by the Joint Venture resulting in “unanticipated costs to [Debtor] of approximately $965,-071.00.”2 Doc. No. 251, Exhibit D, Letter dated December 12, 2011, from Seth Kohn, President, Fleming Steel Company to Daniel O’Brien, Controls Manager, Joint Venture. The December 12, 2011, letter also stated that, in addition to the above amount, Debtor was owed $272,952.00 on the original contract price which the Joint Venture had retained pending the closing of the Boeing Contract. By April of 2012 that amount increased to $277,352. Doc. No. 251, Exhibit C.
Debtor failed to pay all the subcontractors’ invoices and three creditors filed claims against the surety bond as well as mechanics’ liens. Two other creditors filed claims against the bond but did not file mechanics’ liens.3 So that subcontractors could be paid, the Joint Venture and First Sealord reached agreement for the release of the undisputed contract funds which the Joint Venture had retained, see Doc. No. 112, Exhibit, Letter of November 3, 2011, and in November of 2011 First Sealord filed a motion to approve payment of the subcontractor claims based on that agreement. Doc. No. 112. The Court entered an order on December 15, 2011, granting the motion. Doc. No. 133. Pursuant to the agreement and the order, $569,003 was *768paid by the Joint Venture on behalf of First Sealord, as surety, with respect to the mechanics’ liens. The total amount claimed by the Subcontractors exceeded $666,000.
In order to recoup amounts First Sea-lord would have to pay on the bond, it was necessary to get the Joint Venture to agree to pay the additional $965,071.00 in costs incurred by Debtor because of the Joint Venture’s changes to the Boeing Contract. Debtor had contacted Spire4 to inquire as to Spire’s willingness to assist in preparation of the Change Order but never entered into a contract with Spire. On May 11, 2011, Spire sent the Debtor a Letter of Engagement whereby Debtor would retain Spire to assist in drafting a Change Order for the Boeing Contract. See Doc. No. 259, Exhibit A. The next day, May 12, 2011, First Sealord sent a letter to the Joint Venture directing that all future payments owed to Debtor be made to First Sealord. Thereafter, it was decided that Fleming would not retain Spire. We note that the Change Order would not benefit the estate inasmuch as (a) any recovery under a Change Order would go to First Sealord to reimburse it for the bond claims for which it was liable and the expenses it would incur in pursuing the Change Order; and (b) any monies remaining after such payment would be payable to First Commonwealth Bank which had a first lien on all assets of the Debtor.5 Debtor advised First Sealord that Debtor had no interest in the Change Order, that the claim belonged to First Sealord, and that the Debt- or would cooperate with First Sealord which would be liable for all expenses, including those relating to Spire. See Doc. No. 259.
Thereafter, First Sealord contracted with Spire to put together the Change Order for Debtor to present to the Joint Venture to recoup the additional costs and expenses. Acceptance of the Change Order by the Joint Venture was the only way First Sealord would recover what it would have to pay out on the bond in light of Debtor’s inability to pay the subcontractors.
Although Spire began invoicing First Sealord in May of 2011, the two did not enter into a Letter of Engagement until August 4, 2011. However, First Sealord made no payments to any subcontractor under the surety bond and on February 8, 2012, the Pennsylvania Commonwealth Court ordered it into liquidation. That court also terminated the surety bond effective March 9, 2012.
Administrative Expense
In order to qualify for payment of an administrative expense under 11 U.S.C. § 503(b) the expense must be an actual, necessary cost of preserving the estate or must have been incurred in making a substantial contribution to the estate. The purpose of priority treatment for administrative expenses under § 503 of the Bankruptcy Code is to encourage parties “to continue to do business with a debtor post-petition,” In re North American Pe*769troleum Corp. USA, 445 B.R. 382, 400 (Bankr.D.Del.2011), and “to encourage third parties to provide necessary goods and services to the debtor-in-possession.” Id. at 401. For a debt to qualify for payment as an administrative expense it must arise from a transaction with the debtor. In re O’Brien Environmental Energy, Inc., 181 F.3d 527, 532 (3d Cir.1999). In this case, it is undisputed that Debtor disclaimed any interest in pursuing the funds owed by the Joint Venture. Doc. No. 259 at 5, ¶ 15. See infra. Moreover, it is undisputed that Spire did not contract with the Debtor, only with First Sealord. Spire had no arrangement with Debtor. It did not provide a necessary service to Debtor. Its contract with First Sealord and the purpose for which First Sealord engaged Spire was not to benefit or preserve the estate but solely to benefit First Sealord.
Unjust Enrichment
Spire argues that it is entitled to administrative claimant status because otherwise Debtor would be unjustly enriched inasmuch as Spire’s work permitted Debtor to recoup money owed it on the Boeing Contract. “The responsibility for administrative expenses is based on the equitable principle of unjust enrichment, rather than compensation of the creditor’s loss.” In re Funding Systems Asset Management Corp., 72 B.R. 87, 90 (Bankr.W.D.Pa.1987). Spire’s efforts here are to compensate it for the loss it suffered when First Sealord went into liquidation. We find that Debtor was not enriched, unjustly or otherwise.
Black’s Law Dictionary defines unjust enrichment as “[t]he retention of a benefit conferred by another, without offering compensation, in circumstances where compensation is reasonably expected.” Black’s Law Dictionary, 1678 (9th ed. 2009). Spire never expected compensation from the Debtor until First Sealord went into liquidation. Spire’s contract with First Sealord specifies that Spire was working SOLELY for First Sealord and contains a disclaimer that there are any third-party beneficiaries to the contract. Spire’s counsel did not even enter an appearance in the bankruptcy until April 24, 2012, after the Pennsylvania Commonwealth Court cancelled First Sealord’s bond on March 9, 2012. Spire’s contract was with First Sealord, not the Debtor, and, as stated, First Sealord engaged Spire for First Sealord’s benefit, not the Debtor’s. Under the circumstances, Spire could not have “reasonably expected” compensation from Debtor.
We note that the agreement resulting in the release of the undisputed amounts owed to Debtor which the Joint Venture used to pay the mechanics’ liens was between the Joint Venture and First Sealord. Furthermore, it was dated November 3, 2011, six months after Spire first began invoicing First Sealord in May of 2011. See Exhibit to Motion to Approve Payment of Certain Subcontractor Claims, Doc. No. 112, filed by First Sealord on November 15, 2011. The agreement between the Joint Venture and First Sealord also reserved to the Debtor and First Sealord the right to pursue recovery of additional funds “above the undisputed contract balance,” id., but Debtor disclaimed any interest in pursuing the funds. Doc. No. 259 at 5, ¶ 15.
The evidence establishes that, although the Joint Venture paid mechanics’ lien claims in the amount of $569,002.74, the subcontractors were owed over $666,000. Further, the amount of $277,3526 that had *770been retained by the Joint Venture was included in the $569,002.74.7
A letter from Debtor’s president to the Controls Manager of the Joint Venture dated December 12, 2011, noted that Debt- or still was owed an amount8 on the original contract (the retainage) but that Debt- or had incurred additional costs of $965,071. On or about December 12, 2011, at First Sealord’s request, Debtor submitted the request for a Change Order in that amount. Doc. No. 179 at ¶ ll.9 As noted, after First Sealord defaulted on the bond, the Joint Venture paid the mechanics’ liens as stated above but continued to dispute the change order request. By letter dated April 12, 2012, Debtor’s counsel sent a settlement offer to the Joint Venture reducing the total claimed amount to $785,605 (which excluded the undisputed contract balance of $277,352) for a total of $1,062,957.00. Doc. No. 251, Exhibit C. Crediting the Joint Venture for the $569,003 which the Joint Venture had paid on the mechanics’ liens, Debtor offered to settle for $493,954.00. The amount finally agreed on was $375,000 and on June 21, 2012, the Reorganized Debtor filed an emergency motion to approve a settlement with the Joint Venture in that amount. Although the emergency motion states that the “total value of the settlement to the Debtor is $666,650.74,” Doc. No. 179 at ¶ 15, Spire’s assertion that Debtor is “enriched” by this amount ignores the fact that Debtor was owed more than it recovered. The $666,650.74 amount represents the amount paid on the mechanics’ liens that exceeded (1) the amount of $277,352 retained under the contract that the Joint Venture and Debtor did not dispute ($291,-650.74)10 and (2) the $375,000 settlement amount. Adding the settlement amount of $375,000 to the $291,650.74 results in a payment to Debtor of $666,650.74, a shortfall of $298,420.26 of the total amount Debtor asserted it was owed. Thus, after crediting the Joint Venture for what it paid on the mechanics’ liens and subtracting the undisputed amount, Debtor received payment of $666,650.74 on a claim that exceeded $960,000. Therefore, we find that Debtor was not enriched, unjustly or otherwise.
Third-Party Beneficiary
The letter of engagement between Spire and First Sealord, on Spire’s letterhead and signed by Spire’s principal Anthony Gonzales, expressly states that First Sealord is the client and that there were to be no third-party beneficiaries: “This Agreement is for the sole and exclusive benefit of the Client [First Sealord]. Unless stated below, no person or entity is considered to be a third-party beneficiary: I. None.” Doc. No. 259, Exhibit C, Letter dated August 3, 2011, from Spire Consulting Group to James A. Keating, counsel for First Sealord, at 3. There is nothing in the record to support the concept that Debtor was intended to be or was in fact a third-party beneficiary.11
*771
Assignment of First Sealord General Indemnity Agreement to Spire
Spire asserts that because First Sealord assigned its General Indemnity Agreement with Debtor to Spire, Spire is entitled to be paid under the terms of that agreement. Attached to Spire’s Supplemental Application for Administrative Expense, Doc. No. 233, is an Indorsement Allonge which states:
By execution of this Indorsement Al-longe, and in consideration of the terms of the Assignment Agreement dated of even date herewith, First Sealord Surety, Inc., in Liquidation, does hereby assign, transfer, and sets over unto Spire Consulting Group, LLC, ... all of the right, title and interest of First Sealord ... in, to and under the General Indemnity Agreement ... by and between First Sealord ..., Fleming Steel Company. ...
However, the assignment by First Sealord to Spire is dated August 3, 2012, after the objection to First Sealord’s claim was sustained by order of this Court dated July 19, 2012. See Doc. No. 233, Exhibit A (General Indemnity Agreement with In-dorsement Allonge dated August 3, 2012, attached), Doc. No. 217 (order of July 19, 2012, sustaining objection to First Sea-lord’s claim). Spire’s rights can rise no higher than those of its assignor.12 See, e.g., U.S. v. Tabor Court Realty Corp., 803 F.2d 1288, 1299 (3d Cir.1986), cert. denied sub nom. McClellan Realty Co. v. U.S., 483 U.S. 1005, 107 S.Ct. 3229, 97 L.Ed.2d 735 (1987). Inasmuch as First Sealord had no claim against this estate, Spire can have no claim cognizable in this bankruptcy through First Sealord. There was no claim against Debtor that could be assigned.13
For the foregoing reasons, it is ORDERED, this 14th day of November, *7722012, that the Application for Allowance of Administrative Expense is DENIED.
. First Sealord did not file a response to Debtor’s objection to its claim and an order was entered disallowing First Sealord’s claim. See Doc. Nos. 181,217.
. Debtor’s counsel communicated with counsel for the Joint Venture by letter dated April 12, 2012, offering to settle a claimed overage in the amount of $965, 071 for $785,605. See Doc. No. 251, Exhibits C, D.
.The subcontractors also filed litigation against the Joint Venture, First Sealord and unidentified others for the balance owed to them. Doc. No. 112 at 2, ¶ 8.
. The record contains a letter of April 19, 2011, Doc. No. 251, Exhibit A, and an email of May 2, 2011, id., at Exhibit B, between Debtor and Spire whereby Debtor explained the circumstances and transmitted certain information Spire would need in order to quote Debtor a price for putting together the Change Order. Debtor, however, never entered into a contract with Spire to do the work.
. First Commonwealth Bank's secured claim exceed $3 million. Under the plan of reorganization and a stipulation between the Bank and Debtor, First Commonwealth Bank was to be paid $1.75 million as a secured claim and the rest as unsecured. See Doc. Nos. 108, 166.
. In the November 3, 2011, letter memorializing the Joint Venture/First Sealord agree*770ment, the retainage amount was stated to be $202,786. It increased thereafter.
. The $277,352 was not part of the Change Order calculation.
. The letter named a figure of $272,952 which later increased to $277,352.
. One of the bases for Spire’s assertion of entitlement to an administrative expense is that it delivered the Change Order directly to the Debtor but this ministerial act is not sufficient to constitute a benefit to or preservation of the estate. 11 U.S.C. § 503.
.That is, $291,650.74 was part of the overage.
. We also note that from May 31, 2011, through December 31, 2011, Spire billed First Sealord, and only First Sealord, on a monthly basis. See Doc. No. 233, Exhibit C (invoices). The only reference to Debtor is on a September 27, 2011, invoice referring to a charge *771identified as "Develop As-built schedule from Fleming's daily reports.” There is not even a reference to delivery to Debtor which is one of the facts Spire relies on to hook its claim.
Furthermore, the confirmed plan of reorganization provided that First Sealord would look to the Joint Venture to satisfy its claim and any remaining amounts owed would be treated as an unsecured claim under the plan but First Sealord’s claim was disallowed in its entirety because it had paid nothing on the bonds.
. The Assignment Agreement between First Sealord and Spire was not provided to the Court but that does not affect the outcome inasmuch the assignment, evidenced by the Indorsement Allonge, occurred after First Sealord’s claim had been disallowed.
. Nonetheless, Spire relies on paragraphs 5 and 6 of the General Indemnity Agreement between First Sealord and Debtor. Paragraph 5 provides that Debtor will
pay all charges and fees incurred by the Surety, its shareholders, directors, officers, partners, employees, agents, subsidiaries, Affiliates and divisions (and any surety that surety procures to execute any Bond and any other surety with which Surety may act as co-surety on any bond or other instrument) under any agreement to which any Indemnitor is a party.
Doc. No. 233, Exhibit A, at ¶ 5. (The Indemni-tors are the Debtor and its principal(s)). However, when First Sealord assigned the General Indemnity Agreement to Spire, it had no claim. Spire cannot bootstrap a claim based on assignment of the General Indemnity Agreement when no claim existed that could be assigned, notwithstanding the language of the General Indemnity Agreement. For the same reason Spire’s argument with respect to ¶ 6 of the General Indemnity Agreement which provides that Debtor is to hold harmless First Sealord "from ... all liability, ... damage, and expense” fails. Moreover, ¶ 8 of the General Indemnity Agreement provides that Debtor's liability extends to "the amount of all payments ... made by Surety ...” Doc. No. 233, Exhibit A at 2, ¶ 8. First Sealord made no payments. The contract must be read as a whole. Spire has no administrative claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495339/ | OPINION
THOMAS L. PERKINS, Chief Judge.
This matter is before the Court on the motion for summary judgment filed by the Defendants, Michael E. Evans and Froehl-ing, Weber & Schell, LLP, on the complaint filed by Gary T. Rafool, as Trustee for the estate of Central Illinois Energy, L.L.C., for legal malpractice.
BACKGROUND
The Debtor, Central Illinois Energy, L.L.C. (Debtor), was formed in 2004 for the purpose of constructing, owning and operating an ethanol production facility, including a waste-coal fired co-generation facility. In 2005, the Debtor and Lurgi PSI, Inc. (Lurgi), entered into an Engineering, Procurement and Construction Agreement (EPC Agreement), pursuant to which Lurgi agreed to design and construct the ethanol facility. Later, in August of 2005, the parties entered into a second EPC Agreement for the design, engineering and construction of a combined heat and power plant to power the ethanol facility. The EPC Agreements also provided intellectual property (IP) licenses to the Debtor for the use of Lurgi’s intellectual property that was used in the project. Pursuant to the EPC Agreements, the Debtor was obligated to make monthly progress payments for the work completed and equipment procured. As is customary in the construction industry, the EPC Agreements provided for a percentage of each progress payment to be withheld by the Debtor as retainage. Those EPC Agreements allowed Lurgi, at its option, to provide letters of credit for the benefit of the Debtor in lieu of that retain-age. Michael Evans, along with attorneys from another law firm, represented the Debtor in the negotiations resulting in those EPC Agreements.
In April, 2006, the Debtor entered into a credit agreement with Credit Suisse, as agent for itself and a consortium of other lenders, for a construction loan of up to $87,500,000, secured by liens on substantially all of the Debtor’s assets. The law firm of Sidley Austin LLP was employed by the Debtor as additional counsel to assist in the negotiation, documentation and administration of the construction loan.
On July 13, 2006, Lurgi posted an irrevocable standby letter of credit in the amount of $2,525,000 from DZ Bank AG. In January, 2007, the amount of the letter of credit was increased to $4,645,000. On August 7, 2006, Lurgi obtained an additional irrevocable standby letter of credit from Commerzbank in the amount of $3,135,000. The expiration date of both *776letters of credit was December 15, 2007, although the letters of credit were automatically renewable for one year periods unless the respective banks received notice from the Debtor, as beneficiary, along with the letter of credit, instructing the issuing bank to terminate the letter of credit, or unless the issuing bank had sent notice to the Debtor of at least 30 days, but no more than 45 days, that the letter of credit would not be extended. Both letters of credit provided that if the letter of credit was not extended beyond the expiration date and was not renewed or replaced by Lurgi, the Debtor could make a draw within the last fifteen days prior to the current expiration date.
Construction began in May, 2005. By early 2007, the Debtor encountered financial difficulties as a result of a series of delays and cost overruns. Disputes arose between the Debtor and Lurgi. The Debt- or’s troubles came to a head in the late fall of 2007. Considering the Debtor to be in default, Lurgi filed mechanics lien claims and commenced arbitration proceedings against the Debtor. Other subcontractors followed suit and construction was halted. Evans met with Barry Barash, a bankruptcy attorney, to discuss the Debtor’s deteriorating financial condition. During that final week of November, Evans maintained close contacts with Sidley Austin, Barash, Mike Smith, the Debtor’s General Manager, and the members of the Debtor’s board of directors. On November 28, 2007, Lur-gi purportedly delivered termination notices on each of the EPC Agreements.1
On November 30, 2007, the Debtor notified Lurgi of its intent to draw on the letters of credit issued by DZ Bank and Commerzbank, based upon Lurgi’s wrongful termination of the EPC Agreements. By separate letters on that same date, the Debtor notified Lurgi of its intent to draw upon both letters of credit for the alternative reason that neither had been extended beyond the original expiration date of December 15, 2007. On that same date, November 30, 2007, Lurgi caused two new irrevocable standby letters of credit to be issued by Calyon Credit Agricole CIB (Ca-lyon) in the amounts of $4,465,000 and $4,238,000.2 The new letters of credit contained an expiration date of December 15, 2008.
On December 8, 2007, the Debtor’s board of directors terminated Sidley Austin’s representation and authorized the hiring of Barry Barash for the purpose of representing the Debtor in a chapter 11 bankruptcy proceeding. On that same day, Mike Smith resigned as the Debtor’s General Manager. The Debtor filed a chapter 7 petition on December 13, 2007. On January 7, 2008, the Debtor, through Barash, filed an expedited motion for secured postpetition financing that refers to the Calyon letters of credit and proposes to correct the bank account information included on those letters of credit, which motion was subsequently denied for reasons unrelated to the letters of credit. After efforts to find a private buyer for the facilities proved fruitless, the Debtor filed on February 5, 2008, a motion to sell its assets at auction, to establish procedures for the sale and for the assumption and assignment to the purchaser of certain ex-*777eeutory contracts and leases. The Debtor negotiated an agreement with a consortium of its prepetition secured lenders for the purchase of its assets through a credit bid, with the assets to remain subject to perfected mechanics lien claims. Lurgi, among others, objected to the sale on several grounds, including that the EPC Agreements had been terminated prior to the filing of the petition. After a hearing, an order was entered finding that the sale was in the best interests of the Debtor and its creditors and approving procedures for the sale, assumption of executory contracts and leases, and resolution of mechanics lien claims.
The order directed the Debtor to identify the executory contracts which it intended to assume and to notify the counterparties to those contracts by March 20, 2008. On that date, the Debtor filed a list of executory contracts which it intended to assume, specifically reserving the right to seek to assume or reject additional contracts in the future. Neither the EPC Agreements nor the letters of credit were on that list or on an amended list filed by the Debtor on April 8, 2008. One day earlier, Credit Suisse filed an unsigned, but “near final” Asset Purchase Agreement (APA) between the Debtor and New CIE Energy, LLC (New CIE), the limited liability company formed by the prepetition secured lenders. The APA defined the assets which were being sold to New CIE as essentially all of the Debtor’s rights in property of every kind, except for assets which were specifically identified as being excluded. The APA further defined “assumed executory contracts” to mean all of the Debtor’s executory contracts with the exception of those listed on the schedule of excluded executory contracts. The Benchmark & Tech Support Consulting Services Agreement was the only Lurgi contract which was listed on the schedule of contracts which were not to be assumed by the Debtor. No letter of credit was included on the list of excluded executory contracts.
Lurgi, clarifying its objection to the sale, contended that although the Debtor had not formally sought to assume the letters of credit, approval of the proposed APA and the order approving the sale would effect an assumption and assignment of the letters of credit to the purchaser. In response to Lurgi’s objection to the impending sale, the Debtor asserted that the Debtor and the purchaser would comply with the license assignment provisions of the EPC Agreements in order that the EPC Agreements could be transferred to New CIE. Lurgi argued that the letters of credit were independent from the EPC Agreements and were executory contracts to make a financial accommodation that could not be assumed and assigned by the Debtor. On April 24, 2008, the Court entered an order approving the sale, which provided as follows with regard to the EPC Agreements and the letters of credit:
17. Any rights granted to the Debtor pursuant to any letters of credit granted under any contract or agreement including, but not limited to, the EPC Agreements, shall continue to be governed by the terms and conditions of any such contract or agreement, or other applicable law, and, in the event any such assignment to Purchaser pursuant to further order of this Court or agreement amongst the parties, the Purchaser hereby agrees to comply with the applicable terms and conditions of any such contract or agreement.
18. Until entry of a further order of this Court, after a hearing on the merits, or stipulation of the parties, the EPC Agreements shall not be Assumed Exec-utory Contracts, Assumed Executory Leases, or Acquired Assets. All rights, claims, arguments or defenses of the *778Debtor, Purchaser, or Lurgi, Inc. related to (a) the assumption or assignment of such EPC Agreements as Executory Contracts pursuant to section 365 of the Bankruptcy Code, or (b) the transfer of the EPC Agreements as Acquired Assets pursuant to section 363 of the Bankruptcy Code, are hereby reserved pending such further order. Debtor’s failure to comply with the assumption and assignment procedures in the Sale Procedures Order with respect to the EPC Agreements shall not constitute a defense to, or a prohibition against, the assumption and assignment of any such agreement.
Lurgi and New CIE submitted their dispute to mediation, which proceeded throughout the summer. On August 4, 2008, the case was converted to chapter 7. Soon thereafter, Lurgi and New CIE reached a resolution. On September 15, 2008, the chapter 7 Trustee, Lurgi, and New CIE filed a joint motion to compromise their disputes concerning the transferability of the EPC Agreements, the IP Licenses and the letters of credit. Pursuant to the terms of their stipulation and mutual release of claims, the Trustee was to execute a release and return to Lurgi the letters of credit. In addition, the APA was deemed amended to provide that the Debtor would have no obligation to sell or assign either the EPC Agreements or any of the related agreements. The Stipulation and Mutual Release of Claims, attached as an exhibit to the joint motion, identifies the Calyon letters of credit as having been provided by Lurgi for the benefit of the Debtor in lieu of retainage.
An unsecured creditor objected to the compromise. Upon review, the Court withheld approval based upon the form of the proposed order requiring the Trustee to release claims against Lurgi which were held by persons or entities other than the Debtor and the Debtor’s bankruptcy estate, as clearly exceeding the Trustee’s authority. In response to that ruling, Lur-gi withdrew all objections to the Debtor’s motion to sell and requested that the Court reconsider its ruling denying the motion to approve the compromise. Upon reconsideration, this Court, noting that Lurgi had been the sole objector to the assumption and assignment or acquisition of the EPC Agreements, ordered that the EPC Agreements, including the related letters of credit, became “Acquired Assets with all rights and claims of the Debtor arising thereunder transferred and conveyed to the Purchaser, to the extent of the Debtor’s rights thereunder as may be limited by applicable law including provisions of the Bankruptcy Code.” The Trustee abandoned any interest in the EPC Agreements, including the related letters of credit.
The Trustee brought this single-count complaint against the Defendants as “general counsel” to the Debtor, alleging that they committed legal malpractice by failing to advise or cause the Debtor to draw on the letters of credit prior to the bankruptcy filing and seeking damages in the amount of the letters of credit, or $8,883,000. Alternatively, the Trustee alleges, assuming the letters of credit were not contracts to extend financial accommodations, that the Defendants committed legal malpractice by failing to call, or cause the Debtor to call them prior to December 15, 2007.
STANDARDS FOR SUMMARY JUDGMENT
Under Federal Rule of Civil Procedure 56(c), 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 *779material fact and that the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the material facts are not in dispute, the sole issue is whether the moving party is entitled to a judgment as a matter of law. ANR Advance Transp. Co. v. International Broth. of Teamsters, Local 710, 153 F.3d 774, 777 (7th Cir.1998). 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 nonmovant 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. 2505.
OVERVIEW OF A LEGAL MALPRACTICE CLAIM
In order to establish a claim for malpractice, a plaintiff must establish (1) the existence of an attorney/ client relationship; (2) a duty arising from that relationship; (3) a negligent act or omission on the part of the attorney; (4) causation; and (5) damages.3 Because the duty owed by an attorney to a client arises out of a contractual relationship, the attorney’s duty is measured by the scope of the contract of engagement. F.D.I.C. v. Mahajan, 2012 WL 3061852 (N.D.Ill.2012). Thus, to establish a claim for legal malpractice premised upon an attorney’s failure to properly advise a client, the plaintiff must establish that the scope of the representation included the advice that the defendant failed to give. Dahlin v. Jenner & Block, L.L.C., 2001 WL 855419 (N.D.Ill.2001). The duty of an attorney to his client is to exercise a reasonable degree of care and skill. Stevens v. Walker, 55 Ill. 151 (1870). An attorney is not liable for a mere error of judgment. Dorf v. Relles, 355 F.2d 488 (7th Cir.1966). Expert testimony is ordinarily required to establish the applicable standard of care and whether an attorney breached the standard of care. Barth v. Reagan, 139 Ill.2d 399, 151 Ill.Dec. 534, 564 N.E.2d 1196 (1990). The exception to that rule is made for “grossly apparent negligence,” which would be recognizable, without difficulty, by a layman. First Nat. Bank of LaGrange v. Lowrey, 375 Ill.App.3d 181, 313 Ill.Dec. 464, 872 N.E.2d 447 (Ill.App. 1 Dist.2007). The issue of proximate causation in a legal malpractice action is generally considered a factual issue to be decided by the trier of fact, after consideration of all the evidence *780and attending circumstances. Buckles v. Hopkins Goldenberg, P.C., — Ill.App.3d —, 359 Ill.Dec. 728, 967 N.E.2d 458, 2012 IL App (5th) 100432 (5 Dist.2012).
SUMMARY OF COMPLAINT AND MOTION
Notwithstanding that the Complaint is pleaded as a single count, it asserts three separate and distinct causes of action. For purposes of addressing the motion for summary judgment, the Court must dissect the Complaint and identify the separate claims. See Finizie v. Shineski, 351 Fed.Appx. 668, 671 n. 3 (3rd Cir.2009); Gevas v. McLaughlin, 2012 WL 266942 (C.D.Ill.2012).
One claim theorizes that the letters of credit are executory contracts to extend financial accommodations to the Debtor that may not be assumed or assigned by virtue of 11 U.S.C. § 365(c)(2), so that the letters of credit could no longer have been drawn upon once the Debtor filed its chapter 11 petition. The Trustee alleges that the Defendants owed a duty to the Debtor to understand that and to advise the Debt- or’s board of directors to call the letters of credit before bankruptcy. The allegations of breach of duty that form the basis for this claim are made in paragraph 43, sub-paragraphs (a), (b) and (c) of the Complaint.
The second claim is pleaded in the alternative to the first claim, on the theory that the letters of credit are not financial accommodations under section 365(c)(2). In that event, the Trustee alleges that the Defendants breached their duty to the Debtor by failing “to call upon, or cause the debtor in possession to call upon, the Letters of Credit prior to December 15, 2007.” This allegation is set forth in sub-paragraph (e) of paragraph 43 of the Complaint.
For his third claim, the Trustee alleges that the Defendants “failed to advise Bar-ash of the existence of the letters of credit and the company’s right to call upon them.” (Complaint par. 43(d)). Because this asserted breach of duty is, on the face of the allegation, unrelated to and not dependent upon a particular resolution of the section 365(c)(2) issue, it is properly treated as a separate cause of action. Defendants deny all alleged breaches of duty. The Trustee alleges damages in the sum of $8,883,000, the face amount of the Calyon letters of credit.
The motion for summary judgment first seeks a determination that the Debtor’s right to draw upon the letters of credit after bankruptcy was not barred by section 365(c)(2). The Defendants contend that the Calyon letters of credit could have been drawn upon after the bankruptcy filing so that the Trustee’s initial theory, which depends upon an inability to draw, fails because he cannot prove that the Defendants’ acts or omissions were the proximate cause of any harm to the Debt- or. The Trustee’s second claim depends upon a finding that the December 15, 2007 termination date of the DZ Bank and Commerzbank letters remained meaningful despite the issuance of the Calyon letters. If that date became meaningless because of the substitution of the Calyon letters, the Defendants argue in the motion, the Calyon letters could have been drawn upon thereafter and the Trustee cannot establish proximate cause. Likewise, the third claim depends upon attorney Barash’s unawareness of the letters of credit. If he was aware of them, the Defendants contend proximate cause cannot be shown.
NATURE OF A LETTER OF CREDIT AND THE INDEPENDENCE PRINCIPLE
A letter of credit is regarded as a unique commercial instrument. Letters of credit *781are governed by a specialized set of rales contained in Article 5 of the Uniform Commercial Code. The Calyon letters of credit expressly incorporate the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits (UCP 600). UCC Article 5, section 5-116(c), provides that “the liability of an issuer, nominated person, or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation, or other undertaking is expressly made subject.” Section 5-102(a)(10) of the New York Uniform Commercial Code, defines a “letter of credit” to mean “a definite undertaking that satisfies the requirements of section 5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.” NY UCC section 5-102(a)(10).
The issuance of a letter of credit entails three distinct relationships, two of which are contractual. First, there is the underlying agreement between the applicant for the letter of credit and the beneficiary. A second contractual relationship arises between the issuer (usually a bank) and its applicant requiring reimbursement by the applicant for draws obtained by the beneficiary. The third relationship arises from the issuance of the letter of credit to a designated beneficiary, formalizing the issuer’s undertaking to honor a demand for payment by the beneficiary upon compliance with the terms and conditions specified therein. Nissho Iwai Europe PLC v. Korea First Bank, 99 N.Y.2d 115, 752 N.Y.S.2d 259, 782 N.E.2d 55 (N.Y.2002). The relationships between each pair of parties to the letter of credit transaction, characterized as independent yet all required, have been likened to the “three legs of a tripod.” P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (Matter of P.A. Bergner & Co.), 140 F.3d 1111, 1114 (7th Cir.1998).
Generally, a “standby” letter of credit requires the beneficiary to present a document declaring only that the issuer’s applicant has defaulted on some obligation, thereby triggering the beneficiary’s right to draw down on the letter. Wood v. R.R. Donnelley & Sons Co., 888 F.2d 313, 317-18 (3rd Cir.1989). A beneficiary must strictly adhere to the conditions of the letter of credit and even slightly nonconforming documents will not satisfy the required standard of strict compliance. MSF Holding Ltd. v. Fiduciary Trust Co. Intern., 435 F.Supp.2d 285 (S.D.N.Y.2006). The obligation of the issuing bank to hon- or a conforming draft drawn on a letter of credit is absolute unless the documents are forged or fraudulent, or there is fraud in the transaction. Mennen v. J.P. Morgan & Co., Inc., 91 N.Y.2d 13, 666 N.Y.S.2d 975, 689 N.E.2d 869 (N.Y.1997); see, also, UCC § 5-109. The issuer’s payment obligation is unaffected by any disputes relating to the underlying commercial transaction between the beneficiary and the applicant. 3Com Corp. v. Banco do Brasil, S.A., 171 F.3d 739 (2nd Cir.1999). The issuer must pay even if both the applicant and the beneficiary are insolvent, rendering it impossible to obtain reimbursement for the issuer’s honor. Eakin v. Continental Illinois Nat. Bank & Trust Co. of Chicago, 875 F.2d 114, 116-17 (7th Cir.1989). The utility of a letter of credit is that the issuer’s credit is substituted for that of the applicant. Nissho Iwai Europe, 99 N.Y.2d at 119, 752 N.Y.S.2d 259, 782 N.E.2d 55.
Fundamental to the letter of credit transaction is the principle that the issuing bank’s obligation to honor draw de*782mands by the beneficiary is separate and independent from the underlying contractual obligation of the applicant to the beneficiary, and separate as well from the applicant’s reimbursement obligation. First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 294, 486 N.Y.S.2d 715, 475 N.E.2d 1255 (N.Y.1985); Rockwell Intern. Systems, Inc. v. Citibank, N.A., 719 F.2d 583, 587 (2nd Cir.1983). This independence principle means that a letter of credit “takes on a life of its own,” endowing the transaction with the simplicity and certainty that are its hallmarks. Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 815-16 (2nd Cir.1992). The independence principle is universally viewed as essential to the proper functioning of letters of credit and to their particular value. Centrifugal Casting Mach. Co., Inc. v. American Bank & Trust Co., 966 F.2d 1348, 1352 (10th Cir.1992). The independence principle is embodied in Articles 3 and 4 of the UCP 600. ACE American Ins. Co. v. Bank of the Ozarks, 2012 WL 3240239, at *5 (S.D.N.Y.2012). As well, Article 5 of the UCC expressly provides that an issuer is not responsible for .the performance or nonperformance of the underlying contract, arrangement, or transaction, or for any act or omission of others. UCC § 5-108(f). If a letter of credit contains nondocumen-tary conditions, the issuer is authorized to disregard them and treat them as if they were not stated. UCC § 5-108(g).
It is customary in the construction industry for the owner to retain a percentage (often 10%) of the payments due the contractor to secure the contractor’s satisfactory performance of the contract and as a hedge against the risk that the contractor will fail to pay its subcontractors, suppliers and laborers. In re James, 78 B.R. 159, 160 (Bankr.E.D.Tenn.1987); Town & Country Bank of Springfield v. James M. Canfield Contracting Co., 55 Ill.App.3d 91, 12 Ill.Dec. 826, 370 N.E.2d 630 (Ill.App. 4 Dist.1977). It is not uncommon for a contractor to be permitted to substitute a letter of credit in lieu of retainage. See, e.g., In re Enron Corp., 370 B.R. 583 (Bankr.S.D.N.Y.2007); In re Lancaster Steel Co., 284 B.R. 152 (S.D.Fla.2002); In re Northeast Biofuels, LP, 2009 WL 2873073 (Bankr.N.D.N.Y.2009) (EPC agreement gave Lurgi the option to post an irrevocable standby letter of credit in lieu of 10% retainage).
ANALYSIS
In his Complaint, the Trustee alleges that the Defendants, as “general counsel” to the Debtor, owed it a duty to determine the effect that the filing of bankruptcy would have upon the Debtor’s right to call the letters of credit and to counsel the Debtor regarding necessary actions to be taken to preserve its right to collect the sums payable to the Debtor pursuant to those letters of credit.4 It is the Trustee’s position that a letter of credit is a “financial accommodation” which is neither assumable nor assignable under section 365(c)(2) of the Bankruptcy Code. Based upon that premise, the Trustee alleges that the Defendants failed to make that determination and failed to advise Smith, or the directors, that the letters of credit could not be called by the Debtor after the bankruptcy petition was filed. Alternatively, should the Trustee’s position re*783garding the nature of the letters of credit be mistaken, he alleges that the Defendants, after the filing of the bankruptcy, failed to call upon or cause the Debtor to call upon the letters of credit prior to December 15, 2007. The Trustee also alleges that there was a failure of communication between the Defendants and Barash regarding the letters of credit.
The Defendants, without conceding any of the triable issues of fact as to their alleged malpractice, filed this motion for summary judgment solely on the issue of proximate causation. As to the element of causation, the Defendants contend that the Trustee cannot prove this element because the Debtor’s right to draw on the letters of credit was not affected in any adverse way by the bankruptcy filing. Relying on section 5-113 of Revised Article 3 of the New York UCC, the Defendants contend that upon the filing of a chapter 11 petition, letters of credit are transferred to a debtor in possession by operation of law.5 The Defendants also theorize that the letters of credit and the EPC Agreements constituted a single, indivisible contract for purposes of section 365. Considered together as one executory contract they argue, it could not be considered a contract to extend “financial accommodations” within the meaning of section 365(c)(2), because the extension of credit was not the contract’s primary purpose, but only incidental to the construction contracts. See In re United Airlines, Inc., 368 F.3d 720, 724 (7th Cir.2004); In re Thomas B. Hamilton Co., Inc., 969 F.2d 1013 (11th Cir.1992).
In response, the Trustee rejects the Defendants’ reliance on section 5-113 of Revised Article 3, viewing that provision as being in direct conflict with section 365(c)(2) and relying on the preemptive effect of the Bankruptcy Code. The Bankruptcy Code overrides state law where there is an unavoidable conflict and the two statutes cannot co-exist. In re Guido, 344 B.R. 193 (Bankr.D.Mass.2006)(citing Summit Inv. & Dev. Corp. v. Leroux, 69 F.3d 608, 610 (1st Cir.1995)). It is clear from the alternative allegation of the Trustee’s complaint, that he too believes that if the letters of credit are determined not to be contracts of financial accommodation, that they were transferred to the debtor in possession upon the filing of the bankruptcy petition and could have been drawn upon postpetition at least until, according to his theory, December 15, 2007. The Trustee’s principal argument, however, is that the letters of credit are separate contracts from the underlying EPC Agreements for assumption purposes, and are “financial accommodations” which the debtor in possession or the Trustee were prohibited from assuming. The Trustee is in part right and in part wrong. A detailed analysis of section 365 is required to address the issue raised by the motion for summary judgment. But the Court will first address the Calyon letters as substituted letters of credit.
Calyon letters were accepted by Debtor.
The Trustee’s continued reliance on the significance of the December 15, 2007 date ignores the substitution of the Calyon letters. By their terms, the Ca-lyon letters of credit went into effect as of November 30, 2007. The Trustee contends that “it is unclear that the substitute letters of credit were accepted by the Debtor.” (Doc. 45, par. 9) “Acceptance” by the Debtor is not a condition to the effectiveness of the letters of credit or to Calyon’s payment obligation. The letters of credit, on their face, are unconditional and became effective and enforceable upon *784issuance on November 30, 2007. The Debtor’s acceptance of the substitute letters would serve to render the DZ Bank and Commerzbank letters of credit nugatory. If the Debtor did not accept the Ca-lyon letters as substitutes, the DZ Bank and Commerzbank letters would have remained in effect according to their terms meaning any draw demand must have been delivered by December 15, 2007.
The Trustee relies upon the fact that the attorneys (Sidley Austin) for the Debtor and for Lurgi were exchanging emails as late as December 5, 2007, regarding the correction of certain wording and an incorrect date stated in the Calyon letters. The December 5, 2007 email from the Sidley Austin attorney states that “we are okay with exchanging the current LC’s for the Calyon LC’s in their current form, so long as we receive written confirmation that your client will” cause the corrections to be made. This email supports the conclusion that the Debtor eventually accepted the Calyon letters as substitute letters of credit that served to extend the termination date by one year to December 15, 2008. Although the record does not contain the “written confirmation” referred to in the email, its omission is not sufficient to create a genuine dispute as to the fact of the Debtor’s acceptance, since all of the circumstantial evidence in the record supports the inference that the Calyon letters were “accepted” by the Debtor as substitute letters of credit. As indicated by the foregoing recitation of bankruptcy case pleadings pertaining to the EPC Agreements and the letters of credit, the Calyon letters were dealt with by the parties and their attorneys as the effective and operative letters of credit at all times during the bankruptcy case.
The Trustee offers no evidence, and in fact makes no affirmative allegation, that the Calyon letters were rejected by the Debtor. Summary judgment is the “put up or shut up” moment in litigation, where the non-moving party is required to marshal and present evidence in support of his theory of relief. Goodman v. Nat. Sec. Agency, Inc., 621 F.3d 651, 654 (7th Cir.2010). Conclusory allegations or denials, unsupported by specific facts, do not suffice. Payne v. Pauley, 337 F.3d 767, 772-73 (7th Cir.2003).
The Calyon letters of credit by their terms became effective upon issuance on November 30, 2007. Viewing the record in the light most favorable to the Trustee, the most that can be said is that the Debtor’s “acceptance” of the Calyon letters occurred on or after December 5, 2007. But despite the delay, all of the circumstantial evidence supports the finding that the Ca-lyon letters were accepted as substitutes for and served the same purpose as the original letters. Since the Calyon letters extended the termination date to December 15, 2008, the Trustee’s reliance upon the termination date of December 15, 2007, as set forth in the original letters, is unfounded.
Letter of credit is independent undertaking.
The Trustee is correct that the letters of credit are independent of the EPC Agreements. This conclusion follows necessarily from the function of letters of credit in commercial transactions. A letter of credit is issued pursuant to a contract between the issuer and its applicant for the purpose of satisfying or securing a separate contractual obligation owed by the applicant to its counterparty, who becomes the beneficiary of the letter of credit. The applicant pays a fee to the issuer, usually a bank, in exchange for the issuer’s commitment to pay a sum certain to the beneficiary upon demand. By issuing a letter of credit, the issuer provides a form of credit or financial accommodation to its *785applicant, which, if drawn upon, triggers the applicant’s liability to reimburse the issuer. Thus, the issuer extends credit to and accommodates its applicant, not the beneficiary who incurs no repayment liability and owes no obligation whatsoever to the issuer.6
As is universally recognized, a letter of credit has utility and value in a commercial transaction precisely because it evidences an “on demand” payment obligation that is unconditional and independent of the status of the contractual relationship between the applicant and the beneficiary. See In re Northeast Biofuels, LP, 2009 WL 2873073 (Bankr.N.D.N.Y.2009) (issuer’s payment obligation under letter of credit is totally independent of the underlying transaction, citing KMW Intern. v. Chase Manhattan Bank, N.A., 606 F.2d 10, 15 (2nd Cir.1979)). The doctrine of independence is designed to make the issuer’s payment obligation immune from disputes between the beneficiary and the issuer’s applicant.
The independence principle is embodied in the terms of the irrevocable standby letters of credit issued by Calyon as of November 30, 2007, providing that draws are payable on demand to the Debtor, to be debited to the account of Lurgi. As discussed above, the independence principle is embodied as well in the UCP 600, to which the Calyon letters of credit, by their terms, are expressly made subject. The independence principle is part and parcel of letters of credit in general, and of the Calyon letters of credit in particular. Accordingly, the Calyon letters are properly analyzed for purposes of section 365 as independent, stand-alone obligations, entirely divorced from the EPC Agreements.7
Letter of credit is not a contract of the Debtor.
Section 365 applies to “any execu-tory contract ... of the debtor.” The interpretation of the term “executory” is the focus of most of the disputes involving the scope of the section. The prefatory issue, however, is whether the document in question is a contract of the debtor. In re Columbia Gas System, Inc., 50 F.3d 233 (3rd Cir.1995).
A letter of credit satisfies a condition contained in an agreement between the applicant and the beneficiary. The terms and conditions of the issuance of a letter of credit are set forth in an agreement between the issuer and its applicant.8 But there is no bargain between the issuer and *786the beneficiary. The issuer undertakes an obligation to pay money to the beneficiary, but the beneficiary passes no value to the issuer, makes no promise to the issuer, and incurs no duty of performance to the issuer.
As variously characterized, a letter of credit is a “unique commercial instrument,” 9 an engagement,10 and an “absolute undertaking.”11 One thing it is not is a contract. As the court in In re Montgomery Ward, LLC, 292 B.R. 49, 54 (Bankr.D.Del.2003), explained,
[L]etters of credit are not contracts. A letter of credit does not oblige the seller/beneficiary to do anything as a bilateral contract would require. If it did, then the issuing bank would have a cause of action against the beneficiary if it failed to submit the documents to draw on the letter of credit. Article 5 of the U.C.C. contemplates no such remedy. Rather, a letter of credit is a mode of payment, an “undertaking” by a lender.12
Mutuality of obligation is the hallmark of a bilateral contract. Jarka Corp. v. Hellenic Lines, Ltd., 182 F.2d 916, 918 (2nd Cir.1950); Consolidated Laboratories, Inc. v. Shandon Scientific Co., 413 F.2d 208, 212-13 (7th Cir.1969). In the case of a unilateral contract, an offer is accepted by actual performance. Ardito v. City of Providence, 263 F.Supp.2d 358, 366 (D.R.I.2003). Without consideration from the Debtor, either value given or an obligation promised to Calyon, the letters of credit cannot be contracts of the Debtor. By issuing a letter of credit, the issuer does not make a contract with the beneficiary, it fulfills a contractual obligation to its applicant. Moog World Trade Corp. v. Bancomer, S.A., 90 F.3d 1382, 1386 (8th Cir.1996). “Letter of credit” is defined in Article 5 of the Uniform Commercial Code as “a definite undertaking” by an issuer to a beneficiary for the account of an applicant to honor a documentary presentation by payment. UCC § 5-102(a)(10). By this definition, a letter of credit is not a contract. Data General Corp., Inc. v. Citizens Nat. Bank of Fairfield, 502 F.Supp. 776, 784 (D.Conn.1980).
Letter of credit is not executory.
Apart from whether a letter of credit is a contract, it is certainly not executory. In determining whether a contract is executory for the purposes of section 365 of the Bankruptcy Code, nearly all courts employ the definition developed by Harvard Law Professor Vern Countryman in 1973. Under that definition, an “execu-tory” contract is a contract under which the obligations of both the debtor 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 performance of the other. In re Streets & Beard Farm Partnership, 882 F.2d 233, 235 (7th Cir.1989). Both parties to the contract must have significant unperformed obligations. Dick ex rel. Amended Hilbert Residence Maintenance Trust v. Conseco, Inc., 458 F.3d 573 (7th Cir.2006). The “exeeutoriness” of a contract is determined as of the *787petition date. In re Columbia Gas System Inc., 50 F.3d 233, 240 (3rd Cir.1995).
Unless both parties have unperformed obligations, a contract cannot be executory under section 365. In re Exide Technologies, 607 F.3d 957, 962 (3rd Cir.2010). In cases where one party has fully performed and owes no further obligation, the concepts of assumption and rejection serve no purpose. Columbia Gas, 50 F.3d at 239. If the debtor’s counterparty has fully performed, it simply holds a claim against the estate, so rejection would be meaningless and assumption would be of no benefit to the estate, serving only to convert the claim into a first priority expense. Id. Likewise, if the debtor has no unperformed obligations, the performance owed by the counterparty is an asset in the nature of a claim for performance that may be enforced for the benefit of the estate without first being “assumed.” Rejection would equate to a pointless abandonment of valuable property of the estate. Id.
Although it is not a contract at all, where a debtor is the beneficiary of a letter of credit, the debtor has no unperformed obligations but is owed an obligation (payment) by the obligor (the issuer). Since no performance is owed by the debtor, the letter of credit is not execu-tory and does not have to be assumed in order to be drawn upon. Here again, the fact that a draw has implications that are governed by the debtor’s agreement with the issuer’s applicant is immaterial to the question of whether the letter of credit is itself “executory.” It is not.
Letter of credit is not a financial accommodation for the Debtor.
Section 365(c)(2) prohibits the assumption of an executory contract if it is “a contract to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor....”13 Although the term “financial accommodation” is not defined in the Bankruptcy Code, it has been judicially defined as the extension of money or credit to accommodate another. In re Thomas B. Hamilton Co., Inc., 969 F.2d 1013, 1018-19 (11th Cir.1992). This definition is discerned in part from the legislative history of this provision.14 While the legislative history of this provision has not been regarded as entirely clear as to the letter of credit issue before the Court here, it has been consistently recognized that the purpose underlying this provision is to prevent a prepetition creditor from being forced to provide new, postpetition financing to a debtor. In re Sportsman’s Warehouse, Inc., 457 B.R. 372 (Bankr.D.Del.2011); In re TS Industries, Inc., 117 B.R. 682 (Bankr.D.Utah 1990) (purpose of section 365(c) is to prevent a creditor from being required to involuntarily finance a debtor-in-possession’s reorganization effort based on a contract that it negotiated without knowing that the debt- or would be filing bankruptcy); In re Placid Oil Co., 72 B.R. 135 (Bankr.*788N.D.Tex.1987) (prohibition against assumption of contracts for “financial accommodation” protects party who has made a “yet unperformed lending commitment”). The exemption from assumption has been construed as limited to agreements entered into before the filing of the petition which extend financing to debtors either as the primary borrower or as a guarantor. In re Boscov’s Inc., 2008 WL 4975882 (Bankr.D.Del.2008). The term “financial accommodation” is strictly construed. Hamilton, 969 F.2d at 1018; In re Twin City Power Equipment, Inc., 308 B.R. 898 (Bankr.C.D.Ill.2004).
As discussed above, the issuer of a letter of credit is providing a financial accommodation to its customer, the applicant for the letter and the party who is liable to pay amounts drawn. The letter is issued on the basis of the applicant’s credit and ability to pay. The beneficiary’s financial standing is not a factor since the beneficiary incurs no repayment liability to the issuer. Where the beneficiary is the party in bankruptcy, a letter of credit is not a contract to extend financial accommodations “to or for the benefit of the debtor,” under section 365(c)(2).
The Trustee relies on In re Swift Aire Lines, Inc., 30 B.R. 490 (9th Cir. BAP 1983), a case involving similar facts, characterizing it as the only court to have ruled on this issue. In Swift Aire, the court held that a letter of credit payable to a debtor who subsequently filed a chapter 7 petition, was an executory contract to extend financial accommodations that could not be drawn upon by the trustee despite the applicant’s contractual agreement that the letter of credit could be drawn upon even if the debtor filed bankruptcy. The court’s disregard of the underlying contract was based on its view of the strict compliance principle in letter of credit law. The court ruled that the issuer rightfully refused the trustee’s payment demand given the condition of the letter of credit requiring a statement by the corporate secretary of the debtor. Alternatively, the court addressed the argument that the letter of credit was a financial accommodation that could not be assumed and assigned. The court determined that the following legislative history was disposi-tive:
Subsection (c) prohibits the trustee from assuming or assigning a contract or lease if applicable nonbankruptcy law excuses the other party from performance to someone other than the debtor, unless the other party consents. This prohibition applies only in the situation in which applicable law excuses the other party from performance independent of any restrictive language in the contract or lease itself. The purpose of this subsection, at least in part, is to prevent the trustee from requiring new advances of money or other property. The section permits the trustee to continue to use and pay for property already advanced, but is not designed to permit the trustee to demand new loans or additional transfers or property under lease commitments.
Thus, under this provision, contracts such as loan commitments and letters of credit are nonassignable, and may not be assumed by the trustee.
House Report No. 95-595 p. 348, 1978 U.S.C.C.A.N. 5963, 6304.
By its plain terms, section 365(c)(2) may only apply to (1) a contract of the debtor, (2) that is executory, and (3) that extends credit or financial accommodations to or for the benefit of the debtor. A standby letter of credit of the kind issued by Ca-lyon meets none of those three conditions. Since the statutory provision is unambiguous, resort to legislative history as a tool of construction is not proper. Exxon Mobil *789Corp. v. Allapattah Services, Inc., 545 U.S. 546, 567-68, 125 S.Ct. 2611, 162 L.Ed.2d 502 (2005); Trustees of Iron Workers Local 473 Pension Trust v. Allied Products Corp., 872 F.2d 208, 212-13 (7th Cir.1989). Legislative history should be used to resolve ambiguity, not create it. Miller v. Commissioner, 836 F.2d 1274, 1283 (10th Cir.1988).
Even if the legislative history is properly consulted, the Swift Aire court’s conclusion that “[t]he drafters of the Bankruptcy Code considered that letters of credit were executory contracts to make a financial accommodation to or for the benefit of the debtor,” 30 B.R. at 496, is, in this Court’s view, far too broad. That interpretation fixates on the legislative history’s reference to “letters of credit” without giving proper regard to whether it is the issuer’s applicant or the beneficiary who is the debtor in bankruptcy, and to the language and purpose of the statute. The fundamental error of the court lies in its failure to recognize the function of the letter of credit in the underlying transaction. While a letter of credit may be viewed as a financial accommodation for the benefit of the applicant for the letter of credit, it is not a “financial accommodation” for the benefit of the beneficiary. Taking Swift Aire’s analysis one step further, the result of a debtor or trustee drawing on the letter of credit is not to create a debtor/creditor relationship between the debtor and the issuer of the letter of credit, but to cause the issuer to look to the applicant for payment. The Calyon letters of credit were issued to meet an obligation owed by Lurgi and were based upon the financial strength of Lurgi, not of the Debtor. This Court disagrees with Swift Aire’s reasoning and application of section 365(c)(2).
In sum, the Court concludes that the Calyon letters of credit are not financial accommodation contracts and that section 365(c)(2), not applicable to a letter of credit where the beneficiary files for bankruptcy relief, did not bar the Debtor acting as debtor in possession or the Trustee from drawing upon the letters of credit.15
Right to draw upon letter of credit is property of the estate that may be used by debtor in possession.
As instructed by Sidley Austin, on November 30, 2007, Mike Smith sent Lur-gi notice of an intent to draw upon the original letters because of Lurgi’s wrongful termination of the EPC Agreements. Although the issuance of replacement letters by Calyon cured one of Lurgi’s defaults— the nonrenewal of the original letters of credit — Lurgi’s wrongful termination of the EPC Agreements was uncured, thus providing grounds for the Debtor to draw upon the Calyon letters of credit. Whether Lurgi’s termination of the EPC Agreements was actually “wrongful,” determinable with certainty only by a court or an arbitrator, is of no moment. A declaration *790by the Debtor that Lurgi acted wrongfully, by itself would have been sufficient to obtain payment on the letters of credit. The Debtor, as beneficiary of the Calyon letters of credit, had a lawful right, by presenting such a certificate and a request for payment to Calyon, to receive payment from Calyon.16 When the Debtor filed its chapter 11 petition on December 13, 2007, the right to draw upon the Calyon letters of credit became property of the estate pursuant to section 541(a)(1).17 As the Debtor was authorized to operate as a debtor in possession, it had the power and authority to use the property of the estate in the ordinary course of business without notice or hearing. 11 U.S.C. § 363(c)(1).
In their memorandum of law, the Defendants contend that the Trustee cannot prove that they proximately caused the claimed damages. The Defendants support this contention by arguing that the letters of credit remained transferrable and presentable for payment despite the Debtor’s bankruptcy filing. They rely upon the positive provisions of Article 5 of the Uniform Commercial Code and the inapplicability of Bankruptcy Code section 365(c)(2).
Relying primarily upon an argument for the applicability of section 365(c)(2), the Trustee does not quarrel with Defendants’ contention that the applicable provisions of Article 5 of the UCC, on their face, allow for the assignment of letters of credit after bankruptcy, thus enabling a debtor in possession or trustee to draw upon them.18 Article 5 defines “successor of a beneficiary” to include a debtor in possession and a trustee in bankruptcy. UCC § 5-102(a)(15). A successor of a beneficiary is authorized to sign and present documents *791and receive payment in the name of the beneficiary with or without disclosing its status as a successor. UCC § 5-113(a) and (b).
No proximate cause.
Based on these UCC provisions plus the inapplicability of section 365(c)(2), the Defendants contend that the Debtor, serving as debtor in possession as of December 13, 2007, until conversion on August 4, 2008, and the chapter 7 trustee thereafter, had the authority and could have obtained payment from Calyon. Therefore, say the Defendants, their alleged failure to advise the Debtor of the purported need to draw on the letters of credit before bankruptcy or by December 15, 2007, could not have been the proximate cause of any harm to the Debtor. The Court agrees.
Having determined that the Calyon letters of credit, for purposes of section 365(c)(2), were not contracts of the Debtor, were not executory, and did not evidence an extension of credit or financial accommodation to the Debtor, it follows directly that section 365(c)(2) is not applicable. Therefore, the Trustee’s primary cause of action, premised entirely on the applicability of that provision, is defeated.
The second allegation of malpractice in the Complaint is whether, in the event that the Court determines that the letters of credit are not covered by section 365(c)(2), the Defendants breached their duty by failing to call upon or cause the debtor in possession to call upon the letters of credit prior to December 15, 2007. The Court has now determined that the Calyon letters replaced the original letters of credit. Thus the December 15, 2007 date has no significance as the Calyon letters extended the termination date for an additional year to December 15, 2008. The Trustee’s second cause of action cannot stand either, since the Debtor had the right to draw upon the Calyon letters after filing bankruptcy and after December 15, 2007. Any failure of the Defendants to advise the Debtor to draw upon the letters on or prior to December 15, 2007, could not have been the proximate cause of any harm to the estate.
The third claim alleged in the complaint is that the Defendants negligently failed to make Barash aware of the existence of the letters of credit and the Debtor’s right to draw upon them. There is no direct evidence in the record of when Barash first learned of the letters of credit. However, he filed a motion on January 7, 2008, that referred to the letters of credit. On January 28, 2008, Barash filed an exhibit to the Debtor’s statement of financial affairs, which in paragraph 10 addresses the Debt- or’s long-term debt and letters of credit, stating that the collateral of Credit Suisse includes all letters of credit issued to the Debtor.19 It is clear that Barash was aware of the letters of credit early in the bankruptcy case, no later than January 7, 2008. Since the bankruptcy filing did not affect the Debtor’s right to draw upon the letters, even if the Defendants breached a duty by failing to make Barash aware of the letters, that breach could not have been the proximate cause of any harm to the Debtors.
The motion for summary judgment will be granted.
JURISDICTION
The Court previously issued an Opinion determining that the cause of action for *792legal malpractice against the Defendants did not arise in or arise under the Debtor’s bankruptcy case and was not a core proceeding, but indicating an intent to reevaluate the jurisdictional basis as the case progressed. The Court now determines that this adversary proceeding raises claims “arising under” Title 11, which include rights determined by a statutory provision of Title 11. See In re Repository Technologies, Inc., 601 F.3d 710, 719 (7th Cir.2010). The Court determines that this matter is a core proceeding, both statutory and constitutional, under 28 U.S.C. § 157(b)(2)(0). A final judgment may be entered that is appealable to the district court. 28 U.S.C. § 157(b)(1).
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.
IT IS SO ORDERED.
ORDER
For the reasons stated in an Opinion entered this day, IT IS HEREBY ORDERED that the Defendants’ motion for summary judgment is GRANTED; Judgment is entered in favor of the Defendants, Michael E. Evans and Froehling, Weber & Schell, LLP, and against the Plaintiff, Gary T. Rafool, as Trustee for the estate of Central Illinois Energy, L.L.C., Debtor.
. The Trustee disputes this as lacking an evi-dentiary basis in the record. The termination notices are not part of the record. However, to the extent that a wrongful termination by Lurgi would have provided grounds for the Debtor to draw on the letters of credit, the fact of termination is favorable to the Trustee.
. Although the Trustee disputes this fact, he regards it as "immaterial” whether the letters of credit at issue are the Calyon letters of credit or the DZ Bank and Commerzbank letters of credit.
. The parties refer only to Illinois case law and accordingly, the court assumes that the malpractice claim is governed by Illinois law. Each of the four letters of credit contains a mandatory forum selection clause providing that the governing state law is that of New York. However, the Defendants are attorneys licensed to practice in Illinois who main-tamed, at the relevant time, an office in Canton, Illinois. The contract for legal services was, presumably, formed in Illinois and, by all evidence, performed in Illinois. However, the written contract for legal services, if there was one, between the Defendants and the Debtor is not part of the record.
. By their denial of the duty, the Defendants have placed the scope of their representation at issue. A plaintiff in a legal malpractice claim bears the burden to prove that omitted advice was within the scope of representation as a matter of contract. F.D.I.C. v. Mahajan, 2012 WL 3061852 (N.D.Ill.2012); Terry v. Woller, 2010 WL 5069699 (C.D.Ill.2010). The presence of other counsel representing the Debtor calls into question the allocation of responsibility among the various attorneys.
. Pursuant to this same provision, the Defendants maintain that, upon conversion of the case to chapter 7, the Trustee had the right to present the letters of credit for payment.
. Thirty years ago, Bankruptcy Judge Calvin Ashland correctly made the point that a letter of credit is a financial accommodation extended from the issuer to its applicant. In re Swift Aire Lines, Inc., 20 B.R. 286, 287 (Bankr.C.D.Cal.1982), rev’d on other grounds, 30 B.R. 490 (9th Cir. BAP 1983). See discussion infra at 787-89.
. Because the letters of credit are not contracts of the debtor, common law principles applied to the issue of whether multiple related contracts should be construed together are inapposite. Nevertheless, the rule in New York is that the standard for determining whether two contracts are separable, is the intent of the parties as manifested in the documents, viewed in light of the surrounding circumstances. Rudman v. Cowles Communications, Inc., 30 N.Y.2d 1, 13, 330 N.Y.S.2d 33, 280 N.E.2d 867 (N.Y.1972); 131 Heartland Blvd. Corp. v. C.J. Jon Corp., 82 A.D.3d 1188, 921 N.Y.S.2d 94 (N.Y.A.D. 2 Dept. 2011). Even under this standard, the letters of credit, clearly intended to be enforceable as independent third-party payment obligations, are separable from the EPC Agreements.
.The construction and enforcement of the agreement between the issuer and its applicant, including the terms of reimbursement, are governed by traditional contract law. Generale Bank v. Czarnikow-Rionda Sugar Trading, Inc., 47 F.Supp.2d 477 (S.D.N.Y.1999).
. Nassar v. Florida Fleet Sales, Inc., 79 F.Supp.2d 284 (S.D.N.Y.1999).
. Bouzo v. Citibank, N.A., 96 F.3d 51 (2nd Cir.1996).
. Krakauer v. Chapman, 16 A.D. 115, 45 N.Y.S. 127 (N.Y.A.D. 2 Dept.1897).
.The "unwashed” characterize the letter of credit as a contract between the beneficiary and the issuer, but it is better to call it an "undertaking” and so avoid the implication that contract principles might apply to it. 3 James J. White & Robert S. Summers, Uniform Commercial Code, § 26-2, at 113 (4th ed.1995).
. The court in In re Maxon Engineering Services, Inc., 324 B.R. 429, 432 (Bankr.D.Puerto Rico 2005) makes the point that ''[s]ince the financial accommodation described in § 365 is a kind of executory contract, if a contract is not executory, it follows that the contract is not a financial accommodation.”
. The legislative history states that the purpose of the exclusion “is to make it clear that a party to a transaction which is based upon the financial strength of a debtor should not be required to extend new credit to the debtor whether in the form of loans, lease financing or the purchase or discount of notes.” Senate Rep. No. 95-989, 95th Cong., 2nd Sess. 58-59 (1978), reprinted in 1978 U.S.Code, Cong. & Admin. News 5844-45.
. The Defendants' alternative argument is that the Trustee is judicially estopped from contending that the letters of credit could not be transferred. The issue of whether section 365(c)(2) precluded the transferability of the letters of credit was raised early on in the Debtor’s bankruptcy, before conversion of the case to chapter 7 and the appointment of a trustee. Because Lurgi, as the sole objector to the Debtor's motion for assumption and assignment of the letters of credit, eventually withdrew that objection, the issue was never decided by the Court. In fact, the order entered by the Court which authorized the transfer of the EPC Agreements and the related letters of credit, recognized the uncertain effect of section 365(c)(2) upon the transaction. The doctrine of judicial estoppel does not apply where a previously asserted and allegedly inconsistent position was not judicially accepted. Perry v. Blum, 629 F.3d 1 (1st Cir.2010). Putting aside the Trustee's role in advocating the transferability of the letters of credit, there was neither any judicial acceptance or rejection of any position on that issue by this Court.
. That the Debtor and Lurgi may have been engaged in an ongoing negotiation, in addition to the formal arbitration proceeding, during the period of time before and after the bankruptcy filing, does not affect the determination of the Debtor's rights against Calyon. There is no evidence of a ''stand-still” agreement and no claim that such an agreement would have affected Calyon's absolute liability. In any event, the Trustee’s cause of action presumes the Debtor's right to draw upon the letters of credit.
. Confusion may be caused by the overbroad statement that a letter of credit is not property of a debtor’s bankruptcy estate. The statement is true when the applicant is the debtor in bankruptcy, but not when the debtor is the beneficiary. See ACE American Ins. Co. v. Bank of the Ozarks, 2012 WL 3240239, at *6 (S.D.N.Y.2012). More precisely, it is the right to demand and receive payment that becomes property of the estate. The Calyon letters evidence, but do not themselves constitute that right. Calyon's offices are located in Paris, and the letters permit a draw demand to be made by delivery of the certificate and demand for payment by telecopier. Presentation and surrender of the original letters of credit is not required.
.While it may be largely a matter of semantics, whether a chapter 11 filing effects a "transfer” of assets and property interests from the debtor to the debtor in possession is an open question. Because a debtor in possession is, in fact, the same person or entity as the debtor, entitled to deal with its assets and enforce its property and contract rights in its own name, there is no reasoned basis for most bankruptcy purposes to consider a filing to have effected a transfer to a new or different person or entity. N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) (for purposes of section 365, it is "sensible to view the debtor-in-possession as the same 'entity' which existed before the filing of the bankruptcy petition”); In re James Cable Partners, L.P., 154 B.R. 813, 815 (M.D.Ga.1993) (while debtor in possession acquires all rights and assets of debtor, these rights are acquired without an assignment as no real transfer occurs); Matter of GP Exp. Airlines, Inc., 200 B.R. 222, 232 (Bankr.D.Neb.1996) (under section 541, debtor's contractual rights are property of the estate which, under section 363, may be used by the debtor in possession). See, also, 11 U.S.C. § 1101(1) ("debtor in possession” means debtor).
. The existence of a lien on the Debtor’s right to payment under the letters of credit would go a long way toward explaining why the letters were not drawn upon, since those rights and the proceeds would have constituted "cash collateral” under section 363(a). So the decision not to draw upon the letters may well have been made by Credit Suisse. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495340/ | MEMORANDUM DECISION ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
SUSAN Y. KELLEY, Bankruptcy Judge.
On March 10, 2010, Powers Lake Construction Co. (the “Debtor”) filed a petition under Chapter 11 of the Bankruptcy Code. The Chapter 11 reorganization did not succeed, and on December 16, 2010, the Debt- or’s case was converted to Chapter 7. Steven McDonald is the duly appointed and acting Chapter 7 Trustee. On March 9, 2012, the Trustee filed this adversary proceeding against Little Limestone, Inc. (the “Creditor”) to recover a preferential transfer in the amount of $10,919.42 (the “Transfer”). The Creditor answered and raised various affirmative defenses, most particularly challenging the Trustee’s claim that the Debtor had an interest in the transferred funds. The Creditor claims that the Transfer consisted of trust funds as defined by Wis. Stat. § 779.02(5). The Trustee moved for Summary Judgment, and the Creditor objected. After considering the parties’ submissions, this Court issues this Memorandum Decision.
JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This preference action is a core proceeding over which this Court can enter a final order, notwithstanding the Supreme Court’s decision in Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In In re USA Baby, Inc., 674 F.3d 882, 883-84 (7th Cir.2012), the Seventh Circuit stated: “The Supreme Court held in [Stem v. Marshall ] that bankruptcy judges may not enter final judgments on common law claims that are independent of federal bankruptcy law.” A preference claim is not independent of federal bankruptcy law; indeed, “[preference claims only exist as a matter of bankruptcy law. The right of recovery under § 547 is both unique and vital to bankruptcy because it serves one of bankruptcy’s fundamental goals, the equal distribution of estate property to creditors.” KHI Liquidation Trust v. Wisenbaker Builder Servs. (In re Kimball Hill, Inc.), 480 B.R. 894, 905 (Bankr.N.D.Ill.2012). Because the preference claim stems from the bankruptcy, Stem v. Marshall is satisfied. Id. This holding is “borne out by every published opinion in which a Stem challenge to a bankruptcy court’s authority to enter final orders in a preference avoidance action has been raised.” Id. at 905 (citations omitted).
STATEMENT OF FACTS
C.D. Smith Construction, Inc. (“C.D. Smith”) was the prime contractor on a project known as the Fontana Wastewater Treatment Plant (the “Project”) and hired the Debtor as one of its subcontractors. The Debtor in turn contracted with the Creditor to supply limestone for the Project. The Creditor delivered limestone in October and November 2009 and made a final delivery in January 2010. The following chart illustrates the amounts, dates, *806and terms of the invoices issued by the Creditor to the Debtor:
Invoice Date Terms Amounts
10/31/09 Net 60 $7,243.23
11/30/09 Net 45 $602.50
12/31/09 Net 30 $422.60
01/31/10 Net 30 $2,108.99
$542.10
Total $10,919.42
Despite the various terms stated on the invoices, the Creditor alleges that the parties agreed that the Debtor would pay the Creditor once all the materials had been delivered as required for the Project. On February 25, 2010, C.D. Smith issued a check to the Debtor for the Project. That same day, the Creditor issued its lien waiver, and the Debtor issued a check to the Creditor in the amount of $10,919.42.
ANALYSIS
Summary judgment is appropriate only when the evidence presented shows that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Bankr.P. 7056; Eisencorp, Inc. v. Rocky Mountain Radar, Inc., 398 F.3d 962, 965 (7th Cir.2005). All inferences are drawn in the light most favorable to the non-moving party. Id. The Trustee bears the burden of proof that the Transfer is an avoidable preference as defined by Bankruptcy Code § 547. 11 U.S.C. § 547(g).
Section 547(b) of the Bankruptcy Code allows the Trustee to avoid certain interests of the debtor in property. The Creditor disputes that the Transfer involved the Debtor’s property because the transferred funds were held in trust for the Creditor pursuant to Wis. Stat. § 779.02(5),1 which provides:
The proceeds of any mortgage on land paid to any prime contractor or any subcontractor for improvements upon the mortgaged premises, and all 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, services, materials, plans, and specifications used 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 Trustee recognizes the contractor trust fund statute, but contends that to successfully assert that the Transfer was made with trust funds, the Creditor must trace the funds. The Trustee relies on Wisconsin Dairies Coop. v. Citizens Bank & Trust, 160 Wis.2d 758, 768, 467 N.W.2d 124, 128 (1991) (citation omitted), which held: “ ‘[Mjonies formerly held in trust fund status lose their trust fund status if they are paid out to satisfy obligations to parties other than trust fund creditors.’ ” See also In re Straight Arrow Constr. Co., 393 B.R. 652 (Bankr.W.D.Wis.2008) (subcontractor’s claims are secured by trust funds to the extent the funds are traceable to specific projects on which the subcontractor worked, and only to the extent that the funds from the project remain in the hands of the debtor).
The party claiming a trust interest in a contractor’s commingled funds bears the burden to trace the funds received to any funds remaining in the debt- or’s account. Meoli v. Kendall Elec., Inc. (In re R.W. Leet Elec., Inc.), 372 B.R. 846, 855-56 (6th Cir. BAP 2007). The Trustee *807points out that between the time when the check from C.D. Smith was deposited in the Debtor’s checking account (February 26, 2010) and the time when the check to the Creditor cleared the Debtor’s bank (March 3, 2010), the Debtor’s checking account ran a negative balance, destroying the Creditor’s trust fund. The “lowest intermediate balance test” is the rule for construing trust proceeds commingled in a bank account. Under that test:
[A] court will follow the trust fund and decree restitution from an account where the amount on deposit has at all times since the commingling of the funds equaled or exceeded the amount of the trust fund.... Where, however, after the commingling, all the money is withdrawn, the trust fund is treated as lost, even though later deposits are made into the account. Should the amount on deposit be reduced below the amount of the trust fund but not depleted, the claimant is entitled to the lowest intermediate balance in the account. This is based on the fiction that the trustee would withdraw non-trust funds first, retaining as much as possible of the trust fund in the account.
Connecticut General Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 619 (1st Cir.1988) (emphasis added); see also First Federal of Mich. v. Barrow, 878 F.2d 912, 916 (6th Cir.1989) (citation omitted) (“ “[W]here, after the appropriation and mingling, all of the moneys are withdrawn, the equity of the cestui is lost, although moneys from other sources are subsequently deposited in the same account.’ ”).
Applying the lowest intermediate balance test here demonstrates the dissipation of the Creditor’s trust fund before the Creditor’s check was presented. After C.D. Smith’s check was credited to the Debtor’s account on February 26, 2010, debits reduced the balance in the account to less than zero. On March 1 and 2, 2010, the account showed a negative balance. The Debtor made two large deposits on March 3, 2010, allowing the Debtor’s check to the Creditor to clear on that date.2 The bank records conclusively establish that the account balance was negative before the Transfer was made, destroying the trust fund under the lowest intermediate balance test. Although some courts have held that replenished funds can regain their trust status under certain circumstances, this applies “only when the restored funds are deposited into a segregated trust account.” Watts v. Pride Util. Constr., Inc. (In re Sudco, Inc.), 2007 WL 7143065, *7, 2007 Bankr.LEXIS 3730, *21 (Bankr.N.D.Ga. Sept. 27, 2007) (citation omitted). If the funds are deposited back into the debtor’s individual commingled account, “the restored funds are only treated as trust funds if the evidence shows that the debtor intended to make restitution.” Id. at *7, 2007 Bankr.LEXIS 3730, at *22 (citation omitted). The record here does not reflect any attempt on the part of the Debtor to make restitution.
Accordingly, the Transfer was made with property of the Debtor, and the Trustee has established the first element of an avoidable preferential transfer. The Affidavits and documents filed with the Trustee’s Motion show that the Trustee also is entitled to summary judgment on the other elements of a preferential transfer: (1) the Transfer was made to a creditor on an antecedent debt; (2) the Debtor was insolvent; (3) the Transfer was made within 90 *808days of the Debtor’s petition; and (4) the Transfer enabled the Creditor to receive more than other similarly situated creditors in this Chapter 7 case.
However, the Creditor asserts two affirmative defenses that it alleges would defeat the Trustee’s claim-—contemporaneous exchange for new value, and ordinary course of business. Section 547(c)(1) provides that a trustee may not avoid a transfer to the extent the transfer was “(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange....” 11 U.S.C. § 547(c)(1). In support of this defense, the Creditor relies on the Affidavit of its President alleging that the Debtor and Creditor agreed that the Debtor was not obligated to pay the Creditor until all limestone had been provided, and that the Creditor issued a lien waiver on the same day and in exchange for the Transfer. The Trustee’s claim is well-taken that the payment of invoices from four months to one month old is not “substantially contemporaneous,” but the lien waiver was delivered on the same day as the Debtor’s payment, and could qualify for the contemporaneous exchange defense. However, for the lien release to constitute a contemporaneous exchange for new value, the new value must be “given to the debtor.” 11 U.S.C. § 547(c)(1)(A). Most courts hold that a third-party lien release does not establish the requisite new value to the debtor. See In re Chase & Sanborn Corp., 904 F.2d 588 (11th Cir.1990) (release of lien rights on owner’s property does not constitute new value to the debtor); In re Hatfield Electric Co., 91 B.R. 782 (Bankr.N.D.Ohio 1988) (same). A minority have found sufficient value if, “at the time of the preference payment, the owner still owed sufficient sums to the debtor on the project to permit a setoff against the owner’s payment to the sub.” In re J.A. Jones, 361 B.R. 94, 103 (Bankr.W.D.N.C.2007). Here, at the time of the Transfer on March 3, 2010, no payments were due from C.D. Smith to the Debtor. Therefore, the lien release did not provide contemporaneous new value to the Debtor. The Transfer was not substantially contemporaneous with the Creditor’s shipments of limestone, and the lien release did not provide new value to the Debtor. Accordingly, there is no genuine issue of material fact that the Transfer was not a substantially contemporaneous exchange.
The Creditor also raises the ordinary course of business defense. Section 547(c)(2) provides that a transfer may not be avoided “to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms....” 11 U.S.C. § 547(c)(2). The ordinary course of business defense “by its nature, is a fact-intensive” defense that ordinarily “should be decided only after trial.” Buchwald v. Williams Energy Mktg. & Trading Co. (In re Magnesium Corp. of Am.), 460 B.R. 360, 366 (Bankr.S.D.N.Y.2011); see also IT Group, Inc. v. Anderson Equip. Co. (In re IT Group, Inc.), 332 B.R. 673, 677 n. 4 (Bankr.D.Del.2005) (“[T]he ordinary course of business defense is a highly fact-intensive issue, and it is rare indeed for it to be resolved in defendant’s favor on a motion for summary judgment.”).
The Creditor alleges that the payment was made in the ordinary course of business because the payment was equal to the amount of invoices that the Creditor provided to the Debtor. The Trustee al*809leges that the payments were not made in the ordinary course because three of the four invoices were paid late, and the dates of the payments were sporadic. The Court finds that a material issue of fact exists as to this defense: within a day after receiving payment from C.D. Smith, the Debtor paid the Creditor. Ignoring invoice terms and making payment when paid by the general contractor may well be standard in the construction industry. Further, the Debtor and Creditor could have agreed to this payment arrangement. The Trustee cannot simply point to the invoices and claim that as a matter of law the Creditor’s defense fails. The evidence presented is sufficient to establish an issue of fact as to whether this was a payment in the ordinary course of business.
CONCLUSION
The Trustee has carried his burden on proving the elements of a preference, but a genuine issue of material fact exists as to whether the Transfer was made in the ordinary course of business of the Debtor and the Creditor or according to ordinary business terms. Therefore, the Court will grant in part and deny in part the Trustee’s Motion for Summary Judgment and schedule a trial to determine whether the Transfer is excepted from the Trustee’s recovery by the ordinary course of business defense.
. The parties also cite Wis. Stat. § 779.16, but this statute applies to moneys paid "for public improvements.” The record is silent as to whether the Fontana Wastewater Treatment plant is such an improvement, but the Court’s analysis does not change.
. The date the check clears the bank is the operative date for application of preference defenses. See Barnhill v. Johnson, 503 U.S. 393, 402, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) ("[W]e see no basis for concluding that the legislative history ... should cause us to adopt a "date of delivery” rule for purposes of § 547(b).”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495341/ | VENTERS, Bankruptcy Judge.
In these consolidated appeals, Defendants San Diego Gas & Electric Company (“SDG & E”) and Southern California Edison Company (“SCE”) appeal the bankruptcy court’s judgments against them under 11 U.S.C. § 547(b) for payments they received from the Debtors1 in the 90 days *812prior to the bankruptcy petition date. After giving credit for certain “new value” transfers, the bankruptcy court entered judgment against SCE for $131,267.63 and against SDG & E for $31,242.63.
The Defendants assign error to three aspects of the bankruptcy court’s ruling. They argue: 1) that the transfers at issue weren’t preferential because the Defendants weren’t creditors of the Debtors, as required by § 547(b)(1); 2) that the transfers were not on account of antecedent debts, as required by § 547(b)(2); and 3) that the bankruptcy court erred in limiting the Defendants’ new value credits to the value of the utility services they provided to the Debtors’ customers in the preference period.
For the reasons stated below, we affirm the bankruptcy court’s decision with regard to its determination that the payments the Defendants received from the Debtors are avoidable under 11 U.S.C. § 547(b), but we reverse on the bankruptcy court’s calculation of the Defendants’ new value credits.
JURISDICTION
The bankruptcy court’s judgment is a final order over which we have jurisdiction under 28 U.S.C. § 158(b).
BACKGROUND
The facts are undisputed. On February 6, 2009, separate involuntary Chapter 7 bankruptcy petitions were filed against the Debtors. An Order for Relief was entered in each case on March 3, 2009, and the Debtors’ bankruptcy estates were substantively consolidated on February 2, 2011.
The Debtors’ business was to provide utility-management and bill-payment services to restaurants and other businesses. As originally conceived, the Debtors’ business worked in the following manner: The Debtors would receive invoices from a utility provider on behalf of a customer and then periodically report to the customer regarding those invoices. The customer then would transfer funds to the Debtors in an amount that corresponded to the amount of the invoice report and, after receiving those funds from the customer, the Debtors would send the utility provider a check drawn on the Debtors’ bank account.
All of the transfers at issue in this appeal relate to two of the Debtors’ and Defendants’ mutual customers: Buffets, Inc. (and related entities) and Wendy’s International, Inc.2 The Debtors provided bill-payment services to Buffets pursuant to an “Energy Services Agreement” dated January 5, 2007. The Debtors and Wendy’s were parties to an Energy Services Agreement dated May 1, 2007.
In the 90 days prior to the petition date of February 6, 2009, the Debtors made the following 24 transfers to Defendant SCE totaling $183,512.74:
Check No._Check Amt._Check Date_Rcvd. by SCE_Clear Date
6077932_$4,178.52_10/21/08_11/12/08_11/14/2008
6077954_$4,224.86_10/21/08_11/12/08_11/14/2008
6076652_$5,943.93_10/17/08_11/14/08_11/18/2008
6076653_$8,125.06_10/17/08_11/14/08_11/17/2008
6076654_$9,620.77 10/17/08_11/14/08_11/17/2008
6076656 $9,996.85 10/17/08 11/14/08 11/17/2008
*8136078508_$7,948.76_10/23/08_11/12/08_11/14/2008
6078516_$8,156.87_10/23/08_11/12/08_11/14/2008
6078532_$8,188.20_10/23/08_11/19/08_11/21/2008
6078537_$7,827.17_10/23/08_11/18/08_11/20/2008
6078554_$7,435.41_10/23/08_11/18/08_11/20/2008
6078566_$7,804.13_10/23/08_11/18/08_11/20/2008
6078617_$7,678.34_10/23/08_11/13/08_11/17/2008
6079360_$7,371.65_10/27/08_11/13/08_11/17/2008
6079362_$10,844.50_10/27/08_11/13/08_11/17/2008
6079363_$9,514.28_10/27/08_11/13/08_11/17/2008
6079379_$7,860.50_10/27/08_11/17/08_11/19/2008
6079380_$6,322.93_10/27/08_11/17/08_11/19/2008
6079381_$6,628.53_10/27/08_11/17/08_11/19/2008
6079382_$7,970.53_10/27/08_11/17/08_11/19/2008
6079943_$8,460.80_10/28/08_11/12/08_11/14/2008
6080543_$6,881.98_10/29/08_11/17/08_11/19/2008
6080554_$7,461.95_10/29/08_11/25/08_11/28/2008
6080946$7,066.22_10/30/08_11/20/08_11/24/2008
All 24 of the transfers were made by checks drawn on a checking account at U.S. Bank in the name of debtor LGI Energy Solutions, Inc., account no. xxxxxxxx. The first two checks, nos. 6077932 and 607954, totaling $8,403.38, related to Wendy’s; the other 22 checks related to Buffets.
In the 90 days prior to the petition date of February 6, 2009, the Debtors made eight transfers to Defendant SDG & E totaling $75,053.85. All eight of the transfers were made by checks drawn upon account no. 3321 and related to utility services provided to Buffets.
Check No._Check Amt._Check Date_Rcvd by SDG & E Clear Date
6075058_$5,773.59 10/13/08_11/12/08_11/14/08
6078518_$10,402.58 10/23/08_11/12/08_11/17/08
6078952_$9,093.92 10/24/08_11/18/08_11/20/08
6079349_$10,468.59 10/27/08_11/10/08_11/12/08
6079949_$8,514.01 10/28/08_11/20/08_11/24/08
6080548_$11,097.37 10/29/08_11/17/08_11/19/08
6081120_$10,062,69 10/31/08_11/25/08_11/26/08
6081126$9,64110 10/31/08_11/26/08_11/28/08
The 3321 account was a basic, unrestricted business checking account. Both the monthly statements for the 3321 account and the checks drawn on the 3321 account indicate that LGI Energy Solutions, Inc. was the sole holder of the account. Wendy’s and Buffets last made deposits into the 3321 account on November 3, 2008, and November 4, 2008, respectively. Thereafter, Wendy’s and Buffets made their payments to the debtors via other accounts owned by the Debtors at M & I Marshall & Ilsley Bank. Between November 3, 2008, when Wendy’s made its last deposit into the 3321 account, and November 28, 2008, when the last of the 24 checks was debited against the 3321 account, the balance of the 3321 account was overdrawn or drawn to a nominal amount every business day.
*814On and after November 10, 2008, through the petition date, SCE sent 32 Wendy’s invoices to the Debtors, which they then reported to Wendy’s. Wendy’s remitted payment for these invoices, but the Debtors never paid the related invoices of SCE. The Debtors received a total of $41,426.39 pursuant to these invoices.
On and after November 10, 2008, through the petition date, Defendant SCE sent 32 Buffets invoices to the Debtors, which they then reported to Buffets. Buffets remitted payment to the Debtors for these invoices, but the Debtors never forwarded those payments on to SCE. The Debtors received a total of $157,886.99 pursuant to these invoices.
On and after November 10, 2008, through the petition date, Defendant SDG & E sent 21 Buffets invoices to the Debtors, which they then reported to Buffets. Buffets remitted payment for these invoices, but the Debtors never forwarded those payments on to SDG & E. The Debtors received a total of $97,475.50 pursuant to these invoices.
The bankruptcy court held a hearing on the Trustee’s preference claims (Count I)3 against Defendants on June 11, 2012, although the court declined to hear oral argument; it took the case on written submissions instead and entered judgments later that day — against SCE for $131,267.63 and against SDG & E for $31,242.63.
The Defendants timely appealed.
STANDARD OF REVIEW
We review the bankruptcy court’s legal conclusions de novo and its findings of fact under a clearly erroneous standard.4 A finding is clearly erroneous when there is evidence to support it but the court reviewing the entire evidence is left with the definite and firm conviction that a mistake has been committed.5 Whether the Defendants were creditors of the Debtor and whether the transfers were made in payment of antecedent debts are factual questions which we review for clear error. The bankruptcy court’s application of § 547(c)(4) is a mixed question of law and fact.
DISCUSSION
As summarized above, the Defendants appeal three aspects of the bankruptcy court’s ruling. They argue: 1) that the Defendants weren’t creditors of the Debtors, 2) that the transfers were not on account of antecedent debts, and 3) that the bankruptcy court miscalculated the value of the Defendants’ new value credits. Each argument is addressed in turn.
A. The Defendants were creditors of the Debtors
The Bankruptcy Code defines “creditor” as an “entity that has a claim against a debtor that arose at the time of or before the order for relief concerning the debt- or.” 6 A “claim,” in turn, is defined as a:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, *815matured, unmatured, disputed, undisputed, legal, equitable, secured, or;
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduce to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.7
The bankruptcy court held that the Defendants were creditors of the Debtors on two grounds. It found that the Defendants were beneficiaries of a trust created between the Debtors and their customers and that the Defendants became creditors when the Debtors violated the trust by depleting the customer deposits without paying the Defendants’ invoices. Alternatively, the bankruptcy court found that the Defendants were contractual “third-party beneficiaries” with direct claims against the Debtors. Neither of these findings is clearly erroneous.
1. Trust Beneficiary Claims
Minnesota law requires three elements for the creation of a trust: (1) a trustee; (2) a beneficiary; and (3) a definite trust res.8 “No particular form and no specific words are necessary to create a trust. Even though the settlor’s language be inept, clumsy, or even unsuitable, it is adequate if it reveals an intent to create the incidence of a trust relationship.”9
The Debtors’ agreements with Wendy’s and Buffets both evince an intent to create a trust. Paragraph 3b of the agreement between the Debtors and Buffets provides that Buffets will provide money to the Debtors to be used for the specific purpose of paying the bills of utility companies and states that “[a]t no time shall LGI have a legal or equitable interest in the Customers funds and Customer grants no security interest to LGI.”10 The Debtors’ agreement with Wendy’s provides that the funds tendered to the Debtors are to be used for the specific purpose of paying Wendy’s utility bills.
The Debtors’ and Buffets’ intent to create the “incidence of a trust” is further evidenced by the state-court complaint attached to Buffets’ proof of claim, which repeatedly invokes trust language:
• “As a result, [the Debtor] held Plaintiff Buffets’ funds in trust....” (¶3)
• “Defendant M & I Marshall & Ilsley Bank knew [the Debtor] did not have any ownership interest in Plaintiff Buffets’ funds and that [the Debtor] held Plaintiff Buffets’ funds in trust subject to fiduciary duties.” (¶ 4)
• “The Contract provided that [the Debtor] would directly receive the utility invoices ... .to wire transfer or ACH transfer this gross amount to a bank account [Debtor] designated where Plaintiff Buffets’ monies were held in trust for the payment of utility invoices.” (¶ 30)
Having determined that a trust was created, the bankruptcy court held that the Debtors’ dissipation of the trust res, ie., *816the customer deposits, constituted a breach of the trust, giving the Defendants general, unsecured claims against the Debtors for the amounts the Debtors failed to forward to them pursuant to the Energy Services Agreements.
The Sixth Circuit Court of Appeals, in First Federal of Michigan v. Barrow,11 came to the same conclusion under analogous circumstances. In First Federal, a mortgage broker and servicer of mortgages received payments from borrowers and, despite being contractually bound to forward those payments (minus its fees) to the investors, taxing authorities, insurers, etc., it dissipated the payments almost immediately upon receipt and made select payments to certain creditors with later deposits. The Court of Appeals analyzed the situation as follows:
Initially, the monthly payments collected in trust from the mortgagors, including the pro rata amounts for the superior mortgages, taxes, hazard insurance and investors which had originally been held in trust for the mortgagors ... and which were deposited into the Salem Central Account, subsequently lost their identity as a result of commingling with other unidentified debtor funds derived from numerous other miscellaneous sources and became the property of the debtors’ estate.
Additionally, for at least ninety days immediately preceding debtors’ declaration of bankruptcy and probably for some time prior thereto when it became apparent that debtors’ exploding expenses hopelessly exceeded income and the Salem Central Account consistently carried a five figure negative balance, and when monies from that account were disbursed to honor previously issued checks in satisfaction of pre-exist-ing indebtedness, the mortgagors as well as the appellant taxing authorities and investors were stripped of their status as beneficiaries of any trust or constructive trust that may have existed while the mortgage payments were identifiable in segregated escrow accounts and they became general creditors of the debtors and the debtors’ bankrupt estate because the debtors’ conversion of the mortgage payments had occurred at the moment when the identifiable funds were deposited into Salem’s negative balance Central Account from which transfers were made to satisfy debtors’ pre-existing indebtedness to the mortgagors and appellants. Accordingly, the appellants’ charge that the transfers here in controversy were not in payment of pre-existing indebtedness must fail and the repayments to the appellants must be declared to be voidable preferences.12
Like the appellants in First Federal, the Defendants here became general, unsecured creditors of the Debtors at the moment the Debtors depleted the customer deposits, which the evidence shows happened on a daily basis and, most importantly, before the Debtors used those deposits for their intended purpose.
In sum, consistent with the intent to create a trust, Wendy’s and Buffets entrusted the Debtors with specific, identifiable property that they were to hold in trust for payment to the Defendants and other utility companies. The Debtors’ failure to preserve trust property was a breach of trust which gave the Defendants unsecured claims against the Debtors. Thus, the bankruptcy court’s holding that the Defendants were creditors of the Debt*817ors for purposes of § 547(b)(1) is not clearly erroneous.
2. Third-Party Beneficiary Claims
“It is the prevailing rule in Minnesota and other jurisdictions in the United States that a third party may sue on a contract made for his direct benefit.” 13 “If, by the terms of the contract, performance is directly rendered to a third party, he is intended by the promisee to be benefited.” And where a promisor agrees to pay the debts of another — as was the case here — the intended third-party beneficiary possesses the primary claim against the promisor for the debt.14
At oral argument, the Defendants conceded that SDG & E and SCE were third-party beneficiaries with regard to the transfers received on account of the utility services provided to Buffets. They continue to maintain, however, that the language in the Energy Services Agreement with Wendy’s precludes a claim by the Defendants as third-party beneficiaries.15 Specifically, they point to the provision in the Agreement stating that LGI “shall [not] be required to incur any liability in connection therewith.” The bankruptcy court rejected this interpretation of the Energy Services Agreement. That finding is not clearly erroneous.
First, the context of the quoted passage suggests that it was intended only to reinforce the parties’ agreement that LGI had no duty to extend credit, i.e., pay a utility bill for which Wendy’s had not yet forwarded payment. To wit, page 7 of the agreement provides in larger part:
LGI shall then be obligated to pay each utility invoice within two business days of receipt of Wendy’s ACH transfer. LGI shall in no event be required to advance any of its funds or to utilize LGI’s credit in connection with or on behalf of Wendy’s, nor shall LGI be required to incur any liability in connection therewith. Wendy’s shall indemnify and hold harmless LGI from and against any and all claims, liabilities, costs and expenses relating to utility invoices that have been processed in accordance with this Agreement.16
Second, the italicized portion can be interpreted as establishing LGI’s receipt of funds from Wendy’s as a condition precedent to LGI’s obligation to pay utility providers.
Finally, the Energy Services Agreement’s statement that LGI was not required to incur any liability does nothing to actually prevent LGI from incurring a debt to a utility company as a result of its breach of the agreement by, for example, using the funds it received from Wendy’s for another purpose. This interpretation would be more consistent with the subsequent sentence which specifically contemplates potential claims against LGI by the utilities.
*818For these reasons, we hold that the bankruptcy court’s finding that the Defendants were creditors of the Debtors as a consequence of their status as thirdparty beneficiaries of the Energy Services Agreements is not clearly erroneous.
B. The preferential transfers to the Defendants were made in payment of antecedent debts as required by 11 U.S.C. § 547(b)(2)
The Defendants argue that the transfers at issue were not preferences because they weren’t made in payment of antecedent debts. According to the Defendants, the Debtors would not actually owe a debt to the Defendants until the Debtors breached their agreements with Buffets and Wendy’s by failing to make timely payments to the Defendants. Essentially, they argue that a debt created by contract does not arise until the promisor repudiates or breaches the contract. They point to the Eighth Circuit case, In re Bridge Information Systems, Inc.,17 to support their argument.
The Defendants’ argument on this point is without merit and their reliance on In re Bridge Information Systems, Inc. is misplaced.
The Bankruptcy Code does not define when the debtor incurs a debt, but it does define a “debt” as a liability on a claim.18 Thus, the concept of a debt and a claim are coextensive under the Code,19 and a debtor incurs a debt to a creditor for purposes of § 547(b)(2) as soon as the creditor would have had a claim against the debtor’s estate. The Defendants here had a claim against the Debtors when the Debtors received funds from Buffets and Wendy’s.
The rights and duties of a third-party beneficiary contract “depend upon, and are measured by, the terms of the contract.” Under the Buffets Energy Services Agreement, the Debtors were obligated to the “timely payment of invoices” upon receipt of the customer funds. Under the Agreement with Wendy’s, the Debtors were required to “pay each utility invoice within two business days of receipt of Wendy’s ACH transfer.”
The fact that the Debtors had a time within which to perform their obligations before they would be in breach of the contract does not mean that the obligation did not arise until those deadlines were upon them or past, just as the prepayment of a loan before an installment due date or the maturity date constitutes payment on an antecedent debt.20 The key to determining whether a transfer “for or on account of’ a debt owed by a debtor is whether a creditor would be able to assert a claim against the estate absent payment. Here, the Defendants (or the customers, as the primary promisees) had (and, indeed, did file) claims for all the funds paid by a customer that were not paid to the Defendants for utility services when the involuntary bankruptcy petitions were filed against the Debtors.
Furthermore, Bridge Information Systems, Inc., does not stand for the proposition the Defendants attribute to it, i.e., that a contractual duty to pay does not arise until a party is in breach of that duty. Rather, the question in that case was *819whether a payment pursuant to a settlement agreement was in payment of the lessor’s alleged prior breach of a lease or a contemporaneous “buy out” of the lessee’s renewal options.21 If the payment made by the debtor-lessor was in satisfaction of damages caused by its purported prior breach — as the bankruptcy court held— then the payment would have been in satisfaction of an antecedent debt and, therefore, avoidable as a preference. However, if the transfer was payment for the defendant-lessee’s option rights — as the Bankruptcy Appellate Panel held — then the transfer was not in payment of an antecedent debt and not a preference. Quite simply, the holding of Bridge Information Systems, Inc., is inapposite here.
For these reasons, we conclude that the bankruptcy court did not err in its determination that the transfers at issue here were made in payment of antecedent debts for purposes of 11 U.S.C. § 547(b)(2).
C. The Defendants’ new value credit was improperly determined
Section 547(c)(4) of the Bankruptcy Code provides:
The trustee may not avoid under this section a transfer—
(4) 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....”
“New value” is defined as “money or money’s worth in goods, services, or new credit ... including proceeds of such property.” 11 U.S.C. § 547(a)(2).
The bankruptcy court held that the plain language of § 547(c)(4) — specifically, its reference to “such creditor” — requires that new value be supplied by the creditor that received the preferential transfer. Accordingly, it limited the Defendants’ new value credit to the value of the utility services they provided to Buffets and Wendy’s during the preference period.
The Defendants contend that under the Eighth Circuit Court of Appeals case, Jones Truck Lines, Inc. v. Central States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines, Inc.),22 the Defendants’ new value credit should not be limited to the value of the utility services provided to the Wendy’s and Buffets customers during the preference period. Rather, they argue, they are entitled to a credit for all of the payments Wendy’s and Buffets made to the Debtors subsequent to each transfer, regardless of when the utility services were provided. We concur with the Defendants’ interpretation of the holding in Jones Truck Lines.
In Jones Truck Lines, a Chapter 11 debtor-employer sued to recover, as preferential transfers, payments to a “Health and Welfare Fund” and to a “Pension Fund” made on behalf of its employees.23 The bankruptcy court and district court held that under § 547(c)(4), the defendant-Funds could not offset their preference liability with the value provided by the debtor’s employees (in the form of continued services rendered to the debtor); rather, the Funds themselves had to provide new value to the debtor.24 In revers*820ing the lower courts’ decisions, the Court of Appeals examined the parties’ tripartite relationship and held that the employee services provided to the debtor during the preference period qualified as new value which could be applied as an offset against the Funds’ preference liability.25 Notably, the Court of Appeals found that the Funds were creditors of the debtor in their own right but did not limit the Funds’ new value credit to any value they provided to the current employees. And, as a practical matter, it is unlikely that the current employees received any contemporaneous benefit from the Pension Fund. Hence, the bankruptcy court’s calculation of new value in this case is not consistent with the Eighth Circuit’s binding holding in Jones Truck Lines.
Arguably, because the Defendants were found to be creditors in their own right, as opposed to just transferees of payments that benefitted a creditor (Wendy’s or Buffets), the holding of Jones Truck Lines would appear to be contrary to the plain terms of § 547(c)(4), which requires “such creditor,” ie., the creditor that received the transfer (or the benefit of the transfer) to provide the new value. However, the holding in Jones Truck Lines can be harmonized with the statute by interpreting it as a recognition that in tripartite relationships where the transfer to a third party benefits the primary creditor, new value can come from that creditor, even if the third party is a creditor in its own right. And that is exactly the nature of the tripartite relationship here. In fact, as trust beneficiaries and third-party beneficiaries, the Defendants are creditors of the Debtors precisely because the payments made to them were intended to benefit the creditors) that provided the new value (ie., the Debtors’ customers, Wendy’s and Buffets).
Giving the Defendants credit for all of the payments Wendy’s and Buffets made to the Debtors on account of utility services provided by the Defendants, SDG & E’s liability is reduced to zero and SCE’s liability is reduced to $25,625.75. The charts below show the calculation of the Defendants’ new value credits based on the figures contained in the record.26
SCE — WENDY’S NEW VALUE ANALYSIS
Transfer Date Preferential Transfer Transfer to Debtor Net Preference Comment
11/14/2008 4,178.52 4,178.52
11/14/2008 4,224.86 3,403.38
11/20/2008 $40,00 g,363.38
11/20/2008 2,447.73 $5,915.65
11/20/2008 $40,00 $5,875.65
11/20/2008 :,647.66 $3,227.99
11/21/2008 $40.00 $3,187.99
11/21/2008 $2,604.31 $583.6
11/25/2008 $40.00 $543.68
11/25/2008 $2,848.46 ($2,304.78) Preference Liability Eliminated
*821SCE — BUFFETS NEW VALUE ANALYSIS
Transfer Date Preferential Transfer Transfer to Debtor Net Preference Comment
11/14/2008 4,178.52 $4,178.52
11/14/2008 $4,224.86 8,403,38
11/14/2008 $7,948.76 $16,352.14
11/14/2008 8,156.87 $24,509,01
11/14/2008 $8,460.80 $32,969.81
11/14/2008 7,003.12 $25,966,69
11/14/2008 $138.53 $25,828.16
11/17/2008 8,125.06 $33,953.22
11/17/2008 $9,620.77 $43,573.99
11/17/2008 $9,996.85 $53,570,84
11/17/2008 $7,678.34 $61,249,18
11/17/2008 $7,371.65 8,620,83
11/17/2008 $10,844,50 $79,465.33
11/17/2008 9,514.28 $88,979.61
11/18/2008 $5,943.93 $94,923,54
11/19/2008 $6,114.90 8,808.64
11/19/2008 $864.00 $87,944,64
11/19/2008 $960.11 $86,984.53
11/19/2008 4,832.03 $82,152,50
11/19/2008 $4,570.59 $77,581.91
11/19/2008 $7,033.00 $70,548.91
11/19/2008 3,168.70 $64,380.21
11/19/2008 $5,294.10 9,086,11
11/19/2008 5,253.98 $53,832.13
11/19/2008 $7,860.50 $61,692.63
11/19/2008 $6,322.93 $68,015,56
11/19/2008 5,628.53 $74,644.09
11/19/2008 $7,970.5 $82,614.62
11/19/2008 $6,881.98 $89,496.60
11/20/2008 $21.30 $89,475,30
11/20/2008 5,283.78 4,191,52
11/20/2008 $5,410.79 $78,780.73
11/20/2008 $5,728.54 $73,052.19
11/20/2008 $5,280.57 $67,771.62
11/20/2008 3,118.07 $61,653.55
11/20/2008 $7,827.17 $69,480.72
11/20/2008 $7,435.41 $76,916.13
11/20/2008 $7,804.13 $84,720,26
11/21/2008 8,188.20 $92,908.46
11/24/2008 $7,066.2 $99,974.68
11/28/2008 $5,470.19 $94,504.49
11/28/2008 $5,058.94 9,445.55
11/28/2008 $7,803.90 $81,641.65
11/28/2008 $6,438.30 $75,203.35
11/28/2008 $4,826.31 $70,377.04
*82211/28/2008 $7,461.95 $77,838.99
12/1/2008 $71.29 $77,767.70
12/1/2008 $5,256.98 $72,510.72
12/1/2008 $6,067.03 $66,443.69
12/1/2008 $4,771.92 $61,671.77
12/1/2008 3,218.99 $55,452.78
12/1/2008 5,148.72 $50,304.06
12/9/2008 5,107.77 $44,196.29
12/9/2008 5,577.87 $38,618.42
12/9/2008 3,892.98 $31,725.4
12/9/2008 $6,099.69$25,625.75
Preference Liability
SDG & E — BUFFETS NEW VALUE ANALYSIS
Transfer Date Preferential Transfer Transfer to Debtor Net Preference Comment
11/12/2008 $10,468.59 $10,468.59
11/13/2008 3,126.29 $7,342.30
11/13/2008 1,747.28 5,595.02
11/13/2008 1,255.58 $339.44
11/13/2008 11/13/2008 $7,208.34 ($6,868.90) 2,167.03 $0.00 New Value credit does not carry forward.
11/14/2008 5,773.59 $5,773.59
11/17/2008 $10,402,58 $16,176.17
11/19/2008 $11,097.37 $27,273.54
11/20/2008 $7,487.70 $19,785.84
11/20/2008 $2,328.80 $17,457.04
11/20/2008 $9,093.92 $26,550.96
11/24/2008 !,514.01 $35,064.97
11/25/2008 $8,195.65 $26,869.3
11/25/2008 1,855.14 25,014.18
11/26/2008 $10,062.69 $35,076.87
11/28/2008 8,254,95 $26,821.9
11/28/2008 $1,955.21 $24,866.71
11/28/2008 $9,641.10 $34,507.81
12/1/2008 $1,667.01 $32,840.80
12/1/2008 8,236.52 $24,604.28
12/1/2008 $7,942.75 $16,661.5
12/1/2008 $2,055.03 $14,606.50
12/5/2008 7,509.62 $7,096.8
12/5/2008 1,788.17 $5,308.71
12/5/2008 $1,609.64 $3,699.07
12/5/2008 12/5/2008 12/5/2008 $7,454.17 ($3,755.10) $7,880.45 ($11,635.55) L,750.17 ($13,385.72) Preference Liability Extinguished
CONCLUSION
For the foregoing reasons, the portion of the bankruptcy court’s judgment determining that the Defendants received preferential transfers is affirmed. The court’s calculation of the Defendants’ new value *823credit, however, is reversed. SCE is entitled to a new value credit for all but $25,625.75 of the transfers it received and SDG & E is entitled to a new value credit to the full extent of the transfers it received.
. Because the two Debtor's estates have been consolidated, for convenience all references herein will be to the “Debtors,” although a *812particular fact might pertain to a single Debt- or.
. Only SC E provided utility service to Wendy's.
.On May 3, 2012, the Defendants filed motions for summary judgment seeking the dismissal of all counts (I, II, and III) of the Amended Complaint(s). The Trustee voluntarily dismissed Counts II and III, and the bankruptcy court denied summary judgment on Count I.
. See Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir.2002).
. See Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 500 (8th Cir.1991).
. 11 U.S.C. § 101(10).
. 11 U.S.C. § 101(5).
. See e.g., In re Bush’s Trust, 249 Minn. 36, 81 N.W.2d 615, 620 (1957).
. Id. at 619-20.
. Technically, this language would not create a trust, inasmuch as the trustee of a trust holds legal title to the res while the beneficiaries hold an equitable interest in the res. See Farmers State Bank of Fosston v. Sig Ellingson & Co., 218 Minn. 411, 16 N.W.2d 319, 322 (1944). Nevertheless, this language could be interpreted as evidence of the parties’ intent to preclude the Debtors from treating customer funds as their own money, which in turn could be interpreted as an intent to create a trust, albeit clumsily expressed.
. 878 F.2d 912, 917-918 (6th Cir.1989).
. Id. (emphasis added).
. Buchman Plumbing Co., Inc. v. Regents of the Univ. of Minnesota, 298 Minn. 328, 215 N.W.2d 479, 483 (1974).
. In re Maurer, 256 B.R. 495, 502 (8th Cir. BAP 2000).
. Minnesota follows the Restatement (Second) of Contracts, see Cretex Companies, Inc. v. Constr. Leaders, Inc., 342 N.W.2d 135, 139 (Minn.1984), which permits a promisor and promise to contractually restrict (or eliminate) the rights of a third-party beneficiary. “(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties....” Restatement (Second) of Contracts § 302.
.Emphasis added.
. 327 B.R. 382 (8th Cir. BAP 2005), aff'd 474 F.3d 1063 (8th Cir.2007)
. 11 U.S.C. § 101(12).
. See In re Energy Co-op. Inc., 832 F.2d 997, 1001 (7th Cir.1987) ("By defining a debt as a 'liability on a claim,’ Congress gave debt the same broad meaning it gave claim.”).
.See, e.g., In re Bennett Funding Group, Inc., 220 B.R. 739 (2nd Cir. BAP 1998).
. In re Bridge Information Systems, Inc., 327 B.R. at 387-89.
. 130 F.3d 323 (8th Cir.1997).
. Id. at 325-36.
. Id.; In re Jones Truck Lines, Inc., 196 B.R. 483, 492 (Bankr.W.D.Ark.1995.)
. In re Jones Truck Lines, Inc., 130 F.3d at 328-29.
. All of these figures are contained in the Stipulations of Fact filed in the underlying bankruptcy court cases, Stoebner v. SCE, 11-4066 (Doc. 39) and Stoebner v. SDG & E, 11-4065 (Doc. 38). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495342/ | SALADINO, Bankruptcy Judge.
Susan Bala appeals the bankruptcy court’s1 summary judgment determination that the bankruptcy estate is entitled to the cash value proceeds of a life insurance policy the Debtor had obtained for Bala during her employment. For the reasons stated below, we affirm.
STANDARD OF REVIEW
We review a bankruptcy court’s grant of summary judgment de novo, Mwesigwa v. DAP, Inc., 637 F.3d 884, 887 (8th Cir.2011) (citing Anderson v. Durham D & M, L.L.C., 606 F.3d 513, 518 (8th Cir.2010)). When an appellate court reviews a trial court’s entry of summary judgment de novo, it uses the same standard applied by the trial court pursuant to Federal Rule of Civil Procedure 56(c). Bremer Bank v. John Hancock Life Ins. Co., 601 F.3d 824, 829 (8th Cir.2010). Under Rule 56(c), summary judgment is proper if the pleadings, affidavits, and other evidence show there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c); Fed. R. Bankr.P. 7056.
A trial court’s interpretation of a contract is also reviewed de novo. Bremer Bank, 601 F.3d at 829 (citing Transcon. Ins. Co. v. W.G. Samuels Co., 370 F.3d 755, 757(8th Cir.2004)). Further, under North Dakota law, construction of a written contract to determine its legal effect presents a question of law fully reviewable by the appellate court, which independently examines and construes the contract to determine whether the trial court erred in its interpretation. Bendish v. Castillo, 812 N.W.2d 398, 403 (N.D.2012).
BACKGROUND
The material facts are undisputed. Susan Bala is a former employee and the sole stockholder of RSI Holdings. RSI Holdings is the sole stockholder of the Debtor, Racing Services, Inc. (“RSI”). RSI is a Delaware corporation that provided licensed pari-mutuel services in North Dakota.
On March 27, 1995, The Guardian Life Insurance Company of America issued a ‘Whole Life Policy” on Bala’s life. Bala was the listed owner of the policy at the *825time it was created and at all times pertinent to this litigation. On May 16, 1995, approximately two months after the policy was issued, Bala executed a “Majority Shareholder Collateral Assignment (Split Dollar)” agreement in connection with the policy. Under the Collateral Assignment, Bala owned the policy, the premiums were paid by RSI, and Bala’s estate was listed as the beneficiary.
The Collateral Assignment provides in pertinent part:
1. The undersigned [Bala] (herein called “Assignor”) hereby assigns, transfers and sets over to RACING SERVICES, INC. of Fargo, ND (herein called “Assignee”) to the extent of the total of any and all amounts heretofore or hereafter advanced by the Assignee to the Assign- or for the payment of premiums or a portion of the premiums (herein called “Assignee’s Interest”) thereon, Policy No # 3909537 issued by The Company indicated above (herein called “Insurer”) ... upon the life of Susan Bala subject to all the terms and conditions of the Policy.... The Assignor by this instrument agrees and the Assignee by the acceptance of the assignment agrees to the conditions and provisions herein set forth.
2. It is expressly agreed that only the following specific rights are included in this assignment and pass by virtue hereof to the Assignee and may be exercised solely by the Assignee:
a. The right to obtain, upon surrender of the policy by the Assignor, an amount of the cash surrender proceeds up to the amount of the Assignee’s interest in the policy.
b. The right to collect the net proceeds of the policy when it becomes a claim by death or maturity up to the amount of the Assignee’s Interest.
3.The Assignee accepts this assignment and agrees that as long as this assignment is in force, the Assignee will advance to the Assignor each year as the premium on the Policy becomes due, the Assignee’s Payment....
8. If this agreement is terminated, the Assignee shall transfer its interest in the Policy to the Assignor in exchange for an amount equal to the Assignee’s Interest, obtained by the Assignee upon the security of the policy.
Between May 1995 and June 2004 (when the bankruptcy trustee was appointed), RSI paid the monthly premiums due under the policy in the total amount of $70,765.92. From July 2004 through November 2006, the premiums were paid under the policy’s Automatic Premium Loan Provision which provided that “any unpaid premium will be paid at the end of the grace period by an automatic loan if this option was elected in the application,” and “the premium does not exceed the available loan value.” Payment of the premiums under this provision decreased the policy’s cash surrender value.
RSI filed a voluntary Chapter 11 bankruptcy petition on February 3, 2004, in the United States Bankruptcy Court for the District of Delaware. On February 12, 2004, the case was transferred to the United States Bankruptcy Court for the District of North Dakota. On June 15, 2004, RSI’s bankruptcy case was converted from Chapter 11 to Chapter 7, and Kip Kaler was appointed as the Chapter 7 trustee.
As a result of a federal investigation, in February 2005 Bala and RSI were convicted of, among other crimes, conducting and conspiring to conduct an illegal gambling business. Forfeiture judgments were entered against Bala and RSI in the amount *826of $19,000,000.00 and $99,000,000.00, respectively. The Eighth Circuit Court of Appeals, however, reversed on all counts, concluding there was insufficient evidence of guilt.2
In the roughly two years between the convictions and the Eighth Circuit’s reversal, several events concerning the policy took place. In September 2006, the United States Attorney for the District of North Dakota filed a Motion for Forfeiture of Property in the criminal action in the United States District Court for the District of North Dakota.3 The motion sought forfeiture of Bala’s remaining asset — the cash surrender value of the policy. The district court granted the motion on October 25, 2006, and ordered that Bala’s interest in the policy be forfeited to the United States.
Kaler, as trustee of RSI’s bankruptcy estate, claimed an interest in the policy pursuant to the Collateral Assignment that he asserted was superior to the interest of the United States under the forfeiture order. Then, on January 26, 2007, the trustee entered into a settlement agreement with the United States Attorney’s Office under the terms of which (i) the United States agreed to cancel the policy or withdraw its cash value, “whichever is greater”; (ii) the trustee would release to the United States any claim to one-half of the net proceeds; and (iii) the United States or the clerk of the court would hold the proceeds pending the outcome of the criminal appeal. The agreement was subject to bankruptcy court approval which was never obtained.4 Notwithstanding the lack of bankruptcy court approval, on February 8, 2007, Guardian delivered a check for $64,-032.33 — identified as the “net surrender value” of Bala’s interest in the policy at that time — -to the United States Department of Justice.5 At the same time, Guardian also sent a letter to Bala stating that the policy had been “surrendered” and giving instructions on what to do if she wanted to reinstate the policy.
On February 23, 2007, another order was entered in the criminal case. The district court found that Bala might not have received proper notice of the Motion for Forfeiture of Property and ordered that any attempt to liquidate the life insurance asset cease immediately and any proceeds already received be held pending a mandate from the Court of Appeals. That order, however, came too late to prevent the liquidation of the policy — the surrender value had already been sent to the Department of Justice. No action was taken by Bala, Guardian, or the Department of Justice to reverse the surrender of the policy at that time.
In July 2007, four months after Bala’s conviction was reversed, the Department of Justice returned the $64,032.33 check to Guardian. Guardian then notified Bala of the terms and conditions under which the policy surrender could be reversed and the policy reinstated. Specifically, Guardian directed Bala to submit a reinstatement application (which evidently required proof of insurability) and to pay the overdue premium from November 2006 through *827August 2007 (plus loan interest) in the total amount of $6,074.01. Bala did not respond to Guardian’s July 18, 2007, letter, nor did she challenge any of Guardian’s conditions for reinstatement, submit a reinstatement application, or remit the overdue premiums and loan interest.
In January 2009, Guardian filed a Motion for Interpleader Relief in the underlying bankruptcy. Bala resisted, but on April 27, 2009, the bankruptcy court granted the motion and Guardian was directed to deliver the cash surrender value of the policy to the trustee to be held in an interest-bearing bank account. The court noted the funds would be subject to disbursement only upon further order of the court. The order further provided: “Upon the delivery of its check for $64,032.33 to Mr. Kaler ... Guardian Policy No. 3909537 is and shall forever be CANCELED and SURRENDERED, and no further death or cash surrender proceeds thereunder shall be payable....” The order also provided that upon delivery of the funds, “Guardian is fully and completely released of any and all liability and claims arising from or related to any obligation to pay the death or cash surrender proceeds under [the policy].”
On January 24, 2011, the trustee filed the underlying adversary proceeding seeking a determination that the cash surrender value of the policy is an asset of the RSI bankruptcy estate. Bala filed a counterclaim which specifically acknowledged that Guardian had “surrendered” the policy and asserted a claim to the cash proceeds as the owner of the policy. Subsequently, the trustee filed a Renewed Motion for Summary Judgment.6 Bala responded to the motion and filed her own Renewed Cross-Motion for Summary Judgment. The bankruptcy court issued its decision granting judgment for the trustee on April 13, 2012.
BANKRUPTCY COURT DECISION
The bankruptcy court agreed with Bala that the bankruptcy estate did not have an interest in the cash surrender value of the policy under paragraph 2(a) of the Collateral Assignment because the triggering event under that paragraph — a surrender of the policy by Bala — never happened. However, the bankruptcy court concluded that pursuant to paragraph 8, the estate was entitled to the cash surrender value (to the extent of the premiums it had paid) upon termination of the Collateral Assignment. It further held that the Collateral Assignment terminated when the trustee stopped paying premiums or, alternatively, when the bankruptcy court’s April 27, 2009, order deemed the policy “CANCELED and SURRENDERED.” Specifically, the bankruptcy court held:
Two separate events proved to be a “termination” of the agreement. First, RSI’s failure to pay the premium would be a breach of the Collateral Assignment, thus terminating the Assignment (and triggering Clause 8). The language of the Assignment reveals an intent to treat a breach as a termination under Clause 8. Bala agrees that RSI failed to continue payment of the Policy premiums but argues that was a breach of the Collateral Assignment which “was rendered unenforceable and nullified by the RSI Estate.” (Bala B.R., ECF Doc. No. 30, at 3.) Bala cites no language in the Policy or Collateral Assignment that supports her argument that failure to pay the premium nullified the Collateral Assignment.
*828Second, even were the Court to conclude that this failure by RSI to make payment did not terminate the Collateral Assignment, the Collateral Assignment and Policy were certainly terminated by the Court’s April 27, 2009 Order. That order specifically canceled and required surrender of the Policy, and directed Guardian to deposit the cash surrender value with Trustee. Prior to that point, Bala had the option to cure the surrender by submitting a reinstatement application and remitting overdue premium and loan interest. Her failure to make these payments could be viewed as further evidence of termination. At a minimum, this Court’s Order served as the “termination” that triggered Clause 8 of the Collateral Assignment.
The Court thus concludes, under Clause 8, the Collateral Assignment was terminated by Judge Hill’s April 27, 2009 Order in the underlying Bankruptcy. At that time RSI should have transferred its interest in the Policy to Bala in exchange for an amount equal to RSI’s interest in the Policy&emdash;-the cash surrender value. Consequently, RSI’s bankruptcy estate, and not Bala, is entitled to the cash surrender value of the Policy under Clause 8 of the Collateral Assignment.
Bala timely appealed, asserting that the bankruptcy court erred in granting summary judgment for the trustee and denying her cross-motion for summary judgment.
DISCUSSION
Bala argues that the assignee’s (and therefore, the trustee’s) rights in the policy are governed and limited by the express terms of the Collateral Assignment. We agree. While paragraph 1 of the Collateral Assignment is a broad assignment of her rights in the policy, paragraph 2 places clear limitations on the extent of the assignment: “It is expressly agreed that only the following specific rights are included in this assignment and pass by virtue hereof to the Assignee.... ” (emphasis added). Paragraph 2 then goes on to describe the rights given to the assignee&emdash;the assignee is given the right to receive the “cash surrender proceeds” up to the amount of the assignee’s interest (the premiums paid to date by the assign-ee) upon “surrender of the policy by the Assignor.”7
Bala vehemently denies that she ever surrendered the policy and, therefore, she believes the triggering event for the RSI bankruptcy estate to have an interest in the surrender value never took place. We disagree. Bala’s argument ignores the specific language and effect of the district court’s October 25, 2006, forfeiture order. Pursuant to the forfeiture order, “Defendant Bala’s interest in Life Insurance Policy Number 3909537, The Guardian Life Insurance Company of America, is forfeited to the United States.... ” The order also allowed the Attorney General of the United States to seize the policy and to “maintain custody and control” of it. Thus, Bala did not even have the right to request surrender of the policy during the period of time that the forfeiture was in effect&emdash;all of her rights in the policy belonged to the United States, at least until the district court judge issued his February 23, 2007, order staying the forfeiture order. U.S. v. Timley, 507 F.3d 1125, 1130 (8th Cir.2007) (holding that title and ownership of forfeited property vests in the *829United States at the time the defendant’s criminal act occurred).
As it turns out, the policy was “surrendered” while the forfeiture order was in effect as Guardian sent the “surrender” value to the United States on February 8, 2007, with a letter referencing the forfeiture order. Guardian’s action in treating the forfeiture as a surrender is consistent with the policy language. At page 7, the policy clearly provides three methods by which the owner can take the policy value when premium payment has been discontinued — (i) continue the policy as “nonparticipating paid up extended term insurance;” (ii) continue the policy as “participating paid up insurance;” or (iii) surrender the policy for its cash surrender value. It is undisputed that the policy has not continued in any form and Guardian treated the forfeiture order as a “surrender for cash” by the owner.8 Under those circumstances, and under the plain language of paragraph 2(a) of the Collateral Assignment, the assignee is entitled to the cash surrender value up to the amount of the premiums paid. “An insurance contract, like any other contract, is to be construed according to the sense or meaning of the words that are used in the contract.” Andersen v. Standard Life & Acc. Ins. Co., 149 N.W.2d 378, 380 (N.D.1967) (citing Schmitt v. Paramount Fire Ins. Co., 92 N.W.2d 177 (N.D.1958)). Accordingly, Bala’s argument — -that the estate’s right to receive its interest under paragraph 2 of the Collateral Assignment never arose because Bala never surrendered the policy — is simply incorrect.9
Bala also argues that the bankruptcy trustee breached the terms of the Collateral Assignment by failing to pay the premiums and engaged in deliberate efforts to cancel the insurance policy and, therefore, should not be allowed to claim greater rights in the cash value for the estate than the estate would have had if the policy had not been “wrongfully” canceled. Those arguments fail for several reasons.
First, they are based on the premise that the policy surrender or termination by Guardian was “wrongful.” Again, the surrender came at a time when the United States, and not Bala herself, held all of Bala’s interest in the policy pursuant to the specific terms of the forfeiture order. Bala did not have any right to object to the surrender or otherwise exercise any interest in the policy while the forfeiture order was in effect. As it turned out, the district court later found that Bala may not have had proper notice of the forfeiture motion, but that does not cause Guardian’s surrender of the policy proceeds to the United States based on the forfeiture order to be an improper or wrongful act by the trustee.
Second,’ after her conviction was overturned and Guardian gave her the option to reinstate the policy, Bala failed to take any action to do so. Granted, Guardian wanted her to pay the past-due premiums, *830but it expressly acknowledged that the premiums could be paid by the automatic premium loan provisions. Guardian also wanted her to submit a reinstatement application that she says would have required proof of insurability. Bala did not question or otherwise take any action to challenge that requirement by Guardian.
Finally, and in any event, Bala acknowledges several times in her briefs and filings that the policy has “terminated.” 10 The bankruptcy court held that termination of the policy resulted in a “termination” of the Collateral Assignment under clause 8. While we do not necessarily agree that a termination of the policy automatically results in a termination of the Collateral Assignment, we do recognize that Bala assigned the policy to RSI and, therefore, must take steps to terminate the Collateral Assignment in order to be entitled to any of the cash surrender value upon termination of the policy. In other words, despite acknowledging that the policy was surrendered and has terminated, Bala fails to recognize that her rights in the surrender value have been assigned under the Collateral Assignment. If she wants to terminate the Collateral Assignment, paragraph 8 expressly provides that she must repay the premiums advanced by RSI. She has not done so. “We may affirm the bankruptcy court’s order on any basis supported by the record, even if that ground was not considered by the trial court.” Bryan v. Stanton (In re Bryan), 466 B.R. 460, 465 (8th Cir. BAP 2012).
CONCLUSION
For the reasons stated above, we affirm.
. The Honorable Thad J. Collins, United States Bankruptcy Judge for the Northern District of Iowa, sitting by designation in the District of North Dakota.
. See United States v. Bala, et. al., 489 F.3d 334 (8th Cir.2007).
. Case No. 3:03-cr-112.
. The trustee did file a motion for approval in the bankruptcy case and Bala objected. However, the trustee later withdrew the motion for approval.
.Guardian’s cover letter indicated it was sending the money pursuant to the forfeiture order. It is unclear how Guardian became aware of the forfeiture order or whether the United States Department of Justice had taken action under the settlement agreement.
. It was called a "renewed” motion because an earlier motion had been denied by the court.
. The assignee is also given the right to collect the net proceeds of the policy when it becomes a claim by death or maturity up to the amount of the premiums paid. Bala is not deceased and the policy has not matured, so this provision does not apply.
. Bala seems to believe it is significant under paragraph 2 of the Collateral Assignment that Guardian seemed to cause the surrender on the basis of the forfeiture order rather than on her personal request to surrender. We do not agree. We believe that Guardian’s treatment of the policy as surrendered due to the forfeiture of Bala's rights in the order obtained by the United States is substantively the same as a surrender by Bala herself.
. Bala's reliance on Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 548 (8th Cir. BAP 2012) is also misplaced. There, the split-dollar agreement was found to be an executo-ry contract because the owner had not performed his obligation to assign the insurance policy and the corporation had not performed its obligation to pay the premiums. Here, Bala has assigned the policy and the only unperformed obligation appears to be on the part of RSI.
. In fact, the underlying adversary proceeding is solely for tire purpose of determining who is entitled to the surrender proceeds— Bala or the RSI bankruptcy estate; not to determine whether the surrender or termination was proper. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495343/ | ORDER OVERRULING TRUSTEE’S OBJECTION TO CLAIM
MARGARET H. MURPHY, Bankruptcy Judge.
This case commenced November 20, 2009, and Debtor’s Chapter 7 discharge was entered March 11, 2010, and the case closed. When Trustee learned of a lawsuit filed prepetition by Debtor, Trustee reopened this case to administer that asset. By notice entered August 16, 2011, creditors were provided notice of the existence of assets and of the deadline for filing proofs of claim.
William Anthony Meadors (“Meadors”) filed proof of claim number 1 for $41,581.79, characterizing the claim as a domestic support obligation (“DSO”) entitled to priority. Meadors is the former spouse of Debtor and received a judgment against Debtor in April 2011 based on overpayments Meadors made to Debtor for child support. Trustee filed an objection to Meadors’ claim, asserting that Mea-dors’ claim is not a DSO and is not entitled to priority. Trustee contends that although Meadors’ claim arises from an overpayment of Meadors’ obligation to Debtor, which was a DSO, Meadors’ overpayment of the DSO does not render the overpayment claim a DSO entitled to priority under 11 U.S.C. § 507(a)(1)(A). Trustee seeks to reclassify the claim as a general unsecured claim. Meadors filed a response in opposition to Trustee’s objection to the claim. Meadors asserts that a claim arising from overpayment of child support retains its character as priority debt.
Debtor, who is proceeding pro se, filed a response to Trustee’s Objection, asserting that she does not owe Meadors anything. In Meadors’ response to Debt- or’s assertion that nothing is owed to Mea-dors, Meadors relies upon an April 13, 2010 order from a Florida state court confirming a Report and Recommendation signed April 7, 2010 (the “Florida Order”). The Florida Order concluded the overpayment to Debtor totaled $41,581.79. Mea-dors also presented an Order Denying Former Wife’s Motion for Relief from Final Judgment and Relief from Court Order from the Florida state court, signed May 22, 2012 (the “Reconsideration Order”). The Reconsideration Order recites that Debtor, who was represented in that matter by an attorney, sought relief from an order filed August 11, 2011. The Florida court found that Debtor’s motion seeking relief was not timely filed and was otherwise without merit, and thus denied Debtor’s request for relief. Debtor pre*854sented no evidence that the Florida Order was not a final order.1 The general rule is that a party cannot relitigate in bankruptcy court a state court’s determination of the amount of a claim. In re Roussos, 251 B.R. 86 (9th Cir. BAP 2000). The bankruptcy court is not a court in which a party can challenge a final state court order. Therefore, Debtor’s assertion that she owes Meadors nothing is without merit.
Hearing was held September 24, 2012 and continued to October 16, 2012. Present at the hearing were Debtor, proceeding pro se; attorney for the Chapter 7 Trustee; and attorney for Meadors. The facts underlying Meadors’ claim are undisputed.
Debtor and Meadors divorced in 1998. During the years after the 1998 divorce, the parties’ children spent about 60% of their time with Meadors and about 40% of their time with Debtor. Meadors paid the full child support amount to Debtor (via an automatic deduction order (“IDO”)) and Meadors also paid Debtor the support when the children were with him. In May 2003, the IDO was, at Debtor’s behest, unilaterally and improperly increased by $426.12 per month, resulting in overpayment from May 2003 through March 2008 of $29,025.07. Meadors obtained custody of the children on or about April 15, 2008, but the automatic deductions for child support continued because Debtor refused to cooperate in terminating the IDO. From April 2008 until termination of the IDO, the continuing IDO resulted in an additional overpayment of $11,556.72. The Florida Order concluded the total overpayment by Meadors was $41,581.79.
Although the children are now emancipated,2 Debtor listed her daughter on the bankruptcy Schedules3 as a source of income, while at or around the same time, Debtor testified in the Florida domestic court that Debtor supported the daughter. Additionally, Debtor failed to list Meadors in her bankruptcy Schedules as a creditor.
No court in the Eleventh Circuit, including the Eleventh Circuit Court of Appeals, has addressed the legal issue presented in this case. Other courts have addressed this issue, however, and have reached differing results. In the case of In re Lutzke, 223 B.R. 552 (Bankr.D.Oreg.1998), the court addressed an objection to an ex-husband’s claim that the debt based on overpayment of child support was a priority claim.4 The ex-husband asserted that the overpayment claim should retain its character as support. The Lutzke court rejected the ex-husband’s simplistic argument and instead reviewed the evidence to determine whether the ex-husband had established need, which the court identified as an important factor in determining whether an obligation is support. No state court order regarding the overpayment had been entered. The ex-husband made no argument that the amount owed was necessary for his or his children’s *855support, that any income disparity between the parties existed nor that any minor children were living with him. The court noted that state law would not consider overpayment to be child support. Finally, in sustaining the objection to priority treatment of the ex-husband’s claim, the court noted that § 507(a) “was enacted to provide additional protection for creditors and their dependents in need of support.” Id. at 555 (emphasis in original).
The case of Lankford v. Drinkard, 245 B.R. 91 (Bankr.N.D.Tex.2000) concerned an objection to dischargeability under § 523(a)(5). Because the court considered the same issue as above, whether a former spouse’s overpayment of child support could be considered as domestic support, the court’s conclusions are instructive. In that case, the court concluded that the state court order directing reimbursement of the overpayment of a child support obligation was simply a money judgment that benefited only the former spouse and did not constitute support of the ex-spouse nor did the overpayment obligation accede to the status of child support.
In a case reaching a different result, Allen County Child Support Enforcement Agency v. Baker, 294 B.R. 281 (Bankr.N.D.Ohio 2002), the overpayment resulted from an administrative delay in terminating the father’s wage garnishment for child support when he became the custodial parent. The court concluded the overpaid child support to the non-custodial parent was needed by the custodial parent and the non-custodial parent was not privileged to dissipate the overpayments that she knew she was not entitled to. The over-payments were found to be non-discharge-able under § 523(a)(5).
In Norbut v. Norbut, 387 B.R. 199 (Bankr.S.D.Ohio 2008), the focus of the court was again on the relative need of the parties. In Norbut, the parties were divorced in 1989 after 27 years of marriage. The ex-husband was ordered to pay alimony to the debtor for 15 years, which was the time the ex-husband would reach full retirement age. The debtor was also awarded one-half of the ex-husband’s pension benefits. Prior to the end of the 15-year period, the ex-husband retired early, with full pension benefits, so that the debt- or began collecting one-half of the pension benefits and at the same time continued receiving alimony, while the ex-husband was receiving only one-half of his pension benefits and, from that half, was paying alimony to the debtor. After protracted litigation lasting from 1997, when the ex-husband first requested termination of the alimony obligation, to 2007, the state court ordered retroactive termination of the alimony obligation, assessing an overpayment of $72,694.14 to be reimbursed by the debtor. The court considered factors relating to both parties’ relative economic and other circumstances, concluding the overpayment obligation was non-dis-chargeable under § 523(a)(5) because “an order requiring those [alimony payments] to be returned to the [ex-husband] would inevitably have the effect of providing support to the [ex-husband].”
In In re Vanhook, 426 B.R. 296 (Bankr.N.D.Ill.2010), a creditor sought priority treatment of a claim arising from an order for reimbursement of $55,000, representing seven years of child support payments for two children whom he discovered were not his biological offspring. The conclusion in Vanhook was similar to that in Lankford, supra, with the court concluding that the overpayment obligation was simply a money judgment for wrongful payment of child support and not entitled to priority under § 507.
Similarly, in Vaughn v. Reid-Hayden, 2011 Bankr LEXIS 980 (Bankr.N.D.Ind.2011), a court order for the debtor to *856reimburse the father for medical and therapy expenses paid for the parties’ child was found to be a money judgment to reimburse the father for payments made but was not child support. The basis for the court’s finding was that the reimbursement was for the benefit of the creditor, not the child. In Taylor v. Taylor, 455 B.R. 799 (Bankr.D.N.Mex.2011), aff'd 478 B.R. 419 (10th Cir. BAP 2012), the court found an obligation for the debtor to repay the ex-husband for alimony paid after the debtor had begun a cohabitation relationship was dischargeable under § 523(a)(5) because it was not in substance an award of support to the ex-husband.
Finally, in a case with facts similar to those in Vanhook, in Bartos v. Kloeppner, 460 B.R. 759 (D.Minn.2011), the debtor had been ordered by the state court to repay the creditor for child support he had paid for a child he believed he had fathered. A paternity test, however, showed he was not the biological father of the child. The debt was found to be dis-chargeable under both § 523(a)(5) and (15) because the creditor was not the spouse or former spouse of the debtor, the award was not in a divorce decree, separation agreement or property settlement agreement, and the award was not intended for the benefit of the child.
The instant case presents a somewhat unusual set of facts in which the repayment obligation arises from excess child support paid at a time when Meadors was, in addition to paying child support to Debtor, providing at least half the child’s support while she (the child) was in his custody; and from child support improperly withheld via the IDO at a time when Meadors had full custody of the child. Therefore, the repayment obligation to Meadors may properly be characterized as intended for and in the nature of support for the child. The repayment obligation otherwise satisfies the elements of § 101(14A) of a DSO and is, therefore, entitled to priority under § 507(a)(1)(A). Accordingly, it is hereby
ORDERED that Trustee’s objection to Meadors’ § 507(a)(1)(A) priority claim is overruled: the Meadows claim is allowed as a domestic support obligation.
The Clerk, U.S. Bankruptcy Court, is directed to serve a copy of this order upon Debtor, counsel for Debtor, Respondent, counsel for Respondent, and the Chapter 7 Trustee.
IT IS SO ORDERED.
. The Chapter 7 Trustee concedes that the Florida Order upon which Meadors bases his claim is a valid final order.
. Meadors continues to provide support to them.
. Section 521(a) and Bankruptcy Rule 1007(b) require a debtor to file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of exec-utory contracts and unexpired leases, and a statement of financial affairs (the "Schedules”).
.Lutzke was decided under the pre-BAPCPA version of the Bankruptcy Code, which accorded domestic support debts a seventh priority. Under BAPCPA, which was effective for cases filed after October 17, 2005, domestic support debts are entitled to first priority treatment. The instant case is decided under the provisions of BAPCPA. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495345/ | *875
OPINION
JOHN J. THOMAS, Bankruptcy Judge.
The Debtor and his spouse, Mark and Heather Powell, own 62.22 acres of property in Bradford County, Pennsylvania. On August 2, 2006, Anadarko E & P Company LP and the Powells supposedly entered into an oil and gas lease for their property.1 Anadarko assigned a portion of its interest to Chesapeake Appalachia, L.L.C., which further assigned a portion to StatoilHydro USA Onshore Properties, Inc. Collectively, they will be referred to as Lessees. Debtor filed for relief under Chapter 12 of the Bankruptcy Code on July 30, 2010. On May 18, 2011, the Debt- or filed a Motion to “reject and void” the oil and gas lease under § 365(d)(4) of the Bankruptcy Code, alleging that the current lease was dramatically undervalued. (Doc. # 74.)
On July 7, 2011, pursuant to the terms of the original lease, Anadarko attempted to extend the primary term of the lease for an additional five years by unilaterally tendering a check to the Debtor. (Debtor’s Exhibit 3.) This occurred after the bankruptcy was filed and without obtaining relief from the automatic stay.
Objections to the effort to reject the oil and gas lease have been filed by both Anadarko and Chesapeake. The basis of the objections is that an oil and gas lease is neither an executory contract nor a lease as that term is used in the Bankruptcy Code and, therefore, cannot be rejected.
Under 11 U.S.C. § 365(a), a trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor. Of course, in order for § 365 to be applicable, the instrument in question must either be a lease or an executory contract.2 This raises some intriguing issues involving the intersection of state property law and bankruptcy law.
An oil and gas lease is a peculiar instrument wherein an exploratory company contracts to search for oil and gas on the lands of another. It typically includes a right to search, a right to drill, a right to transport, and the right to sell whatever oil and gas are found as a result on payment of a royalty. The owner of the land typically retains use of the surface. While the activity rarely changes, the legal vehicles by which this all transpires can vary greatly.
Since 1859, when oil in paying quantities was discovered in this state, there have been many and radical developments in the industry with corresponding changes in the contracts employed to define the respective rights of land owners and operators and the laws and decisions have kept pace with these advances. All these contracts are in common parlance referred to as leases. Many of the early contracts were mere licenses, some exclusive and others not so. Funk v. Haldeman, 53 Pa. 229 [ (1867) ]. These were followed by contracts having many of the characteristics of ordinary leases, being in the form of a lease of the land for the purpose of operating for and producing oil and gas. Duke v. Hague, 107 Pa. 57 [ (1884) ]; Brown v. Beecher, 120 Pa. 590, 15 A. 608 [ (1888) ]. While the early leases were usually for fixed periods, frequently five to twenty years, as it was discovered that the oil could not often be exhausted *876in those periods these leases came to be drawn for fixed periods and as long thereafter as oil or gas was found in paying quantities. These were followed by grants of the oil for like periods with the same covenants as were found in an ordinary lease. Then there were absolute conveyances of oil and gas in fee simple without reservations or restrictions. When leases were made of land for a definite number of years for the purpose of exploring for and producing oil and a royalty was reserved to the lessor, the interest of the lessees was held to be an interest in land, a chattel real, ‘but none the less a chattel.’ Brown v. Beecher, supra, 120 Pa. page 603, 15 A. page 609; Titusville Novelty Iron Works’, Appeal, 77 Pa. 103, 107 [ (1875) ]. A mere license to remove the oil was held to be an incorporeal here-ditament.
Appeal of Baird, 334 Pa. 410, 411, 6 A.2d 306, 310 (Pa.1939).
Specific to Pennsylvania, state law allows for multiple options springing from the fact that there are three discrete estates in land, i.e., the surface estate, the mineral estate, and the right to surface support. Hetrick v. Apollo Gas Company, 415 Pa.Super. 189, 195, 608 A.2d 1074, 1077 (1992). In Pennsylvania, a mining agreement is “a sale absolute, a conditional sale, a lease in the ordinary acceptance of that term, or a mere license to mine and remove the minerals.” Hummel v. McFadden, 395 Pa. 543, 553-54, 150 A.2d 856, 861 (Pa.1959). In opening the land for exploration, the landowner typically will authorize the exploration entity to enter the land and transport the mineral by license, land rental (traditional lease), easement or right of way. This is somewhat distinct from the manner in which the mineral, e.g., coal, gas, or oil, is transferred to the exploration company. Traditionally, an outright sale of the mineral is an option. Should it be the case that the mineral was transferred prior to the bankruptcy, then an essential element of the contract, the conveyance of the mineral, may no longer be executory as that term is explained by the Supreme Court and our Third Circuit Court of Appeals. N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 522-26, 104 S.Ct. 1188, 1194 n. 6, 79 L.Ed.2d 482 (1984) and Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872 F.2d 36, 39 (3rd Cir.1989). Bildisco and Sharon Steel embraced Countryman’s definition of executory contract, i.e. “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.” Professor Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973). On the other hand, should the fee estate in the mineral not have changed hands from the owner of the fee, then it appears that the provisions of § 365 may come into play. While the form of the instrument may be a lease, that factor is not controlling, rather it is its character. Hummel v. McFadden, 395 Pa. at 555, 150 A.2d 856. Even a lease which limits the lessee to a removal of the minerals over a term of years does not make the instrument any less of a sale. Id. at 566 n. 8, 150 A.2d 856. A key to the character of the instrument can be found in its language. For example, a grant of the privilege for digging and boring for oil for a certain term is a lease for the production of oil and not a sale of the oil or an interest in the land. Duffield v. Hue, 129 Pa. 94, 108-109, 18 A. 566, 568 (Pa.1889). On the other hand, a lease of coal in place together with a right to mine for a royalty and remove it vests in the lessee a fee estate. Smith v. Glen Alden Coal Co., 347 Pa. 290, 301, 32 A.2d 227, 233 (1943).
*877Overlaying this analysis is the reality that there are “marked differences in the nature of oil and gas and solid minerals” affecting the lessees’ rights. Appeal of Baird, 834 Pa. 410, 6 A.2d 306, 311 (1939). As aptly put by one author, “[o]il and gas in their natural state are migratory and tend generally to move toward areas of lesser pressure. As a result, the oil and gas under one tract may be drained by a well on another tract overlying the same reservoir. Traditional property concepts are difficult to apply in this context. Can one be said to ‘own’ something that is not necessarily quantifiable and to which one’s neighbor can gain legal title by ‘capture’?” Wayne C. Byers, Timothy N. Tuggey, Oil and Gas Leases and Section S65 of the Bankruptcy Code: A Uniform Approach, 63 Am. Bankr.L.J. 337, 338-339 (1989). It is this very anomaly- — the fluidity associated with oil and gas — that appears to have motivated the Pennsylvania Supreme Court to construct a special interpretation of an oil and gas lease as conveying a title that is inchoate and allowing exploration only until oil or gas is found, regardless of the linguistics used in the lease. T.W. Phillips Gas and Oil Co. v. Jedlicka, — Pa. —, 42 A.3d 261 (2012). “If development during the agreed upon primary term is unsuccessful, no estate vests in the lessee. If, however, oil or gas is produced, a fee simple determinable, is created in the lessee, and the lessee’s right to extract the oil or gas becomes vested.” Id. at 267. Vesting is critical to the analysis, since the “vesting” is that of a fee simple determinable3 which terminates the executory nature of the contract and takes this interest, be it license, lease, or other and converts it to a real property interest in the mineral estate. It has generally been observed that § 365 does not apply to a real property interest or freehold estate. Matter of Topco, Inc., 894 F.2d 727, 740 (5th Cir.1990).
Whether an oil and gas lease is a true lease is a matter of state law. In re Pillowtex, Inc., 349 F.3d 711, 715 (3rd Cir.2003). Nevertheless, for purposes of § 365(d)(4), “leases of real property shall include any rental agreement to use real property.” 11 U.S.C. § 365(m). Whether a contract constitutes an unexpired lease subject to 11 U.S.C. § 365 is a matter of state law. Matter of Topco, Inc., 894 F.2d 727, 740 n. 17 (5th Cir.1990), In re Harris Pine Mills, 862 F.2d 217 (9th Cir.1988). Whether the instrument is an executory contract is a matter of federal law. In re Terrell, 892 F.2d 469 (6th Cir.1989); Cameron v. Pfaff Plumbing and Heating, Inc., 966 F.2d 414 (8th Cir.1992); In re Cochise College Park, Inc., 703 F.2d 1339 (9th Cir.1983); In re Streets & Beard Farm Partnership, 882 F.2d 233 (7th Cir.1989).
Some courts have assumed that an oil and gas lease is an executory contract. In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363, 381 (5th Cir.1987) (“Any party to an ‘executory contract,’ such as a long-term supply contract or an oil and gas operating agreement, may similarly obtain from the debtor full performance plus additional ‘assurance’ as the quid pro quo for continued dealings.”) King v. Baer, 482 F.2d 552 (10th Cir.1973)(empha-sis mine). Other courts have considered an oil and gas lease a transfer of an interest in real property and therefore not an *878executory contract. Laugharn v. Bank of America Nat. Trust & Savings Ass’n, 88 F.2d 551 (9th Cir.1937). This is the argument -of the Lessees who advance that Pennsylvania law classifies an oil and gas lease as a transfer of realty relying on Lesnick v. Chartiers Natural Gas Co., 889 A.2d 1282, 1284 (Pa.Super.2005). Lesnick, however, has been superceded by the Pennsylvania Supreme Court, which illuminated this area of the law in the T.W. Phillips Gas and Oil Co. case by explaining that this type of “lease” is in the nature of a contract and controlled by the principles of contract law. T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d at 267. That court concluded, until oil or gas is produced, no freehold estate vests in the lessee. Logically then, if, at the time bankruptcy was filed and there was no oil or gas produced — as is true in this case— then contract principles would apply including an interpretation of whether this was an executory contract or lease.4
The determination of whether an oil and gas lease is an executory contract is no easy task. It must be ascertained whether the terms of this contract are consistent with the Countryman definition of executory contract. Are the obligations of each side to the contract so far unperformed that the failure of either to perform would be a material breach? This resolution becomes somewhat problematic since the lessor’s obligation is simply to deliver access to the property and refrain from interfering with the lessee’s rights to explore, etc. A Louisiana Court, despite acknowledging the passive nature of the lessor’s role, has concluded that the contract is indeed executory. Texaco Inc. v. Louisiana Land and Exploration Co., 136 B.R. 658, 668 (M.D.La.1992). An Oklahoma Court decided otherwise. In re Clark Resources, Inc., 68 B.R. 358 (Bkrtcy.N.D.Okl.1986). I venture to say, however, that this distinction is not critical since clearly, and I don’t use that word lightly, the oil and gas lease before me is an agreement “to use real property” and thus falls within the bankruptcy definition of lease of real property. 11 U.S.C. § 365(m). See also In re Gasoil, Inc., 59 B.R. 804 (Bkrtcy.N.D.Ohio 1986). Had gas been discovered prior to the bankruptcy filing, the conversion of the instrument to a determinable fee would have terminated its qualification as a “lease” under § 365 because the Lessees would have had the right to extract their gas from the Debtor’s property. Moreover, if gas had vested in Lessees prior to bankruptcy filing, the executory nature of the contract would cease, and we, again, would be talking about the law of real property rather than an executory contract.
Having concluded that the Debtor is a party to an unexpired lease, I now turn my attention to whether such lease should be rejected per the Debtor’s request under § 365(a). Rejection is subject to the Court’s approval. The Debtor certainly has no absolute right to rejection. N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). This is where the Debtor’s record comes up short. No evidence was submitted to suggest that this Court *879should approve either the rejection or the assumption of the lease. While the Debt- or’s Motion implies the ability to renegotiate a lease for a higher return, no evidence was placed on the record suggesting that such is the case.
Furthermore, this approach glosses over the subtleties of lease/contract rejection versus outright avoidance. It is assumed from case law that “rejection does not alter the substantive rights of the parties to the lease.” In re Flagstaff Realty Associates, 60 F.3d 1031, 1034 (3rd Cir.1995), quoting from In re Chestnut Ridge Plaza Associates, L.P., 156 B.R. 477, 483 (Bankr.W.D.Pa.1993). Under § 365(h) of the Bankruptcy Code, rejection would not appear to oust the Lessees from their rights to occupy the premises.
The short of it is that, whether the oil and gas lease is considered an unexpired lease or an executory contract, the Debtor has demonstrated no justification for rejection and no authority for avoidance.
An Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that the Amended Motion to Avoid Oil and Gas Lease (Doc. # 78) is denied.
. None of the copies of the lease submitted to the Court bear a signature purporting to be authorized by Anadarko. Nevertheless, this has not been raised as an issue by the parties.
. The Debtor posits that the agreement is not a lease. See Debtor’s Brief in Support at 2 n.2 (Doc. # 144).
. "A fee simple determinable is an estate in fee that automatically reverts to the grantor upon the occurrence of a specific event. The interest held by the grantor after such a conveyance is termed 'a possibility of reverter.’ Such a fee is a fee simple, because it may last forever in the grantee and his heirs and assigns, 'the duration depending upon the concurrence of collateral circumstances which qualify and debase the purity of the grant.’ T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A.3d at 267(citations omitted).
. Complicating this filing was the fact that, post bankruptcy filing, oil and gas was found on neighboring lands, and a pooling agreement (Wygrala Unit) was recorded on August 31, 2011, (Debtor’s Exhibit 4), that, but for bankruptcy, would have vested the oil and gas interest associated with the Debtor’s property into the lessees. It was this single activity occurring during the initial exploratory phase of the lease that allows the inchoate interest of the lessees to vest into a freehold estate; however, it is the very activity that is void as to estate property by § 362(a)(3) of the Bankruptcy Code since it works a transfer of possession of property of the estate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495346/ | MEMORANDUM OPINION
BRIAN F. KENNEY, Bankruptcy Judge.
This matter comes before the Court on the Foreign Representative’s Motion to Enforce and/or Apply the Automatic Stay (Docket No. 673) in order to enjoin the prosecution of a lawsuit recently filed in the Northern District of California by Altis Semiconductor SNC (“Altis”) against Qim-onda AG (“Qimonda”) and its affiliate, Qimonda Licensing LLC (“Qimonda Licensing”). Altis has filed an Opposition (Docket No. 677), in which Altis opposes the relief sought by the Debtor, and in the alternative, requests relief from the automatic stay. The Foreign Representative has filed a Reply Memorandum (Docket No. 680). The Court heard the arguments of the parties on October 9, 2012.
For the reasons stated below, the Court will order that: (1) Altis’s lawsuit against Qimonda, insofar as it alleges pre-petition breaches of the Joint Development Agreements, and/or pre-petition breaches of confidentiality, is a violation of the automatic stay under 11 U.S.C. § 362(a)(1), and will be enjoined (or alternatively, will be enjoined pursuant to 11 U.S.C. § 1521(a)(1)); (2) Altis’s request that the District Court declare the sale to. Adesto “void” is an impermissible collateral attack on this Court’s March 11th Order, and will be enjoined; (3) Altis will be enjoined from seeking relief under Paragraph 2 of its Prayer for Relief, that the “Defendants be enjoined from selling or licensing any intellectual property co-owned with Altis through [the parties’] joint development relationship to the detriment of Altis,” as being an impermissible attempt to exercise control over property of the debtor within the territorial jurisdiction of the United States under 11 U.S.C. § 362(a)(3) (or alternatively, will be enjoined pursuant to 11 U.S.C. § 1521(a)(1)); (4) Altis’s Motion for relief from the automatic stay will be granted in part, as to any alleged post-petition breaches of the JDA’s and/or alleged violations of fiduciary duty, though collection of any verdict in favor of Altis will be stayed as to assets of the debtor located within the territorial jurisdiction of the United States pursuant to 11 U.S.C. § 1521(a)(2); and (5) the Altis lawsuit is not a violation of the stay as to Qimonda Licensing, and the Court will decline to extend the automatic stay as to Qimonda Licensing.
FINDINGS OF FACT
For purposes of this Opinion, the Court assumes familiarity with the underlying facts of the Qimonda Chapter 15 case pending in this Court. In re Qimonda *884AG, 462 B.R. 165 (Bankr.E.D.Va.2011).1 In addition, the Court makes the following findings of fact:
1. Qimonda is a German company. Its business involved the development, manufacture and sale of semiconductor memory devices.
2. On January 23, 2009, Qimonda filed an Insolvency Petition with the Munich Insolvency Court in Germany. Dr. Michael Jaffé was appointed as the Insolvency Administrator.2
3. On June 15, 2009 (the “Petition Date”), Qimonda filed a Chapter 15 Petition with this Court, seeking recognition of the German insolvency proceeding as the main foreign proceeding.
4. On July 22, 2009, the Court entered an Order (the “Recognition Order”) approving the petition. Docket No. 56. Pursuant to 11 U.S.C. § 1520, this gave effect to Sections 361, 362, 363, 549 and 552 of the Bankruptcy Code (11 U.S.C. §§ 361, 362, 363, 549 & 552), with respect to property of the debtor located within the territorial jurisdiction of the United States. At the same time, the Court entered a supplemental Order (the “Supplemental Recognition Order”) granting the debtor additional relief pursuant to 11 U.S.C. § 1521, and implementing Bankruptcy Code Sections 305-307, 342, 345, 349, 350, 364-366, 503, 504, 546, 551 and 558 of the Bankruptcy Code. Docket No. 57.
The Altis Joint Development Agreements
5. In October 2003, Altis and Qimon-da’s predecessor, Infineon Technologies, entered into a Joint Development Agreement (the “2003 JDA”) for the purpose of jointly developing “an MRAM product demonstrator based on 7SF and a next generation MRAM technology, potentially based on 8SF semiconductor technology.” 2003 JDA Docket 680, Ex. A, p. 2. This was later amended to the design and development of “an MRAM technology based on 180nm CMOS and a next generation MRAM technology based on 130nm CMOS or smaller feature sizes,” as well as “the development and validation of a CBRAM technology as part of the MRAM Project.” Docket 680, Ex. A, amendment, p. 34-35.
6. With respect to patents, the 2003 JDA provided that any invention, discovery, design or improvement conceived or reduced to practice (whether solely by one party, or jointly) “shall be jointly owned by the PARTIES and title to all PATENTS issued thereon shall be jointly owned by the PARTIES, unless otherwise agreed in writing by the Parties.” 2003 JDA Sec. 7.1.
7. The 2003 JDA further provided:
7.2 Licensing Rights. INFINEON and its AFFILIATES shall have the right to grant licenses (including the right for any licensee to grant sublicens-es) to third parties under any of the PATENTS as per Section 7. 1, or to assign such PATENTS to third parties, *885without compensation to ALTIS and/or its employees or DELEGATES and with necessary consent hereby given by ALTIS for the granting of such licenses or for such assignment, as may be required by the law of any country. AL-TIS shall not have the right to grant licenses or sublieenses to third parties. (Emphasis added).
8. The 2003 JDA also contains very specific provisions, and remedies, with respect to confidential information. See 2003 JDA, §§ 5.2 (“Confidential Information”), 5.3 (“Confidentiality, General Exceptions”), 5.4 (“Exceptions”), 5.5 (“Disclosure Rights INFINEON”), 5.6 (“Disclosure Rights, ALTIS”), 5.7 (“Minor Portions”) & 5.8 (“Restricted Information”).
9. In August 2007, Altis and Qimonda entered into a similar JDA (the “2007 JDA”), for the purpose of jointly developing “MRAM and CBRAM technology, transition metal oxide memory technology and phase change memory technology.” 2007 JDA, Docket 680, Ex. B, p. 2. The 2007 JDA contained confidentiality provisions similar to those of the 2003 JDA. See 2007 JDA, §§ 4.2 (“Confidential Information”), 4.3 (“Confidentiality, General Exceptions”), 4.4 (“Exceptions”), 4.5 (“Disclosure Rights QIMONDA”), 4.6 (“Disclosure Rights, ALTIS”), 4.7 (“Minor Portions”) & 4.8 (“Restricted Information”).
10. The 2007 JDA contained different provisions relating to the respective rights of the parties in inventions, intellectual property and patents. Basically: (a) if the invention pertained uniquely to TMO (a defined term), then Qimonda would own the patent; (b) if one party created the invention, then that party would own the intellectual property rights; and (c) if the invention was jointly created, then ownership of the intellectual property rights would alternate, based chronologically on the time of the joint inventions. See 2007 JDA, § 6.1.
11. Section 6.2 of the 2007 JDA provides as follows:
6.2. Licensing Rights. QIMONDA, its SUBSIDIARIES and ALTIS and its SUBSIDIARIES shall have the right to grant licenses under the PATENTS on INVENTIONS respectively owned as per Section 6.1, or to assign its ownership in such PATENTS on INVENTIONS to third parties, without compensation to the other PARTY and/or its employees or delegates. (Emphasis added).
The Sale of Certain Patents to Adesto
12. On March 16, 2009, roughly three months before Qimonda filed its Chapter 15 petition with this Court, Qimonda entered into a Non-Disclosure Agreement with Adesto Technologies, the purpose of which was to enable the parties to explore the sale of Qimonda’s patents.
13. On January 13, 2010, the Foreign Administrator filed a Motion to Establish Procedures for the Sale of Certain Patent Rights (the “Sale Procedures Motion”). Docket No. 202.
14. The Notice of Hearing contained a thirteen page Service List, and included Altis’s parent corporations, IBM and Infi-neon. Docket No. 203. However, the Notice of Hearing did not include Altis as a noticed party.
15. The Foreign Administrator also caused to be published a Notice of his Motion to Establish Procedures in the Wall Street Journal, on January 19, 2010. Docket No. 210.
16. The Foreign Administrator’s Motion drew a number of objections, including objections from Altis’s parent corporations, Infineon (Docket No. 216) and IBM (Docket No. 214).
*88617. On March 11, 2010, the Court entered an Order granting the Foreign Administrator’s Motion (the “March 11th Order”). Docket No. 254. The March 11th Order provided, in part:
Any sales of the Patents conducted pursuant to the German Procedures shall not be made “free and clear” of any interests under Section 363(f) of the Bankruptcy Code or any other rights retained by the Objecting Parties, if any, and shall instead be made expressly subject to such interests and/or rights. Any rights in the Patents held by the Objecting Parties shall continue to exist as set forth under applicable law and may be prosecuted in any court or tribunal of competent jurisdiction.
Id. at ¶ 2(a).
18. Notably, under the terms of the March 11th Order, the “Objecting Parties” included IBM and Infineon, but did not include Altis.
19. The Foreign Representative filed a Notice of Intent to Sell a number of patents to Adesto Technologies Corporation, Inc., on June 28, 2010, for the purchase price of $500,000. Docket No. 268; see also Amended Notice of Intent to Sell, Docket No. 275.
20. On October 12, 2010, the Foreign Representative filed a Quarterly Report of Sale, confirming the sale of the patents to Adesto. Docket No. 337.
The Altis Lawsuit
21. On June 21, 2012, Altis filed a Complaint in the U.S. District Court for the Northern District of California against Qimonda, Qimonda Licensing, LLC, and Qimonda North America Corp.3 Altis Complaint CV12-03227, Docket No. 677, Ex. 2.
22. The Summary of the Case states: “This case is about the wrongful licensing of the jointly held intellectual property of the joint venture between Altis and Qimonda AG to the commercial detriment of Altis’ cutting edge research and development ventures.” Altis Complaint CV12-03227, p. 2, ¶ 3. The gravamen of the Complaint is that Qimonda “has sold, licensed or transferred the parties’ valuable joint assets to third parties that Altis was already engaged in joint venture development with, in breach of the fiduciary duties owed to Altis as a former joint venture partner.” Id. at ¶ 5.4
23. Altis refers to, and relies upon, Qimonda’s fiduciary duties arising out of the JDAs, throughout the Complaint. Id. at ¶¶ 31 (“Defendants failed to protect confidential information owned by Altis as required by the JDAs with Altis and violated the fiduciary duties owed to Altis as a former joint venture partner”); 37 (Defendants’ actions “constitute a breach of the fiduciary duty Qimonda AG and/or QNA owed to Altis under the JDAs ”); 44 (“Defendants have breached the fiduciary duty Qimonda AG owed to Altis as a joint venture partner”); 55 (“in violation of a fiduciary duty owing to Altis arising from the 2003 JDA ”) (emphasis added).
24. The Prayer for Relief in the Complaint requests the following relief:
1. Defendants be enjoined from disclosing any Altis Know-How and/or Altis confidential information to any third party through their licensing programs;
*8872. Defendants be enjoined from selling or licensing any intellectual property co-owned with Altis through joint development relationship to the detriment of Altis;
3. A judgment declaring Defendants’ sale of Qimonda AG’s co-ownership of the Patents at Issue to Adesto void;
4. The Court award restitution, costs, and injunctive relief to Altis as a result of injury due to Defendants’ violations of California’s Unfair Competition Law, Bus. & Prof.Code, § 17200 et seq., in amounts to be ascertained at trial;
5. A judgment be entered against Defendants for Altis’ actual damages according to proof, and for any profits attributable to Defendants’ wrongful actions; and
6. Awarding Altis all such other, and further relief as the Court deems just and proper.
Altis Complaint CV12-03227, pp. 19-20.
25. On September 12, 2012, the Foreign Representative filed his Motion in this Court to enforce the automatic stay and for related relief. Qimonda Motion, Docket No. 673.
CONCLUSIONS OF LAW
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Order of Reference of the U.S. District Court for this District of August 15, 1984. This is a core proceeding, within the meaning of 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate), (G) (motions to terminate, annul, or modify the automatic stay), (M) (orders approving the use or lease of property) and (N) (orders approving the sale of property). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1409(a).
While ordinarily, a request for in-junctive relief requires the filing of an adversary proceeding, this Motion involves the application of the automatic stay (and related provisions under 11 U.S.C. §§ 1520 and 1521). Accordingly, no adversary proceeding is required. In re Hookup, L.L.C., 2012 WL 4904538 (Bankr.E.D.Va.2012); In re Fas Mart Convenience Stores, Inc., 318 B.R. 370 (Bankr.E.D.Va.2004).
I. The Automatic Stay Applies to Al-tis’s Allegations of Pre-Petition Breach.
A. Sections 1520(a)(1) and 362(a)(1).
Section 1520(a)(1) of the Bankruptcy Code provides that, upon recognition of a foreign main proceeding: “sections 361 and 362 apply with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States.” 11 U.S.C. § 1520(a)(1).
Upon recognition of a foreign main proceeding, an estate is not created, as Section 541 of the Bankruptcy Code is not among the enumerated Sections of the Bankruptcy Code that become operative upon recognition under Section 1520. However, upon recognition, the automatic stay applies to property of the debtor that is within the territorial jurisdiction of the United States. See In re JSC BTA Bank, 434 B.R. 334, 337 (Bankr.S.D.N.Y.2010) (“[T]he Court concludes that the automatic stay does not afford broad anti-suit in-junctive relief to the debtor entity outside the territorial jurisdiction of the United States upon entry of an order of recognition in a chapter 15 case.”) The absence of the creation of an estate results in certain Sections of the Code not being applicable, by their use of the term “estate.” For example, literally read, Section 362(a)(3) (prohibiting any act to obtain *888possession of property of the estate or to exercise control over property of the estate) and Section 362(a)(4) (prohibiting any act to create, perfect or enforce a lien against property of the estate), would not apply. Fortunately, Sections 1521(a)(1) and (2) are available to fill in the gaps.
Bankruptcy Code Section 362(a)(1) bars: 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 [the Bankruptcy Code], or to recover a claim against the debtor that arose before the commencement of the case under [the Bankruptcy Code].
11 U.S.C. § 362(a)(1).
The Fourth Circuit has noted:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debt- or a breathing spell from its creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
Grady v. A.H. Robins Co., 839 F.2d 198, 200 (4th Cir.1988) (quoting H.R.Rep. No. 95-595, at 340-41 (1977); S.Rep. No. 95-989, at 54-55 (1978), reprinted in U.S.C.C.A.N. 5787, 5840-41 & 6296-97). Congress intended that the definition of “claim” in the Code be as broad as possible. Id.
The automatic stay does not, however, apply to purely post-petition torts. Grady, 839 F.2d at 201-02 (adopting the conduct test for when a contingent tort claim arises). Similarly, the automatic stay does not apply to post-petition breaches of contract. In re Bellini Imports, Ltd., 944 F.2d 199 (4th Cir.1991). Even with respect to post-petition breaches of contract, though, the stay contained in Sections 362(a)(3) and (4) operates to prevent “any act to obtain possession of property of the estate,” and “any act to create, perfect, or enforce any lien against property of the estate,” respectively. 11 U.S.C. § 362(a)(3)-(4). Thus, even post-petition creditors “must obtain relief from the stay to satisfy a judgment against property of the bankruptcy estate.” Bellini Imports, 944 F.2d at 201.
There is one further refinement to the foregoing. Where a pre-petition contract has been rejected by the debtor, creditors are barred by the automatic stay from bringing actions against the debtor that are rooted in those contracts. This is because, when a contract is rejected, the creditor will have a rejection claim against the estate under Section 365(g) “immediately before the date of the filing of the petition.” 11 U.S.C. § 365(g)(1) (emphasis added). This provision makes it clear that the rejection of an executory contract gives rise to a pre-petition, and not a post-petition, claim.
Two cases illustrate this point. First, in In re Old Carco LLC (f/k/a Chrysler, LLC), Chrysler rejected a number of dealership contracts, as executory contracts under Section 365 of the Code. 424 B.R. 633 (Bankr.S.D.N.Y.2010). The dealers asserted administrative expense priority claims for damages sustained as a result of the rejection, based on Dealer Laws within each of their respective States. Id. at 637. The dealers further argued that the Debt- or was obligated to respect these Dealer Laws pursuant to 28 U.S.C. § 959(b), and that the Debtor’s breach of the Dealer Laws gave rise to a post-petition, administrative claim. Id. The Court rejected the argument, noting:
*889Where a claim is based upon an obligation that stems from a rejected pre-petition contract, encumbering a debtor with a “post-petition obligation would seriously undercut the entire purpose of the rejection process.” Requiring administrative priority for “obligations that were first undertaken pre-petition is exactly what the rejection provisions are supposed to avoid.”
Id. at 639-40 (quoting In re Ames Dep’t Stores, Inc., 306 B.R. 43, 60 (Bankr.S.D.N.Y.2004)).5
In the second case, In re Great Atlantic & Pacific Tea Co., the Debtor rejected a trucking contract with Grocery Haulers, Inc. 467 B.R. 44, 48 (S.D.N.Y.2012). This caused Grocery Haulers to have to lay off hundreds of employees without providing them with the required 60 days’ notice under the federal WARN Act and the applicable New Jersey statute. Id. The union sued Grocery Haulers. Id. Grocery Haulers filed a third-party complaint against the Debtor, alleging that A & P was responsible for post-petition breaches of the WARN Act and the New Jersey statute, as well as for a tortious interference claim. Id. at 49. The Bankruptcy Court held that Grocery Haulers’ claims arose out of the rejection of its pre-petition contract with the Debtor, and that it was entitled to a pre-petition claim under Section 365(g), and enjoined Grocery Haulers from proceeding on its third party complaint against A & P. Id. at 49-50. The District Court affirmed. Id. at 59. The Court noted:
Appellant has not cited a case relating to a debtor’s rejection of an executory contract — and the Court is aware of none— that holds that statutory and tort liability for damages flowing from a rejected executory contract may be treated as arising post-petition.... As Judge Drain found, however, the same theory does not hold here because the postpetition conduct was the rejection of the contract, which did happen in bankruptcy and by legal fiction is treated as having occurred pre-petition. See Hr’g Tr. 159:8-160:10; [Fed. Realty Inv. Trust v. Park (In re Park), 275 B.R. 253, 256 (Bankr.E.D.Va.2002) ]. Accordingly, the Bankruptcy Court did not err in finding that the claims regarding the WARN Acts violations arose pre-petition and are stayed under Section 362.
467 B.R. at 52; see also Realty Inv. Trust v. Park (In re Park), 275 B.R. 253, 256 (Bankr.E.D.Va.2002) (“rejection simply constitutes a breach of the lease or contract. [11 U.S.C. § 365(g) ]. Even though the act of rejection takes place after the date of the bankruptcy filing, the breach (with certain exceptions) is treated as occurring on the date of the bankruptcy filing. Id. As a result, any claim for damages flowing from the breach is treated as a prepetition claim.”)
In this case, the record is not sufficient to determine whether the alleged breaches of fiduciary duty occurred entirely pre-petition, entirely post-petition, or (as is more likely) a combination of pre-petition and post-petition. Altis’s Complaint alleges that “in or about the summer and fall of 2010, Defendants actively solicited Adesto to purchase and/or license certain CBRAM-related intellectual property co-owned by Altis and Qimonda.” Altis Opposition, Docket No. 677 at ¶ 30. The *890Qimonda-Adesto Non-Disclosure Agreement is dated as of March 16, 2009, roughly three months before Qimonda filed its Chapter 15 petition with this Court, so it is likely that many of the alleged disclosures occurred pre-petition.
The Order of Recognition (Docket No. 56) caused the automatic stay to be in effect. 11 U.S.C. § 1520(a)(1). The Supplemental Order (Docket No. 57) gave effect to Section 365 of the Code. The Altis JDAs have all been rejected as a matter of German insolvency law, pursuant to Section 103 of the German Insolvency Code. Like the dealer claims for administrative expenses in Old Careo, and like the WARN Act and tortious interference claims in A & P, Altis’s claims for pre-petition breaches of the JDAs, and/or pre-petition breaches of fiduciary duty, unquestionably stem from, and necessarily depend upon, the fiduciary duties arising from the pre-petition JDAs. Indeed, without the now-rejected JDAs, Altis would have no claims in the California lawsuit at all. Rather than allege that Qimonda breached the confidentiality terms of the JDAs, Altis alleges that Qimonda breached its fiduciary duties as a joint venture partner by disclosing confidential information. But, at least as to the alleged pre-petition disclosures, this is just a thinly veiled attempt to plead one’s way around the automatic stay and the fact that the JDA’s have been rejected under German law.
Altis argues that it can’t possibly be in violation of the stay, when it had no notice of the Sale Procedures Motion and the March 11th Order. Altis, however, unquestionably had notice of this bankruptcy case when it filed its lawsuit against the Debtor. In effect, Altis is seeking to parlay its lack of notice in connection with the March 11th Order into a “get out of bankruptcy free” card. The lack of notice to Altis cannot allow it to ignore the jurisdiction of this Court altogether.
It is clear that Altis has sued the Debtor based on pre-petition contractual obligations that have now been rejected by the Foreign Administrator. The Court finds that the Altis lawsuit, insofar as it requests damages for pre-petition breaches of the JDAs, or for pre-petition breaches of fiduciary duty, is a violation of the automatic stay pursuant to 11 U.S.C. § 362(a)(1), and the Court will enjoin the prosecution of the lawsuit with respect to such allegations.
To the extent that the automatic stay of Section 362 may not apply, the Court will stay the commencement of the action pursuant to 11 U.S.C. § 1521(a)(1), which allows the Court to stay “the commencement or continuation of an individual action or proceeding concerning the debt- or’s assets, rights, obligations or liabilities to the extent that they have not been stayed under Section 1520(a),” as to any allegation of pre-petition breaches of the JDA’s or breaches of confidentiality.
B. The Terms of the March 11th Sale Order Do Not Remove the Protections of the Automatic Stay.
Altis argues further that “[t]he March 11 Sale Order does not cut off rights; rather, it preserves them.” Altis Opposition at p. 8. As noted, the March 11th Order does not provide that the sale is free and clear of all liens, claims and interests; to the contrary, it provides that the sale is not a sale free and clear under Section 363(f). Further, with respect to the Objecting Parties, the Order provides that “[a]ny rights in the Patents held by the Objecting Parties shall continue to exist as set forth under applicable law and may be prosecuted in any court or tribunal of competent jurisdiction.” March 11 Sale Order, Docket No. 254, p. 2. Altis is not identified as an Objecting Party in the Order. Altis argues that it is not identified as an Objecting Party because it never *891had notice of the Sale Procedures Motion, nor the entry of the March 11th Order. Altis further argues that, owing to the lack of notice it should be treated as an Objecting Party.
Altis’s position is not without some surface appeal. The Court accepts for purposes of this Motion that Altis did not have notice of the entry of the March 11th Order. The Court also accepts for purposes of this Motion that Altis may have had a property interest to protect. However, the Court declines to make the leap suggested by Altis that, for these reasons, it should be treated as an Objecting Party under the March 11th Order. Altis’s position, as a co-owner of the patents pursuant to the JDAs, is just fundamentally different from that of the Objecting Parties, who for the most part were licensees protecting their rights as such. The Objecting Parties negotiated language in the March 11th Order with which they were satisfied. This language protected their interests. The Court declines to speculate as to whether Judge Mitchell, in entering the March 11th Order, would have granted the same protections to Altis that he provided to the Objecting Parties. The most that can be said about the March 11th Order in this regard is that it did not deal with the rights of co-owners of the patents being sold. It certainly did not address Altis’s rights.
II. Altis’s Request that the Sale to Adesto be Declared “Void” is an Impermissible Collateral Attack on this Court’s March 11th Sale Order.
Paragraph 3 of Altis’s Prayer for Relief requests: “[a] judgment declaring Defendants’ sale of Qimonda AG’s co-ownership of the Patents at Issue to Adesto void.” Altis Complaint CV12-03227, p. 19. This is an impermissible collateral attack on this Court’s March 11th Order. Spartan Mills v. Bank of Am. Ill., 112 F.3d 1251, 1256 (4th Cir.1997) (“Under the holding of [Celotex Corp. v. Edwards, 514 U.S. 300, 305-07, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) ], Spartan Mills cannot allow a final order that deprives it of a lien position to stand and then hope to attack it collaterally at another time and in another forum”); FutureSource LLC v. Reuters Ltd. 312 F.3d 281, 286 (7th Cir.2002), cert. denied 538 U.S. 962, 123 S.Ct. 1769, 155 L.Ed.2d 513 (2003) (“the order approving a bankruptcy sale is a judicial order and can be attacked collaterally only within the tight limits that Fed.R.Civ.P. 60(b) imposes on collateral attacks on civil judgments”).
In Spartan Mills, the creditor had actual notice of the sale, and in this ease, Altis claims that it did not. In Spartan Mills, though, the creditor complained of a different kind of due process violation, the lack of an adversary proceeding to avoid its lien. In either event, the principle is the same: the creditor cannot be permitted to mount a collateral attack on a final sale order, especially where, it has alternative remedies available to it.6
This does not mean that Altis is without a remedy. Altis can move in this Court to vacate the March 11th Order, pursuant to Bankruptcy Rule 9024, which incorporates Federal Rule of Civil Procedure 60(b).
A number of courts have noted that, “[b]y far the most frequent mistake or *892infirmity held to warrant vacating a confirmed sale is defective notice to interested parties of the judicial sale.” In re Chung King, 753 F.2d 547, 551 (7th Cir.1985); In re Compak Cos., 415 B.R. 334, 341 (N.D.Ill.2009); see also In re Taneja, 2011 WL 1045286 (Bankr.E.D.Va.2011) (“That the trustee’s failure to provide Specialized with notice of the proposed sale constitutes a serious procedural error is clear.”)
A Rule 9024 Motion, and the kind of relief that might be granted, could potentially turn on three questions. The first is whether Altis had actual notice of the Sale Procedures Motion and/or the March 11th Order. Clearly, Altis’s parent corporations, IBM and Infineon were on notice of the Sale Procedures Motion. They objected, and were identified as Objecting Parties in the Order. When asked at the argument on this Motion whether perhaps IBM or Infineon had forwarded this notice on to Altis, counsel for Altis stated that so far, there was no indication that Altis had received such notice. The Court accepts this representation, and appreciates counsel’s candor. However, whether or not Altis received actual notice could be the subject of discovery, and may be a disputed issue in connection with a Rule 9024 Motion.
Second, a Rule 9024 Motion will depend on the nature and extent of Altis’s rights in the property. See In re Taneja, 2011 WL 1045286 (“A determination that U.S. Bank’s due process rights were infringed when it was not given notice of the proposed sale does not, however, require that the sale itself be set aside. As noted, even if U.S. Bank had been given notice and had objected, the court could — and likely would — have approved a sale free and clear of U.S. Bank’s disputed lien.”) The Foreign Administrator maintains that Altis has already consented to the sale, and that no compensation is due to Altis, pursuant to Section 7.2 of the 2003 JDA. See supra Finding of Fact ¶ 7. The record is insufficient at this time for the Court to conclude that Altis had already consented to the sale. Clearly, though, Altis’s rights in the property, if any, will have to be determined in connection with a Rule 9024 Motion.
Third, a Rule 9024 Motion could raise the question of whether or not Adesto is a good faith purchaser entitled to the protections of Section 363(m). The March 11th Order did not make a finding that Adesto was a good faith purchaser. This remains an open issue that would be relevant in fashioning relief, if any, on a Rule 9024 Motion. It is possible that, if Adesto is found to be a good faith purchaser, the Court could fashion a remedy that would allocate a portion of the sale proceeds to Altis commensurate with its rights, if any, under applicable nonbankruptcy law in the patents, while not disturbing Adesto’s status as a good faith purchaser if Adesto is found to occupy that position. In re Com-pak Cos., 415 B.R. at 344 (“Given the procedural posture of this case, and the ‘strong policy of finality of bankruptcy sales,’ we believe that a narrow remedy is appropriate.”). All of these issues can be determined in connection with a Rule 9024 Motion.
Even assuming that Altis did not have notice of the entry of the March 11th Order, Altis’s remedy lies in Rule 9024, not in bringing its lawsuit in California against the Debtor. The Court will enjoin Altis’s from proceeding -with its request in the lawsuit that the District Court declare the sale to Adesto void.
III. Altis is Improperly Seeking to Exercise Control Over Property of the Debtor.
Paragraph 2 of Altis’s Prayer for relief requests that the “Defendants be *893enjoined from selling or licensing any intellectual property co-owned with Altis through [the parties’] joint development relationship to the detriment of Altis.” Al-tis Complaint CV12-03227, p. 19. This is plainly an attempt to exercise control over the Debtor’s property located within the United States.
The Court continues to have jurisdiction over the U.S. patents. The parties agree that there are patents that are not the subject of the March 11th Sale Order that are still owned by the Debtor, and in which Altis may have an interest pursuant to the JDAs.
Altis’s lawsuit, in seeking to enjoin further sales, is an act to exercise control over property of the debtor located within the United States. This act violates Section 362(a)(3) of the Bankruptcy Code. Alternatively, to the extent that Section 362(a)(3) may not apply (again, because no estate is created), the Court will enjoin this portion of Altis’s lawsuit pursuant to 11 U.S.C. § 1521(a)(1).
IV. The Court Will Decline to Extend the Stay to Protect Qimon-da Licensing.
It is clear that, absent unusual circumstances, the automatic stay does not protect Qimonda Licensing, a non-debtor subsidiary of Qimonda. Kreisler v. Goldberg, 478 F.3d 209 (4th Cir.2007); A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 1016 (4th Cir.1986). The Foreign Administrator asserts two alternative bases for relief: (1) injunctive relief pursuant to 11 U.S.C. §§ 1521(a) and 105(a); and (2) the Barton doctrine. Neither basis compels the grant of this unusual relief in this case.
A. The Foreign Administrator’s Request for Injunctive Relief.
The Foreign Administrator requests that the Court extend the automatic stay to Qimonda Licensing pursuant to 11 U.S.C. §§ 1521(a) and 105(a). Section 1521(a) provides as follows:
Upon recognition of a foreign proceeding, whether main or nonmain, where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including—
(1) staying the commencement or continuation of an individual action or proceeding concerning the debtor’s assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520(a);
11 U.S.C. § 1521(a).
Section 105(a) of the Code provides as follows:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
11 U.S.C. § 105(a).
The Foreign Administrator argues that the Court should consider the request to stay the action as against Qimonda Licensing under the traditional four-part test for injunctions. The Court agrees that the standard for granting a preliminary injunction is applicable here. CT Inv. Mgmt. Co. v. Carbonell, 2012 WL 92359 (S.D.N.Y.2012); In re Vitro, S.A.B. de C.V., 455 B.R. 571, 580-83 (Bankr.N.D.Tex.2011); In re Calpine Corp., 365 B.R. 401, 408 (S.D.N.Y.2007) (in a Chapter 11 case, “the automatic stay can apply to non-debt*894ors, but normally does so only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor’s estate”) (citations omitted).7
The factors to be employed in this test are not entirely clear, however. The Foreign Administrator cites AH. Robins, 788 F.2d at 1016, for the four factors to be considered in granting or denying a preliminary injunction. Qimonda Motion, p. 12. The Fourth Circuit in AH. Robins, in turn, relied upon the Blackwelder factors. Blackwelder Furniture Co. of Statesville, Inc. v. Seilig Mfg. Co., 550 F.2d 189, 195 (4th Cir.1977). However, since the Robins decision, the Blackwelder factors have been replaced with the factors identified in Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008). See Real Truth About Obama, Inc. v. Fed. Election Com’n, 575 F.3d 342, 346 (4th Cir.2009), vacated on other grounds — U.S. —, 130 S.Ct. 2371, 176 L.Ed.2d 764 (2010) (“Our Blackwelder standard in several respects now stands in fatal tension with the Supreme Court’s 2008 decision in Winter.”)
The Winter factors are stated as follows: “A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.” 555 U.S. at 374, 129 S.Ct. 1093. The Court will employ the Winter factors in its determination of whether to extend the automatic stay to the non-debtor subsidiary, Qimonda Licensing pursuant to Sections 1521 and 105 of the Code.
1. Likelihood of Success on the Merits.
Addressing the first factor, a likelihood of success on the merits, the Court finds that Qimonda Licensing has a good chance of success on the merits in defending the California litigation. Qimonda Licensing was not a party to the JDAs and does not appear to have owed any duties, fiduciary or contractual, to Altis. Oddly, though, this factor weighs against Qimonda Licensing because, as stated below, the ability to defend the lawsuit on the merits represents an adequate remedy at law.
2. Irreparable Harm.
With respect to the second factor, that of irreparable harm, the Court finds that the Foreign Administrator has not demonstrated irreparable harm. The likelihood of irreparable harm turns on whether or not the Foreign Administrator has adequate remedies at law. Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959) (“The basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies”); Tattoo Art, Inc. v. TAT Intern., LLC, 794 F.Supp.2d 634 (E.D.Va.2011) (“The inquiry for irreparable harm ‘inevitably overlaps with’ the inquiry as to the adequacy of legal remedies”) (citing MercExchange, L.L.C. v. eBay, Inc., 500 F.Supp.2d 556, 582 (E.D.Va.2007)). At this point, the Foreign Administrator has two available legal remedies with respect to Qimonda Licensing. First, he can defend the lawsuit on the merits. It isn’t clear to the Court why Qimonda Licensing is included in the lawsuit in the first place. Clearly, Qimonda Licensing didn’t enter into a Joint Development Agreement with Altis, and does *895not appear to owe Altis any fiduciary duties. The Complaint does not distinguish among the Defendants, in terms of their legal duties to Altis, nor with respect to their individual culpabilities. Perhaps, under applicable non-bankruptcy law, Altis can cobble together a theory that Qimonda Licensing conspired with Qimonda to deprive Altis of its rights, but this might run into intra-corporate conspiracy problems. See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984) (parent and subsidiary incapable of conspiring with one another for purposes of Section 1 of the Sherman Act, because of complete unity of interest); Drum v. San Fernando Valley Bar Ass'n, 182 Cal.App.4th 247, 106 Cal.Rptr.3d 46 (2d Dist.2010) (applying Cop-perweld intracorporate immunity to claims under California Unfair Competition Act).
The Court recognizes that the defense of the lawsuit will not be without a required expenditure of substantial legal fees on behalf of the Foreign Administrator— which brings us to the second legal remedy. If the Foreign Administrator decides that the costs of defending the lawsuit on behalf of Qimonda Licensing are not justifiable, he can file a Chapter 11 or a Chapter 7 petition for Qimonda Licensing here in the United States. Unquestionably, all of the acts alleged in the lawsuit would pre-date such a filing, and would be subject to the automatic stay in a Qimonda Licensing bankruptcy filing.
S. Balancing the Equities.
Addressing the third factor, the balance of the equities, on the one hand, the Foreign Administrator failed to give Altis notice of the Sale Procedures Motion, which has in large part created the problem. Further, Dr. Jaffé created Qimonda Licensing as a U.S. subsidiary of Qimonda. He might have expected that, sooner or later, Qimonda Licensing could be sued in the United States and would not have the protection of the automatic stay. At the same time, as noted above, Altis has attempted to use the lack of notice of the Sale Procedures Motion to its advantage, in effect, ignoring the jurisdiction of this Court over the assets of the Debtor, despite its actual knowledge of the bankruptcy case at the time that it filed the lawsuit. This factor favors neither party.
I. The Public Interest.
With regard to the fourth factor, whether the injunction is in the public interest, the Court finds that this factor heavily favors Altis. Specifically, the Court agrees with the decision in In re Vitro, SAB, in which the bankruptcy court held that extending the automatic stay to non-debtor subsidiaries would be contrary to basic U.S. bankruptcy law. 455 B.R. at 581.8 In Vitro, the Court refused to recognize the Judgment of the Mexican courts approving a Consurso, or plan of reorganization, that not only reorganized the Debt- or’s financial affairs, but also extended protection from creditors to the Debtor’s non-debtor subsidiaries. Id. at 581-82. The Vitro Court held as follows:
Finally, the granting of an injunction will disserve the public interest. Extending the automatic stay or issuing an injunction for non-debtors contravenes a basic and compelling principle of federal bankruptcy law. Like the rest of the Code, Chapter 15 focuses on protecting the debtors, not the non-debtor subsidiaries. If granted, precedent will be set that any foreign debtor can initiate in*896solvency proceedings solely for a parent holding company in a foreign jurisdiction, get an injunction protecting non-debtor subsidiaries in the United States, and confirm a plan through insider votes leaving creditors in the United States with little recourse.
Id. As in Vitro, the Foreign Administrator here is seeking to accomplish something in Chapter 15 that U.S. bankruptcy law ordinarily would not allow absent unusual circumstances. Specifically, the Foreign Administrator is seeking a stay against a non-debtor entity. The Vitro case involved the foreign court’s protection of foreign, non-debtor subsidiaries. In this case, we have a U.S. non-debtor subsidiary. However, the principal is the same — the Court in Vitro refused to recognize the foreign court’s Order because such a result ordinarily would not be allowed under U.S. law. Id.; see also In re Sivec SRL, 476 B.R. 310, 323 (Bankr.E.D.Okla.2012) (noting that under 11 U.S.C. § 1522(a), the Court may grant relief under Section 1521 “only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected”). Under U.S. law, any such stay should only be granted under unusual circumstances and for compelling reasons. In this case, the Foreign Administrator has failed to overcome the fundamental principal that the automatic stay does not apply to a non-debtor.
The public policy at issue here weighs heavily in favor of Altis, and against the Foreign Administrator’s position with respect to Qimonda Leasing.
B. The Barton Doctrine does not Apply-
The Foreign Administrator requests in the alternative that the Court stay the action against Qimonda Licensing in light of the Barton doctrine. Barton, 104 U.S. 126, 26 L.Ed. 672; McDaniel v. Blust, 668 F.3d 153 (4th Cir.2012); In re VistaCare Grp., LLC, 678 F.3d 218 (3d Cir.2012). The Barton doctrine does not provide a general, or even a qualified, immunity to the Foreign Representative. Rather, it is the necessary product of the Court’s supervision of its professionals. McDaniel, 668 F.3d at 157. In effect, the Court serves as a gatekeeper under the Barton doctrine, protecting its appointed professionals from frivolous lawsuits that would interfere with the administration of the estate. In re Cutright, 2012 WL 1945703 (Bankr.E.D.Va.2012) (“The prima facie case requirement requires a ‘pre-screening’ of the allegations by the appointing court to determine if the plaintiff can present adequate grounds upon which to proceed against the trustee in another forum.”)
In this case, Dr. Jaffé is the Court-supervised administrator of Qimon-da, not of Qimonda Licensing. Qimonda Licensing is a U.S. corporation and is not in bankruptcy. Accepting the Foreign Administrator’s argument that it makes no difference whether the Foreign Administrator was appointed initially by the German Court or by this Court (once a U.S. court has recognized the foreign main proceeding), it is still true that Dr. Jaffé was appointed by that Court with respect to Qimonda, and not with respect to Qimonda Licensing, which, as noted, is a U.S. corporation. Further, the Court sees no harm to the notion of comity between the German Court and the U.S. courts in refusing to extend the automatic stay to a U.S., non-debtor subsidiary. The German Court’s interest in supervising the affairs of Qimonda Licensing is, like Dr. Jaffé’s interest in Qimonda Licensing, indirect. The Foreign Administrator cites no case (whether under Chapter 7, Chapter 11 or Chapter 15) in which *897a court has interposed the Barton doctrine to prevent a lawsuit against a related company that is not under the jurisdiction of the reviewing court. The Court concludes that the Barton doctrine is not implicated with respect to Dr. Jaffé’s indirect interest in Qimonda Licensing. Moreover, for the reasons discussed above — particularly, the legal remedies currently available to Qimonda Licensing — the Court in its discretion declines to stay Altis’s lawsuit against Qimonda Licensing.
The Court concludes that the Barton doctrine is not implicated by Altis’s lawsuit against Qimonda Licensing.
V. Altis’s Motion for Relief from the Automatic Stay.
Altis requests in the alternative that it be granted relief from the automatic stay to proceed with its lawsuit against Qimon-da. The Court will deny Altis’s Motion as to any alleged prepetition breaches. However, it will grant the Motion as to the establishment of liability and the fixing of any damages for post-petition breaches, but not for the collection of any judgment against assets of the debtor located within the territorial jurisdiction of the United States.
A. Alleged Pre-Petition Breaches.
With respect to any alleged pre-petition breaches of the JDAs, or alleged breaches of fiduciary duty, Section 362(d)(1) allows the Bankruptcy Court to lift the automatic stay for cause. The term “cause,” however, is not defined. In the Fourth Circuit, the following factors are to be taken into account:
(1) whether the issues in the pending litigation involve only state law, so the expertise of the bankruptcy court is unnecessary; (2) whether modifying the stay will promote judicial economy and whether there would be greater interference with the bankruptcy case if the stay were not lifted because matters would have to be litigated in bankruptcy court; and (3) whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court.
Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir.1992). See also In re Lee, 461 Fed.Appx. 227, 231 (4th Cir.2012) (applying the Robbins factors).
In this case, there is no compelling reason to grant relief from the stay to allow Altis to proceed with its litigation in California as to the alleged pre-petition breaches. The issues in the lawsuit involve both bankruptcy and non-bankruptcy law — the latter being primarily the duties that Qimonda may have had as a joint venturer, under the JDAs; the former, being the effect, if any, of the March 11th Sale Order, and whether effective relief can be granted to Altis at this point. This Court can decide both the bankruptcy and non-bankruptcy issues in connection with the determination of Altis’s rejection claim.
With respect to the second factor, the Court does not see any judicial economy in lifting the automatic stay. Further, if the litigation were allowed to proceed, the Court sees a very real possibility of interference with the administration of this bankruptcy case.
Most importantly, Altis has not even proffered any method by which the assets of the Debtor within the United States can be protected. Even if Altis were to obtain a judgment against the Debtor, collection would be stayed as to assets of the Debtor within the United States, under Section 1521(a)(2). See also Bellini Imports, 944 F.2d at 201 (applying the same principle under 11 U.S.C. § 362(a)(3) and (4)). Altis has not met its burden of showing how the *898assets of the Debtor within the United States would be protected if the litigation were allowed to proceed. Altis’s Motion for Relief from the Automatic Stay will be denied as to any pre-petition breaches of the JDAs or alleged pre-petition breaches of fiduciary duty.9
B. Post-Petition Breaches.
Finally, Altis’s Complaint alleges post-petition breaches of the JDAs and/or post-petition breaches of Qimonda’s fiduciary duties as a joint venturer. Rejection of an executory contract gives rise to a claim for a breach, which as noted, is effective as of the petition date. Just because a contract is rejected, however, does not give the debtor license to engage in postpetition breaches of the contract, nor as in this case, alleged breaches of fiduciary duties, to the detriment of its counter-party. See Sunbeam Prods., Inc. v. Chi. Am. Mfg., LLC, 686 F.3d 372, 377 (7th Cir.2012) (Upon rejection, “[t]he debtor’s unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights of the other contracting party have been vaporized”);10 In re Phillips, 2010 WL 3041968 (W.D.Wash.2010) (“Rejection frees the estate from the obligation to perform (in this case, to pay insurance premiums), but it does not nullify, invalidate, cancel, or rescind the contract, and it does not eliminate any claims or defenses that the debtor had with regard to the contract.”); In re Prentice, 2012 WL 1801711 (Bankr.E.D.Mich.2012) (“rejection did not (contrary to Debtor’s position) perforce render [a] non-complete clause void or unenforceable”); In re IndyMac Bancorp, Inc., 2012 WL 1037481 (Bankr.C.D.Cal.2012) (“Beyond creating a breach and yielding a claim against the estate, rejection does not substantively affect the contract — it is not terminated, vaporized, or otherwise cancelled.”) In the unusual circumstances of this case, where the non-debtor counterparty is alleging post-petition breaches of the duties arising out of the JDAs, which according to Altis’s allegations are resulting in continuing harm, the rejection of the JDAs does not cut off Altis’s rights entirely.
The Court will grant Altis’s Motion for Relief from the Automatic Stay with respect to establishing liability, if any, and the fixing of damages, if any, arising out of the alleged postpetition breaches of the JDAs and/or post-petition breaches of fiduciary duty. Again, this does not mean that Altis can proceed on a theory that it was harmed post-petition by a pre-petition breach. Rather, Altis can proceed to the establishment of liability and damages based solely on breaches actually occurring post-petition.11
Pursuant to 11 U.S.C. § 1521(a)(2) (which provides that the Court can stay *899execution against the debtor s assets to the extent not stayed under Section 1520(a)), Altis will not be entitled to enforce any judgment it obtains against assets of the Debtor located within the territorial jurisdiction of the United States, without first being granted relief from the automatic stay. Whether any award of damages rises to the level of an administrative expense will be determined either by this Court, or by the German Court, at a later date.
CONCLUSION
For the foregoing reasons, the Court will order that: (1) Altis’s lawsuit against Qimonda, insofar as it alleges pre-petition breaches of the JDAs, and/or pre-petition breaches of confidentiality, is a violation of the automatic stay under 11 U.S.C. § 362(a)(1), and will be enjoined (or alternatively, will be enjoined pursuant to 11 U.S.C. § 1521(a)(1)); (2) Altis’s request that the District Court declare the sale to Adesto “void” is an impermissible collateral attack on this Court’s March 11th Order, and will be enjoined; (3) Altis will be enjoined from seeking relief under Paragraph 2 of its Prayer for Relief, that the “Defendants be enjoined from selling or licensing any intellectual property co-owned with Altis through [the parties’] joint development relationship to the detriment of Altis,” as being an impermissible attempt to exercise control over property of the debtor within the territorial jurisdiction of the United States under 11 U.S.C. § 1520(a)(1); (4) Altis’s Motion for relief from the automatic stay will be granted in part, as to any alleged post-petition breaches of the JDAs and/or alleged violations of fiduciary duty. Pursuant to 11 U.S.C. § 1521(a)(2), Altis will not be permitted to collect any judgment as to assets of the debtor located within the territorial jurisdiction of the United States, absent further Order of this Court. Whether or not such post-petition claims rise to the level of administrative expenses will have to be determined by either the German Court or this Court; and (5) the Altis lawsuit is not a violation of the stay as to Qimonda Licensing, and the Court will decline to extend the stay as to Qimonda Licensing. A separate Order shall issue.
. This decision is presently on appeal to the United States Court of Appeals for the Fourth Circuit. On December 19, 2011, Judge Mitchell of this Court denied the Foreign Representative’s Motion for certification of a direct appeal to the Fourth Circuit pursuant to 28 U.S.C. § 158(d)(2). In re Qimonda AG, 462 B.R. 165 (Bankr.E.D.Va.2011). However, on May 7, 2012, the District Court ruled that it would certify the appeal directly to the Fourth Circuit. Jaffe v. Samsung Elecs. Co. (In re Qimonda AG), 470 B.R. 374 (E.D.Va.2012).
. For purposes of this Memorandum Opinion, the terms "Foreign Representative,” "Insolvency Administrator” and "Dr. Jaffé” are used interchangeably. Similarly, the terms "Debtor” and "Qimonda” (but not Qimonda Licensing) are used interchangeably.
. Qimonda North America, or QNA, is the subject of a Chapter 11 proceeding in Delaware. No relief is sought in this Court with respect to QNA. Qimonda Motion, Docket No. 673, at n. 1.
. For reasons unknown to the Court, Altis has chosen not to include Adesto as a party in this lawsuit.
. The dealers have since taken up the fight in the Court of Federal Claims, asserting that the rejection of their dealer contracts constituted a taking by the government without just compensation. The Court has denied the government's motion to dismiss asserting that the bankruptcy court rulings were res judicata of the takings claims. Colonial Chevrolet Co., Inc. v. U.S., 103 Fed. Cl. 570 (Fed.Cl.2012), certified in part for interlocutory appeal, 106 Fed.Cl. 619, 2012 WL 3590526 (Fed.C1.2012).
. The conclusion that Altis’s lawsuit represents an impermissible collateral attack on the Sale Order is reinforced by Altis’s argument that "[t]he sale of the Patents at Issue was the critical act of the Debtor and its affiliates that harmed Altis. Indeed, had the Administrator not consummated the sale of the Patents at Issue to Adesto, per the terms of the Non-Disclosure Agreement between QAG and Adesto attached to the Motion, Altis would not have been harmed.” Altis Opposition, at 11.
. The Court recognizes the tension between Carbonell, which extended the protection of the automatic stay to a foreign, non-debtor subsidiary, and Vitro, which did not (both cases involved Mexican debtors and their subsidiaries).
. The Vitro case is currently on direct appeal to the Fifth Circuit. In re Vitro, SAB, De C.V., 2012 WL 2367161 (Bankr.N.D.Tex.2012).
. To be clear, this denial of Altis's Motion for Relief from the Automatic Stay as to pre-petition breaches includes the denial of Altis’s Motion, and the continuation of the stay, as to any allegation that Altis was harmed post-petition as a result of a pre-petition breach. See Grady, 839 F.2d at 203 (adopting the conduct test, for contingent claims).
. The Court also recognizes the tension between the Sunbeam Products decision and the Fourth Circuit’s decision in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir.1985). Sunbeam Products is cited above solely for the proposition that the executory contract is not "vaporized.”
.For the reasons stated above, the Court also finds that the Barton doctrine has been satisfied as to the establishment of liability and damages for any alleged post-petition breaches of confidentiality. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495347/ | MEMORANDUM OPINION
JANET S. BAER, Bankruptcy Judge.
Most requests to avoid judicial liens focus on whether those hens may be validly avoided. This matter presents the less common issue of when a judicial lien can be avoided. Debtors Phillip and Noreen Harris (the “Debtors”) have moved to avoid the judicial hen of United Credit Union (the “Creditor”). The Creditor admits that the hen may be avoided but contends that it need not release the hen unless and until the Debtors complete their chapter 13 plan and receive a discharge. For the following reasons, the Debtors’ motion will be granted, but the hen will be avoided only after entry of the Debtors’ discharge.
I. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (0). Venue is properly placed in this Court pursuant to 28 U.S.C. § 1409(a).
II. FACTS AND BACKGROUND
The pertinent facts, drawn from the parties’ pleadings, the exhibits to the pleadings, and the Court’s docket, are few and undisputed:
1. On March 27, 2012, the Debtors filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code. (Debtors’ Mot. ¶ 4; Creditor’s Resp. ¶ 4.)
2. At the time of the filing, the Debtors owned homestead property located at 2601 E. 92nd Street in Chicago, *901Illinois (the “Subject Property”). (Bankr.Docket No. 1, Sch. A.)
3. Pursuant to Zillow, the Subject Property is valued at $144,300. (Debtors’ Mot. ¶ 9 & Ex. C.) The Creditor does not dispute this valuation figure.
4. As of the petition date, the Subject Property was encumbered by a mortgage with a principal balance of $164,957. (Id. at ¶ 10.)
5. On their schedule C, the Debtors claimed a homestead exemption, pursuant to 11 U.S.C. § 522(b)(3) and 735 Ill. Comp. Stat. 5/12-901 (West 2010), in the amount of $15,000 with respect to the Subject Property. (Bankr.Docket No. 1, Sch. C; Debtors’ Mot. ¶ 8 & Ex. B.)
6. About nine months before the filing of the bankruptcy case, the Creditor was awarded a monetary judgment in the amount of $10,732.12 against debtor Noreen Harris. (Debtors’ Mot. ¶ 5 & Ex. A; Creditor’s Resp. ¶ 2.)
7. The subsequent filing of the judgment with the Office of the Cook County Recorder of Deeds fixed a lien on the Subject Property. (Debtors’ Mot. ¶ 6; Creditor’s Resp. ¶ 3.)
8. The payoff balance owed to the Creditor at the time of the bankruptcy filing was $7,425.25. (Creditor’s Resp. ¶ 5.)
9. On July 30, 2012, the Debtors filed a motion to avoid the Creditor’s lien. (Bankr.Docket No. 32.) About two months later, on September 25, 2012, the Creditor filed a response to the motion, conceding that the lien at issue is a judicial lien that may be avoided but arguing that the Creditor is not required to release the lien until the Debtors have completed their chapter 13 plan and obtained their discharge. (Bankr.Docket No. 37.)
III. DISCUSSION
The Debtors seek to avoid the Creditor’s lien pursuant to section 522(f)(1)(A) of the Bankruptcy Code.1 That statute provides, in pertinent part, that “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled ... if such lien is ... a judicial lien[.]” 11 U.S.C. § 522(f)(1)(A). To avoid a lien under section 522(f)(1)(A), a debtor must prove that: (1) the lien sought to be avoided is a judicial lien; (2) the lien impairs an exemption that the debtor has claimed and to which the debtor would have otherwise been entitled; and (3) the debtor has an interest in the property. Id.; In re Moreno, 352 B.R. 455, 458 (Bankr.N.D.Ill.2006).
There is no dispute that all three elements have been met for the avoidance of the lien here, and, in fact, the Creditor admits that the lien is a judicial lien that can be avoided under section 522(f)(1)(A). The Creditor argues, however, that the Debtors are not entitled to avoid the lien before receiving a discharge. The only issue before the Court, then, is whether lien avoidance under section 522(f) is effective immediately or whether it must be conditioned on completion of the Debtors’ chapter 13 plan and the subsequent entry *902of discharge in the case pursuant to section 1328(a).2
Courts addressing this question have reached different conclusions about when section 522(f) lien avoidance is effective, and there is no binding case law in the Seventh Circuit on the issue. A majority of courts, however, hold that lien avoidance under section 522(f) is not effective until the debtor completes his plan and receives a discharge and, thus, condition section 522(f) orders releasing liens on the issuance of discharge. See In re Prince, 236 B.R. 746, 750-51 (Bankr.N.D.Okla.1999); In re Stroud, 219 B.R. 388, 390 (Bankr.M.D.N.C.1997); see also In re Mulder, No. 810-74217-reg., 2010 WL 4286174, at *2-3 (Bankr.E.D.N.Y. Oct. 26, 2010) (recognizing the majority view but disagreeing with it).3
Courts that condition the avoidance of judicial liens on the issuance of discharge explain that doing so ensures that creditors’ interests are protected. Stroud, 219 B.R. at 390. The majority acknowledges that section 349(b)(1)(B) provides creditors with some protection by mandating that a judicial lien be reinstated upon dismissal of a bankruptcy case. Prince, 236 B.R. at 749-50; Stroud, 219 B.R. at 390. That statute provides, in relevant part, that “[u]nless the court, for cause, orders otherwise, a dismissal of a case ... reinstates ... any transfer avoided under section 522....” 11 U.S.C. § 349(b)(1)(B).
Although section 349(b)(1)(B) protects creditors by reinstating their liens upon dismissal of a case, the statute does not provide creditors with absolute protection. Instead, it “undoes the bankruptcy case only ‘as far as practicable.’ ” Mulder, 2010 WL 4286174, at *3 (quoting H.R.Rep. No. 95-595, at 338, 95th Cong., 1st Sess. (1977), 1978 U.S.C.C.A.N. 5963, 6924). If a debt- or has sold encumbered property to a third party, for example, the reinstatement provided under section 349(b)(1)(B) becomes meaningless. Stroud, 219 B.R. at 389. A creditor in such a situation will suffer “irreversible harm” in trying to “reattach the lien” or “be left with no security in which to satisfy [its] claim” upon dismissal of a *903chapter 13 case. Id. at 390; see also Potter, 2001 WL 36159722, at *4 (requiring entry of a discharge order prior to entry of a lien avoidance order “[i]n order to ensure that the operation of § 349(b)(1)(B) is not impaired and the subject property is not irreparably compromised during the pen-dency of th[e] case”).
In addition to section 349(b)’s failure to provide creditors with complete protection, the practical application of reinstating a lien under the statute is burdensome and fraught with problems. “One c[an] argue that § 349(b)(1)(B) is self-effectuating in nature” and that, if a case is dismissed, the avoidance of a lien is automatically invalidated. Prince, 236 B.R. at 749. “While such a proposition is theoretically correct ..., its practical application is problematic. Once a lien upon real estate has been avoided, and the order of avoidance made part of the appropriate real estate records, the reversal of the lien avoidance is akin to unringing a bell.” Id. at 749-50.
In addressing these concerns in a case with facts similar to those in the instant matter, the Stroud court granted the chapter 13 debtors’ motion to avoid the creditor’s judicial lien, provided that the debtors obtained a discharge in the bankruptcy. Stroud, 219 B.R. at 390-91. The court ordered that if the property at issue were sold during the chapter 13 case, the trustee was to hold the proceeds of the sale in escrow pending the debtors’ successful completion of the plan. Id. at 391. If the debtors completed their plan, then the trustee would give those proceeds back to the debtors. Id. If the debtors did not complete their plan, then the creditor’s lien on the property would be transferred to the net proceeds of sale. Id. The court also directed that upon entry of an order of discharge in the case, the debtors were to attach a certified copy of the discharge order to a certified copy of the order avoiding the lien and file the two orders together in the Office of the Clerk of Superior Court in the appropriate county. Id.
The Prince court reached the same decision and entered a similar order. “[T]o ensure that the operation of § 349(b)(1)(B) [wa]s not impaired,” the court required that the order of lien avoidance not be entered upon the real estate records relating to the homestead before the entry of an order of discharge in the case. Prince, 236 B.R. at 750. Accordingly, the court granted the motion to avoid the judicial lien but ordered that the debtors wait to file it “unless and until they receive an order of discharge.” Id. at 750-51. The court further ordered that the debtors were “prohibited from transferring or encumbering” the subject property unless either they received a discharge or “th[e] [c]ourt enter[ed] a specific order authorizing said sale or encumbrance.” Id. at 751. The court noted the “limited nature” of its decision, explaining that, in most cases, motions to avoid liens are “routinely granted” and orders avoiding the liens entered prior to entry of discharge orders. If, however, “a creditor objects to the entry of an order of lien avoidance prior to discharge,” the court said, “it must file a written resistance to [the] motion seeking lien avoidance.” Id. at 750.
In contrast to the majority view, a minority of courts find that section 522(f) lien avoidance “cannot be made subject to any subsequent event.” Mulder, 2010 WL 4286174, at *3; see also In re Ferrante, No. 09-13098/JHW, 2009 WL 2971306, at *4 (Bankr.D.N.J. Sept. 10, 2009) (stating that “an order for § 522(f) lien avoidance may be effected immediately, and may not be conditioned upon the debtor’s successful achievement of a discharge”). These courts note that nothing in the Code suggests that section 522(f) lien avoidance “is *904anything other than immediate.” Mulder, 2010 WL 4286174, at *4. They explain that if a debtor moves for lien avoidance on the ground that the lien impairs his exemption under section 522(f), creditors are afforded sufficient protection under section 349(b). Id. at *2; Ferrante, 2009 WL 2971306, at *4. According to the minority, that section “was not intended to function as a limitation on any section of the Bankruptcy Code while the case is pending.” Mulder, 2010 WL 4286174, at *3. Faulting the majority for equating discharge (which does not trigger section 349) with dismissal (which does trigger section 349), the minority points out that failure to receive a discharge does not go “hand in hand with dismissal of a case,” explaining that there are “fact[ual] scenarios under which a case may be closed without a discharge but not ‘dismissed.’ ” Id. at *2-3. Although the minority position acknowledges that the practical problems faced by creditors who seek to reinstate liens are “real and appropriate,” those courts maintain that such concerns “do not overcome the statutory framework by which property exempted by the debtor without timely objection is exempt and available for the debtor’s use ... without regard to the issuance of a discharge.” Ferrante, 2009 WL 2971306, at *5.
Having considered both sides of the issue, the Court agrees with the majority and concludes that, in light of the Creditor’s objection, lien avoidance in this case must be conditioned on the Debtors’ completion of their chapter 13 plan and the granting of a discharge in order to ensure that the Creditor’s interests are protected. The Debtors are entitled to a fresh start, but only after they have completed their plan and received a discharge. See Stroud, 219 B.R. at 390; Potter, 2001 WL 36159722, at *4. Accordingly, the Court holds that the judicial hen here may be avoided, provided that the Debtors make all of their plan payments and obtain a discharge in the bankruptcy case. The lien avoidance order, entered concurrently with this Memorandum Opinion, shall not be filed in the real estate records relating to the Subject Property until an order of discharge has been entered in the case, and the Creditor need not release its lien until then. The Debtors are prohibited from transferring or encumbering the Subject Property unless either they receive a discharge or the Court enters a specific order authorizing such sale or encumbrance.
In so ruling, the Court echoes the Prince court’s caveat about the limited nature of this decision. Motions to avoid liens will continue to be routinely granted by the Court, with corresponding orders entered prior to entry of discharge, unless creditors submit “written resistance” to such motions.
IV. CONCLUSION
For the foregoing reasons, the Debtors’ motion to avoid the Creditor’s judicial lien is conditionally granted, provided that the Debtors complete their chapter 13 plan and obtain a discharge in the bankruptcy. A separate order will be entered consistent with this Memorandum Opinion.
. Unless otherwise noted, all statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101 to 1532.
. Section 1328(a) provides, in relevant part, that "as soon as practicable after completion by the debtor of all payments under the plan, ... the court shall grant the debtor a discharge of all debts provided for by the plan[.]” 11 U.S.C. § 1328(a).
. Courts deciding lien avoidance issues in other contexts have agreed with the majority’s conclusion. See, e.g., Lantzy v. Rojas (In re Lantzy), BAP No. CC-10-1057-KiLPa, Bankr. No. 08-20561-KT, 2010 WL 6259984, at *4 (9th Cir. BAP Dec. 7, 2010) (stating that " 'a lien strip under § 522(f), which is very similar to the valuation and stripping of a consensual lien, is not final until discharge’ "); Victorio v. Billingslea, 470 B.R. 545, 554 (S.D.Cal.2012) (noting in the context of stripping a wholly unsecured junior lien in a chapter 20 case that "lien avoidance ... does not become permanent until the debtor completes all payments under the plan and receives a discharge”); In re King, 290 B.R. 641, 651 (Bankr.C.D.Ill.2003) (explaining that "the lien — avoiding effect of the confirmed plan [at issue], while established at confirmation, is contingent upon a discharge pursuant to Section 1328”); Potter v. Mortg. Lenders Network, USA (In re Potter), Bankr. No. 00-10595, Adv. No. 01-01031, 2001 WL 36159722, at *4 (Bankr.D.Vt. Sept. 21, 2001) (granting the debtors’ summary judgment motion avoiding a mortgage lien but requiring that the lien avoidance order "provide that it shall not be entered upon the real estate records relating to the subject property until an order of discharge has been entered in th[e] bankruptcy case”); Lee Servicing Co. v. Wolf (In re Wolf), 162 B.R. 98, 109 (Bankr.D.N.J.1993) (stating that if "the debtors do not complete all payments required by the plan, they are not entitled to have any liens cancelled of record, any more than they are entitled to a discharge under Code section 1328. Otherwise, the debtors might not have sufficient incentive to complete the plan payments after the liens are cancelled.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495740/ | MEMORANDUM OPINION AND ORDER DISMISSING THE ADVERSARY PROCEEDING PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6)
MARTIN GLENN, Bankruptcy Judge.
Pending before the Court in this adversary proceeding are two motions: the Motion To Dismiss Adversary Proceeding Pursuant to Bankruptcy Rule 7012(b)(6) by Defendants Susan Turner and Mortgage Electronic Registration Systems, Inc., (“Non-Debtors’ Motion,” ECF Doc. # 12) and Debtors’ Motion for Dismissal of Adversary Proceeding Pursuant to Bankruptcy Rule 7012(b)(6) and FRCP 12(b)(5), and (6) or, in the Alternative, Permissive Abstention Pursuant to 28 U.S.C. § 1884(c)(1) (“Debtors’ Motion,” ECF Doc. # 13, and together with the Non-Debtors’ Motion, the “Motions”).
GMAC Mortgage, LLC (“GMACM”) and Executive Trustee Services, LLC (“ETS,” and together with GMACM, the “Debtor Defendants”), each a debtor and debtor in possession in the above-captioned chapter 11 cases (collectively with all affiliated debtors and debtors in possession, the “Debtors”), and Defendants Susan Turner (“Turner”) and Mortgage Electronic Registration Systems, Inc. (“MERS,” and together with Turner, the “Non-Debtor Defendants”) seek dismissal of the Adversary Complaint. In support of the Debtors’ Motion, the Debtor Defendants submit the Declaration of Erica Richards, dated March 6, 2013 (the “Richards Deck,” ECF Doc. # 13, Ex. 1). The Court held a hearing in consideration of the Motions on March 21, 2013.
For the following reasons, the Court GRANTS the Motions and orders that Judgment be entered in favor of Defendants dismissing the Complaint with prejudice.
I. BACKGROUND
A. The Foreclosure Proceeding
On May 2, 2009, Amerigroup Mortgage Corporation (“Amerigroup”) originated Plaintiffs’ mortgage loan in the amount of $175,950.00. The loan is evidenced by a promissory note (the “Note”) secured by real property located at 6109 Bridgewood Drive, Killeen, Texas 76549 (the “Property”) pursuant to a deed of trust (the “Deed of Trust”) executed contemporaneously with the Note. On or about June 6, 2012, Amerigroup assigned the Deed of Trust to GMACM. Plaintiffs defaulted on the Note and, after GMACM initiated a non-judicial foreclosure proceeding, the Property was sold at a foreclosure sale on August 7, 2012.
B. The Plaintiffs’ Bankruptcy Cases
On August 7, 2012, the same day as the foreclosure sale, Mr. Kimber filed a chapter 13 petition in the Texas Bankruptcy Court for the Western District of Texas *492(the “Texas Bankruptcy Court,” Case No. 12-11803). On September 10, 2012, the Texas Bankruptcy Court entered an order for summary dismissal of the case for failure to timely file a plan and/or schedules. The Case was closed on November 29, 2012.
On October 8, 2012, Plaintiffs filed a joint petition chapter 13 petition, again in the Texas Bankruptcy Court (Case No. 12-61074 (CAG)). On November 20, 2012, Plaintiffs initiated an adversary proceeding in the Texas Bankruptcy Court (the “Texas AP,” Adv. Proc. No. 12-6040 (CAG)) against the following defendants: GMACM; Amerigroup; Transcontinental Title Co.; MERS; Turner; Anh P. Nguyen; ETS; Pite Duncan, LLP; Gabrial Ozel; Raye Mayhorn; Realty Executives of Killeen, Inc.; Sol Jessy Lockhart; and Alarcon Law Group P.C. (collectively, the “Texas AP Defendants”). The Texas AP complaint asserts claims for: (a) violation of the automatic stay in Mr. Kimber’s first bankruptcy case (Count I); (b) avoidance of defective deed of trust (Count II); (c) declaratory relief (Count III); and (d) turnover (Count IV). See Texas Complaint, attached as Exhibit A to the Richards Decl.
In response to a motion to dismiss filed by the Texas AP Defendants, the Texas Bankruptcy Court entered an order on February 21, 2013. (“First Texas Order,” Adv. Proc. No. 12-6040(CAG), ECF Doc. #41.) The First Texas Order dismissed with prejudice all claims against Turner and MERS (the “Non-Debtor Defendants”). First Texas Order ¶ 1. Additionally, the First Texas Order dismissed with prejudice all claims against GMACM and ETS, the Debtor Defendants, except Count I (violation of the automatic stay). Id. ¶¶ 2-3. In order for Plaintiffs to proceed with the sole surviving claim against the Debtor Defendants, the First Texas Order required Plaintiffs to file an amended complaint by March 6, 2013. Id. ¶4. The Plaintiffs failed to amend their complaint by the deadline. The Texas AP was closed on March 8, 2013, and the Texas Bankruptcy Court entered an order dismissing Count I with prejudice on March 19, 2013. (“Second Texas Order,” Adv. Proc. No. 12-6040(CAG), ECF Doc. # 46, and together with the First Texas Order, the “Texas Orders.”)
C. The Adversary Proceeding Before This Court
On May 14, 2012 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in this Court. The Debtors are managing and operating their businesses as debtors in possession pursuant to Bankruptcy Code sections 1107(a) and 1108. Their chapter 11 cases (collectively, the “Bankruptcy Case”) are being jointly administered pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). (Case. No. 12-12020 (MG), ECF Doc. #59.)
On November 26, 2012, Plaintiffs filed the Complaint initiating the instant Adversary Proceeding, and on November 29, 2012, a summons and notice of pretrial conference was issued. In the Complaint, Plaintiffs assert claims that are identical to those previously asserted in the Texas AP against the same Defendants. In particular, Plaintiffs claim that Defendants violated the automatic stay in Mr. Kimber’s first bankruptcy case by selling the Property in foreclosure (Count I). Plaintiffs allege that the Deed of Trust is defective and should be avoided because the signature on the assignment by Turner is fraudulent and the Deed was not perfected (Count II). Plaintiffs seek declaratory relief from this Court stating that the Deed of Trust, *493Assignment and the asserted lien in the Property are void (Count III). Last, Plaintiffs seek a turnover of the market value of the Property to Plaintiffs’ bankruptcy estate (Count IV). The Complaint requests that the bankruptcy court enter judgment in favor of Plaintiffs on all of the claims asserted in the Complaint. Other than the language included in the prayer for relief, requesting that the bankruptcy court enter judgment in favor of Plaintiffs, the Complaint otherwise fails to comply with Local Bankruptcy Rule 7008-1 which requires that the Complaint “shall contain a statement that the pleader does or does not consent to the entry of final orders or judgment by the bankruptcy judge if it is determined that the bankruptcy judge, absent consent of the parties, cannot enter final orders or judgment consistent with Article III of the United States Constitution.” To the extent that any claim in the Complaint is a non-core claim, the moving parties have explicitly consented to this Court’s entry of a final judgment dismissing or preserving those claims. Non-Debtors’ Mot. at 1, Debtors’ Mot. ¶ 3.
The Defendants filed their respective Motions on March 6, 2013. The Motions seek dismissal of the Complaint under Rule 12(b)(5) for insufficient service of process,1 Rule 12(b)(6) for failure to state a claim upon which relief may be granted, and the judicial doctrines of collateral es-toppel 2 and res judicata. Plaintiffs did not respond to the Motions or appear at the hearing on the Motions.
II. DISCUSSION
A. Authority to Enter Final Judgment
Count I of the Complaint alleges that Defendants violated the automatic stay created by the Bankruptcy Code, so the claim is a core matter over which the bankruptcy court may enter final judgment. 28 U.S.C. § 157(b). Other claims included in the Complaint appear to be non-core claims, but that issue need not be completely resolved. If a matter brought before the bankruptcy court is non-core, “the parties may consent to entry of a final order or judgment by a bankruptcy judge.” Executive Sounding Board Assocs. Inc. v. Advanced Machine & Engineering Co. (In re Oldco M Corp.), 484 B.R. 598, 605 (Bankr.S.D.N.Y.2012) (citing Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 2606, 2609, 180 L.Ed.2d 475 (2011)); 28 U.S.C. § 157(c)(2). Here, the defendants expressly consented to the Court entering final orders or judgment. Since filing the Complaint, the Plaintiffs have not appeared or filed any additional pleadings. While the Plaintiffs did not comply with Local Bankruptcy Rule 7008-1, they did expressly request that the Court enter judgment in their favor on all of the claims in the Complaint. Under these circumstances, the Court concludes that the Plaintiffs likewise consented to the Court entering final orders or judgment in this case.
*494B. Legal Standard
Bankruptcy Rule 7012 incorporates by reference Rule 12(b)-(i) of the Federal Rules of Civil Procedure (the “Rules”). Fed. R. Bankr.P. 7012(b). A party may move to dismiss a cause of action based on the complaint’s “failure to state a claim upon which relief can be granted.” Fed. R.CivP. 12(b)(6). Rule 8(a)(2) requires a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.CivP. 8(a)(2).
Following the Supreme Court’s decision in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), courts use a two-prong approach when considering a motion to dismiss. See L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430 (2d Cir.2011); Harris v. Coleman, 863 F.Supp.2d 336, 340 (S.D.N.Y.2012); Bektic-Marrero v. Goldberg, 850 F.Supp.2d 418, 425 (S.D.N.Y.2012); King County, Wash. v. IKB Deutsche Industriebank AG, 863 F.Supp.2d 288, 297 (S.D.N.Y.2012), reh’g denied, 863 F.Supp.2d 317 (S.D.N.Y.2012). First, the court must accept all factual allegations in the complaint as true, but should ignore legal conclusions clothed in factual garb. Iqbal, 556 U.S. at 677-79, 129 S.Ct. 1937; L-7 Designs, 647 F.3d at 430; Boykin v. KeyCorp, 521 F.3d 202, 204 (2d Cir.2008). Second, the court must determine if these well-pleaded factual allegations state a “plausible claim for relief.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. The only allegations that may survive a motion to dismiss are those that cross “the line between possibility and plausibility of entitle[ment] to relief.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quotations omitted).
Whether entitlement to relief is plausible “depends on a host of considerations: 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.” L-7 Designs, 647 F.3d at 430. Courts do not make plausibility determinations in a vacuum; it is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 663-64, 129 S.Ct. 1937. A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 663, 129 S.Ct. 1937. Complaints drafted by pro se plaintiffs are to be construed liberally, but they must nonetheless be supported by specific and detailed factual allegations sufficient to provide the court and the defendant with “a fair understanding of what the plaintiff is complaining about and ... whether there is a legal basis for recovery.” Iwachiw v. New York City Bd. of Elections, 126 Fed.Appx. 27, 29 (2d Cir.2005) (citations omitted).
C. The Doctrine of Res Judicata Requires That the Action Be Dismissed
Courts in this District have dismissed a complaint under Rule 12(b)(6) based on an affirmative defense, such as res judicata, otherwise known as claim preclusion. See Cost v. Super Media, 482 B.R. 857, 863 (S.D.N.Y.2012) (dismissing district court action against employer because plaintiffs proof of claim in employer’s previous chapter 11 case was expunged); Dellutri v. Village of Elmsford, No. 10 Civ. 01212(KMK), 2012 WL 4473268, at *4-5 (S.D.N.Y. Sept. 28, 2012). “Under the doctrine of res judicata ... [a] final adjudication on the merits of an action precludes the parties or their privies from relitigating issues that were or could *495have been raised in that action.” Leather v. Eyck, 180 F.3d 420, 424 (2d Cir.1999) (quoting Rivet v. Regions Bank of La., 522 U.S. 470, 476, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998)).
To determine whether the Texas Orders bar the Plaintiffs from asserting claims in this adversary proceeding, the Court must consider whether (1) the prior decision was a final judgment on the merits; (2) the litigants were the same parties; (3) the prior court was of competent jurisdiction; and (4) the causes of action were the same. Corbett v. MacDonald Moving Services, Inc., 124 F.3d 82, 88 (2d Cir.1997).
Each of those conditions exist in this case and the action is therefore barred by res judicata. The Texas AP and this Adversary Proceeding involve identical parties (factor 2); the Texas Bankruptcy Court and this Court are both courts of competent — -indeed identical — subject matter jurisdiction under 28 U.S.C. § 1334 (factor 3); and Plaintiffs alleged identical claims in both proceedings (factor 4).3
In addition, the Texas Orders amount to a final judgment on the merits (factor 1). Under Bankruptcy Rule 8002, Plaintiffs could have appealed either of the Texas Orders up until fourteen days after their respective entry. Fed. R. BaNKR.P. 8002(a). Not having made an appeal, the Texas Orders are now final.4 In order for a judgment to be on the merits, “[r]es judicata does not require the precluded claim to actually have been litigated; its concern, rather, is that the party against whom the doctrine is asserted had a full and fair opportunity to litigate the claim.” EDP Med. Computer Sys., Inc. v. U.S., 480 F.3d 621, 626 (2d Cir.2007). If a prior action was dismissed under Rule 12(b)(6), such a dismissal is “on the merits, with res judicata effects.” Teltronics Servs., Inc. v. L M Ericsson Telecommc’ns, Inc., 642 F.2d 31, 34 (2d Cir.1981).
The Texas Orders were dismissals on the merits under Rule 12(b)(6). As plaintiffs in the Texas AP, Mr. and Mrs. Kimber had the opportunity to pursue their claims against the Defendants, and the First Texas Order notes that Plaintiffs’ arguments were considered in deciding that motion. The Texas Bankruptcy Court gave Plaintiffs a chance to pursue their sole surviving claim against the Debt- or Defendants, but the court made it clear that the claim would be dismissed unless Plaintiffs amended their complaint. Having attempted and failed to pursue these exact claims against these exact Defendants in Texas Bankruptcy Court, Plaintiffs are estopped from relitigating this action before this Court.
III. CONCLUSION
Having considered the arguments of the moving parties and for the reasons stated above, Debtors’ Motion is GRANTED and Non-Debtors’ Motion is GRANTED. Accordingly, the Court orders that the Complaint be dismissed with prejudice. Counsel for the moving parties shall prepare and submit a Judgment dismissing the Complaint with prejudice without costs.
IT IS SO ORDERED.
. The Plaintiffs have not filed an affidavit of service for the Complaint and Summons, and the Debtor Defendants assert that they have no record of being served, either directly or through counsel or registered agent. Because there are grounds for dismissing the Adversary Proceeding with prejudice, the Court does not address whether the Plaintiffs’ deficient service of the Summons and Complaint creates an alternative ground for dismissal.
. Collateral estoppel is a doctrine that precludes relitigating issues "if those issues were actually litigated and determined in [a] prior action and if their determination was essential to the judgment." Restatement (Second) of Judgments § 17 (1982). The Court finds adequate grounds to dismiss the action based upon res judicata alone and therefore does not reach the issue of collateral estoppel.
. The Court notes that even the same error in paragraph numbering appears at the same point in both complaints. See Texas Complaint, attached as Exhibit A to the Richards Deck, at 11.
. The First Texas Order, entered on February 21, was appealable until March 7, 2013. The Second Texas Order, entered on March 19, was appealable until April 2, 2013. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495741/ | MEMORANDUM OPINION
THOMAS P. AGRESTI, Chief Judge.
INTRODUCTION
This Adversary Proceeding and related objections to exemptions are part of a series of cases informally known to the Court as the “Titus” cases because they all involve certain attorneys who were partners in the former Pittsburgh law firm of *502Titus & McConomy, LLP (“T & M”).1 T & M and some of its partners individually, were sued for breach of a lease agreement by TrizecHahn Gateway, LLC (“Trizec”), which ultimately secured a joint and several judgment against T & M and its partners. Trizec then began pursuing execution on the judgment and some of the partners ended up in bankruptcy, either voluntarily or involuntarily. The issues raised in the Titus cases revolve around allegations of fraudulent transfer in connection with the disposition of the partners’ post-T & M earnings vis-a-vis the Trizec judgment, as well as objections to exemptions.
All of the Titus cases were originally assigned to the Hon. M. Bruce McCullough, and upon his death in late 2010 they were reassigned to the Hon. Bernard Markovitz. Judge Markovitz conducted trials in all of the Titus cases during 2011, including the present matter which was tried on November 30, 2011. Judge Markovitz issued memorandum opinions in two of those cases. See, In re Arbogast, 466 B.R. 287 (Bankr.W.D.Pa.2012), aff'd., 479 B.R. 661 (W.D.Pa.2012) and In re Titus, 467 B.R. 592 (Bankr.W.D.Pa.2012), motion to amend denied by 479 B.R. 362 (Bankr.W.D.Pa.2012). Before he could render decisions in the remaining Titus cases, however, Judge Markovitz retired from the bench and those cases were reassigned to the Undersigned.2
Upon being assigned the Titus cases, the Court was somewhat uncertain as how best to proceed with respect to the matters for which Judge Markovitz had conducted trials, but not yet issued decisions at the time of his retirement. The Court initially thought the matters might need to be retried. However, at a Status Conference held on March 26, 2012, the Parties in the affected Titus cases all consented to the Court making findings of fact and conclusions of law based solely on its review of the pleadings, post-trial briefs, trial transcript and exhibits. See, Order of March 27, 2012, Adv. Doc. No. 121. Pursuant to Fed.R.Bankr.P. 7052, the within Memorandum Opinion sets forth the Court’s findings of fact and conclusions of law as to the pending matters following such review.3
*503For the reasons set forth below, the Court finds in favor of the Trustee as to certain of his claims in the fraudulent transfer action. The Court will also sustain, in part, and overrule, in part, the Objections to exemption made by the Trustee and Trizec.
STATEMENT OF FACTS
One of the Defendants in this case is the Debtor, Thomas C. Wettach, an attorney who at one time was a partner of T & M. The other Defendant is Bette C. Wettach, the wife of the Debtor.
T & M formerly rented office space in a building owned by Trizec. On July 28, 2000, Trizec 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 (hereafter “the Lease Litigation”) on the basis that T & M had breached its lease agreement with Trizec. In addition to T & M itself, Trizec also 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 a joint and several judgment in the Lease Litigation in favor of Trizec and against certain of the defendants, including the Debtor. The base amount of such judgment was approximately $2.7 million. The Lease Litigation judgment was subsequently appealed to the Pennsylvania Superior Court. Although that court affirmed the Common Pleas Court’s decision as to most of the named defendants, it reversed as to the Debtor, finding that he had signed the lease in a representational capacity that protected him from personal liability based on an “absolution clause” in the lease. See, Trizechahn Gateway, L.L.C. v. Titus, 930 A.2d 524 (Pa.Super.2007). That decision was further appealed to the Pennsylvania Supreme Court, which reversed the Superior Court and reinstated the Debt- or’s liability. See, Trizechahn Gateway, L.L.C. v. Titus, 601 Pa. 637, 976 A.2d 474 (2009), reversing in part and remanding.
In the meantime, as the Lease Litigation was ongoing, the Debtor filed a bankruptcy petition under Chapter 7 on October 14, 2005. In Schedule B of his petition, the Debtor listed personal property with a total value of $2,951,000, which may be summarized as follows:
• PNC cheeking account $ 22,000
• Household goods 10,000
• Books and pictures 3,000
• Photography equipment 2,000
• Guardian life ins. policy 135,000
• IRA-IBS Financial Services 1,300,000
• IRA-Merril Lynch 945,000
• Cohen & Grigsby 401(k) pension plan 275,000
• Stocks 150,000
• Loan repayment due 23,000
• Motor vehicles 84,000
• Office equipment 2,500
TOTAL $ 2,951,000
The Debtor claimed all of this property as exempt in Schedule C, most of it on the basis that under Pennsylvania common law it was owned jointly with his wife as en-tireties property, and the rest (the IBS Financial IRA, the Guardian life insurance policy, and the C & G pension plan) on the basis of 42 Pa.C.S.A. § 8214(b) or (c). On Schedule F, the Debtor listed a $3,000,000 *504unsecured claim by Trizec against him, and listed $3,000,000 unsecured claims against him buy each of the other T & M partners who had also been found jointly and severally liable to Trizec in the Lease Litigation.4
On May 16, 2006, Trizec filed precautionary Objections to Debtor’s Exemptions, Doc. No. 46, claiming that it had not yet received its requested documentation concerning the claimed exemptions, and due to an impending deadline, wanted to preserve its right to object. The Chapter 7 Trustee likewise filed an Objection to Debtors’ Exemptions, Doc. No. 47, the next day on a precautionary basis for the same reason. (The two filings will be referred to hereinafter collectively as the “Objections ”). Because of the precautionary nature of the Objections, they did not clearly articulate a basis for objecting to any of the claimed exemptions, merely stating that Trizec and the Trustee were awaiting documentation.
The Trustee commenced a fraudulent transfer adversary proceeding against the Defendants by filing a Complaint on October 15, 2007 (the “Wettach FTA”). The currently operative pleading in the case is an Amended Complaint that was filed on February 14, 2010, Adv. Doc. No. 50. The Amended Complaint contains three counts under the Pennsylvania Uniform Fraudulent Transfer Act (“PaUFTA”), 12 Pa. C.S.A. §§ 5101, et seq. Count I pleads an action for fraudulent transfer with actual intent under 12 Pa.C.S.A. § 5104(a)(1), Count II pleads constructive fraudulent transfer under 12 Pa.C.S.A. § 5104(a)(2)(H), and Count III also pleads constructive fraudulent transfer, this time under 12 Pa.C.S.A. § 5105.5 The Trustee is authorized to pursue the Wettach FTA pursuant to 11 U.S.C. § 544(b)(1), which 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].”
The gist of the Wettach FTA, as set forth in the Amended Complaint, is that the Debtor engaged in fraudulent transfers when, subsequent to the initiation of the Lease Litigation in July 2000, he caused his individual compensation from the law firm of Cohen & Grigsby, P.C. (“C & G”) (where he became a shareholder and *505employee after T & M was dissolved), to be deposited into various accounts and business interests held jointly with his wife as entireties’ property, some of which were then used to acquire other assets. The contention is that such deposits constituted “transfers” under PaUFTA, and that such transfers by the Debtor were fraudulent, either actually or constructively so, because they were made without him receiving a reasonably equivalent value in exchange, and had the effect of shielding the Debtor’s individual compensation from the reach of his individual creditors, such as Trizec, by converting it into entireties’ property.
The Trustee is seeking a variety of relief in the Wettach FTA, stating that he “seeks all remedies available ... pursuant to 12 Pa.C.S.A. § 5107.” A number of specific remedies are listed, including an avoidance of the allegedly fraudulent transfers, an attachment of all fraudulently-transferred assets, an injunction against any further transfers, allowing the Trustee to levy execution on the fraudulently-transferred assets, and a monetary judgment against both the Debtor and Mrs. Wettach for the amount of the transfers to be avoided as fraudulent.
In pursuing the Wettach FTA, the Trustee relies heavily on the decision in In re Meinen, 232 B.R. 827, 840-43 (Bankr.W.D.Pa.1999) for his position that a debt- or’s transfers of his individual compensation into an entireties’ account or other entireties’ property can constitute fraudulent transfers. The Meinen decision and the cases cited therein do indeed generally support the Trustee’s position, provided that such deposited compensation was not then utilized to satisfy reasonable and necessary household expenses for the maintenance of the debtor’s family.
The Defendants initially responded to the Amended Complaint by filing a motion to dismiss, Adv. Doc. No. 50. The Defendants raised a number of arguments in that motion, including an argument that one of the PaUFTA provisions, 12 Pa. C.S.A § 5109, is a statute of repose that would act to eliminate any claim based on a transfer that occurred more than four (4) years prior to the date of the filing of the Wettach FTA, i.e., any transfer made prior to October 15, 2003.6 The Defendants therefore asked for a dismissal with respect to any transfers occurring before that date. Judge McCullough, who was then handling the case, denied the motion to dismiss, with prejudice. He did not set forth his reasoning with respect to the other arguments for dismissal that the Defendants had made, but he did hold as follows with respect to the statute of repose argument:
(b) Irrespective of any potential application to the instant matters of any tolling doctrine vis-a-vis the 4 year limitations period set forth in 12 Pa.C.S.A. 5109, such limitations period, when applied to the instant adversary proceedings regarding Debtors Thomas Wettach and David Cohen, does not operate to bar Plaintiffs avoidance actions to the extent that they pertain to any alleged fraudulent transfers that occurred within the 4-year period that precedes the dates upon which Wettach’s and Cohen’s bankruptcy cases were commenced, In re Cowden, 337 B.R. 512, 522 (Bankr.W.D.Pa.2006)—i.e., § 5109 does not operate to bar such actions respecting debtors Thomas Wettach and David Co*506hen to the extent that such actions pertain to such transfers that occurred between October 14, 2001 and October 14, 2005;
See May 25, 2010 Order, Adv. Doc. No. 59 at Paragraph (b).
Following the denial of their motion to dismiss, the Defendants then filed an Answer to the Amended Complaint The Defendants alleged that the transfers in question were consistent with the historic practice they had followed since the inception of their marriage and denied any fraudulent intent. They also raised several affirmative defenses, including ones related to insolvency, discharge of the Trizec debt as precluding the Wettach FTA, and the statute of repose.
As was indicated above, the Wettach FTA and the Objections were tried jointly on November 30, 2011. In a subsequent post-trial brief, the following summary of the “damages” still being sought by the Trustee in the Wettach FTA and by the Trustee/Trizec in the Objections is provided:
1. Income/Inheritanee Estate of William Wettach $ 66,722.62
2. Guardian Life: increase in cash value 148,581.88
3. C & G severance benefit 16,830.28
4. C & G pension contributions 204,503.28
5. Expenses in excess of necessities, mise, investments 82,500.09
6. Expenses in excess of necessities: entertainmenVtravel 75,476.22
7. Expenses in excess of necessities: auto 134,706.02
8. Expenses in excess of necessities: housing 178,508.21
9. Expenses in excess of necessities: contributions 27,595.62
10. Expenses in excess of necessities: allowances 54,755.00
11. Bank account balances at filing 49,837.67 49,837.67
TOTAL $ 1,040,016.89 7
See Adv. Doc. No. 116 at 13. The post-trial brief does not indicate which of these items are being sought pursuant to the Wettach FTA, and which pursuant to the Objections. It would, of course, have been preferable for that to have been done but the Court will make do with the evidence and argument as presented.
DISCUSSION
A. Legal Principles to be Applied
The Court does not reach its decision in this case in a vacuum. Many of the same legal issues presented here have previously been addressed in other of the Titus cases. See, particularly, the bankruptcy court decision in Arbogast (466 B.R. 287), the affirmance of that decision by the district court (479 B.R. 661), the bankruptcy court decision in Titus (467 B.R. 592), the bankruptcy court decision in Cohen (2012 WL 5360956), and the partial affirmance and partial vacation with remand of that decision by the district court (487 B.R. 615). See also this Court’s decision in Oberdick being released this same date.
All of these cases have resulted in a fairly settled view as to a number of basic legal principles to be applied in deciding matters of the nature presented here. The Court will briefly set forth these underlying principles, before turning to an application of them based on the specific facts of the present case.
*507
A. (1) Transfer of Individual Compensation into Entireties Property
A. (2) Burden of Proof
The essential holding of Meinen, supra, is recognized as the applicable law. That is to say, the deposit or payment of individual debtor compensation into an en-tireties account or other entireties’ property may constitute a fraudulent transfer for purposes of PaUFTA unless such payments or deposits were subsequently spent on “necessities” for the marital unit.8 Both the Debtor and his spouse are deemed to be “initial transferees” of such deposits or payments regardless of whether: (a) she is the one who later spent such deposits; and, (b) that which was purchased with such deposits actually benefit-ted her. Therefore, to the extent that such deposits are determined to constitute fraudulent transfers, the Trustee may obtain a joint and several money judgment against both the Debtor and Mrs. Wettach in the amount of such value, pursuant to § 550(a)(1). See, generally, Arbogast, 466 B.R. at 306-07.
As part of his prima facie case, the Trustee must prove by a preponderance of the evidence that the Debtor caused the transfers in question to be made into an entireties’ account or other entireties’ property. He must also show by a preponderance of the evidence that the Debtor failed to receive reasonably equivalent value in exchange for the transfer of his individual compensation into en-tireties’ property, or, in other words, the Trustee must show that the transferred funds were not used to satisfy necessities or were spent on other assets that are presently held as entireties’ property. See Arbogast, 466 B.R. at 308; Cohen (D.Ct.), 487 B.R. at 622-23. The Trustee must also prove by a preponderance of the evidence that the Debtor was insolvent at the time of the transfers, or was thereby rendered insolvent. Cohen, at 621. The Defendants, however, have the burden of producing at least some useful evidence to demonstrate how they spent the transferred funds, and absent such evidence the trustee will be deemed to have met his burden of proof as to reasonably equivalent value. Cohen, id.
A. (3) Consequence of other Funds Going Into an Account
Because of the nature of an account in which deposits are made from multiple sources, it may not be possible, or at the very least would be difficult, to show what deposits were used for what expenditures. In other words, if deposits into an entire-ties’ account are made up of both a debt- or’s individual compensation, as well as funds from some other source that would not constitute a potential fraudulent transfer (e.g., the spouse’s compensation), it may be impossible to determine what deposit was used for a particular expenditure. When confronted with that reality in Titus, Judge Markovitz therefore concluded that it was as least as likely as not that the “other” deposited funds were used toward any non-necessary expenditures, meaning that the Trustee would have failed to meet his burden to that extent. Titus, 467 B.R. at 624. This, in effect, means that for such other deposits, the Defendants get a dollar-for-dollar reduction against any liability they would otherwise have. While the Court has some reservations about this approach (see the discussion on this point in Oberdick), it *508was approved by the district court in Cohen and will be followed here.
A. (4) Insolvency
The constructive fraudulent transfer statutes upon which the Trustee relies are conditional and do not apply to every transfer. Under 12 Pa.C.S.A. § 5104(a)(2)(ii), the Trustee must show that the Debtor “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.” Under 12 Pa.C.S.A. § 5105, the Trustee must show that the Debtor was insolvent at the time of the transfers, or was rendered insolvent as a result of the transfers. In other words, if the Trustee fails to show the existence of these conditions he cannot prevail even if transfers otherwise within the scope of the statute occurred. It therefore makes sense to first examine whether the Trustee has proven the existence of these conditions, and only then, if necessary, to turn to other questions surrounding the transfers.
The Defendants argue that the Trizec debt itself cannot be counted as a liability of the Debtors for purposes of the PaUFTA insolvency analysis because Trizec’s claim was the subject of a bona fide dispute until June 7, 2006, when a final judgment was rendered in the state court Lease Litigation—a date well after the October 14, 2005 filing of the Debtor’s bankruptcy petition. Similar arguments have been made, and rejected, in the other Titus cases. For instance, as noted in the Oberdick opinion also filed this date, Judge Jeffrey A. Deller of this Court dealt with this very issue in Cohen and concluded that the effective date of the Trizec debt for insolvency purposes was July 2000, when the Lease Litigation was filed. He noted that PaUFTA provides that a “debt” is “liability on a claim”, with claim defined broadly as a “right to payment,” to include even those that are unliquidated, or disputed, or not reduced to judgment. Cohen (B.Ct.), 2012 WL 5360956, at *8. The Court agrees with that conclusion. Since all of the challenged transfers in the present case occurred after the initiation of the Lease Litigation, and since the Debtor acknowledged being aware of the Lease Litigation and that it involved a claim of over $2 million by no later than August 2000, the full amount of the Trizec claim can be counted as a liability of the Debtor’s for insolvency-testing purposes. See Tr. Tran, at 14,1. 22 through 15,1.1.
The Trustee elicited an admission from the Debtor that all of the assets he had listed in Schedule B of his petition were either owned by the entireties or were exempt under non-bankruptcy law, such that, as defined under PaUFTA, he had no assets during the period from 2001 to 2005. See Tr. Tran, starting at 120,1. 17 through 122,1. 23.
Given that the Debtor had a large personal liability during the relevant period of time, in the form of the Trizec claim, and no assets, he was therefore insolvent for purposes of PaUFTA beginning in 2001 and continuing at all relevant times thereafter. Likewise, given the large size of the Trizec liability and his lack of assets, the Debtor believed, or at the very minimum should have believed, that he would incur debts beyond his ability to pay them as they became due. See Cohen (D.Ct.), 487 B.R. at 628.
A. (5) Effect of Discharge of the Trizec Debt
The Debtor in this case has not yet been granted a discharge.9 However, he *509notes that when such discharge is ultimately granted, it will include the Trizec debt because no complaint objecting to the discharge of that debt was ever filed, and it is now too late to do so. This is akin to the argument made by the debtor in Ober-dick, although that debtor was in an even stronger position as to this issue because he had actually already received his discharge by the time of his fraudulent transfer trial. Despite that, the argument was rejected in Oberdick based on the analysis provided by Judge Markovitz in the Titus and Arbogast decisions, which concluded that the pursuit of a fraudulent transfer action by a bankruptcy trustee pursuant to 11 U.S.C. § 544(b)(1) transforms the matter into a bankruptcy cause of action. Because a bankruptcy cause of action can only be brought post-petition, it is necessarily not a pre-petition claim and would therefore not be extinguished by the Debt- or’s discharge. See, Titus, 467 B.R. at 611-12; Arbogast, 466 B.R. at 307. See also, Cohen (D.Ct.), 487 B.R. at 627. The same conclusion applies here; any discharge the Debtor may ultimately obtain would not extinguish his potential liability in this case.
A. (6) Lookback Period
The Defendants argue that any recovery in the Wettach FTA should be limited to transfers that occurred from October 14, 2003 through October 14, 2005. They arrive at this conclusion in the following manner. First, they argue that there is a four year “lookback period” under PaUFTA, pointing to 12 Pa.C.S.A § 5109. They peg the end-date of this lookback period as October 15, 2007, the date the adversary proceeding was filed, and conclude that any transfers occurring before October 14, 2003, must be excluded. Second, they argue that since the bankruptcy petition was filed on October 14, 2005, any income earned by the Debtor after that date was not property of the estate pursuant to 11 U.S.C. § 541(a)(6), so any transfers made after that date cannot be recovered.
The Court agrees that four years is the appropriate lookback period. However, it disagrees that this period should be counted back from the date the adversary proceeding was filed. Rather, the lookback period should be counted back from the date of the bankruptcy filing. See, Cohen (B.Ct.), 2012 WL 5360956, *5. In that case, Judge Deller properly found that a Chapter 7 trustee stands in the shoes of the unsecured creditors of the debtor, and so long as the applicable state law statute of limitations has not expired prior to the *510date the debtor files for bankruptcy, the trustee may bring an avoidance action pursuant to 11 U.S.C. § 544(b), within the time constraints of 11 U.S.C. § 546(a). Judge Deller further noted that under PaUFTA an action to recover a fraudulent transfer must be brought within four years of the date of the transfer. See, 12 Pa. C.S.A § 5109. Under Section 54.6(a) of the Bankruptcy Code, a trustee must bring an avoidance action within 2 years of the filing of the petition.
Applying this same reasoning to the present case leads to the conclusion that when the Debtor’s petition was filed, the statute of limitations under PaUFTA had not yet run with respect to transfers occurring from October 14, 2001 to October 14, 2005. Furthermore, the Trustee acted within the time limit required by Section 546(a) when he filed the adversary proceeding on October 15, 2007.10 Thus, just as in Cohen, here the Trustee stands in Trizec’s shoes and may challenge any transfers the Debtor made from October 14, 2001 to October 14, 2005.
A. (7) Actual Fraud
Although it is not strictly a general legal principle as are those discussed above, it will be convenient at this point in the Opinion to discuss as well the actual fraud claim made by the Trustee in Count I of the Amended Complaint. A similar claim was made in the other Titus eases and the Court here is going to dispose of that claim in just the same manner as has been done in all of those other cases. In short, the Court finds that the Trustee has failed to prove that the Defendants engaged in actual fraud pursuant to 12 Pa. C.S.A. § 5104(a)(1). The reasons for that conclusion, as stated in detail in the Oberdick opinion being issued this date, are equally applicable in the present case, and no purpose would be served by restating them verbatim here. Very briefly, the Court will note that it is relying upon the finding as expressed by Judge Markovitz in Arbogast, after having had the opportunity to personally evaluate the demeanor and credibility of the Defendants, that he found no suggestion of an actual fraudulent intent. The Court’s own, independent review of the record in this case is no different. Thus, only the constructive fraudulent transfers remain in the Wettach FTA, and it is to those, and the Objections, to which the Court now turns.
B. Analysis of the Particular Claims
The Court may now apply the general legal principles as set forth above to the particular facts of this case. As a starting point with respect to the Wettach FTA, the Trustee was required to prove the fact and amount of “transfers” from individual Debtor compensation, into an entireties’ account of the Defendants’, that occurred during the lookback period, previously determined to be from October 14, 2001 to October 14, 2005. This, of course, represents only a “gross” amount, which would be subject to a further reasonably equivalent value analysis, which could include possible downward adjustments to reflect expenditures for necessities, other sources of deposits into the same account, etc. Nevertheless, without a proven gross amount as a place to begin, the Court is hard-pressed to see how any relief can be provided to the Trustee.
The Court notes that the adequacy of the Trustee’s proof as to the gross amount of transfers was not initially raised as an issue by the Defendants when they filed *511their post-trial brief. However, after the Court itself raised this issue in the Ober-dick case, the Defendants filed a Supplemental Post Trial Brief, Doc. No. 144, in which they now argue that there is no evidence in the record regarding the amount of the Debtor’s C & G income that was deposited into the Defendants’ entire-ties’ account during the lookback period, and they say they are not able to agree on such amount.
In Oberdick the Trustee eventually filed a motion to supplement the trial record, seeking to include in the record two additional exhibits that would have provided some considerable clarity as to the amount of Debtor deposits. In a separate Opinion also being issued this date, the Court denies the Trustee’s motion to supplement the record in Oberdick. That denial does not, however, result in a finding that the Trustee in Oberdick failed to prove the essential element of the amount of deposits, although that was an option certainly considered by the Court. Instead, starting with the undisputed fact that deposits had occurred, and albeit with some difficulty in “connecting the dots” that could have easily been avoidable, the Court was able to determine that the Trustee had met his burden of proof with respect to an amount of deposits based solely on the existing trial record.
Just as in Oberdick, the Trustee in the present case appears to have contemplated the introduction of an exhibit at trial to directly establish the amount of deposits that were made into the Defendants’ en-tireties’ account. See the Joint Pretrial Statement, Doc No. 111, listing an Exhibit 23 described as “Schedule of Deposits with source documents Thomas C. Wettach Employment.” Again, just as in Oberdick, the Trustee here failed to introduce that exhibit into the record at trial, and otherwise failed to directly establish the amount of deposits.11 Unlike in Oberdick, the Trustee in the present case has not sought to supplement the trial record. The Court must therefore determine whether on the existing record the Trustee has met his burden of proof in this regard.
The fact of the Debtor’s deposit of his C & G compensation into an entireties’ account is clearly established by the record. See, e.g., Answer to Amended Complaint at ¶¶ 12, et seq. (acknowledging the fact of the deposits, but disclaiming any fraudulent intent or other impropriety in doing so), and affirmative defenses, id. at ¶¶ 51, et. seq. (same). At trial, the Debtor testified as follows:
Q. Okay. And the income you generated in these years [2001 through 2005] was deposited into your joint account at PNC?
A. The firm deposited money into the account.
Q. It was deposited into your account at PNC by your firm, because you directed that they deposit it there. They didn’t do it because they thought it was a good idea. They did it because you directed them to.
A. They asked me how I wanted it done.
Q. And you told them?
A. I agreed, that’s the way I preferred it.
Tr. Tran, at 120, lines 6-15. Although not expressly so stated by the Debtor, the Court finds this to be sufficient as an admission that all of the Debtor’s C & G *512compensation was deposited into the en-tireties’ account, except to the extent that the record may show otherwise.
The total amount of these transfers made during the lookback period is more difficult to determine. The Defendants’ income tax returns for 2001 through 2005 were introduced as exhibits. The testimony of the Defendants established that Mrs. Wettach herself had no, or only de mini-mus, earned income during this period, and made no deposits into the entireties’ account. Tr. Tran, at 119, 1. 12 through 120,1.5; 162, lines 10-12. Thus, the Court concludes that the Trustee has met his burden of proof by showing that the amounts listed on line 7 of the tax returns (wages, salaries, tips, etc.) reflect the individual income of the Debtor that was deposited into the entireties’ account. These amounts are as follows:
2001 $376,358
2002 $202,122
2003 $365,305
2004 $242,597
2005 $216,334
See, Exhibits 10-14.
The returns for 2002 through 2004 are completely within the lookback period and can be added in toto to an overall deposit number. However, the returns for 2001 and 2005 also include time outside the lookback period, and it seems virtually certain that some of the reported income for those years was deposited into the entire-ties’ account outside the lookback period, and some during that period. In the absence of further detail as to when deposits were made during those two years, the Court could handle the returns in a number of ways. One would be to totally disregard any deposits for those years due to too much uncertainty. This seems unduly restrictive in that it ignores the virtual certainty of deposits having been made during the lookback portions of the years in question. Another possibility would be to take a strict pro rata approach and assume deposits were made proportionately throughout the year in question. Under that approach, the Court would And that 21.6%12 of the Debtor’s 2001 income was deposited into the entireties’ account during the lookback period, while 78.4% of his 2005 income was so deposited. This seems overly generous to the Trustee, who after all does have the burden of proof and should feel the consequence of any uncertainty.
The Court finds that if it takes /& of the strict pro rata amounts for the affected two years, that will give it sufficient confidence that the Trustee’s burden has been met.13 That would mean 10.8% of 2001 income, and 39.2% of 2005 income. To sum up, the Court therefore finds that the Trustee has sufficiently proven, that is by a preponderance of the evidence, that deposits totaling $933,472 were made into the Defendants’ entireties’ account at PNC Bank from the individual C & G compensation of the Debtor during the lookback period.
The C & G compensation is not the only possible item of deposits into the PNC entireties’ account that is at issue here. *513The Debtor also acknowledged receiving an inheritance of $66,722.62 from the estate of his father, William Wettach, during the lookback period. Like his compensation from C & G, this would have been individual property of the Debtor, and the Trustee seeks to recover it “to the extent that those amounts were deposited in the joint PNC checking account and drawn from that account for purposes other than necessities.” Trustee Post Trial Brief at 11.
The record discloses some uncertainty as to what was done with the money from this inheritance. The Trustee, relying upon Exhibit 24 and the accompanying “source documents” from which the compilation was made, asserts that a net of $66,722.62 from the inheritance went into the PNC entireties’ account. The Exhibit shows deposits made on May 8, 2002, July 8, 2002, and August 12, 2002 and the source documents, pages from the defendants’ Q Book,14 do indeed seem to confirm such deposits were made. However, the Debtor also gave undisputed testimony that during the 2002-2003 time frame, money was also put into the Defendants’ Merrill Lynch Investment Account, and the source of funds for that was the inheritance he received from the estate of his father. Tr. Tran, at 51, lines 6-15.
Attempting to reconcile these seemingly contradictory assertions, the Court is led to conclude that the most likely explanation is that the inheritance funds were originally deposited into the PNC entire-ties’ account, and then subsequently withdrawn from that account and deposited into the Merrill Lynch Investment Account. Assuming that to be what happened, the Court concludes that the Trustee cannot make a recovery as to these funds because he has voluntarily waived any recovery related to deposits into or withdrawals from the Merril Lynch Investment Account.15 Thus, the Trustee has proven potentially actionable deposits of $933,472 into the PNC entireties’ account during the lookback period, and that serves as the starting point for further analysis by the Court.
The Trustee must next show that the transferred funds were spent on non-necessities, or were used to acquire other entireties’ property still being held as such. It must also be kept in mind that the Defendants had the burden of producing at least some useful evidence to demonstrate how they spent the transferred funds.
B. (1) The PNC Entireties’ Account
The Trustee has identified six broad groupings of expenditures from the PNC entireties’ account that he contends do not qualify as necessities, making them recoverable under PaUFTA. Each of these groupings is discussed below.
B. (1)(a) Miscellaneous Investments
In this category the Trustee identifies expenditures of $82,500 from the en-tireties’ account that were used for what he terms miscellaneous investments. These are itemized in Exhibit 31, which shows a single payment of $2,500 to an entity known as Evoxis, Inc., and three payments totaling $80,000 to an entity *514known as Speed 4 U, LP. The Debtor testified that he owned a 1% interest in Evoxis and that the payment in question represented a voluntary investment by him. Tr. Tran, at 80, 1. 14, et. seq. The Debtor also had an equity interest in Speed 4 U, and the payments to it were also voluntary investments. See id. at 81, line 11, et. seq.
The Court agrees with the Trustee that these payments do not qualify as necessities for purposes of a fraudulent transfer analysis. However, one of the payments in question, $50,000 to Speed 4 U on December 3, 2003, was made not from the PNC entireties’ account, but rather from a Merrill Lynch investment account which the Defendants jointly owned. See, Exhibit 31, p. 4; Tr. Tran, at 82, 11. 8-21. As the Court has previously noted, in his post-trial brief the Trustee has voluntarily discontinued any effort to make recoveries related to deposits or withdrawals from the Merrill Lynch account. See, fn 7, supra. Since this particular payment came from the Merrill lynch account it may not be recovered. Under this category, the Trustee has thus proven by a preponderance of the evidence, $32,500 in non-necessity investment expenditures from the PNC entireties account.
B. (1)(b) Entertainment/Travel
The expenditures in the category of entertainment and travel total $75,476.22 and are itemized in Exhibit 34. Counsel for the Trustee stated that this list was compiled by going through the Defendants “Q books” and two credit card billing records, and pulling from them any expenditures that appeared to be travel or entertainment related, for instance air fare, hotels, and dining. The Debtor was asked at trial if he was able to determine if any of the charges in the exhibit were business related. He testified that he was “pretty sure” that “probably 85 per cent” of the charges were business related. Tr. Tran, at 105, lines 7-14, 22-24. However, he was unable to say whether any specific line item expenditure was or was not business related. The Debtor also testified that of the total amount shown on the exhibit, approximately $27,000 had been reimbursed by clients. Id. at 106, lines 2-5. When asked how he had arrived at that figure, the Debtor stated it had been based on his personal review of the “source documents.” Id. at 107, lines 12-16. The Debtor further testified that the difference of approximately $48,000 between the total expenses shown on Exhibit 34 and what he had been reimbursed by clients was not necessarily non-business related because many of his client expenses were not reimbursed.
Counsel for the Trustee attempted to go through individual items in the list with the Debtor to determine which were business related, but the Debtor said he could not do so because he needed “different documents” than the ones in the Exhibit. When asked what other documents he was referring to, the Debtor said he had source documents that came off the Q Books that showed what he paid. The following exchange then occurred:
Q. All right. So I’m going to presume that while you and Mr. Cooney reviewed this documentation, that you’re going to produce evidence that you’ve just referred to relating to the fact that some of these were business related, and some of those business related expenses were reimbursed.
A. That’s correct.
Tr. Tran, at 108, lines 11-16. The Debtor also testified that he had documents with descriptions of the entries that were not contained in the source documents that had been used to prepare Exhibit 34 and that he (Debtor) would be introducing *515those documents later. Id. at 109, lines 1-7.
The subject of these entertainment/travel expenses never again came up at trial, and in particular, the additional documents which the Debtor had indicated would be introduced to explain the expenses, were not forthcoming. As was discussed above, even though the Trustee has the overall burden of proof, the Defendants have the burden of providing at least some useful evidence to show what transferred funds were spent on, and if they failed to do so the Trustee will be presumed to have met his burden.
The Cohen decision provides the Court guidance as to how this burden of production should be implemented. In that case, the trustee had sought reimbursement for various expenses he claimed were not necessities, including some “unexplained” expenditures. Addressing this aspect of the case, Judge Deller stated:
During trial, the Trustee asked the Debtor whether he could tell the Court what these funds were used to purchase. The Trustee specifically asked the Debt- or, “[i]f I were to ask you to review these nine pages to determine the purpose for which the checks here have been drawn, do you have access this afternoon to information that would enable you to answer that question?” The Debtor responded that he believed the statements were accurate, but could not answer what was purchased with said funds.... This Court therefore finds that the Defendants failed to satisfy their initial burden of producing some evidence regarding what they purchased with the deposited funds....
Cohen (B.Ct.), 2012 WL 5360956, at *13. On appeal, the district court stated that Mr. Cohen had testified that he did not know what the funds in question were specifically used for, but that they were used for necessities. In affirming on this point, the district court held that the bankruptcy court had not committed clear error by affording no weight to this testimony. Cohen (D.Ct.), 487 B.R. at 624.
In the present case, the Defendants at least provided the Trustee with sufficient evidence to show that the expenditures at issue were related to travel. They did not, however, provide evidence — evidence that they acknowledged having in their possession — that would have gone a step further and showed whether particular items of expense were business-related (and therefore likely necessities), or not business-related (and therefore likely non-necessities). The Debtor did testify that he had personally reviewed documentation showing that approximately $27,000 of the expenses in question had been reimbursed by clients, making them clearly business-related. This has the ring of truth and the Court will accept it as a fact. As to the remainder of this category, however, the Court finds the Debtor’s bare assertion that overall probably 85% of the expenses were business-related, to be entitled to no weight, particularly when the Debtor made clear that evidence which could have proven this assertion was readily at hand. Under the circumstances presented, the Court finds that the Defendants failed to meet their burden of production with respect to $48,476.22 of the expenses in this category, and the Trustee will be deemed to have met his burden of proof in this category to that extent.
B. (1)(c) Auto Expenses
In this category, the Trustee is seeking a recovery of $134,706.02 for automobile expenses incurred by the Debtors during the lookback period. Clearly, in this day and locality it would be agreed by virtually everyone that some reasonable level of motor vehicle expense would qualify as a necessity for the typical family. *516See, e.g., Cohen (B.Ct.), 2012 WL 5360956, at *13. The Trustee does not dispute that general principle, but he argues that the Defendants expended “exorbitant amounts” on “high-end” motor vehicles during the lookback period which should not be considered as expenditures for necessities.
The evidence adduced at trial showed that the Defendants owned seven (7) motor vehicles at the time of the bankruptcy filing, this in a household of two people. The Debtor valued them at $12,000 each in his petition, explaining that he had not given the values to his bankruptcy attorney and was not sure why they were valued that way, but that $12,000 “looked like a good average.” Tr. Tran, at 87, lines 4-19. These vehicles consisted of 5 BMW's, a Ford F-150 truck, and a Fiat Spider. All of the vehicles were inspected (except for the Fiat, which was an antique that did not require inspection), operable, and insured.
The items of automobile-related expense were set forth on Exhibit 36 and included such things as insurance, repairs, parts, car payments, and automobile club payments. The Trustee is not seeking recovery of any expenses for fuel or parking.
The Court agrees with the Trustee that not all of these expenditures by the Defendants can be justified as necessities. Having said that, the Trustee presented little evidence as to exactly where the line should be drawn between vehicle expenses that were necessities and those that were not. The Court concludes that reasonable arguments can be made for considering two or three vehicles to have been necessities for the Defendants. The argument for two vehicles would obviously be an allowance of one vehicle for each member of this two-member household. The argument for three vehicles would be to allow one more vehicle for specialized uses, such as hauling, property maintenance, etc., that would be beyond the capacity of a regular passenger car. Based on the record before it, the Court finds that the size and character of the Defendants’ property is such that an additional service vehicle would be warranted. The Trustee thus failed to meet his burden of showing a third vehicle, specifically the Ford F-150 pick up truck, would not be a necessity. Therefore, the Court finds that expenses allocated for and paid by the Defendants for three vehicles, 2 passenger cars and one utility vehicle, were payments for necessities.
Having determined that ownership expenses for only three vehicles may be justified as necessities, the Court is next left to determine how that affects the amount claimed by the Trustee. The listed expenses were not broken down by vehicle, or at least not to the point where the Court could attribute particular expenses to a particular vehicle. And in any event, even if the expenses could be so apportioned, there is no basis for deciding which of the vehicles should be considered necessities and which luxuries. The Court does note that, regardless of his testimony attempting to distance himself from the filing, the Debtor himself filed a petition that placed an equal value on each of the vehicles. The Court thus feels a sufficient level of comfort to treat all of the vehicles as equivalent, and thus to allocate the expenses among the vehicles on a strictly proportionate basis. In other words, since 4/7ths of the motor vehicles were not necessities, the Trustee may recover 4/7ths of the expenses in this category, or $76,975.16
*517
B. (l)(d) Housing
In this category, the Trustee is seeking $178,508.21, itemized on Exhibit 38, related to improvements made by the Defendants to their home that he contends were not necessary. The house in question, is located at 152 Kenyon Rd., Pittsburgh, Pa. Vacant land was purchased by the Defendants in 1994 and the house was built shortly thereafter, with the Defendants actually moving in during 1996. Since 1997 or 1998 the Defendants have been the only residents at the house, their adult daughters having both moved out by then.
The Debtor testified that the house was habitable when they moved into it, but that it was not “finished.” Prior to 2002 the house had a living room, dining room, kitchen, den, four bedrooms, three bathrooms, and a garage. Beginning in 2002, the Defendants had extensive improvements made to the house. They finished the basement, making an art studio for Mrs. Wettach, an office for the Debtor, and adding a fourth bathroom. On the outside of the house they had another garage, deck and stairways built, as well as landscaping which included a pond and waterfall.
Under questioning by his attorney, the Debtor testified as follows:
Q. And you testified rather extensively regarding those [housing expenses]. Do you believe that completion of your house constituted a luxury item?
A. No.
Q. Can you tell me why not?
A. Well, the house had to be finished. I mean it wasn’t in a saleable state at that point, if I wanted to sell it, I had to do something with it, and that’s what we did. We finished the house, and put a garage on it, and finished the landscaping in the back of the house.
Tr. Tran, at 129, line 23 through 130, line 7. However, upon further questioning by the Trustee, the Debtor acknowledged that there had already been a garage at the house prior to 2002, and that the construction in question was for an additional garage. Id. at 144, line 6-17. He also stated that all of the different improvements had been completed by 2004, but he has in fact never listed the house for sale. Id. at 144, line 18 through 145, line 4.
As with automobile expenses, the Court certainly agrees that some level of housing expense qualifies as a necessity for purposes of a PaUFTA claim. The Court would note that the Trustee is not seeking to recover expenses related to mortgage payment, taxes, or utilities for the Defendant’s house, nor is it likely he could successfully do so. The challenged expenses related to the 2002 through 2004 improvements are of another character, however. The undisputed evidence showed that the Defendants’ house was habitable prior to the commencement of the improvements, and in fact they had been living there for 6 years with no apparent problems. The evidence also showed that the pre-im-provement version of the house was already more than adequate for a two-person household, having four bedrooms and three bathrooms.
*518The Court certainly does not fault the Defendants for wanting to add additional amenities to the house, but does not see how by any reasonable stretch these amenities can be considered necessities. There was no testimony that the art studio or office were needed for the Defendants’ to be able to engage in financially remunerative activity, nor was the need for an additional garage explained.17 New water landscaping features likewise cannot be viewed as necessities under any circumstance. As to a deck, the Court can envision circumstances in which it might qualify as a necessity, for example if a house was built with a raised doorway that cannot be used until an adjoining deck is constructed, but there was nothing to indicate that was the case here.
Not all of the expenditures listed on Exhibit 38, however, appear to relate to these non-necessary improvements. The Debtor was able to identify some particular items that were likely for home repairs, maintenance or other things that the Court would view as necessities. The following expenses are found to fall into that group:
• Press Brothers $ 804.65 repair
• Titan VAC. $525.00 repair
• Pool City $1,213.38 furniture
• Chuck McPherson $3,506.00 unrelated work
• CRMdesigns $ 680.00 unrelated work in house
• Decsign Co., Inc. $1,203.84 unrelated work in house
• Robert Murphy $1,014.00 yard work
• Boom Plumbing $ 763.78 furnace upgrade/repair
• Urban Tree care $1,500.00 tree trimming
These expenses, totaling $11,210.65 must be deducted from what Trustee is seeking, resulting in a finding that the Trustee met his burden in this regard and may recover $167,297.65 under this category for unnecessary home improvement expenses.
B. (1)(e) Contributions
Under this category the Trustee seeks recovery of $27,595.62, reflecting charitable contributions that the Defendants made during the lookback period. The Trustee concedes that this is not an “outlandish” amount, but says the contributions were voluntarily made and should be recoverable. The individual contributions under this category are listed on Exhibit 39, and with a few exceptions all appear to be to well-recognized charitable entities, such as schools, United Way, theater, symphony, public television and a church. The largest such individual donation was $1,690.62, and almost all were for $1,000 or less.
The Bankruptcy Code recognizes charitable contributions as a legitimate, and indeed encouraged, expense for debtors. See, e.g. 11 U.S.C. § 544(b)(2) (excluding trustee’s lien creditor status with respect to charitable contributions); 11 U.S.C. § 51.8(a)(2) (excluding transfers to a charitable entity from reach of fraudulent transfer provision); In re Goforth, Inc., 466 B.R. 328, 336 (Bankr.W.D.Pa.2012) (discussing the Religious Liberty and Charitable Donations Protection Act of 1998, Pub. L. 105-183 (June 19, 1998)). The amount donated by the Defendants here does not strike the Court as in any way unreasonable. Given that the Court *519has previously found that the Debtor earned income of at least $933,000 during the lookback period, the total of challenged contributions represents only about 3% of income.
As noted above, however, there are a few items in the list which cannot be viewed as reasonably necessary charitable expenses, those being donations that were made to the C & G PAC, the National Republican Congressional Committee, and the Jan Esterly campaign. Such contributions, totaling $2,200, were political in nature, and since the Trustee has met his burden in this regard, this amount may be recovered by him.
B. (l)(f) Allowance
The Trustee characterizes this category as comprising a portion of the “allowance” for some ordinary household expenses that was transferred from the PNC entireties’ account to Mrs. Wettach during the lookback period. According to the evidence, Mrs. Wettach would take these allowance payments, deposit them into another account at Dollar Bank (also held jointly with the Debtor), and then make various payments out of that account. Among the items for which payments were made with the allowance were food, all utilities, clothing, and “everything else” in the nature of household expenses other than mortgage, car payments, and insurance (which were paid from the PNC entireties’ account). Tr. Tran, at 111, line 3 through 112, line 10. The Trustee says the existence of this Dollar Bank account was not disclosed on the Debtor’s petition and he (the Trustee) only learned about it shortly before trial. The total amount of these allowance payments made during the lookback period was $148,505. Of that amount, the Trustee is seeking a recovery of $54,755.
The Trustee arrived at the above figure in the following manner. First he took the Debtor’s normal monthly expenses as shown on Exhibit J to the petition, and from that he deducted the expenses known to be paid from another source, i.e. the mortgage payments, auto payments, insurance, and home maintenance that were paid from the PNC bank entireties’ account. He thus arrived at total monthly expenses of $1,950 that would have been paid from the funds represented by the allowance. Taking that amount over the life of the lookback period leads to total expenses of $91,650,18 and he thus concludes that the amount provided by way of the allowance exceeded reasonable and necessary household expenses by $54,755 during the lookback period.
The Trustee questioned Mrs. Wettach about the various expenses that were paid out of the allowance, via the Dollar Bank account, and she confirmed that the items from Schedule J that the Trustee has used to arrive at his figure were, in fact the items that were paid from the allowance. See Tr. Tran, at 164, line 6 through 169, line 13. Mrs. Wettach also confirmed that she helped her husband prepare Schedule J.
The Trustee’s theory is that the Defendants should be bound by the monthly expense listed in Schedule J, and that to the extent the total of those expenses over the lookback period are less than the amount paid in allowances, such represents unexplained expenditures that should be amenable to recovery. The Court agrees with the Trustee. While the Defendants *520have provided evidence to the satisfaction of the Trustee to show monthly necessary expenses of $1,950 payable with the allowance, in the form of their Schedule J, which the Trustee does not contest, they have not provided any evidence to show what the remaining amounts of the allowance were used for. Thus, the Defendants have not met their burden of production as to that portion of the allowance claim and the Court will deem that these funds were not spent on necessities. The Trustee may thus recover $52,805 under this category.
B. (1)(g) Summary as to PNC Entireties’ Account
To sum up, regarding the PNC entire-ties’ account, the Court finds that the Trustee has met his burden under PaUF-TA to show expenditures for non-necessities in the following amounts:
1. Miscellaneous Investments $32,500.00
2. Entertainment/Travel 48,476.22
3. Auto Expenses 76,975.00
4. Housing 167,297.65
5. Contributions 2,200.00
6. Allowance 52,805.00
TOTAL $380,253.87
This amount is well within the amount of deposits proven to have occurred. The Court has also previously found that the Debtor was insolvent for purposes of PaUFTA at all times when the deposits were made. Finally, the evidence was clear that, other than the Debtor’s C & G compensation, there was no source of “other deposits” into the entireties account during the lookback period. See, e.g., Tr. Tran, at 162, lines 10-12 (Mrs. Wettach testifying that she had no income which she deposited into the entireties’ account since 2001). To be more exact, there was another source of funds into the entireties’ account during the relevant period, that being the inheritance from the Debtor’s father, but it was subsequently paid into the Merrill, Lynch account and, as previously explained, has been waived so it is appropriately disregarded. The Defendants also argued at one point that Mrs. Wettach had made a deposit of an inheritance that she received into the account, but under questioning she conceded that would have occurred long before the look-back period. See Tr. Tran, at 161, line 23 through 162, line 2. Furthermore, any suggestion that intangible, non-economic contributions by Mrs. Wettach can be treated as another “deposit,” or somehow otherwise provide reasonably equivalent value, must be rejected. See Cohen (D.Ct.), 487 B.R. at 625.
The Trustee has thus proven by a preponderance of evidence that all necessary elements for a constructive fraudulent transfer claim under 12 Pa.C.S.A. § 5105 related to the entireties’ account exist. Among other things, he has shown that the transfers were made without the Debtor receiving a reasonably equivalent value at a time when he was insolvent. Additionally, the Defendants are entitled to no offset for any “other deposits” made into the entireties account. The Court has also previously concluded that the Debtor believed, or reasonably should have believed, that he would be unable to pay his debts as they came due, so the Trustee also proved his case under 12 Pa.C.S.A. § 5104(a)(2)(ii). Since the initial fraudulent transfers were made to the Defendants as tenants by the entireties, the Trustee may recover from either or both of the Defendants.
The Court does note that the Amended Complaint seeks “interest,” which is presumably a reference to pre-judgment interest on any amount found due on the PaUFTA claims. The Trustee has never pursued that remedy any further in this action, nor does it appear that was done by *521any of the trustees in the other Titus cases. The Court therefore presumes the Trustee has waived any claim for prejudgment interest, although the accompanying order will set a deadline for filing any motion seeking prejudgment interest just to be certain.
B. (2) Balance Remaining in Bank Accounts at Time of Bankruptcy Filing
The Trustee is here seeking a recovery of $49,837.67, representing the balance in three jointly held bank accounts at the time of the filing of the petition:
• Dollar Bank (# xxxxxxxx5805) $10,573.32
• Dollar Bank (# xxxxxx4309) (savings) $ 4,178.20
• Dollar Bank (# xxxxxx4309) (checking) $ 602.68
• PNC Bank (# xxxxxx6039) $34,483.37
See Exhibit 41. It will be noted that one of those accounts is the PNC entireties’ account, so to that extent this item could have been addressed in the prior section of the Opinion. However, since the Trustee has lumped the four accounts together, the Court finds it more convenient to follow that lead and deal with them collectively here rather than split them up.
Much like the discussion given above related solely to the PNC entireties account, the Trustee’s theory here is that the exclusive and ultimate source of funds for the four accounts was the Debtor’s individual compensation, and since there were balances in the accounts at the time the bankruptcy petition was filed, it naturally follows that the balances in the account were not spent on necessities and are therefore recoverable.
The Trustee also notes that the Defendants have not shown that the balances were ever used for the payment of necessities, implying that perhaps if the balances were used to fund necessities after the filing that could somehow reduce or eliminate the Trustee’s claim. The Court does not necessarily agree with that position. It has previously been determined that the applicable lookback period is October 14, 2001 through October 14, 2005. In the Court’s view, the relevant “snapshot” of the status of the accounts is at the end point of that lookback period, so whatever happened to the balances after that date would be irrelevant. In any event, there is no indication that funds in the accounts at the time of the filing were subsequently used for necessities, so the Court need not decide that issue.
The Defendants stipulated that the balance amounts in the accounts was correct. See Tr. Tran, at 48, lines 16-18. The Debtor did not disclose the existence of the Dollar Bank accounts in his petition, nor did he claim an exemption in them. He did disclose the PNC entireties’ account, although he showed it with a balance of $22,000. The debtor claimed an exemption in the PNC entireties’ account on the basis that it was entireties’ property owned with his wife.
The Court finds the Trustee’s basic argument sound. It has previously been established that if the Debtor’s individual compensation was transferred into a joint account, that constitutes a fraudulent transfer, except to the extent such funds were subsequently used to pay for necessities for the marital unit. As indicated above, the Court believes it must look to the status quo in the accounts as it existed on the date of the bankruptcy filing. At that point in time, there were balances in the accounts so those funds clearly had not been spent on necessities. The fact that the Defendants may have planned in the future to spend the balances in whole or in *522part on necessities invites improper speculation and is of no moment.
The Trustee may thus recover the balances in the PNC entireties’ account and in the one Dollar Bank account with both a checking and savings component (# xxxxxx4309), i.e., the one into which Mrs. Wettach deposited the funds she received as an allowance for household expenses. As to those accounts, the evidence was clear that the exclusive source of funding was the Debtor’s individual compensation. The other Dollar Bank account (# xxxxxxxx5805) is a different matter. The Court has reviewed the trial transcript and can find no evidence to show the source of funds for that account. See, e.g., Tr. Tran, at 115, line 12 through 116, line 4. The Trustee failed to meet his burden of proof with respect to that account.
To sum up, under this category the Trustee may recover $39,264.25. The Debt- or may not thwart the Trustee’s fraudulent transfer recovery by claiming an exemption in the PNC entireties account, so to the extent necessary, the Objections to exemption will be granted. See, e.g., In re Duncan, 329 F.3d 1195 (10th Cir.2003) (Chapter 7 trustee, who had avoided as a fraudulent transfer the debtor-husband’s pre-petition transfer of property that he owned to he and his wife as tenants by the entirety, could recover even though debtor had claimed a homestead exemption in the property and the trustee had never objected to exemption); 11 U.S.C. § 522(g)(1) (limiting debtor’s ability to exempt property recovered by the trustee to transfers that were not voluntary transfers).
B. (3) Guardian Life — Increase in Cash Value
The Debtor has valued his interest in a Guardian life insurance policy at $135,000, and claimed that as exempt pursuant to a Pennsylvania statute, 42 Pa. C.S.A. § 8124(c).19 The Trustee explains his challenge to the Guardian Life policy as follows:
The Trustee does not challenge the Guardian Life policies, does not challenge the death benefits, does not even challenge the cash value of the Guardian Life policies. The trustee seeks to avoid as fraudulent transfers only those premium payments and dividend reinvestments which resulted in an increased value of the Guardian Life policies subsequent to October 14, 2001.... The Trustee advances the same argument [as expressed by the Court in Matter of Loomer, 222 B.R. 618 (Bankr.D.Neb.1998) ] as to the Guardian Life premium payments and dividends reinvested after October 14, 2001 to the extent that an increase in the cash value was realized, the death benefit of the policies did not change. The cash value, an amount beyond the reach of the Debtor’s creditors, *523did change. That increase in the cash value of the Guardian Life policies resulted from a fraudulent transfer of Debtor’s assets and is therefore avoidable.
Trustee Post trial brief at 7-8.
The Debtor testified that he owned the Guardian Life policy individually, that it was purchased well before the lookback period, and that the $135,000 figure he listed for a value probably represented the cash value of the policy. Tr. Tran, at 40, line 18 through 41, line 5. He further testified that the term “cash value” did not mean he could just go to the insurance company and obtain that amount. Payment would be in the form of a loan that he would have to pay back at 8% interest. Id. at 130, lines 14-20.
The Trustee has set forth his computations regarding the Guardian Life policy on Exhibit 25. The Defendants have stipulated to the accuracy of the numbers stated in that exhibit, while disagreeing with the legal conclusions the Trustee seeks to have the Court draw. In reviewing the Exhibit, the Court is immediately struck by the fact that 6 of the 8 Premium/Dividends Accrued entries occurred outside the lookback period, from 2006 through 2011. These cannot be recovered pursuant to the Wettach FTA, nor can they be the subject of an Objection to exemption as they were post-petition transactions. Eliminating those excluded transactions immediately reduces the Trustee’s claim for this item to $39,371.84, the amount of the “increase in cash value” that occurred during the lookback period.
Even as to this remaining amount, the Court finds that the Trustee cannot make a recovery. In the first place, it appears the Guardian Life policy, including its cash surrender value, is exempt under 42 Pa. C.S.A. § 8124(c)(6). Second, even if it were not exempt, the Trustee has not set forth a viable argument as to why he should be able to make a recovery. When faced with a similar claim by the trustee in the Cohen case, the bankruptcy court properly stated:
This Court holds that the purchase of life insurance policies to benefit a spouse, or the payment of premiums required to maintain the policies in effect, constitutes an expense reasonable and necessary for the maintenance of the Defendants’ household. This Court thus finds that the Debtor received reasonably equivalent value in return for any of the direct deposits of his salary that he may have used to fund such premiums.
2012 WL 5360956, at *12. See also, Arbogast, 466 B.R. at 319-20. The Court agrees with that conclusion. Even assuming that the premium payment amounts in question ($19,286.28 in both 2004 and 2005) came from the Debtor’s individual compensation, which is frankly not entirely clear from the record, the Court finds that the payments were not unreasonable and were payments for necessities.
B. (4) C & G Severance Benefít
As of the date his petition was filed, the Debtor had an employment agreement with C & G dated January 1, 2000, that provided he would receive a formula-based severance benefit from the firm in the event of his termination from employment. The Debtor became a “contract” employee of C & G in November 2009, triggering the right to receive the severance pay. On January 7, 2011, he was paid $16,830.28 by C & G, the net amount of the severance benefit after deduction of taxes.
The Trustee says he is seeking to recover this amount for the estate on a “very basic theory.” He says the severance benefit was a right to receive money which the *524Debtor enjoyed as of the date his petition was filed, but since it was neither scheduled or exempted in the petition, it is an asset the Trustee may recover.
An initial question is presented as to whether the Trustee’s claim of the severance benefit falls within the scope of either the Wettach FTA or the Objections to exemptions. The latter is obviously an impossibility since the severance benefit was not listed in the petition, nor was an exemption claimed in it. As to the former, the Trustee is not claiming that the severance benefit constituted a fraudulent transfer in any way, and a review of the Amended Complaint reveals nothing that might reasonably be characterized as an effort by the Trustee to recover the severance benefit payment. Rather, what appears to have happened in the Court’s view, is that the Trustee became aware of the severance benefit during discovery and added it to his platter of claims at trial, without taking any steps to amend the pleadings first.
Given this, the Defendants would certainly have had grounds to object at trial on the basis of unfair surprise, or raising issues beyond the pleadings, when the Trustee brought up the severance benefit issue. However, after having reviewed the trial record, the Court does not find that the Defendants ever made any such objection. Thus, the Court finds that the following Rule is implicated here:
(b) Amendments During and After Trial.
(2) For Issues Tried by Consent. When an issue not raised by the pleadings is tried by the parties’ express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move — at any time, even after judgment — to amend the pleadings to conform them to the evidence and to raise an unpleaded issue. But failure to amend does not affect the result of the trial of that issue.
Fed.R.Bankr.P. 7015, incorporating Fed.R. Civ.P. 15(b)(2). Since the Defendants never objected at trial, the issue relating to the severance benefit was tried by consent, and the Court will proceed to consider it.
The legal issue presented is whether an interest that was only conditional or contingent at the time the Debtor’s petition was filed, and only paid to Debtor subsequently after the condition was fulfilled, constitutes property of the estate that the Trustee may recover. The Parties have not pointed to any law on this question, but the Court’s own research has revealed some pertinent cases. For instance, in In re Booth, 260 B.R. 281 (6th Cir. BAP 2001) the trustee filed a turnover action against the debtor, seeking to recover a pro rata portion of a postpetition profit sharing payment that the debtor had received from his employer. The debtor argued that because he had filed his petition before the employer calculated its profits or made the payment, he had no legal or equitable interest in the profit sharing when the petition was filed and therefore no part of the payment was property of the estate. The court began by noting that the purpose of 11 U.S.C. § 541(a)(1) is to bring anything of value that the debtor has into the estate. It found the debtor’s interest in his employer’s profit sharing to be a contingent interest under Ohio law, and further found that contingent interests were fully alienable and attachable by creditors. The Court stated that in applying the Bankruptcy Code, courts have “almost uniformly adhered to the view that contingent interests are property of the estate under § 511(a)(1).” 260 B.R. at 285.
The Booth court cited a long list of cases to that effect, involving a variety of different types of contingent interests, including *525a severance benefit. See, e.g., In re Ryerson, 739 F.2d 1423 (9th Cir.1984) (payments made to debtor after termination from employment based on pre-petition contract were property of the bankruptcy estate, although paid after commencement of the case, at least to extent payments were related to pre-bankruptcy services). See also, In re LaSpina, 304 B.R. 814 (Bankr.S.D.Ohio 2004) (where debtor had negotiated a severance benefit with his employer pre-petition, the payment was property of the estate even though not made until post-petition; in such cases focus is on whether the payments are sufficiently rooted in the pre-bankruptcy past so as to be included in the estate). By contrast, see, In re Moseman, 436 B.R. 398 (Bankr.E.D.Tex.2010) (severance payment was not property of the estate where it was made post-petition, and debtor did not have a contingent right to a severance payment under a pre-petition employment contract); In re Bruneau, 148 B.R. 4 (Bankr.D.Conn.1992) (post-petition severance payment not property of the estate where debtor had not elected to participate in severance program until after petition filed).
In the present case, the Debtor clearly had a contractual right to the severance payment at the time his petition was filed, and such right was clearly rooted, in part, on his pre-petition services to C & G under that contract. The Court has reviewed the employment contract and finds nothing therein to indicate that the severance payment was intended to be non-alienable, or otherwise protected under the Employee Retirement Income Security Act or some similar statute, nor has the Debtor argued that the benefit is protected on that basis. The Court must therefore conclude that the severance benefit was property of the estate pursuant to 11 U.S.C. § 541(a)(1).
That is not the end of the matter, however, because the Court does not believe it would be fair and equitable for the Trustee to be able to recover the entire amount of the severance benefit. This is not a situation where the trigger for entitlement to the benefit occurred only shortly after the bankruptcy petition was filed. That did not happen until November 12, 2009, more than 4 years after the petition was filed. If the Debtor’s entire body of service to C & G is viewed as the consideration for the severance payment he eventually received, then it is clear a sizeable portion of that service occurred post-petition. See, e.g., 11 U.S.C. § 541(a)(6) (property of the estate does not include individual debtor’s post-petition earnings). As a matter of equity, the Court therefore concludes that the Trustee may recover only that portion of the severance benefit payment corresponding to the pre-petition period of the Debtor’s service at C & G pursuant to the employment agreement.
The employment agreement creating the severance benefit right was signed on January 1, 2000 and the Debtor’s petition was filed on October 14, 2005. Thus, roughly 5/9 of the service underlying the severance benefit occurred pre-petition. Therefore, the Trustee may recover that proportion, or $9,350, as property of the estate.
B. (5) C & G Pension Contributions
The final item claimed by the Trustee is $204,503.28, representing contributions to the C & G, P.C. Pension Plan (the “C & G Plan”) that were made during the lookback period on behalf of the Debtor, as well as gains realized from the contributions. The Debtor’s interest in the C & G Plan is noted as “401K Pension Plan” on Schedule B of his petition and the total value is shown as $275,000. That entire amount is claimed as exempt by the Debtor on Schedule C pursuant to “42 Pa.C.S. Section 8124(b).” As noted previously, both *526Trizec and the Trustee filed Objections to the exemptions, which would include the exemption claimed in the C & G Plan.
The contributions/gains being pursued by the Trustee are itemized in Exhibit 80, which shows total of $155,000 in such contributions made from 2001 through 2005 and net gains of $49,508.28 realized from October 1, 2001 through 2005. The Defendants have stipulated to the accuracy of the numbers set forth in Exhibit 30, without agreeing that they are recoverable by the Trustee. See Tr. Tran, at 48, lines 10-11. The contributions were made directly by C & G into the C & G Plan for the benefit of the Debtor as part of his overall compensation.
The Trustee’s theory as to these contributions is that they were similar to the deposit of the Debtor’s earnings into the PNC entireties account in that they were made by C & G at the voluntary direction of the Debtor, which had the effect of shielding the funds in question from creditors who would otherwise have been able to look to those funds to satisfy the debt owed to them by the Debtor. The Trustee points out that the January 1, 2000 employment agreement that the Debtor entered into with C & G upon joining the firm provides that one of the “additional benefits” he was entitled to was participation in the firm’s retirement benefit plan, “to the extent not waived by him.” See Exhibit 28. The Trustee also points to Section 3.8 of the C & G Plan document which provides that an employee “may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan.” Id. The Trustee argues that, by not exercising his ability to opt out of participating in the C & G Plan, the Debtor engaged in fraudulent transfers. The Court presumes the Trustee’s theory to be that if the Debtor had opted out, the funds in question would have been paid to him as regular earnings which, assuming they had been deposited into the PNC entireties account along with the other earnings, could have been recovered as a fraudulent transfer.
As noted above, in Schedule C of his petition, the Debtor claimed an exemption in the C & G Plan pursuant to 42 Pa.C.S.A. § 8124(b). This is actually a rather vague designation of a basis for claiming an exemption. Section 8124 is generally titled as “Exemptions of particular property,” and consists of 3 subsections, one of which is Section 8124(b), entitled “Retirement funds and accounts.” Section 812k(b) itself contains numerous, further subdivisions describing different types of such funds and accounts. In their post-trial brief the Defendants have further specified the basis of the claimed exemption, pointing particularly to 42 Pa. C.S.A. 8124(b)(1)(vii), which provides:
(b) Retirement funds and accounts.—
(vii) Any pension or annuity, whether by way of a gratuity or otherwise, granted or paid by any private corporation or employer to a retired employee under a plan or contract which provides that the pension or annuity shall not be assignable.
See Doc. No. 115 at 13-14. The Defendants note that, with certain exceptions not applicable here, the C & G Plan contains an anti-alienation provision that prohibits an assignment to creditors. See Ex. J at Section 9.2(a). Also, despite the language in the January 1, 2000, employment agreement between the Debtor and C & G, upon which the Trustee relies, the Debtor testified that he did not believe he had the ability to opt out of participation in the C & G Plan. See Tr. Tran, at 137, lines 10-15; 149, lines 18-24.
*527In this case, the Parties have not pointed to any case law or other support interpreting Section 8124(b)(1)(vii), apparently each relying primarily on the plain language of the statute itself. The Defendants are clearly correct that the C & G Plan appears to meet one of the conditions for an exemption under the statute because it includes an anti-alienation provision. However, there are a number of exceptions in the provision which could arguably lead to a conclusion that the anti-alienation condition is not met. See Section 9.2(b)-(d) of the Plan. Moreover, Section 8121(b) (1)(vii) also includes another condition, i.e., that the grant or payment by the employer is to a “retired employee.” In this case, the Debtor was not a retired employee of C & G during the pre-petition period. By all indications he was functioning as an active, full-time employee at the firm during the entire lookback period. The earliest indication of any change in the Debtor’s status that might arguably be viewed as even a step toward retirement did not occur until November 2009 when he became a “contract employee” of C & G, thereby triggering the severance benefit that was discussed in the previous section of this Opinion.
The Court’s cold, plain reading of Section 8121(b) (1)(vii) would thus seem to require a finding that the statute does not apply here. Additionally, the Court’s own research revealed the case of In re Roberts, 81 B.R. 354 (Bankr.W.D.Pa.1987), wherein Judge Markovitz, when faced with a similar issue under the same statute, reached that same conclusion. Rejecting an argument that the exemption should apply even though the debtor had not been retired when he filed his bankruptcy petition, Judge Markovitz stated:
The Plaintiff asserts that this exemption applies only to “retired employees,” and as Debtor was not retired as of the date of the bankruptcy filing, this statutory exemption is not applicable. Debtor counters that the alternate verbiage “granted or paid” refers to any employee having an entitlement to funds upon retirement. We are not guided by any legislative history in defining “granted” as it is used in this subsection. However, we do not believe that a lexicography or generic legal interpretation is appropriate. In reviewing the statute itself, we find that “granted” relates to “a retired employee”. Similarly, there is a significant relationship between “granted” and “paid”; the existence of the disjunctive rules out mere redundancy. We believe that “granted” is a stage beyond vesting, while remaining a stage before payment. There has been no grant to a retired employee. There has been no payment to a retired employee. Indeed, there is no retired employee. Expressio unius est exclusio alterius. The exemption of the pension plan pursuant to 42 Pa.C.S.A. § 8124(b)(1)(vii) will be denied.
81 B.R. at 375-76. In the absence of any contrary authority, the Court finds itself in agreement with the decision in Roberts and concludes that the funds being sought by the Trustee are not protected by Section 8121(b) (1)(vii).
Although the Defendants have not made reference to any other specific subdivision under Section 8121(b) that might serve as a basis for an exemption, because they referenced the provision generally in Schedule C, the Court itself undertook a review to see if any might apply. The only other one that could potentially be a basis for exemption of the C & G Plan is 12 Pa.C.S.A. § 8121(b)(1)(ix), which provides:
(ix) Any retirement or annuity fund provided for under section 401(a), 403(a) and (b), 408, 408A, 409 or 530 of the Internal Revenue Code of 1986 (Public
*528Law 99-514, 26 U.S.C. § 401(a), 403(a) and (b), 408, 408A, 409 or 530), the appreciation thereon, the income therefrom, the benefits or annuity payable thereunder and transfers and rollovers between such funds. This subparagraph shall not apply to:
(A) Amounts contributed by the debt- or to the retirement or annuity fund within one year before the debtor filed for bankruptcy. This shall not include amounts directly rolled over from other funds which are exempt from attachment under this subparagraph.
(B) Amounts contributed by the debt- or to the retirement or annuity fund in excess of $15,000 within a one-year period. This shall not include amounts directly rolled over from other funds which are exempt from attachment under this subparagraph.
(C) Amounts deemed to be fraudulent conveyances.
It can be seen that a precondition for the application of an exemption under Section 8124(b) (1)(ix) is that the fund be “provided for under” certain provisions of the Internal Revenue Code (“IRC”). The exact meaning of this qualifying language is not entirely clear.
In the recent case of State Farm Mut. Auto. Ins. Co. v. Lincow, 792 F.Supp.2d 806 (E.D.Pa.2011), the court held that the term “provided for under” means the conditions set forth in the listed IRC sections must be met, or, using the parlance of federal tax law, the plan into which the funds in question have been paid must be “tax qualified.” The Court agrees with the holding in Lincow and adopts it here. The Lincow court further held that the party asserting the exemption under Section 8124(b)(1)(ix) bears the burden of demonstrating such tax qualification. 792 F.Supp.2d at 810. This Court also concludes that the Debtor had an initial burden of showing tax qualification to secure an exemption under Section 8121(b) (1)(ix), which should have been a fairly simple matter to show, notwithstanding that the overall burden of proof on the Objections rests with the Trustee/Trizec. See, Fed. R.Bankr.P. 4.008(c). This is particularly true in the present case, where the Debtor has not ever explicitly pled or otherwise relied on Section 8124(b) (1)(ix) so as to give the Trustee and Trizec any notice that such provision may be at issue.
The above conclusion poses a problem for the Debtor, because there does not appear to be any evidence in the record to show that the C & G Plan is a tax qualified plan under the applicable IRC provisions. The Court scoured the transcript of the trial and could find nothing to indicate that the C & G Plan is qualified, nor do any of the Exhibits, including the excerpts from the Plan document that each side submitted, show that to be the case.20 There is certainly reason to suspect that the C & G Plan may be tax qualified, but mere suspicion or speculation is not a substitute for evidence. Based on the evidence of record, the Court therefore has no alternative but to find that the contributions/gains related to the C & G plan are not protected by Section 8124(b)(1)(ix).21
To sum up, the Court finds that the contributions/gains related to the C & G Plan are not exempt. The Trustee is not seeking the full value of the Debtor’s inter*529est in the C & G Plan, only that which he seeks to characterize as tantamount to fraudulent transfers occurring during the lookback period. The Court generally agrees with the Trustee that in principle he can make a recovery under a fraudulent transfer theory as he proposes. However, the Trustee cannot make a full recovery of the amount he is seeking.
First, no recovery will be allowed for any “gain.” It is clear from the Trustee’s own Exhibit 30 that contributions had been made into the C & G Plan on behalf of the Debtor before the lookback period ever started. The first account document shows there was already a balance of $73,840.95 in the C & G Plan for the Debtor as of October 1, 2001, none of which would be recoverable by the Trustee because it pre-dated the lookback, which did not start until October 14, 2001. All of the subsequent gains by the C & G Plan would necessarily have included some gains attributable to this initial balance. If the Trustee sought to recover gains related to improper contributions, it was incumbent upon him to segregate those gains from gains related to the initial balance. As far as the Court can tell, the Trustee has not done that, lumping all gains made by the C & G Plan during the lookback period together into a single number. Thus, the Trustee has failed to meet his burden of proof with respect to any gains made by the C & G Plan.
Second, as to contributions, the Trustee is seeking recovery for contributions made for each of the years 2002 through 2005. The years 2002, 2003, and 2004 are not a problem, because they are completely within the lookback period. However, 2005 was a split year, with part of the year within the lookback period and part outside of it. The Trustee has not provided any information to show when contributions were made within the year 2005, so the Court cannot determine whether any or all of the contributions were made within the lookback period. Furthermore, there was no testimony to show whether contributions were made periodically each pay period, or in one lump sum. If the latter, it is certainly possible that the entire contribution for 2005 was made at or near the end of the year, which would make it completely outside the lookback period. Because of these uncertainties, the Court does not have sufficient confidence to attempt any sort of pro rata approach as to the contributions for 2005, and instead, finds that the Trustee has failed to meet his burden of proof as to them.
The contributions made during 2002, 2003 and 2004 to the C & G Plan total $114,000. The Court has previously found that the Debtor was insolvent during this period of time and/or could not pay his debts as they came due. The documentary evidence shows that the Debtor had the ability to opt out of the C & G Plan, or at least the ability to seek such an opt-out, but he failed to make any attempt to do so. If the contributions had not been paid to the C & G Plan, they would have been paid to the Debtor as earnings and been available to pay creditors. Thus, the contributions of $114,000 constitute fraudulent transfers and may be recovered by the Trustee — however, only if the C & G Plan is property of the estate.
Unlike the Debtor in Oberdick, the Debtor in the present case did not make the alternative argument that the C & G Plan was not property of the estate pursuant to 11 U.S.C. § 541(c). In broad terms, that statute provides in Subsection (1) the general rule that the interest of a debtor in property becomes property of the estate notwithstanding any provision in an agreement or by way of applicable nonbankrupt-cy law that restricts or conditions the *530transfer of such interest by the debtor, or that is conditioned on the insolvency or financial condition of the debtor. That general rule is, however, subject to an important exception, stated as follows:
(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
11 U.S.C. § 541(c)(2).
The Court would not normally be inclined to consider an argument which a party has chosen not to make. However, the finding as to the C & G Plan will obviously have a significant impact on the Defendants, and furthermore, there is some indication from the district court that a bankruptcy court should perhaps consider whether a particular item of property is actually “property of the estate” even if the debtor has only raised exemption as an issue. See, In Re Kieswetter, 2011 WL 4527365, at *8 fn. 10 (W.D.Pa.2011). Thus, even though the Debtor has not argued that the C & G Plan is not property of the estate under Section 511(c)(2), the Court will consider that argument.
It can be seen that there are 3 major elements which must be shown for Section 541(c)(2) to apply. First, that there is a restriction on the transfer of the beneficial interest of the Debtor. That element appears to be met here based on the anti-alienation provision in Section 9.2(a) of the C & G Plan. Second, that the restriction is in a “trust.” The Court is not aware of any evidence in the record to show that the C & G Plan constitutes or includes a “trust,” although there are some references in the Plan documents excerpts that were admitted into evidence to a “Trust” and “Trust Fund,” which at least suggests the trust element might be met.
The third element required under Section 541(c)(2) is that the transfer restriction be enforceable under applicable nonbankruptcy law. In the Court’s experience, this element is frequently met by showing the restriction is enforceable pursuant to ERISA, as was done, for example, in Oberdick. However, the Court has previously found that the Debtor did not demonstrate the C & G Plan was “qualified” for purposes of Section 8124(b) (1)(ix), and that same finding would apply with respect to Section 541(c)(2). Kieswetter, supra (evidence regarding the validity of a spendthrift provision would be the same whether determining an exemption or property of the estate).
Even though the Debtor cannot rely on ERISA to meet the requirements of Section 541(c)(2), he may still be able to show that the anti-alienation provision is enforceable under Pennsylvania law, which would also be a potential source of “applicable nonbankruptcy law.” See, e.g., Velis v. Kardanis, 949 F.2d 78, 82 (3d Cir.1991) (applicable nonbankruptcy law under Section 541(c)(2) embraces state spendthrift trust laws). The Court is reluctant to make a determination as to whether the C & G Plan anti-alienation provision is enforceable under Pennsylvania law without hearing argument from the Parties.
In short, the Court has found that the C & G Plan is not exempt and that the Trustee may recover $114,000 in contributions made to the Plan during the lookback period. However, that finding is conditional on a further finding as to whether those contributions are property of the estate pursuant to Section 541(c)(2). The Court cannot make that determination until it has heard argument from the Parties as to whether the record establishes that the C & G Plan is a trust, and whether the subject anti-alienation provision is enforceable under Pennsylvania spendthrift trust *531law. An argument date will be set by the Order accompanying this Opinion.
CONCLUSION
For the reasons stated above, the Trustee may recover a total of $428,868.12 from the Defendants. An argument on whether an additional $114,000 of the C & G Plan contributions are property of the estate which the Trustee should be permitted to recover, will also be scheduled. Finally, a deadline for filing any motion for prejudgment interest will be set. An appropriate order follows.
. See, In re Paul H. Titus, Case No. 10-23668 and Böhm v. Titus, Adv. No. 10-2338; In re Thomas D. Arbogast, Case No. 10-20237 and Cardiello v. Arbogast, Adv. No. 10-2092; In re David G. Oberdick, Case No. 08-20434 and Shearer v. Oberdick, Adv. No. 08-2155; and In re David I. Cohen, Case No. 05-38135 and Sikirica v. Cohen, Adv. No. 07-2517. T & M was itself also a debtor in this Court. See In re Titus & McConomy, LLP, Case No. 03-25332, closed on November 29, 2007.
. The Cohen matter was subsequently transferred to the Hon. Jeffery A. Deller on July 13, 2012, and he has issued a decision in that case. See, In re Cohen, 2012 WL 5360956 (Bankr.W.D.Pa.2012), aff'd. in part, vacated in part, remanded by Cohen v. Sikirica, 487 B.R. 615 (W.D.Pa.2013).
. These are core matters under 28 U.S.C. § 157(b)(2)(A) and (H). The Court's jurisdiction to hear and decide these matters under 28 U.S.C. § 1334 was not disputed. The Defendants initially challenged the Court’s power to render this decision on the basis of the holding in Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), however, they have since withdrawn that position. See Defendants’ Supplemental Post Trial brief at 5, Adv. Doc. No. 129. The Court concludes that it has the constitutional authority to enter a final judgment in these matters, or that in the alternative, the parties have consented to the entry of a final judgment. See, In re River Entm’t Co., 467 B.R. 808, 822-825 (Bankr.W.D.Pa.2012). Finally, if it is determined that the Court does not possess the authority to enter a final judgment, it does have the authority to submit proposed findings of fact and conclusions of law to the District Court, and this Memorandum Opinion should be construed as such.
. Apparently these claims were listed due to potential indemnity causes of action that the T & M partners had voluntarily agreed to among themselves if any partner paid more than his or her proportional share of the Trizec debt.
. 12 Pa.C.S.A. §§ 5104(a)(1) and (2)(ii) provide, 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. § 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.
. The motion to dismiss incorrectly stated that the adversary proceeding had been filed on November 15, 2007, rather than the correct date of October 15, 2007, so it argued that transfers made prior to November 15, 2003, were eliminated by Section 5109. The Court assumes this was inadvertent and uses the corrected dates.
. Going into the trial, the Trustee had been seeking a total recovery of $1,692,074.35. The large bulk (more than $530,000) of the reduction as shown in the post-trial brief came from the Trustee's decision to abandon any claim related to a Merrill Lynch Investment Account.
. An alternate view, as expressed by the state court in some of the Titus cases before they came into the bankruptcy court, to the effect that such transfers would only be fraudulent transfers to the extent they were subsequently spent on “luxuries,” is therefore rejected.
. A review of the docket indicates that a discharge order was actually entered on October *50927, 2006, Doc. No. 64, but it was vacated four days later as having been inadvertently entered, Doc. No. 65. The Debtor filed a Motion to Compel Issuance of a Discharge on September 30, 2010, Doc. No. 129, while Judge McCullough still had the case. Nothing was done on that motion while he had the case. The case was then reassigned to Judge Markovitz and he scheduled the motion for a hearing on April 19, 2011, see Doc. No. 136. The Debtor filed a CNO on April 15, 2011, see Doc. No. 138. The matter just seems to have disappeared for an extended period after that for some unknown reason. The docket does not reflect that the motion was ever granted, and there is no record of a hearing having occurred on April 19, 2011. Since the Debtor has never raised the existence of this motion as an issue with the Undersigned, the Court assumed it had been abandoned and was going to deny the motion as moot, without prejudice, as a way to "clean up” the docket. Within the last few days, however, the Debtor has filed a Renewed Motion to Compel Issuance of a Discharge, Doc. No. 154, clearly indicating he has not abandoned his effort to obtain a discharge. By separate order, the Court will deny the motion filed at Doc. No. 129 as moot in light of the recently filed motion at Doc. No. 154 and schedule that motion for hearing. For the reasons indicated in this Opinion, the outcome of that motion will have no effect on the decision here.
. Although two years from the date of bankruptcy filing actually expired on October 14, 2007, that was a Sunday, which allowed the Trustee until the next day, Monday, October 15, 2007, to file the adversary. See Fed.. R. Bankr.P. 9006(a)(2)(C).
. The Court will not speculate as to why the Trustees in the two cases would have listed these exhibits yet then not sought to introduce them at trial, except to note that the fact that it happened in two cases perhaps makes it more likely to have been the result of some deliberate strategy rather than simply an oversight.
. As the Court calculates it, 79 days in 2001 were within the lookback period, while 287 days in 2005 were within the lookback period. This equates to the respective percentages shown for each of the years.
. It may be argued that such calculations are arbitrary. Other than either completely disregarding the years 2001 and 2005, or using a strict pro rata approach, any other approach to resolution of the matter arguably could be considered somewhat arbitrary. However, in the end, since only $380,000 of the entireties account is found to be recoverable, the amount of deposits found into the account does not really impact the final decision so long as the amount is above the $380,000 level.
. The Q books are checking records for the PNC entireties’ account which the Defendants maintained through use of the Quicken computer program, and which they turned over to the Trustee in discovery.
. The Court was left with the task of weighing the relevance of this evidence since the Trustee merely relied on the exhibit to speak for itself. In trying to square the exhibit with the Debtor’s testimony, the Court was required to "connect the dots” as to the exhibit’s purpose. The Defendants did not object to the evidence nor did the Trustee explain its relevance.
. As a very rough check on that conclusion, the Court takes judicial notice that the current IRS national standard for monthly motor vehicle ownership costs, effective April 2, *5172012, is $517 per car. Taking that figure times three, times the 48 months of the look-back period, would yield necessary expenses totaling $74,448, which is within reasonable distance of the Court's conclusion that $57,731 in vehicle expenses were necessities. Given that monthly ownership costs have undoubtedly risen over the last decade, the national standard would have been lower during the relevant period, bringing a result even closer to the Court’s finding.
. The Court has previously found that any automobile expenses for more than three vehicles were not necessities, which would comport with a finding that an additional garage was likewise not necessary.
. For some unexplained reason, the Trustee "extrapolated” this monthly figure over only 47 months, rather than the 48 the Court would have expected. The Court has adjusted the amount sought by the Trustee downward by $1,950 to account for that additional month.
. That statute provides in relevant part:
(c) Insurance proceeds. — The following property or other rights of the judgment debtor shall be exempt from attachment or execution on a judgment:
(3) Any policy or contract of insurance or annuity issued to a solvent insured who is the beneficiary thereof, except any part thereof exceeding an income or return of $100 per month.
(4) Any amount of proceeds retained by the insurer at maturity or otherwise under the terms of an annuity or policy of life insur-anee if the policy or a supplemental agreement provides that such proceeds and the income therefrom shall not be assignable.
(6) The net amount payable under any annuity contract or policy of life insurance made for the benefit of or assigned to the spouse, children or dependent relative of the insured, whether or not the right to change the named beneficiary is reserved by or permitted to the insured. The preceding sentence shall not be applicable to the extent the judgment debtor is such spouse, child or other relative.
. Contrast the present case with Oberdick, where there was unrebutted testimony that the retirement plan at issue was ERISA-quali-fied.
. Furthermore, even if Section 8124(b)(1)(ix) had been found applicable here, it would not fully protect the contributions/gains in any event based on the limitations contained in subsections (A)-(C) of the statute. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495743/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
This unusual case asks a bankruptcy court to determine whether an assault (possibly a sexual assault or rape) and a wrongful death (possibly a murder) were the willful and intentional acts of the debt- or, and, whether claims arising from the injuries are dischargeable in the debtor’s bankruptcy. Because no liability for the alleged acts has yet been determined and no damages assessed, this opinion and the decision it explains is to some degree advisory. This court lacks the jurisdiction, or at least the power and authority, to quantify any obligation arising from the debtor’s acts. Those claims are determinations of state law alone. However, a determination that those claims are dischargeable would render any further pursuit of the claims a violation of the injunction under 11 U.S.C. § 524.
The plaintiffs have alleged that the debt- or, as a host of an underage drinking party, and as a participant with others in a sexual assault and battery, willfully and maliciously injured Ashley Johnson, one of the under-aged drinkers at the party. The alleged victim did not survive an automobile accident which happened within minutes after she left the drinking party. The defense acknowledges that the claims and the evidence might support a finding of negligence but deny that the injuries to Ashley Johnson were willful or malicious.
This matter was tried to the Court on December 6, 7 and 19, 2012; the plaintiffs were represented by Joseph F. Owens and Eliza M. Reyes and the defendant was represented by Vincent J. Guerrero and Jeffery D. Nordholm; the evidence has been closed; and the parties have made closing arguments; so, I make the following:
FINDINGS OF FACT
1. Debtor Andrew J. Weihert filed a voluntary Chapter 7 petition on February 23, 2012.
2. Plaintiffs Patricia A. Johnson and Del Johnson filed a complaint against the debtor on May 24, 2012. The plaintiffs are the parents of Ashley Johnson. Then-claims arise out of the circumstances immediately preceding her death on the morning of July 17, 2010. Patricia John*562son filed both in her individual capacity and as the special administrator of the estate of Ashley A. Johnson, deceased.
3. Shortly after 2:00 a.m. on July 17, 2010, Ashley Johnson died in a single car rollover accident off of West Road in Wa-tertown, Wisconsin.
4. The relevant chain of events leading up to her death began in the afternoon of July 16,2010.
5. Ashley Johnson’s friend Michelle Mess learned around 3:00 p.m. on July 16 that the debtor was planning a party at his house that evening. It was arranged that Mess would drive Ashley Johnson to the party. The debtor had not previously met or known Ashley Johnson.
6. Mess had also agreed to drive Brett Hart and Jaime Malkowski to the party. She drove her red Dodge Neon to their residence around 6:00 p.m. to pick them up.
7. Mess took Hart and Malkowski back to her house to wait until Ashley was ready. Around this time, Ashley Johnson was at the beach near her house watching the sunset with Tyler Bostwick.
8. Ashley Johnson texted Mess when she was ready to be picked up.
9. With Hart and Malkowski in the car, Mess arrived at Ashley Johnson’s house, and Ashley got into Mess’s car.
10. The four of them drove back to Mess’s house to wait for further information regarding when the party would start.
11. Around this time, Mess was exchanging texts with Kyle Porzky, the debt- or’s cousin. Mess requested that Porzky and the debtor procure beer for her, offering to reimburse them for it.
12. Mess received the green light to go to the party around 8:30 p.m.
13. Mess drove Hart, Malkowski, and Ashley Johnson to the debtor’s house at N8890 West Road, Watertown, Wisconsin. They arrived around 9:00 p.m.
14. Mess, Hart, Malkowski, Ashley Johnson, the debtor, Porzky, and the final guest, Martin Hutchins, were the only seven persons who attended the party.
15. Samantha Johnson did not attend the party.
16. Shortly after her arrival, Mess paid the debtor for the beer he had purchased for her.
17. The seven partiers played beer pong and watched movies, including Joe Dirt and a home video of the debtor four-wheeling.
18. Both Mess and Ashley Johnson were underage, and both were drinking at the party. The debtor knew they were drinking, and he knew they were underage.
19. No persons are remembered by those present as having gone upstairs during the party. The debtor’s bedroom is located on the ground floor of his house.
20. Malkowski wanted to leave the party early because she was sick. At around 10:45 p.m., Mess left the party to drive Hart and Malkowski home. They arrived at Hart and Malkowski’s residence shortly after 11:00 p.m.
21. Ashley Johnson stayed behind at the party with Hutchins, Porzky, and the debtor.
22. At one point, Hutchins slapped Ashley Johnson’s bottom. The debtor told Hutchins that behavior was unacceptable.
23. After dropping off Hart and Mal-kowski at their residence, Mess returned to the party.
24. The remaining partiers continued to play beer pong and watch movies.
*56325. Around 1:30 a.m., Hutchins and Porzky told Mess that she was too drunk to drive and offered to drive her home. Mess refused their offers and continued to stay at the party.
26. Around 2:00 a.m., the debtor ended the party because he needed to wake up early that morning to get to his work milking cows.
27. Ashley Johnson left the party site in Mess’s red Neon, with Mess driving.
28. Mess was wearing her seat belt. Ashley Johnson was not wearing her seat belt.
29. The car approached a 90 degree turn on West Road at a speed too great for Mess to execute the turn. When the car hit the gravel on the inside part of the curve, it started rolling over.
30. Hutchins and Porzky were standing outside of the debtor’s house when they heard tires squeal. They jumped into their vehicles and drove slightly more than one-quarter mile to the accident scene.
31. When Mess’s car stopped rolling, it was on its side. The driver’s side window was on the grass, and the open passenger side window was facing the sky.
32. Mess turned the vehicle’s key to “off’ because she was worried about a fire starting, and then she climbed out of the car.
33. Hutchins and Porzky arrived at the scene and inquired where Ashley Johnson was. Mess told them that Ashley was still in the ear.
34. Hutchins jumped into the car and felt Ashley Johnson’s body for a pulse.
35. When he did not feel a pulse, Hutchins lifted Ashley Johnson’s body out of the car.
36. Hutchins and Porzky carried Ashley Johnson’s body away from the car and laid it on the grass.
37. Mess instructed Hutchins and Porzky to leave the accident scene so they would not get in trouble. Hutchins and Porzky insisted that Mess first call 911. After she had called 911, they both left the scene.
38. Mess attempted to perform CPR on Ashley Johnson until the police arrived.
39. Ashley Johnson’s body was transferred to Milwaukee in a “body bag” for examination. At the medical examination, Ashley Johnson’s body exhibited injuries consistent with rollover accidents.
CONCLUSIONS OF LAW
1. This Court lacks jurisdiction to enter judgment determining the specific amount of debt owed to the plaintiffs or the extent of any damages suffered by the plaintiffs.
2. The only issue before this Court is whether any debt which might be owed to the plaintiffs is non-dischargeable by the debtor in his bankruptcy.
3. The plaintiffs have failed to meet the burden of proving by a preponderance of the evidence that the debtor caused willful and malicious injury under 11 U.S.C. § 523(a)(6) on both their first and second causes of action.
4. No battery or sexual assault of Ashley Johnson by the debtor has been proved.
5. No conspiracy to commit any battery or sexual assault of Ashley Johnson has been proved.
6. Any social host liability that the debtor may have under Wisconsin law does not rise to the level of willful and malicious injury in this case.
DISCUSSION
Section 157 of Title 28 specifically withholds jurisdiction for bankruptcy *564courts to liquidate personal injury and wrongful death claims. Under Section 157, bankruptcy courts have subject matter jurisdiction to hear “core proceedings.” 28 U.S.C. § 157(b)(1). Core proceedings
include, but are not limited to ... allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11.
28 U.S.C. § 157(b)(2)(B) (emphasis added). In this case, the alleged injuries constituted both personal injury and wrongful death claims. Since the debt is being held dischargeable, any determination of liability or damages would have to be for purposes of distribution in the bankruptcy case. Therefore, this Court does not have the jurisdiction to enter a judgment on liability or damages in this case.
Even if the debt had been held non-dischargeable, this Court still would not have been able to enter a money judgment. Determination of liability and damages would no longer have been for purposes of distribution in the bankruptcy case, but under the reasoning of Stern v. Marshall, this Court lacks the constitutional authority to enter a money judgment for non-dischargeable debt. Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). As bankruptcy scholar Douglas Baird explains in his article, Blue Collar Constitutional Law, the Supreme Court in Stem “distinguishes between administering the bankruptcy estate on the one hand and engaging in actions that are the province of a common law judge on the other.” Douglas G. Baird, Blue Collar Constitutional Law, 86 Am. Bankr. L.J. 3, 4-5 (2012). Liquidating a non-dischargeable debt is not necessary to administer the bankruptcy estate, and dis-chargeability can be determined independent of liquidation.
This Court does have both the authority and the jurisdiction to determine dischargeability of any debt owed by the debtor to the plaintiffs. Bankruptcy courts have jurisdiction to make “determinations as to the dischargeability of particular debts,” 28 U.S.C. § 157(b)(2)(I), and “[d]etermining the scope of the debtor’s discharge is a fundamental part of the bankruptcy process.” In re Deitz, 469 B.R. 11, 20 (9th Cir. BAP 2012). Under the logic of Stem, since determining dis-chargeability is necessary to administer the bankruptcy estate, the bankruptcy court has the constitutional authority to enter final judgments on dischargeability. See Stern, 131 S.Ct. 2594.
The plaintiffs conceded in argument that there were only three items of evidence which supported their claims. Those were the testimony of Samantha Johnson, the identification and condition of denim shorts worn by Ashley Johnson on the night in question, and a brown leather belt which was found in the vehicle by crime scene investigators. The belt was identified by Patricia Johnson as having belonged to and been worn by Ashley Johnson on the night in question. The remainder of the plaintiffs’ case depended on the impeachment of witnesses with stories inconsistent with Samantha Johnson’s testimony or with a hypothesis for the events not directly subject to evidence in the case.
Samantha Johnson’s testimony was, in most significant parts, incredible. She claimed to have been at the underage drinking party but her Grandmother with whom she lived testified that she never left *565the house on the evening of July 16th or the morning of July 17, 2010. No other witness corroborated the testimony of Samantha Johnson and none testified that she was present at the party. In addition, Samantha Johnson was said to have changed her testimony. Indeed, the story of the events of the evening of July 16th and the morning of July 17th varied in significant detail from one telling to the next, such as first claiming the victim was struck by a baseball bat and later claiming that she was struck by a softball-sized rock. There were many similar inconsistencies between prior and later stories attributed to Samantha Johnson. Her credibility was further undercut by evidence of influence, both by oral persuasion and by exchange of money and gifts from Plaintiff, Patricia Johnson, which appeared to have shaped Samantha Johnson’s testimony. For these reasons, Samantha Johnson’s account of the events of July 16th and 17th is not credited.
The denim shorts were on Ashley Johnson’s body when it was examined by the medical examiner. They were extensively stained by blood, especially in the area of the crotch and left leg hole. The button fastener at the waistband was missing and appeared to have been torn out of the fabric completely, leaving a hole which appeared to oppose the button hole. Several teeth of the zipper appeared to be missing or damaged. The plaintiffs have argued for adopting an inference that the damage and staining to the shorts is the result of a sexual assault. However, the medical examiner, whose experience is very extensive, testified that the location of blood stains on clothes which have remained on a victim transported in a body bag is not a reliable indicator of the location or nature of injuries to a body. This is because blood flows and pools in low spots as the bag is moved. In addition, there is no direct evidence of when or how the button was torn or the zipper damaged.
The brown belt was even more remote to the plaintiffs’ allegations than the other two items of evidence. Patricia Johnson said she saw it in the belt loops of Ashley’s shorts just prior to Ashley’s departure in Mess’ car. No other witness placed the belt anywhere except the crime scene investigator who found it lying on the floor of Mess’ car after the accident, as was shown by a crime scene photo. Plaintiffs have argued that a close examination of the photo indicates that the belt was not functional as a belt when found and there is some appearance of the buckle being loosened or detached. But, the suggested inference that the belt was torn in an assault on Ashley Johnson and removed from her shorts to facilitate a sexual assault has no independent proof. It is equally likely that the belt was removed from the shorts at some time while Ashley Johnson was in the car and under no duress because the buckle failed or that the buckle failed during that removal.
At the medical examination (autopsy), the examiner found no injury to Ashley Johnson’s genitalia or anus and no injuries indicative of resistance to an assault. An examination undertaken by Patricia Johnson of the shorts and panties found no evidence of sperm or semen. No examination was apparently made for DNA. So, neither the incredible testimony of Samantha Johnson nor the physical evidence sustains the plaintiffs’ allegations of sexual assault. Other allegations of assault, battery and murder depend wholly on the testimony of Samantha Johnson and have been traced to the anguished imagination of Ashley Johnson’s grieving mother.
As part of their first claim, the plaintiffs also alleged that the debtor was part of a conspiracy to commit battery and assault. Under Wisconsin law, there is *566“no such thing as a civil action for conspiracy,” but “[t]here is an action for damages caused by acts pursuant to a conspiracy.” Radue v. Dill, 74 Wis.2d 239, 241, 246 N.W.2d 507, 509 (1976) (quoting Singer v. Singer, 245 Wis. 191, 195, 14 N.W.2d 43, 46 (1944)). In this case, no conspiracy or damages pursuant to a conspiracy were proved. The only evidence of the alleged conspiracy was the same as that already discussed: the shorts, the belt, and the incredible testimony of Samantha Johnson. To the extent that the plaintiffs alleged assault and battery, they alleged that the debtor acted in concert with other parties and hence was part of a conspiracy. Since the assault and battery were not proved, the conspiracy was not proved either. No additional evidence of any plan or scheme was offered.
Turning to the plaintiffs’ second claim of social host liability, this case presented the complicated question of whether a claim based in negligence can ever be considered non-dischargeable as a willful and malicious injury. In Jendusa-Nicolai v. Larsen, the Seventh Circuit Court of Appeals reviewed the definitions of willful and malicious injury and noted that “courts are all over the lot in defining this phrase in section 523(a)(6).” Jendusa-Nicolai v. Larsen, 677 F.3d 320, 322 (7th Cir.2012). But the Court of Appeals also stated that it felt the variation in definitions is a “pseudo-conflict among circuits” of “different legal definitions of the same statutory language that probably don’t generate different outcomes.” Jendusa-Nicolai, 677 F.3d at 322-23. In attempting to reconcile these variations, the Court of Appeals held that “whatever the semantic confusion, we imagine that all courts would agree that a willful and malicious injury, precluding discharge in bankruptcy of the debt created by the injury, is one that the injurer inflicted knowing he had no legal justification and either desiring to inflict the injury or knowing it was highly likely to result from his act.” Id. at 324.
Generally, negligence and recklessness do not constitute willful and malicious injury. In Kawaauhau v. Geiger, the Supreme Court held that “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Kawaauhau v. Geiger, 523 U.S. 57, 64, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). In Kawaauhau, the bankruptcy court had concluded that the doctor’s treatment fell so far below the appropriate standard of care that it was willful and malicious, but the Supreme Court held that “nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Id. at 61, 118 S.Ct. 974. Instead, willful and malicious injury naturally overlaps with intentional torts. As the Supreme Court explained in Kawaauhau, “the (a)(6) formulation triggers in the lawyer’s mind the category ‘intentional torts,’ as distinguished from negligent or reckless torts” because “[ijntentional torts generally require that the actor intend the con sequences of an act, not simply the act itself.” Kawaauhau, 523 U.S. at 61-62, 118 S.Ct. 974 (internal quotations omitted). However, the overlap is not exact. Not all intentional torts involve an intent to cause injury. Jendusa-Nicolai, 677 F.3d at 322. For example, “libel can be committed by someone who believes, though negligently or even recklessly, that his libelous statement is privileged because it’s true; such a debt is therefore dischargeable.” Id. (citing Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986)).
That leaves the question of whether there exists a small category of negligence cases that could constitute willful and malicious injury. Here, the plaintiffs’ second claim was for social host liability, a *567claim based in negligence. See Wis. Stat. § 125.085(4)(b) (“Subsection (2) [providing immunity from civil liability for social hosts that provide alcohol] does not apply if the provider knew or should have known that the underage person was under the legal drinking age and if the alcohol beverages provided to the underage person were a substantial factor in causing injury to a 3rd party.”). Assuming that the debt- or were found to have social host liability — based on his providing alcohol to Mess, knowing she was underage, and the alcohol being a substantial factor in the injury to Ashley Johnson — could this claim rise to the level of willful and malicious injury?
Whether the intent or knowledge element can ever be attached to a negligence claim to make it rise to the level of willful and malicious injury, the plaintiffs failed to prove intent or knowledge here. The plaintiffs failed to show that the debtor either desired to inflict the injuries that Ashley Johnson suffered in the car crash or that he knew her injuries were highly likely to occur. When the debtor ended his party around 2:00 a.m. that morning, the scenario that ultimately played out was only one of many possibilities. Mess could have changed her mind about accepting a ride from Porzky or Hutchins. Ashley Johnson could have asked to get a ride home with one of them instead of with Mess. Mess and Ashley could have stood around talking or waiting in the car for Mess to sober up. Mess could even have driven safely while intoxicated, or Ashley Johnson may not have been injured if she had worn her seat belt. When the debtor ended his party that morning, the car accident was a possibility, but at that point in time, it was not an outcome that was “highly likely to occur.”
Rule 11 Sanctions
On October 3, 2012, the debtor brought a motion for sanctions under Federal Rule of Bankruptcy Procedure 9011 against plaintiffs and plaintiffs’ counsel. Fed. R. Bankr.P. 9011. The debtor argued that plaintiffs presented a pleading and later advocated allegations and factual contentions in that pleading for which there could never be evidentiary support. A final hearing was held on the motion for sanctions on December 12, 2012, and the matter was taken under advisement.
At the time of the hearing, the debtor objected to plaintiffs’ Exhibits 2, 5, and 6.1 have determined that the exhibits in question are relevant and no other evidentiary objections are applicable. Therefore, the exhibits in question are received into evidence.
Federal Rule of Bankruptcy Procedure 9011 authorizes a bankruptcy court to impose sanctions on attorneys or unrepresented parties. Rule 9011 provides:
By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances ...
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery ...
Fed. R. Bankr.P. 9011(b). Rule 9011 is the “bankruptcy counterpart of Federal Rule of Civil Procedure 11.” Collier on Bankruptcy § 9011.02. “Because Rule 9011 conforms to Civil Rule 9011, precedents that have been and will be developed under the latter will be of significant assistance in interpreting the former.” Id.
*568The Seventh Circuit Court of Appeals has identified several factors that are relevant in determining whether a reasonable inquiry was conducted under Rule 11 and therefore under Rule 9011:
To measure the reasonableness of a party’s inquiry into the factual bases of its claims, we look to a number of factors including: “whether the signer of the documents had sufficient time for investigation; the extent to which the attorney had to rely on his or her client for the factual foundation underlying the pleading, motion or other paper; whether the case was accepted from another attorney; the complexity of the facts and the attorney’s ability to do a sufficient pre-filing investigation; and whether discovery would have been beneficial to the development of the underlying facts.” Brown v. Federation of State Medical Bds. of the United States, 830 F.2d 1429, 1435 (7th Cir.1987).
Divane v. Krull Elec. Co., Inc., 200 F.3d 1020, 1028 (7th Cir.1999). The reasonable inquiry standard is “said to be objective.” In re Slaughter, 191 B.R. 135, 140 (Bankr.W.D.Wis.1995) (citing Mars Steel Corp. v. Continental Bank, N.A., 880 F.2d 928, 932 (7th Cir.1989) (en banc)). The reasonableness of an attorney’s inquiry “focuses on inputs rather than outputs, conduct rather than result.” Slaughter, 191 B.R. at 140 (quoting Mars Steel, 880 F.2d at 932). The right question to ask in this inquiry is “not whether the claim itself was frivolous or nonfrivolous, but whether the attorney conducted an adequate inquiry into the facts and the law before he filed the claim.” Slaughter, 191 B.R. at 140 (internal quotation omitted).
A majority of courts have held that the burden of proof is on the moving party to prove that sanctions are warranted. See, e.g., In re Weaver, 307 B.R. 834, 841 (Bankr.S.D.Miss.2002); In re Kliegl Bros. Universal Elec. Stage Lighting Co., Inc., 238 B.R. 531, 541 (Bankr.E.D.N.Y.1999); In re Standfield, 152 B.R. 528, 534 (Bankr.N.D.Ill.1993); In re Cedar Falls Hotel Props. Ltd. P’ship, 102 B.R. 1009, 1014 (Bankr.N.D.Iowa 1989). Once a prima facie case has been established, “the burden shifts to the party from whom the sanction is sought” to show that the rule has been complied with. In re KPMA P’ship, Ltd., No. 04-35261, 2006 WL 2868978, at *1 (Bankr.S.D.Tex. Oct. 5, 2006) (citing Kliegl Bros., 238 B.R. at 541 (Bankr.E.D.N.Y.1999); In re King, 83 B.R. 843, 847 (Bankr.M.D.Ga.1988)).
Over the years, courts have dealt with the issue of whether there is a continuing duty to correct or withdraw an offending claim once the party becomes aware that there is no evidentiary support for the allegations. An early line of cases regarding the 1983 version of FRCP 11 “suggested that a paper could ‘become frivolous.’ ” Georgene M. Vatro, Rule 11 Sanctions § 5.04 (American Bar Association 2004). This reasoning was incorporated into the 1993 version of Federal Rule of Civil Procedure 11: an attorney may be sanctioned for presenting a position to the court by “signing, filing, submitting, or later advocating.” Fed. R. Civ. Pro. 11; see also, Fed. R. Bankr.P. 9011. There is no affirmative continuing duty to withdraw papers, although withdrawal “will generally immunize the target from sanctions.” Georgene M. Vairo, Rule 11 Sanctions § 5.04 (American Bar Association 2004) (citing Advisory Committee Note); see also, In re Southern Textile Knitters, 65 Fed.Appx. 426 (4th Cir.2003); Pantry Queen Foods, Inc. v. Lifschultz Fast Freight, Inc., 809 F.2d 451 (7th Cir.1987). An attorney has a safe harbor of 21 days after the motion for sanctions has been served to correct or withdraw the challenged position before the motion for sane-*569tions may be filed with the court. Fed. R. Bankr.P. 9011(c)(1)(A).
In his motion for sanctions, the debtor alleged that that plaintiffs and plaintiffs’ counsel knew that the third cause of action in the plaintiffs’ complaint could have no evidentiary basis. The third cause of action sought denial of the debt- or’s discharge under Section 727(a)(4) of the Bankruptcy Code for making a false oath in connection with his bankruptcy case. 11 U.S.C. § 727(a)(4). Plaintiffs alleged that the debtor failed to disclose his beneficial interest in the Andrew J. Hay-dock Weihert Trust, created by the will of his deceased grandmother Ethel Weihert (not to be confused with the debtor’s interest in the Ethel D. Weihert Irrevocable Trust, also created by Ethel Weihert’s will, which was properly disclosed in the debt- or’s schedules).
The debtor argued that the plaintiffs should have known there was no evidentia-ry basis to support their claim as of August 28, 2012, when the Joint Pre-trial Statement was filed and the plaintiffs “later advocated” their position in the third claim. At that point in time, the plaintiffs knew that the Wisconsin Circuit Court Access record in the matter of Ethel D. Weihert does not show that a testamentary trust was created. Additionally, when the motion for sanctions was served on the plaintiffs and plaintiffs’ counsel on July 19, 2012, the correspondence included a letter from attorney Jay Smith of Neuberger, Wakeman, Lorenz, Griggs & Sweet of Lake Mills, Wisconsin, who handled the affairs of Ethel Weihert after her death. (Debtor’s Ex. 3). The letter explained that the testamentary trust was never created because there were no assets to administer under the trust. Id.
However, even as of August 28, 2012, the plaintiffs and plaintiffs’ counsel had good reasons for believing that there could be evidentiary support for their third cause of action. First, the debtor’s Exhibit 8, which is an email from attorney Nor-dholm to attorneys Reyes and Owens on July 24, shows that the plaintiffs’ attorneys had legitimate questions about Ethel Wei-hert’s assets even after the July 19 correspondence. (Debtor’s Ex. 8). The debtor attempted to answer the plaintiffs’ attorneys’ concerns regarding livestock, equipment, and machinery that remained with Michael Weihert instead of going into the estate, but the plaintiffs’ attorneys properly sought to discover why these assets did not go into the estate. Second, the debtor had a proven incident of not disclosing an asset that was distributed to him under the will. The debtor did not include the vehicle that he received from the estate of Ethel Weihert on his schedules until he was challenged on his interests in the estate and the testamentary trust. The debtor’s schedules reflect that they were amended on June 6, 2012, to include the motor vehicle. This provides a reasonable basis for the plaintiffs’ attorneys to believe that other distributions were not disclosed. Third, plaintiffs’ Exhibit 6 is a letter from attorney Jay Smith to the debtor dated December 5, 2011. It regards distributions from the irrevocable trust: “Badger Bank is withholding your portion of the trust due to concerns that your share of the trust might be subject to seizure by creditors if a judgment is entered against you in case number 10-CV-1026 in the Jefferson County Circuit Court.” (Pis.’ Ex. 6). Since the irrevocable trust was withholding distribution, it is reasonable for the plaintiffs and plaintiffs’ counsel to seek to discover whether there were other assets that were not being distributed.
Thus, on July 19, when attorneys Reyes and Owens received correspondence from the debtor’s attorney attempting to show that the debtor had no interest in either *570the estate or the testamentary trust, plaintiffs and plaintiffs’ counsel had legitimate bases for believing that the debtor could be concealing assets. The discovery period was set to extend for 120 days following the pretrial conference, which was held on July 24, 2012. The plaintiffs’ attorneys had until near the end of November to develop the facts relating to their third cause of action. Even on August 28, when the plaintiffs “later advocated” the third cause of action by reiterating it in the joint pretrial statement, it is likely that they still needed time to investigate the facts. The debtor provided no evidence that the plaintiffs had any additional knowledge at that point. Therefore, it was appropriate for the plaintiffs to seek discovery on the third cause of action, and sanctions are not appropriate in this case.
An order dismissing the complaint and denying requested sanctions will be entered.
ORDER
On the basis of the memorandum decision filed this date, it is hereby ORDERED that:
(1) the complaint is DISMISSED, and
(2) the debtor’s motion for sanctions is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495744/ | SCHERMER, Bankruptcy Judge.
James C. Schlehuber (the “Debtor”) appeals from the order of the bankruptcy court1 converting his Chapter 7 bankruptcy case to a case under Chapter 11, pursuant to § 706(b) of Title 11 of the United States Code (the “Bankruptcy Code”). We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.
ISSUE
The issue in this appeal is whether the bankruptcy court abused its discretion when, without the consent of the Debtor, it converted the Debtor’s Chapter 7 bankruptcy case to a case under Chapter 11 pursuant to Bankruptcy Code § 706(b).
*572BACKGROUND
In January 2012, the Debtor and his wife filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The Debtor and his wife filed their bankruptcy schedules and Statement of Financial Affairs the same day. Their debts were primarily business debts.
The schedules filed on the petition date revealed that the Debtor and his wife had a significant income each year, the great majority of which was attributable to the Debtor’s earnings. The schedules also showed a substantial monthly surplus. Fremont National Bank & Trust Company (the “Bank”), an unsecured creditor, filed a motion seeking to convert the Debtor’s and his wife’s Chapter 7 case to a case under Chapter 11 under Bankruptcy Code § 706(b).
Following the Bank’s filing of its § 706(b) motion, the Debtor and his wife amended their schedules. The amended schedules showed that the Debtor and his wife were separated and that they maintained separate households. The Debtor decreased the amount of his monthly income, increased the amount of his monthly expenses, and claimed to have no monthly disposable income. The Debtor also filed a resistance to the Bank’s motion to convert.2
In October 2012, the bankruptcy court held a hearing on the Bank’s § 706(b) motion. The Bank maintained that conversion was in the best interest of all parties because the Debtor had significant income with which to fund a Chapter 11 plan and the Debtor would be able to rehabilitate his affairs through a Chapter 11 plan. The U.S. Trustee joined in support of the Bank’s request to convert the Debtor’s case.
The Bank introduced the Debtor’s earning statements through mid-June 2012 and the Debtor’s tax documents for 2009 through 2011. The average monthly income derived from the Debtor’s June 15, 2012 year-to-date earnings statement is greater than the amount disclosed on his amended schedule of income. The average monthly income derived from the Debtor’s 2009, 2010, and 2011 W-2 forms is less than that derived from his June 15, 2012 year-to-date earnings statement, but it, too, is greater than the amount disclosed on his amended schedule of income. With either average monthly income, after allowance is made for the expenses listed on his amended schedule of expenses, the Debtor would have significant monthly disposable income.
The Debtor submitted into evidence his affidavit. In his affidavit, the Debtor states that in 2011 he left his then current employment and began working for another company. In 2011 he obtained a onetime bonus and had a low sales quota, but in 2012 his sales quota was increased, decreasing his chance of obtaining “sales commission accelerators.” According to the Debtor his “income varies uncontrollably and [his] bonuses are not guaranteed.” The Debtor also stated that he was required to pay an additional sum of money to his estranged wife monthly.
Various arguments were made at the hearing regarding why the case should not be converted, including that the Debtor and his wife wanted to discharge their debt and obtain their fresh start, they would not voluntarily commit their post-petition earnings to a Chapter 11 plan, conversion would not promote rehabilita*573tion of their financial affairs or reorganization of their business because there was no business to reorganize, and that conversion under § 706(b) based on the arguments of the Bank and the U.S. Trustee would be an end run around § 707(b)’s requirement that a debtor have primarily consumer debt. The Debtor represented that his income varied, the amount of his income from the original schedules was not an accurate picture of the Debtor’s income looking forward, the amended schedules were filed based on projections of the Debtor’s income looking forward, and the Debtor and his wife had substantially no income producing assets with which to fund a plan.
Although the Debtor and his wife filed a joint voluntary bankruptcy petition, the bankruptcy court only converted the Debt- or’s case to one under Chapter 11, and only the Debtor appeals.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. Willis v. Rice (In re Willis), 345 B.R. 647, 650-51 (8th Cir. BAP 2006). We review the conversion of a Chapter 7 case to Chapter 11 under Bankruptcy Code § 706(b) for an abuse of discretion. Id. at 654. “The bankruptcy court abuses its discretion when it fails to apply the proper legal standard or bases its order on findings of fact that are clearly erroneous.” Lovald v. Tennyson (In re Wolk), 686 F.3d 938, 939 (8th Cir.2012) (citation omitted).
DISCUSSION
A. 11 U.S.C. § 706(b)
Bankruptcy Code § 706(b) provides that “[o]n request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time.” 11 U.S.C. § 706(b).
As this panel noted previously, “[t]he decision whether to convert [under § 706(b) ] is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.” Willis, 345 B.R. 647 at 654 (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977), reprinted in 1978 U.S.C.C.A.N. 5963; S.Rep. No. 989, 95th Cong.2d Sess. at 94 (1978), reprinted in 1978 U.S.C.C.A.N. 5787) (internal quotation marks omitted). Section 706(b) does not provide guidance regarding the factors a court should consider. In re Quinn, 490 B.R. 607, 621-22, 2012 WL 6737484, at *10 (Bankr.D.N.M. Dec. 28, 2012). “Since there are no specific grounds for conversion, a court ‘should consider anything relevant that would further the goals of the Bankruptcy Code.’ ” Proudfoot Consulting Co. v. Gordon (In re Gordon), 465 B.R. 683, 692 (Bankr.N.D.Ga.2012) (quoting In re Lobera, 454 B.R. 824, 854 (Bankr.D.N.M.2011)).
After a hearing at which arguments were made by the Debtors, the Bank, and the U.S. Trustee,3 the bankruptcy court exercised its discretion under § 706(b) and granted the Bank’s motion to convert the Debtor’s case to Chapter 11. In doing so, it determined that, based on the evidence, the Debtor’s income had historically been “very substantial.” The court stated that “the ability to pay is far and away an important factor under [§ ] 706(b),” and it recognized that the Debtor would have the choice in Chapter 11 to make payments *574under a plan and receive a discharge. The Debtor’s ability to fund a Chapter 11 plan if he chooses to do so was certainly an important and relevant consideration. See 11 U.S.C. §§ 1115(a)(2) (property of estate includes post-petition earnings of individual debtor); 1127(e) (plan may be modified post-confirmation); 1129(a)(15) (individual debtor to dedicate projected disposable income to plan under certain circumstances).
The bankruptcy court’s decision was supported by the record and was clearly within its discretion.
B. Notwithstanding the Debtor’s arguments, the bankruptcy court acted within its discretion under § 706(b).
The Debtor makes arguments against conversion of his case, none of which convince us that the bankruptcy court abused its discretion.
1. It is irrelevant that the Debtor was an individual with primarily non-consumer debts.
The Debtor takes the position that conversion of his case to one under Chapter 11 served as an end run around § 707(b)’s requirement that an individual debtor have primarily consumer debts. According to the Debtor, arguments made by the Bank and the U.S. Trustee in favor of conversion (asserting the Debtor’s ability to pay) “strongly resemble” those made in cases alleging an abuse of the provisions of Chapter 7 under Bankruptcy Code § 707(b). The Debtor maintains that because ability to pay is considered under § 707(b) (which section applies only to a debtor with primarily consumer debts), the ease of an individual debtor with primarily business debt should not be converted to Chapter 11 based on his ability to pay.
We see no basis for imposing the limit requested by the Debtor on the conversion of his case; the bankruptcy court did not err in its decision. Nothing in § 706(b) suggests that a court may not focus on ability to pay under that section where the Debtor is -an individual with primarily business debts. 11 U.S.C. § 706(b). And, ability to pay was logically a central consideration under § 706(b) in light of the fact that confirmation of a plan is a goal in Chapter 11.
The case relied upon by the Debtor in its brief for his position that the bankruptcy court improperly focused on his ability to pay, In re Ryan, 267 B.R. 635 (Bankr.N.D.Iowa 2001), is not binding on us (or the bankruptcy court) and is distinguishable. To the extent Ryan could be read to apply to the facts of this case, we disagree with it. The Ryan court disallowed an unsecured creditor’s request to convert a debtor’s Chapter 7 case to Chapter 11 under § 706(b) based on the debtor’s ability to pay. Id. When Ryan was decided, the law did not provide a creditor with standing to seek dismissal under § 707(b) and, although the earlier version of § 707(b) applied, the parties with standing had not sought dismissal.4 Id. at 639. In addition to seeking conversion under § 706(b), the Ryan creditor asked the court (as his preferred remedy) to issue a sua sponte order dismissing the debtor’s case under § 707(b). Id. at 638. The court characterized the creditor’s § 706(b) request as a disguised § 707(b) motion to dismiss. Id. at 639.
The Bank sought relief under § 706(b) because that is a provision under which a creditor may seek to convert a case to Chapter 11 without the Debtor’s consent, *575not because the Bank was trying to circumvent another Bankruptcy Code provision. And, just as the bankruptcy court’s decision in Ryan was made as an exercise of its discretion, it was within the bankruptcy court’s discretion to convert the Debtor’s case here.
2. The bankruptcy court acted within its discretion when it assessed the evidence and determined conversion was warranted.
The Debtor also submits that the bankruptcy court’s ruling was erroneous because the court allegedly looked only to the interests of the creditors (ie., the Debtor’s ability to pay) and failed to consider the interests of the Debtor or those who depend on him for support. Noting his desire to discharge his debts and obtain a fresh start, the Debtor makes several of the same arguments he made before the bankruptcy court. The Debtor maintains that he has no disposable income from his services or income producing assets with which to fund a plan, and has no business to reorganize because the business property was surrendered to the secured creditors. The Debtor is not willing to voluntarily commit his post-petition earnings to a Chapter 11 plan. He states that requiring him to fund a Chapter 11 plan would not allow him to rehabilitate his finances and, instead, would harm him.
We disagree with the Debtor’s position. As an initial matter, the bankruptcy court assessed the evidence presented to it and found that the Debtor had the ability to fund a Chapter 11 plan. The bankruptcy court’s determination was supported by the record, and we will not second guess it. And, it is not necessary that a Chapter 11 debtor be engaged in business to reorganize. Toibb v. Radloff, 501 U.S. 157, 166, 111 S.Ct. 2197, 115 L.Ed.2d 145 (1991) (“[Bankruptcy] Code contains no ‘ongoing business’ requirement for Chapter 11 reorganization”).
As support for his argument that the bankruptcy court erred by not considering his interests, the Debtor cites legislative history (also cited by this panel in Willis, 345 B.R. at 654) stating the court’s decision to convert under § 706(b) “is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.” H.R.Rep. No. 595, 95th Cong., 1st Sess. at 380 (1977), reprinted in 1978 U.S.C.C.A.N. 5963; S.Rep. No. 989, 95th Cong.2d Sess. at 94 (1978), reprinted in 1978 U.S.C.C.A.N. 5787. However, reduced to its core, the Debtor’s position amounts to an argument that his interests (or desires) should be paramount to those of his creditors. But, the bankruptcy court acted within its discretion by determining that the Debtor’s ability to pay was “far and away an important factor under [§ ] 706(b),” and converting the case to Chapter 11. The Debtor argued why he believed that conversion was not in his best interest or that of his dependents. The Bank maintained that if the case was converted to Chapter 11, the Debtor could rehabilitate his financial affairs, and it submitted that conversion was in the interest of all parties. It is clear from the record as a whole that the bankruptcy court necessarily considered these arguments. And, it recognized that the Debtor would have the choice in a Chapter 11 case to make plan payments and obtain a Chapter 11 discharge.5
*576Contrary to the Debtor’s apparent belief, nothing in § 706(b) states that an individual debtor’s interest should control whether his case is converted to Chapter 11. 11 U.S.C. § 706(b); see also 11 U.S.C. § 303(b) (involuntary Chapter 11 case allowed against individual). Moreover, no argument made or case cited by the Debt- or convinces us that the interests of the Debtor should have governed the bankruptcy court’s decision, or that ability to pay was not the most important consideration. Rather, we hold that the bankruptcy court’s decision was consistent with the statute, supported by the record, and properly made within its discretion. See e.g., Willis, 345 B.R. at 655 (affirming denial of individual debtor’s request to convert from Chapter 7 to Chapter 11 under § 706(b) based on debtor’s “fraudulent, evasive, and uncooperative behavior”); see also Texas Extrusion Corp. v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1161 (5th Cir.1988) (affirming conversion of individual debtor’s case to Chapter 11 under § 706(b) where bankruptcy court found primary purpose of debtor’s previous conversion to Chapter 7 was to interfere with Chapter 11 reorganization of debtor and other debtors).
CONCLUSION
For the foregoing reasons, the decision of the bankruptcy court is AFFIRMED.
. The Honorable Thomas L. Saladino, Chief Judge, United States Bankruptcy Court for the District of Nebraska.
. In addition, the Debtor challenged the constitutionality of Bankruptcy Code §§ 1115(a)(2), 1127(e) and 1129(a)(15). The constitutional issues were not raised on appeal and are deemed abandoned.
. The United States of America also appeared and made an argument about the constitutional issue that is not before us on appeal.
. When Ryan was decided, § 707(b) provided only for dismissal, not for conversion to Chapter 11, as is now allowed by that statute.
. The U.S. Trustee submits that, based on the unambiguously plain language of § 706(b) (negating any need to look at the legislative history), a court is not required to make any particular findings or to balance any interests. Because we hold that the bankruptcy court acted within its discretion here, we do not opine regarding what a court must consider *576in other cases under § 706(b) to avoid abusing its discretion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495745/ | ORDER GRANTING MOTION TO DISMISS FILED BY DEFENDANTS AURORA LOAN SERVICES, AURORA BANK, FSB AND WELLS FARGO
A. BRUCE CAMPBELL, Bankruptcy Judge.
This matter comes before the Court on the Motion to Dismiss (“Motion”) filed by Defendants Aurora Loan Services, (“ALS”), Aurora Bank, FSB (“Aurora Bank”) and Wells Fargo Bank, N.A. as trustee for Structured Adjustable Rate Mortgage Loan Trust Mortgage Pass Through Certificates, Series 2007-3 (“Wells”) (collectively “Defendants”), and the Response filed by Plaintiff/Debtor Anthony Semadeni (“Debtor”). The Court, having reviewed the foregoing and being otherwise advised in the premises, finds as follows.
I. The Complaint
A. Background and Relevant Facts
Debtor’s complaint is based primarily on Defendants’ actions in connection with a public trustee’s foreclosure sale of Debt- *580or’s residence. For the most part, Debt- or’s claims are based on discrepancies in copies of the evidence of debt that were filed with the public trustee and in related court proceedings. The following summary of events is drawn from the allegations of the complaint, documents attached to and incorporated in the complaint, undisputed copies of documents attached to the Motion, and the Court’s file.1
In October, 2009, a public trustee’s foreclosure was commenced by ALS against Debtor’s residence (“Property”). ALS asserted that it was the “owner” of a note (“Note”) secured by a deed of trust on the Property. The copy of the Note submitted to the public trustee was payable to First Magnus Financial Corporation (“First Magnus”), and it had no endorsement purporting to transfer ownership of the note to ALS.2 This foreclosure sale was withdrawn and a second foreclosure sale was commenced by ALS in February, 2011. In this proceeding, ALS represented to the public trustee that it was the “holder” of the Note, but again, the copy of the Note provided to the public trustee had no endorsements.
In connection with the second foreclosure sale, ALS filed a proceeding under Colo. R. Civ. P. 120 to obtain an order authorizing the public trustee’s sale. The Rule 120 motion was filed in El Paso County District Court (“State Court”). Again ALS represented itself as the “holder” of the Note and submitted a copy of the Note with no endorsements. An order authorizing sale was entered by the State Court.
On June 6, 2011, prior to the foreclosure sale of the Property, Debtor filed a Chapter 7 bankruptcy petition, which was assigned Case No. 11-23615 ABC (“First Chapter 7 Case”). In his schedules, Debt- or listed ALS as a secured creditor with a lien on the Property.
ALS filed a motion for relief from stay in Debtor’s First Chapter 7 Case, seeking an order from this Court which would allow it to continue with the pending public trustee’s foreclosure. The copy of the Note attached to the ALS’ motion for relief from stay had two endorsements, one from First Magnus to Lehman Brothers, and a second from Lehman Brothers to ALS. Neither Debtor or his Chapter 7 bankruptcy trustee opposed the motion, and, on July 29, 2011, this Court entered an order granting ALS relief from the automatic stay, “to foreclose on and/or take possession and control of [the Property]” (“Lift Stay Order”). On August 24, 2011, the public trustee’s sale was held, and ALS was the high bidder. On September 19, 2011, after receiving a confirmation deed from the public trustee, ALS commenced a forcible entry and detainer action to evict Debtor from the Property.
On October 6, 2011, Debtor filed a quiet title action against ALS, Wells, Mortgage Electronic Registry Systems, Inc., and the El Paso County Public Trustee in State *581Court. Debtor’s quiet title complaint alleged that ALS was not the owner or holder of the Note, that ALS did not have standing to institute foreclosure proceedings, and that ALS deliberately misled the Public Trustee and the State Court in the Rule 120 action. Debtor requested a determination that the State Court’s order authorizing the Public Trustee to conduct the foreclosure sale of the Property was void and that ALS had no interest in the Property.
On December 2, 2011, Debtor’s First Chapter 7 Case was closed without entry of discharge because Debtor failed to file the requisite certificate of having completed a course in personal financial management.
On December 14, 2011, ALS filed a motion to dismiss Debtor’s quiet title action. Attached to this motion was yet a different copy of the Note, which contained a blank endorsement from the original payee, First Magnus.3 On February 1, 2012, the State Court granted ALS’ motion to dismiss the quiet title action. The State Court found that in the schedules filed by Debtor in his First Chapter 7 Case, Debtor failed to disclose any claims against ALS, and he listed ALS as a secured creditor with a lien on the Property. It ruled that Debtor was judicially estopped to claim that ALS was not a secured creditor in the quiet title suit and that Debtor lacked standing to bring any claims against ALS because they were property of his bankruptcy estate.
On April 17, 2012, Debtor filed another Chapter 7 bankruptcy case, Case No. 12-17567 ABC (“Second Chapter 7 Case”). On April 28, 2012, in his Second Chapter 7 Case, Debtor filed a motion to extend the automatic stay in order to prevent ALS from taking action to recover possession of the Property. ALS opposed Debtor’s motion to extend the stay, saying it was the holder of the Note, and that it was in possession of the original note with a blank endorsement from First Magnus. Debt- or’s motion to extend stay was granted, and ALS has, to date, not sought relief from the stay in the Second Chapter 7 Case.
B. Debtor’s Claims for Relief
Debtor’s complaint in this adversary proceeding is challenging to comprehend. The Court has endeavored to glean the substance of Debtor’s claims for relief by construing the allegations in a light most supportive to the claims alleged. The following is the Court’s best construction of the nature and bases for the six claims for relief contained in Debtor’s complaint.
First, Debtor seeks declaratory relief. Debtor requests the Court to determine that its July 29, 2011 Lift Stay Order is void because Defendants have committed “evident fraud,” on the Court. Debtor claims to be the owner of the Property, seeming to allege that if the Lift Stay Order is void, the public trustee’s sale was in violation of the automatic stay, and the foreclosure sale and the confirmation deed issued to ALS by the Public Trustee are also void. Debtor requests the Court to “make the determination as to the validity, nature and extent of Defendants [sic] interest in the Property so that Debtor may set off Defendants [sic] claims through Debtors [sic] damage claims set forth herein and as may be determined at trial.” Complaint, ¶ 103.
Debtor’s Second Claim for Relief is for breach of contract against ALS and Wells. Debtor alleges that First Magnus did not loan any money to Debtor and that ALS *582and/or Wells are liable for First Magnus’ breach of the loan contract as successors in interest to First Magnus. Debtor claims unspecified damages resulting from the breach of contract by ALS and Wells.
Debtor’s Third Claim for Relief is against ALS, Aurora and Wells for breach of the implied duty of good faith and fair dealing. Debtor alleges that ALS, Aurora, and/or Wells are liable as successors in interest to First Magnus and that there was a “failure of consideration as to the transfer of assets to Wells from First Magnus.” Complaint, ¶ 116. Debtor asserts that ALS and/or Wells “attempted to re-contract with Debtor in relation to a purported obligation that they knew or should have know had been extinguished by the failure of First Magnus.” Complaint, ¶ 119.
Debtor’s Fourth Claim for Relief is for abuse of legal and regulatory process. Debtor alleges that Defendants used “nonjudicial administrative legal process to obtain property without lawful standing to do so.” Complaint, ¶ 123. Debtor alleges that Defendants knowingly or negligently submitted incorrect evidence of their debt to this Court, the State Court and the Public Trustee. Debtor claims unspecified damages.
Debtor’s Fifth Claim for Relief is for damages, injunctive and declaratory relief for Defendants’ alleged violation of Civil RICO statutes. Debtor alleges Defendants committed actions prohibited by the Civil RICO statutes when they “[stole] the equity in Debtor’s Property through the use of false representations, perjury, conversion, sham pleadings [and] manufactured evidence.” Complaint, ¶ 132. Debtor also claims that Defendants have engaged in a pattern of intentional infliction of emotional distress.
Defendant’s Sixth Claim for Relief is for an accounting of all funds paid by Debtor to Defendants.
In his wherefore clause, Debtor requests a declaration that the Lift Stay Order and the Public Trustee’s confirmation deed are void, an order quieting title to the property to Debtor, a determination that the original loan is void for lack of consideration, injunctive relief against continued violations of RICO, actual, treble, and punitive damages, and other relief.
II. The Motion to Dismiss
Defendants assert three general arguments in support of their Motion. First, according to the preclusion doctrines of res judicata and collateral estoppel, Defendants assert that Debtor is barred from relitigáting the issues actually litigated and decided in the quiet title action, as well as all claims that could have been brought by Debtor against ALS and Wells in that case. Defendants assert that all of Debt- or’s claims to set aside the foreclosure, to void the public trustees’s deed, and any claims challenging ALS’ title to the property are precluded from being raised in this adversary proceeding.
Next Defendants argue that Debtor’s claims which seek, in essence, to undo the foreclosure sale are claims brought by a state court loser complaining of injuries caused by a prior state court judgment who seeks federal court review and reversal of the unfavorable state court judgment. These claims, Defendants assert, are barred by the Rooker-Feldman doctrine.
Defendants also maintain that each of Debtor’s six claims for relief lack essential factual or legal elements, and therefore Debtor has failed to state any claims upon which relief can be granted.
III. Discussion
A. Standards for Determination of a Motion under Fed.R.Civ.P. 12(b)
The purpose of a motion to dismiss under Fed.R.Civ.P. 12(b)(6) is to test the *583legal sufficiency of the complaint assuming all the factual allegations in the complaint are true. Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir.1994). In making this determination, the court must determine whether the complaint contains enough facts to state a claim for relief that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). 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. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The court must accept the facts alleged in the complaint as true, even if they are doubtful, Twombly, 550 U.S. at 555-556, 127 S.Ct. 1955, and it must make all reasonable inferences in favor of the plaintiff. Tal v. Hogan, 453 F.3d 1244, 1252 (10th Cir.2006). When considering dismissal for lack of standing or on a facial attack on subject matter jurisdiction under Rule 12(b)(1), the court must also assume the material facts in the complaint are true and construe the complaint in favor of the plaintiff. U.S. v. Rodriguez-Aguirre, 264 F.3d 1195, 1203 (10th Cir.2001); Holt v. United States, 46 F.3d 1000, 1002 (10th Cir.1995).
B. Debtor May Not Relitigate Claims Relating to ALS’ Title to the Property and ALS’ Standing to Foreclose
1. Prior Final Judgment in Quiet Title Action
In his complaint Debtor alleges that, on October 5, 2011, he filed a quiet title complaint in State Court, that ALS and Wells moved to dismiss the quiet title complaint, that the State Court granted the motion to dismiss, and that Debtor filed a motion to reconsider the dismissal which was denied. Complaint, ¶ 64-71. Debtor refers to ALS’ and Wells’ motion to dismiss and the State Court’s order dismissing the quiet title action in his instant complaint and states that these documents are attached as Exhibits “I” and “J.”4 Defendants have attached to their Motion a copy of the Debtor’s quiet title complaint, and Debtor does not dispute that the copy is accurate.
The quiet title complaint alleged, among other things, that the ALS never owned the Note, that it deliberately misled the Public Trustee and the State Court as to ALS’ standing to institute a foreclosure sale, that the Note was not in default, and that ALS’ and Wells had no lawful interest in the Property. Debtor requested the State Court to enter an order determining that the foreclosure sale was void, that ALS’ and Wells had no right or interest in the Property, and that Debtor was the owner of the Property.
The State Court’s order dismissing all of Debtor’s claims in the quiet title action is a final judgment entitled to pre-clusive effect as determined under Colorado law. Rules for application of preclusion principles are determined by the law of the forum in which the prior judgment was rendered. Marrese v. American Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). Thus, a judgment is afforded the same preclusive effect in a subsequent action brought in a different forum that it would be afforded if the latter action were brought in the original forum.
*5842. Claim Preclusion (Res Judicata )
Under Colorado law, claim preclusion “works to preclude the relitigation of matters that have already been decided as well as matters that could have been raised in a prior proceeding but were not.” Argus Real Estate, Inc. v. E-470 Public Highway Authority, 109 P.3d 604, 608 (Colo.2005). It requires: (1) finality of the first judgment, (2) identity of the subject matter, (3) identity of the claims for relief, and (4) identity or privity between the parties in both actions. Id.
The State Court’s order dismissing Debtor’s quiet title action is a final judgment and ALS, Wells, and the Debtor were parties to the quiet title action. Thus Debtor is precluded from relitigating against ALS and Wells any claims that were or could have been brought in the quiet title action. In determining whether there exists identity of claims for relief in this case and in the quiet title action, the court must focus on the injury for which relief is sought. “[C]laim preclusion bars relitigation ... of all claims that might have been decided if the claims are tied by the same injury.” Id. at 609. “[O]nce a judgment is entered ... it ‘extinguishes the plaintiffs claim ... ineludifing] all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.’ ” Id. (quoting Restatement (Second) of Judgments § 24 (1982)).
Claim preclusion thus bars Debtor from asserting against ALS and Wells any claims for relief with respect to the transaction or transactions out of which the quiet title action arose. This includes all claims that ALS’s foreclosure sale was void because of fraud on the public trustee or fraud in the Rule 120 action, and all claims that ALS’ foreclosure was void because ALS lacked standing to initiate the power of sale under the deed of trust securing the Note. These claims have already been decided against Debtor in the quiet title action. Debtor’s claims against ALS and Wells for breach of the implied duty of good faith and fair dealing, abuse of process, civil RICO, and accounting are also barred by claim preclusion to the extent they relate to ALS’s actions in connection with the public trustee’s sale of the Property.
3. Issue Preclusion (Collateral Estoppel)
Issue preclusion, or collateral estoppel, precludes parties to a previous action from relitigating issues of fact or law actually litigated and determined by a valid and final judgment. Restatement (Second) of Judgments § 27 (1982). Under Colorado law, the following elements must be shown in order for issue preclusion to apply: (1) the issue precluded is identical to an issue actually litigated and necessarily adjudicated in the prior proceeding; (2) the party against whom estop-pel 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 issue in the prior proceeding. McNichols v. Elk Dance Colorado, LLC, 139 P.3d 660, 667 (Colo.2006). According to Colorado law, an issue is “actually litigated” if the parties raised the issue in the prior action, the issue was submitted for determination, and the issue was actually determined by the adjudicatory body. Bebo Constr. Co. v. Mattox & O’Brien, P.C., 990 P.2d 78, 85 (Colo.1999). “Necessarily adjudicated” means that the determination of an issue was necessary to the judgment. Id. at 86.
*585In some jurisdictions, where there are multiple alternative findings which are each independently sufficient to support a judgment, none of the findings is accorded issue preclusive effect in a later case. This position is based on comment i. to § 27 of the Restatement (Second) of Judgments and is directly contrary to the position of the First Restatement of Judgments. The Second Restatement position has been the subject of criticism by many courts. The Colorado Supreme Court has not ruled on this issue, but in Stanton v. Schultz, 222 P.3d 303, 308 (Colo.2010), it recognized the criticism of and declined to adopt the Second Restatement position, instead affirming the judgment below on a different ground. “When the federal courts are called upon to interpret state law, the federal court must look to the rulings of the highest state court, and, if no such rulings exist, must endeavor to predict how that high court would rule.” Johnson v. Riddle, 305 F.3d 1107, 1118 (10th Cir.2002). In light of the Colorado Supreme Court’s reluctance to adopt the Second Restatement position in Stanton v. Schultz, and its acknowledgment of the criticism of that rule, this Court predicts that it would not deny preclusive effect in this case to the State Court’s finding that Debtor was judicially estopped to deny ALS’ standing to foreclose, even though the State Court also made an alternative finding that Debtor lacked standing to pursue his claims.
Accordingly, Debtor is precluded from relitigating, against any of the Defendants (even those not parties to the quiet title action), whether ALS had standing to foreclose and whether it committed any fraud in connection with the foreclosure sale. These issues were actually litigated and decided against Debtor in the quiet title suit. Debtor is precluded from relit-igating his claims against any of the Defendants for declaratory relief, abuse of process, and civil RICO to the extent they are based on allegations of ALS’ fraud in the foreclosure proceeding or lack of standing to institute the foreclosure.
C. Debtor Lacks Standing to Pursue Claims Arising Prior to the Filing of His Chapter 7 Cases
Debtor’s complaint does not specify when his claims for damages for breach of contract, breach of the duty of good faith and fair dealing, abuse of process, or civil RICO arose. However, to the extent those claims arose prior to June 6, 2011, these claims are assets of the estate in his First Chapter 7 Case. Since the claims were not listed by Debtor in his schedules in that case, they were not abandoned to Debtor when the First Chapter 7 Case was closed on December 2, 2011, and remain property of that estate. 11 U.S.C. § 554(c) and (d). Debtor lacks standing to prosecute these claims. Clark v. Trailiner Corp., 242 F.3d 388 (10th Cir.2000) (unpublished decision) (citing Vreugdenhill v. Navistar Int’l Transp. Corp. 950 F.2d 524, 526 (8th Cir.1991) (chapter 7 debtor who failed to schedule potential claim cannot prosecute claim after emerging from bankruptcy)).
To the extent the claims arose on or after June 6, 2011, but prior to April 17, 2012, the claims are assets of the estate in Debtor’s Second Chapter 7 Case. Debtor did not list the claims in his Second Chapter 7 case, they have not been abandoned, and the case remains open. Debtor lacks standing to assert these claims; they may be prosecuted only by the Chapter 7 trustee of his Second Chapter 7 Case.5
*586D. This Court Lacks Subject Matter Jurisdiction Over Debtor’s Post-Petition Claims Against Defendants
To the extent that any of Debtor’s claims against any of the Defendants arose after April 17, 2012, they are not assets of either of Debtor’s bankruptcy estates, and the claims have no connection to or effect on either case. Accordingly, the United States District Court, and this Court by reference therefrom, lack subject matter jurisdiction to entertain such claims under 28 U.S.C. § 1334(a) or (b). See, Professional Home Health Care, Inc. v. Complete Home Health Care, LLC (In re Professional Health Care, Inc.), 2002 WL 1465914 (Bankr.D.Colo.2002); Gardner v. United States (In re Gardner), 913 F.2d 1515 (10th Cir.1990); Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir.1984).
E. Debtor’s Claims of Fraud on this Court are Untimely or Insufficient as a Matter of Law
As noted above, Debtor’s complaint is not entirely clear as to the basis for his request for injunctive and declaratory relief concerning title to the Property. It does appear, however, that at least part of the theory of Debtor’s complaint is that this Court’s Lift Stay Order was entered as a result of fraud on this Court, and accordingly, the order should declared void; it should be determined that the automatic stay was never effectively lifted; and the foreclosure sale should be declared void as in violation of the automatic stay.
Pursuant to Fed. R. Bankr.P. 9024 and Fed.R.Civ.P. 60(b)(3) and (c)(1), a motion for relief from an order based on fraud must be brought “no more than a year after the entry of the ... order.” Here the order from which Debtor seeks relief was entered on July 29, 2011. His complaint in this adversary proceeding was filed more than one year later, on October 12, 2012. Debtor may not proceed under Rule 60(b)(3) to obtain the relief he seeks.
Rule 60(d) contemplates two other avenues for relief from fraud on the court: an independent action for relief from an order, or invoking the inherent power of a court to set aside its judgment if procured by fraud. U.S. v. Buck, 281 F.3d 1336, 1341 (10th Cir.2002). The Supreme Court has strictly limited the availability of an independent action to situations where it is necessary to prevent a “grave miscarriage of justice.” U.S. v. Beggerly, 524 U.S. 38, 47, 118 S.Ct. 1862, 141 L.Ed.2d 32 (1998). The “fraud on the court” necessary to support either an independent action or to invoke the inherent power of a court is “fraud which is directed to the judicial machinery itself ... not fraud between the parties or fraudulent documents, false statements or perjury.” Bulloch v. United States, 763 F.2d 1115, 1121 (10th Cir.1985). “[O]nly the most egregious misconduct, such as bribery of a judge or members of a jury, or the fabrication of evidence by a party in which an attorney is implicated,” is sufficient for this type of relief. U.S. v. Buck, 281 F.3d at 1342, quoting Weese v. Schukman, 98 F.3d 542, 552-53 (10th Cir.1996). In addition, fraud on the court sufficient to invoke the court’s inherent power or to support an independent action to set aside an order “requires a showing that one has acted with an intent to deceive or defraud the court [and] the fact that misrepresentations were made to a court is not of itself ... sufficient.” Robinson v. Audi Aktiengesellschaft, 56 F.3d 1259, 1267 (10th Cir.1995).
Debtor has alleged that the attorneys representing ALS in the First Chapter 7 Case represented to this Court that an exhibit to their motion for relief from stay was a copy of the original Note, when *587in fact, the document was apparently a copy of a copy of the Note. This misrepresentation by ALS’ attorneys would be “fraud on the court” sufficient to retroactively declare the Lift Stay Order void only if the attorneys and ALS intended to deceive this Court into believing that ALS had standing to request relief from stay when in fact it did not. Debtor’s fraud on the court theory fails on this last point. The State Court litigated and determined the issue of ALS’ standing to foreclose in the quiet title action. Debtor is precluded from claiming in this adversary proceeding that ALS’ lacked standing, and thus is precluded from establishing ALS or its attorneys had the intent to deceive this Court sufficient to justify relief from the Lift Stay Order.
IV. Conclusion
There are overlapping reasons that the claims in Debtor’s complaint are subject to dismissal under Rule 12(b). They may be summarized as follows.
The Debtor’s First Claim for Relief fails to state a claim for fraud on this Court sufficient to set aside the Lift Stay Order, and to the extent it seeks a declaration that the State Court’s order authorizing sale was void or that ALS lacked standing to foreclose, it is barred by the doctrines of claim and/or issue preclusion.
Debtor lacks standing to bring his Second Claim for Relief for breach of contract because this claim remains property of the estate in either his First or Second Chapter 7 case.
Debtor’s Third Claim for Relief for breach of the duty of good faith and fair dealing, his Fourth Claim for Relief for damages for abuse of process, his Fifth Claim for Relief for damages and equitable relief for civil RICO violations, and his Sixth Claim for Relief for an accounting must be dismissed because Debtor lacks standing to bring any such claims which arose prior the filing of his Second Chapter 7 case, and this Court lacks subject matter jurisdiction over the claims arising after the filing of Debtor’s Second Chapter 7 case.
To the extent Debtor’s Third, Fourth, Fifth and Sixth claims for relief depend on the allegation that ALS’ did not have standing to institute foreclosure proceedings, or that ALS committed fraud on the Public Trustee or the State Court, the claims are barred by the doctrine of issue preclusion. As to ALS and Wells, they are also barred by the doctrine of claim preclusion.
Accordingly, it is
ORDERED that Defendants’ Motion to Dismiss is granted and Debtor’s complaint is dismissed.
. In evaluating a Motion to Dismiss under Fed.R.Civ.P. 12(b)(6), the Court may consider "documents referred to in the complaint if the documents are central to the plaintiff’s claim and the parties do not dispute the documents' authenticity.” Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir.2007). A court may also consider facts subject to judicial notice, including its own files and records, without converting a Rule 12(b)(6) motion to a motion for summary judgment. Tal v. Hogan, 453 F.3d 1244, 1264 n. 24 (10th Cir.2006).
. Debtor alleges that all "copies” of the Note submitted by ALS to the public trustee, the State Court, or this Court, prior to December 14, 2011, were actually copies of a copy of the Note. It is not entirely clear whether Debtor also contends that ALS was not actually in possession of the original Note prior to December 14, 2011.
. This copy of the Note contains no marking from the August 24, 2011 public trustee sale indicating that the indebtedness evidenced by the Note was cancelled or reduced by the holder, ALS’, successful credit bid at the foreclosure sale of the Property.
. In fact, the motion to dismiss and the State Court's Order are Exhibits I and J to Defendant’s Motion for Temporary Restraining Order, filed contemporaneously with the Complaint. See, Docket # 3 in Adversary Proceeding No. 12-1678.
. Debtor admits in his complaint that his "damage claims are an asset of the estate and must be determined prior to discharge by the Trustee.” Complaint, ¶ 7. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495747/ | ORDER GRANTING PLAINTIFF’S MOTIONS FOR PARTIAL SUMMARY JUDGMENT
MARY GRACE DIEHL, Bankruptcy Judge.
This action involves a consulting contract between a California school district and Debtor, in his capacity as a benefits specialist. The contract and other related causes of action between the parties were litigated in the California Superior Court, resulting in a judgment against debtor for $2 million(excluding interest and costs). The school district now seeks a determination that its judgment debt is nondis-chargeable. Additionally, the school district seeks a determination that a portion of Debtor’s claimed exemptions, in the form of IRA accounts, are not property of the estate due to a constructive trust imposed upon funds as a result of the California Superior Court order and judgment. Debtor opposes the School District’s claims and argues against any application of collateral estoppel or constructive trust.
Plaintiff Santa Ana Unified School District (“School District”) filed two motions for partial summary judgment. The first motion seeks a determination that its judgment debt is nondischargeable under §§ 523(a)(2)(A) and (a)(6). (Docket No. 7). The second motion seeks a declaratory judgment on Count III of its Complaint. (Docket No. 34). Count III requests a determination that $1,266,794 held in Debtor’s IRA accounts is not property of the estate due to a constructive trust on the property for which School District is the beneficiary. The two Summary Judgment Motions address all counts in School District’s complaint.
As to the Motion regarding non-dis-chargeability, Debtor filed a Response in opposition and brief in support, in addition to Debtor’s affidavit, Exhibits in support of the brief, and statement of facts. (Docket Nos. 17-19 & 21).1 School District filed a Reply. (Docket No. 22). School District relies on its first Statement of Material Facts (Docket No. 8); the June 11, 2012 Affidavit of Michael Bishop, as Deputy Superintendent of the Santa Ana Unified School District (Docket No. 9); Debtor’s responses to Requests for Admissions (Docket No. 10); the case record, including the Final Judgment of the Superior Court *615of California, County of Riverside, which is attached to the Complaint.
As to the second motion seeking a declaratory judgment regarding that certain funds in Debtor’s IRA accounts are not property of the estate, School District relies on its second Statement of Material Facts (Docket No. 35), discovery responses, including the October 9, 2012 Deposition of Defendant Kirk Montgomery (Docket No. 38, Exhibit F); the Affidavit of Michael Bishop, Deputy Superintendent for School District; and the case record. Debtor filed a Response in opposition to the Motion and brief in support (Docket No. 43), response to the statement of undisputed facts (Docket No. 41), Affidavit of Debtor (Docket No. 40), and an amended Response (Docket No. 46). School District filed a Reply. (Docket No. 44).
For the reasons set forth below, School District has met its burden that no material facts are in genuine dispute and it is entitled to judgment that (1) the judgment debt is non-dischargeable and that (2) the identified $1,266,794 monies in Debtor’s IRA accounts are not property of the estate because a constructive trust was imposed upon such funds for the benefit of School District. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (I), and (0), and jurisdiction over this action is set forth in 28 U.S.C. §§ 157(b) and 1334(b).
I. Facts
Debtor filed chapter 7 bankruptcy on November 10, 2011. (Case No. 11-82598-MGD). Chapter 7 Trustee, Robert Silli-man, filed a no asset report on January 13, 2012. (Case No. 11-82598; Docket No. 10.) No discharge has been entered for Debtor. Debtor’s Schedule C exemptions lists three IRA accounts: (1) Pacific Life ($794,368.12), (2) Western Reserve Life ($553,046.61), and (3) SEI ($255,378.95). Debtor later filed amended exemptions, yet the IRA accounts and amounts remained the same. (Case No. 11-82598; Docket No. 36).
Plaintiff School District exists under the laws of the state of California. (Docket No. 8, Plaintiff’s Statement of Material Facts (“SOF ”), ¶ 1). School District is a creditor of Kirk Montgomery (“Debtor”), dba K.M. Employee Benefits Services, evidenced by a judgment in the Superior Court of California, County of Riverside (“California Superior Court”). Id. at ¶ 4. Debtor included his debt to School District as an unsecured, non-priority liability in the amount of $3,023,767.56 on Schedule F of his bankruptcy schedules. Id. at ¶ 7.
The relationship between the parties began in July of 2000. School District issued a request for proposals to consultants in regard to its employee benefits plan, seeking assistance with the negotiation of rates and services with insurance carriers and administrators. Id. at ¶ 9. School District stated in its request that it would pay all compensation for services; consultants were not to receive compensation, fees, or commissions from carriers. Id. at ¶ 10; Debtor’s Contested Matter Admissions (“Admissions”), ¶ 4. Debtor submitted a proposal to School District in August of 2000. Id. at ¶ 12; Exhibit C to Complaint (“Debtor’s Proposal”). Debtor’s proposal included: “All compensation for services [would] be paid by the District with no compensation, fees, or commissions received by the consultant/broker from carriers or administrators.” Id. at ¶ 15; Debt- or’s Proposal. Debtor further represented that: “Certain carriers have as part of the underwriting process, built-in commissions that are not removed from the rating formula. In these cases, we are willing to remit any commissions, overrides, or other carrier compensation to Santa Ana Unified *616School District to 100% of the total fee.” Id. at ¶ 16; Debtor’s Proposal.
Debtor was approved and appointed as School District’s employee benefits consultant on October 10, 2000. Id. at ¶ 18. Debtor and School District executed the Employee Benefit Consultant Service Agreement (“Agreement”) sometime between November 2000 and the end of that calendar year. Id. at ¶ 19; Admissions, ¶ 15. The term under the Agreement began on November 1, 2000. SOF, ¶ 17; Exhibit D to Complaint (“Agreement”). Section 3 of the Agreement provided:
As per Consultant’s [Debtor’s] formal proposal dated August 18, 2000, the District [Plaintiff] will be required to pay $60,0000.00 per each contract year beginning November 1, 2000 and ending October 31, 2003, subject to annual review. Payment to be made monthly at the rate of $5,000.00 per month. All parties agree that certain carriers have as part of their underwriting process, built-in commissions that are not removed from the rating formula. In these cases, the Consultant [Debtor] will remit any commissions, overrides or other carrier compensation to the District [Plaintiff] to One Hundred Percent (100%) of the total fee.
Agreement, ¶ 3. School District wrote a letter dated October 27, 2000 advising of Debtor’s November 1, 2000 retention and defining the scope of Debtor’s work, as agent for School District. Debtor’s Exhibit D (“Debtor’s Responsive Exhibits ”); Docket No. 21. The recipient of the letter is unknown. This letter also authorized Debtor to negotiate on behalf of School District on all matters relating to group insurance and employee benefits. Id. This same letter directs carriers to make commissions payable to Debtor. Docket No. 21, Exhibit D.
In early 2001, Debtor made requests for proposals (“RFPs”) to various insurance carriers. Montgomery Affidavit, ¶ 18 (Docket No. 18). The RFPs instructed each insurance carrier to add commissions into the quotes at the following rates: Medical 5% flat; Dental 10% flat; Vision 10% flat, and Life 10% flat. Id. at ¶ 18; Exhibit E to Complaint (Kirk Montgomery Employee Benefits Service RFP “KMEBS RFP ”). This instruction was provided in the “Specifications” section of the RFP, along with other requirements. Id. Accordingly, Blue Cross added in a 5% Medical charge to the quotes in its proposal and 10% Dental charge. Id. at ¶ 20; Exhibit F to Complaint {“Blue Cross Proposal ”). Blue Cross’s proposal identified these commission rates “as specified in the RFP.” Blue Cross Proposal, p. 11.
A few months later, Debtor recommended that School District switch from a self-funded insurance program to a fully funded program with Blue Cross. SOF, ¶ 35; Montgomery Affidavit ¶ 22. In August 2001, Plaintiff changed to a fully funded program with Blue Cross. SOF at ¶ 42. School District realized significant savings — estimated to lower premium payment obligation by $2 million — as a result of the switch recommended by Debtor. Montgomery Affidavit, ¶ 23.
Each Blue Cross renewal of the insurance policy included a 5% commission, which was designated in its own line item. Bishop Affidavit, ¶ 23; Exhibits G & H to Complaint (“Blue Cross Renewals ”). Debtor sent School District renewal spreadsheets that were modified from the Blue Cross renewal form. Montgomery Affidavit ¶ 24; Exhibits I & J to Complaint (“KM Renewal Reports ”).
Debtor’s renewal report included all line items from Blue Cross with the exception of the commissions line item. Blue Cross Renewals; KM Renewal Reports. Debt- *617or’s renewal submitted to School District combined the “Commissions” figure with the “Retention” figure, with the resulting sum listed on the “Retention” line. Id,.; Bishop Affidavit ¶¶ 24-26. The 2002 renewal from Blue Cross to Debtor, the commission line item was $1,039,854 and the retention line item was $1,079,500. 2002 Blue Cross Renewal; Exhibit G to Complaint. Debtor sent School District 2002 renewal information entitled “Refunding Calculation” that includes each line item from the Blue Cross renewal with the exception of commission. 2002 Blue Cross Renewal; 2002 EM Renewal Report. In the information sent to School District by Plaintiff, the Retention line item totaled $2,119,353. 2002 KM Renewal Report; Exhibit I to Complaint. Similarly, the 2003 Blue Cross renewal to Debtor included a commission line item in the amount of $1,301,961 and a $1,259,824 retention line item. 2008 Blue Cross Renewal. Debtor provided School District renewal information that did not include a commission line item, and the first offer retention line item totaled $2,561,784 with a final offer column showing $2,453,415 for retention. 2008 KM Renewal Report.
During the term and renewed terms of the Agreement, Debtor remitted to School District certain commissions from other insurance carriers. Montgomery Affidavit, ¶ 26; Exhibit K to Complaint (“Remitted Commission Checks”). Debtor did not inform School District of the Blue Cross commission. SOF ¶ 57; Bishop Affidavit, ¶ 28. The term of the Agreement between the parties was renewed in August of 2002. Bishop Affidavit, ¶ 29.
Defendant made several contributions to his pension plan from 2001 to 2003. Docket No. 48; Deposition of Kirk Montgomery (“Montgomery Deposition ”), p. 83. In 2001, Debtor contributed the sum of $211,739.00; in 2002, Debtor contributed the sum of $472,180.00; and in 2003, Debt- or contributed the sum of $582,875.00. These sums totaled $1,266,794.00. Id. Debtor’s contributions to his pension plans were composed, at least in part, of the commissions he received from Blue Cross. Id. at 81-83. Between the years of 2002 and 2004, Debtor deposited these same sums into defined benefits pension plans with Pacific Life Insurance Company ($211,739.00), Western Reserve Life ($472,180.00), and American Funds ($582,-875.00). Id. at p. 87. In 2004, Defendant rolled over these investments into his IRA accounts. Id. at p. 89.
In November of 2003, School District requested information from Blue Cross regarding the amount of commission included in the paid premium amounts. Bishop Affidavit, ¶ 30. Blue Cross provided School District with a letter on February 3, 2004 detailing the 2002 and 2003 commissions paid via the account premiums, noting that the commissions were based on 5% of the paid premiums. Exhibit L to Complaint (“2004 Blue Cross Responsive Letter ”). The 2004 letter from Blue Cross revealed that over $3,500,000 in commissions had been paid by School District during 2001 through 2003. Id. The 2004 letter also provided a reduction to 2004 premium rates based on the elimination of commission. Id.
Plaintiff filed a complaint against Debtor in the California Superior Court on April 27, 2004. SOF, ¶ 65. On September 29, 2011, Plaintiff obtained a Final Judgment against Debtor in the California Superior Court. Id. at ¶ 4. Litigation against Debt- or in the California Superior Court took the form of a trial in two phases. Exhibit A to Complaint (California Superior Court Order and Judgment (“Judgment ”))2. *618Blue Cross of California served as plaintiff and School District served as a cross-complainant. Id. Pursuant to the California Superior Court’s Final Judgment, Debtor is indebted to School District in the amount of $2 million plus interest3 and costs. SOF, ¶ 6. The California Superior Court considered five separate counts against Debtor: (1) Breach of Contract, (2) Breach of Implied Covenant of Good Faith and Fair Dealing, (3) Breach of Fiduciary Duty, (4) Concealment, and (5) Constructive Trust. (Docket No. 21, Exhibit C (“Second Amended Cross-Complaint ”)).
On February 17, 2011, the California Superior Court entered a Tentative Decision in favor of School District on the fourth and fifth counts of Concealment and Constructive Trust. Judgment, p. 11-28. On March 25, 2011, the Tentative Decision became the California Superior Court’s Statement of Decision by operation of law. Id. at 10.
On the fourth count of Concealment, the California Superior Court found that Debtor disclosed some facts regarding the commissions, but “intentionally failed to disclose other important facts, thereby making such disclosure deceptive.” Id. at 14. The Court also found that School District was unaware of the facts; that Debt- or intentionally deceived School District by concealing facts; that School District reasonably relied on Debtor’s deception; and that School District was harmed. Id. at 15.
As to the count of Constructive Trust, the California Superior Court imposed a constructive trust against Debtor and in favor of School District in the amount of $1,266,794. Id. at 17. Debtor held these funds in his defined benefits retirement account with EH Financial Group. Id. The California Superior Court found that at least the sum of $1,266,794 was “specific, identifiable property” wrongfully acquired by the Debtor and constituting an unjust enrichment. Id.
On the first count of Breach of Contract, the California Superior Court ruled that Debtor did not breach the contract with School District. Id. at 12. Rather, it found that the contract between School District and Debtor “imposed no legal duty on [Debtor] to disclose commissions to [his] client (the District) in excess of $60,000 pear year.” Id.
Debtor disputes some facts. The discussion section will address whether these disputes are material and the impact they have on School District’s Motions. The parties dispute several facts relating to whether and when School District knew of Debtor’s Blue Cross commissions. Debtor reasons that the October 2000 letter from School District to unidentified recipients4 confirms that School District knew Debtor was receiving commissions. Montgomery Affidavit, ¶ 28; Docket No. 21, p. 48 (“Exhibit D”). The October 2000 letter notifies that Debtor’s firm is “appointed as the exclusive insurance consultant” for School District. Exhibit D. This letter also provides the scope of Debtor’s firm’s engagement to School District as “all matters relating to the [School District’s] group insurance and employee benefits.” Id. This letter also directs that all commis*619sions payable are to be directed to Debtor. Id.
Debtor also introduces facts that School District did not know of the Blue Cross commissions because the School District never inquired as to the Blue Cross commissions until late 2003, and that he was acting in accordance with the Agreement. Montgomery Deposition, p. 55. Debtor further asserts that commissions are standard in the industry and typically paid when authorized by the client, which was School District, here. Montgomery Affidavit, ¶¶ 25 & 29-30.
The parties also disagree as to whether Debtor instructed Blue Cross not to disclose the commissions. Debtor asserts that he merely told Blue Cross to have School District talk to him directly in late 2003, and School District asserts Debtor rebuffed its inquiry for the purpose of hiding the commissions. Montgomery Deposition, p. 52-56; Bishop Affidavit, ¶ 30. Debtor also disputes School District’s characterization of his intent when he submitted the renewal tables to School District with the commission line item removed. Debtor asserts that it is industry standard to put proposals into your own forms and format. Montgomery Affidavit, ¶ 24. School District proposes that the purpose of the altered form was to conceal the commissions. Bishop Affidavit, ¶¶ 52-53.
School District asserts that Debtor failed to disclose the 5% commission in Blue Cross’s premiums. Id. at ¶ 21(a). Debtor does not dispute this fact but asserts that he did not know that commissions were not built into the standard Blue Cross quote formulas. Montgomery Affidavit, ¶ 21.
II. Summary Judgment Standard
In accordance with Rule 56 of the Federal Rules of Civil Procedure, applicable to this Court pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, summary judgment is appropriate only 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 moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). Material facts are those which might affect the outcome of a proceeding under the governing substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Further, a dispute of fact is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id.
The moving party has the burden of establishing the right to summary judgment. Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir.1991); Clark v. Union Mut. Life Ins. Co., 692 F.2d 1370, 1372 (11th Cir.1982). Once this burden is met, the nonmoving party cannot rely merely on allegations or denials in its own pleadings. Fed.R.Civ.P. 56(e). Rather, the nonmoving party must present specific facts that demonstrate there is a genuine dispute over material facts. Hairston v. Gainesville Sun Pub. Co., 9 F.3d 913, 918 (11th Cir.1993). The “[o]ne who resists summary judgment must meet the mov-ant’s affidavits with opposing affidavits setting forth specific facts to show why there is an issue for trial.” Leigh v. Warner Bros., Inc., 212 F.3d 1210, 1217 (11th Cir.2000); Fed.R.Civ.P. 56(e).
In determining whether a genuine issue of material fact exists, the Court must view the evidence in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); Rosen v. Biscayne Yacht & Country Club, Inc., 766 F.2d 482, 484 (11th Cir.1985). It remains the burden of the moving party to *620establish the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
III. Discussion
Debtor asserts that material issues of fact remain as to the nondischargeability determination and as to whether identified funds in Debtor’s IRA accounts should be excluded from the property of the estate. The Court disagrees. As discussed in more detail below and viewing the facts in favor of Debtor, School District has established sufficient undisputed, material facts regarding the nondischargeability of the debt under § 523(a)(2)(A) and the exclusion of Debtor’s IRA accounts from property of the estate. Therefore, Debtor’s argument that factual disputes serve as a basis to deny School District’s Motions fails. Summary judgment is appropriate on both claims addressed below.
A. Plaintiff Is Entitled to Apply the Doctrine of Collateral Estoppel to its Section 523(a)(2)(A) Claim.
In Counts I and II, School District seeks summary judgment as to the nondis-chargeability of the debt pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(6). School District asserts that the California Superi- or Court Final Judgment entitles it to a determination of non-dischargeability. Debtor opposes any application of issue preclusion. Debtor disputes the California Superior Court’s factual findings. Debtor also argues that the claims resulting in judgment against Debtor in the prior action California Superior Court action are not identical to the dischargeability claims asserted in this action.
Issue preclusion, historically seen as collateral estoppel, precludes the re-litigation of the same issues between the same parties in different causes of action. In re St. Laurent, II, 991 F.2d 672, 675 (11th Cir.1993). Issue preclusion relies upon the findings of fact actually litigated in one lawsuit, and the effect of those findings upon subsequent litigation which involves a different cause of action but arising out of the same or virtually same nexus of operative facts. Brown v. Felsen, 442 U.S. 127 n. 10, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). “Section 1738 embodies concerns of comity and federalism that allow the States to determine, subject to the requirements of the statute and the Due Process Clause, the preclusive effect of judgments in their own courts.” Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). The doctrine of collateral estoppel is based on the efficient use of judicial resources and on a policy of discouraging parties from ignoring actions brought against them. Gonzalez v. Moffitt, 252 B.R. 916, 920 (6th Cir. BAP 2000).
“It is well-established that the doctrine of collateral estoppel applies in a discharge exception proceeding in bankruptcy court.” In re Bilzerian, 100 F.3d 886, 892 (11th Cir.1996) (citing Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991); Hoskins v. Yanks (In re Yanks), 931 F.2d 42, 43 n. 1 (11th Cir.1991)). Relitigation in bankruptcy court of the issue decided by the state court would conflict with the principle of federalism that underlies the Full Faith and Credit Act. In re Baldwin, 249 F.3d 912, 920 (9th Cir.2001). “While collateral estoppel may bar a bankruptcy court from relitigating factual issues previously decided in state court, however, the ultimate issue of dischargeability is a legal question to be addressed by the bankruptcy court in the exercise of its exclusive jurisdiction to determine dischargeability.” Id. (citing In re Halpern, 810 F.2d 1061, 1064 (11th Cir.1987)).
*621In reviewing whether a prior judgment ought to be given preclusive effect in a subsequent federal proceeding, the preclusion law of the state in which the judgment was rendered controls. In re Baldwin, 249 F.3d at 917; Colo. W. Transp., Inc. v. McMahon, 380 B.R. 911, 916 (N.D.Ga.2007) (“Pursuant to 28 U.S.C. § 1738, the judicial proceedings of any State are granted “the same full faith and credit” in federal court as they would receive in the State’s courts.”); In re Lowery, 440 B.R. 914, 924 (Bankr.N.D.Ga.2010). School District’s ability to use the doctrine of collateral estoppel will be assessed under California law, which sets out five threshold requirements:
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.
In re Baldwin, 249 F.3d at 917-18 (quoting Lucido v. Superior Court, 51 Cal.3d 335, 341, 272 Cal.Rptr. 767, 795 P.2d 1223 (Cal.1990)).
1. School District Seeks to Preclude Relitigation of Identical Issues Determined in the California Superior Court.
In this case, the first threshold requirement — identical issues — demands particular attention. Debtor contests School District’s use of issue preclusion because the prior adjudication is not identical to the non-dischargeability claims in this case. The standard for determining identity of issues is whether the issues in a bankruptcy proceedingly “closely mirror” issues determined in the prior case. In re Moir, 291 B.R. 887, 891-92 (Bankr.S.D.Ga.2003). Do the elements of a § 523(a)(2)(A) claim line up with the elements of the California state law claim of concealment or deceit?
First, two preliminary matters raised by the Debtor in opposition to the use of collateral estoppel will be addressed. Debtor challenges the identity of issues requirement on two broad bases. First, Debtor correctly asserts that the prior litigation did not include bankruptcy issues. (Docket No. 17 (“Debtor’s Responsive Brief”)-, p. 7). The caselaw, however, explicitly addresses Debtor’s argument. Claims that are germane to the Bankruptcy Code — including discharge and dis-chargeability claims — could not arise in state law proceedings. Instead of eliminating use of the preclusion doctrine, bankruptcy courts look beyond the state court claim or cause of action and compare the elements of the claims in which judgment was rendered to the requisite elements of the claims arising in the Bankruptcy Code and apply the factual findings to a bankruptcy-based cause of action. Grogan v. Garner, 498 U.S. at 284, 111 S.Ct. 654; In re St. Laurent, 991 F.2d at 676.
Second, Debtor challenges School District’s ability to use issue preclusion based on the legal standard used by the California Superior Court. (Debtor’s Responsive Brief, p. 8). Debtor argues that there is not identity of issues because the California Superior Court did not apply the common law tort of concealment but, instead, relied upon statutory deceit under California Code Section § 1710. Id. The name of the claim determined by the California Superior Court is not relevant, here. Instead, this Court will consider whether *622Debtor is barred from relitigating identical factual issues in these claims. See In re Baldwin, 249 F.3d at 920.
The Superior Court rendered a judgment against Debtor for the tort of concealment or deceit. Under California law, a claim of concealment falls under “fraudulent deceit.” Cal. Civ.Codb § 1709. A claim for concealment arises when one “willfully deceives another with intent to induce him to alter his position to his injury or risk.” Id. A deceit is defined as the “suppression of a fact, by one who is bound to disclose it, or who gives information or other facts which are likely to mislead for want of communication of that fact.” Cal. Civ.Code § 1710(3). The five elements of a fraudulent deceit claim under California law are: “(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact -with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” Grant v. Aurora Loan Srvs., Inc., 736 F.Supp.2d 1257, 1272 (C.D.Cal.2010) (citations omitted).
For School District to preclude litigation of the § 523(a)(2)(A) non-dis-chargeability claim, the elements of § 523(a)(2)(A) must “closely mirror” the elements of the concealment and fraudulent deceit. The elements of a § 523(a)(2)(A) claim are:
... (1) the debtor made a false representation (2) with the purpose and intention of deceiving the creditor; (3) the creditor relied on such false statement; (4) the creditor’s reliance on the false statement was justifiably founded; and (5) the creditor sustained damage as a result of the false statement.
In re Johannessen, 76 F.3d 347, 350 (11th Cir.1996) (numbering added).
The factual findings of the California Superior Court with respect to the requisite elements of the concealment or deceit claim closely mirror the elements of § 523(a)(2)(A), and the first requirement for applying issue preclusion is satisfied. Each relevant element addressed in the California Superior Court that relates to the § 523(a)(2)(A)’s nondischargeability claim asserted in this action will be compared below.
The California Superior Court factual findings with respect to concealment or deceit, explicitly identify false representations made by Debtor and the attendant intent. The California Superior Court found that Debtor “intentionally failed to disclose” some important facts and “actively concealed” his receipt of commission payments from Blue Cross. Judgment, p. 14. The California Superior Court also found that Debtor “lied” to the School District representative. Id. The California Superior Court also made explicit factual findings regarding Debtor’s intent, finding that he “intentionally failed to disclose other important facts to [School District], thereby making such disclosure deceptive.” Id.
With respect to the reliance aspects of the § 523(a)(2)(A) claim, Debtor also asserts that there is not sufficient identity of issues because the requisite reliance element was not an element of the concealment claim. Fraudulent deceit, as applied by the California Superior Court, requires that “the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact,” and the Superior Court’s *623findings addressed this element. The California Superior Court found that the School District “did not know the concealed facts.” Although the term “reliance” is not explicitly used in the concealment or deceit elements, the concept and substance of reliance is included — plaintiff would not have acted if he had known the fact. The California Superior Court’s findings included a determination that School District did not know and that it “reasonably relied on [Debtor’s] deception.” Id. at 15. For purposes of application of issue preclusion, the elements closely mirror each other. The assessment of whether this amounts to the required justifiable reliance for § 528(a)(2)(A) will be discussed in more detail below.
Lastly, both claims require a damages element. Therefore, the issue of nondis-chargeability under § 523(a)(2)(A) is sufficiently identical to the tort of concealment litigated in the California Superior Court, and the first requirement to apply collateral estoppel is met.
2. The Remaining Requirements of Collateral Estoppel Under California Law Are Satisfied.
The undisputed facts satisfy the remaining four requirements to apply collateral estoppel: actual litigation of the issues; necessary decision of the issue; a decision final and on the merits; and identical parties.
The judgment against Debtor for concealment or deceit was actually litigated. In order to establish that an issue was “actually litigated” for collateral estoppel to be applicable, only two requirements need be met: (1) that the issue has been effectively raised in the prior action, either in the pleadings or through development of the evidence and argument at trial or on motion; and (2) that the losing party have had a “fair opportunity procedurally, substantively and evidentially” to contest the issue. Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1323 (11th Cir.1995). Undisputed facts establish that the issues were effectively raised and that Debtor had a full and fair opportunity to contest the issue. There is no dispute that the parties fully litigated School District’s concealment or deceit claims over a 7-year period, culminating in a two-phase trial. Evidence presented at trial included testimony, including that of Debtor, and documentary evidence. The California Superi- or Court relied on all forms of evidence in its ruling, showing that Debtor had all available tools to defend and contest the claims.
In assessing the third requirement for applying issue preclusion, the Court inquires as to whether elements of this non-dischargeability claim were necessary to the adjudication of the concealment or deceit claim. The Court construes Debtor’s argument regarding the prior preceding not litigating bankruptcy issues as a challenge to whether § 523(a)(2)(A) issues were necessary to the California Judgment.
“Preclusive force [only] attaches to determinations that were necessary to support the court’s judgment in the first action. Litigants conversely are not precluded from relitigating an issue if its determination was merely incidental to the judgment in the prior action.” Resolution Trust Corp. v. Keating, 186 F.3d 1110, 1115 (9th Cir.1999) (citations omitted). Here the identity of the respective required elements demonstrates that the California Superior Court’s Judgment necessarily relied upon the factual issues presented in the nondischargeability claims against Debtor in this proceeding. Debt- or’s conduct and intent, coupled with the School District’s knowledge and reliance were essential factual determinations to *624impose liability against Debtor. School District’s failure to demonstrate any of these elements would have defeated its concealment'or deceit claim; therefore, the issues were necessary.
The burden of proof imposed on School District in the California Superior Court and this action is similar, which is a factor to be considered in the necessary element of applying issue preclusion. In re Bush, 62 F.3d at 1322. Debtor’s incentives to defend the concealment claim were the same as it is to defend the nondischarge-ability claim. There is no incidental finding that creates concern for the Court. School District has presented sufficient undisputed facts to defeat any challenge Debtor may have to the use of preclusion on this basis.
The parties do not dispute that the decision of the California Superior Court was final and made on the merits. The California Superior Court gave “full consideration” to the evidence submitted by the parties before entering judgment. Complaint, Exhibit A, Judgment, p. 12. Furthermore, the decision was finalized and filed on September 29, 2011 by operation of law. Id. at 2. Debtor has not appealed the judgment of the California Superior Court. As to the last requirement that the parties in both matters must be identical, Debtor does not dispute that he was a defendant in the California Superior Court litigation. All requirements to apply collateral estoppel are, therefore met.
B. The Judgment Debt Is Nondis-chargeable Pursuant Section 523(a)(2)(A).
While a bankruptcy court can apply collateral estoppel on issues litigated in a prior action, the bankruptcy court is additionally responsible for determining on the basis of the facts whether the debt is nondischargeable. In re Lowery, 440 B.R. 914, 923 (Bankr.N.D.Ga.2010). A central purpose of the Bankruptcy Code is to provide an opportunity for certain debtors to discharge their debts and enjoy a fresh start. See Grogan v. Garner, 498 U.S. 279, 284-85, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Quaif v. Johnson, 4 F.3d 950, 952 (11th Cir.1993). Congress created some exclusions to the general policy of discharging debts. The nondischargeability provision of § 523(a)(2)(A) prevents debtors from obtaining a discharge for debts obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(A). A creditor must demonstrate that the elements of a § 523(a)(2)(A) claim are met by a preponderance of the evidence. Grogan v. Garner, 498 U.S. at 286, 111 S.Ct. 654; In re Johannessen, 76 F.3d 347, 350 (11th Cir.1996).
School District has carried its burden of establishing that the undisputed facts satisfy all the required elements of § 523(a)(2)(A). Applying issue preclusion against Debtor and relying upon the factual determinations of the California’s Superior Court’s ruling in favor of School District, and in consideration of undisputed facts in the record here, entitle School District to a determination that the judgment debt it is owed in nondischargeable. Because the Court concludes that the debt is nondischargeable under § 523(a)(2)(A), it is not necessary to determine whether the debt is also nondischargeable under a claim for willful and malicious injury under § 523(a)(6).
Debtor seemingly contests the factual findings of the California Superior Court. Debtor’s Responsive Brief, p. 8. Debtor attempts to recharacterize the facts and put facts previously litigated and determined in dispute. The purpose of issue preclusion is designed to address this ex*625act position taken by Debtor. Debtor cannot not put previously adjudicated issues in dispute based on alternative legal theories or disagreements with the factual findings by the California Superior Court. Any dispute regarding another court’s judgment can only be resolved by appealing the judgment of such court, not be asserting alternative facts and evidence in a subsequent proceeding. Full faith and credit is given to the prior order as prescribed by law. 28 U.S.C. § 1738.
Based on the undisputed facts each of the following § 523(a)(2)(A) elements have been satisfied by School District. They will be addressed in order: (1) the debtor made a false representation with intent to deceive; (2) reliance on the false representation; (3) the creditor’s reliance was justifiable; and (4) resulting damages to the creditor.
1. Debtor made false representations with an intent to deceive School District.
The undisputed facts establish that Debtor made false representations to School District regarding the Blue Cross commissions he was receiving. Misrepresentations do not always require an affirmative statement. Fraud may consist of silence, concealment, or intentional nondisclosure. SunTrust Bank v. Brandon (In re Brandon), 297 B.R. 308, 313 (Bankr.S.D.Ga.2002). Silence or concealment of a material fact can create a false representation under § 523(a)(2)(A). Id.; see also Citizens & S. Nat’l Bank v. Thomas (In re Thomas), 12 B.R. 765, 768 (Bankr.N.D.Ga.1981). The California Superior Court found that Debtor “disclosed some facts to School District about such commissions, but intentionally failed to disclose other important facts, thereby making such disclosure deceptive.” Judgment, p. 14. The California Superior Court also found that Debtor “lied to its representatives by revising tables from Blue Cross to hide those commissions.” Id. The undisputed facts establish that Debtor did not inform Plaintiff of the instruction he issued in the RFPs to include a 5% Medical commission, the subsequent inclusion of the 5% commission in Blue Cross’s quotes, and Blue Cross’s commission payments to Debtor.
Debtor attempts to create a factual dispute regarding School District’s knowledge of the commissions. Debtor submits as an exhibit a October 2000 letter from School District directing payments of all commissions to Debtor. Debtor’s opportunity, however, to litigate School District’s knowledge in defense of his actions was present in the California Superior Court action. In re McNallen, 62 F.3d 619, 625 n. 2 (4th Cir.1995). There, the court explicitly found that School District “did not know the concealed facts.” Judgment, p. 15.
To determine whether the misrepresentations were made with an intent to deceive is a subjective issue and a review of the totality of the circumstances is relevant in determining a debtor’s intent. Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 305 (11th Cir.1994). The California Superior Court made findings as to Debtor’s intent and labeled his actions “deceptive.” Judgment, p. 14.
Debtor also attempts to create factual disputes regarding the impact of his submission of his revised tables to School District. His affidavit includes that it is an industry standard to use one’s own forms. Montgomery Affidavit, ¶ 24. This statement fails to create a genuine issue of material fact. The undisputed facts remain that Debtor altered the renewal tables to School District to eliminate the commission line item. Debtor also contests that he instructed Blue Cross not to inform School District of the commissions. Again, Blue Cross’s actions are not materi*626al in this action and can not defeat School District’s motion for summary judgment.
The totality of the circumstances based on the undisputed facts and factual findings of the California Superior Court establish that Debtor made misrepresentations with intent to deceive. Here, Debtor’s fraudulent representation was Debtor’s intentional non-disclosure.
2. Reliance on Debtor’s False Representation
The undisputed facts satisfy the reliance element of a § 523(a)(2)(A) claim. The California Superior Court found that School District “reasonably relied” on Debtor’s misrepresentation. Judgment, p. 15. Further, the undisputed facts establish that School District made its initial decision to change to a self funded plan under Blue Cross based on Debtor’s proposal, which did not include the commission line item. Similarly, the undisputed facts establish that School District’s renewal decisions were based on Blue Cross proposals altered and submitted by Debt- or.
3. School District’s Reliance was Justified
In Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), the Supreme Court determined that the applicable standard of reliance that a creditor must establish under § 523(a)(2)(A) is justifiable reliance rather than the rigid standard of reasonable reliance. The standard of justifiable reliance requires bankruptcy courts to apply a subjective test to determine whether a creditor justifiably relied on a debtor’s misrepresentation. In re Bucciarelli, 429 B.R. 372, 376 (Bankr.N.D.Ga.2010). Justifiable reliance is not as exacting a standard as reasonable reb-anee, which requires consideration of what a reasonable person would do. Field v. Mans, 516 U.S. at 70-71, 116 S.Ct. 437.
In this matter, the California Superior Court determined that School District “reasonably relied” on Debtor’s false statements. Judgment, p. 15. The factual finding that School District did not know of the hidden commission, id., and that totality of circumstances under the undisputed facts establish that School District used Debtor’s proposals to make its decision to switch plans and to renew the plans. Debtor does not dispute that School District did not see the Blue Cross commissions paid to Debtor before 2003, and that the altered spreadsheets presented by Debtor did not include commissions.
Debtor does dispute that School District had no knowledge that he received commissions. Debtor supports his argument of the School District’s general knowledge of his commissions with the October 2000 letter from School District (“Exhibit D”), which notifies presumably potential insurance carriers that Debtor is its exclusive insurance consultant for group and employee benefits. This letter states that commissions payable be directed to Debt- or. Id. The Court does not view this letter as raising a dispute of material fact. Further, School District’s knowledge of Debt- or’s retention of Blue Cross commissions was previously litigated and determined in the California Superior Court. The California Superior Court explicitly found School District had no knowledge of the concealed facts. Judgment, p. 15.
The question for this Court is whether the undisputed facts viewed in the light most favorable to Debtor establish that School District justifiably relied on Debtor’s misrepresentations. A creditor’s reliance is typically justified when there is nothing on the face of the representation that it is false or that the creditor does not have actual knowledge of the falsity of the representation. FCC Nat’l Bank v. Gilmore, 221 B.R. 864, 874 n. 10 (Bankr.*627N.D.Ala.1998). The undisputed facts establish that School District justifiably relied on the information provided by Debtor regarding the Blue Cross plan and premiums because the School District did not know about the commissions at the time they were earned and retained by Debtor.
Courts have also determined that access to information is a factor for courts to consider when assessing justifiable reliance, yet there is no duty to investigate under the justifiable standard. In re Brandon, 297 B.R. 308, 315 (Bankr.S.D.Ga.2002); Branton v. Hooks (In re Hooks), 238 B.R. 880, 885 (Bankr.S.D.Ga.1999). Debtor’s arguments about School District’s failure to inquire fail as a matter of law. The factual findings that Debtor’s disclosure of some commissions but not the Blue Cross commissions contributed to Debtor’s deceptive scheme contribute to a determination, here, that School District justifiably relied on Debtor’s misrepresentations.
4. Damages Resulted from Debtor’s Misrepresentations
The undisputed facts considered in favor of Debtor also establish that damages to School District resulted from Debtor’s fraudulent misrepresentation. The California Superior Court found that Plaintiff was harmed by Debtor’s misrepresentations. Judgment, p. 15. Debtor received over $3,500,000 in commissions from Blue Cross that could have otherwise resulted in lower premium payments to Blue Cross by School District. Debtor’s arguments that his recommendation was overall beneficial to School District is true, yet that fact does not provide a exception to the nondischargeability determination under § 523(a)(2)(A).
School District has satisfied its burden and is entitled to a determination that the judgment debt owed by Debtor is nondis-chargeable under § 523(a)(2)(A).
C. Identified Funds in Debtor’s Scheduled IRA Assets Are Not Property of the Estate Pursuant to 11 U.S.C. § 541(d).
School District’s second Motion for summary judgment seeks a determination that certain funds in Debtor’s IRA accounts are not property of the estate because these funds were placed in a constructive trust for School District’s benefit. For the reasons set forth below, School District is entitled to judgment on this count as a matter of law as well.
Under § 541(d), “[pjroperty in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate ... only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.” 11 U.S.C. § 541(d). Pursuant to the language of § 541(d), property in which the debtor holds no equitable interest does not become part of the bankruptcy estate. Clark v. Wetherill (In re Leitner), 236 B.R. 420, 424 (Bankr.D.Kan.1999). Where the debtor holds bare legal title to property, the legal title enters the bankruptcy estate subject to the debtor’s duty to convey the property to its beneficiary. Id. Because the equitable interest in the property is not property of the debtor, the beneficiary’s equitable interest does not become property of the estate. Id.
Section 541(d) recognizes the fact that some rights may supersede the rights of the estate. In re Reider, 177 B.R. 412, 415-16 (Bankr.D.Me.1994). The law “does not authorize a trustee to distribute other people’s property among a bankrupt’s creditors.” Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36, 83 *628S.Ct. 232, 9 L.Ed.2d 190 (1962). While many courts are concerned with equality of distribution, the policy of equal distribution is not implicated where a debtor transfers property that would not have been available for distribution to his creditors. See Begier v. IRS, 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (citation omitted).
School District asserts that Debtor holds only “bare legal title and not an equitable interest” in $1,266,794 of Debtor’s scheduled IRA assets and thus that this sum does not belong to the Debtor’s estate. The basis of School District’s claim is the California Superior Court’s imposition of a constructive trust on Debtor for the sum of $1,266,794.
A constructive trust is a remedy used by courts of equity “to compel a person who has property to which he or she is not justly entitled to transfer it to the person entitled to it.” Pac. Lumber Co. v. Superior Court, 226 Cal.App.3d 371, 378, 276 Cal.Rptr. 425 (Cal.Ct.App.1990); Haskel Eng’g & Supply Co. v. Hartford Accident & Indem. Co., 78 Cal.App.3d 371, 375, 378, 144 Cal.Rptr. 189 (Cal.Ct.App.1978). The party seeking this remedy must show that it is entitled to relief by clear and convincing evidence. Bank of Alex Brown v. Goldberg (In re Goldberg), 158 B.R. 188, 194 (Bankr.E.D.Ca.1993). Constructive trusts exist “to prevent unjust enrichment and to prevent a person from taking advantage of his or her own wrongdoing.” Communist Party v. 522 Valencia, 35 Cal.App.4th 980, 990, 41 Cal.Rptr.2d 618 (Cal.Ct.App.1995). The Court concludes that the identified funds in Debtor’s IRA assets do not belong to the bankruptcy estate. Rather, this property interest belongs to School District.
1. School District Established that the Constructive Trust Requirements Are Met Based on the California Superior Court Final Judgment.
Constructive trusts “arise out of state law.”5 Lin v. Ehrle (In re Ehrle), 189 B.R. 771, 776 (9th Cir. BAP 1995) (citing Torres v. Eastlick (In re N. Am. Coin & Currency, Ltd.), 767 F.2d 1573, 1575 (9th Cir.1985)). California Civil Code sections 2223 and 2224 address the imposition of constructive trusts. See id. Under Civil Code § 2223, “[o]ne who wrongfully detains a thing is an involuntary trustee thereof, for the benefit of the owner.” Cal. Civ.Code § 2223. Under Civil Code § 2224, “[o]ne who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he or she has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it.” Cal. Civ.Code § 2224. Three conditions must be met for a California court to impose a constructive trust: “(1) the existence of a res (property or some interest in property); (2) the right of a complaining party to that res; and (3) some wrongful acquisition or detention of the res by another party who is not entitled to it.” Communist Party v. 522 Valencia, 35 Cal.App.4th at 990, 41 Cal.Rptr.2d 618.
*629A beneficiary is entitled to a constructive trust only if it can “trace the trust res into its succeeding transfigure-ments.” Taylor Assocs. v. Diamant (In re Advent Mgmt. Corp.), 178 B.R. 480, 488 (9th Cir. BAP 1995) (citing Heckmann v. Ahmanson, 168 Cal.App.3d 119, 136, 214 Cal.Rptr. 177 (Cal.Ct.App.1985)). To satisfy this requirement, a creditor must show that the property was “specifically and directly exchanged for the property sought to be recognized as trust property.” Bank of Alex Brown v. Goldberg (In re Goldberg), 158 B.R. 188, 196 (Bankr.E.D.Cal.1993). “Commingling trust funds with personal funds generally renders the trust unenforceable against the commingled funds or property acquired from the commingled funds.” Id. Some courts do not permit the recognition of constructive trusts unless “state law has impressed property with a constructive trust prior to its entry into bankruptcy.” In re Pina, 363 B.R. 314, 323 (Bankr.D.Mass.2007). For instance, the Ninth Circuit’s bankruptcy appellate panel has held that a constructive trust “can only be established by litigation, and the litigation must be successful before the property right is absolute.” In re Advent Mgmt. Corp., 178 B.R. at 488.
Here, the California Superior Court imposed a constructive trust in the sum of $1,266,794 against Debtor. Judgment, p. 17. The California Superior Court’s Final Judgment indicates that the three conditions necessary to impose a constructive trust were satisfied. Id. at 15. The court noted that Debtor “argued that commingling defeated] a constructive trust, but cited no authority in that regard.” Id.
Debtor, again, argues that the constructive trust is not enforceable because of commingling. Debtor also asserts that since Debtor no longer owns the defined benefits plan managed by EH Financial, and, therefore, any constructive trust was destroyed.
Yet, the undisputed facts, including Debtor’s deposition testimony, satisfy the tracing requirement that the total sum of $1,266,794 can be traced from Debtor’s deposits of checks from Blue Cross into his accounts, to his pension plan, to the retirement accounts included in Debtor’s schedules. Debtor asserts that his deposition testimony also creates factual disputes because there is some ambiguity as to the transfers of these funds.
Debtor’s arguments do not create issues of material fact. Debtor’s commingling arguments are with respect to the creation of the original constructive trust by the California Superior Court. Such arguments cannot put the Superior Court’s imposition of the constructive trust in dispute. School District is entitled to judgment that $1,266,794 is not property of the estate and was placed in constructive trust for School District’s benefit. The constructive trust was imposed by operation of law by the California Superior Court. This fact is undisputed and supported by law. In re Advent Mgmt. Corp., 178 B.R. at 488. The purpose of the California Superior Court’s imposition of the constructive trust was to protect the rightful owner of ill-received funds. The name of such account holding the identified funds or subsequent transfer of accounts does not destroy the trust under applicable law because the funds are “specifically and directly exchanged for the property sought to be recognized as trust property.” In re Goldberg, 158 B.R. at 196. School District has presented undisputed facts as to the source of the identified funds in certain IRAs.
Therefore, School District’s role as beneficiary to the court-imposed constructive trust results in Debtor holding only bare legal title and School District holding the equitable interest in the identified funds in the IRA accounts currently held by Debt- *630or. The identified $1,266,794 in IRA funds are not property of the bankruptcy estate.
IV. Conclusion
The undisputed facts viewed in favor of Debtor establish that School District is entitled to judgment as a matter of law as to the nondischargeability of the judgment debt and that $1,266,794 of identified funds in Debtor’s IRA accounts are not property of the estate. For the reasons stated herein, it is
ORDERED that Plaintiffs Motions for Partial Summary Judgment are hereby GRANTED as to Counts One and Three.
It is FURTHER ORDERED that the debt owed to School District is nondis-chargeable and that $1,266,794 in identified funds in Debtor’s IRA accounts are not property of the estate.
A separate judgment in favor of Santa Ana Unified School District will be entered contemporaneously with this Order.
The Clerk is directed to serve a copy of this Order to the parties on the attached distribution list.
. School District urges the Court to find Debt- or's Response untimely under Local Rule 7007-l(c). The Court uses its discretion to consider all of Debtor's responsive pleadings. Based on the ruling, the timeliness of Debt- or’s response is irrelevant.
. Page citations to Exhibit A to the Complaint refer to the page number of the Exhibit as *618presented to this Court, not the page numbers on the California Superior Court documents.
. California Superior Court determined prejudgment interest in the amount of $997,643.16 and $26,124.40 in costs. Judgment, p. 5. The $2997,643.16 incurred post-judgment interest at the rate of 10% per an-num. Id. at 5-6.
. Exhibit D has a received by Maria Jacobs stamp on the bottom but no recipient address block. It appears to be a form letter presumably sent to numerous recipients.
. "The Ninth Circuit Court of Appeals has held that the mere fact state law would impose a constructive trust does not end the analysis of whether such a trust should be recognized in bankruptcy.’’ Mitsui Mfrs. Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.), 13 F.3d 321, 325 n. 6 (9th Cir.1994). Yet, most courts have held that a constructive trust cannot be avoided by a trustee where personal property is in question. See, e.g., Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc., 960 F.2d 366, 372 n. 2 (3d Cir.1992); City Nat’l Bank of Miami v. General Coffee Corp. (In re General Coffee Corp.), 828 F.2d 699 (11th Cir.1987). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495748/ | OPINION AND ORDER ON DISCHARGEABILITY OF DEBT
LAMAR W. DAVIS, JR., Bankruptcy Judge.
Debtor filed his Chapter 13 case on July 20, 2011. Dckt. No. I.1 He initiated this adversary proceeding to determine dis-chargeability of debt on August 20, 2012. A trial of the above captioned matter took place on January 11, 2013. After consideration of the record, the Court now enters the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
The Court adopts and incorporates in full the parties’ “Stipulated Facts Not in Dispute” filed in their Joint Pre-Trial Statement as follows:
On May 26, 2009, William Robert Marshall, III (the “plaintiff/husband”) filed a Petition for Divorce against Joy Renee Marshall (the “defendant/wife”). The Superior Court of Chatham County, entered its Final Judgment of Decree of divorce on January 13, 2011.
The Final Order provided that plaintiff/husband pay child support in the amount of $1,471.00 monthly; alimony in the amount of $1,000.00 monthly for 7 years, every educational expense through high school, not to exceed the cost of attending Savannah Christian Preparatory School.
On June 27, 2011, the Superior Court granted the defendant/wife’s motion for attorney fees, and awarded her $24,440.25, payable on or before December 30, 2011 directly to her attorney, Terry Hubbard. The Court found the plaintiffihusband’s gross income to be *632$10,167.08 and defendant/wife’s gross monthly income to be $3,330.32.2
The Plaintiff/debtor filed his chapter 13 petition on July 20, 2011. Ms. Marshall subsequently paid the debt to Mr. Hubbard.
Joint Pre-Trial Statement, Dckt. No. 71.
Ms. Marshall filed a proof of claim in Debtor’s Chapter 13 case in the amount of $25,071.71. This amount encompassed $24,440.25 in attorney’s fees associated with the parties’ divorce and related actions, with the remainder for the reimbursement of Debtor’s share of various medical, dental, and school-related expenses that Ms. Marshall paid on behalf of the parties’ children. Her claim identified these obligations as domestic support obligations entitled to priority under 11 U.S.C. § 507(a)(1). The latter portion of this claim for the reimbursement expenses is undisputedly a domestic support obligation; however, the parties dispute whether the attorney’s fees should be considered a domestic support obligation.
Debtor filed his Chapter 13 plan on August 4, 2011. Dckt. No. 18. This Court’s Order granting confirmation of Debtor’s plan was entered January 26, 2012. Dckt. No. 45. The Plan provides for payment of priority claims in full, but is not adequately funded to pay Ms. Marshall’s claim in full. The Trustee subsequently filed a motion to increase payments or convert the case. Dckt. No. 47. Debtor filed an objection to Ms. Marshall’s claim on July 3, 2012, arguing that her claim was not entitled to priority status. Dckt. No. 54.
Debtor then initiated this adversary proceeding, contending that the claimed obligation of $24,440.25 is not entitled to priority status and can be discharged because it is not a domestic support obligation.
CONCLUSIONS OF LAW
Section 523(a)(5) of the Bankruptcy Code excepts from a § 1328(b) discharge a debt “for a domestic support obligation.” 11 U.S.C. § 523(a)(5). The definition of “domestic support obligation” (“DSO”) was added to the Code by Congress under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) in § 101(14A), which reads in relevant part:
The term ‘domestic support obligation’ means a debt that accrues before, on, or after the date of the order for relief in a ease 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
(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 or the debtor or such child’s parent, without regard to whether such debt is expressly so designated....
BAPCPA also amended the Code to grant a first priority administrative status to DSOs under § 507(a)(1). If an exception to discharge arises under § 523(a)(5), the amount of that debt has a first priority claim under 11 U.S.C. § 507(a)(1) and would have to be fully funded within the *633confines of the Chapter 13 plan. See 11 U.S.C. § 1322(a)(2) (a Chapter 13 plan is required to “provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim”). If, on the other hand, the Court determines that such award is not actually a DSO, the Debtor, in theory, would be required to pay the claim amount under § 523(a)(15)3 as a nonpriority claim because it does not fall within the parameters of § 507(a)(1) which reads in relevant part:
(a) The following expenses and claims have priority in the following order:
(1) First:
(A) Allowed unsecured claim for domestic support obligations that, as of the date of the filing of the petition in a case under this title, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person, on the condition that funds received under this paragraph by a governmental until under this title after the date of the filing of the petition shall be applied and distributed in accordance with applicable nonbankruptcy law.
11 U.S.C. § 507(a)(1)(A). The net effect of this is that Debtor would pay some pro-rata amount of the approximately $24,000.00 within the five year plan and the balance would be dischargeable at the end of the case.
In support of Debtor’s contention that Ms. Marshall’s attorney’s fees claim is dis-chargeable and nonpriority, Debtor first asserts that the divorce decree put the parties on relatively equal financial footing, with Ms. Marshall “in effect left with a higher net income.” Complaint, A.P. Dckt. No. 1 at 4. Accordingly, Debtor argues that this supports a finding that the attorney’s fee award is not a domestic support obligation. Further, Debtor contends that granting priority status for Ms. Marshall’s attorney’s fees claim would be an undue hardship as it would require him to increase his plan payment from $664.00 to $1,327.00. Id. at 4-5.
At the hearing, Debtor argued that the attorney’s fee obligation is not denominated as alimony and is not in the nature of alimony, maintenance or support, in part because the decree expressly provides for a separate payment of alimony and for child support and reimbursement of certain educational and medical expenses. Thus, Plaintiff argues it should not be inferred that the trial court determined the additional payment of attorney’s fees as necessary to the wife’s support, but rather that support was fully provided for in other portions of the divorce decree.
Assuming Debtor is unsuccessful in this argument, an alternate position taken by the Debtor is that the attorney’s fee obligation is not excepted from discharge un*634der § 523(a)(5) because the payment of the attorney’s fee obligation is not to the spouse, but rather was ordered to be paid to the spouse’s attorney. Complaint. A.P. Dckt. No. 1 at 5-6. Debtor acknowledges that this Court and numerous other courts have construed the statutory text in such a way that payments ordered to be made directly to a spouse’s attorney and for the benefit of the spouse are DSOs. In re Stevens, slip copy, 2006 WL 6885815, at *2 (Bankr.S.D.Ga.2006) (Davis, J.) (“[Bankruptcy courts have frequently determined that an award of attorney’s fees in connection with a divorce decree is in the nature of support and therefore non-dischargeable under Section 523”); Holliday v. Kline (In re Kline), 65 F.3d 749, 751 (8th Cir.1995) (“[Debtor’s] obligation to pay the attorney fees is nondischargeable under § 523(a)(5), notwithstanding that it is payable directly to [former wife’s attorney]”); Matter of Hudson, 107 F.3d 355, 357 (5th Cir.1997) (Court ordered obligation to pay attorney’s fees directly to attorney who represented child’s parent in child support litigation against debtor is nondischargeable under § 523(a)(5)); In re Gwinn, 20 B.R. 233, 234 (9th Cir. BAP 1982) (“[A] claim for attorney’s fees awarded to the debtor’s wife’s attorney in a divorce action is non-dischargeable pursuant to 11 U.S.C. § 523(a)(5), even though the debt was payable directly to the attorney.”); but see In re Orzel, 386 B.R. 210 (Bankr.N.D.Ind.2008) (debtor’s obligation on fee award entered in favor of third-party law firm that had represented debt- or’s former spouse in marital dissolution action was not obligation for alimony, maintenance, or support “owed to a spouse, former spouse or child”).
Debtor asks the Court in light of the passage of BAPCPA to revisit this previous precedent. The Court agrees that in light of subsequent statutory changes it is appropriate to revisit that precedent and determine if it is still controlling.
Ms. Marshall’s position is that an award of attorney’s fees under Georgia law is in the nature of support because such an award is provided for only as a part of expenses of litigation in an action seeking alimony, divorce and alimony, or contempt of court arising out of an alimony or divorce and alimony case, and the award is based on the relative financial circumstances of the parties. A.P. Dckt. No. 11 at 4. Ms. Marshall relies on precedent in this Court holding that an award of attorney’s fees by the Superior Court is in the nature of support. Stevens, 2006 WL 6885815. Ms. Marshall contends that BAPCPA has not altered the law in this area. A.P. Dckt. No. 11 at 6-7.
The Court agrees with Ms. Marshall and concludes that the statutory changes have not invalidated prior case law. See In re Papi, 427 B.R. 457, 462, n. 5 (Bankr.N.D.Ill.2010) (“Although the Bankruptcy Abuse Prevention and Consumer Protection Act, which applies to all cases filed on or after October 17, 2005, added the term ‘DSO’ to the Code, that term was developed from the definition of a nondischargeable debt for alimony, maintenance, and support in former Section 523(a)(5). Accordingly, case law interpreting the former version of Section 523(a)(5) remains relevant and persuasive here.”) (citations omitted); In re Poole, 383 B.R. 308, 313 (Bankr.D.S.C.2007) (observing that the similarity of language in pre-BAPCPA § 523(a)(5) and post-BAPCPA § 101(14A) makes case law applicable to pre-BAPCPA § 523(a)(5) helpful in interpreting § 101(14A)). Therefore, the Court concludes that pre-BAPCPA precedent remains relevant.
To that effect, it is clear that pre-BAPCPA precedent overwhelmingly concludes that an award of attorney’s fees *635does not lose its DSO character by being payable directly to the attorney. Matter of Holt, 40 B.R. 1009 (S.D.Ga.1984); Stevens, 2006 WL 6885815; see also In re Bedingfield, 42 B.R. 641 (S.D.Ga.1983) (support obligations may be DSOs even if not payable directly to wife or children). Post-BAPCPA cases have reached similar decisions. See, e.g., In re Andrews, 434 B.R. 541 (Bankr.W.D.Ark.2010) (finding under current law that attorney’s fee award arising from a divorce decree was a “domestic support obligation” even though the payee was former wife’s attorney); Rogowski, 462 B.R. 435 (surveying cases and holding that matrimonial attorney’s fees payable directly to the attorney satisfied the definition of DSO). Accordingly, the fact that the attorney’s fee award is payable directly to Mr. Hubbard has no bearing on whether the debt is a DSO.
The Court notes that although the attorney’s fee award was to be payable directly to Mr. Hubbard, Ms. Marshall has already paid the attorney’s fees herself. Thus, even though Debtor seeks to characterize such debt as a non-DSO because the debt was to be paid directly to her attorney, Ms. Marshall contends that she is now entitled to assert the claim in her own right as a subrogee under § 509. Debtor, on the other hand, argues that because Ms. Marshall has paid the attorney’s fees, the bankruptcy court may be released from giving deference to the Superior Court’s determination of who was in a better position to pay the debt because that determination is now irrelevant. The Court need not address these arguments because it finds that the obligation will not lose its DSO character by virtue of being payable directly to Ms. Marshall’s attorney.
The Court’s task is simply to determine whether the attorney’s fee award is in the nature of support. In re Harrell, 754 F.2d 902, 907 (11th Cir.1985) (‘We conclude that Congress intended that bankruptcy courts make only a simple inquiry into whether or not the obligation at issue is in the nature of support ... It will not be relevant that the circumstances of the parties may have changed_”) (emphasis in original). This Court in Stevens noted that “the nature of a debt arising out of a divorce proceeding is based on the intent of the court that awarded the judgment” and concluded that “[o]ne of the critical factors in determining the State Court’s intent is the disparity between the parties’ earning capacities at the time of the judgment.” Stevens, 2006 WL 6885815, at *2. The Superior Court’s award of attorney’s fees arising from the parties’ divorce proceeding at the time of judgment was based on a disparity of the parties’ financial circumstances.4 Thus, I find the debt to be in the nature of support, and conclude that Debtor’s obligation to pay Mr. Hubbard’s attorney’s fees satis-*636fíes the definition of a DSO in § 101(14A). Therefore, the debt is non-dischargeable under §§ 523(a)(5) and 1828(a)(2) and is entitled to priority under § 507(a)(1).
ORDER
Pursuant to the foregoing, it is the ORDER of this Court that the Superior Court attorney’s fee award of $24,440.25 is non-dischargeable and entitled to priority under 11 U.S.C. § 507(a)(1).
. For this Order, citations to the main bankruptcy case [11-41469] will appear as "Dckt. No. --citations to Debtor’s Adversary Proceeding [12-4050] will appear as "A.P. Dckt. No.-",
. On November 13, 2012, this Court entered an Order granting Ms. Marshall's Motion in limine (A.P. Dckt. No. 12) to preclude Debtor from introducing further evidence of the parties’ prior or current financial circumstances because such matters had previously been litigated in Superior Court. A.P. Dckt. No. 14.
. Section 523(a)(15) excepts from discharge debts “to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.” 11 U.S.C. § 523(a)(15). Section 1328(a)(2) limits debt excepted from discharge in a Chapter 13 case under § 523 to debt "of the kind specified in ... paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a)”, and so § 523(a)(15) debt is likely dischargeable here. But see In re Rogowski, 462 B.R. 435, 440 n. 9 (Bankr.E.D.N.Y.2011) (discussing the tension and facial conflict between § 523(a) and § 1328(a)(2), but not deciding the issue).
. The Superior Court awarded attorney's fees to Ms. Marshall’s attorney under O.C.G.A. § 19-6-2, which provides in relevant part:
(a) The grant of attorney’s fees as a part of the expenses of litigation, made at any time during the pendency of the litigation, whether the action is for alimony, divorce and alimony, or contempt of court arising out of either an alimony case or a divorce and alimony case, including but not limited to contempt of court orders involving property division, child custody, and child visitation rights, shall be:
(1) Within the sound discretion of the court, except that the court shall consider the financial circumstances of both parties as a part of its determination of the amount of attorney’s fees, if any, to be allowed against either party; and
(2) A final judgment as to the amount granted, whether the grant is in full or on account, which may be enforced by attachment for contempt of court or by writ of fieri facias, whether the parties subsequently reconcile or not.
Ga.Code Ann. § 19-6-2(a) (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495750/ | Opinion Granting Plaintiff’s Motion For Summary Judgment And Denying Defendant’s Motion For Summary Judgment
PHILLIP J. SHEFFERLY, Bankruptcy Judge.
Introduction
The Chapter 7 trustee filed this adversary proceeding under § 549 of the Bankruptcy Code to recover $43,700.00 of post-petition payments made by the debtor to the defendant. The trustee and the defendant filed cross motions for summary judgment. For the reasons set forth in this opinion, the Court finds that the trustee may avoid the payments made by the debt- or to the defendant under § 549. As a result, the Court will grant the trustee’s motion for summary judgment and deny the defendant’s motion for summary judgment.
Jurisdiction
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.1
On July 14, 2010, an involuntary Chapter 7 petition was filed against Harvey Goldman & Company (“Debtor”). When the involuntary petition was filed, the Debtor was in the business of buying and selling used industrial machinery and equipment, some of which the Debtor sold to purchasers overseas. The Debtor contested the involuntary petition and continued its business during the gap period, i.e. *659between the filing of the involuntary petition and the entry of the order for relief. After a trial on the involuntary petition, the Court granted the petition and entered an order for relief on November 16, 2010.
Nova World International, LLC (“Nova”) is a Michigan limited liability company owned by Yevgeniy Epshteyn and engaged in the business of arranging shipments of cargo to various places around the world. Nova is a non-vessel operating common carrier that provides “delivery of cargo from point A to point B” (ECF. No. 43, Ex. A, Epshteyn dep. at 7). Nova does not own or operate any vessels, but instead has “service contracts with several steamship lines” (id.) and has relationships with trucking companies and rigging companies. Nova does not physically put cargo into containers for shipping, but instead works over the telephone and computer to coordinate with different companies to put cargo into containers, have them picked up, and then shipped (id. at 9, 18). Nova operates out of an office in West Bloomfield, Michigan, with five employees, two of whom are project managers that provide the coordinating services, and two of whom are in charge of preparing the documentation for each project (id. at 8-9).
The Debtor was one of Nova’s first customers (id. at 13). The Debtor and Nova started doing business together in 2007 or 2008. Since then, Nova handled approximately 30 to 40 containers each year for the Debtor (id. at 14). Typically, when the Debtor needed Nova’s services, one of the Debtor’s employees, either David Simcha or Simon Levin, would contact Nova by telephone or Epshteyn would stop by the Debtor’s warehouse. According to Epsh-teyn, the “[m]ost likely [] way it would happen is I could stop by Worldwide and ask them ... what the plan is for the next month-” (Id. at 15.) Simcha or Levin would estimate the number of containers the Debtor would need, as it generally took some time for the Debtor to negotiate a sale. Later, Simcha or Levin would describe the machine that the Debtor needed to have shipped, and inform Epsh-teyn of the intended destination. (Id. at 15-16.) Nova would then provide “booking numbers” to a trucking company, and either a trucking company or someone from a steamship line would then take an appropriately sized container to the Debt- or’s location to be used for shipping the Debtor’s machine (id. at 17-18).
Once the container was at the Debtor’s location, the Debtor’s employees loaded the machine into the container (id. at 18). Nova would arrange to have either a trucking company or a steamship line pick up the container from the Debtor and take it to a railhead in Detroit (id. at 18-19). Epshteyn estimated that about half the time, Nova arranged for delivering the container to the Debtor’s location and then shipping the container via truck and steamship to the Debtor’s requested destination. The other half of the time, the steamship line was “hundred percent” responsible (id. at 19).
In this adversary proceeding, the trustee seeks to recover payments for six overseas shipments. For all six of these shipments, the Debtor hired Nova prior to the involuntary bankruptcy petition to make arrangements for the transport of specific machines. Nova performed its services, and the Debtor’s machines were placed on vessels that sailed from the United States, prior to the involuntary bankruptcy petition being filed. After the Debtor’s machines were placed on vessels leaving the United States, but prior to the involuntary bankruptcy petition, Nova issued an invoice (“Invoices”) for each of these shipments. Each of the Invoices contained a description of the cargo, a description of services relating to the cargo, a date of *660shipment, terms for payment and an invoice amount. Each of the Invoices also contained the statement that it was “Subject to Terms and Conditions listed at: www.nova-shipping.com.”
Paragraph 1 of the Terms and Conditions (“Terms and Conditions”) on Nova’s website states:
These Terms and Conditions apply to any and all purchasing activities between NOVA WORLD INTERNATIONAL, LLC, a Michigan, USA limited liability company doing business as Nova Shipping and its related companies, agents and/or representatives (collectively, the “Company”) and the “Customer” and to any and all services performed and goods sold or provided by the Company to the Customer. Legal relationships between the Company and the Customer are governed exclusively by these Terms and Conditions.
Paragraph 5 of the Terms and Conditions states:
[N]or does Company assume any responsibility or liability for any acts and/or omissions of such third parties and/or its agents, and the Company shall not be liable for any delay or loss of any kind, which occurs while a shipment is in the custody or control of a third party or the agent of a third party. The Customer agrees to assert and bring any and all claims in connection with the acts or omissions of a third party solely against such third party and/or its agents[J
Paragraph 11(a) of the Terms and Conditions states:
The Company issues invoices upon commencement of the services for the Customer or the sale of goods to the Customer. Except where otherwise agreed in writing signed by the Company, the Customer shall pay in full all invoices within ten (10) days from date of invoice.
Other than the Invoices, there are no documents between Nova and the Debtor that refer in any way to the Terms and Conditions, or to any variance in the Terms and Conditions.
The Debtor paid each of the Invoices by check during the gap period. One check was issued for payment of two of the Invoices, and a separate check was issued for each of the other four Invoices. The Debt- or issued all of the checks after the date of the involuntary petition, and all of them cleared before the order for relief. The invoice number, the invoice date, the sailing date, the invoice amount and payment terms, as well as the date of issuance, date of clearance and amount of the Debtor’s checks paying the Invoices, are as follows:
Date of Date of Clearance Amount of Invoice Invoice Sailing Invoice Invoice Debtor’s of Debtor’s Debtor’s Number Date Date Amount Terms Check Check Check
3922 6/7/2010 6/7/2010 $20,000.00 10 days 7/22/2010 7/27/2010 $23,350.00
3940 5/24/2010 5/24/2010 $ 3,350.00 20 days 7/22/2010 7/27/2010
3967 6/18/2010 7/3/2010 $ 6,300.00 10 days 7/23/2010 7/26/2010 $ 6,300.00
3989_6/7/2010 5/21/2010 $ 3,350.00 10 days S/6/2010 8/12/2010 $ 3,350.00
4003 6/24/2010 6/2/2010 $ 7,200,00 10 days 8/2/2010 8/6/2010 $ 7,200.00
3952 6/18/2010 7/2/2010 $ 3,500.00 10 days 8/5/2010 8/9/2010 $ 3,500.00
Nova performed all of the services that are described on the Invoices prior to the time that the involuntary bankruptcy petition was filed. Nova does not have any *661records to show that it performed any services described on the Invoices after the involuntary bankruptcy petition was filed (ECF No. 43, Ex. A at 91). Although all of the Invoices predate the filing of the involuntary bankruptcy petition, the Debt- or’s machines that are referenced in the Invoices did not arrive at their ultimate destinations overseas until after the involuntary bankruptcy petition was filed. The dates of delivery of the machines covered by the Invoices are as follows:
Invoice Number Delivery Date
3922_8/12/2010
3940_7/17/2010
3967_7/26/2010
3989_7/30/2010
4003_7/30/2010
3952_7/31/2010
Stuart Gold (“Trustee”) was appointed as the Chapter 7 trustee for the Debtor after the order for relief was entered. On August 17, 2011, the Trustee filed a one count complaint in this adversary proceeding to avoid the five payments (“Transfers”) made by the Debtor with respect to the Invoices. After the close of discovery, on December 31, 2012, the Trustee and Nova filed a consent (ECF No. 39) to the entry of a joint final pretrial order. On January 7, 2013, the Court conducted the final pretrial conference, at which the Trustee and Nova requested that the Court postpone the trial and instead extend the deadline for filing dispositive motions so that they each could file a motion for summary judgment. The Court granted their request. On February 7, 2013, the Trustee filed a motion for summary judgment. On the same day, Nova filed a motion for summary judgment. On March 11, 2013, the Court heard arguments on the cross motions for summary judgment and took them under advisement. The cross motions for summary judgment are now ready for decision.
Summary Judgment Standard
Fed.R.Civ.P. 56 for summary judgment is incorporated into Fed. R. Bankr.P. 7056. Summary judgment is only appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “[T]he 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.” Id. at 247-48, 106 S.Ct. 2505. A “genuine” issue is present “ ‘if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.’ ” Berryman v. Rieger, 150 F.3d 561, 566 (6th Cir.1998) (quoting Anderson, 477 U.S. at 248, 106 S.Ct. 2505).
“The initial burden is on the moving party to demonstrate that an essential element of the non-moving party’s case is lacking.” Kalamazoo River Study Group v. Rockwell International Corp., 171 F.3d 1065, 1068 (6th Cir.1999) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). “The burden then shifts to the non-moving party to come forward with specific facts, supported by evidence in the record, upon which a reasonable jury could return a verdict for the non-moving party.” Id. (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505). “The non-moving party, however, must provide more than mere allegations or denials ... without giving any significant probative evidence to support” its position. Berryman v. Rieger, 150 F.3d at 566 (citing Anderson, 477 U.S. at 256, 106 S.Ct. 2505).
“Essentially, a motion for summary judgment is a means by which to ‘challenge the opposing party to “put up or shut up” on a critical issue.’ ” Cox v. *662Kentucky Dept. of Transportation, 53 F.3d 146, 149 (6th Cir.1995) (quoting Street v. J.C. Bradford & Co., 886 F.2d 1472, 1477 (6th Cir.1989)). “If the record taken in its entirety could not convince a rational trier of fact to return a verdict in favor of the nonmoving party, the motion should be granted.” Id. at 150 (citing Street, 886 F.2d at 1480).
Discussion
Section 549(a) of the Bankruptcy Code governs the avoidance of post-petition transfers of property of a bankruptcy estate. It provides as follows:
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the case; and
(2) (A) that is authorized only under section 303(f) or 542(c) of this title; or
(B) that is not authorized under this title or by the court.
Nova does not dispute that the Transfers occurred after the commencement of this bankruptcy case. Nova also does not dispute that the Transfers were made from property of the bankruptcy estate. Finally, Nova does not dispute that the Transfers were authorized to be made by the Debtor only under § 303(f)2 of the Bankruptcy Code, and not by any other provision of the Bankruptcy Code or by the Court.
There is no question that all of the elements of § 549(a) are present. The dispute between Nova and the Trustee turns on whether Nova is entitled to invoke the exception to the avoidance of a post-petition transfer that is set forth as follows in § 549(b):
(b) In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has.
Federal Rule of Bankruptcy Procedure 6001 states that “[a]ny entity asserting the validity of a transfer under § 549 of the Code shall have the burden of proof.” Therefore, it is Nova’s burden to show that the Transfers qualify for the exception of § 549(b).
In its motion for summary judgment, Nova argues that the Transfers qualify for the exception under § 549(b) because Nova gave value to the Debtor after the involuntary bankruptcy petition was filed. According to Nova, even though it was hired by the Debtor prior to the involuntary bankruptcy petition, and performed all of the services to arrange and coordinate the shipments of the Debtor’s machines prior to the involuntary bankruptcy petition, the Debtor only realized any value from Nova’s services when the Debtor’s machines reached their ultimate destinations overseas, which occurred after the involuntary bankruptcy petition was filed. Further, Nova contends that the Debtor only became obligated to pay the Invoices when the Debtor’s machines reached their final overseas destinations. To the extent *663that its Invoices and Terms and Conditions state otherwise, Nova argues that the Debtor did not sign the Invoices, the Debt- or did not read the Terms and Conditions, and the Invoices and Terms and Conditions are not applicable to the Debtor because both Nova and the Debtor “understood” that the Debtor would only pay Nova once the Debtor’s machines reached their overseas destination.
In support of its motion, Nova relies upon affidavits signed by Simcha and Lev-in, plus the deposition testimony of Epshteyn. Simcha, the former president of the Debtor, states in paragraph 3 of his affidavit (ECF No. 44-7) that notwithstanding the terms of the Invoices, “the invoiced amount would not be due and payable until the goods were actually delivered to the intended party.” In paragraph 4 of his affidavit, Simcha states that the Debtor received “absolutely no benefit from the services of Nova Shipping until delivery was made to the intended party[.]” In paragraph 5 of his affidavit, Simcha says that he “never signed and never intended to be bound by” the Terms and Conditions, because they “did not constitute the actual agreement of the parties.” Finally, in paragraph 6 of his affidavit, Simcha states that Nova “was wholly responsible” to the Debtor until delivery of the Debtor’s cargo was made to its final destination.
Levin’s affidavit (ECF No. 44-6) is similar to Simcha’s. Levin states in paragraph 3 of his affidavit that the Debtor and Nova “understood and agreed that the invoiced price for shipment would not be due and payable” until the Debtor’s machines were delivered to their intended recipient overseas. In paragraph 5 of his affidavit, Lev-in says that “both parties ignored any language on Nova Shipping’s website concerning payment to be made within 10 or even 20 days from the invoice date.”
Epshteyn’s testimony was similar. Epshteyn did not dispute that the Invoices require payment of the invoiced amount within a specified number of days, and he did not dispute that the Terms and Conditions likewise require payment of the invoiced amount within the terms set forth in the Invoices. However, Epshteyn explained that the Invoices are not really demands for payment, but instead are only intended to be “informational” (ECF No. 43, Ex. A at 22-23), designed to “advise” Nova’s customers what a transaction may cost the customer (id. at 85). As for the Terms and Conditions, Epshteyn explained that they “are general and they are created to protect Nova” (id. at 53), although he acknowledged that there was nothing in writing between Nova and the Debtor that varied in any way either the Invoices or the Terms and Conditions (id.).
The Trustee argues that Nova has not come forward with any specific facts, supported by evidence in the record, to show that it gave anything of value to the Debt- or after the commencement of the bankruptcy case. Epshteyn’s deposition, Sim-cha’s affidavit and Levin affidavit do not identify a single act or service performed by Nova for the Debtor post-petition. Instead, they demonstrate that all of Nova’s services in arranging the six shipments of the Debtor’s machines, were performed before the bankruptcy ease was filed. Therefore, the Transfers were made to pay pre-petition debts and not for any value given to the Debtor post-petition.
The starting point to determine whether Nova has met its burden of proof is the statute itself. Section 549(b) provides an exception to the avoidance of a post-petition transfer under § 549(a) only “to the extent any value ... is given after the commencement of the case in exchange for such transfer.” Nova’s arguments are misplaced in that they focus on the value *664that Nova believes the Debtor received after the commencement of the bankruptcy case. Section 549(b) requires the Court to consider what was given by the transferee post-petition, not what was received by the debtor post-petition. See Guinn v. Oakwood Properties, Inc. (In re Oakwood Markets, Inc.), 203 F.3d 406, 410 (6th Cir.2000) (“[T]he extent of value given must be determined from the ‘giver’s’ perspective!;.]”).
Neither Simcha’s affidavit nor Lev-in’s affidavit describe anything that was given by Nova to the Debtor after the commencement of the case. Neither describes even a single service or act performed by Nova after the involuntary bankruptcy petition was filed. Similarly, when asked in his deposition to identify any services that Nova performed for the Debtor after the filing of the involuntary bankruptcy petition, Epshteyn could not do so. In his deposition, Epshteyn was asked a series of questions about each of the shipments covered by the Invoices. In particular, Epshteyn was asked whether the services performed by Nova for the Debtor were performed prior to the involuntary bankruptcy petition or after it. His answers were remarkably similar for each of the Invoices. Epshteyn could not identify any services that Nova performed after the involuntary bankruptcy petition was filed for any of the shipments covered by the Invoices. Further, when asked whether Nova had any records that might reflect any services performed by Nova for the Debtor after the involuntary bankruptcy petition was filed, Epshteyn answered “no” and concluded that “[i]t is “impossible to determine whether Nova did anything after the petition date (ECF No. 43, Ex. A at 91).
In sum, Epshteyn’s deposition testimony and the affidavits of Simcha and Levin do not contain any probative evidence that Nova performed any services for the Debt- or, or otherwise gave anything of value to the Debtor after the involuntary bankruptcy petition was filed.
Although conceding that it has no records nor any other evidence of any services that it performed for the Debtor after the involuntary bankruptcy petition was filed, Nova nonetheless asserts that it is still entitled to invoke the exception of § 549(b) because the Debtor only received a benefit from Nova’s pre-petition services once the Debtor’s machines arrived at their intended overseas destinations, which occurred post-petition. Stated another way, Nova contends that even if all of its services in arranging and coordinating the shipments of the Debtor’s machines took place prior to the involuntary bankruptcy petition being filed, the Debtor received no benefit from those pre-petition services until the machines were delivered post-petition. Therefore, the Debtor had no obligation to pay for those services until the machines arrived at their intended destinations overseas. According to Nova, this makes the Debtor’s obligations to Nova post-petition debts.
Nova’s own documents belie its argument. Each of the Invoices describes services that Nova performed pre-petition! Each of the Invoices requires payment of a sum certain. Each of the Invoices sets forth the due date for such payment. Five of the Invoices require payment in ten days and the other Invoice requires payment in 20 days. None of the Invoices say or imply in any way that payment is only required when the Debtor’s machine reaches its final destination. Further, each of the Invoices states that it is subject to the Terms and Conditions. Section 11(a) of the Terms and Conditions confirms that “the Customer shall pay in full all invoices within ten (10) days from the date of invoice.” The Invoices and the *665Terms and Conditions unequivocally require the Debtor to pay Nova the amounts set forth in the Invoices by a date certain, without regard to whether the machines ultimately reach their intended final destination. The balance of the Terms and Conditions are also contrary to Nova’s argument. Once Nova performed its services in coordinating and arranging for the shipments, and then rendered the Invoices upon the cargo sailing from the United States, Nova had done all that it was required to do in order to be paid for its services. Most importantly, any risk of loss that occurred after that date was contractually borne by the Debtor and not by Nova.3
The documentary evidence of the relationship between Nova and the Debtor is clear and consistent. However, Nova urges the Court to disregard its Invoices and Terms and Conditions because there was an “understanding” between Nova and the Debtor that the Debtor did not have to pay its debts to Nova in accordance with the Invoices and the Terms and Conditions. Nova’s evidence of such “understanding” consists solely of Simcha’s and Levin’s conclusory statements that the Debtor did not intend to be bound by the Invoices and the Terms and Conditions, plus Epshteyn’s self-serving deposition testimony in which he attempts to disavow all of Nova’s own documents because it is now expedient to do so. Nova has not come forward with any specific facts or other probative evidence to establish the existence of any “understanding” between the Debtor and Nova contrary to the Invoices and the Terms and Conditions.4 Nova’s argument that the Transfers were in payment of debts that were incurred by the Debtor post-petition is wholly unsupported by Nova and directly controverted by all of Nova’s own documentary evidence.
Conclusion
There are no genuine issues of fact. The Invoices are pre-petition debts that were incurred by the Debtor with Nova for services that were performed entirely pre-petition by Nova for the Debtor. Nova issued its Invoices upon completion of the performance of its services. There were no post-petition services performed by Nova. The Transfers were payments made by the Debtor after the commencement of *666the case to pay the pre-petition debts owed to Nova pursuant to the Invoices. Nova has not met its burden of proof to show that it gave any value to the Debtor post-petition that would enable Nova to qualify for the exception under § 549(b) or even to create a genuine issue of fact that would prevent the Court from granting summary judgment to the Trustee. The Trustee is entitled to summary judgment. The Court will enter a separate order consistent with this opinion.5
. On January 7, 2013, the Court entered a Joint Final Pretrial Order (ECF No. 40) that contains a stipulation of facts. The facts set forth in this section of the opinion are taken in part from the stipulation and in part from the affidavits, deposition testimony and papers filed by the parties.
. Section 303(f) provides that after an involuntary bankruptcy petition has been filed, "until an order for relief in the case, any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced.”
. Nova attached to its motion for summary judgment a copy of a license (ECF No. 44-4) issued to it by the Federal Maritime Commission, authorizing Nova to carry on business as a "non-vessel operating common carrier.” Nova argues that this license shows that Nova remains responsible for the Debtor’s machines until they reach their final destination. However, whatever legal obligations this license may impose upon Nova relative to the Federal Maritime Commission, the issuance of the license does not show that Nova actually gave or did anything after the filing of the Debtor’s bankruptcy case. Nor does Nova reconcile its argument that it remains responsible for the Debtor’s machines until they reach their final destination with paragraph 5 of Nova’s own Terms and Conditions, which categorically states that Nova is not responsible for its customer’s cargo once it is placed in the custody of a vessel or other third party.
. Nova’s brief in support of its motion for summary judgment makes several other arguments. The Court has considered all of them, even if they are not mentioned in this opinion. None of them have merit. They do not create any genuine issues of material fact either as to the Trustee's burden to demonstrate the elements of § 549(a) or Nova’s burden to demonstrate the elements of § 549(b).
. The Court notes that the Debtor paid five of the six Invoices by Transfers made after the delivery of the Debtor’s machines to their final destination, and paid the other Invoice (Invoice 3922) by a Transfer made before the delivery of the machine described in that Invoice. But dates of the Transfers relative to the dates of deliveiy are irrelevant. The fact that the Debtor paid five of the Invoices past their express due date does not tend to prove that there was any "understanding” between the Debtor and Nova that contradicted or altered either the Invoices or the Terms and Conditions. This fact is especially unsurprising considering that the Court expressly found in the trial of the involuntary bankruptcy petition that the Debtor was generally not paying its debts as they came due. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495751/ | OPINION REGARDING GERMAN STATES’ OBJECTION TO THE INCLUSION OF STATE STATUTORY AND POLICE POWER CLAIMS IN CLASS PROOF OF CLAIM NO. 666
JAMES D. GREGG, Chief Judge.
I. INTRODUCTION.
Prior to its bankruptcy filing, Second Chance Body Armor, Inc. (“Second Chance” or the “Debtor”) manufactured and sold bullet-resistant concealable body armor to various individuals and entities, including many law-enforcement officers and agencies. After concerns arose about the performance of some of its bullet-resistant vests, particularly those containing Zylon fiber, various vest purchasers and State Attorneys General initiated legal actions against Second Chance and the manufacturers of the Zylon fiber, Toyobo Co. Limited and Toyobo America, Inc. (collectively, “Toyobo”). The actions against Second Chance were stayed when the company filed a voluntary chapter 11 petition on October 17, 2004.
Approximately one year later, this Court issued an order certifying a class (the “Class Certification Order”) through which purchasers and users of Second Chance’s Zylon vests could assert claims against the Debtor. The Class was limited to breach of warranty claims, and specifically excluded other claims for violation of statute and punitive or exemplary damages. The Class also excluded claims asserted by States’ Attorneys General (“State AGs”) exercising their police powers.
The case was converted to chapter 7 on November 22, 2005, and James W. Boyd was appointed as the Chapter 7 Trustee (“Trustee”). In the years that followed, the Trustee undertook the arduous process of administering Second Chance’s bankruptcy estate. Among other things, the Trustee sold the Debtor’s business and pursued lengthy, contentious litigation of Second Chance’s breach of warranty and fraud claims against Toyobo.1 Numerous proofs of claim were filed against the *669Debtor’s bankruptcy estate by individuals and entities who had purchased Second Chance’s Zylon vests, the United States, the State AGs, and the Class. The Trustee filed objections to many of these claims and engaged in extensive negotiations with the governmental entities and Class Counsel in an effort to accurately identify vest purchasers and prevent duplicate recoveries.
Finally, in the summer of 2012, this court approved a Class Notice Program which required potential class claimants to file claims with the Class by a date certain. Eight states2 that had not previously filed proofs of claim against the bankruptcy estate filed claims with the Class. On August 9, 2012, the German Free State of Bavaria and the German State of North Rhine-Westphalia (collectively, the “German States”) filed an Objection to the Inclusion of State Statutory and Police Power Claims in the Class Proof of Claim No. 666 (the “Objection”). The German States’ Objection asserts that the claims of six of these states — Alabama, Florida, Georgia, Mississippi, Ohio, and Tennessee (collectively, the “Six State Claims”) — seek recovery on behalf of all vest purchasers in each respective state. Although the Six State Claims seek breach of warranty damages relating to actual vest purchases, the German States argue that such representative claims may only be filed pursuant to each state’s consumer protection statute, which in turn, derives from the state’s police powers.3 Therefore, the German States assert that the Six State Claims constitute statutory or police power claims which fall outside the Class definition and may not be included in the Class Claim.
For the reasons set forth below, the court rejects the German States’ proposed construction of the Class Certification Order and overrules the German States’ Objection.
II. FACTS AND PROCEDURAL BACKGROUND.
A. General Background.
The general factual background of this bankruptcy case has been recounted in numerous pleadings and court opinions4 and is not disputed in this contested matter. In 1999, Second Chance began selling concealable body armor containing Zylon, a “super fiber” manufactured by Toyobo. Zylon was thought to be an excellent material for use in ballistic applications because it had superior physical characteristics but was lighter, softer, and more flexible than traditional aramid fibers, like Kevlar. Over time, Second Chance manufactured three models of Zylon vests: the Ultima and Ultimax vests, which were made entirely from Zylon, and the Tri-Flex vests, *670which contained Zylon mixed with other aramid fibers. Because Second Chance’s Zylon vests were lighter and more comfortable than other ballistic vests on the market, initial sales of the vests were hugely successful. The vests were sold to federal, state and local law enforcement agencies, as well as to military personnel and individual officers. Some of these vest purchases were funded by a United States government program called the Bulletproof Vest Partnership Act (the “BVPA”), through which the federal government reimbursed certain vest purchasers for a portion of the purchase price of certain vests. Each Second Chance vest included a five year express warranty.5
In 2001, concerns arose regarding the durability of Zylon, particularly in hot and humid conditions. Subsequent testing suggested that Second Chance’s Zylon vests might be losing strength faster than expected and might not provide adequate ballistic protection for the entire five year warranty period. In 2003, Second Chance announced a recall and remedial program for its Ultima and Ultimax vests.
Despite the recall, a large number of State AGs and classes of consumers began filing lawsuits against Second Chance and Toyobo. One of the largest lawsuits was a class action filed against Second Chance and Toyobo in Oklahoma state court (the “Oklahoma Class Action”). These lawsuits, along with the costs of the recall program, caused Second Chance to file a petition under chapter 11 of the Bankruptcy Code on October 17, 2004.
B. The Motion for Class Certification.
On April 5, 2005, shortly after the commencement of Second Chance’s bankruptcy case, Steven W. Lemmings and the City of Prior Creek (the “Class” or “Class Claimants”) filed a putative class proof of claim (the “Class Claim”). (Claim No. 666; Class Exh. F.)6 The Class Claimants also filed a Motion for Class Certification on April 5, 2005. (Dkt. No. 268.) As originally proposed, the Class was broadly defined to consist of “all persons and entities in the United States and its territories, who have purchased, possess(ed), or own(ed) a bulletproof vest manufactured by the Debtor, Second Chance Body Armor, Inc., which contains Zylon®, a fiber manufactured and sold by Toyobo Company, Ltd. and Toyobo America, Inc.” (Id.) This broad definition contained limited exclusions for affiliates of the Debtor and Toyobo, vest distributors, those who opted out, and holders of personal injury claims. (Id.) The only government claims excluded under the proposed definition were the claims of the federal government. (Id.)
The damages sought in the original Class Claim consisted of “breach of warranty claims (both express and implied), damages for fraudulent misrepresentation and omissions in connection with the marketing and sale of the vests (consumer fraud), treble damages (where available), punitive damages (where available), inter*671est, costs, and any other damages available to the Class Claimants.” (Claim No. 666; Class Exh. F, n.3.) The Class Claim estimated that there were as many as 150,945 potential Class members. (Id.) This estimate was based on the total number of Second Chance Zylon vests sold to consumers in the United States from 1999 through 2004. (Id) Utilizing this number of vests, the putative Class estimated that the total amount of the breach of warranty claims alone could total $188,281,250.00. (Id.)
C. Hearing on the Motion for Class Certification.
The Debtor and the Unsecured Creditors’ Committee both filed responses in opposition to the Motion for Class Certification and a hearing was held before this court on May 17, 2005. (Dkt. Nos. 329 & 330.) At the hearing, counsel for the Debtor provided some additional background regarding the status of the case. He explained, for example, that a working group consisting of the various State AGs had been formed, and that the group had been in “constant communication” with the Debtor and its counsel. (Transcript of Hearing held on May 17, 2005, Dkt. No. 373, at 61.) The Debtor’s attorney emphasized that the State AGs were filing representative claims through which they were “asserting rights to recover for all of the people in their state.” (Id. at 62.) As of the date of the hearing, three states had filed such representative proofs of claim, but the Debtor’s attorney indicated that he expected the “majority of AGs” would file similar claims prior to the expiration of the bar date. (Id. at 63.)
With regard to the Motion for Class Certification, Debtor’s counsel acknowledged that the Debtor would not contest its liability for the breach of express warranty claims relating to the Ultima and Ultimax vest models. (Id. at 58.) He argued, however, that the variety of other claims asserted by the Class might be subject to state law variations and, as such, would be inappropriate for resolution in the context of a class proof of claim. (Id. at 54-56.)
Counsel for the Class countered these arguments by asserting that a class proof of claim was the best way to ensure that the interests of the “little guys,” i.e., individual vest purchasers, were adequately represented in the bankruptcy case. Class counsel explained that “one of the things that [came] through loud and clear” during the hearing was that “the little guy, the little consumers” were “not going to be adequately protected by the Unsecured Creditors Committee.” (Id. at 23.) He further stated that, of the 150,000 vest claimants identified by the Class, only a “handful” of individual claimants had filed their own claims against Second Chance’s bankruptcy estate. (Id. at 39.)
The court shared both the Debtor’s concerns about the breadth of the proposed Class and the Class’s concerns about adequate representation of individual vest purchasers. Specifically, the court stated that individual vest purchasers might not pursue breach of warranty claims on their own, and that class certification would likely result in “many more people participating and getting what they are entitled to.” (Id. at 80-81.) The court commented that there were “some good points made about class certification” when it came to “representing the little guy ... to make certain that all creditors get their share.” (Id. at 79.)
Seeking a compromise and a practical solution, the court inquired whether counsel had considered crafting a more narrow class that would facilitate recovery for breach of express warranty clams, but would leave those claimants who wanted to *672“try for triple damages” under specific state law theories to do so outside of the Class. (Id. at 99.) The court explained:
If the decision would be a big class involving lots of state law issues and treble damages and ... all the rights that you may otherwise have outside of the class, I’d be disinclined to certify a class.
If it’s a class that ... just deals with core issues that are going to be readily determinable and it looks like it’s going to move quickly and it’s going to be fair and just overall ... [and] give some rough justice to everybody, I’m leaning that way. I’m kind of in favor of that.
(Id. at 104-05.) The court encouraged Class counsel to “come up with some sort of reasonable proposal” for certification of a narrowed class. (Id. at 108.) The court commented:
And I’ll tell you if it really goes to the express warranty issues and recovering on that basis, I’m going to be listening to you real closely. To the extent you get into state law, you’re going to lose my interest.
(Id.)
Because of the Debtor’s financial situation, counsel for the Class agreed that the case was “essentially an express warranty case” and that narrowing of the Class definition might be appropriate. (Id. at 92-94.) Class counsel further suggested that the State AGs were likely to support a Class comprised of breach of warranty claims, but that reservations for the exercise of certain governmental police powers might have to be considered. (Id. at 101-02.) Accordingly, the court adjourned the hearing to give the parties time to discuss revising the Class definition.
D. The Class Certification Order.
The parties’ negotiations were successful, and on October 6, 2005, the court entered a stipulated Order Granting Motion for Class Certification (the “Class Certification Order”). (Dkt. No. 625.) The order certified a Class consisting of:
All persons and entities in the United States and its territories, who have purchased or used a bulletproof vest manufactured by Second Chance Body Armor, Inc., which contains Zylon®, a fiber manufactured and sold by Toyobo Company, Ltd. and Toyobo America, Inc. Excluded from the Class are Second Chance Body Armor, Inc., Toyobo Company, Ltd., Toyobo America, Inc., their affiliates, parents and subsidiaries; all directors, officers, agents, and employees of any of the foregoing; any distributors of Second Chance Body Armor, Inc.; any person or entity who timely opts out of this proceeding; any person with present or future personal injury claims; any claims of state attorneys general exercising their police powers [referred to herein as the “Police Powers Exclusion”]; and any claims belonging to the federal government....
(Id. at 1A) (emphasis added.) The order further provided that the “Class is limited to breach of warranty claims, and shall expressly exclude any and all claims for violation of statute and/or punitive or exemplary damages, including by not limited to any and all claims for penalties or civil penalties brought by any State Attorney General on behalf of consumers ” (referred to herein as the “Breach of Warranty Limitation”). (Id.)
E. Amendments and Objections to the Class Claim.
After entry of the Class Certification Order, the Class filed an amended proof of claim on December 21, 2005 (the “First Amended Class Claim”). (Claim No. 666; Class Exh. DD.) In contrast to the original Class Claim, which was based on the broad *673definition initially proposed by the Class, the First Amended Class Claim reflected the narrowed Class definition agreed to by the parties and adopted by the court in the Class Certification Order. (Id. at n.l.) Despite this narrowing, the total number of vests referenced in the First Amended Class Claim—50,945—remained the same. (Id. at n.3.) Using an estimated purchase price of $1,200 per vest, the First Amended Class Claim asserted total breach of warranty claims of approximately $181,134,000. (Id.)
The Trustee filed an objection to the First Amended Class Claim on July 17, 2009. (Dkt. No. 1997.) The Trustee’s objection focused on two main aspects of the Class Claim. First, the Trustee asserted that the amount of the Class Claim should be calculated using an average cost per vest of $750, rather than the $1,200 figure asserted by the Class. (Id. at ¶ 14.) Second, and more problematically, the Trustee noted several developments that complicated identification of Class members and presented the potential for duplication of claims. For instance, the United States filed a proof of claim against the Debtor’s bankruptcy estate, a portion of which related to payments made to vest purchasers under the BVPA. (Claim No. 932.) To the extent the Class Claim sought recovery for the full purchase price of an individual vest, and the United States also sought recovery for the BVPA amount reimbursed to the vest purchaser, the claims of the federal government and the Class potentially overlapped. (See, e.g., Trustee’s Objection to Class Claim, Dkt. No. 1997 at ¶ 15-16, Motion for Approval of Class Notice Program, Dkt. No. 3307, at ¶ 4.)
In addition, although the filing of the bankruptcy case stayed the Oklahoma Class Action against Second Chance, the lawsuit continued postpetition against Toy-obo. A settlement was ultimately reached in that lawsuit (the “Oklahoma Settlement”) and approximately $29 million was distributed to the vest purchasers who were members of the Oklahoma class. (Trustee’s Objection to Class Claim, Dkt. No. 1997 at ¶ 9-10 and 15, Motion for Approval of Class Notice Program, Dkt. No. 3307 at ¶ 5.) Again, to the extent that a vest purchaser received funds from the Oklahoma Settlement and was also eligible to be included in the Class Claim in this case, potential for duplication of recoveries existed.
Other potential overlaps with the Class Claim occurred when individual purchasers and entities filed direct proofs of claim against the Debtor’s bankruptcy estate. For instance, twenty states, acting through their State AGs, filed proofs of claim against the estate (the “State Claims”). (See, e.g., Claim Nos. 473 and 934 filed by the State of Texas.) Each claim asserted damages for vests purchased in the respective state, either by individuals and law-enforcement agencies directly or by wholesalers and distributors who sold vests to individuals and law-enforcement agencies (the “Damage Portion”). The claims also asserted damages for various civil penalties and costs (the “Penalty Portion”). The Trustee filed objections to the State Claims in September 2011. (See, e.g., Objection to Claim No. 473 and Claim No. 934 filed by the State of Texas, Dkt. No. 3057.) In his objections, the Trustee asserted that the Damage Portions of the State Claims were duplicative of the Class Claim and of individual claims filed in the bankruptcy cases. The Trustee also argued that the Penalty Portions of the State Claims should be subordinated under § 726(a)(4) of the Bankruptcy Code.7
*674To resolve these potential problems, the Trustee’s objection to the First Amended Class Claim suggested the number of Class members be re-calculated and reduced. The Trustee asserted that total number of Zylon vests sold by Second Chance should be the starting point. From this number, vests sold to the United States should be subtracted, as the United States was specifically excluded from the Class under the Class Certification Order. The Trustee also stated that the number of vests included in the Class Claim should be reduced to the extent that separate proofs of claim for those vests had been filed by individuals or entities against the Debtor’s estate. The Trustee’s objection did not assert that the State Claims were excluded from the Class under the Police Powers Exception or the Breach of Warranty Exclusion, but only that duplication of such claims should be avoided. Finally, the Trustee argued that amounts received by Class members under the Oklahoma Settlement and BVPA should be deducted from the total amount of the Class Claim.
In November 2009, a trial of the Trustee’s breach of warranty and fraud claims against Toyobo commenced in this court. Sixty-five days of demanding and contentious trial were held before a settlement agreement was reached in February 2011. Over objection by a creditor, this court approved the settlement of the adversary proceeding in a written opinion and order issued on July 5, 2011. (In re SCBA Liquidation, Inc., 451 B.R. 747 (Bankr.W.D.Mich.2011); Dkt. Nos. 2514 and 2515.)
After dismissal of the Toyobo adversary proceeding, the Class Claimants filed a Second Amended Class Claim on August 23, 2011. (Claim No. 666; Class Exh. G.) The Second Amended Class Claim was based on the same total number of vests as the previous claims, but reflected an agreement with the Trustee that $750 was the appropriate average cost per vest to be used in calculation of the amount claimed. (Id. at ¶2.) The Second Amended Class Claim also included deductions for amounts received by Class members under the Oklahoma Settlement and the BVPA. With these adjustments, the total amount of the Class Claim was reduced to $113,208,750.
The Trustee filed a second objection to the Class Claim on September 30, 2011. (Dkt. No. 3097.) The German States also filed objections to the Class Claim, and to the proofs of claim filed by individual Class members, on September 30, 2011. (Dkt. Nos. 3108 and 3109.) Again, both the Trustee’s and the German States’ objections to the Class Claim focused on the average price per vest to be used in calculating the claim and on preventing the potential for duplicate recoveries among Class members. Neither objection specifically asserted that representative claims filed by the States must be excluded from the Class under the Class Certification Order. In fact, it is noteworthy that the German States’ objections characterized the Class definition in a manner which suggests that all breach of warranty claims, including those brought by State AGs on behalf of vest purchasers, would be included in the Class. After quoting the Class definition, the German States explain:
Thus, each and every claimant in this proceeding whose claim is based upon the purchase and use of a bulletproof vest in the United States and its territories, and who is not the United States government is a member of the Class. *675Based on the definition of the Class ..., the only claimants who are not Class members are: A. Foreign purchasers/users of vests, like Bavaria and NRW; B. Axel Bierbach, the insolvency Administrator of the Second Chance Body Armor GmbH; C. the United States; and D. claimants whose claims are not premised upon the purchase or use of vests.
(Dkt. No. 3109, at ¶ 7 and 11.)
Beginning in early 2012, several status conferences were held regarding the objections to the Class Claim and the State Claims. With regard to the State Claims, the Trustee, Class Counsel and the various State AGs engaged in extensive negotiations over a proposed settlement of Trustee’s objections to the State Claims. Under the proposed settlement, the Damage Portion of each State Claim would be recalculated to prevent potential duplications, allowed as a general unsecured claim, and paid through the Class. The Penalty Portions of the State Claims would also be amended, allowed, and subordinated pursuant to § 726(a)(4) of the Bankruptcy Code.
F. The Class Procedures Motion.
The parties also undertook efforts to identify Class members and further narrow the outstanding issues regarding the Class Claim. On January 31, 2012, the Class Claimants filed a Motion for Approval of Class Notice Program, Authorization to Engage Notice Consultants and Support Vendor, Approval of Claim Form, Approval of Adjustment of Individual Class Member Claims, and Approval of Notice Procedures Regarding Class Claim Administration (the “Class Procedures Motion”). (Dkt. No. 3307.) Among other things, the Class Procedures Motion proposed a mechanism by which potential Class Claimants would be notified of the certification of the Class and their eligibility to participate in the Class. The motion further requested that each potential Class Claimant be required to file a claim form with the Class by a date certain. With regard to the State claims, the motion states that the court’s Class Certification Order “permits claims of States to be part of the Class, to the extent that they are not based upon the exercise of police powers. Many States assert claims in part based upon breach of warranty (which may properly be within the Class) and in part upon exercise of police powers (which would be excluded).” (Class Procedures Motion, Dkt. No. 3307, at ¶ 30.) The motion states that a “number of States have indicated their desire to file their breach of warranty claims and/or their restitution claims, at a value of $750.00 per vest, through the Class and to receive distribution through the Class, although not becoming a Class member.” (Id. at ¶ 34.)
The Trustee filed a limited objection to the Class Procedures Motion which raised minor technical issues. (Dkt. No. 3332.) The German States also filed a response to the Class Procedures Motion. (Dkt. No. 3337.) In their response, the German States stated that, apart from the issues raised in the Trustee’s limited objection, they did not object to the “housekeeping” and administrative aspects of the motion. (Id. at ¶ 20.) The German States asserted that the Class Procedures Motion should not be construed as dispositive of the substantive issues raised by the Class Claim. (Id.) To that end, the German States’ response raised “protective” objections to several aspects of the Class Procedures Motion. (Id.)
A hearing on the Class Procedures Motion was held before this court on February 27, 2012. During the hearing, the court stated that any decision regarding the Class Procedures Motion would be *676“without prejudice for the German States or the [Tjrustee, or, for that matter, the [Sjtates” to raise issues “about the number of vests, the application of payments or credits for the Oklahoma settlements” or any other substantive issue regarding the Class Claim. (Transcript of Hearing held on February 27, 2012, Dkt. No. 3586, at 23.) The court permitted counsel for the Class Claimants to briefly address the “protective” objections raised by the German States. One of the issues addressed was the potential for the States to receive distributions through the Class, and that such distributions not be based on a State’s exercise of its police powers. Counsel for the Class explained:
Some of the states do have direct purchase claims that are based on that state buying a vest and which would be a breach of warranty type claim. Some of the states through their police power have both ... a restitution claim as well as other penalty claims. The restitution claim again is based — although it is a police power claim — is based on individual vests that were purchased within the state.... It is, I believe, clear in our materials, and it is certainly the consensus of all the states we’ve talked to and the [Tjrustee, that anything that is not based on a vest purchase that is in fact a punitive or exemplary damage, or the like, will be treated as a subordinated claim as the [Cjode contemplates and not within this restitution group.... [Pjolice power ... would be yes as to individual vests but no as to any sort of penalty or punitive damages or exemplary damages.
(Id. at 26-28.) The court explained that Class counsel’s statement was consistent with the court’s understanding of the proposed treatment of the State Claims: “anything to do with a penalty or non-compensatory damages for purchases of the vests ... was tentatively going to be treated as a subordinated claim. But the consequential direct damages from the purchase of a vest or vests were going to be treated differently.” (Id. at 27-28.)
At the conclusion of the hearing, the court approved the Class Procedures Motion with modifications as stated on the record, and with the understanding that approval was without prejudice to the future adjudication of any substantive objections to the Class Claim. An order approving the motion was entered by the court on March 6, 2012. (Dkt. No. 3395.)
G. Resolution of the States’ Representative Proofs of Claim.
By May 2012, the Trustee had reached stipulations with nineteen of the State AGs who had filed claims against the Debtor’s bankruptcy estate.8 Consistent with the *677parties’ previous discussions, the stipulations provided that the Damage Portion of each State Claim was to be re-calculated and allowed as a general unsecured claim. However, for “administrative purposes,” the Damage Portion was to be “satisfied pursuant to the payment process established for the Class Claim in the Bankruptcy Case.” (See, e.g., Order Approving Stipulation Resolving Claim No. 473 and Claim No. 934 filed by the State of Texas, Dkt. No. 3464.) The Penalty Portions of the State Claims were also amended, allowed, and subordinated for distribution pursuant to § 726(a)(4). (Id.) The German States did not object to the resolution of the nineteen State Claims or to their payment through the Class Claim. (See German States’ Memorandum of Law on Timing, Waiver, and Standing, Dkt. No. 3615, at 8.)
H. The Six State Claims and the German States’ Objection.
After receiving the notice required by the Class Procedures Motion, eight states that had not previously filed proofs of claim against the Debtor’s bankruptcy estate filed claims with the Class. The State of Florida filed a claim for “7783 Total vests purchased in Florida,” indicating that the claim was made “on behalf of Florida Purchasers.” (Class Exh. A.) The State of Georgia, also acting “on behalf of Georgia purchasers” filed a claim for “3,623 total vests sold in Georgia.” (Class Exh. B.) The State of Mississippi filed a claim for 483 vests. (Class Exh. C.) The State of Ohio filed a claim for 4,421 vests “on behalf of Ohio purchasers.” (Class Exh. D.) The State of Alabama completed an online claim form for 349 vests, and the State of Tennessee filed an online claim form for 348 vests.9 Two other states, Wisconsin and Idaho, filed claims with the Class, but identified specific police departments within their states that had purchased vests.10
The German States filed their objection to six of these states’ claims — Florida, Georgia, Mississippi, Ohio, Alabama and Tennessee — on' August 9, 2012.11 (Dkt. No. 3579.) As previously noted, the German States’ Objection asserts that although the Six State Claims seek damages *678for breach of express warranty, the only basis for the Six States to file such representative claims on behalf of consumers is each state’s consumer protection statute. The German States contend that these consumer protection statutes derive from each state’s police powers. Therefore, the German States argue that the Six State Claims are excluded from the Class under the Class Certification Order and, more specifically, the Police Powers Exception and the Breach of Warranty Exclusion.
On August 17, 2012, the German States, Class Counsel, and the Trustee filed a Joint Statement of Issues raised by the German States’ Objection. (Dkt. No. 3581.) The court subsequently entered a scheduling order bifurcating the issues. (Dkt. No. 3588.) On November 27, 2012, a hearing was held on the issues of timing, waiver and standing. After the hearing, the court entered an interlocutory order holding that the German States have standing to object to the Class Claim and to inclusion of the claims of the State Class Claimants within the Class; (2) that the German States’ Objection to the Class Claim is timely; and (3) that the German States have not waived their objection to the inclusion of the claims of the State Class Claimants in the Class. (Dkt. No. 3632.)
A continued evidentiary hearing on the remaining issues raised in the German States’ Objection was held on January 2, 2013. After the hearing, the parties submitted supplemental legal memoranda and their stipulation to augment the evidentia-ry record. (Dkt. Nos. 3650, 3651, 3652.) The court then took the matter under advisement.
III. ISSUE.
The general issue presented is whether the Six State Claims, which assert breach of warranty damages for specific vests on behalf of vest purchasers within each state, may be included in the Class Claim or whether such representative claims are excluded from the Class under the Class Certification Order.
IV. JURISDICTION.
The court has subject matter jurisdiction over this bankruptcy case and this contested matter. 28 U.S.C. § 1334. The case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) and L.R. 83.2(a) (W.D. Mich.). The German States’ Objection is a core proceeding because it involves the “administration of the estate” and the “allowance or disallowance of claims against the estate.” 28 U.S.C. § 157(b)(2)(A) and (B). This opinion constitutes the court’s findings of fact and conclusions of law. Fed. R. BanKr.P. 7052.
V. DISCUSSION.
From the court’s perspective, the dichotomy created by the Class Certification Order is clear and unambiguous: breach of warranty claims stemming from the purchase of Zylon vests, whether brought by individual vest purchasers or by states on behalf of individual purchasers, are to be included in the Class. Other types of claims, including those for fines, penalties or punitive damages, are not. Under this construction, which was the court’s intention when it certified the Class, the fact that the Six State Claims, which seek breach of warranty damages relating to specific vests purchased by consumers within each state, may be included in the Class Claim is self-evident.
In' their Objection, the German States assert an entirely different and overly technical interpretation of the Class Certification Order. The German States argue that the distinction drawn by the Class Certification Order is not between breach *679of warranty claims and other claims for fines, penalties, and punitive damages, but instead is between claims brought pursuant to an individual state’s police powers or consumer protection statute and those that are not. More specifically, although the German States acknowledge that the Six State Claims seek breach of warranty damages relating to vest purchases within each state, the German States argue that the only basis for the states to bring such representative claims is under their consumer protection statutes and/or through exercise of their police powers. According to the German States, such statutory or police power claims are excluded from the Class under the Class Certification Order. This recently developed and highly technical interpretation of the Class Certification Order is at odds with the court’s longstanding construction of the order and requires the court to examine its consistent interpretation of the order in greater detail.
A. Interpretation of the Class Certification Order.
Like other written documents, unambiguous court orders are to be enforced as written. See In re Dow Corning Corp., 456 F.3d 668, 676 (6th Cir.2006) (confirmed plan of reorganization is to be interpreted using general contract principles) (citations omitted). However, if a court order is “susceptible of two interpretations, it is the duty of the court to adopt that one which renders it more reasonable, effective and conclusive in the light of the facts and the law of the case.” Hendrie v. Lowmaster, 152 F.2d 83, 85 (6th Cir.1945) (quoting Pen-Ken Gas & Oil Corp. v. Warfield Natural Gas Co., 137 F.2d 871, 885 (6th Cir.1943)); see also In re Dow Corning Corp., 456 F.3d at 676 (“A term is deemed ambiguous when it is ‘capable of more than one reasonable interpretation.’”) (quoting Miller v. United States, 363 F.3d 999, 1004 (9th Cir.2004)).
When a court construes its own order, the meaning of the order should “be determined by what preceded it and what it was intended to execute.” Hendrie, 152 F.2d at 85 (quoting Union Pac. R.R. Co. v. Mason City & Fort Dodge R.R. Co., 222 U.S. 237, 247, 32 S.Ct. 86, 90, 56 L.Ed. 180 (1911)). The “most important factor in determining the meaning is the intention of the judge who entered the order. ” Zevitz v. Zevitz (In re Zevitz), 230 F.3d 1361, 2000 WL 1478371 (6th Cir. Sept. 28, 2000) (unpublished table decision) (emphasis added) (citing In re Doty, 129 B.R. 571, 588 (Bankr.N.D.Ind.1991)). For this reason, a trial judge’s interpretation of his or her own order is given substantial deference on appeal. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 n. 4, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009) (“a bankruptcy court’s interpretation of its own confirmation order is entitled to substantial deference”) (collecting cases); Satyam Computer Servs., Ltd. v. Venture Global Eng’g, LLC, 323 Fed.Appx. 421, 430 (6th Cir. Apr. 9, 2009) (unpublished decision) (an appellate court typically defers to the trial court’s “interpretation of its order and reviews for abuse of discretion because the [trial] court ‘is obviously in the best position to interpret its own order’ ”) (citation omitted); In re Dow Corning Corp., 456 F.3d at 676 (“a bankruptcy court’s interpretation of its own decisions” is given “significant deference”).
The German States’ Objection challenges the understanding of the Class Certification Order that has been held by the court, the Class, the Trustee, and the State AGs since entry of the order more than seven years ago. The German States’ Objection also raises a colorable potential ambiguity in the order’s terms. Accordingly, the court has decided to summarize a detailed analysis of the history of the Class *680Certification Order, the intended meaning of the Police Powers Exception and the Breach of Warranty Limitation, and the legal basis for the Six State Claims.
B. History of the Class Certification Order.
The history of this bankruptcy case, and the circumstances that resulted in entry of the Class Certification Order, resolve any asserted ambiguities in the order’s provisions. Throughout this case, the court has repeatedly expressed its intention to ensure that all creditors were treated equally and that the interests of the “little guys”— the individual police officers, firefighters, and other first responders who purchased the recalled Second Chance vests — were adequately represented and universally protected. As illustrated by the comments of the parties and the court at the hearing on the Motion for Class Certification, this goal was the driving force behind certification of the Class. The court believed certification of a class would provide a relatively simple mechanism through which claimants, particularly those who might lack the knowledge or economic incentive to file their own claims against the Debt- or’s bankruptcy estate, could assert their breach of warranty claims for faulty vests. At the same time, the court did not want resolution of the Class Claim to be unduly complicated or confused by other types of claims (such, as claims for fines, penalties, and other types of punitive damages) that might be subject to variations in state law and unique types of proofs.
Accordingly, the court encouraged the parties to narrow the Class definition in a way that might balance these competing interests. Specifically, the court suggested crafting a Class that would include breach of express warranty claims, but would exclude all other types of claims. This distinction was referenced repeatedly at the hearing on the Motion for Class Certification. The court bluntly stated that it would be “disinclined” to certify a class “involving lots of state law issues and treble damages” but would be in favor of certifying a more narrow class that would deal with “core” breach of warranty issues and might “give some rough justice to everyone.” 12 Counsel for the Debtor indicated that the Debtor would not contest liability for breach of express warranties, at least with regard to two of the Zylon vest models manufactured by Second Chance.13 Class Counsel also agreed that the case was “essentially an express warranty case.”14
Importantly, when the issue of class certification was being argued and considered, neither the parties nor the court distinguished between breach of warranty claims brought by individual vest purchasers and breach of warranty claims brought by the State AGs on behalf of individual purchasers. At the hearing on the Motion for Class Certification, Debtor’s counsel informed the court that several State AGs had already filed representative claims against the bankruptcy estate and indicated that a majority of other states were likely to file similar claims in the future.15 Although the legal focus for such representative claims was not considered in detail, no party objected to the States filing such claims.
C. Intended Meaning of The Breach of Warranty Limitation and Police Powers Exception.
Given the historical perspective and the record in this case, it is easy to discern the *681intended meaning of the language in the Class Certification Order. The order establishes a class comprised of purchasers and users of Second Chance’s bullet-resistant Zylon vests. Unlike the broad Class definition originally proposed by Class counsel, the Class Certification order limits the Class to breach of warranty claims. Therefore, the order “expressly exclude[s] any and all claims for violation of statute and/or punitive or exemplary damages, including but not limited to any and all claims for penalties or civil penalties brought by any State Attorney General on behalf of consumers.”16 In hindsight, the German States argue that this language excludes representative breach of warranty claims filed by State AGs because the legal authority for such claims derives, at its core, from state consumer protection statutes. Such a distinction was never contemplated nor intended by the court. The intent of the Breach of Warranty Limitation was to exclude claims for violation of state consumer protection statutes, but only to the extent such claims sought damages for liability other than breach ofwar-ranty. Simply put, breach of warranty claims were to be included within the Class and other types of claims were not. Accordingly, this court concludes that the Six State Claims are not excluded from the Class under the Breach of Warranty Limitation.
The Police Powers Exclusion served a similar purpose. Under the Police Powers Exclusion, “any claims of state attorneys general exercising their police powers” are also excluded from the Class.17 The term “police powers” is not defined in the Class Certification Order. The phrase “police and regulatory power” does, however, appear in § 362(b)(4) of the Bankruptcy Code. Although the Bankruptcy Code definition of “police and regulatory powers” is not controlling for purposes of the Class Certification Order, the general understanding of the phrase in bankruptcy cases is helpful when considering the intended meaning of the “police powers” phrase in the order.
Section 362(b)(4) provides that certain actions by governmental units and entities are excepted from the automatic stay, when such actions constitute “enforcement of such governmental unit’s or organization’s police and regulatory power.” For purposes of § 362(b)(4), the phrase “police or regulatory power” generally refers to “the enforcement of state laws affecting health, welfare, morals, and safety, but not regulatory laws that directly conflict with control of the res or property by the bankruptcy court.” Javens v. City of Hazel Park (In re Javens), 107 F.3d 359, 367 (6th Cir.1997) (quoting In re Missouri, 647 F.2d 768, 776 (8th Cir.1981)). To determine whether a governmental action constitutes an exercise of “police or regulatory power” under § 362(b)(4), the Sixth Circuit Court of Appeals applies a “pecuniary purpose test” and a “public policy test.” See Chao v. Hospital Staffing Servs., Inc., 270 F.3d 374, 385 (6th Cir.2001).18 These complementary tests “are *682designed to sort out cases in which the government is bringing suit in furtherance of either its own or certain private parties’ interest in obtaining a pecuniary advantage over other creditors.” Id. at 389 (citation omitted) (emphasis in original).19 Under these standards, “an action will only be exempt from the automatic stay” as an exercise of police or regulatory powers “if the action has been instituted to effectuate the public policy goals of the governmental entity, as opposed to actions instituted to protect the entity’s pecuniary interest in the debtor’s property or to adjudicate private rights.” Id. at 386. Accordingly, an action will be regarded “as outside the police power exception” when it “incidentally serves public interests but more substantially adjudicates private rights.”20 Id. at 390.
The Six State Claims represent the precise type of governmental action described by the Sixth Circuit as falling outside the police powers exception to the automatic stay. The Six State Claims are representative breach of warranty claims filed by the state governmental entities on behalf of private citizens. Although the Six States have a public policy interest in ensuring payment of warranty claims and compliance with state consumer protection laws, the primary purpose of the Six State Claims is adjudication and protection of the private rights of individual vest purchasers.
This court concludes that the term “police powers” in the Class Certification Order should be construed consistently with the general understanding of the term in bankruptcy cases. The Six State Claims would not constitute an exercise of “police powers” for purposes of § 362(b)(4). Likewise, the Six State Claims are not excluded from the Class by the Police Powers Exception.
D. Subsequent Construction of the Class Certification Order.
The intended distinction between breach of warranty claims and other types of claims is also evident in pleadings filed, actions taken, and statements made after entry of the Class Certification Order. *683First, although the Class Claim has been amended several times, the total number of vests has remained constant. The original Class Claim, which was filed before entry of the Class Certification Order and utilized the broad definitions initially proposed by the Class, was based on a total of 150,945 vests. That total number of vests did not decrease in the First Amended Class Claim, even though the amended claim was filed after the Class definition had been significantly narrowed by entry of the Class Certification Order. If the Class believed that representative breach of warranty claims filed by the State AGs were excluded from the Class under the Class Certification Order, it would have reduced its vest claims accordingly.
Second, although the Trustee has raised various objections to the Class Claim, he has never argued that the representative breach of warranty claims filed by the State AGs are excluded from the Class. The Trustee’s objections to the Class Claim have focused on the average price per vest and on preventing duplication of recoveries. Specifically, the Trustee objected to the Class Claim to the extent it included the vest claims of entities, whether individuals or States, who had also filed direct proofs of claim against the bankruptcy estate. There would have been no reason for the Trustee to object to such overlapping claims if he believed that all representative state claims were excluded from the Class. The Trustee also advocated adjusting the calculation of the claim to account for amounts paid under the BVPA and the Oklahoma Settlement. Again, the Trustee would not have suggested that the BVPA amounts paid to the States should be deducted from the Class Claim if he had believed that all representative state claims were excluded from the Class.
Finally, and perhaps most importantly, the resolution of the Trustee’s objections to proofs of claims filed by the State AGs against the bankruptcy estate is wholly consistent with this court’s prior statements and the court’s interpretation of the Class Certification Order. The stipulated orders resolving these claims generally provided that the Damage Portion of each State’s representative claim — i.e., the portion of the claim that related to breach of warranty or restitution for actual vests purchased in the respective state — was allowed against the estate and was to be paid through the Class. The portion of the claims that asserted other civil penalties and costs was subordinated under § 726(a)(4).
The court recognizes that these State Claims technically differ from the Six State Claims because they were filed directly against the bankruptcy estate, rather than through the Class. However, in the universe of vest claims, there is no meaningful distinction between the two. To the extent the States’ representative claims seek breach of warranty damages on behalf of individual vest purchasers, whether against the bankruptcy estate or through the Class, the claims should be allowed. There is no reason to treat the Six States differently than the treatment given to all the other States.
E. Legal Basis for the Six State Claims.
As illustrated by the foregoing discussion, until the German States filed their Objection to the Six State Claims, neither the court nor the parties recognized any potential difference between breach of warranty claims brought by individual vest purchasers and breach of warranty claims brought by States on behalf of individual purchasers. At the time the Class Certification Order was entered, the State AGs were actively involved in representing consumer interests in the bankruptcy case. Several State AGs had already filed repre*684sentative claims against the Debtor’s bankruptcy estate, and the court was advised that other representative State Claims were likely to follow. The court did not focus on any explicit legal basis for the representative State Claims, but to the extent the claims asserted breach of warranty theories, the court took it for granted that valid claims would be allowed and paid, either directly from the bankruptcy estate or by their inclusion in the Class.
The German States’ Objection challenges the court’s prior assumption. Specifically, the German States argue that the only possible legal authority for the representative breach of warranty claims filed by the Six States is each state’s consumer protection statute and/or police powers. The Six States have not yet been given the opportunity to address this issue.21 In addition, even if some of the Six State Claims are based on consumer protection statutes or police powers, this court has determined that such claims are not excluded from the Class under the Class Certification Order, when the order is interpreted in light of its intended meaning and the circumstances surrounding its entry.
Notwithstanding, the Class has suggested two bases, other than state consumer protection laws, that would permit the Six States to file representative breach of warranty claims with the Class on behalf of individual vest purchasers: the doctrine of parens patriae and Bankruptcy Rule 2018. The court acknowledges that neither of these theories directly permits the states to file representative proofs of claim. However, under the unique facts and circumstances of this case, the court concludes that both theories support the conclusion that the Six States may file representative breach of warranty claims, under this particular Class Certification Order.
1. The Parens Patriae Doctrine.
The Class argues that the States have the ability to file representative proofs of claim under the doctrine of par-ens patriae. Translated literally, parens patriae means “parent of the country.” Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 600, 102 S.Ct. 3260, 3265, 73 L.Ed.2d 995 (1982). The doctrine gives a state standing to “act on behalf of its citizens” if the state’s “quasi-sovereign interests are implicated.” Kelley v. Sclater (In re Sclater), 40 B.R. 594, 596 (Bankr.E.D.Mich.1984); see Snapp, 458 U.S. at 600-01, 102 S.Ct. at 3265. Quasi-sovereign interests “are not sovereign interests, proprietary interests, or private interests pursued by the State as a nominal party.” Snapp, 458 U.S. at 602, 102 S.Ct. at 3266. Instead, for a quasi-sovereign interest to exist, “the State must articulate an interest apart from the interests of particular private parties” such as its interests in ensuring the “health and well-being — both physical and economic— of its residents in general.” Snapp, 458 U.S. at 607, 102 S.Ct. at 3268-69. The *685injury alleged by the State must apply to a “sufficiently substantial segment of its population,” although both the injury to an identifiable group of people and the “indirect effects of the injury” may be considered. Snapp, 458 U.S. at 607, 102 S.Ct. at 3269. The Supreme Court has explained:
One helpful indication in determining whether an alleged injury to the health and welfare of its citizens suffices to give the State standing to sue as parens pat-riae is whether the injury is one that the State, if it could, would likely attempt to address through its sovereign lawmaking powers.
Snapp, 458 U.S. at 607, 102 S.Ct. at 3269.
In bankruptcy cases, the doctrine of parens patriae has most often been invoked to give state attorneys general standing to file nondischargeability actions on behalf of injured or defrauded citizens, even in the absence of a direct debt to the state entity. See, e.g., New York v. DeFelice (In re DeFelice), 77 B.R. 376 (Bankr.D.Conn.1987) (Attorney General for the State of New York had standing to bring nondischargeable debt action on behalf of consumer creditors); In re Sclater, 40 B.R. 594 (Bankr.E.D.Mich.1984) (Michigan Attorney General had parens patriae standing to bring nondischargeable debt action against corporate and individual debtors accused of defrauding purchasers of health spa memberships). These cases frequently cite the state’s consumer protection laws as evidence of the state’s quasi-sovereign interest in protecting the economic well-being of consumers through the filing of a nondischargeability action. In re DeFelice, 77 B.R. at 380 (New York’s consumer protection statute is an attempt to protect the state’s citizens from consumer fraud; “the state’s interest in vindicating its consumer protection laws in its courts is directly linked to its attempt to block the discharge of listed debts in [the bankruptcy court]”); In re Sclater, 40 B.R. at 596-97 (the applicability of parens patriae “is even stronger in this proceeding because the Michigan legislature has acted to prevent a class of injuries to the welfare of its citizens by enacting the Consumer Protection Act;” the “Attorney General is thus seeking to protect Michigan residents from fraudulent and deceptive practices under a mandate from the state legislature addressing this specific type of injury”) (emphasis in original).
The court has been unable to locate any written opinion which has utilized the doctrine of parens patriae as a basis for states to file representative proofs of claim. However, the same considerations that give rise to parens patriae standing in nondischargeability cases support the conclusion that parens patriae gives the Six States authority to file representative breach of warranty claims with the Class. Although the primary purpose of the Six State Claims is to protect the economic interests of individual vest purchasers, the claims also represent an attempt to protect the States’ quasi-sovereign interest in ensuring the general economic well-being of all consumers. Application of this doctrine under these specific facts permit the Six States to protect “the little guys.” Further, the Six States should be permitted, within the bankruptcy system, to protect their police, firefighters and first responder citizens who purchased the recalled vests.
2. Bankruptcy Rule 2018.
The Class also asserts that the representative claims filed by the Six States are authorized under Fed. R. BankeP. 2018. Rule 2018(b) provides:
In a chapter 7, 11, 12, or 13 case, the Attorney General of a State may appear and be heard on behalf of consumer creditors if the court determines the ap*686pearance is in the public interest, but the Attorney General may not appeal from any judgment, order, or decree in the case.
The Advisory Committee Note explains that this rule “specifically grants the appropriate state’s Attorney General the right to appear and be heard on behalf of consumer creditors when it is in the public interest.” Fed. R. BANKR.P. 2018 (Advisory Committee’s Note). The Note explicitly states that “consumer creditors” would include “individuals who purchased or leased property [for personal, family or household use] in connection with which there may exist claims for breach of warranty.” M22
Thus, Bankruptcy Rule 2018 generally permits state attorneys general to intervene and participate in bankruptcy cases on behalf of consumer creditors. Although the rule does not specifically permit state attorneys general to file proofs of claim on behalf of citizens, at least one court has cited the rule as authority for such representative claims. In re U.S. Fidelis, Inc., 481 B.R. 503 (Bankr.E.D.Mo.2012). The Debtor in U.S. Fidelis was a corporation formed by “two seam artist brothers with prior criminal histories” which marketed vehicle service contracts to consumers. Id. at 507-08. When the Debtor finally collapsed due to “high cancellation rates” and the brothers “treating [it] as their own personal ATM,” it faced investigations by various state attorneys general for “deceptive trade practices and other issues.” Id. at 508. In its written opinion overruling an objection filed by three creditors and confirming the chapter 11 plan filed by the Unsecured Creditors’ Committee as the result of a global settlement, the U.S. Fidelis court discussed the involvement of the various state attorneys general in the case:
The Attorneys General are authorized to participate and intervene on behalf of the consumer creditors under Rule 2018(b), and have played a critical role in representing those consumer creditors.
The Attorneys General filed proofs of claim, and several obtained authority to cast ballots on behalf of their constituencies. The presence of the Attorneys General gave the Court comfort that the interests of the consumer creditors were being vigorously pursued, allaying concerns that the Court had voiced at the beginning of the Case [about protecting the interests of the victims of the Debt- or’s malfeasance].
Id. at 518. The court further explained:
State attorneys general are empowered under federal bankruptcy law to intervene on behalf of the consumer creditors for a reason: to ensure that the legal process results in the best possible resolution for the consumers without burdening each consumer with active participation (otherwise, many consumers would be marginalized, as meaningful participation may require personal legal expertise and sufficient resources to personally participate, or the financial wherewithal to obtain counsel to participate).
Id. Accordingly, for purposes of confirmation, the U.S. Fidelis court concluded that the support of the various attorneys general for the plan established the affirmative consent of consumer creditors to the plan’s terms.
*687Although the U.S. Fidelis decision involved confirmation of a chapter 11 plan, this court believes that the statements about the participation of state attorneys general and the value of permitting states to file representative claims apply with equal force in this case. As in U.S. Fidel-is, the State AGs have played a critical and valuable role in this case: monitoring the proceedings; protecting the interests of individual vest purchasers; and assuring that otherwise unrepresented individuals will have easy access to this court to receive compensation for their breach of warranty claims. The State AGs have filed representative proofs of claim, both against the estate, or (as with the Six State Claims) with the Class. The representative claims against the estate have been allowed. Many of those allowed claims will be paid through the Class as requested by most of the other States. There is no reason to treat the Six State Claims any differently. Under the unique facts of this case, the court concludes that Bankruptcy Rule 2018 permits the Six States to file representative breach of warranty claims with the Class. See also Fed. R. BaNkr.P. 1001 (The Bankruptcy Rules “shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.”)
F. Modification of the Class Certification Order.
As a final alternative, the Class argues that the court may modify the Class Certification Order to clarify the fact that representative breach of warranty claims filed by the States may be included in the Class. Under the applicable rules, an “order that grants or denies class certification may be altered or amended before final judgment.” Fed.R.Civ.P. 23(c)(1)(C) (incorporated by reference in Fed. R. Civ.P. 23); see also Powers v. Hamilton County Public Defender Comm’n, 501 F.3d 592, 619 (6th Cir.2007) (trial courts “have broad discretion to modify class definitions”).
Given this court’s interpretation of the Class Certification Order, modification of the Class definition is not required at this time. However, if it becomes necessary to modify the Class definition in the future to make it crystal clear that the Six States’ representative breach of warranty claims may be included in the Class, the court will revisit the request and very likely modify the Class definition to reflect what the court, and other parties (except the German States), intended.
VI. CONCLUSION.
The court acknowledges that the legal principles that govern this matter are somewhat nebulous. The German States’ highly-technical construction of the Class Certification Order, when considered only in isolation, is not without some limited merit. However, when the order is viewed in context of the overall architecture of this case, the court is firmly convinced that representative breach of warranty claims such as the Six State Claims were included and were intended to be included in the Class definition.
Furthermore, the German States are not harmed by this court allowing the Six States to file representative claims with the Class. To the contrary, denying compensation to the Six States and their individual citizens would be a windfall to the German States and some other creditors. From the first day, the court has expressed a desire to treat all States (and for that matter, all other entities) equally. This bankruptcy case has gone on for too long and it is past the time to make a final distribution to the purchasers of the recalled vests. All valid breach of warranty claims that are allowed should be paid as *688quickly as possible.23
For the foregoing reasons, the German States’ Objection to the Class Claim is OVERRULED. A separate order shall be entered accordingly.
. After sixty-five days of trial, the Trustee and Toyobo reached a settlement agreement. The Trustee's claims against Toyobo and the resulting settlement are addressed in detail in this court's opinion approving the settlement. In re SCBA Liquidation, Inc., 451 B.R. 747 (Bankr.W.D.Mich.2011) (Dkt. Nos. 2514 and 2515.).
. The eight states that filed claims with the Class are Alabama, Florida, Georgia, Idaho, Mississippi, Ohio, Tennessee, and Wisconsin.
. The German States did not object to the claims filed by Wisconsin and Idaho because those claims specifically identified the police departments within each state that purchased the vests. Thus, the German States viewed the Wisconsin and Idaho claims as "claimfs] being presented by the chief law enforcement officer of the state for vest purchase[s] by law enforcement agencies within the state.” (See German States' Memorandum of Law on Timing, Waiver, and Standing, Dkt. No. 3615, at 9-10.) The German States assert that these constitute breach of contract claims by vest purchasers or their designated representative, and therefore are properly included in the Class Claim. {Id..)
. See, e.g., In re SCBA Liquidation, Inc., 451 B.R. 747 (Bankr.W.D.Mich.2011) (opinion approving settlement of Toyobo litigation); Claimants’ Motion for Class Certification, Dkt. No. 268; Debtor's Brief in Opposition to Claimants’ Motion for Class Certification, Dkt. No. 330.
. The express warranty was extended to original users and purchasers only and was governed by Michigan law. See Class Claimants’ Supplemental Memorandum in Support of Class Certification, Dkt. No. 376, at 5-6.
. Where possible, citations herein are to the court’s docket. If a document is not a part of the court's docket, or if cross-reference is helpful for clarity, citations are to the party’s exhibits, e.g., “Class Exh.-” or “German States' Exh.-.” All of the parties' exhibits were admitted into evidence at the evidentiary hearings on the German States’ Objection. (See Transcript of Evidentiary Hearing held on November 27, 2012, Dkt. No. 3634, at 13-14; Transcript of Adjourned Evidentiary Hearing held on January 2, 2013, Dkt. No. 3647, at 5.)
. The Bankruptcy Code is set forth in 11 U.S.C. §§ 101-1532 inclusive. The specific *674provisions of the Bankruptcy Code are referred to in this opinion as "§-.”
. The State of California was the only state that filed a proof of claim and failed to respond to the Trustee’s objection. Notwithstanding California’s failure to respond, the Trustee asked the court to treat California’s claim consistently with the other State Claims. Accordingly, the court entered an order (the “California Order”) disallowing California's claim against the bankruptcy estate but providing that “the State of California shall have a claim within the Class ... but shall not be deemed to be a Class Member.” (See Order Granting Objection to Claim No. 304 filed by the People of the State of California, Dkt. No. 3567.) The German States filed a motion for clarification and/or reconsideration of the California Order on August 9, 2012. (Dkt. No. 3580.) The court denied the German States’ motion in a written opinion and order entered on October 22, 2012. (In re SCBA Liquidation, Inc., 485 B.R. 153 (Bankr.W.D.Mich.2012); Dkt. Nos. 3618 & 3619.) In its written opinion denying the German States' motion for reconsideration, the court explained:
Although the language of [the California Order] differed from the stipulated orders entered with regard to the other State Claims — California's claims were disal*677lowed against the bankruptcy estate while the other State Claims were allowed — the end result was the same. Each State Claim, including California's claim, is to be paid through the Class.
(Id. at 158) (emphasis in original).
.Because the Tennessee and Alabama claims were submitted electronically, hard copies of these claims are not available and were not included among the Class’s original exhibits. On January 23, 2013, the parties submitted a stipulation to augment the evidentiary record relating to the German States’ Objection to the Class Claim. (Dkt. No. 3650.) Pursuant to the stipulation, the affidavit of Melissa D. Eisert of Rust Consulting, Inc., the claims administrator for the Class, was added to the evidentiary record. (Dkt. No. 3648.) The Eisert affidavit includes a copy of the template used by claimants when filing electronic Class Claims, and a copy of a spreadsheet showing the actual information provided by the States of Alabama and Tennessee when completing their online claim forms. (Id. at Exhs. A & B.) The spreadsheet indicates that these two states identified the "classmember that purchased vests” as "Tennessee Consumers” and the "State of Alabama — Assistant A.G. Noel Barnes,” respectively. (Id. at Exh. B.)
. See, e.g., Representative Claim filed by the State of Wisconsin, Attached as Exh. 1 to the Declaration of Daniel K. Reising in Support of [German States’] Objection to State Police Power and Statutory Claims, Dkt. No. 3622.
. The German States did not object to the claims filed by Wisconsin and Idaho because the German States believe those claims are "direct claims on behalf of the state itself as opposed to either representative or vicarious claims.” (See Transcript of Hearing held on July 25, 2012, Dkt. No. 3593, at 24.)
. Transcript of Hearing held on May 17, 2005, Dkt. No. 373, at 104-05.
. Id. at 58.
. Id. at 92-94.
. Id. at 62-63.
. Class Certification Order, Dkt. No. 625 at HA.
. Id.
. The “pecuniary purpose test,” requires courts to consider "whether the governmental proceeding relates primarily to the protection of the government’s pecuniary interest in the debtor’s property, and not to matters of pub-lie safety.” Chao, 270 F.3d at 385 (quoting Word v. Commerce Oil Co. (In re Commerce Oil Co.), 847 F.2d 291, 295 (6th Cir.1988)) (additional citations omitted). Only "proceedings which relate primarily to matters of public safety are excepted from the stay” as exercises of governmental "police or regulatory powers.” Id.
The "public policy” test requires courts to "distinguish between proceedings that adjudi*682cate private rights and those that effectuate public policy.” Id. at 385-86. Actions taken to "effectuate a public policy” constitute an exercise of police powers and are excepted from the automatic stay. Id. at 386.
. The legislative history of § 362(b)(4) suggests that the police powers exception to the automatic stay applies "where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws” or is "attempting to fix damages for violation of such a law.” H.R.Rep. No. 595 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6299; S.Rep. No. 989 (1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 5838. However, the standards utilized by the Sixth Circuit demonstrate that application of § 362(b)(4) is not dependant on the type of law underlying the governmental action, but on the purpose of the law that the governmental entity is seeking to enforce.
. In discussing this aspect of the public policy test, the Sixth Circuit explained that the existence of the test “naturally presumes that some suits by governmental units, even though they would effectuate certain declared public policies, will nevertheless be regarded as largely in furtherance of private interests.” Chao, 270 F.3d at 389. The court suggested that:
An extreme example of such would be a suit by a state attorney general on behalf of a supplier against its debtor-customer to enforce a contract obligation. Although the suit would effectuate the state’s public policy in favor of enforcing contractual obligations or requiring payment of damages, the suit essentially enforces the supplier's private rights against the debtor and would result in a pecuniary advantage to the state-favored supplier vis-a-vis other creditors of the debtor's estate.
Id.
. At a status conference held before this court on July 25, 2012, the Assistant Attorney General for the State of Texas urged the court to give notice to the Six States, so they would have the opportunity to appear and be heard on this issue. Because the court firmly believed that the Class Certification Order permitted the Six State Claims to be included in the Class, the court declined to impose unnecessary costs and delay by requiring the Six States to respond to the German States’ Objection.
If this court’s interpretation of the Class Certification Order is reversed and remanded, the Six States will be given the opportunity to appear and be heard on these issues before any adverse decision is entered against them. In the court’s view, to do otherwise would violate the Six States' due process rights.
. The court recognizes that one might argue that use of the bullet resistant vests might be characterized as “work” or "employment” purposes. In reply, one can respond “what is more 'personal' than protecting one’s life?"
. During its many hearings and status conferences, the court pushed the Trustee and all other parties in interest to complete this case as quickly as possible. But for the German States’ objection (and another one which is now pending), final distributions would have been completed in late 2012 and this case would have likely been closed. We will trudge on. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495754/ | MEMORANDUM
MARCIA PHILLIPS PARSONS, Chief Judge.
In this action removed from state court, the husband of the chapter 7 debtor seeks damages from the debtor’s chapter 7 trustee and her court-appointed auctioneer for conversion, intentional infliction of emotional distress, violation of civil rights under 42 U.S.C. § 1983, and violation of due process rights under the Tennessee Constitution. The allegations arise out of the plaintiffs contention that the defendants illegally sold his property and that of his *714adult children when they sold the debtor’s property pursuant to orders of this court.
Presently before the court is the plaintiffs request to remand this suit to state court based on the allegation that removal was untimely and improper. Also before the court is the defendants’ motion to dismiss for failure to state a claim upon which relief may be granted based on the Barton doctrine, see Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881), and on the assertion that the defendants are protected by quasi-judicial immunity. As discussed hereafter, the plaintiffs request for remand will be denied and the defendants’ motion to dismiss will be granted, the court having concluded that they are protected by immunity. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) and (0).
I. The Bankruptcy Case
Susan H. Lunan, (hereinafter “Debtor”), filed a voluntary petition for chapter 11 relief on December 24, 2008. More than nine months later the case was converted to chapter 7 on October 9, 2009, after the Debtor failed to file a chapter 11 plan within the time contemplated by an agreed order. David H. Jones was thereafter appointed chapter 7 trustee (“Trustee”).
In her schedules filed shortly after the commencement of her chapter 11 case, the Debtor listed ownership of numerous assets. On Schedule A, the Debtor scheduled three parcels of real property with a total value in excess of $1.5 million, including her residence located at 3520 Orebank Road, Kingsport, Tennessee with a scheduled value of one million dollars. On Schedule B, the Debtor listed personal property of almost seven million dollars, including household furniture, appliances, electronics and lawn equipment valued at $15,000; art and collectibles valued at $50,000; jewelry valued at $25,000; and six Mercedes vehicles with a total value of $491,000.
On March 24, 2009, the Debtor amended Schedule B to increase the stated value of her household furniture, appliances, electronics and lawn equipment to $25,000; to add sporting and hobby equipment valued at $10,000; to add horses valued at $30,000; and to add three additional vehicles, a 2006 Mercedes SL 500, a 1968 Camaro, and a 1981 DeLorean.
After the bankruptcy case’s conversion from chapter 11 to chapter 7, the first mortgage holder on the Debtor’s residence filed on December 22, 2009, a motion for relief from the automatic stay, alleging that the Debtor had not made any payments on the obligation since the bankruptcy filing and that the outstanding debt against the residence, including two other junior liens, totaled $1,163,993.87. By consent order entered on July 19, 2010, the first mortgage holder agreed to allow the Trustee to market the residence for sale.
On April 21, 2011, two and a half years after the initial bankruptcy filing and more than 18 months after the conversion to chapter 7, the Trustee filed a notice of intent to sell by public auction on June 2, 2011, the Debtor’s real property located at 3520 Orebank Road, Kingsport, Tennessee. Also on April 21, 2011, the Trustee filed a notice of intent to sell by public auction on June 2, 2011, the following:
certain personal property, including, but not limited to, furniture, appliances, dishes, crystal, jewelry, electronics, including televisions, rugs, paintings, lawn equipment, etc., owned by the Debtor. The trustee also intends to sell the following automobiles: “(1) 1968 Camero [sic]; (2) 1981 DeLorean; (3) 2006 Mercedes ML 63; (4) 2002 Mercedes ML 55; and (5) 1987 Mercedes 560 SEL.
Both notices stated that the planned public auction of the realty and personalty would *715be conducted by Ken Phillips, an auctioneer who had been employed by the Trustee on behalf of the estate by order entered January 28, 2010. The Trustee served both notices on the debtor personally, her attorneys and all parties in interest, and stated that any objections to the proposed sales must be filed within 21 days as contemplated by E.D. Tenn. LBR 9013 — 1(h). No objections or responses were filed to either of the notices.
On May 7, 2011, the Trustee filed a motion to compel the Debtor to turn over to the Trustee the Debtor’s personal property that the Trustee had noticed for sale, and scheduled a May 24, 2011 hearing on the motion. On the morning of the scheduled hearing, the Debtor filed an objection to the Trustee’s turnover motion. Notwithstanding her previous failure to object to the Trustee’s notice of intent to sell her personal property, the Debtor stated that she opposed the planned auction because it would result in less than fair value being paid for her assets, she had a friend who would assist her in obtaining a bank loan to pay her unsecured debt, and selling just a portion of her personalty would be sufficient to pay her debts in full, with the exception of one claim which was otherwise subject to set-off. The Debtor also stated that she needed her vehicles for transportation, and that some of the personal property in the residence that the Trustee was planning to sell was the sole property of her husband, belonged to her son, or was jointly-held property. Specifically, the Debtor asserted that certain artwork belonged to her husband, and attached to her objection receipts or certificates of ownership for the artwork. Also attached to the objection were two appraisal certificates for some jewelry items which listed both the Debtor and her husband as owners of the jewelry. Lastly, the Debtor requested in the objection that the 1981 DeLorean be removed from her list of property because it had been purchased by her husband prior to their marriage and her name added to the title for insurance purposes.
The Debtor, her attorney, and her husband Larry N. Lunan appeared at the May 24, 2011 hearing, as did the Trustee. In a proffer of proof, the Trustee stated that shortly after the case converted to chapter 7, he and Mr. Phillips met with the Debtor at her residence and questioned her as to who owned the furniture, artwork, jewelry, and vehicles located there and she advised that she did. The Trustee also stated that the debtor and her attorney had indicated at that time that the debtor wanted to pay off her unsecured creditors to avoid having her assets sold, so the Trustee advised her as to the amount necessary to pay unsecured claims and administrative expenses. The Trustee stated that after that meeting he waited over a year for the Debtor to come up with the necessary funds to pay unsecured creditors, and when she failed to do so, noticed the assets of the estate for sale. The Trustee objected to the Debtor’s last-minute attempt to stop the planned sale by claiming that some of the property belonged to others, but stated that he had no desire to sell Mr. Lunan’s property, and that he had advised Mr. Lunan to remove his personal property from the residence before the planned auction. In response, the Debtor did not contradict the Trustee’s statements, but stated that she had recently come across some receipts that indicated that her husband had purchased some of the artwork that she had listed in her schedules. The Debtor also stated that one of the Mercedes was in both her and her husband’s names, that her husband had purchased the DeLorean automobile prior to their marriage although title was in both of their names, and that one of the *716Mercedes actually belonged to her son, although titled in her name. The Debtor indicated that she planned to amend her schedules, consistent with these statements.
At the conclusion of the hearing, the court overruled the Debtor’s objection to turnover and granted the Trustee’s motion. The court cited the fact that the case had been pending in chapter 7 for more than a year and a half, such that the Debtor had had ample opportunity to make other arrangements to pay off her unsecured creditors and avoid a sale of her assets. Similarly, as to ownership of her scheduled assets, the court noted that the Debtor had scheduled all personal property as being solely owned by her when she first filed for bankruptcy relief two and a half years previously, that she had continued to list these assets as her property in the eight monthly operating reports that she had filed while she was in chapter 11, and that she had not amended her schedules to state otherwise, despite having ample opportunity to do so.1 The court observed that the mere fact that Mr. Lunan may have purchased the artwork did not make it solely his, as it could have been a gift to the Debtor or to the household. Lastly, the court cited the Debtor’s unexplained failure to object to the Trustee’s prior notice of intent to sell.
Consistent with the ruling announced by the court at the conclusion of the May 24, 2011 hearing, the court entered an order on June 1, 2011, granting the Trustee’s motion to compel turnover. The order stated in part the following:
It is, therefore, ORDERED that:
1. The Trustee’s Motion to Compel Debtor to Turn Over Property to the Trustee is hereby granted in its entirety.
2. All of Larry Lunan’s personal property, including pets, and all of the Debtor’s clothing and wearing apparel and pets shall be removed' from the Debtor’s residence located at 35402 Ore-bank Road, Kingsport, TN 37664 (the “Residence”) by midnight May 30, 2011. All of the Debtor’s remaining personal property, including but not limited to, household furniture, including living area furniture, bedroom furniture, dining room furniture, etc., appliances, dishes, crystal, electronics, including televisions, rugs, lawn equipment, lamps, patio furniture and grills, pool furniture, decorative items, and all artwork and paintings, including but not limited to, the following (1) Caprinas Venice; (2) Newport Beach Regatta; (3) By the Pool; (4) A Still Life of Wine Bottles; (5) Parisan Street Scene; (6) Paris Poster; and (7) Cote D’Azur shall remain at the Residence and be subject to being sold at the June 2, 2011 auction (the “Auction”). Further, the Debtor shall immediately turn over to the Trustee, or his designated representative, all of her jewelry, including but not limited to, two (2) 14kt white gold diamond rings; Oyster Perpetual Lady Rolex watch; 14kt gold bracelet; and, two (2) 14 kt gold three stone rings for sale at the Auction.
*7173. The Debtor shall immediately turn over to the Trustee, or his designated representative, for sale at the Auction the following automobiles, along with the titles, and keys; (1) 1968 Cáma-ro; (2) 1987 Mercedes 560 SEL; (3) 1981 DeLorean; and (4) 2007 Mercedes ML 63. Further, the Debtor shall immediately turn over to the Trustee, or his designated representative, any other automobiles, along with the titles, and keys, that were titled in the Debtor’s name only at the time of her bankruptcy filing for future sale by the Trustee, if necessary.
On June 25, 2011, the Trustee filed a motion for authority to sell the real property located at 3520 Orebank Road, Kings-port, Tennessee free and clear of liens pursuant to 11 U.S.C. § 363, stating that a contract for the sale of the realty had been entered into at the June 2, 2011 auction. The motion set a July 12, 2011 hearing, and was served on the Debtor, her attorneys, and all parties in interest. No objection or other response was filed to the motion, and no party appeared at the hearing in opposition to the motion. Accordingly, the court entered an order on July 14, 2011, granting the motion.
On July 25, 2011, the Trustee filed a motion to compel the Debtor and her family to vacate the property located at 3520 Orebank Road, Kingsport, Tennessee so that it could be turned over to its purchaser. A hearing on this motion was set for August 9, 2011. The Debtor filed an objection to the motion, asserting that the court could not compel her and her family, which included her husband and two adult children, to vacate the residence. The objection did not address why the Debtor had not previously objected to the sale of the residence despite two prior opportunities to do so. At the conclusion of the scheduled hearing, this court overruled the Debtor’s objection, and granted the Trustee’s motion by order entered August 10, 2011.
The Debtor appealed three orders of the court: the June 1, 2011 order compelling her to turn over her personal property to the Trustee, the June 14, 2011 order granting the Trustee’s motion to sell her residence free and clear of liens, and the August 10, 2011 order directing the Debtor and her family to vacate her residence so that it could be turned over to the purchaser. On March 26, 2012, and July 24, 2012 respectively, the United States District Court for the Eastern District of Tennessee dismissed the appeal of the orders compelling the turnover of the Debt- or’s personal property and approving the sale of the Debtor’s residence free and clear of liens. The district court concluded that the Debtor did not have standing to appeal because she was not a person aggrieved by the bankruptcy court orders. Also on July 24, 2012, the district court dismissed the Debtor’s appeal of the order directing her to vacate her residence, citing her failure to provide a transcript of the bankruptcy court proceeding as part of the record on appeal as required by Federal Rule of Bankruptcy Procedure 8006. The Debtor then further appealed all three orders to the United States Court of Appeals for the Sixth Circuit, where the appeals are currently pending.
II. The State Court Action
On June 4, 2012, Larry Lunan, pro se, (“Plaintiff’) filed a civil action in the Circuit Court of Sullivan County, Tennessee against the Trustee. The Plaintiff thereafter amended the complaint on June 28, 2012, to add Mr. Phillips and two “John Doe” defendants. The Plaintiff alleges that the Trustee, instead of utilizing an adversary proceeding under Federal Rule of Bankruptcy Procedure 7001 and a hear*718ing under 11 U.S.C. § 368,3 illegally and for personal gain used a motion to compel turnover to obtain control of Plaintiffs property and that of his adult children, as well as property Plaintiff jointly owned with the Debtor. The Plaintiff further alleges that he pointed out his separate property to the Trustee and advised him that there was a second dwelling on the Debtor’s real property that belonged solely to him, but the Trustee falsely represented to the bankruptcy court at the May 24, 2011 hearing that he had no prior knowledge of any ownership claims by anyone other than the Debtor, thereby committing fraud upon the court. The Plaintiff also alleges that on the morning of the auction he requested permission from the Trustee to withdraw his personal property from the residence, but the Trustee denied his request and threatened to charge the Debtor and the Plaintiff with bankruptcy fraud if they removed any property. Lastly, the Plaintiff alleges that the Trustee and Mr. Phillips (“Defendants”) did not provide security on the day of the sale such that sentimental items were stolen, that Mr. Phillips adjusted the thermostat and opened the windows causing the electric bill paid by Plaintiff to be higher than normal, and that Mr. Phillips absconded with Plaintiffs moving dolly and extension cords.
Based on these factual allegations, the amended complaint sets out nine counts for relief for which the Plaintiff seeks a disgorgement of funds obtained by the Defendants, an accounting, and damages. Specifically, in the first eight counts, the Plaintiff alleges that the Trustee with willful malice: (1) denied the Plaintiff due process under the Tennessee Constitution, Article 1, Section 8; (2) violated the Plaintiffs civil rights under 42 U.S.C. § 1983; (3) converted the Plaintiffs personal property, including eight works of art, in violation of TenmCode Ann. §§ 39-14-103 and 40-13-221, criminal statutes against theft and embezzlement, respectively; (4) converted personal property in which the Plaintiff had a joint interest, including the 1981 DeLorean, 1987 Mercedes, 1968 Cá-maro, and certain jewelry purchased for the Debtor, in violation of the same state law criminal statutes; (5) confiscated and converted in violation of state law personal property belonging to the Plaintiffs two adult children that was located at the Debtor’s residence; (6) committed a fraud on the bankruptcy court by giving false testimony; (7) violated Tenn.Code Ann. § 39-14-112, the extortion criminal statute, by converting Plaintiffs property through the use of extortion and threats of criminal liability for bankruptcy fraud; and (8) intentionally inflicted emotional distress in violation of Tenn.Code Ann. § 39-17-309, which addresses the criminal offense of intimidating others from exercising their civil rights, and “T.P.I. CIVIL, 4.35,” the Tennessee Pattern Jury Instruction for the tort of intentional infliction of *719emotional distress. In the last count of the amended complaint, the Plaintiff alleges that the Trustee conspired with Mr. Phillips and potentially others,4 “to liquidate for gain the converted property” in violation of TenmCode Ann. § 39-12-103, the criminal offense of conspiracy.
III. This Adversary Proceeding
On August 3, 2012, the Defendants filed a Notice of Removal, removing the Plaintiffs state court action to this court. In the Notice, the Defendants state that removal was proper pursuant to 28 U.S.C. §§ 1441(b),5 1442(a)(3), and 1452(a). Additionally, the Defendants state that this is a core proceeding pursuant, in part, to 28 U.S.C. § 157(b)(2)(A) and (0). Alternatively, the Defendants assert that this is a related proceeding pursuant to 28 U.S.C. § 157(c)(1).
On August 13, 2012, the Defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), alleging that Plaintiff was required by the Barton doctrine to seek leave of this court prior to filing the state court action. See Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881). Alternatively, the Defendants argue that dismissal is required because their actions were protected by quasi-judicial immunity.
In response, the Plaintiff filed on September 4, 2012, an “Objection/Response to the Notice of Removal Filed by David Jones on August 3, 2012,” and an “Objection/Response to the Motion to Dismiss Filed by David Jones on August 13, 2012,” which the Plaintiff thereafter revised on September 25, 2012. In these documents, the Plaintiff asserts that this adversary proceeding should be remanded because removal was untimely under 28 U.S.C. § 1446(b), and inappropriate because there is no federal question jurisdiction under 28 U.S.C. § 1441(b), this is not a core proceeding, and suits against a trustee involving ultra vires acts or commenced under 11 U.S.C. § 323 need not be brought in bankruptcy court. Alternatively, the Plaintiff argues that discretionary abstention pursuant to 28 U.S.C. § 1334(c)(1) is appropriate. Further, the Plaintiff opposes the motion to dismiss, asserting that neither the Barton doctrine nor immunity applies because the Defendants’ actions were ultra vires, outside the scope of their authority. In reply, the Defendants filed *720additional memoranda of law in opposition to Plaintiffs remand request and in further support of their dismissal motion. Each of the issues raised by these filings will be addressed in turn.
IV. The Pending Motions
A. Removal of the Plaintiff’s State Court Action
The Plaintiffs first argument in support of remand is that the Defendants’ removal of this action was untimely under 28 U.S.C. § 1446(b). This provision states, in part, that:
[t]he notice of removal of a civil action or proceeding shall be filed within 30 days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based, or within 30 days after the service of summons upon the defendant if such initial pleading has then been filed in court and is not required to be served on the defendant, whichever period is shorter.
28 U.S.C. § 1446(b)(1). From its wording, § 1446(b) appears to indicate that mere “receipt” of either the complaint or summons is sufficient to start the running of the 30-day removal period, irrespective of the technicalities of service of process requirements. In fact, prior law held as much. See Tech Hills II Assocs. v. Phoenix Home Life Mut. Ins. Co., 5 F.3d 963, 967 (6th Cir.1993). However, in 1999, the United States Supreme Court ruled that formal process is required, and that a “defendant’s time to remove is triggered by simultaneous service of the summons and complaint, or receipt of the complaint, ‘through service or otherwise,’ after and apart from service of the summons, but not by mere receipt of the complaint unattended by any formal service.” See Murphy Bros., Inc. v. Michetti Pipe Stringing, Inc., 526 U.S. 344, 347-48, 119 S.Ct. 1322, 143 L.Ed.2d 448 (1999). Thus, under the facts of that case, a faxed courtesy copy of the filed-stamped complaint was insufficient to start the 30-day removal clock. Id. In light of the Murphy Brothers decision, the district court for this district has concluded that mere receipt of the complaint alone or actual knowledge of the lawsuit is no longer sufficient. See Arthur v. Litton Loan Servicing LP, 249 F.Supp.2d. 924, 927-28 (E.D.Tenn.2002). Similarly, the court of appeals for this circuit, albeit in an unpublished decision, has recognized that the 30-day period for removal under § 1446(b) runs from formal service of both the summons and complaint on each defendant. See Campbell v. Johnson, 201 F.3d 440, 1999 WL 1253098, *2 (6th Cir.1999) (table opinion) (citing Murphy Bros., 526 U.S. 344, 119 S.Ct. 1322, 1329, 143 L.Ed.2d 448 (1999)).
In the present case, the Notice of Removal was filed on August 3, 2012. The Plaintiff asserts that the filing was untimely because the Defendants had actual or constructive notice of the state court lawsuit more than thirty days before, on June 29, 2012. As support for this factual assertion, the Plaintiff cites an email communication dated that day between an assistant United States trustee and the Trustee about the lawsuit, and an unsubstantiated alleged statement by an attorney for the United States trustee to the Debtor’s former attorney that Ken Phillips had been served on or before July 2, 2012. In response, the Defendants assert that removal was timely, and reference returns of service which indicate that the complaint and summons were formally served by a Sullivan County deputy sheriff on Mr. Phillips on July 9, 2012, and on the Trustee on July 11, 2012.
Although the Plaintiffs allegations support knowledge of the state court suit more than 30 days prior to the filing of the *721notice of removal, they do not establish when the Defendants were actually served ■with both the complaint and summons. The only evidence of such service is the returns of service signed by the deputy sheriff, which indicate that formal service occurred within the 30-day period preceding the notice of removal filing on August 3, 2012. Accordingly, Plaintiffs argument that the Notice of Removal was untimely under 28 U.S.C. § 1446(b) must be rejected.
The court turns next to Plaintiffs argument that remand is required because removal was inappropriate. The Plaintiffs first assertion in support of this contention is that there is no federal question jurisdiction. The Plaintiff acknowledges that one of his claims is for a violation of his federal civil rights under 42 U.S.C. § 1983, but points out that it is only one claim and argues that it is “not an essential element.”
The court agrees that federal question jurisdiction is not an appropriate basis for removal of Plaintiffs state court action to this court. Granted, Plaintiffs 42 U.S.C. § 1983 claim is a claim arising under the laws of the United States as contemplated by the removal provisions of 28 U.S.C. § 1441(c). See Jennings v. City of Lafollette, No. 3:09-cv-72, 2009 WL 971686, *1 (E.D.Tenn. April 8, 2009). However, a district court’s jurisdiction over federal questions such as plaintiffs civil rights claim is derived from 28 U.S.C. § 1331. There is no statutory authority for a district court to refer 28 U.S.C. § 1331 actions to bankruptcy courts. Cf. Household Retail Services, Inc. v. Seale (In re Best Reception Sys., Inc.), 219 B.R. 980, 984 (Bankr.E.D.Tenn.1998) (providing similar analysis within the context of 28 U.S.C. § 1332(a)’s diversity jurisdiction). The referral permitted by the district court to the bankruptcy court under 28 U.S.C. § 157(a) is limited to matters within the district court’s bankruptcy jurisdiction under 28 U.S.C. § 1334. See id. at 983-84.
The Defendants’ removal of the state court lawsuit to this court, however, was not based solely on the federal question removal statute. Rather, the Defendants also cite both 28 U.S.C. §§ 1442(a)(3) and 1452(a). As to the latter, § 1452(a) provides that, “[a] party may remove any claim or cause of action in a civil action ... to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.” Pursuant to 28 U.S.C. § 1334(a), “the district courts shall have original and exclusive jurisdiction of all cases under title 11,” and under § 1334(b), “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.” In other words, the federal district court has exclusive jurisdiction over bankruptcy cases and non-exclusive jurisdiction over all civil proceedings connected with the bankruptcy cases. Section 1334 evidences the intent of Congress to bring all bankruptcy-related matters within the jurisdiction of the federal court. 1 Collier on Bankruptcy ¶ 3.01[3] (16th ed. 2012).
For purposes of determining whether bankruptcy jurisdiction exists, it is not necessary to distinguish between the “arising under,” “arising in,” and “related to” categories of § 1334(b). Mich. Emp’t Sec. Comm’n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir.1991). Instead, “it is necessary only to determine whether a matter is at least ‘related to’ the bankruptcy.” Id. (citing Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th Cir.1987)). The scope of “related to” jurisdiction is expansive in that “[t]he usual articulation of the test for determining whether a civil *722proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Id. at 1141-42 (quoting Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984)).
Undeniably, the Plaintiffs various claims asserted in the state court complaint fall within the scope of “related to” jurisdiction. Every claim pertains to the Defendants’ conduct while they were administering the assets of the bankruptcy estate under the authority of, and pursuant to the orders of the bankruptcy court. The Plaintiff seeks a disgorgement of funds the Defendants received in their official capacities as the chapter 7 trustee and court-appointed auctioneer, and damages for the conduct that the bankruptcy court ordered — turnover and sale of specified property. In effect, the Plaintiff seeks a reexamination of the very orders of the bankruptcy court, and of the conduct of the Defendants that not only led to those orders, but their actions in carrying out the court’s orders. Clearly, to the extent that a reviewing court would determine that the bankruptcy court’s orders were improper, that the Trustee utilized the wrong bankruptcy procedure and/or committed a fraud on the bankruptcy court, or that the Defendants are required to disgorge funds received by them in their official capacities, Plaintiffs claims will have an impact on the bankruptcy estate such that the court has bankruptcy jurisdiction under 28 U.S.C. § 1334. Accordingly, removal of this action was proper under § 1452(a).6
Moreover, under the facts at hand, the court is confident that it not only has jurisdiction over the instant proceeding as a related matter, but also as a core proceeding. As explained by the Sixth Circuit, “[a] core proceeding either invokes a substantive right created by federal bankruptcy law or one which could not exist outside of the bankruptcy.” Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 483 (6th Cir.1992) (citing In re Wolverine Radio, 930 F.2d at 1144). In determining whether a particular proceeding is a core proceeding, the bankruptcy judge must consider “both the form and substance of the procedure in making its determination.” Id. Additionally, “[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.” 28 U.S.C. § 157(b)(3).
In the present case, the genesis of Plaintiffs complaints against the Defendants is the Debtor’s bankruptcy case. 28 U.S.C. § 157(b)(2) includes in the list of core proceedings “(A) matters concerning the administration of the estate; ... [and] (0) other proceedings affecting the liquidation of the assets of the estate....” 28 U.S.C. § 157(b)(2)(A) and (O). Even if the facts as alleged by the Plaintiff are true, all of the actions taken by the Defendants of which the Plaintiff complains were in the context of administering the estate and liquidating the estate’s assets. Accordingly, the Plaintiffs claims against the Defendants constitute a core proceeding.
This conclusion is supported by decisions of the Sixth Circuit Court of Appeals involving analogous facts. In Sanders Confectionery Products, the court held that the plaintiffs claims against the bankruptcy trustee for lender liability, common law fraud, RICO violations, and securities *723law claims were core proceedings because they related to his conduct in administering assets of the bankruptcy estate. See Sanders Confectionery Prods., 973 F.2d at 483 n. 4. As stated by the court, “[w]hile the specific causes of action, such as RICO, exist independently of bankruptcy cases, an action against a bankruptcy trustee for the trustee’s administration of the bankruptcy estate could not.” Id.
Similarly, in In re Lowenbraun, the spouse of the chapter 7 debtor sued the trustee’s attorney in state court, alleging libel, slander, abuse of process and outrageous conduct, arising out of contempt proceedings filed against the couple and an' interview that counsel had given to a local newspaper in which he suggested that the debtor and his spouse had committed bankruptcy fraud. Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314, 319 (6th Cir.2006). The Sixth Circuit concluded that the action was a core proceeding “because the genesis of her state-law action was the bankruptcy proceeding.” Id. at 321. See also Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1437-38 (9th Cir.1995) (“postpetition state law claims asserted by or against a trustee in bankruptcy or the trustee’s agents for conduct arising out of the sale of property belonging to the bankruptcy estate qualify as core proceedings”); Kirk v. Hendon (In re Heinsohn), 247 B.R. 237, 244 (E.D.Tenn.2000) (plaintiffs suit asserting malicious prosecution and defamation claims against the bankruptcy trustee was a core proceeding because the conduct about which the plaintiff complained “would not have arisen but for Defendant’s obligations and conduct as a trustee”).
The Plaintiffs last two arguments as to why removal was improper are that the acts of the Defendants were ultra vires, that is, outside the scope of their authority, and that § 323 of the Bankruptcy Code authorizes a suit against the trustee but does not expressly require that the action be brought in bankruptcy court. See 11 U.S.C. § 323(b) (“The trustee in a case under this title has capacity to sue and be sued.”). Because both assertions involve consideration of the Barton doctrine, as Plaintiffs filings recognize, the court will move to consideration of that issue.
B. Defendants’ Motion to Dismiss
1. The Standard
Federal Rule of Civil Procedure 12(b)(6), applicable to adversary proceedings through Federal Rule of Bankruptcy Procedure 7012(b), provides that complaints may be dismissed for “failure to state a claim on which relief can be granted.” In order “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 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)). “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. (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955). Determining whether a claim for relief is plausible is a “context-specific task” requiring the court “to draw on its judicial experience and common sense.” Id. at 679, 129 S.Ct. 1937 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir.2007)). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’ ” Id. at 678, 129 S.Ct. 1937.
2. The Barton Doctrine
The Defendants assert that this action must be dismissed because the *724Plaintiff failed to seek approval from this court before suing them as required by the Barton doctrine. “Under the Barton doctrine, ‘leave of the bankruptcy forum must be obtained by any party wishing to institute an action in a state forum against a trustee, for acts done in the trustee’s official capacity and within the trustee’s authority as an officer of the court.’ ” Heavrin v. Schilling (In re Triple S Restaurants, Inc.), 519 F.3d 575, 578 (6th Cir.2008) (quoting Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir.1993)). See also Barton v. Barbour, 104 U.S. 126, 127, 26 L.Ed. 672 (1872) (“It is a general rule that before suit is brought against a receiver leave of the court by which he was appointed must be obtained.”). This principle applies not only to a bankruptcy trustee but also to those individuals who are the “functional equivalent of a trustee.” See In re DeLorean Motor Co., 991 F.2d at 1241. “[C]ourt appointed officers who represent the estate are the functional equivalent of a trustee [where] they act at the direction of the trustee and for the purpose of administering the estate or protecting its assets.” Id. (citing In re Balboa Improvements, Ltd., 99 B.R. 966, 970 (9th Cir. BAP 1989)). It has been recognized that court appointed auctioneers fall within this “functional equivalent” definition. See Carter v. Rodgers, 220 F.3d 1249, 1251-53 (11th Cir.2000); Equip. Leasing, LLC v. Three Deuces, Inc., No. 10-2628, 2011 WL 6141443, *3 (E.D.La. Dec. 9, 2011). Consequently, the Plaintiff was required by the Barton doctrine to seek this court’s approval prior to suing the Defendants in state court if he is suing them for “acts done in [their] official capacities] and within [their] authority as ... officers] of the court.” See In re Triple S Restaurants, Inc., 519 F.3d at 578.
The factual allegations of the Plaintiffs amended complaint readily establish this standard. Under § 704(a)(1) of the Bankruptcy Code, the primary task of a chapter 7 trustee is collecting and reducing to money the property of the estate. See 11 U.S.C. § 704(a)(1). Thus, the Trustee was acting in his official capacity and within his authority as an officer of the court in filing notices of intent to sell and motions for turnover, and in conducting an action of estate property, even if the Trustee utilized an incorrect statutory procedure or filed the wrong type of motion as the Plaintiff alleges. Similarly, Mr. Phillips as the court appointed auctioneer for the estate was acting at the direction of the Trustee for the purpose of administering the estate by conducting the estate auction. Lastly, and most significantly, the Defendants were acting pursuant to orders of this court in selling the assets at issue, even if they belonged to the Plaintiff or his adult children as he alleges.7 See Novak v. Clark, No. 03-4136-JAR, 2004 WL 1293249, *2-3 (D.Kan. June 4, 2004) (because trustee was administering assets of the estate in his official capacity, Barton doctrine applied to debtor’s state court lawsuit against the chapter 7 trustee despite claim that sale of vehicle was fraudulent and a fraud on the bankruptcy court).
*725Notwithstanding the foregoing, the Plaintiff asserts that the Barton doctrine is not applicable for two reasons. First, citing Lambert v. Schwab (In re Lambert), 438 B.R. 523 (Bankr.M.D.Pa.2010), the Plaintiff argues that a bankruptcy trustee is not actually appointed by the bankruptcy court under current law, such that the policy considerations supporting the Barton doctrine no longer apply. Second, the Plaintiff maintains that the Defendants’ alleged conversion of his assets was ultra vires or outside of their official capacities, which has been long recognized as an exception to the doctrine. See Barton v. Barbour, 104 U.S. at 134 (analogizing the position of a receiver to that of a assignee in bankruptcy and stating “if, by mistake or wrongfully, the receiver takes possession of property belonging to another, such person may bring suit therefor against him personally as a matter of right; for in such case the receiver would be acting ultra vires”). In support of this proposition, the Plaintiff cites Leonard v. Vrooman, 383 F.2d 556 (9th Cir.1967); Teton Millwork Sales v. Schlossberg, 311 Fed.Appx. 145 (10th Cir.2009); and Henkel v. Lickman (In re Lickman), 297 B.R. 162 (Bankr.M.D.Fla.2003).
As to Plaintiffs first argument, the bankruptcy court in Lambert did conclude that the common-law Barton doctrine did not survive enactment of the Bankruptcy Code of 1978 because bankruptcy courts no longer appoint the trustee, see 11 U.S.C. § 701(a)(1),8 and because § 323 of the Bankruptcy Code provides that the trustee in a bankruptcy case has the capacity to be sued but does not mention prior court approval. See In re Lambert, 438 B.R. at 525-26. More recently, however, the Third Circuit Court of Appeals has expressly rejected Lambert and affirmed the continued validity of the Barton doctrine under the Bankruptcy Code for bankruptcy trustees. See In re VistaCare Grp., LLC, 678 F.3d 218, 231-32 (3d Cir.2012); see also Carter v. Rodgers, 220 F.3d at 1252 n. 4 (concluding that it was irrelevant for Barton doctrine purposes that defendants were court “approved” rather than court “appointed”). More importantly for this court, Lambert is in direct conflict with controlling Sixth Circuit precedent. On three separate occasions the court has recognized the continued viability of the Barton doctrine for bankruptcy trustees under the Bankruptcy Code. See In re Triple S Restaurants, Inc., 519 F.3d at 578; In re Lowenbraun, 453 F.3d at 322; In re DeLorean Motor Co., 991 F.2d at 1240. Accordingly, the Plaintiffs Lambert argument must be rejected.
The Plaintiffs second argument is that the Defendants’ actions were ultra vires or outside the scope of their authority such that permission from the bankruptcy court to bring suit was not required. According to Plaintiff, the Defendants’ actions were ultra vires because they were not authorized to convert his assets, to intentionally inflict emotional distress, or to violate his rights under state and federal law.
The Sixth Circuit has stated that there is “a presumption that acts were a part of the trustee’s duties unless Plaintiff initially alleges at the outset facts demonstrating otherwise.” In re Lowenbraun, *726453 F.3d at 322 (quoting In re Heinsohn, 247 B.R. at 246). This presumption prevents plaintiffs “from making unsupported allegations in an attempt to defeat Congress’s goal of providing exclusive federal jurisdiction over bankruptcy matters.” Id.
While this court understands the point being made by the Plaintiff in this regard, the fact remains that the Defendants took possession of and sold the assets in question and, if true, threatened the Plaintiff with a charge of bankruptcy fraud, all in the course of carrying out their official duties. The Plaintiffs allegations of fraud or malfeasance by the Defendants do not alter this conclusion. For example, in Satterfield v. Malloy, No. 10-CV-03-TCK-FHM, 2011 WL 2293940 (N.D.Okla. June 8, 2011), the plaintiff sued the chapter 7 trustee, alleging a violation of 42 U.S.C. § 1985(2), a violation of his First and Fifth Amendment rights, breach of fiduciary duty and civil conspiracy, all arising out of the trustee’s course of conduct as bankruptcy trustee. When the chapter 7 trustee moved to dismiss based on the Barton doctrine, the plaintiff asserted the ultra vires exception because the complaint alleged that the trustee was guilty of unlawful and improper acts. The court rejected this argument, concluding that the allegations of misconduct did not necessarily place the chapter 7 trustee’s actions outside the scope of the trustee’s authority. “Because the essence of such allegations relates to [djefendant’s execution of his duties as trustee, the ultra vires exception does not apply.” Id. at *4.
Similarly, in Lawrence v. Goldberg, 573 F.3d 1265, 1271 (11th Cir.2009), the plaintiff sued the chapter 7 trustee and the trustee’s professionals alleging that they had colluded to enforce a turnover order that the bankruptcy court had improperly entered, and otherwise had unlawfully brought assets into the bankruptcy estate. Based on these allegations, the plaintiff asserted violations of the federal wiretapping laws, RICO, the Fair Debt Collection Practices Act, and federal and constitutional rights under 42 U.S.C. § 1983. Id. at 1268. Notwithstanding these claims, the Eleventh Circuit Court of Appeals concluded that the lawsuit fell within the Barton doctrine because the defendants had performed the challenged actions, locating estate assets and enforcing the bankruptcy court’s turnover order, in their official capacities. Id. at 1270.
In Novak v. Clark, the plaintiff sued the chapter 7 trustee and his attorney, alleging that they had committed a fraud on the bankruptcy court by “knowingly, intentionally, and fraudulently” submitting an order for a sale of an automobile owned by the debtor’s father rather than the debtor, thereby violating the plaintiffs Fourteenth Amendment rights to due process. The district court concluded that the suit was filed in violation of the Barton doctrine, because in selling the automobile the trustee had acted in his official capacity and pursuant to an order of the bankruptcy court. Novak v. Clark, 2004 WL 1293249, at *2. See also Giovanazzi v. Schuette, No. 09-0496 AHM, 2009 WL 649187, at *4 (C.D.Cal. March 10, 2009) (Barton doctrine precluded suit against chapter 7 trustee and his counsel where allegations arose directly from and were based entirely on their actions to secure assets of the bankruptcy estate; complaint that alleged defendants operated a scam of taking property ex parte and ultra vires without a factual foundation or evidentiary support failed to state a claim).
Additionally, decisions by the Sixth Circuit Court of Appeals demonstrate the correctness of the conclusion that mere allegations of improper conduct by a trustee do not take the claims outside the Barton doctrine. In Lowenbraun, as *727previously discussed, the debtor’s spouse sued the chapter 7 trustee’s attorney in state court for libel, slander, abuse of process and outrageous conduct. In re Lowenbraun, 453 F.3d at 319. Upon removal of the lawsuit to the bankruptcy court, the spouse argued that the Barton doctrine did not apply because counsel had acted outside the scope of his authority, and had “intentionally concocted false allegations against [the spouse] to hide his own negligence.” Id. at 322. The bankruptcy court rejected this argument and the Sixth Circuit Court of Appeals affirmed, concluding that the allegation that counsel’s actions were prompted by improper motives was insufficient to undermine application of the Barton doctrine, as counsel had been acting to recover missing estate assets. Id. Similarly, in Triple S Restaurants the court of appeals concluded that a suit arising out of the chapter 7 trustee’s alleged threat to report the plaintiff to the United States Attorney for criminal charges fell within the scope of the trustee’s duties for Barton doctrine purposes as a trustee has a duty under 18 U.S.C. § 3057(a) to report any criminal activity related to the bankruptcy proceeding. In re Triple S Restaurants, Inc., 519 F.3d at 578.
The cases cited by the Plaintiff in support of his contention that the acts of Defendants were ultra vires and thus outside the scope of the Barton doctrine do not involve analogous facts or support the opposite conclusion. In Leonard, the trustee’s conduct was found to be ultra vires where he, without court order, took possession of property that he believed that the debtor had fraudulently conveyed prior to the filing of the bankruptcy case. Leonard v. Vrooman, 383 F.2d at 561. Noting that the debtor in that case had not scheduled the seized property as property of the estate, the court of appeals observed that under these circumstances, the trustee “should have obtained a turnover order directing delivery to the trustee of the personalty.” Id. In the instant case, not only did the Debtor schedule the subject property, but the Trustee also obtained a court order authorizing the turnover and sale of the property in question. In Schlossberg, another case cited by the Plaintiff, the court-appointed receiver was authorized by court order to seize assets belonging to a certain individual. Teton Millwork Sales v. Schlossberg, 311 Fed.Appx. at 148. Rather than seize the named individual’s assets, the receiver, without court order, seized assets of a corporation of which the named individual was a 25% shareholder. Not surprisingly, the court concluded that the receiver’s actions were ultra vires. Id. at 148. Lastly, in Lickman, the plaintiff argued that the Barton doctrine did not apply because the chapter 7 trustee and her attorneys had conspired to defraud in the sale of estate property. In re Lickman, 297 B.R. at 204. The bankruptcy court rejected this argument, noting that the sale had occurred with court approval after notice and a hearing. Id. at 205. As stated by the court, the sale “was not and cannot be an ultra vires act. Instead, it squarely falls within the ambit and the protections of the Barton doctrine.” Id.
Notwithstanding this court’s conclusion that the Plaintiffs filing of the state court action against the Defendants without prior approval from this court violated the Barton doctrine, dismissal is not mandated on this basis. Removal of the state court suit to the appointing bankruptcy court cures a Barton doctrine violation. See Harris v. Wittman (In re Harris), 590 F.3d 730, 742 (9th Cir.2009), but see Herrera v. Gonzales (In re Herrera), 472 B.R. 839, 852-54 (Bankr.N.M.2012) (rejecting the removal-cures-violation approach). As explained by the Ninth Circuit in Harris:
*728[A]bsent leave of the appointing court, the Barton doctrine denies subject matter jurisdiction to all forums except the appointing court. The Barton doctrine is a practical tool to ensure that all lawsuits that could affect the administration of the bankruptcy estate proceed either in the bankruptcy court, or with the knowledge and approval of the bankruptcy court. The Barton doctrine is not a tool to punish the unwary by denying any forum to hear a claim when leave of the bankruptcy court is not sought. When Harris’s case was removed to the appointing bankruptcy court, all problems under the Barton doctrine vanished.
Id. at 742 (emphasis in original).
The Harris conclusion was implicitly followed by the courts in Triple S Restaurants and Lowenbraun, decisions which reached the Sixth Circuit. See In re Triple S Restaurants, Inc., 519 F.3d 575; In re Lowenbraun, 453 F.3d 314. Both cases involved actions removed to bankruptcy court after having been commenced in state court in violation of the Barton doctrine, and in neither case did the bankruptcy court summarily dismiss the lawsuit upon concluding that the Barton doctrine applied. Id. Rather, each court proceeded with a consideration of the plaintiffs’ claims, with the court in Triple S Restaurants dismissing for failure to state a claim, 519 F.3d at 578-79, and the Lowenbraun court examining and determining the defendant’s immunity defense. In re Lowenbraun, 453 F.3d at 322-23. Although the precise question of whether dismissal is required upon a violation of the Barton doctrine was not addressed, both decisions were affirmed by the court of appeals. Accordingly, the court rejects the assertion that violation of the Barton doctrine requires dismissal of this action.
Before turning to the alternative basis for the Defendants’ dismissal motion, immunity, the court must first address Plaintiffs abstention request. As previously stated, the Plaintiff seeks discretionary or permissive abstention pursuant to 28 U.S.C. § 1334(c)(1), which provides, “nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” 28 U.S.C. § 1334(c)(1). At least one court has expressly concluded that absent approval by the appointing bankruptcy court under the Barton doctrine, abstention would be inappropriate because the state court would lack independent jurisdiction over the proceeding. See Indus. Clearinghouse, Inc. v. Mims (In re Coastal Plains, Inc.), 326 B.R. 102, 111 (Bankr.N.D.Tex.2005) (“Pursuant to the Barton Doctrine, this Court has exclusive jurisdiction over this action, and thus abstention and remand would be inappropriate, even if the case were not dismissed.”); see also In re McKenzie, 476 B.R. 515, 529 (E.D.Tenn.2012) (citing Kashani v. Fulton (In re Kashani), 190 B.R. 875, 886-87 (9th Cir. BAP 1995), for the proposition that “the reason the party must seek leave of court [under the Barton doctrine] is because the non-appointing court lacks subject-matter jurisdiction”).
The Sixth Circuit Court of Appeals has not expressly addressed the issue of whether a bankruptcy court may grant permissive abstention under 28 U.S.C. § 1334(c)(1) if there has been a violation of the Barton doctrine. However, in the similar context of remand,9 the court in Low-*729enbraun found no error in the bankruptcy court’s denial of the plaintiffs remand motion based on the conclusion that the plaintiffs failure to obtain leave to sue in violation of the Barton doctrine deprived the Kentucky court of jurisdiction. See In re Lowenbraun, 453 F.3d at 322. In reaching this conclusion, the Sixth Circuit cited Pertuso v. Ford Motor Credit, 233 F.3d 417, 426 (6th Cir.2000), wherein the court held that a plaintiffs state law claims for unjust enrichment and an accounting, which claims “presuppose[d] a violation of the Bankruptcy Code,” were preempted by federal bankruptcy law. Similarly, explained the Lowenbraun court, the presumption that a trustee and other bankruptcy professionals were acting within the scope of their duties “prevents a plaintiff ... from making unsupported allegations in an attempt to defeat Congress’s goal of providing exclusive federal jurisdiction over bankruptcy matters.” In re Lowenbraun, 453 F.3d at 322 (“Congress intended for the Bankruptcy Code to be comprehensive and for the federal courts to have exclusive jurisdiction over bankruptcy matters”). From this discussion, the court concludes that it would be inappropriate to return a core proceeding to state court after a violation of the Barton doctrine because that court lacks jurisdiction. See In re McKenzie, 476 B.R. at 529 (noting that absent compliance with the Barton doctrine, the non-appointing court lacks subject matter jurisdiction). Accordingly, the Plaintiffs abstention request must be denied as a matter of law.
3. Immunity
Lastly, the Defendants assert that dismissal of this adversary proceeding is warranted because they have quasi-judicial or derived judicial immunity. Assertions of immunity may properly be considered in a Rule 12(b)(6) motion to dismiss. See, e.g., Weissman v. Nat’l Assn. of Sec. Dealers, Inc., 500 F.3d 1293, 1309 (11th Cir.2007) (“There can be no doubt that a motion to dismiss under Rule 12(b)(6) is a proper vehicle to defeat a complaint that, on its face, cannot overcome an immunity defense.”). A bankruptcy trustee is “entitled to broad immunity from suit when acting within the scope of his authority and pursuant to court order.” In re McKenzie, 476 B.R. at 525. Moreover, as with respect to the Barton doctrine, court-appointed officers who represent the estate are similarly entitled to the immunity where “they act at the direction of the trustee and for the purpose of administering the estate or protecting its assets.” In re DeLorean Motor Co., 991 F.2d at 1240. In response to the Defendants’ immunity contention, the Plaintiff again raises his ultra vires argument, noting that “[a] trustee can be held personally liable ... for acting outside the scope of his authority— that is, by engaging in an ultra vires act....” In re McKenzie, 476 B.R. at 526 (citing Illinois Dep’t of Revenue v. *730Schechter, 195 B.R. 380, 384 (N.D.Ill.1996)). In fact, one such ultra vires act cited by the district court in McKenzie was “seizing property not owned by the bankruptcy estate.” Id. (citing Leonard v. Vrooman, 383 F.2d 556).
Assuming as true each of the allegations in the amended complaint as this court must do in the context of a motion to dismiss under Rule 12(b)(6), see Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 the court nonetheless concludes that all of the alleged conduct by the Defendants is protected by immunity. In the first, third, fourth, fifth, and sixth counts of the amended complaint, the Plaintiff alleges that the Trustee converted his property and that of his adult children by fraudulently filing a turnover motion rather than a Rule 7001 adversary proceeding, and by giving false testimony to the court as to ownership, thereby committing a fraud on the court. The Plaintiff alleges that these actions denied him due process in violation of the Tennessee Constitution and state criminal statutes against theft and embezzlement.10 However, the property allegedly converted by the Defendants was taken from the Plaintiff pursuant to court order. Consequently, the Defendants are protected by absolute immunity in carrying out the terms of the order. See, e.g., Gross v. Rell, 695 F.3d 211, 216 (2d Cir.2012) (“Bankruptcy trustees are generally immune to the extent that they are acting with the approval of the court.”); Gregory v. United States, 942 F.2d 1498, 1500 (10th Cir.1991) (bankruptcy trustee enjoys absolute immunity when executing “facially valid judicial orders”); In re Weisser Eyecare, Inc., 245 B.R. 844, 848 (Bankr.N.D.Ill.2000) (“Because trustees serve an important function as officers of the court, they enjoy ... absolute immunity if operating pursuant to a court order.”).
The foregoing legal principle is true, even it the court’s order improperly included non-estate property as the Plaintiff alleges. Absolute immunity excuses even allegations of bad faith, malice, or gross error. In re Heinsohn, 231 B.R. 48, 66, n. 12 (Bankr.E.D.Tenn.1999). The alleged exception for property not owned by the bankruptcy estate, see In re McKenzie, 476 B.R. at 526 (citing Leonard v. Vrooman, 383 F.2d 556), does not apply in the instant case because the property was taken pursuant to court order, unlike the property seized in Leonard. See Leonard v. Vrooman, 383 F.2d at 556. Also in this regard, it is well settled that testimony given in court as well as statements made to a court in the course of litigation are protected by immunity, even if false. See Rashid v. Kite, 934 F.Supp. 144, 147 (E.D.Pa.1996) (doctrine of witness immunity “provides that witnesses are absolutely immune from suits arising from testimony given in the course of a judicial proceeding” and “[t]his immunity extends to pretrial statements so long as they are related to proposed litigation”).
In the second, seventh, and eighth counts of the amended complaint, the Plaintiff alleges that the Trustee fraudulently converted his property by threaten*731ing to prosecute the Debtor and the Plaintiff for bankruptcy fraud. According to the Plaintiff, the Trustee’s acts were illegal pursuant to a Tennessee statute criminalizing extortion, a violation of the Plaintiffs civil rights, and constituted an intentional infliction of emotional distress. Under similar facts, the Sixth Circuit in Lowenbraun recognized that extrajudicial statements by a trustee to a newspaper suggesting that the debtor and his wife had committed bankruptcy fraud were protected by immunity if the information was disseminated in good faith and served a proper public purpose. In re Lowenbraun, 453 F.3d at 323. The court of appeals affirmed the bankruptcy court’s dismissal of the action based on the plaintiffs failure to offer any factual support for his conclusory allegations that the trustee had acted in bad faith. Id. Similarly, in the present case, the Plaintiff has alleged no facts that would support a claim of bad faith, merely conclusory statements.
Lastly, in the ninth count, the Plaintiff alleges that the Trustee and the Auctioneer conspired to liquidate the property converted from the Plaintiff and are therefore liable. However, as discussed with prior counts, the Defendants were acting pursuant to orders of this court in liquidating the property in question. Accordingly, they are protected by immunity.11
V. Conclusion
An order will be entered in accordance with the foregoing denying the Plaintiffs request for remand and the granting the Defendants’ motion to dismiss on the immunity issue.
. The court now sees that this statement was partially erroneous. In her amended Schedule B filed March 24, 2009, the Debtor indicated that the DeLorean and six of the Mercedes vehicles were jointly owned. All other scheduled personalty was listed as the Debt- or’s sole property, as it had been listed in the Debtor’s original schedules. No reference was made by either party to the amended Schedule B at the May 24, 2011 hearing.
. It appears that this number was a typographical error as the Debtor’s residence was located at 3520 Orebank Road, Kingsport, Tennessee.
. Section 363(h) of the Bankruptcy Code provides that "the trustee may sell both the estate’s interest ... and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety, only if ... [four specified requirements are met].”). 11 U.S.C. § 363(h). Federal Rule of Bankruptcy Procedure 7001(3) lists "a proceeding to obtain approval under § 363(h) for the sale of both interests of the estate and of a co-owner in property” as an adversary proceeding. If a third party is a co-owner with the estate in estate property, a trustee must initiate an adversary proceeding and satisfy § 363(h) if the trustee desires to sell the interests of both, absent the agreement of the co-owner. See 3 Collier on Bankruptcy ¶ 363.08[1] (16th ed. 2012) ("The trustee must seek authority for such a [§ 363(h)] sale by an adversary proceeding on notice to the co-owner.”).
. The "others” likely refers to the two John Doe defendants. The record reflects that the Plaintiff has neither amended his complaint to identify the two John Doe defendants nor served anyone other than the Trustee and Mr. Phillips. Because more than 120 days have elapsed since the filing of the amended complaint without service on the John Doe defendants, the complaint is subject to dismissal as to the John Doe defendants pursuant to Federal Rule of Civil Procedure 4(m) ("If a defendant is not served within 120 days after the complaint is filed, the court — on motion or on its own after notice to the plaintiff — must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period.”). See Nicholson v. City of Chattanooga, 1:04-cv-168, 2005 WL 2657001 (E.D.Tenn. Oct. 18, 2005) (dismissing John Doe defendants not identified and served within 120 days from filing of complaint).
. This section pertains to removal based on diversity of citizenship, which would appear to have no applicability to the case at hand. The Defendants cite § 1441(b) as their basis for federal jurisdiction not only in their Notice of Removal but also in their memorandum in opposition to Plaintiff's remand motion. Section 1441(c) of title 28, which addresses joinder of federal and state law claims, would appear to be the more appropriate section. The Defendants' mistake is not fatal because removal was otherwise proper under 28 U.S.C. § 1452(a), an alternative basis for removal cited by Defendants in their Notice of Removal, as discussed in the body of this opinion.
. Having reached this conclusion, it is unnecessary for this court to determine whether removal was also authorized under 28 U.S.C. § 1442(a)(3), an alternative removal basis cited by the Defendants in their Notice of Removal.
. Although unnecessary to resolve in light of the court’s dismissal of this action, the court questions whether the Plaintiff has standing to raise the ultra vires exception with regard to the property of his adult children. See Bowers v. Banks (In re McKenzie), 473 B.R. 274, 284 (Bankr.E.D.Tenn.2012) ("the standing to raise the ultra vires exception to the Barton doctrine requires the aggrieved party to be the owner of the property tortiously taken”). Although the Plaintiff asserts that he had "custody” of his adult children’s personalty, custody is not ownership. See Black's Law Dictionary (9th ed. 2009) ("The care and control of a thing or person for inspection, preservation, or security.”).
. Under current law, after the order for relief under chapter 7, the United States trustee appoints an interim trustee that is a member of the panel of private trustees established under 28 U.S.C. § 586(a)(1). See 11 U.S.C. § 701(a)(1). The service of an interim trustee terminates when a trustee is elected at a meeting of creditors. See 11 U.S.C. § 701(b). If the creditors do not elect a chapter 7 trustee at the meeting of creditors as permitted by 11 U.S.C. § 702(b), “then the interim trustee shall serve as trustee in the case.” 11 U.S.C. § 702(d).
. Section 1452(b) of title 28 likewise provides that "[t]he court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground.” *72928 U.S.C. § 1452(b). "Factors to consider in deciding whether to equitably remand a case include: '1) duplicative and uneconomical use of judicial resources in two forums; 2) prejudice to the involuntary removed parties; 3) forum non conveniens; 4) the state court’s ability to handle a suit involving questions of state law; 5) comity considerations; 6) lessened possibility of an inconsistent result; and 7) the expertise of the court in which the matter was originally pending.' " Parrett v. Bank One, N.A. (In re Nat’l Century Fin. Enters., Inc., Investment Litigation), 323 F.Supp.2d 861, 885 (S.D.Ohio 2004) (quoting Mann v. Waste Mgt. of Ohio, Inc., 253 B.R. 211, 215 (N.D.Ohio 2000)). Although "[t]he analysis under § 1334(c)(1) is largely the same as under § 1452(b),” id., in this instance consideration of these equitable considerations is foreclosed under either statute because of this court’s conclusion that the state court lacks subject matter jurisdiction to hear this action.
. As an aside, the court notes that to the extent the Plaintiff is attempting to hold the Trustee liable for crimes he is precluded from doing so. See Bass Anglers Sportman's Soc’y of Am. v. Scholze Tannery, Inc., 329 F.Supp. 339, 345 (E.D.Tenn.1971) ("alleged violations of criminal statutes may be enforced only by the proper prosecuting authorities and not by private parties”). For purposes of considering the Defendants’ motion to dismiss, however, this court will construe the Plaintiff's claims liberally as tort claims. See, e.g., Read v. Duck (In re Jacksen), 105 B.R. 542, 543 (9th Cir. BAP 1989) ("Pro se briefs are held to a less strict standard than those drafted by a lawyer.... Courts are to make reasonable allowances for pro per litigants and to read pro se papers liberally.” (citations omitted)).
. On a final note, this court observes that all of the foregoing establishes that the Defendants have immunity from any attempt by the Plaintiff to hold them personally liable for their conduct that was authorized by court order, or within the scope of their official authority. To the extent that the court erred by authorizing the Defendants to sell non-estate property without following the proper procedures, an issue not before the court at this time, then relief may be available as a claim against the Debtor’s estate. In making this statement, the court does not intend to revisit the sale of any property that was previously authorized. Moreover, it is highly questionable that this court has the authority to do so, as the court's rulings are before the Sixth Circuit Court of Appeals, depriving this court of jurisdiction over the matter pending further order of that court. See Buesgens v. Bergman (In re Bergman), 397 B.R. 348, 351 (Bankr.E.D.Va.2008) ("The rule is well established that the taking of an appeal transfers jurisdiction from the Bankruptcy Court to the Appellate Court with regard to any matter involved in the appeal and divests the Bankruptcy Court of jurisdiction to proceed further with such matters.”).
The court simply observes that it, and presumably the Trustee, overlooked at the May 24, 2011 hearing that the Debtor had indicated in her amended Schedule B filed March 24, 2009, that the DeLorean and six of the seven Mercedes automobiles were jointly owned. However, from the state court complaint, the only automobiles that the Plaintiff alleges were converted because he had a joint interest in them were the DeLorean, a 1987 Mercedes, and a 1968 Camaro. Of these vehicles, only the DeLorean was scheduled by the Debtor as jointly owned. To the extent that the Plaintiff had an ownership interest in the DeLorean, he may have a claim against the estate for his portion of the sale proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495760/ | AMENDED MEMORANDUM AND OPINION
KATHLEEN H. SANBERG, Bankruptcy Judge.
This motion came on for hearing on March 13, 2013. Marilyn L. Slovak (the “Debtor”) asks the court to determine that the second mortgage held by TCF National Bank (the “Creditor”) is unsecured in its entirety pursuant to 11 U.S.C. § 506 and strip the second lien from the property. There were no objections.
Stephen J. Beseres appeared on behalf of the Debtor. Thomas E. Johnson appeared on behalf of Jasmine Z. Keller, the Chapter 13 Trustee.
The court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 151, 15T(a) — (b)(1), 1334(a)-(b) and Local Rule 1070-1. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
For the reasons stated below, the court finds that the evidence presented is insufficient to prove that the second mortgage is unsecured in its entirety and denies the Debtor’s motion.
BACKGROUND
The Debtor filed for Chapter 13 protection on December 19, 2012. In the Debt- or’s petition, she lists ownership of real property with the legal description of:
Lot 18, Block 4, John Ryden Second Addition, County of Hennepin, State of Minnesota.
On Schedule A, the Debtor lists the value of the property as $95,413.00.
The property is secured by two mortgages both held by the Creditor. The Creditor’s first mortgage was filed on February 2, 2009. The Creditor’s second mortgage was filed on September 28, 2006. (The second mortgage has been subordinated to the first mortgage by a subordination agreement dated January 23, 2009). The Creditor filed two proofs of claims in connection with its first and second mortgages on the property. When the case was filed, according to the proofs of claims, the balances for the first and second mortgages were $116,913.51 and $14,776.76, respectively. The Creditor listed both claims as secured claims.
The Debtor’s mother owns a life estate interest in the property and the Debtor holds the remainder interest. The Debt- or’s mother is 100 years old and resides in a nursing home. The Debtor currently lives on the property.
At the hearing, the Debtor alleged that the Creditor withdrew any objection to the Debtor’s motion. However, no objection was filed with the court in this case.
BURDEN OF PROOF
Under 11 U.S.C. § 506(a), the debtor holds the evidentiary burden to establish that a creditor’s lien is wholly unsecured in order to strip the lien.1
The court turns to the Debtor’s proof of valuation.
DETERMINATION OF SECURED STATUS
The Debtor argues that the second mortgage held by the Creditor should be considered unsecured under 11 U.S.C. § 506(a) because the value of the property is less than the balance of the first mortgage. On Schedule A, the Debtor lists the *826market value of the property as $95,413.00. The Debtor bases this value on her own opinion, internet searches, and a Hennepin County tax-assessment.
Under Minnesota law, the Debt- or has a right to give her opinion as to the value of the property.2 However, it is up to the court to determine how much weight to give the Debtor’s opinion. Here, the Debtor states in an affidavit that she based her valuation opinion on the increase in crime in the neighborhood, the year-old sale of a home across the street, and the foreclosure of several neighboring homes. The Debtor did not testify at the hearing and did not provide any information about the quality, physical characteristics, age, or condition of the property itself.
The evidence of the value presented in the motion papers includes two internet searches for home values in the Debt- or’s neighborhood: Trulia and Yahoo! Homes, which included estimates from Zil-low and Appraisal.com. Both of these Internet searches show value estimations between $100,000.00 and $117,247.00, which exceed the Debtor’s current value estimation of $95,413.00. Internet searches are insufficient evidence of property value because they are at best questionable and at worst evidence of nothing.3 The court finds that the internet searches fail to prove the value of the property.
The Debtor additionally includes her Hennepin County tax assessment with her motion. The Debtor notes that the tax assessment listed the “2013 Estimated Market Value” for the property as $108,200.00.4 The difference between the balance of the first mortgage and the 2013 Estimated Market Value is approximately 7.5%. Generally, the assessed value of a property for tax purposes is not considered direct evidence of a property’s market value.5 In similar property valuation cases, courts have rejected the estimated market value found in tax assessments, requiring further information about the calculation of the assessed value and additional supporting and reliable evidence of the value of the property.6 Here, no such evidence was presented. Due to the lack of supporting and reliable evidence and the relatively small difference between the *827mortgage balance and the tax assessed value, the court will not accept the 2013 Estimated Market Value as sufficient evidence to establish the value of the property.
A court’s determination that a lien is not secured under Section 506(a) allows a debtor to strip that lien from the property. This is a dramatic remedy that has direct consequences to both the now-determined unsecured creditor and the other unsecured creditors. Here, the court finds that the Debtor is not entitled to strip the lien because the Debtor failed to meet her burden and provide sufficient, reliable evidence establishing the value of the property or that the Creditor is wholly unsecured.7
Due to the court’s ruling above, the court will not address the Debtor’s arguments concerning whether or not the Debtor’s avoidance of the second mortgage would also void the junior lien on the mother’s life estate interest.
DUE PROCESS CONCERNS
Courts have long been concerned about due process when determining the status of a secured claim.8 Here, the address for the property listed on the notice of motion and the Debtor’s motion cover sheet is incorrect. While the proper address is found within the motion papers and the Debtor alleges that the Creditor withdrew its objection to the motion,9 it is unclear if the Creditor received proper notice. As the court is denying the motion based on other grounds, the court does not reach a conclusion as to whether or not due process was satisfied, but the court notes its concern.
CONCLUSION
The Debtor’s motion to determine value of the property is denied pursuant to 11 U.S.C. § 506(a) based on the Debtor’s failure to provide sufficient evidence of the value of the property.
IT IS ORDERED:
The Debtor’s motion to determine value of property is denied.
. Mahmud v. JTH Investment Group, LLC (In re Mahmud), No. 08-0175, 2008 WL 8099115, *4 (Bankr.E.D.Pa. Dec. 4, 2008); In re Young, 390 B.R. 480, 486 (Bankr.D.Me.2008); In re Shropshire, 284 B.R. 145, 149 (Bankr.N.D.Ala.2002); In re Finnegan, 358 B.R. 644, 649-50 (Bankr.M.D.Pa.2006); In re Brown, 244 B.R. 603, 609 (Bankr.W.D.Va.2000).
. Klapmeier v. Telecheck Intern., Inc., 482 F.2d 247, 253 (8th Cir.1973); Lehman v. Hansord Pontiac Co., 246 Minn. 1, 74 N.W.2d 305, 309 (1955).
. In re Darosa, 442 B.R. 173, 177 (Bankr.D.Mass.2010) (finding internet valuations unreliable, especially websites such as Zillow, which allow any internet user to enter information that would change the value of property); Gray v. Bank of Am., N.A. (In re Gray), No. 09-14445, 2010 WL 276179, at *3 (Bankr.E.D.Va. Jan. 15, 2010) (holding that internet valuations have limited utility because the internet company did not individually appraise the property and the court has no way of knowing how the valuation was calculated).
. For taxes payable in 2013, the assessed value is established as of January 2, 2012. Because the Debtor filed her petition on December 19, 2012, this would correspond to the January 2, 2012 assessed value.
. EOP-Nicollet Mall, L.L.C. v. County of Hennepin, 723 N.W.2d 270, 283 (Minn.2006) (“[T]he assessed value of property for tax purposes is not relevant to the question of that same property’s market value”); Smalkoski v. County of Hennepin, No. 27-CV-09-02798, 2010 WL 4868006, at *3 (Minn.Tax Ct. Nov. 17, 2010) (placing no weight on the tax assessed values); C.C. Marvel, Annotation, Valuation for Taxation Purposes as Admissible to Show Value for Other Purposes, 39 A.L.R.2d 209, § 4(a) (citing recent cases and noting that "[i]t is the overwhelming weight of authority that assessed value is not competent direct evidence of value for purposes other than taxation.”).
. In re McCarron, 242 B.R. 479, 482 (Bankr.W.D.Mo.2000) (rejecting the tax assessed value because the assessor did not examine the house and was unaware of the condition of the home); In re Darosa, 442 B.R. at 176 (finding the tax assessed value unreliable and *827requiring further information about the methodology and timeliness of the tax assessor's valuation); see also In re Gray, 2010 WL 276179, at *3 (holding that tax assessments are not determinative evidence of value unless additional analysis is included with the assessment in a relief from stay motion).
.The Trustee noted at the hearing that the Creditor’s proofs of claims list the same value for the property as the Debtor's Schedule A: $95,413.00. Valuations and estimations in bankruptcy are done for different purposes and at different times, so the court is not bound by a previous value determination. In re Ahlers, 794 F.2d 388, 398 (8th Cir.1986) (finding that an initial valuation for a relief from stay was not res judicata for the purposes of determining the value of a property), rev'd on other grounds, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988); In re Babcock & Wilcox Co., 274 B.R. 230, 262 (Bankr.E.D.La.2002) ("The court again emphasizes that valuations and estimations in bankruptcy are done for different reasons, as of different times, and may be used for different purposes”). Thus, the court does not consider the Creditor's proofs of claims as direct evidence of value because the purpose of a property valuation under Section 506(a) is different from the Creditor's purpose in filing the proofs of claims. It is ultimately the Debtor’s burden to prove the value of the property.
. See generally In re Linkous, 990 F.2d 160, 162-63 (4th Cir.1993); Wright v. Commercial Credit Corp. (In re Wright), 178 B.R. 703, 705-06 (Bankr.E.D.Va.1995); In re Bennett, 466 B.R. 422, 432-34 (Bankr.S.D.Ohio 2012).
. There is no record of any objection filed by the Creditor in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495762/ | OPINION
KLEIN, Bankruptcy Judge.
A husband and wife tag team who have used serial adversary proceedings to wrestle with a lender now find themselves pinned by the so-called “two dismissal rule” of Federal Rule of Civil Procedure 41(a)(1)(B). In the course of seven bankruptcy cases, they filed three adversary proceedings asserting the same claim against the same defendants, the first two of which were voluntarily dismissed by notices of dismissal under Rule 41(a)(l)(A)(i). The unilateral second dismissal operates “as an adjudication on the merits” that ends the wrestling match in this court. Hence, the third adversary proceeding is DISMISSED.
The linchpin of the rationale is that the term “same claim” in Rule 41(a)(1)(B) means “claim” as used in the Restatement (Second) of Judgments § 24. That is, “same claim” is determined under a transactional analysis to include all rights of a plaintiff to remedies against a defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose. Here, all relief sought in the complaints arises out of a common nucleus of operative facts.
Facts
J. Pedro Zarate and Maria Villarreal Camacho are spouses who own, as community property, a small commercial shopping center in the City of San Joaquin, California, with respect to which they obtained what they describe as a “refinancing purchase money loan” through Greenpoint Mortgage Funding, Inc. They contend that this loan was an instance of predatory lending.
The Greenpoint loan, which made its way into mortgage-backed securities, is the focus of the dispute being pursued by Zarate and Camacho in which they seek to obtain clear title to the real property, damages, and declaratory and injunctive relief.
The couple has chosen to use the bankruptcy court as the forum for pursuing their claim against Greenpoint and other entities involved in the loan throughout its history. Their strategy is serial filing.
Zarate has filed six chapter 13 cases in the Eastern District of California: (1) No. 08-34307, filed October 3, 2008, dismissed November 18, 2008; (2) No. 09-40590, filed September 24, 2009, dismissed November 10, 2009; (3) No. 11-40715, filed August 25, 2011, dismissed October 12, 2011; (4) No. 11-48088, filed December 1, 2011, dismissed March 28, 2012; (5) No. 12-26252, filed March 30, 2012, dismissed September 11, 2012; and (6) No. 13-22346, filed February 22, 2013, which is still pending.
Camacho filed a chapter 7 case, No. 12-35648, on August 28, 2012, and has received a chapter 7 discharge.
Three adversary proceedings have been filed by the couple thus far against Green-point and entities in privity with Green-point: (1) Zarate v. Greenpoint Mortgage Funding, Inc., et al., No. 12-02113, filed March 9, 2012, voluntarily dismissed by notice of dismissal filed under Fed. *840R.Civ.P. 41(a)(1)(A)(i) March 29, 2012; (2) Zarate v. Greenpoint Mortgage Funding, Inc., et al., No. 12-02206, filed May 3, 2012, voluntarily dismissed by notice of dismissal filed under Fed.R.Civ.P. 41(a)(1)(A)(i) September 11, 2012; and (3) Camacho v. Greenpoint Mortgage Funding, Inc., et al., No. 12-02608, filed October 17, 2012.
Although the successive complaints allege additional theories of recovery, the factual allegations in each complaint reveal that the factual basis for all such theories is the Greenpoint loan. Thus, Camacho conceded orally on the record on February 26, 2013, that her adversary proceeding No. 12-02608 does not materially differ from the two complaints that were filed by her husband and voluntarily dismissed.
The voluntary dismissals of Adversary Nos. 12-02113 and 12-02206 were by Za-rate through counsel, who filed notices of dismissal before a defendant filed an answer or a motion for summary judgment as permitted by Rule 41(a)(1)(A).
Camacho filed the instant, third, adversary proceeding on October 17, 2012, following her husband’s dismissal of the second adversary proceeding on September 11, 2012.
Jurisdiction
Jurisdiction is founded on 28 U.S.C. § 1334(b). The power of a bankruptcy judge over this adversary proceeding is governed by 28 U.S.C. § 157.
The gravamen of the complaint sounds in non-core theories. All defendants expressly consented orally on the record in open court that a bankruptcy judge may hear and determine the matter in its entirety. 28 U.S.C. § 157(c)(2) (non-core); Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 567-70 (9th Cir.2012) (core)). The plaintiff likewise consented orally on the record, and also consented by conduct in two respects: by filing this lawsuit alleging that it is a core proceeding and by not subsequently questioning this court’s authority over the action. Id. Accordingly, this court has the power to “hear and determine” the adversary proceeding in its entirety, regardless of core or non-core status.
Analysis
The “two dismissal rule” in Civil Rule 41(a)(1)(B) is a basic feature of federal civil procedure that applies in bankruptcy adversary proceedings. Fed.R.Civ.P. 41(a)(1)(B), incorporated by Fed. R. Bankr.P. 7041. It limits access to the federal courts for those who file serial lawsuits.
I
The “two dismissal rule” is a limiting principle for the general rule that a plaintiff may at any time before a defendant serves an answer or motion for summary judgment voluntarily dismiss a civil action without a court order either by notice of dismissal or by stipulation by parties who have appeared.1 Fed.R.Civ.P. 41(a)(1)(A), incorporated by Fed. R. Bankr.P. 7041; Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 397-98, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990) (history of rule).
*841A
The effect of a unilateral dismissal depends upon whether the action previously has been dismissed. The first voluntary dismissal by notice or stipulation is presumptively without prejudice unless otherwise stated. A second notice of dismissal, however, operates as an “adjudication on the merits” if the plaintiff has previously dismissed any action in state or federal court based on or including the same claim. Fed.R.Civ.P. 41(a)(1)(B), incorporated by Fed. R. Bankr.P. 7041.2
Here, there were two Rule 41(a)(l)(a)(i) voluntary dismissals of adversary proceedings in this court by notices of dismissal before the third adversary proceeding was filed.
B
The dismissals are deemed to have been by the same plaintiff as in the third action due to the relationship of the two individual plaintiffs. Zarate and Camacho are spouses in a community property state pursuing community property claims. That is sufficient to warrant treating them as the same plaintiff. They are so closely aligned in interest that each is virtual representative of the other. FDIC v. Alshuler (In re Imperial Corp. of Am.), 92 F.3d 1503, 1506 (9th Cir.1996); Nordhorn v. Ladish Co., 9 F.3d 1402, 1405 (9th Cir.1993); Lake at Las Vegas Investors Group, Inc. v. Pac. Malibu Dev. Corp., 933 F.2d 724, 727 (9th Cir.1991); 8 James Wm. Moore et al., Moore’s Federal Practice § 41.33[7][k] (3d ed. 2012) (“Moore’s”).
II
The key question under Rule 41(a)(1)(B) is the meaning of the term “same claim.” If the second action asserted a different “claim,” then the “two dismissal rule” would not apply.
A
There is little discussion in the cases of what constitutes “the same claim” for purposes of the “two dismissal rule.” 9 Chas. A. Wright & Arthur R. Miller, Federal Practice & Procedure § 2368 (3d ed. 2008); Moore’s, §§ 41.33[7][e] & [f].
One must be precise about the meaning of “same claim” in Rule 41(a)(1)(B) because the word “claim” in the Civil Rules is subject to the formal fallacy of ambiguity where one word has different meanings. Since “claim” has multiple meanings in the Civil Rules, the outcome depends upon which meaning applies here. Moore’s, § 131.10[3][b]; cf. United States v. Memphis Cotton Oil Co., 288 U.S. 62, 67-68, 53 S.Ct. 278, 77 L.Ed. 619 (1933) (“ ‘cause of action’ may mean one thing for one purpose and something different for another.”).
The pleading requirements in Rule 8 use the term “claim for relief’ in the sense that can mean a theory for relief based on a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a). A party may state “as many separate claims” as it has, regardless of whether they are consistent. Fed.R.Civ.P. 8(d)(3).
If “same claim” means same grounds or theory of the case or remedies or forms of relief, then the “two dismissal rule” would *842not necessarily be fatal to the instant adversary proceeding because Camacho added an additional theory for recovery in her complaint even though she concedes that the underlying facts are the same for all of the counts in her complaint.
If, however, “same claim” means “claim” in the broader sense of the Restatement (Second) of Judgments — all of. plaintiffs rights to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose — then the “two dismissal rule” is fatal. Restatement (Seoond) of Judgments § 24 (“Restatement”).3
The Restatement definition of “claim” includes other grounds or theories of the case not presented in the first action, as well as other forms of relief. Restatement § 25.4 The structure and context of Rule 41(a)(1) answers the.question in favor of the broader Restatement version associated with claim preclusion.
The structure of Rule 41(a)(1) links the term “same claim” with “adjudication on the merits.” This connotes the concept of the “claim” for purposes of the rules of res judicata. For those purposes, “claim” means “all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.”
The context confirms that the Restatement meaning of “claim” controls. What is being dismissed under Rule 41(a) is an entire lawsuit that, if it had gone to judgment in the ordinary course, would have provided the basis for claim preclusion under the Restatement analysis.
B
The question then becomes: what consequence follows from the proposition that the second dismissal, in the words of Rule 41(a)(1)(B), “operates as an adjudication on the merits”?
The Supreme Court has answered that question: “adjudication upon the merits” in Rule 41 is the opposite of dismissal “without prejudice.” Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 505, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001) (“Semtek ”).
Dismissal “without prejudice,” in turn, means dismissal without barring the *843plaintiff from returning to the federal court with the same claim. Id.
Conversely, a dismissal that is an “adjudication upon the merits,” is a dismissal that does bar the plaintiff from returning to the federal court with the same claim.
An “adjudication on the merits” is a necessary condition, but is not always a sufficient condition, for claim-preclusive effect in other courts. Id. at 505-06, 121 S.Ct. 1021.
Thus, Semtek teaches that the unilateral second dismissal of the Zarate/Ca-macho claim operated as Rule 41(a)(1)(B) "adjudication on the merits" that barred refiling of the "same claim," determined in accordance with Restatement § 24, in a federal court. Thus, Camacho's adversary proceeding is barred.
C
One final nit. As Semtek was decided under the version of Civil Rule 41 that applied until the restyling of the Civil Rules in 2007, it is appropriate to confirm that the restyling did not introduce an inadvertent substantive change in Rule 41(a)(1).
Although the language of Rule 41(a)(1) was revised in 2007, both the previous version and the current version of the rule link the term “same claim” with “adjudication on the merits.”5
Hence, the 2007 restyling did not materially alter Rule 41(a)(1). The issue of the meaning of “same claim” in Rule 41(a)(1)(B) has been inherent in the rule since its inception. The linked terms “same claim” and “adjudication on the merits” were in the former rule, as well as, in the restyled rule.
Hence, Semtek continues to control the construction of Rule 41 in the post-2007 restyled rules.
Conclusion
The adversary proceeding filed by Camacho following the unilateral second dismissal of an adversary proceeding by her spouse, Zarate, is barred by virtue of the Rule 41(a)(1)(B) “two dismissal rule.” It presents the same claim, determined under Restatement (Second) of Judgments § 24, asserted by plaintiffs who are virtual representatives of each other as spouses in a community property state asserting a community property claim. The federal forum wrestling match is over. A rematch, if any would be permitted, would have to occur in a state court of competent jurisdiction.
This adversary proceeding is DISMISSED.
. Rule 41(a)(1)(A) ("Voluntary Dismissal — By the Plaintiff”) provides:
(A) Without a Court Order. Subject to Rules 23(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 parly serves either an answer or a motion for summary judgment; or
(ii) a stipulation of dismissal signed by all parties who have appeared.
Fed.R.Civ.P. 41(a)(1)(A), incorporated by Fed. R. Bankr.P. 7041.
. The formal statement of the "two dismissal rule” is in the second sentence of Rule 41(a)(1)(B):
(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.
Fed.R.Civ.P. 41(a)(1)(B), incorporated by Fed. R. Bankr.P. 7041 (emphasis supplied).
. Under Restatement § 24:
§ 24. Dimensions of "Claim” for Purposes of Merger or Bar — General Rule Concerning "Splitting”
(1) When a valid and final judgment rendered in an action extinguishes the plaintiff's claim pursuant to the rules of merger or bar (see §§ 18, 19), the claim extinguished includes all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.
(2) What factual grouping constitutes a "transaction”, and what groupings constitute a "series”, are to be determined pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties’ expectations or business understanding or usage.
Restatement (Second) of Judgments § 24.
. Under Restatement § 25:
§ 25. Exemplification of General Rule Concerning Splitting
The rule of § 24 applies to extinguish a claim by the plaintiff against the defendant even though the plaintiff is prepared in the second action
(1) To present evidence or grounds or theories of the case not presented in the first action; or
(2) To seek remedies or forms of relief not demanded in the first action.
Restatement (Second) of Judgments § 25 ("Exemplification of General Rule Concerning Splitting”).
. Before the 2007 restyling amendments, the relevant part of Rule 41(a)(1) provided:
Unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim.
Fed.R.Civ.P. 41(a)(1) (second sentence), repealed 2007.
After 2007, the rule provides:
(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.
Fed.R.Civ.P. 41(a)(1)(B), incorporated by Fed. R. Bankr.P. 7041.
The Advisory Committee note to the 2007 amendment explains, “the changes are intended to be stylistic only.” Fed.R.Civ.P. 41(a)(1), advisory committee note 2007. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495763/ | MEMORANDUM OPINION
BENJAMIN COHEN, Bankruptcy Judge.
The matter before the Court is the Motion to Compel Arbitration and Stay Adversary Proceeding (A.P. Doc. No. 27) filed on April 3, 2012 by the defendant, Roy Thomas Latimer, Jr. After notice, a hearing was held on May 23, 2012. Appearing were: Brenton K Morris and Frederick Mott Garfield, attorneys for the defendant; and Bradley Richard Hightower, the attorney for the plaintiff, Second Avenue Holdings, LLC. The matter was submitted on the record in this case and the arguments and briefs of counsel.
I. FINDINGS OF FACTS
1. The debtor, Mr. Latimer, is the managing member and owns membership interests in a limited liability company known as Goodall-Brown Management, *849LLC. (“GBM”). GBM is the general partner of Goodall-Brown Associates, LP (“GBA”).
2. On December 31, 2001, GBA obtained a loan in the amount of $2,975,000 from a lender named “The Bank” to use for construction to convert a commercial building know as the Goodall Brown Building into loft apartments and retail space.
3. Three documents were executed with respect to the loan: (1) a promissory-note; (2) a “Future Advance Mortgage, Assignment of Rents and Leases and Security Agreement,” which provides security for repayment of the amounts loaned; and (3) a “Construction Loan Agreement,” which dictates how and when the funds would be distributed to GBA and defines what events constitute defaults under the note. A.P. Doc. No. 1, Exhibits A, B, & C.
4. Mr. Latimer executed the note, and the construction loan agreement, and the security agreement on behalf of GBA in his representative capacity as manager of GBM, GBA’s general partner. Mr. Latimer, along with several other individuals, also personally guaranteed repayment of the loan. Those other individuals were eventually released from their guarantees.
5. The note provides for interest only payments until October 31, 2003 (the “Construction Maturity Date”), and after that date, for monthly principal and interest payments until October 31, 2004 (the “Term Maturity Date”), on which date GBA had the option to either pay the balance due in full or extend the term of the loan until October 31, 2006 (the “Extended Term Maturity Date”). Through a series of amendments to the note, the “Construction Maturity Date” was extended to June 30, 2004, and the “Extended Term Maturity Date” was ultimately extended to August 5, 2013. The last and eighth amendment to the note was executed on August 5, 2010.
6. To secure payment of amounts due under the note, GBA, in the “Future Advance Mortgage, Assignment of Rents and Leases and Security Agreement,” in addition to conveying the property to the lender, also assigned to the lender all leases of the property, or any part thereof, that it had entered into or might otherwise enter into in the future, as well as all rents which might accrue or be produced by virtue of any such rental of the property. The document specifically forbad GBA from collecting more than one month’s rent in advance from any tenant and from waiving, releasing, reducing, discounting, discharging or compromising the payment of any of the rents that might accrue or had accrued for any portion of the property.
7. On October 1, 2005, GBA leased the entire property to Sloss Real Estate Group, Inc. (“SREG”). The lease was to run until September 30, 2037. The rent for the first year of the lease was an amount equal to the annual debt service on the property. The annual rent for the two years after that was an amount equal to the lesser of the annual debt service or $25,000 per month. The annual rent for the remaining term of the lease was to be an amount equal to 150% of the annual debt service.
8. The lease provided the lessee with the option to purchase the property after January 31, 2008. The lessee was required to pay the lessor $4,700,000 for the property if it should elect to exercise the option before August 30, 2008. After that date, the option price would be the greater of $4,700,000 or the fair market value of the property as determined by appraisal.
9. The lease requires any and all disputes between the lessor and the lessee concerning the lease to be resolved ■through binding arbitration administered *850by the American Arbitration Association. The dispute resolution provision reads:
13.1.2. Dispute Resolution. The parties recognize that disputes may arise in the future concerning this Lease (a “Dispute”). Therefore, the parties shall resolve any and all such Disputes of any nature whatsoever in the following manner:
13.1.2.1 Negotiation. In the event of a Dispute, the parties shall attempt to settle such Dispute through informal negotiations. To this effect, they shall consult and negotiate with each other, in good faith for a period of thirty (30) days and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties.
13.1.2.2 Arbitration. Any Dispute, which remains unresolved at the end of such thirty (30) day period, shall be submitted to binding arbitration in accordance with Chapter 1, Title 9 of the United States Code (Federal Arbitration Act). Arbitration shall be administered by the American Arbitration Association (“AAA”) in accordance with its Commercial-Arbitration Rules as supplemented by its Supplementary Procedures for Complex Cases.
A.P. Doc. No. 28, Exhibit A.
10. The lease defines the term “parties” to mean “Landlord and Tenant.” “ ‘Parties’ shall mean Landlord and Tenant.” A.P. Doc. No. 28, Exhibit A. It likewise defines the term “party” to mean either the “Landlord or Tenant.” Id.
11. On December 6, 2005, with GBA’s consent, SREG purported to assign its interest in the lease to Sloss Goodall-Brown, LLC (“SGB”). A.P. Doc. No. 28, Exhibit B. The document in which the assignment was effected, which was executed by Mr. Latimer (on behalf of GBM for GBA), SREG and SGB, contains the representation that SGB was, at that point in time, a limited liability company wholly owned by SREG. SREG promised in the document to continue its complete ownership of SGB for the remainder of the lease term, absent GBA’s permission to do otherwise. Moreover, SGB promised in that document not to assign its interest in the lease without GBA’s written consent.
12. Problematic to the efficacy of the purported assignment is the fact that SGB did not exist as a legal entity. It was not legally formed until December 8, 2009, when its articles of formation were filed in the office of the probate judge of Jefferson County, Alabama. A.P. Doc. No. 28, Exhibit C. SGB’s articles of formation list SREG as its sole initial member.
13. On August 30, 2006, SREG provided a letter to GBA purporting to terminate the lease effective November 1, 2006.
14. On July 20, 2010, GBA delivered a letter to SREG and SGB purporting to terminate the lease for nonpayment of rent.
15. On October 7, 2010, Superior Bank, which had been assigned the note, GBA, and Mr. Latimer, the lone remaining guarantor, entered into the final amendment to the note and other agreements relating thereto. The document effecting those amendments is entitled “Eighth Amendment to Loan Documents and Forbearance Agreement.” A.P. Doc. No. 28, Exhibit 2A. Mr. Latimer executed that document on behalf of GBA in his representative capacity as manager of GBM, GBA’s general partner, and in his personal capacity as guarantor.
16. Among other things, the amendment extended the maturity date of the note until August 5, 2013. In addition, the parties thereto recognized the default occasioned by SREG’s nonpayment of rent which resulted in GBA’s termination of its lease:
*851As referenced in the Seventh Amendment to Loan Documents dated October 31, 2006, Borrower executed a master lease of the Project on October 1, 2005 (the “Master Lease”) to Sloss Real Estate Group, Inc. (“Sloss”). Sloss has ceased paying rent and has requested an adjustment to the terms of the Master Lease. Borrower and Sloss have conducted negotiations on a modification of the Master Lease to resolve the default by Sloss, but no agreement has been reached by the parties thereto, and the Master Lease remains in default (the “Sloss Default”). The Sloss Default is an Event of Default under the Loan Agreement.
“Eighth Amendment to Loan Documents and Forbearance Agreement” A.P. Doc. No. 28, Exhibit A2.
Superior Bank, however, agreed in the amendment to forbear from exercising its rights to accelerate the note and foreclose its mortgage based on the default resulting from SREG’s nonpayment of rent until September 1, 2011, provided GBA continued to make its payments when due, no other events constituting defaults occurred, and the proceeds of any settlement between SREG and GBA were turned over to it.
17. On August 31, 2010, GBA filed suit in the state circuit court against SREG and SGB seeking $452,698.12 in rents due under the lease and $11,207 in rents purportedly converted by SREG/SGB from subtenants who were supposed to have made rent payments directly to GBA following their default under the lease.
18. On January 17, 2011, Mr. Latimer filed the present bankruptcy case under Chapter 11.
19. On January 26, 2011, GBA amended its state court complaint. In the amendment, it listed as additional defendants Sloss Real Estate Group, Inc., Sloss Real Estate Company, Inc., Leigh Ferguson, Catherine S. Crenshaw, Jack Peterson, A. Page Sloss, Jr., Ronald J. Cappello, and Vicki H. Bolton. It added as additional grounds for liability allegations that the defendants, in order to defraud GBA, falsely represented that SGB had been legally formed when the lease assignment took place; that SGB is a sham entity formed solely by the defendants to perpetrate a fraudulent scheme to avoid paying the rent owed under the lease; that because of their alleged complicity in that scheme, the corporate veil should be pierced and liability imposed on the individual defendants; and that all said defendants were engaged in a conspiracy to accomplish that scheme.
20. According to Second Avenue’s complaint in this case, on April 18, 2011, Mr. Latimer, on behalf of GBA, sent a letter to one of its lessees, Bottled Poetry, LLC, offering to accept prepayment of a discounted amount of rent for the remainder of that entity’s term. By accepting the offer, Bottled Poetry had to pay only a lump sum of $30,792.68, rather than the $36,226.68 in monthly payments that it would otherwise had to pay over the course of the remaining eight months of its lease. A.P. Doc. No. 1, Exhibit H.
21. On June 24, 2011, the state court issued an order: (1) referring GBA’s claims against the corporate entities and limited liability companies to arbitration pursuant to the arbitration clause in the lease; and (2) denying, until after the completion of discovery, the individual defendants’ request to stay litigation of GBA’s claims against them until after completion of the arbitration proceeding. A.P. Doc. No. 28, Exhibit E.
22. On August 12, 2011, Mr. Latimer converted his case to Chapter 7.
*85223. On September 22, 2011, Second Avenue Holdings, LLC was legally formed. A.P. Doc. No. 28, Exhibit H. Its articles of organization list Catherine S. Crenshaw as the sole initial member.
24. On October 5, 2011, Superior Bank notified GBA that GBA was in default and that it was, consequently, exercising its rights under the mortgage to seize rents payable from GBA’s tenants. According to Second Avenue’s complaint, Superior simultaneously made demands on GBA’s tenants, Red Rock Realty Group, Inc. and The Wine Loft of Birmingham, to forward their rent payments to it rather than GBA.
25. On October 24, 2011, Second Avenue purchased the note owed by GBA from Superior Bank for $2,400,000. A.P. Doc. No. 28, Exhibit A3.
26. On December 2, 2011, Second Avenue sent a notice to GBA informing GBA that it was foreclosing its mortgage, that the amount then due under the note secured by the mortgage was $3,002,379.54, and that the property would be sold to satisfy that debt at public outcry to the highest bidder on January 3, 2012. Second Avenue purchased the property at the foreclosure sale for a credit bid of $2,600,000.
27. On December 12, 2011, Second Avenue filed the present adversary proceeding alleging that Mr. Latimer personally orchestrated GBA’s receipt of the discounted, prepayment of rent from Bottled Poetry in violation of the security agreement. Second Avenue concluded that the debtor’s actions caused GBA not to remit that rent to Superior Bank, and therefore the debtor owes a debt for that rent to Second Avenue which is not, by virtue of 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6) dischargeable in bankruptcy. It contends furthermore that Mr. Latimer’s conduct should preclude him from obtaining a discharge altogether by virtue of 11 U.S.C. § 727(a)(2), (a)(3).
28. On January 26, 2012, GBA amended its state court complaint a second time to add a count alleging that the corporate and individual defendants described therein, by defaulting on the lease, and then forming Second Avenue and orchestrating that entity’s purchase of the note from Superior Bank, and subsequent foreclosure, tortuously interfered with its contract with Superior Bank.
29. On July 13, 2012, the state court referred all claims made by GBA against the individual defendants named in its complaint to arbitration. The state court based that referral on two findings. Those were: (1) that the corporate defendants were the alter egos of the individual defendants, and, therefore, are the real assignees of the lease, rather than SGB, and, consequently, are subject to the arbitration provision in the lease; and (2) that because SGB was legally nonexistent when the lease assignment took place, the individual defendants, operating as a de facto partnership became assignees of the lease and are, consequently, subject to the arbitration provision.
In addition, the state court found that the individual defendants were parties to the master lease. It wrote:
a. The Corporate Defendants are the mere Instrumentality or alter ego of the Individual Defendants or alternatively that because Sloss Goodall-Brown had not been incorporated as of the date of the execution of the Assignment in December of 2005 that the Individual Defendants were acting as a partnership or proprietorship from the date of the assignment and at all times at issue.
A.P. Doc. No. 46.
II. CONCLUSIONS OF LAW
Mr. Latimer seeks an order:
*853compelling arbitration of all disputes between these parties and all issues presented in this Adversary Proceeding, No. 11-00432.65 (the “AP”), except the issue of whether Latimer is entitled to a discharge and whether any debt owed to the plaintiff, Second Avenue Holdings, LLC (“Second Avenue”), is due to be excepted from discharge, and staying all court proceedings related to this AP pending the completion of arbitration.
Motion to Compel Arbitration and Stay Adversary Proceeding at 1, A.P. Doc. No. 27.
A. Compelling Arbitration
There is no agreement to arbitrate disputes between Mr. Latimer and Second Avenue with respect to either the loan, or the mortgage, or the lease. In fact, there is no express agreement to arbitrate disputes with respect to those contracts between GBA and Second Avenue.
Second Avenue is subject to the arbitration provision in the lease as a result of the automatic assignment of leases provision in the security agreement. Mr. Latimer, who is not personally a party to the lease, is not.
“[Arbitration is a matter of contract, and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” Custom Performance, Inc. v. Dawson, 57 So.3d 90, 97 (Ala.2010) (citations and internal quotation marks omitted). “Generally, a nonsig-natory to an arbitration agreement cannot be forced to arbitrate [his] claims.” Id. (citations and internal quotation marks omitted). Since there is no explicit agreement to arbitrate disputes between Mr. Latimer and Second Avenue, either with respect to the loan or the lease, the former’s request to have the factual issues in this case resolved in the pending arbitration proceeding must be premised on other grounds.
Applicable state law provides the rule of decision for the question of whether a non-party to a contract containing an arbitration clause, namely Mr. Latimer in the present case, can enforce that clause against a party to the contract, namely Second Avenue. Lawson v. Life of the South Ins. Co., 648 F.3d 1166, 1171 (11th Cir.2011).
Under Alabama law, a nonsigna-tory to a contract containing an arbitration provision may be compelled to arbitrate his claims against a signatory to the contract if the nonsignatory is a third-party beneficiary of the contract; or under an equitable estoppel theory if the nonsigna-tory is asserting legal claims to enforce rights or obtain benefits that depend on the existence of the contract that contains the arbitration agreement. Custom Performance, Inc. v. Dawson, 57 So.3d at 97-98. Also, under the doctrine of intertwining claims, “a nonsignatory to an arbitration agreement may compel a signatory to arbitrate claims ‘where arbitrable and non-arbitrable claims are so closely related that the party to a controversy subject to arbitration is equitably estopped to deny the arbitrability of the related claim.’ ” Id. at 99 (quoting Conseco Fin. Corp. v. Sharman, 828 So.2d 890, 893 (Ala.2001) (citing Cook’s Pest Control, Inc. v. Boykin, 807 So.2d 524 (Ala.2001))).
None of those theories may be invoked by either a nonsignatory to compel arbitration by a signatory, or a signatory to compel arbitration by a nonsignatory, if the language of the contract containing the arbitration clause explicitly limits the clauses applicability to the parties to the contract. Fountain v. Ingram, 926 So.2d 333, 338 (Ala.2005); Jim Burke Automotive, Inc. v. McGrue, 826 So.2d 122, 131 *854(Ala.2002); Ex parte Stamey, 776 So.2d 85, 89-90 (Ala.2000). The lease specifically limits the applicability of the arbitration clause contained therein to disputes between the “landlord” and “tenant.” Mr. Latimer is neither. Moreover, the cause of action asserted by Second Avenue in this case is grounded on rights and responsibilities created by and embodied in the security agreement, which contains no arbitration requirement, rather than the lease, which contains the arbitration clause relied upon by Mr. Latimer. Furthermore, the arbitration clause only requires arbitration of “disputes ... concerning this Lease.” The dispute before the Court concerns the security agreement, not the lease. Consequently, since the arbitration clause is limited in scope to the parties to the lease, which he is not, and to disputes concerning the lease, which the present matter does not concern, and the arbitration clause which he seeks to enforce is not contained in the document which forms the basis of the dispute in this lawsuit, Mr. Latimer possesses no basis for compelling Second Avenue to arbitrate the issues in this case.
Therefore, the Court finds that the part of the debtor’s motion seeking to compel arbitration is due to be denied.
B. Stay of the Dischargeability Proceeding
Mr. Latimer also asks the Court to stay litigation of this discharge-ability proceeding until the arbitration has concluded. “When confronted with litigants advancing both arbitrable and non-arbitrable claims ... courts have discretion to stay nonarbitrable claims.” Klay v. All Defendants, 389 F.3d 1191, 1204 (11th Cir.2004). “In this instance, courts generally refuse to stay proceedings of nonarbi-trable claims when it is feasible to proceed with the litigation.” Id. “Crucial to this determination is whether arbitrable claims predominate or whether the outcome of the nonarbitrable claims will depend upon the arbitrator’s decision.” Id.
Unlike the situation in Klay, this Court does not have before it arbitrable issues and nonarbitrable issues, having sent the former to arbitration and faced with the decision of whether to stay resolution of the latter until after arbitration is finished. Like the situation in Klay, however, it is faced with a situation where the issues before it, i.e., the dischargeability vel non of the debt allegedly owed by Mr. Latimer to Second Avenue, and Second Avenue’s objection to his discharge, are not arbitra-ble and the resolution of related, germane issues is pending in a parallel arbitration proceeding.
Klay relies as authority for its conclusions the following statement made by the Supreme Court in a footnote in Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 21 n. 23, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). It reads:
In some cases, of course, it may be advisable to stay litigation among the non-arbitrating parties pending the outcome of the arbitration. That decision is one left to the district court (or to the state trial court under applicable state procedural rules) as a matter of its discretion to control its docket. See generally Landis v. North American Co., 299 U.S. 248, 254-255, 57 S.Ct. 163, 165-66, 81 L.Ed. 153 (1936).
460 U.S. 1, 21 n. 23, 103 S.Ct. 927.
As authority for that statement of law, the Supreme Court, as indicated, relied on its previous decision in Landis v. North American Co., 299 U.S. 248, 57 S.Ct. 163, 81 L.Ed. 153 (1936), in which it enunciated, and initially set the parameters of, the federal trial court’s power to stay or otherwise postpone the trial of proceedings before it. Landis included:
*855Viewing the problem as one of power, and of power only, we find ourselves unable to assent to the suggestion that before proceedings in one suit may be stayed to abide the proceedings in another, the parties to the two causes must be shown to be the same and the issues identical. Indeed, counsel for the respondents, if we understand his argument aright, is at one with us in that regard, whatever may have been his attitude at the hearing in the courts below. Apart, however, from any concession, the power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance. Kansas City Southern R. Co. v. United States, 282 U.S. 760, 763, 51 S.Ct. 304, 305, 306, 75 L.Ed. 684 [ (1931) ]; Enelow v. New York Life Ins. Co., 293 U.S. 379, 382, 55 S.Ct. 310, 311, 79 L.Ed. 440 [ (1935) ]. True, the suppliant for a stay must make out a clear case of hardship or inequity in being required to go forward, if there is even a fair possibility that the stay for which he prays will work damage to some one else. Only in rare circumstances will a litigant in one cause be compelled to stand aside while a litigant in another settles the rule of law that will define the rights of both. Considerations such as these, however, are counsels of moderation rather than limitations upon power. There are indeed opinions, though none of them in this court, that give color to a stricter rule. Impressed with the likelihood or danger of abuse, some courts have stated broadly that, irrespective of particular conditions, there is no power by a stay to compel an unwilling litigant to wait upon the outcome of a controversy to which he is a stranger. Dolbeer v. Stout, 139 N.Y. 486, 489, 34 N.E. 1102 [ (1893) ]; Rosenberg v. Slotchin, 181 App.Div. 137, 138, 168 N.Y.S. 101 [ (1917) ]; cf. Wadleigh v. Veazie, [28] Fed.Cas. [1319,] No. 17,-031 [ (C.C.D.Me.1838) ]; Checker Cab Mfg. Co. v. Checker Taxi Co., (D.C.[1928]) 26 F.2d 752; Jefferson Standard Life Ins. Co. v. Keeton, (C.C.A.[1923]) 292 F. 53. Such a formula, as we view it, is too mechanical and narrow. Kansas City Southern R. Co. v. United States, supra; Friedman v. Harrington, (C.C.[D.Mass.1893]) 56 F. 860; Amos v. Chadwick, L.R. 9 Ch.Div. 459; L.R. 4 Ch.Div. 869, 872. All the cases advancing it could have been adequately disposed of on the ground that discretion was abused by a stay of indefinite duration in the absence of a pressing need. If they stand for more than this, we are unwilling to accept them. Occasions may arise when it would be ‘a scandal to the administration of justice’ in the phrase of Jessel, M.R. (Amos v. Chadwick, L.R. 9 Ch.Div. 459, 462), if power to coordinate the business of the court efficiently and sensibly were lacking altogether.
299 U.S. at 254-255, 57 S.Ct. 163.
Landis involved three lawsuits proceeding simultaneously in separate district courts. Two were to enjoin the enforcement of a particular statute. One sought enforcement of the same statute. The plaintiffs in two of the cases were defendants in the third and the plaintiff in the third case was the defendant in the other two. Justice Cardozo couched the issue in the case as, “The controversy hinges upon the power of a court to stay proceedings in one suit until the decision of another, and upon the propriety of using such a power in a given situation.” 299 U.S. at 249, 57 S.Ct. 163.
*856The Supreme Court reiterated the precepts enunciated in Landis in American Life Ins. Co. v. Stewart, 300 U.S. 203, 57 S.Ct. 377, 81 L.Ed. 605 (1937), albeit in dicta. In that case, after an insured’s death, an action was brought in equity to cancel an insurance policy for misrepresentations allegedly made by the application. The beneficiary subsequently filed a separate suit at law to recover the proceeds of the policy. Both lawsuits were filed in federal district court. As a “for what its worth,” the Court posited that the trial court, had it been asked to do so, could have considered whether justice would be done by suspending the first suit until the second had been completed. American Life included:
A court has control over its own docket. Landis v. North American Co., December 7, 1936, 299 U.S. 248, 57 S.Ct. 163, 81 L.Ed. 153. In the exercise of a sound discretion it may hold one lawsuit in abeyance to abide the outcome of another, especially where the parties and the issues are the same. Id. If request had been made by the respondents to suspend the suits in equity till the other causes were disposed of, the District Court could have considered whether justice would not be done by pursuing such a course, the remedy in equity being exceptional and the outcome of necessity. Cf. Harnischfeger Sales Corp. v. National Life Ins. Co. (C.C.A.[1934]) 72 F.(2d) 921, 922, 923. There would be many circumstances to be weighed, as, for instance, the condition of the court calendar, whether the insurer had been precipitate or its adversaries dilatory, as well as other factors. In the end, benefit and hardship would have to be set off, the one against the other, and a balance ascertained. Landis v. North American Co., supra.
300 U.S. at 216, 57 S.Ct. 377.
In Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), the Court recognized the qualified power of a federal trial court to stay proceedings before it when a parallel action involving the same or substantially the same issues and parties is pending in state court. Colorado River included:
Although this case falls within none of the abstention categories, there are principles unrelated to considerations of proper constitutional adjudication and regard for federal-state relations which govern in situations involving the contemporaneous exercise of concurrent jurisdictions, either by federal courts or by state and federal courts. These principles rest on considerations of “(w)ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.” Kerotest Mfg. Co. v. C-O-Two Fire Equipment Co., 342 U.S. 180, 183, 72 S.Ct. 219, 221, 96 L.Ed. 200, 203 (1952). See Columbia Plaza Corp. v. Security National Bank, 173 U.S.App.D.C. 403, 525 F.2d 620 (1975). Generally, as between state and federal courts, the rule is that “the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction.... ” McClellan v. Carland, supra, 217 U.S. [268] at 282, 30 S.Ct. [501] at 505, 54 L.Ed. [762] at 767 [ (1910) ]. See Donovan v. City of Dallas, 377 U.S. 408, 84 S.Ct. 1579, 12 L.Ed.2d 409 (1964). As between federal district courts, however, though no precise rule has evolved, the general principle is to avoid duplicative litigation. See Kerotest Mfg. Co. v. C-O-Two Fire Equipment Co., supra; Steelman v. All Continent Corp., 301 U.S. 278, 57 S.Ct. 705, 81 L.Ed. 1085 (1937); Landis v. North American Co., 299 U.S. 248, 254, 57 S.Ct. 163, 165, 81 L.Ed. 153, 158 *857(1936). This difference in general approach between state-federal concurrent jurisdiction and wholly federal concurrent jurisdiction stems from the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them. England v. Louisiana State Bd. of Medical Examiners, 376 U.S. 411, 415, 84 S.Ct. 1 [461], 464, 11 L.Ed.2d 440, 444 (1964); McClellan v. Carland, supra, 217 U.S., at 281, 30 S.Ct. at 504, 54 L.Ed. at 766; Cohens v. Virginia, 6 Wheat. 264, 404, 5 L.Ed. 257 (1821) (dictum). Given this obligation, and the absence of weightier considerations of constitutional adjudication and state-federal relations, the circumstances permitting the dismissal of a federal suit due to the presence of a concurrent state proceeding for reasons of wise judicial administration are considerably more limited than the circumstances appropriate for abstention. The former circumstances, though exceptional, do nevertheless exist.
It has been held, for example, that the court first assuming jurisdiction over property may exercise that jurisdiction to the exclusion of other courts. Donovan v. City of Dallas, supra, 377 U.S. at 412, 84 S.Ct. at 413 [1582], 12 L.Ed.2d at 1582 [413]; Princess Lida v. Thompson, 305 U.S. 456, 466, 59 S.Ct. 275, 280, 83 L.Ed. 285, 291 (1939); United States v. Bank of New York & Trust Co., 296 U.S. 463, 477, 56 S.Ct. 343, 347, 80 L.Ed. 331, 338 (1936). But cf. Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296, 90 L.Ed. 256 (1946); United States v. Klein, 303 U.S. 276, 58 S.Ct. 536, 82 L.Ed. 840 (1938). This has been true even where the Government was a claimant in existing state proceedings and then sought to invoke district-court jurisdiction under the jurisdictional provision antecedent to 28 U.S.C. § 1345. United States v. Bank of New York & Trust Co., supra, 296 U.S. at 479, 56 S.Ct. at 348, 80 L.Ed. at 339. But cf. Letter Minerals, Inc. v. United States, 352 U.S. 220, 227-228, 77 S.Ct. 287, 291-292, 1 L.Ed.2d 267, 274 (1957). In assessing the appropriateness of dismissal in the event of an exercise of concurrent jurisdiction, a federal court may also consider such factors as the inconvenience of the federal forum, cf. Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 67 S.Ct. 839, 91 L.Ed. 1055 (1947); the desirability of avoiding piecemeal litigation, cf. Brillhart v. Excess Ins. Co., 316 U.S. 491, 495, 62 S.Ct. 1173, 1175, 86 L.Ed. 1620, 1625 (1942); and the order in which jurisdiction was obtained by the concurrent forums, Pacific Live Stock Co. v. Oregon Water Bd., 241 U.S. 440, 447, 36 S.Ct. 637, 640, 60 L.Ed. 1084, 1096 (1916). No one factor is necessarily determinative; a carefully considered judgment taking into account both the obligation to exercise jurisdiction and the combination of factors counseling against that exercise is required. See Landis v. North American Co., supra, 299 U.S. at 254-255, 57 S.Ct. at 165-166, 81 L.Ed. at 158. Only the clearest of justifications will warrant dismissal.
424 U.S. at 817-819, 96 S.Ct. 1236.
“[The] Colorado River analysis is applicable as a threshold matter when federal and state proceedings involve substantially the same parties and substantially the same issues.” Ambrosia Coal and Const. Co. v. Pages Morales, 368 F.3d 1320, 1330 (11th Cir.2004) (parenthetical added). And while the Colorado River opinion was couched in terms of dismissal, the Eleventh Circuit Court of Appeals has clarified that a stay of the federal action, rather than dismissal of the same, is the appropriate course in the event the Colorado River factors dictate deference to the state court suit. Its opinion in Moorer v. *858Demopolis Waterworks and Sewer Bd., 374 F.3d 994 (11th Cir.2004) included:
We now join our sister circuits in holding that “a stay, not a dismissal, is the proper procedural mechanism for a district court to employ when deferring to a parallel state-court proceeding under the Colorado River doctrine.” LaDuke, 879 F.2d at 1561-2; Mahaffey, et al. v. Bechtel Assoc. Prof'l Corp., D.C., et al., 699 F.2d 545, 546-47 (D.C.Cir.1983) (holding that a stay “effectively con-servéis] court resources while avoiding premature rejection of the litigant’s access, as specified by statute, to a federal forum”). A stay is preferred because it lessens the concerns associated with statute of limitations, brings “the federal action back before the same federal judge that had previously considered the case ... [and] [i]t protects the rights of all the parties without imposing any additional costs or burdens on the district court.” LaDuke, 879 F.2d at 1562. The district court erred in dismissing this action.
Id. at 998.
Both Colorado River and Ambrosia Coal, in reliance on Colorado River, make it abundantly clear that the six Colorado River factors are only applicable when parallel state and federal proceedings are involved, and not to situations where both proceedings are in federal court. Ambrosia Coal included:
[W]hen multiple federal district courts might contemporaneously litigate concurrent jurisdictions, although “no precise rule has evolved, the general principle is to avoid duplicative litigation.” [quoting Colorado River, 424 U.S. at 817, 96 S.Ct. 1236].
This general principle does not apply, however, when the duplicative litigation arises between state and federal courts. As the Supreme Court recognized, “[generally, as between state and federal courts, the rule is that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction .... ” Id. (marks and citations omitted). Federal courts have a “virtually unflagging obligation ... to exercise the jurisdiction given them.” Id. A policy permitting federal courts to yield jurisdiction to state courts cavalierly would betray this obligation. Thus, federal courts can abstain to avoid duplica-tive litigation with state courts only in “exceptional” circumstances [i.e., under the circumstances outlined in Colorado River]. Id. at 818, 96 S.Ct. at 1246.
Ambrosia Coal and Const. Co. v. Pages Morales, 368 F.3d at 1328.
This is not a situation such as those addressed by the courts in Colorado River and Ambrosia Coal, where one lawsuit is pending in federal court and another is pending in state court involving the same or substantially the same parties and issues.
The principles enunciated in Colorado River, and repeated in Ambrosia Coal, to-wit: that stay considerations in parallel state and federal proceedings require consideration of the six Cobrado River factors while stay considerations in parallel federal proceedings require consideration of a Landis based “avoid[anee] [of] dupli-cative litigation” standard, (Colorado River at 1246) was reiterated with clarification for the present circumstances in the previously mentioned Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 21 n. 23, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). That case involved a dispute between a hospital and a contractor who the hospital had hired to construct additions to the hospital. The construction contract had an arbitration provision. A dispute arose between the parties. The hospital *859filed an action in state court against the contractor and the architect on the project seeking a declaratory judgment that there was no right to arbitration, that it was not liable to the contractor, and that if it was liable it would be entitled to indemnity from the architect. The contractor then filed a diversity-of-citizenship action in federal district court seeking an order compelling arbitration under § 4 of the United States Arbitration Act. The district court stayed the action pending resolution of the state-court suit because both actions involved the same parties and the same issue, i.e., arbitrability of the dispute. The Court of Appeals reversed and remanded the case with instructions to enter an order compelling arbitration. The Supreme Court concluded that the Colorado River factors provided the appropriate litmus, and upon its consideration of those factors, affirmed the Court of Appeals. The hospital argued that if the district court ordered arbitration between it and the contractor, it would have to proceed on two fronts: one in arbitration against the contractor and one in state court against the architect who was not party to the arbitration agreement. The Supreme Court rejected that argument based on its conclusion that the only common issue in the two proceedings was arbitrability and requiring the district court to address that issue would not result in piecemeal litigation of that particular issue. With respect to the resulting piecemeal litigation of the underlying issues between the parties, i.e., the hospital’s liability to the contractor in arbitration and the architect’s liability to the hospital via indemnity in state court, the Court’s practical suggestion, at least for future reference, was for the court entertaining the nonarbitrable issues to stay resolution of those issues pending conclusion of arbitration. Cone Memorial Hospital included:
In some cases, of course, it may be advisable to stay litigation among the non-arbitrating parties pending the outcome of the arbitration. That decision is one left to the district court (or to the state trial court under applicable state procedural rules) as a matter of its discretion to control its docket. See generally Landis v. North American Co., 299 U.S. 248, 254-255, 57 S.Ct. 163, 165-66, 81 L.Ed. 153 (1936).
460 U.S. at 21 n. 23, 103 S.Ct. 927.
The Supreme Court said that the decision of the district court to stay or not stay the case before it, which involved only the issue of arbitrability, pending conclusion of a parallel state case addressing the same issue, hinged on consideration of the six Colorado River factors but, as indicated by the language of the quoted footnote, the decision to stay a proceeding involving nonarbitrable issues pending conclusion of a parallel arbitration proceeding hinges on Landis considerations.
As in Landis, American Life, Moses, with respect to the scenario described in footnote 23 of that opinion, and Klay, Lan-dis considerations, and not Colorado River considerations, have dictated the results in other Supreme Court and Eleventh Circuit Court of Appeals decisions which have not involved parallel federal and state proceedings. In Air Line Pilots Ass’n v. Miller, 523 U.S. 866, 118 S.Ct. 1761, 140 L.Ed.2d 1070 (1998) the defendant union was the exclusive bargaining agent for pilots employed by commercial air carriers, including Delta Air Lines. The union and Delta amended their collective-bargaining agreement to include an agency-shop clause which required each pilot who was not a union member to pay the union a monthly service charge for the representation of such employee. Several Delta nonunion pilots, filed suit against the union in federal district court charging that the agency *860shop clause was unlawful. The pilots unsuccessfully moved for a preliminary injunction. The union began collecting the agency fees in the amount of 2.35 percent of each pilot’s earnings. The union ultimately determined that 19 percent of its expenses for that year were not germane to collective bargaining and accordingly reduced the fees charged the nonunion pilots. Under the union’s policies applicable to the agency fees, pilots who objected to the fee calculation could request arbitration. The nonunion pilots filed objections. The union referred those objections to arbitration along with those submitted by union pilots. The nonunion pilots amended their district court complaint to add a count challenging the manner in which the union calculated the agency fee and asked the arbitrator to suspend the arbitration. The arbitrator declined to defer to the federal court litigation and the district court denied a motion to enjoin the arbitration. The nonunion pilots entered a conditional appearance in the arbitration proceedings. The arbitrator ultimately sustained the union’s agency-fee calculation in substantial part. After the arbitrator issued his decision, the district court granted summary judgment for the union in the federal court action, concluding that the nonunion pilots seeking to challenge a union’s agency-fee calculation must exhaust arbitral remedies before proceeding in court. Accordingly, the court held that the nonunion pilots qualified for clear-error review of the arbitrator’s fact-findings and de novo review of all legal issues. Then, having determined that the arbitrator had committed no error of law or fact, the court sustained his decision. The Court of Appeals found no legal basis for requiring objectors to arbitrate agency-fee challenges unless they had agreed to do so and reversed, holding that the arbitrator’s decision had no application to the nonunion pilots’ objections. The Supreme Court framed the question before it as, “whether an objector must exhaust a union-provided arbitration process before bringing an agency-fee challenge in federal court ...” if that objector was not signatory to the arbitration requirement. 523 U.S. at 871, 118 S.Ct. 1761. It answered that question in the negative. In doing so it noted the union’s concern that it would be consequently required to litigate the agency-fee challenges in two forums simultaneously: (1) against nonsignatory objectors in district court; and (2) against signatory objectors in arbitration. The Court countered that that result could be ameliorated by the district court’s exercise of its discretion under Landis to stay the action before it until after conclusion of the arbitration proceeding. Air Line Pilots Ass’n included:
Our recognition of the right of objectors to proceed directly to court does not detract from district courts’ discretion to defer discovery or other proceedings pending the prompt conclusion of arbitration. See, e.g., Landis v. North American Co., 299 U.S. 248, 254-255, 57 S.Ct. 163, 166, 81 L.Ed. 153 (1936) (“[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance.”).
Id. at 879 n. 6, 118 S.Ct. 1761.
In Clinton v. Jones, 520 U.S. 681, 117 S.Ct. 1636, 137 L.Ed.2d 945 (1997), an individual sued the sitting President of the United States in federal district court. The district court denied the President’s motion to dismiss, but granted him temporary immunity until he left office. The Supreme Court held that the Constitution *861does not generally afford the President temporary immunity from suit for civil damages arising out of events that occurred before he took office; the doctrine of separation of powers does not require federal courts to stay all private actions against the President until he leaves office; and the district court abused its discretion in deferring the trial of the lawsuit until after the President left office. In doing so, it recognized a trial court’s, “broad discretion to stay proceedings as an incident to its power to control its own docket,” citing Landis, but concluded that the stay granted in that case was impermissible because it was too, “lengthy and categorical ... [and took] no account whatever of the ... [plaintiffs] interest in bringing the case to trial,” and “delaying trial would increase the danger of prejudice resulting from the loss of evidence, including the inability of witnesses to recall specific facts, or the possible death of a party.” 520 U.S. at 707-708, 117 S.Ct. 1636 (parentheticals added). The Court explained:
Strictly speaking the stay was not the functional equivalent of the constitutional immunity that petitioner claimed, because the District Court ordered discovery to proceed. Moreover, a stay of either the trial or discovery might be justified by considerations that do not require the recognition of any constitutional immunity. The District Court has broad discretion to stay proceedings as an incident to its power to control its own docket. See, e.g., Landis v. North American Co., 299 U.S. 248, 254, 57 S.Ct. 163, 165-166, 81 L.Ed. 153 (1936). As we have explained, “[especially in cases of extraordinary public moment, [a plaintiff] may be required to submit to delay not immoderate in extent and not oppressive in its consequences if the public welfare or convenience will thereby be promoted.” Id. at 256, 57 S.Ct. at 166. Although we have rejected the argument that the potential burdens on the President violate separation-of-powers principles, those burdens are appropriate matters for the District Court to evaluate in its management of the case. The high respect that is owed to the office of the Chief Executive, though not justifying a rule of categorical immunity, is a matter that should inform the conduct of the entire proceeding, including the timing and scope of discovery.
Nevertheless, we are persuaded that it was an abuse of discretion for the District Court to defer the trial until after the President leaves office. Such a lengthy and categorical stay takes no account whatever of the respondent’s interest in bringing the case to trial. The complaint was filed within the statutory limitations period — albeit near the end of that period — and delaying trial would increase the danger of prejudice resulting from the loss of evidence, including the inability of witnesses to recall specific facts, or the possible death of a party.
The decision to postpone the trial was, furthermore, premature. The proponent of a stay bears the burden of establishing its need. Id. at 255, 57 S.Ct. at 166. In this case, at the stage at which the District Court made its ruling, there was no way to assess whether a stay of trial after the completion of discovery would be warranted. Other than the fact that a trial may consume some of the President’s time and attention, there is nothing in the record to enable a judge to assess the potential harm that may ensue from scheduling the trial promptly after discovery is concluded. We think the District Court may have given undue weight to the concern that a trial might generate unrelated civil actions that could conceivably hamper the President in conducting the duties of his *862office. If and when that should occur, the court’s discretion would permit it to manage those actions in such fashion (including deferral of trial) that interference with the President’s duties would not occur. But no such impingement upon the President’s conduct of his office was shown here.
Id. at 706-708, 117 S.Ct. 1636.
In Ortega Trujillo v. Conover & Co. Communications, Inc., 221 F.3d 1262 (11th Cir.2000), a bank brought suit in a Bahamian court against several members of the Ortega family and associated companies alleging that they misappropriated funds from the bank through the use of fraudulent loan transfers. In connection with that case, the bank’s public relations firm issued a press release accusing the Ortegas of perpetrating a massive fraud scheme. The Ortegas then brought suit in a United States federal district court against the bank and its public relations firm for defamation.
The district court sua sponte stayed the case before it pending resolution of the Bahamian lawsuit and “until such time as the Bahamian Courts conclude their review,” because the two cases were closely related, the Bahamian Litigation was filed over a year before the district court suit, a trial date had already been set in the Bahamian litigation (a finding that proved to be mistaken), and the issues in the Bahamian case directly related to those raised in the district court case. The court directed the parties to submit status reports on the progress of the Bahamian litigation every three months.
On appeal, the Eleventh Circuit panel vacated the stay because it found it to be “immoderate.” 221 F.3d at 1264. In doing so, it recognized the power of the district court to stay proceedings before it under appropriate circumstances. Ortega included:
A variety of circumstances may justify a district court stay pending the resolution of a related case in another court. A stay sometimes is authorized simply as a means of controlling the district court’s docket and of managing cases before the district court. See, e.g., Clinton v. Jones, 520 U.S. 681, 117 S.Ct. 1636, 1650, 137 L.Ed.2d 945 (1997) (discussing district court’s “broad discretion to stay proceedings as an incident to its power to control its own docket”). And, in some cases, a stay might be authorized also by principles of abstention. See, e.g., Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 116 S.Ct. 1712, 1722, 135 L.Ed.2d 1 (1996) (noting that abstention principles may require district court to stay case pending resolution of related proceedings).
Id.
The court, however, recognized general limitations on that power:
When a district court exercises its discretion to stay a case pending the resolution of related proceedings in another forum, the district court must limit properly the scope of the stay. A stay must not be “immoderate.” CTI-Container Leasing Corp. v. Uiterwyk Corp., 685 F.2d 1284, 1288 (11th Cir.1982). In considering whether a stay is “immoderate,” we examine both the scope of the stay (including its potential duration) and the reasons cited by the district court for the stay. See Hines v. D’Artois, 531 F.2d 726, 733 (5th Cir.1976). As the Supreme Court has explained, “[a] stay is immoderate and hence unlawful unless so framed in its inception that its force will be spent within reasonable limits, so far at least as they are susceptible of prevision and description.” Landis v. North American Co., 299 U.S. *863248, 57 S.Ct. 163, 167, 81 L.Ed. 153 (1936).
Id.
The court concluded that the stay order entered by the district court was “immoderate” because it was “indefinite in scope,” since it was couched in language that would permit the stay to last until the exhaustion of all appeals in the foreign court, and that the district court’s assessment that the Bahamian case was proceeding expeditiously was mistaken. The court explained:
The scope of the stay ordered by the district court seems indefinite. The stay, by its own terms, remains in effect until the “Bahamian Courts conclude their review.” The stay appears to expire only after a trial of the Bahamian case and the exhaustion of appeals in that case. In addition, contrary to the district court’s assessment of the Bahamian litigation, the record indicates that the Bahamian case is not progressing quickly. We conclude, therefore, that the stay is indefinite in scope. Cf. American Manuf. Mut. Ins. Co. v. Edward D. Stone, Jr. & Assoc., 743 F.2d 1519, 1524 (11th Cir.1984) (finding stay of federal court proceedings pending conclusion of state court proceedings indefinite where state proceedings had been pending for 18 months and no trial date had been set in state court); CTI-Container, 685 F.2d at 1288 (vacating district court stay where duration of stay could “safely be described as an indefinite period”).
Id. at 1264-1265.
The court concluded that the tri-monthly status report requirement imposed by the trial court as a condition of the stay did not make it any less “indefinite” because it was not coupled with a requirement that the trial court actually assess the progress of the Bahamian litigation in conjunction •with the submission of those status reports. The court explained further:
Plaintiffs argue that the stay is not indefinite because the district court ordered the parties to submit status reports on the Bahamian litigation every three months. This requirement, however, does not make the scope of the stay less indefinite. The district court’s requirement of status reports does not guarantee that the district court will reassess the propriety of the stay every three months. The district court could do nothing when status reports are filed, and the stay would continue in effect until the Bahamian litigation concluded. As the Supreme Court explained in Lan-dis, “an order which is to continue by its terms for an immoderate stretch of time is not to be upheld as moderate because conceivably the court that made it may be persuaded at a later time to undo what it has done.” 57 S.Ct. at 167.
Id. at 1264 n. 3.
The court also cited as problematic the fact that the district court failed to explain in detail its legal basis for imposing the stay, thus leaving it to speculate with respect to what that basis might be. “The stay order does not explain in detail the district court’s reasoning in staying further proceedings in this case.” Id. at 1265. The court attempted to deduce the legal basis relied on by the district court based on the practical considerations cited by it for imposing the stay. But it concluded that the possible legal grounds for the district court’s decision that might be supported by those considerations would be insufficient. The opinion included:
We can see from the district court’s order no reason sufficient to justify the indefinite stay that the district court ordered. The stay order does not explain in detail the district court’s reasoning in staying further proceedings in *864this case. The order does mention three considerations that the district court found important: (1) that the Bahamian case and this case involve related issues; (2) that the Bahamian case predates this case by more than one year; and (3) “that a trial date in the Bahamian Litigation has already been set.” From the district court’s mention of these three factors, the parties suggest two possible reasons for the district court’s stay: (1) that the district court, pursuant to its inherent power to control its own docket, stayed this case for the sake of judicial economy; and (2) that the district court stayed this case under the doctrine of international abstention. We cannot justify the stay that the district court ordered on either ground. The case law illustrates that, in a case like this one, the interests of judicial economy alone are insufficient to justify such an indefinite stay. See Landis, 57 S.Ct. at 167 (vacating similar stay in like circumstances). And, we will not attempt to justify the district court’s stay on abstention grounds. The district court never mentions “abstention” in its order. The district court’s order cites no cases related to international abstention. And, the district court’s order mentions only a few of the many factors that a district court must examine in considering an international abstention question. See Turner Entertainment Co. v. Degeto Film, 25 F.3d 1512, 1519-22 (11th Cir.1994) (discussing factors relevant to international abstention). Abstention is the exception instead of the rule, see id. at 1518; and “courts regularly permit parallel proceedings in an American court and a foreign court.” Id. at 1521. Abstention, therefore, is not to be undertaken lightly. So, we-when the district court did not mention abstention at all-decline to presume that abstention motivated the district court’s exercise of its discretion to stay this case. We, therefore, do not decide today whether international abstention might justify the stay that the district court ordered.
Id.
In CTI-Container Leasing Corp. v. Uiterwyk Corp., 685 F.2d 1284 (11th Cir.1982), CTI filed suit against Uiterwyk Corporation alleging breach of leases for ocean cargo containers and related equipment. Uiterwyk moved to implead Iran and Iran Express Lines, an Iranian corporation and instrument of the Iranian government, as third-party defendants. The United States Department of Justice filed a statement of interest which expressed the United States position that the lawsuit should be stayed by virtue of an Executive Order expressing agreement between the United States and Iran which suspended all actions against Iran except to the extent they would be submitted to the Iran-United States Claims Tribunal. The district court stayed the action in toto pending determination by the Iran-United States Claims Tribunal of its jurisdiction to hear the claims against Iran and IEL.
On appeal, the Eleventh Circuit panel affirmed the district court’s order to the extent it stayed Uiterwyk’s action against Iran and IEL because that stay was mandated by the executive order. But it reversed the order to the extent it operated to stay the action between CTI and Uiter-wyk because, it concluded, that stay was “indefinite or immoderate ...” 685 F.2d at 1288.
In doing so, the court recognized the power of the district court to stay actions before it. “The inherent discretionary authority of the district court to stay litigation pending the outcome of related proceeding in another forum is not questioned.” Id. But it reiterated, citing Lan-dis, that such stays will be upheld only *865when they are not “indefinite or immoderate.” The court stated further:
The district court has a general discretionary power to stay proceedings before it in the control of its docket and in the interests of justice. Nevertheless, stay orders will be reversed when they are found to be immoderate of an indefinite duration. In Landis v. North American Co., 299 U.S. 248 (57 S.Ct. 163, 81 L.Ed. 153) (1936), the Supreme Court held that a “stay is immoderate and hence unlawful unless so framed in its inception that its force will be spent within reasonable limits, so far at least as they are susceptible of prevision and description.”
Id. (quoting McKnight v. Blanchard, 667 F.2d 477, 479 (5th Cir.1982)).
The court found the stay to be immoderate or indefinite because it was impossible to estimate how long CTI would have to wait until Uiterwyk’s action against Iran and IEL would be addressed by the Tribunal. It is apparent that the court was informed in that regard from its knowledge of numerous other similar proceedings involving third-party actions instituted by Uiterwyk’s against Iran and IEL. It explained:
It is difficult to accurately predict the time that CTI will be forced to stand aside if it is required to await the Tribunal’s determination of its jurisdiction to hear these claims, but it can safely be described as an indefinite period of time. We cannot uphold such an indefinite or immoderate stay despite Uiterwyk’s arguments to the contrary. We, therefore, agree with the procedural posture taken by other courts in similar litigation arising out of Uiterwyk’s involvement with Iran and IEL. These courts that were faced with third party complaints have severed and stayed the third-party actions against Iran and IEL while allowing the principal actions against Uiterwyk to proceed to trial.
Id. at 1288-1289 (citations omitted).
Uiterwyk argued that the entire action should be stayed because: (1) it would be prejudiced in developing its evidence without the presence of Iran and IEL who were necessary for a complete resolution at one time of the rights of all parties to the litigation arising out of the same facts; (2) it would be subjected to the significant expense of participating in proceedings before both the district court and the Tribunal; and (3) IEL and Iran were indispensable parties to the litigation.
The court rejected Uiterwyk’s first argument because the issue in the principal action was the contract between Uiterwyk and CTI and not the alleged agency agreement between Uiterwyk and IEL. In fact, Uiterwyk’s claims against Iran and IEL were contingent upon a finding in the district court that Uiterwyk was liable to CTI and the district court would have to enter a judgment in favor of CTI before the Tribunal could enter a judgment in Uiter-wyk’s favor against the third-party defendants. Moreover, the absence of Iran and IEL would not hamper Uiterwyk’s presentation of its impossibility of performance and force majeure defenses.
The court rejected Uiterwyk’s second argument because it concluded that it would not incur duplicative costs by having to litigate the principal action in district court and the action against Iran and IEL in the Tribunal because the third-party claims before the Tribunal would be stayed pending conclusion of the primary district court action. Furthermore, any extra costs Uiterwyk might incur would not outweigh the hardship to CTI if it were to be compelled to await the Tribunal’s decision for an indeterminate period of time.
*866The court rejected Uiterwyk’s third argument because even if Iran and IEL were indispensable parties they could still be joined even though Uiterwyk’s action against them in the Tribunal would be stayed pending resolution of the district court suit involving CTI’s claims against it. Again in that regard, the court was substantially aided and informed by its knowledge of several virtually identical situations involving thud-party actions filed by Uiterwyk against Iran and IEL which had been stayed pursuant to the executive order while the principal actions in those situations had been permitted to go forward. The court explained:
We feel that the district court’s objectives of adhering to the Iran-United States Agreement, Executive Order 12,-294, and the Statements of Interests filed by the United States can best be accomplished by following the paths taken by the courts in the NIC Leasing, Cotco Leasing, and Xtra cases. In these cases, Uiterwyk’s motions for a stay of the entire actions were denied and the third party defendants were joined, but such third-party actions were severed under Rule 42(b), and stayed pursuant to Executive Order No. 12,294. The parties were directed to proceed with their respective principal actions. Therefore, we conclude that district court abused its discretion when it ordered a stay of this entire action.
Id. at 1290.
Several definitive points can be gleaned from the cases discussed above. The first point is that the Colorado River factors are only applicable if there are parallel cases proceeding simultaneously in state court and federal district court. They have no application to parallel cases proceeding in the same federal district court, or to parallel cases proceeding in two or more federal district courts, or to parallel cases proceeding simultaneously in federal district court and a foreign tribunal. Similarly, they do not apply to parallel cases proceeding simultaneously in federal district court and a specialized international tribunal, such as the Iran-United States Claims Tribunal in CTI, or to parallel cases proceeding simultaneously in federal district court and arbitration. Those situations are, instead, governed by the principles enunciated in Landis and its progeny.
The second point is that regardless of how nonarbitrable issues get to arbitration, a federal trial court has the power under Landis and its progeny, including Moses, Air Line Pilots Ass’n, and Elay, to stay litigation of nonarbitrable issues pending resolution of the arbitration of arbitrable issues.
The third point is that any stay of the litigation of nonarbitrable issues ordered by a federal trial court pursuant to Landis and its progeny may not be immoderate or indefinite.
Having identified Landis as the legal basis for staying the litigation of nonarbitrable issues in this case pending resolution of arbitrable issues being litigated in the parallel arbitration proceeding, it is essential to identify and state, to the extent possible, those considerations germane to a Landis analysis. The following axioms were considered relevant in the decisions examined above:
A court has control over its own docket. Incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants, a court may hold one lawsuit in abeyance to abide the outcome of another.
The decision to stay one suit pending the conclusion of another requires the *867exercise of judgment, which must weigh competing interests and maintain an even balance.
There are many circumstances to be weighed including the condition of the court calendar, whether the parties have been precipitate or dilatory, and whether a stay is necessary to avoid duplicitous litigation. The plaintiffs (in the case to be stayed) interest in bringing the case to trial must be taken into account, as well as to what extent delaying trial may increase the danger of prejudice resulting from the loss of evidence, including the inability of witnesses to recall specific facts, or the possible death of a party.
A stay sometimes is authorized simply as a means of controlling the district court’s docket and of managing cases before the district court. And, in some cases, a stay might be authorized also by principles of abstention.
The court may consider the burden that the supplicant for the stay may suffer if the stay is not granted by being required to simultaneously litigate two proceedings at the same time, and whether he will be prejudiced in presenting his defense in the action he wants to have stayed if it is not stayed, and to what extent resolution of the issues in the case he wants stayed will be controlled by, or substantially clarified by decisions made in the parallel case.
The interests of judicial economy alone are insufficient to justify an indefinite stay.
In the end, benefit and hardship will have to be set off, the one against the other, and a balance ascertained.
The burden of making out the justice and wisdom of a stay is on the suppliant for relief.
The stay must be kept within the bounds of moderation. It may not be of indefinite duration in the absence of a pressing need.
A stay is immoderate and hence unlawful unless so framed in its inception that its force will be spent within reasonable limits, so far at least as they are susceptible of prevision and description.
An order which is to continue by its terms for an immoderate stretch of time is not to be upheld as moderate because conceivably the court that made it may be persuaded at a later time to undo what it has done.
The stay order, therefore, may not be couched in language that will permit the stay to last indefinitely.
The court must estimate when the parallel action will be concluded, within reason, or otherwise gauge the progress and anticipated progress of that proceeding, and accordingly limit the duration of the stay to a fairly definite, reasonable period of time or an event which is anticipated to occur within a reasonable period of time.
After ordering the stay, the court should conduct regular periodic evaluations to insure that the parallel suit is proceeding expeditiously and that continuation of the stay continues to be provident, and that the plaintiff in the nonstayed proceeding is not being prejudiced beyond merely the delay inherent in staying the case. Any such evaluation must be coupled with a requirement that the court actually reassess the propriety of the stay based on the progress of the parallel litigation, and its commitment to terminate or modify the stay if the parallel suit is not progressing as anticipated or is causing additional or unforeseen prejudice to the other party, or if continuation of the stay is otherwise inappropriate.
*868If the stay is to be based on abstention factors, the court must say so in its order, and discuss those factors, and cite abstention case law in support of its conclusions.
Before proceedings in one suit may be stayed to abide the proceedings in another, the parties to the two causes need not be the same or the issues identical. A stay may be imposed even if the parallel action will not settle every question of fact and law in the stayed suit if the litigation in the parallel suit will in all likelihood settle or simplify many of those issues.
The court should explain in detail its reasons for granting the stay and the basis of its scope and duration.
Neither Landis nor the cases cited herein which relied on it purported to definitively outline its boundaries or define exclusively or comprehensibly what factors are germane to deciding whether and under what circumstances a stay is appropriately granted in the first instance, questions of moderation and definitiveness in scope and duration aside. Other factors not addressed or present in those cases may be germane, not the least of which is the type of proceeding involved and characteristics peculiar to that proceeding.
C. The Present Case
In the present case, the stay question arose in the context of a bankruptcy nondischargeability adversary proceeding. As a result, one peculiar aspect of this proceeding is that the supplicant for the stay is a Chapter 7 debtor. Considerations of the economic burden which the debtor will have to bear in order to litigate in two forums at the same time are, therefore, particularly acute. In a case in which a creditor requested relief from the stay to liquidate a claim which it contended was nondischargeable in state court, this court made the observation that the potential economic burden on the debtor of having to participate in a jury trial in state court was a consideration in determining whether that course of action was advisable. This Court wrote:
In such a review, this Court must consider that if relief from the stay is granted, a debtor may be forced to expend substantial post-bankruptcy earnings in counsel fees and associated expenses in order to defend a state court action, or may be unable to afford to defend in state court with the result that an adverse judgment is entered against him or her, or may be forced to make a disadvantageous settlement because of a financial inability to mount a satisfactory defense in state court. If these results occur, the reservation of exclusive jurisdiction, and one of the primary reasons for it, would be undermined.
The financial burden of defending a state court proceeding (and the deleterious consequences, win or lose, which shouldering that burden will presumably have on a debtor’s opportunity to gain the fresh start contemplated by the Bankruptcy Code) may preclude relief from the stay in situations were the dischargeability of the debt underlying the state court proceeding has been put into issue in the bankruptcy court (absent extenuating circumstances militating in favor of passing the litigation to the state court). Certainly, a debtor must, if relief from the stay is denied, still defend against a non-dischargeability complaint in bankruptcy, and that debtor will of course incur some expense in making that defense. However, the expense of defending in this Court will ordinarily be less than the expenditures that would be required of a debtor to mount a satisfactory defense in a state court trial. Bankruptcy procedure for *869determining the dischargeability of debts is, more than a trial in state court, by design, a more expedient, efficient and less costly mechanism for both determining dischargeability of a debt and for liquidating a debt underlying a claim of non-dischargeability.
In re Cummings, 221 B.R. 814, 819 (Bankr.N.D.Ala.1998).
Granted, the situation in Cummings is not exactly parallel to the present circumstances. However, considerations with respect to the economic impact on the debtor in this case if required to simultaneously participate in two parallel proceedings are very similar. Whereas, if the present dis-chargeability proceeding is held in abeyance until after that portion of the arbitration proceeding involving his claims against the intertwined defendants has been completed, the debtor will only have to finance the cost of one lawsuit at a time, and if GBA is successful, the debtor’s situation in this adversary could be much less complex, and far more advantageous, since the plaintiff herein, as will be discussed next, could be precluded by an adverse judgment on those claims, from pursuing a case against him. Or he will at least at that point in time be assured of sufficient funds to defend the subsequently resumed adversary proceeding and have basis for recouping any damages that may be awarded herein.
Moreover, a proceeding challenging the dischargeability of a debt is actually two lawsuits in one. Section 523(a) of the Bankruptcy Code precludes “A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title ... from any debt ...” of the nature described in the subsections of that statute. The term “debt” is defined in 11 U.S.C. § 101(12) as “liability on a claim.” A “claim” is defined as “a right to payment.” 11 U.S.C. § 101(5)(A). Whether the creditor is owed a “claim,” and the nature of that “claim,” and the amount of that “claim,” and whether the debtor is liable for that “claim,” are matters that are strictly defined by state law. The U.S. Supreme Court explained in Travelers Cas. and Sur. Co. of America v. Pacific Gas and Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007):
Indeed, we have long recognized that the “ ‘basic federal rule’ in bankruptcy is that state law governs the substance of claims, Congress having ‘generally left the determination of property rights in the assets of a bankrupt’s estate to state law.’ ” Ibid. (quoting Butner v. United States, 440 U.S. 48, 57, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); citation omitted). Accordingly, when the Bankruptcy Code uses the word “claim” — which the Code itself defines as a “right to payment,” 11 U.S.C. § 101(5)(A) — it is usually referring to a right to payment recognized under state law. As we stated in But-ner, “[property interests are created and defined by state law,” and “[u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” 440 U.S. at 55, 99 S.Ct. 914; accord, Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161, 67 S.Ct. 237, 91 L.Ed. 162 (1946) (“What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed is a question which, in the absence of overruling federal law, is to be determined by reference to state law”).
Id. at 450-51, 127 S.Ct. 1199.
Because the debtor must owe a debt to a creditor before that debt can be declared nondischargeable, a creditor must establish the existence and amount of the debt which he contends is nondischarge*870able under state law. The court in Stanbrough v. Valle (In re Valle), 469 B.R. 35 (Bankr.D.Idaho 2012) explained:
Making a determination regarding the dischargeability of a debt involves a two-step process: first, the establishment of the debt itself; and second, a determination as to the nature — dischargeable or nondischargeable — of that debt. Banks v. Gill Distrib. Ctrs., Inc. (In re Banks), 263 F.3d 862, 868 (9th Cir.2001). At times the debt at issue has previously been liquidated; other times it has not. In the case of an unliquidated debt, the bankruptcy court must necessarily determine liability and damages in order to establish the underlying debt.
Id. at 43.
See also, Sterling Factors, Inc. v. Whelan, 245 B.R. 698, 708 (N.D.Ga.2000) (“[A]n adversary proceeding respecting dischargeability consists of three elements: liability, damages, and dischargeability.”); Trustees of the Operating Engineers Local # 965 Health Benefit Plan v. Westfall (In re Westfall), 379 B.R. 798, 802-803 (Bankr.C.D.Ill.2007) (“This Court must determine the existence of an underlying debt before reaching the dischargeability issues.”); Drummond v. Freeland (In re Freeland), 360 B.R. 108, 129 (Bankr.D.Md.2006) (“When a complaint to determine nondis-chargeability of debt is brought in the bankruptcy court prior to the entry of a judgment in a nonbankruptcy forum, the bankruptcy court has subject matter jurisdiction, not only to determine nondis-chargeability of the debt, but also to liquidate the amount of the debt and enter a nondischargeable judgment therefor.”); Gattalaro v. Pulver (In re Pulver), 327 B.R. 125, 132 (Bankr.W.D.N.Y.2005) (“In an Adversary Proceeding respecting dis-chargeability, there are three elements to be determined. These elements are liability, damages and dischargeability.”).
Problematic to the liability determination in this case are the unresolved issues raised by Mr. Latimer, including his tortuous interference with business or contractual relationship cause of action, which are pending before the arbitrator. If, as he contends, that is: (1) Second Avenue is merely a fraudulent tool, formed and used by its creators to continue and accomplish a fraudulent plan to avoid responsibility under the lease; (2) to end run the purchase option in the same; (3) thereby acquire the property at a substantial discount; (4) to tortuously interfere with GBA’s relationship with the lender; and (5) GBA successfully obtains a judgment against the entities named in its complaint, including the individuals who formed Second Avenue and caused it to purchase the loan — the impact on the issues in this adversary proceeding would be significant. The same would hold true if the progenitors of Second Avenue are found simply to be liable for the mountain of unpaid rent which the debtor and GBA claims to be due as a result of the former’s alleged breach of the lease. The potential recovery represented by either of those causes of action would dwarf the $30,792.68 in rent which Second Avenue claims Mr. La-timer caused GBA to use in an unauthorized manner, thus providing GBA an ample right of recoupment or set-off which would eliminate the obligation that Second Avenue claims to be nondischargeable.
In addition, if GBA’s claims are borne out in arbitration, depending how the facts evolve and are established in that proceeding, Mr. Latimer may be able to assert defenses based on the misconduct of Second Avenue’s progenitors, or their breach of the lease, which may preclude his liability in this case altogether. If this adversary proceeding is not stayed pending the conclusion of the arbitration, the debtor will, in order to take advantage of any *871defenses based on the evidence which support GBA’s arbitrable causes of action, have to submit that evidence in this case also. That course of action simply does not make any sense from the point of view of either judicial economy or judicial efficiency, or from the point of view of the added strain, in time, money, and resources on all involved.
The Court will not venture a guess as to what the outcome of the arbitration will be, or what defenses Mr. Latimer may add as a result of the findings and conclusions of the arbitrator, if any. However, it would constitute a gross injustice if Mr. Latimer is required to bear the compound expense and effort of proving his case in two proceedings instead of one, especially when the Court is unaware of any hardship that Second Avenue will suffer as a result of being required to await the outcome of the arbitration proceeding to try its case.
Staying a determination of the issues in this case until after the arbitration is through, and then applying the relevant findings from that proceeding to the present action, is closely analogous to the common practice of permitting the litigation of the issues of liability and damages in a dischargeability case to proceed in state court, where they would otherwise be tried absent bankruptcy, and holding the issues of dischargeability in abeyance until after the state court action has been concluded, where they can then be decided based on the findings of the state court. That result is often accomplished by granting relief from the stay. “Numerous courts have determined that, under appropriate circumstances, a bankruptcy court may grant relief from the stay to allow a debt to be liquidated in a pending state court proceeding, and then make a determination of dischargeability based on the state court record.” In re Cummings, 221 B.R. 814, 819 n. 9 (Bankr.N.D.Ala.1998). Other courts elect to dismiss the dischargeability proceeding without prejudice to the plaintiffs right to refile it after conclusion of the state court litigation, assuming the latter results in a judgment against the debt- or. Gray v. Berry (In re Gray), 2000 WL 34239244, *3 (W.D.Wis., April 12, 2000); Kowalewycz v. Sears (In re Sears), 68 B.R. 34, 36 (Bankr.W.D.Mo.1986). Other courts elect to abstain from hearing the liability and damages issues, reserving determination of the dischargeability issues until after conclusion of the state court proceeding, pursuant to the bankruptcy abstention statute, 28 U.S.C. § 1334(c)(1), which provides: “[N]othing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding rising under title 11 or arising in or related to a case under title 11.” See Wallace v. Guretzky, 2009 WL 3171767, *3 (E.D.N.Y., Sept. 29, 2009); Bricker v. Martin, 348 B.R. 28, 38-39 (W.D.Pa.2006); Williams v. Horowitz (In re Horowitz), 2010 WL 814103, *5 (Bankr.E.D.N.Y., March 1, 2010); DiFronzo v. Wider (In re Wider), 2009 WL 4345411, *3 (Bankr.E.D.N.Y., Nov. 30, 2009); Speck v. Demers (In re Demers), 2009 WL 3681675, *1 (Bankr.E.D.Wash., Oct. 30, 2009); In re Gibson, 349 B.R. 54, 58 (Bankr.D.Idaho 2006); The Fowler & Hunting Company v. Granoff (In re Granoff), 242 B.R. 216, 221 (Bankr.D.Conn.1999); Easley v. Dulek (In re Warren), 204 B.R. 66, 68 (Bankr.N.D.Okl.1996); Braun v. Zarling (In re Zarling), 85 B.R. 802, 804 (Bankr.E.D.Wis.1988); Blackmer v. Richards (In re Richards), 59 B.R. 541, 544 (Bankr.N.D.N.Y.1986).
D. Second Avenue’s Complaint Does Not Support Its Claim of Prejudice If the Dischargeability Proceeding is Stayed
For purposes of deciding the present motion only, Second Avenue’s complaint is *872insufficient with respect the allegation of its theories of nondischargeability. In Count Two, it contends that the debt allegedly owed by Mr. Latimer resulted from fraud, and is, therefore, nondischargeable by virtue of 11 U.S.C. § 523(a)(2)(A). However, it does not allege that Mr. Latimer made any misrepresentation to it, which is, of course, the sine qua non of a 523(a)(2)(A) discharge exception. In its Count Three, it contends that the debt allegedly owed by Mr. Latimer is nondis-chargeable because it resulted from, “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). However, the contractual relationship it describes, and which is evinced by the documents attached to the complaint, does not, on its face, constitute a technical or express, trust, which is required for fiduciary defalcation nondischargeability. Guerra v. Fernandez-Rocha (In re Fernandez-Rocha), 451 F.3d 813, 816 (11th Cir.2006). In contrast, it describes merely a security agreement, under which, at least absent default and notice, GBA was under no duty to segregate or remit rents to Second Avenue, or its assignor, and was free to use those funds in the operation of its business, see Davis v. Aetna Acceptance Co., 293 U.S. 328, 334, 55 S.Ct. 151, 79 L.Ed. 393 (1934); EvaBank v. Richardson (In re Richardson), 2007 WL 2381990 (Bankr.N.D.Ala., Aug. 17, 2007). That would seem to eliminate the possibility of larceny and embezzlement as well.
In addition, in its Count Four, Second Avenue contends that the debt allegedly owed by Mr. Latimer is nondischargeable because it resulted from his, “willful and malicious injury ...” to the rents which he purportedly caused GBA to use in an unauthorized manner. 11 U.S.C. § 523(a)(6). Again, for purposes of deciding the present motion only, it appears from the complaint that the security agreement did not require GBA to segregate or remit rent to Second Avenue or its assignee until after default and notice, which did not occur until October 2011. It is, therefore, not apparent how either GBA or Mr. Latimer could have willfully and maliciously converted rents in April 2011, which is when the complaint alleges it happened, since, at that point in time, GBA was ostensibly free to use those funds in the operation of its business without obtaining any sort of additional permission from Second Avenue or its assignee. Granted, GBA’s acceptance of discounted, prepaid rent was a violation of the security agreement. However, a breach of contract does not, without more, make the resulting debt nondischargeable.
Moreover, in passing, and for purposes of deciding this motion only, the Court notes that Second Avenue’s right to raise nondischargeability issues is not readily apparent. Under Alabama law, which dictates whether or not Mr. Latimer owes a debt to Second Avenue, i.e., is liable to the latter, “a chose in action for recovery of converted property is not assignable.” Rice v. Birmingham Coal & Coke Co., Inc., 608 So.2d 713, 715 (Ala.1992). In fact, “It seems to be well settled, as a general proposition under the common law, that a right of action arising from tort is nonassignable, and this rule has been applied to actions for fraud and deceit ...” All States Life Ins. Co. v. Jaudon, 228 Ala. 672, 154 So. 798, 799 (1934).
The sufficiency of one of the claims made by Second Avenue in Count One of its complaint pursuant to 11 U.S.C. § 727(a)(2) is likewise questionable. It contends that Mr. Latimer should be denied a discharge because he purportedly:
transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mu*873tilated, or concealed property, in the form of rents received from the Real Property, that belonged to the Defendant within one (1) year prior to the Petition Date with the intent to hinder, delay, or defraud the Defendant’s creditors, including the Plaintiff, within the meaning of Section 727(a)(2) of the Bankruptcy Code.
A.P. Doc. No. 1.
Section 727(a)(2) provides that:
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....
11 U.S.C. § 727(a)(2).
Second Avenue’s allegation tracks 727(a)(2)(A). It does not claim that Mr. Latimer transferred, etc. property of the estate after he filed his bankruptcy estate. Instead, it claims that he transferred his property, with the prerequisite intent, before filing bankruptcy. Problematic to that claim is the fact that Mr. Latimer filed bankruptcy on January 17, 2011. The alleged conversion of rents did not take place until after April 18, 2011. Section 348(a) of the bankruptcy code provides that while, “Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted ...,” it “does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.” 11 U.S.C. § 348(a). Since, by virtue of that code section, Mr. Latimer’s conversion of his case to chapter 7 on August 12, 2011, did not effect a change in the date of the filing of the petition, his purported transfer of property after January 17, 2011, could not possibly qualify as a transfer, etc. of “property of the debtor, within one year before the date of the filing of the petition.”
Also in Count One of its complaint, Second Avenue contends that Mr. Latimer should be denied a discharge because he purportedly, “concealed, destroyed, mutilated, falsified, or failed to keep or preserve recorded information, including books, documents, records, and papers from which the Defendant’s financial condition or business transactions might be ascertained, within the meaning of Section 727(a)(3) of the Bankruptcy Code.” Section 727(a)(3) provides that:
(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....
11 U.S.C. § 727(a)(3).
The onus is on Mr. Latimer to satisfy the requirements of that code section. Therefore, any difficulty in performing that duty which may result from a stay of this adversary proceeding will fall on him and not Second Avenue. Consequently, Second Avenue has no apparent basis for contending that its 727(a)(3) cause of ac*874tion may be prejudiced by any delay in prosecuting it that may result from the stay of the present matter.
The Court is not prejudging Second Avenue’s case. However, the fact that the language of its complaint is currently insufficient on its face to support the relief which it seeks, detracts from concerns that it will actually suffer any prejudice as a result of being required to await the outcome of the arbitration to prove those claims.
The Court is also not abdicating its responsibility to decide either the discharge-ability issues raised in Second Avenue’s complaint or its objections to Mr. Latimer’s discharge. A stay of this proceeding is warranted, however, so that issues with respect to the claims made by Mr. Latimer which are currently in arbitration may be resolved. Those issues are germane to the present case and could result in resolution of the same by way of recoupment or otherwise. Staying this action will serve the purpose of avoiding duplicitous litigation since Mr. Latimer will otherwise have to raise and try the arbitrable issues in this case as a matter of self defense, and in the arbitration proceeding as well. Such a conundrum would not only result in prejudice to him in the form of additional expense, time, attention, and effort, but will also needlessly consume the valuable and limited resources of this Court which could otherwise be better spent attending to other litigation. Moreover, the imminent danger of conflicting decisions about the same issues could result in unnecessary confusion and unjust results. On the other hand, the Court cannot imagine what prejudice will result Second Avenue by the imposition of a stay. It’s progenitors will have to participate in the arbitration anyway. And it has not suggested that whatever evidence it needs to prove its case is likely to disappear before that proceeding is finished.
E. Scope of the Stay
Having decided a stay is warranted, the scope of the stay must next be addressed and established. The creed of Landis is moderation. However, each of the three cases discussed above, in which the parallel proceeding was an arbitration, indicated that a federal court has the power to stay an action involving nonarbitrable issues until a parallel arbitration proceeding is through. "Our recognition of the right of objectors to proceed directly to court does not detract from district courts' discretion to defer discovery or other proceedings pending the prompt conclusion of arbitration." Air Line Pilots Ass'n v. Miller, 523 U.S. 866, 879 n. 6, 118 S.Ct. 1761, 140 L.Ed.2d 1070 (1998). "In some cases, of course, it may be advisable to stay litigation among the non-arbitrating parties pending the outcome of the arbitration." Moses H. Cone Memorial Hasp. v. Mercury Const. Corp., 460 U.S. 1, 21 n. 23, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). "When confronted with litigants advancing both arbitrable and nonarbitrable claims courts have discretion to stay nonarbi-trable claims." Klay v. All Defendants, 389 F.3d 1191, 1204 (11th Cir.2004).
Having the issues decided by the arbitrator is the desired objective. And that is not accomplished unless the case involving the nonarbitrable issues is stayed until the arbitration is finished. And if that is not accomplished then neither is the goal of avoiding duplicative litigation. Those cases appear, therefore, to set a baseline rule that, if a stay is warranted, the duration of the arbitration is by definition moderate and definite. In other words, if that is what it takes to get the issues decided by arbitration, then nothing less will necessarily do. Part of an arbitration will not get it done.
Nevertheless, the Court is mindful of the admonishment of Landis, and acutely concerned with what impact the stay in *875this case may have on Second Avenue as time goes on. Therefore, it intends to keep tabs on the arbitration, with the help of the litigants in this ease, and endeavor to ameliorate any deleterious effect of the delay which may arise if that proceeding does not proceed in a reasonably prompt manner.
Second Avenue asserted that its primary concern is discovery and asked for discovery to proceed in this case. But the Court is concerned that allowing discovery to proceed simultaneously in this proceeding and in the arbitration will create a potential source of conflict between the arbitrator and this tribunal. Moreover, at the hearing of this matter, Second Avenue, while expressing its concern over having its discovery efforts delayed, did not convince the Court that a delay in obtaining discovery will ultimately be prejudicial to its ease. And it admits that discovery will be available in arbitration, although it was, at that point in time, not available because of nuances associated with that particular proceeding. Furthermore, the possibility of discovery going forward in this case, and possibly other pretrial activities, can be revisited, and the stay modified accordingly if the arbitration does not proceed expeditiously.
Second Avenue expressed, in particular, at the hearing of this matter, its dissatisfaction with what it considers efforts by Mr. Latimer to avoid discovery. Of course, it may make that argument to the arbitrator should it occur during the course of the arbitration. However, it should be made clear that this Court will look askance at any intentionally dilatory actions taken by either party during the arbitration in an effort to delay or impede the progress of the same.
While it is the intention that the stay of this proceeding last until the arbitration proceeding has concluded, the Court will set a status conference in three months, and at the end of each three month interval thereafter. At that time, and at any such succeeding status conference, the parties may report on the progress of the arbitration, or lack thereof, and express their displeasure, if any, with the same or recommendations with respect to going forward. If the arbitration is not proceeding in a relatively expeditious manner, the Court will entertain motions to alter the stay in a manner that will alleviate any prejudice resulting from that proceeding’s lack of progress. In that way the Court can keep its fingers on the pulse of the arbitration, and evaluate the continued necessity of the stay in its present form in light of the circumstances existing at any such point in time.
An Order will be entered contemporaneously with this Memorandum Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495764/ | Memorandum Opinion
JOHN T. LANEY, III, Chief Judge.
These matters come before the Court on similar motions in each adversary proceeding. In both proceedings, the debtor-defendant moves to dismiss for failure to state a claim upon which relief can be granted, moves to strike certain complaint allegations, and moves for a more definite statement. The Court heard oral arguments on the motions November 6, 2012. At the conclusion of the hearing, the Court took the matters under advisement. For the reasons set forth below, the Court will grant in part and deny in part the debtor’s motions, and the Court will grant the plaintiffs in both matters 21 days to amend their complaints.
I. Background
The debtor filed his Chapter 7 case on February 28, 2012. Despite being the defendant in three pending Colquitt County Superior Court matters initiated by Ms. Smith and Mr. and Mrs. Brown, the debtor did not include the plaintiffs on his original list of creditors, nor did he include the lawsuits on his Statement of Financial Affairs. The plaintiffs therefore did not receive notice from the Clerk’s Office of the debtor’s bankruptcy. On May 22, the debtor amended his Schedule F and Statement of Financial Affairs to include Ms. Smith and her two lawsuits against the debtor. The debtor gave an incorrect address for Ms. Smith, but she was informed of the bankruptcy on May 26 through correspondence from the superior court regarding the stay of her lawsuits. The debtor did not amend to add the Browns or their lawsuit until July 13. The Court does not know whether the Browns had actual notice of the debtor’s bankruptcy before receiving notice from the Clerk’s Office. Because of the delay, on July 28, the debtor moved for an extension of deadlines to object to exemptions, to object to discharge, and to file a complaint to determine dischargeability of debts.
Before Ms. Smith or the Browns appeared in the case, the Court entered a discharge order on June 8. On June 12, Ms. Smith filed a document in the debtor’s bankruptcy case captioned as a motion for stay relief but asking the Court to determine the dischargeability of the claims in her superior court actions. At the July 25 hearing on the motion, the Court clarified that the proper way to ask for a determination of dischargeability is through an adversary proceeding; if the debt is determined nondischargeable, the Court would grant relief to prosecute the claims.
Ms. Smith filed her adversary proceeding pro se on September 18. Her state court actions — and her adversary complaint — allege harassment, slander, libel, threats of physical harm, stalking, and the filing of false complaints. She alleges fraud under § 523(a)(2), fraud or defalcation while in a fiduciary capacity under § 523(a)(4), and willful and malicious injury under § 523(a)(6). She also alleges that the debtor’s discharge was obtained through fraud and thus the debtor’s discharge should be revoked under § 727(d)(1). The Browns, also pro se, filed their adversary proceeding on September 20. They also have a pending-but-stayed *883lawsuit in Colquitt County Superior Court. The complaint indicates the action involves real estate the debtor sold to the Browns, but the record is unclear precisely what the issues are in that lawsuit. The adversary complaint alleges fraud in that transaction under § 523(a)(2) and willful and malicious injury under § 523(a)(6). The Browns also seek a discharge revocation under § 727(d)(1).
In response to each complaint, the debt- or moved to dismiss for failure to state a claim upon which relief can be granted, moved to strike certain allegations, and moved for a more particular statement. The debtor asserts numerous defects in each complaint. To be exact, the debtor asserts 16 violations of the Federal Rules of Bankruptcy Procedure in the Smith complaint and 23 in the Brown complaint. The Court took the matters under advisement at the November 6 hearing on the motions.
While researching the matter, the Court came across Scott v. Williams (In re Williams), 302 B.R. 923 (Bankr.M.D.Ga.2003) (Laney, J.), in which this Court adopted a test to determine when the Court should lift the stay to allow a mov-ant to resume a pending state court action. Thus the Court, in the past, had stated a party could get stay relief, before determining dischargeability, to continue in a pending lawsuit, whereas in the present case, the Court told Ms. Smith she must first file an adversary proceeding. The Court wishes to be consistent, so the Court set a hearing in the main case on Ms. Smith’s original motion, which the Court treated as a motion for stay relief.
The Court heard arguments on the motion on January 24, 2013. The Court found that Ms. Smith did not meet her burden under In re Williams and that stay relief was not appropriate. The Browns, never having moved for stay relief, were not a party to the hearing. The Court again took under advisement the sufficiency of Smith and Brown complaints.
II. Analysis
The general rules of pleading in adversary proceedings are in Federal Rule of Bankruptcy Procedure 7008, which adopts Federal Rule of Civil Procedure 8.1 Federal Rule 8(a)(2) requires a complaint to contain “a short a plain statement of the claim showing that the pleader is entitled to relief.” This rule establishes “liberal pleading standards.” Erickson v. Pardus, 551 U.S. 89, 94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007). It requires only “that the claim for relief be stated with brevity, conciseness, and clarity, a standard articulated many times over by federal courts throughout the country.” Wright & Miller, Federal Practice and Procedure: Civil 3d § 1215. The complaint “does not need detailed factual allegations.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). It need only contain enough facts to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Id. (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)) (ellipsis in original). Under this “notice pleading” standard, a plaintiff need not specifically plead every element of the cause of action or allege a specific fact for each element if the allegations and reasonable inferences therefrom establish the plaintiff states “some viable legal theory.” American Federation of Labor and Congress of *884Industrial Organizations v. City of Miami, Florida, 637 F.3d 1178, 1186 (11th Cir.2011); see also Lee v. Caterpillar, Inc., 496 Fed.Appx. 914, 2012 WL 5458179, at *1 (11th Cir.2012). Moreover, Federal Rule 8(e) requires courts to construe pleadings “so as to do justice.” This means that “the complaint is to be liberally construed in favor of plaintiff.” Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969).
Despite this leniency, a “complaint must contain enough facts to make a claim for relief plausible on its face; a party must plead ‘factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ ” Resnick v. AvMed, Inc., 693 F.3d 1317, 1324-25 (11th Cir.2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). Moreover, certain matters require more specific pleading. Relevant to this opinion is Federal Rule 9(b), applicable to adversary proceedings through Bankruptcy Rule 7009, which requires a party alleging fraud to state the circumstances constituting fraud with particularity. Federal Rule 9(b) is an exception to the simplified standard of Rule 8(a), see Swierkiewicz v. Sorema N. A., 534 U.S. 506, 513, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002), but Rule 9(b) does “not abrogate the concept of notice pleading.” U.S. ex rel. Clausen v. Laboratory Corp. of America, Inc. 290 F.3d 1301, 1310 (11th Cir.2002).
Ms. Smith and the Browns filed their complaints pro se.2 Pro se parties are afforded more leniency with their pleadings than attorneys: “[A] pro se complaint, however inartfully pleaded, must be held to less stringent standards than formal pleadings drafted by lawyers.” Erickson, 551 U.S. at 94, 127 S.Ct. 2197 (quoting Estelle v. Gamble, 429 U.S. 97, 106, 97 S.Ct. 285, 50 L.Ed.2d 251 (1976)); see also Alba v. Montford, 517 F.3d 1249, 1252 (11th Cir.2008) (“[P]ro se pleadings are held to a less strict standard than pleadings filed by lawyers and thus are construed liberally.”). But pro se filers are still required to follow the “minimum pleading standards” of the Federal Rules, McMahon v. Hunter, 2007 WL 1952906, at *6 (M.D.Fla.2007), and “a filer’s pro se status does not excuse her from compliance with the Federal Rules of Civil Procedure.” King v. ADT Security Services, 2007 WL 2713212, at *13 (S.D.Ala.2007) (citing Albra v. Advan, Inc., 490 F.3d 826, 829 (11th Cir.2007)). And “this leniency does not give a court license to serve as de facto counsel for a party ... or to rewrite an otherwise deficient pleading in order to sustain an action.” GJR Investments, Inc. v. County of Escambia, Florida, 132 F.3d 1359, 1369 (11th Cir.1998) (citations omitted), overruled on other grounds by Randall v. Scott, 610 F.3d 701, 709 (11th Cir.2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)).
When considering pre-answer motions questioning the sufficiency of a complaint, the Court “must take the factual allegations of the complaint as true and make all reasonable inferences from those facts to determine whether the complaint states a claim that is plausible on its face.” Cline v. Tolliver, 434 Fed.Appx. 823, 825 (11th Cir.2011) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). Motions to dismiss for failure to state a claim, motions for a more definite statement, and motions to strike are governed by Federal Rule 12(b)(6), Federal *885Rule 12(e), and Federal Rule(f), respectively. Bankruptcy Rule 7012(b) applies Federal Rule 12(b)-(i) to adversary proceedings.
These general concepts are the backdrop for the discussion of specifics below. The Court will address each paragraph of the debtor’s motions in order, considering more than one at a time when sensible. The Court will construe the plaintiffs’ pleadings as liberally as it can within the confines of the Federal Rules and Bankruptcy Rules. When possible, the Court will explain legal concepts in plain terms and more thoroughly than it might otherwise. The Court hopes that educating all parties on the applicable law will ultimately save time and avoid litigation over simple pleading matters.
A. Smith Complaint
1. Paragraphs 1 and 14
The debtor states, in ¶ 1, that the plaintiff fails to state a claim under § 523(a)(2) because “there was not any extension of credit by the plaintiff.” The Court assumes the debtor intended to say the plaintiff did not allege an extension of credit — “there was not any extension of credit” is an improper fact-based argument when the Court must assume the complaint’s allegations are true. Paragraph 14 contends the plaintiff fails to state a claim because the plaintiff does not allege a misrepresentation by the debtor.
Broadly speaking, § 523(a)(2) excepts from discharge three types of debts created through intentional misrepresentations. The plaintiff does not specify which subsection(s) she thinks apply to her, but only § 523(a)(2)(A) conceivably applies. It makes nondischargeable
(a) ... 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 ...;
Section 523(a)(2)(A) “incorporate[s] the general common law of torts,” Field v. Mans, 516 U.S. 59, 70 n. 9, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), and so “a creditor’s proof of actual fraud under subsection (2)(A) requires satisfaction of the elements of common law fraud.” Colombo Bank v. Sharp (In re Sharp), 340 Fed.Appx. 899, 901 (4th Cir.2009). The elements of a § 523(a)(2)(A) claim are the following: “the debtor made a false statement with the purpose and intention of deceiving the creditor; the creditor relied on such false statement; the creditor’s reliance on the false statement was justifiably founded; and the creditor sustained damage as a result of the false statement.” Fuller v. Johannessen (In re Johannessen), 76 F.3d 347, 350 (11th Cir.1996). Silence or omission of material fact can be the basis for a under § 523(a)(2)(A) claim if the debtor has a duty to speak. See, e.g. AT&T Universal Card Services v. Mercer (In re Mercer), 246 F.3d 391, 404 (5th Cir.2001). On a motion to dismiss for failure to state a claim, the Court must assume that the factual allegations are true and give the plaintiff the benefit of all reasonable inferences. E.g., Rehberg v. Paulk, 611 F.3d 828, 835 n. 1 (11th Cir.2010).
The plaintiff does not state a claim under § 523(a)(2)(A). The plaintiff did not allege an extension of credit, but an extension of credit is only one possible transaction that can be the subject of a § 523(a)(2)(A) claim. The statute also includes money, property, services, renewal of credit, and refinance of credit obtained by misrepresentation or actual fraud. *886Thus, § 528(a)(2) presupposes a transfer of something to the plaintiff. Absent from the complaint is any allegation that the plaintiff transferred anything of value to the debtor.
Moreover, the plaintiff does not allege the debtor misrepresented anything to her or that she relied on any misrepresentation. The complaint states in ¶ 81, “Debt- or is in violation of Bankruptcy Code 11 U.S.C. § 523(a)(2) on the basis of Debtor’s fraudulent acts.” The superior court lawsuits were filed, according to ¶ 4 of the adversary complaint, “in an attempt to prevent Defendant ... from continuously harassing her. The harassment has been in the form of lying to authorities on Plaintiff, filing false complaints against Plaintiff, making threats and gestures of physical injury to Plaintiff and on-going stalking of Plaintiff.” Anything in the complaint that can be construed as a misrepresentation happened to people other than the plaintiff. The adversary complaint alleges that the debtor filed complaints on false information against the plaintiff (¶ 10, ¶ 14), and that the debtor lied to the police on numerous occasions about the plaintiff or about the debtor’s control over real property (¶ 11, ¶ 12, ¶ 13, ¶ 17). Paragraph 17 particularly reveals a misunderstanding of § 523(a)(2). It states that the debtor “committed fraud when he knowingly, recklessly, and intentionally made false representations of material fact to an officer of Colquitt County.... [The officer] justifiably relied on Defendant Charles Smith’s false misrepresentations.... ” Nothing in the complaint can be construed as the debtor having made false statements to the plaintiff, and thus nothing can be construed as having been justifiably relied upon by the plaintiff.
Perhaps the complaints in the state court matters, which the plaintiff incorporated by reference into the adversary complaint,3 contain this lacking information, and perhaps the plaintiff thought that incorporating those allegations into the adversary complaint would suffice. But the plaintiff did not attach those complaints,4 and the Court can only test the sufficiency of a complaint by what the Court sees. Perhaps the plaintiff thinks § 523(a)(2) covers any loss caused by any type of misrepresentation. The only way the Court can make sense of the fraud allegations is with this line of logic: the debtor made false statements in complaints and to police officers, which caused the plaintiff to spend money on various lawsuits, money the plaintiff now does not have because of the debtor’s misrepresentations. But that is not the type of fraud that results in nondischargeability. “Not all frauds are included within the exception of section 523(a)(2)(A), but only those involved in the obtaining of money, property, or services” by false pretenses, false presentations, and actual fraud. 4 Collier on Bankruptcy ¶ 523.08[l][d]. Even in the best possible light, the complaint fails to state a claim for fraud under § 523(a)(2)(A).
2. Paragraph 2
The debtor states the plaintiff fails to state a claim for attorney fees and punitive damages.
a. Attorney Fees
Bankruptcy Rule 7008(b) requires that a request for attorney’s fees be pleaded as a claim. In the plaintiffs prayer for relief, she asks that she be awarded court costs. Court costs do not necessarily in-*887elude attorney fees. At the January 24 hearing, the plaintiff indicated she seeks attorney fees of approximately $9,000.00. At least one court has noted that “few case authorities ... deal with the adequacy of pleadings to assert a claim for attorney’s fees for purposes of Rule 7008(b),” Charlie Y., Inc. v. Carey (In re Carey), 446 B.R. at 393, and so the Court did not find much caselaw guidance. For Bankruptcy Rule 7008(b) to mean anything, however, an ambiguous prayer and statements at a hearing are insufficient to state a claim for attorney fees. See, e.g., Garcia v. Odom (In re Odom), 113 B.R. 623, 625 (Bankr.C.D.Cal.1990) (“Although plead with specificity, Plaintiffs’ request for fees is in the form of a prayer only. Such a request is deemed insufficient under Rule 7008(b).”); Ramsey v. Countrywide Home Loans, Inc. (In re Ramsey), 424 B.R. 217, 226 (Bankr.N.D.Miss.2009) (oral request at trial insufficient). The Court found only one case where a naked prayer for attorney fees was held sufficient under Bankruptcy rule 7008(b) and the Federal Rules’ notice pleading standard. See Moran v. Deutsche Bank National Trust Co. as Indenture Trustee (In re Moran), 2012 WL 6645025 (Bankr.D.Hawai’i 2012). The Court disagrees with that holding because it renders Bankruptcy Rule 7008(b) a nullity, but even that court found relevant a contractual attorney fee provision providing extra notice.
Bankruptcy Rule 7008(b) clearly requires more than a simple prayer for attorney fees, let alone an ambiguous request for court costs. By its own terms, Bankruptcy Rule 7008(b) states that a request for attorney fees “shall be pleaded as a claim.” The Federal Rules distinguish a claim from the relief sought — Rule 8(a)(2) requires “a short and plain statement of the claim showing the pleader is entitled to relief,” and Federal Rule 8(a)(3) separately requires “a demand for the relief sought.” At a minimum, Bankruptcy Rule 7008(b) requires an allegation in the body of the complaint that the pleader is entitled to attorney fees. What is required beyond that minimum will depend on what gives a defendant fair notice of the claim, which will likely include some basis for the entitlement. Allegations as simple as “Debtor acted with actual malice and intent to deceive Plaintiff in making false representations, thus entitling Plaintiff to punitive damages ... plus attorney fees” have been held sufficient. Morsey v. Semer (In re Semer), 2012 WL 5305748, at *4 (Bankr.N.D.Ohio 2012).
The plaintiff in this case will require allegations more substantial. At the January 24 hearing, the debtor’s attorney noted that the plaintiff is pro se both in this and the two superior court matters, which suggests the plaintiff has incurred no attorney fees. Even if the plaintiff otherwise satisfies Bankruptcy Rule 7008(b), a request for attorney fees by a pro se plaintiff is not facially plausible and certainly does not give the debtor fair notice of what he allegedly owes or why he owes it. The plaintiff alleges in her state court complaint, and in this adversary proceeding, that the debtor filed several complaints against her on false information. Presumably, the attorney fees are from defending herself in those proceedings, and the following discussion is based on that assumption.
Because “no general right to receive attorney’s fees exists under the Bankruptcy Code,” Fry v. Dinan (In re Dinan), 448 B.R. 775, 784 (9th Cir. BAP 2011), to state a claim for attorney fees the plaintiff must “be able to recover the fee outside of bankruptcy under state or federal law.” Id. at 785; see also In re Carey, 446 B.R. at 390 (“[T]he allowance of claims for attorney’s fees in bankruptcy *888generally is recognized as governed by state law.”) (citing Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007)). And of course, in this context, the fees themselves must be nondischargeable. Thus, at issue are the following questions: Is the plaintiff entitled to attorney fees under Georgia law for fees incurred defending herself from false complaints? If so, are those attorney fees nondischargeable?
i. Attorney Fees Under Georgia Law
The plaintiff alleges the debtor filed false complaints against her. Georgia recognizes malicious prosecution as a cause of action. See O.C.G.A. § 51-7-40; see also McKissick v. S.O.A., Inc., 299 Ga.App. 772, 774, 684 S.E.2d 24, 27 (2009) (listing the elements of malicious prosecution). Malicious prosecution is an intentional tort, see Cantrell v. Allstate Ins. Co., 202 Ga.App. 859, 415 S.E.2d 711 (1992), and “every intentional tort invokes a species of bad faith and entitles a person so wronged to recover the expenses of litigation including attorney fees.” Carroll v. Johnson, 144 Ga.App. 750, 752, 242 S.E.2d 296, 298 (1978). Expenses incurred defending the criminal prosecution, including attorney fees and loss of time, “represent a proper element of actual damages.” Rae v. Griffin, 160 Ga.App. 96, 96, 286 S.E.2d 64, 65 (1981). Thus, if the plaintiff can win a malicious prosecution action, under Georgia law she is entitled to recover money spent defending herself, including attorney fees.
ii. Dischargeability of Attorney Fees
In Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), the Supreme Court held that § 523(a)(2)(A) excepted from discharge any liability arising from fraudulently obtained money, property, services, or credit, including punitive damages and attorney fees. See id. at 223, 118 S.Ct. 1212. The Court’s holding turned on its interpretation of “debt for” in § 523(a)(2). See id. at 219-21, 118 S.Ct. 1212. “Debt for” comes up in other subsections, including (a)(6), which excepts from discharge “any debt — for willful and malicious injury by the debtor to another entity or to the property of another entity.” Thus the Court’s holding is not limited to § (a)(2) debts. See id.; In re Dinan, 448 B.R. at 785 (“The Supreme Court did not limit its holding in Cohen to cases only under section 523(a)(2)(A). The Court also cited sections 523(a)(1)(B), (a)(4), (a)(6), and (a)(9) as clear examples of instances in which damages, including attorney’s fees, that exceed actual damages would be non-dischargeable.”). Attorney fees incurred because of a debtor’s willful and malicious acts are therefore nondischargeable.
A § 523(a)(6) claim can be based on acts giving rise to a malicious prosecution claim in Georgia. See Kasper v. Turnage (In re Turnage), 460 B.R. 341, 346 (Bankr.N.D.Ga.2011) (“That is because the elements required to prove malicious prosecution ... under Georgia law closely resemble the elements needed to establish a willful and malicious injury for purposes of section 523(a)(6).”). However, a dis-chargeable malicious prosecution judgment — and thus any attorney fees awarded — is possible. Under Georgia law, the essential element “malice” can be inferred from the defendant’s reckless disregard or conscious indifference, or from lack of probable cause. E.g., Fleming v. U-Haul Co. of Georgia, 246 Ga.App. 681, 684, 541 S.E.2d 75, 78-79 (2000). But “[r]ecklessly or negligently inflicted injuries are not excepted from discharge under § 523(a)(6).” Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir.2012) (citing Kawaauhau v. Geiger, 523 U.S. 57, 64, 118 *889S.Ct. 974, 140 L.Ed.2d 90 (1998)). In the Eleventh Circuit, a debtor commits “a ‘willful’ injury when he or she commits an intentional act the purpose of which is to cause injury or which is substantially certain to cause injury,” and “malicious” means “wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will.” Id. (quoting Hope v. Walker (In re Walker), 48 F.3d 1161, 1164 (11th Cir.1995)). So for the plaintiffs malicious prosecution claim to be dischargeable through § 523(a)(6), it must be based on “an intentional act the purpose of which is to cause injury or which is substantially certain to cause injury,” and not merely reckless disregard.5 The plaintiff alleges that the false complaints were filed “deliberately and maliciously.” ¶ 16. Assuming a court finds likewise, a successful malicious prosecution claim would be nondischargeable, as would any attorney fees spent because of the malicious prosecution.
As stated above, the plaintiff has not stated a claim for attorney fees. The Court can only speculate as to whether a set of facts and inferences exist that entitle her to attorney fees, but the Court cannot assume the existence of facts not pleaded or not capable of being reasonably inferred. If the plaintiff wishes to pursue attorney fees, she must state the claim in the body of the complaint, and she must allege enough facts to make the claim plausible.
b. Punitive Damages
Bankruptcy Rule 7008(b) does not require punitive damages to be pleaded as a claim, so a plaintiff does not have to “state a claim” for punitive damages. Perhaps the debtor intended to state that punitive damages are an item of special damage under Federal Rule 9(g). That rule, applicable to adversary proceedings through Bankruptcy Rule 7009, states, “If an item of special damage is claimed, it must be specifically stated.” Punitive damages are not an item of special damage. See, e.g., Scutieri v. Paige, 808 F.2d 785, 790-90 (11th Cir.1987) (district court clearly erred in not submitting punitive damage issue to jury even when complaint did not specifically request punitive damages because “complaint specifically alleged that Defendants acted maliciously, wantonly, willfully and in bad faith and with a reckless disregard for Plaintiffs’ rights.”); see also Guillen v. Kuykendall, 470 F.2d 745, 748 (5th Cir.1972) (“It is not necessary to claim exemplary damages by specific denomination if the facts show that the wrong complained of was inflicted with malice, oppression, or the like circumstances of oppression.”) (citations and internal quotation marks omitted). The plaintiffs factual allegations would be enough to put the debtor on notice that punitive damages were at issue, and the specific prayer more than suffices.6
3. Paragraphs 3, 4, 5, 9, 10, 11, and 13
The above paragraphs all argue a related point — that the plaintiff does not state the circumstances constituting fraud with particularity.
*890Bankruptcy Rule 7009 applies Federal Rule 9 to adversary proceedings. Federal Rule 9(b) states, “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” This rule “requires more than conclusory allegations that certain statements were fraudulent; it requires that a complaint plead facts giving rise to an inference of fraud.” West Coast Roofing and Waterproofing, Inc. v. Johns Manville, Inc., 287 Fed.Appx. 81, 86 (11th Cir.2008). To satisfy the particularity requirement, the Eleventh Circuit “generally require[s] that a complaint identify (1) the precise statements, documents or misrepresentations made; (2) the time and place of and persons responsible for the statement; (3) the content and manner in which the statements misled the plaintiff; and (4) what the Defendants gained by the alleged fraud.” Id.; see also U.S. ex rel. Clausen v. Laboratory Corp. of America, Inc., 290 F.3d 1301, 1310 (11th Cir.2002).
The Court has already concluded that the plaintiff fails to state a claim for fraud under § 523(a)(2). The plaintiff also alleges fraud under § 523(a)(4) and § 727(d)(1). The Court will analyze the allegations supporting both claims.
a. Section 523(a)(4) Claim
Section 523(a)(4) excepts from discharge “any debt — for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The plaintiff alleges that the debtor falsely represented — to a police officer — “that he is the executor of the estate of our parents and that he has control of [certain real property].”7 ¶ 17(d). Elsewhere in the complaint, the plaintiff alleges the debtor “has been attempting to take their property for more than 25 years,” ¶ 21, “has a long history of taking financial advantage of his own parents,” ¶4, “stole several hundred dollars and our Father’s check book from our Mother’s purse,” ¶ 4, has stolen various checks sent from the government to the parents, ¶ 4, has stolen their parents’ farm equipment, ¶ 4, and has tried to force the parents out of their home. ¶ 4. The plaintiff concludes, “Defendant is in violation of 11 U.S.C. § 523(a)(4) since he claims to be executor of the estate of [the parents], but has continuously violated his fiduciary duty by committing fraud, bullying and harassing others.”8 ¶ 33.
The plaintiff does not allege the debtor actually is a fiduciary — she alleges the debtor falsely misrepresented to a police officer that he is the executor of his parents’ estate, and because he claimed to be their executor, he should fall under § 523(a)(4). The plaintiff essentially reads into § 523(a)(4) an estoppel component. But § 523(a)(4) is clear: the debtor must act in a fiduciary capacity. See also Allen v. Scott (In re Scott), 481 B.R. 119, 180 (Bankr.N.D.Ala.2012) (“Courts universally apply a two-part test to determine whether a debt is nondischargeable under section 523(a)(4). That test is: (1) Was the defendant acting in a fiduciary capacity; and, (2) *891Did the defendant commit an act of defalcation while acting in that capacity.”). Because the plaintiff does not allege a fiduciary relationship, the plaintiff fails to state a claim under § 523(a)(4).
Amending to affirmatively allege a fiduciary relationship will likely be ineffective. The complaint alleges the debtor is trying to take property currently owned by the parents&emdash;¶ 21 states that certain real estate “is property owned by our parents.” The complaint is otherwise unclear about whether the parents are still alive. If the parents are alive, there is no estate; with no estate to be an executor of, fiduciary obligations arising from being an executor cannot exist. A claim based on a fiduciary relationship that cannot possibly exist is not facially plausible. But the claim under § 523(a)(4) suffers another, more insurmountable defect. Section 523(c)(1) requires that dischargeability complaints under § 523(a)(2), (a)(4), and (a)(6) be made “on request of the creditor to whom such debt is owned.” The plaintiff does not have standing to object to the discharge-ability of any § 523(a)(4) debts unless the debt is to her. Any fiduciary obligations, and debts arising therefrom, are owed to the parents, not her.
b. Section 727(d)(1) Claim
The plaintiff asks that the debtor’s discharge be revoked under § 727(d)(1) because the debtor’s bankruptcy schedules allegedly include property he does not own and omit property he does own.
Section 727(d)(1) revokes a discharge "obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge." Section 727(a)(4)(A) denies a discharge not already granted when "the debtor knowingly or fraudulently, or in connection with the case-made a false oath or account." Revocation of discharge under § 727(d)(1) can be based on a false oath or account under § 727(a)(4)(A). Walton v. Paul (In re Paul), 2012 WL 4894581, at *3 (Bankr.N.D.Ga.2012) (citing Walton v. Staub (In re Staub), 208 B.R. 602, 604 (Bankr.S.D.Ga.1997)). Moreover, misrepresentations and omissions in schedules “may qualify as a false oath made in connection with the bankruptcy case.” Id. (citing Stamat v. Neary (In re Stamat), 635 F.3d 974, 982 (7th Cir.2011)). Thus, the Court can revoke a discharge because of misrepresentations and omissions in bankruptcy schedules.
The Court will revoke a discharge "if the following criteria have been satisfied: (1) the debtor obtained the discharge through fraud; (2) the creditor possessed no knowledge of the debtor's fraud prior to the granting of the discharge; and (3) the fraud, if known, would have resulted in the denial of the discharge under 11 U.S.C. § 727(a)." The Cadle Co. v. Parks-Matos (In re Matos), 267 Fed.Appx. 884, 887 (11th Cir.2008). Under § 727(a)(4)(A), the plaintiff must show "(1) the debtor made a statement under oath, (2) the statement was false, (3) the debtor knew the statement was false, (4) the debtor made the statement with fraudulent intent, and (5) the statement related materially to the bankruptcy case." In re Paul, 2012 WL 4894581, at *3 (quoting Pioneer Credit Company v. Roubieu (In re Roubieu), 2005 WL 6459370, at *4 (Bankr.N.D.Ga.2005)). When a § 727(d)(1) claim is based on § 727(a)(4)(A), the elements partially merge, and a plaintiff states a claim under § 727(d)(1) if she states a claim under § 727(a)(4)(A) and alleges no knowledge of the fraud before the discharge.
The plaintiff does not mention when she became aware of the alleged fraud. However, the plaintiff did not know about the bankruptcy filing until May 26, *8922012 — twelve days before the order of discharge was entered. She became aware of the bankruptcy through the debtor’s Plea of Stay on Account of Bankruptcy filed in the superior court matters. Despite two pending lawsuits, the debtor originally did not list the plaintiff on his Schedule F. Moreover, when the debtor amended to add the plaintiff, on May 22, he gave an incorrect address. These errors prompted the debtor to move, on July 23, for an extension of time for parties to object to discharge and to file a complaint to determine dischargeability, which the Court granted two days later. That motion was filed 45 days after the June 8 discharge.
Bankruptcy Rule 4004(a) states that parties must object to discharge no later than 60 days after the first date set for the meeting of creditors. That deadline was June 4. Bankruptcy Rule 4004(b)(1) allows the Court, for cause and on motion of any party in interest, to extend the time to object to discharge. Under that subsection, “the motion shall be filed before the time has expired.” Bankruptcy Rule 4004(b)(2) is an exception to the requirement of filing before the time expires. It states,
A motion to extend the time to object to discharge may be filed after the time for objection has expired and before discharge is granted if (A) the objection is based on facts that, if learned after the discharge, would provide a basis for revocation under § 727(d) of the Code, and (B) the movant did not have knowledge of those facts in time to permit an objection.
The debtor filed — and the Court granted — the motion to extend after the discharge, which is a scenario outside of the Bankruptcy Rule 4004(b)(2)’s exception. Bankruptcy Rule 9006(b)(3) states that the Court can enlarge the time to object under 4004(a) “only to the extent and under the conditions stated in those rules.” Thus it appears the Court improperly granted an untimely motion. See also In re Biggs, 2012 WL 2974885, at *3 (Bankr.S.D.Fla.2012) (motions to extend filed after entry of discharge order do not satisfy Bankruptcy Rule 4004(b)(2)).9 The situation is also unusual in that, while Rule 4004(b)(1) refers to “any party in interest,” subsection (b)(2) clearly envisions a nondebtor movant. The debtor cannot “learn after discharge” facts already known that would result in a revocation, nor can the debtor “not have knowledge” of facts in time to object to his own discharge. Revocations ■under § 727(d) are based on certain bad acts the debtor has already done and knows about. So a debtor movant can never meet the standard in Bankruptcy Rule 4004(b)(2).
Because of this aberration, whether this claim is for revocation of discharge under § 727(d)(1) or an objection to discharge under § 727(a)(4)(A) is unclear.10 The Court extended the time to object to dis*893charge (albeit after the discharge was granted), and the plaintiff filed the complaint before the deadline, so calling this claim an objection to discharge is reasonable. But logically, a party cannot object under § 727(a)(4)(A) to a discharge already granted — a granted discharge can only be revoked under § 727(d)(1), not objected to retrospectively through § 727(a)(4)(A). The difference is important. If the Court treats the claim as one under § 727(d)(1), the plaintiff must prove an extra element — not knowing about the fraud before discharge. It is possible that the plaintiff, in the time between receiving notice of the debtor’s bankruptcy and the debtor’s discharge, became aware of the fraud. In that case, the Court would face the absurd result that both a § 727(a)(4)(A) claim and a § 727(d)(1) claim would be untimely when the Court extended the time — on the debtor’s request — specifically to allow a timely complaint to determine whether the debtor is entitled to a discharge.11
Because the debtor requested the extension of time — due to lack of notice caused by the debtor’s own mistakes — the Court finds that the debtor has waived any defenses based on timeliness of any dis-chargeability objection or revocation proceeding. If the debtor views the claim as an objection to discharge under § 727(a)(4)(A), the debtor has waived the defense that a party cannot object to discharge after the discharge. If the debtor views the claim as a request for revocation under § 727(d)(1), the debtor has waived the defense of pre-discharge knowledge of fraud. The plaintiff, therefore, does not have to prove that she did not know about the fraud before discharge. The practical effect is that the plaintiff need only prove the elements of a § 727(a)(4)(A) claim.
The Court will now discuss the allegations supporting the claim. The plaintiff alleges the following misrepresentations and omissions on Schedules A and B:
• “Property listed on Debtor’s Amended Schedule A — Real Property is not properly listed. The 1st & 3rd properties do not provide an address that gives an actual location of the property. These are two properties Debtor is attempting to steal from other Owners and mislead the Bankruptcy Court.” ¶ 20.
• “As to the 3rd property on Schedule A — Real Property, Debtor is attempting to take it outright. (See false affidavits and Colquitt County Property Card from Tax Assessor’s Office, EXHIBIT F).” ¶ 23.
• “On Amended Schedule C, Debtor cannot claim an exemption of property he does not won [sic]. Debtor does not own and has no interest in properties 1 & 3 on the Amended Schedule C.”12 ¶ 30.
• “The 2nd property ... is property owned by our parents. Defendant has been attempting to take their property for more than 25 years.” ¶ 21.
• “Though Debtor lists a 1/10 interest on the schedule for the 2nd property, he has been aggressively attempting to take the entire property....” ¶ 22.
• “Debtor has no original deed for the [fourth property]. Debtor is attempting to manipulate the Bankruptcy Court regarding all the properties on Amended Schedule A — Real Property.” ¶ 24.
*894• “Debtor has completely omitted real property that he does own in an attempt to conceal assets from the Bankruptcy Court and Creditors. Debtor is required to list all assets pursuant to 11 U.S.C. § 521(l)[sic].”13 ¶ 25.
• “Debtor is in violation of 11 U.S.C. § 521(1) regarding his Amended Schedule B — Personal Property." ¶ 29.
As is obvious in these allegations (and as articulated at the hearings), the plaintiff thinks the debtor is claiming ownership of property that is not his. The plaintiff indicated at the hearings she thinks listing property on Schedule A somehow creates ownership rights or legitimate claims to property the debtor otherwise does not have.14 Certain land has been the center of a longstanding family dispute, the plaintiff sees bankruptcy schedules stating the debtor has interests in that land, and now the dispute has taken center stage in bankruptcy court. The Court wants to remind the plaintiff that debtors must disclose every interest in land, no matter how small, no matter how contingent, no matter how remote. The debtor must disclose land he merely thinks he has an interest in, even if he is ultimately wrong. Mistreatment of family members has no bearing on whether land is properly scheduled.
The Court will now address each of the plaintiffs claims of false oaths.
i. First Property on Schedule A
The plaintiff alleges the property is not properly listed because Schedule A does “not provide an address that gives an actual location of the property.” ¶ 23. This is an ambiguous objection. The property is listed as 0.07 acres located on U.S. Highway 319 N. in Norman Park, Georgia. The Court does not know whether the plaintiff is alleging that this address is false or insufficiently describes where the property is. If the plaintiff thinks the location given is false, she has not stated so with particularity. If she merely thinks the description is insufficient, the issue is not one of a false oath but rather whether the trustee has enough information to determine whether to investigate further. See Donarumo v. Furlong (In re Furlong), 660 F.3d 81, 87 (1st Cir.2011). That is for the trustee to decide.
The plaintiff also asserts that the debtor does not own, and has no interest in, this property. ¶ 30. She further alleges the debtor is trying to steal it from other people. ¶ 20. The debtor must schedule any property he owns or claims to own, whether or not the plaintiff agrees with the debtor’s assessment of ownership. The debtor clearly thinks he owns this property. Omitting property that could possibly benefit the estate would have been a basis for a § 727(a)(4)(A) or a § 727(d)(1) claim, so debtors should err on the side of overinclusion. And as more fully explained below in the Court’s discussion of the second property on Schedule A, including property that should be omitted — rather than omitting property that should be included — is not the type of false oath § 727(a)(4)(A) contemplates.
ii. Second Property on Schedule A
The plaintiff claims the second property is owned by her (and the debt- *895or’s) parents and that the debtor is trying to “take” it. ¶ 21. Schedule A says the debtor is a co-owner in the property with a one-tenth interest. The Court is still unsure whether one or both parents are living or deceased. If the parents are living and own the property, the debtor arguably misrepresented an ownership interest.15 But barring extraordinary circumstances, this type of misrepresentation would not result in denial of discharge because it does not relate materially to the bankruptcy case. A false oath materially relates to the case “if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of ... property.” Chalik v. Moorefield, (In re Chalik), 748 F.2d 616, 618 (11th Cir.1984). Property the debtor has no interest in does not meet this standard. If the estate has “no interest in property that was omitted from a schedule, the omission is not material and should not be a ground for denying a discharge.” 6 Collier on Bankruptcy ¶ 727.04[1][b] (Resnick & Sommer eds., 16th ed.). While the issue here is not an omission, the concept is the same — the estate has no interest in property the debtor has no interest in, and thus the inclusion does not materially relate to the bankruptcy case. Moreover, intent to defraud in a Chapter 7 case through claiming to own more property is difficult to fathom.
iii. Third Property on Schedule A
Like with the first property, the plaintiff alleges that the debtor does “not provide an address that gives an actual location of the property.” ¶ 20. The debtor scheduled a one-tenth interest in property located at U.S. Highway 319 N., Norman Park, Georgia. The Court reiterates the points made regarding the first property.
The plaintiff also states that the debtor does not own the property, ¶ 30, and “is attempting to take [the property] outright.” ¶23. The plaintiff then points to attached Exhibit F, which she refers to as “false affidavits and Colquitt County Property Card from Tax Assessor’s Office.” ¶ 23. The first affidavit is of the debtor. It states that the debtor has been in possession of certain property (described via metes and bounds) “[f]or in excess of twenty five years prior to the date of’ the affidavit. It also states that his “possession of the subject property has been public, continuous, exclusive, uninterrupted, and peaceable,” and that he “make[s] claim to the same.” The other affidavit is from someone familiar with the property, who states that the property “has been claimed by Willie Lee Smith and Charles D. Smith for at least 40 years.” Both affidavits were recorded in the real estate records at the Colquitt County Superior Court Clerk’s Office. The property record card lists the owners as Charles Smith and the estate of Willie Lee Smith.
The elements of a § 727(a)(4)(A) claim, as listed above, are (1) a debtor’s statement under oath that is (2) false, (3) which the debtor knew was false and (4) which the debtor made with fraudulent intent, and (5) which related materially to the bankruptcy case. At this stage, the Court “must take the factual allegations of the complaint as true and make all reasonable inferences from those facts to determine whether the complaint states a claim that is plausible on its face.” Cline v. Tolliver, 434 Fed.Appx. 823, 825 (11th Cir.2011) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). *896“The plausibility standard ‘calls for enough fact to raise a reasonable expectation that discovery will reveal evidence’ of the defendant’s liability.” Chaparro v. Carnival Corp., 693 F.3d 1333, 1337 (11th Cir.2012) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955).
The plaintiff states a claim under § 727(a)(4)(A). The debtor scheduled a one-tenth interest in certain property, which the plaintiff alleges the debtor is trying “to take.” The plaintiff references attached affidavits filed in the real estate records establishing the debtor claims to have acquired at least a one-half (and possibly full) interest in the property through adverse possession. The plaintiff also points to a Colquitt County Tax Assessor record listing the debtor as one of two owners. Moreover, the plaintiff alleges, “Debtor is attempting to manipulate the Bankruptcy Court regarding all the properties” on Schedule A, ¶ 24, and that the debtor is “attempting to ... mislead the Bankruptcy Court” about this property. If 20. Taking the allegations as true and giving the plaintiff the benefit of all reasonable inferences, the plaintiff states a claim that the debtor (1) made a statement under oath (in Schedule A), (2) that was false (one-tenth instead of one-half or full),16 (3) that the debtor knew was false (the Court can infer from the debtor’s affidavit he knew one-tenth was false), (4) that the debtor made with fraudulent intent (the debtor is trying to manipulate and mislead the Court),17 (5) that related materially to the bankruptcy case (the statement concerns the existence of an interest of property, and the estate might have an interest in the full value or half value of the property).
Moreover, the plaintiff alleges fraud with sufficient particularity. Federal Rule 9(b) is intended to “alert[ ] defendants to the ‘precise misconduct with which they are charged’ and protect[ ] defendants ‘against spurious charges.’ ” Ziemba v. Cascade International, Inc., 256 F.3d 1194, 1202 (11th Cir.2001) (quoting Durham v. Business Management Associates, 847 F.2d 1505, 1511 (11th Cir.1988); see also Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 217 (3rd Cir.1997) (“The purpose of the rule is to allow a defendant to meaningfully respond to a complaint.”)). Some courts hold that the particularity required for § 727(a)(4)(A) claims is less than that for other types of fraud claims. See, e.g., Boan v. Damrill (In re Damrill), 232 B.R. 767, 774 (Bankr.W.D.Mo.1999). This makes sense because the debtor requires fewer details to meaningfully respond. For instance, if a plaintiff alleges omissions from bankruptcy schedules, it is *897senseless to speak of the time and place of the misrepresentations, or the manner in which the statements misled the plaintiff, or what the debtor gained as a result of the misrepresentations. Moreover, the existence of a specific location on a tangible item — i.e., Schedule A on the debtor’s bankruptcy petition — creates an inherent particularity not found in typical fraud cases.
The complaint is not perfect, but the debtor knows precisely what he is alleged to have done, what property is at issue, what documents are in play, and what is at stake. Fraud allegations need not be elaborate. The plaintiff need not prove her case in the complaint, nor must she allege the fine points of an alleged scheme. The defendant can meaningfully respond to this claim.
iv.Fourth Property on Schedule A
The plaintiff alleges in ¶ 24 that the debtor has no original deed for this property. Deeds are not required for an interest in property, so the plaintiff does not allege a false statement. Even if the debt- or lacked any deed he is required to schedule his interest in the property. And “original deed” is ambiguous. The Court does not know whether the plaintiff is alleging the debtor has no deed but owns the property otherwise, or he had an original deed he lost, or he has no deed because he does not own the property. And again, including property not owned does not relate materially to the case,
v.Unspecified Omitted Real Property
The plaintiff alleges, “Debtor has completely omitted real property that he does own in an attempt to conceal assets from the Bankruptcy Court and Creditors. Debtor is required to list all assets pursuant to 11 U.S.C. § 521(1).” ¶ 25. This is the only allusion to unscheduled real property. In the context of a § 727(a)(4)(A) claim, the complaint “must include more than just a bare allegation that a debtor failed to list something on his schedules.” Boan v. Damrill (In re Damrill), 232 B.R. 767, 774 (Bankr.W.D.Mo.1999).
vi.Unspecified Omitted Personal Property
The plaintiff alleges the debtor “is in violation of 11 U.S.C. § 521(1) regarding his Amended Schedule B — Personal Property.” Again, this bare allegation is insufficient.
4. Paragraph 6
Paragraph 6 states, “The complaint refers to alleged claims of third parties, claims that plaintiff cannot pursue, and claims that are over 4 years old (paragraph 19) and barred by the statute of limitations and therefore the complaint fails to state a claim upon which relief can be granted.” The complaint’s ¶ 19 states, “Defendant has willfully and maliciously caused on-going financial and emotional injury for a period of over 20 years solely for the purpose of taking property he does not own.” The debtor’s reference to claims of third parties is ambiguous — -the Court is unsure whether the debtor refers to the § 523(a)(4) claim discussed earlier or whether the debtor thinks ¶ 19 asserts a third party claim for willful and malicious injury under § 523(a)(6). As noted in Part II.A.3.a., § 523(c)(1) requires that dis-chargeability complaints under §§ 523(a)(2), (a)(4), and (a)(6) be made “on request of the creditor to whom such debt is owned.” To the extent the plaintiff asserts third party claims not already addressed, the Court finds she has no standing.
Paragraph 19 can also be read as supporting the plaintiffs own § 523(a)(6) claims. The debtor contends the plaintiff fails to state a claim under § 523(a)(6) because the four-year statute of limitations *898has run on the actions alleged in ¶ 19. The four-year statute of limitations the debtor refers to is presumably that for injuries to personal property, codified at O.C.G.A. § 9-3-31. Claims under § 523(a)(6) also implicate the two-year statute of limitations for personal injuries and one-year statute of limitations for slander, both codified at O.C.G.A. § 9-3-33. The debtor alleges acts that potentially form the basis of numerous § 523(a)(6) claims — she alleges harassment, slander, libel, threats of physical harm, stalking, and the filing of false complaints, each of which might be its own cause of action.18
Under Federal Rule 8(c), applicable to adversary proceedings via Bankruptcy Rule 7008, the statute of limitations is a defense that must be raised in a responsive pleading, not in a motion to dismiss. The plaintiff is not required to negate this affirmative defense by pleading compliance with the statute of limitations. La Grasta v. First Union Securities, Inc., 358 F.3d 840, 845 (11th Cir.2004). Dismissal for failure to state a claim “on a statute of limitations grounds is appropriate only if it is ‘apparent from the face of the complaint’ that the claim is time-barred.” Id. (quoting Omar ex rel. Cannon v. Lindsey, 334 F.3d 1246, 1251 (11th Cir.2003)). Paragraph 19 states the debt- or “has willfully and maliciously caused ongoing financial and emotional injury for a period of over 20 years.” Even if this allegation contained the only reference to timeframe, it would not be apparent on the face of the complaint that any claim is time-barred. The complaint contains multiple allegations dated in various months of 2010 supporting the willful and malicious injury claim, and the superior court matters — which form the basis of the § 523(a)(6) claims — were filed in 2011. It is apparent on the face of the complaint that any § 523(a)(6) claims with a limitations period two years or more are not time-barred.
5. Paragraph 7
The complaint’s Exhibit A is a photocopy of a check the debtor indorsed and on which he wrote his social security number. The debtor states that “Exhibit A to the complaint must be redacted since it contains the entire social security number of debtor in violation of the Court’s rules and the applicable privacy laws.” Our Local Rule 5075-l(a) says the following:
(a) Redaction by the Clerk of the Court. Any entity needing to redact information on file with the Court may file a request for redaction. Such request shall specify the document containing the information and a contention that the information is one or more of the following types:
(i) Social Security numbers
Upon filing such request, the Clerk of Court shall remove the subject document from the public docket. The party requesting redaction shall file with the Court a replacement document with all necessary redaction properly executed by the filer within 14 days from the date of the request. If no replacement document is filed, the Clerk of Court shall place the original document back on the public docket.
Normally, a party cannot request a redaction through a Rule 12 motion. But to expedite matters, the Court will direct the Clerk of the Court to remove Exhibit A. *899The plaintiff will have 14 days to file a redacted Exhibit A.
6.Paragraph 8
The debtor states that the complaint’s ¶ 30 improperly objects to the claim of exempt property through a complaint. That paragraph states, “On Amended Schedule C, Debtor cannot claim an exemption of property he does not won [sic]. Debtor does not own and has no interest in properties 1 & 3 on the Amended Schedule C.”
The debtor is correct that objections to exemptions cannot be initiated through a complaint. Part VII of the Bankruptcy Rules govern procedure in adversary proceedings. Bankruptcy Rule 7003, which applies Federal Rule 3 to adversary proceedings, states that adversary proceedings are commenced by filing a complaint with the court. Bankruptcy Rule 7001 contains an exclusive list of proceedings the Bankruptcy Code classifies as adversary proceedings — that is, it contains an exclusive list of proceedings requiring a complaint. Objections to exemptions are not on the list. Disputes not governed by Part VII are contested matters governed by Bankruptcy Rule 9014. Bankruptcy Rule 9014(a) states, “In a contested matter not otherwise governed by these rules, relief shall be requested by motion.” See also Bankruptcy Rule 4003(b) (“[A] party in interest may file an objection to the list of property claimed as exempt....”).
However, the plaintiff is not objecting to an exemption. She is not alleging the debtor is not entitled to a certain exemption — she is alleging the debtor does not own the first and third properties on Schedule C, which are also the first and third properties listed on Schedule A. The plaintiff already voiced her thoughts on Schedule A earlier in the complaint. Because the allegation is redundant, it violates Federal Rule 8(a)(2)’s requirement that a statement of the claim be short and plain.
7. Paragraph 12
The complaint’s ¶¶ 17(d) and 33 allege, respectively, (1) the debtor falsely represented being the executor of his parents’ estate and (2) the debtor violated his fiduciary duties as executor through fraud. The debtor contends that this inconsistency is so vague or ambiguous that the debt- or cannot reasonably prepare a response. The debtor moves for a more definite statement under Federal Rule 12(e).
This issue is moot. The Court has already explained that among the multiple deficiencies of the plaintiffs § 523(a)(4) claim, the plaintiff does not have standing to bring § 523(a)(4) claims on others’ behalf. But the Court would like to note that Federal Rule 8(d) explicitly allows inconsistent pleadings. See also United Technologies Corp. v. Mazer, 556 F.3d 1260, 1273 (11th Cir.2009) (“[W]e are not troubled by what the district court saw as inconsistent allegations. Rule 8(d) of the Federal Rules of Civil Procedure expressly permits the pleading of both alternative and inconsistent claims.”). The complaint at issue does not allege the debtor actually acted in a fiduciary capacity — it alleges the debtor lied about being an executor, and because he claims to be an executor, he should fall under § 523(a)(4). This is a Rule 12(b)(6) issue, not a Rule 12(e) issue. And had the plaintiff actually pleaded inconsistent allegations, the inconsistency would not be grounds for a more definite statement.
8. Paragraph 15
In the plaintiffs prayer for relief, she asks that the Court declare the superior court claims nondischargeable. As part of that prayer, the plaintiff states, “Plaintiff respectfully requests that this Honorable Court allow the cases to continue in Col-*900quitt County so that Plaintiff is not unduly Prejudiced by double expenses and time.” The debtor states this violates our local rule prohibiting stay relief motions being combined with other forms of relief.
Local Rule 9004-l(a) does indeed prohibit combining motions for stay relief with other forms of relief, and under Bankruptcy Rule 7001, stay relief cannot be adjudicated through an adversary proceeding. However, pursuant to the Court’s two preliminary orders on the stay relief motions in the main case (ECF Nos. 36 and 50), the stay relief motion is being carried along with the adversary proceeding, and the Court will hear both at the same time. The complaint’s request for stay relief is technically improper, and thus an amended complaint should not include it, but it does not affect the adversary proceeding.
9. Paragraph 16
Pursuant to Federal Rule 12(f), the debtor moves to strike the complaint’s ¶¶ 3-33 because the plaintiff does not state whether she consents to entry of a final judgment by a bankruptcy judge as required by Bankruptcy Rule 7008(a). The debtor also moves to strike ¶¶ 4-33 under Federal Rule 12(f) because of “redundant, immaterial, impertinent, and scandalous matter.” And the debtor moves under Federal Rule 12(e) for a more definite statement, alleging, “The complaint is vague, ambiguous, and confusing, and is not understandable.”
Federal Rule 12(f) allows a court, on its own or by a party’s motion, to strike “any redundant, immaterial, impertinent, or scandalous matter.” Striking a pleading is “a drastic remedy to be resorted to only when required for the purposes of justice ... [and] when the pleading to be stricken has no possible relation to the controversy.” Augustus v. Board of Public Instruction of Escambia County, Florida, 306 F.2d 862, 868 (5th Cir.1962) (quoting Brown & Williamson Tobacco Corp. v. United States, 201 F.2d 819, 822 (6th Cir.1953)). These motions “are rarely granted absent a showing of prejudice.” Stephens v. Trust for Public Land, 479 F.Supp.2d 1341, 1346 (N.D.Ga.2007). The rule’s purpose is to avoid litigating issues that will not affect the outcome of the case and to minimize delay, prejudice, and confusion. E.g., United States v. 6941 Morrison Drive, Denver, Colorado, 2012 WL 5989609, at *1 (D.Colo.2012). Establishing prejudice will be difficult — if not impossible — if no jury will see the pleadings. See, e.g., Wanecke v. Northwest Airlines, 10 F.R.D. 403, 403 (N.D.Ohio 1950) (“Although the language ... may not perform any useful function in the complaint, prejudice to the defendant, in the event the proposed evidence is excluded at the time of trial, can be prevented either by proper instruction to the jury or by refusal to submit the pleadings to the jury.”); Roberson v. Great American Insurance Cos. of New York, 48 F.R.D. 404, 422-23 (N.D.Ga.1969) (the jury getting inadmissible evidence through the “back door” of complaint allegations “might be prejudicial if the jury were to see it”; if issue is a nonjury matter, “any prejudice to the defendant by the jury is obviated”).
Federal Rule 12(e) states, “A party may move for a more definite statement of a pleading to which a responsive pleading is allowed but which is so vague or ambiguous that the party cannot reasonably prepare a response.... The motion ... must point out the defects complained of and the details desired.” A motion for a more definite statement is proper if the pleading “fails to specify the allegations in a manner that provides sufficient notice,” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002), or does not contain enough information to frame a responsive *901pleading. Barnett v. Bailey, 956 F.2d 1036, 1043 (11th Cir.1992). This motion is intended to remedy unintelligible pleadings rather than pleadings lacking in detail. E.g., Fernandez v. Centric, 2013 WL 310373, at *2 (D.Nev.2013).
a. Defective Allegation of Jurisdiction
The complaint states, "This Court has jurisdiction pursuant to 11 U.s.c. § 157. This is a non-core proceeding." Federal Rule 8(a) requires that a complaint contain "a short and plain statement of the grounds for the court's jurisdiction." Bankruptcy Rule 7008(a) adds the following requirements for adversary complaints:
The allegation of jurisdiction required by Rule 8(a) shall also contain a reference to the name, number, and chapter of the case under the Code to which the adversary proceeding relates and to the district and division where the case under the Code is pending. In an adversary proceeding before a bankruptcy judge, the complaint, counter claim, cross-claim or third-party complaint shall contain a statement that the proceeding is core or non-core and, if non-core that the pleader does or does not consent to entry of final orders or the judgment by the bankruptcy judge[19]
The plaintiff alleges this adversary proceeding is a noncore proceeding but does not state whether she consents to entry of final orders by the bankruptcy judge. The debtor does not explain why this omission justifies striking all but the first two paragraphs of the complaint. The omission does not make the remainder of the complaint redundant, immaterial, impertinent, or scandalous. A more fitting remedy is to allow the plaintiff to clarify this allegation. At the November 7 hearing, the plaintiff admitted that this allegation was based on a misunderstanding of the law. She accepted the Court’s explanation that dischargeability proceedings are core proceedings. The plaintiff should therefore amend her complaint to state that this proceeding is core. Alternatively, if the plaintiff has come to believe this proceeding is noncore, she should either amend to state she consents to entry of a final order by the bankruptcy judge, amend to state she does not consent to entry of a final order, or file a motion to withdraw reference under 28 U.S.C. 157(d) and Bankruptcy Rule 5011 if she thinks cause for withdrawal exists.
The jurisdiction allegation has other defects. The plaintiff states the Court has jurisdiction pursuant to 28 U.S.C. § 157, which does not exist. The plaintiff likely intended 28 U.S.C. § 157. But that statute does not grant federal subject matter jurisdiction-it merely clarifies what matters a district court can refer to bankruptcy judges. The grant of jurisdiction over bankruptcy cases, and matters arising in or related to bankruptcy cases, is in 28 U.S.C. § 1334, and a correct allegation of jurisdiction would also contain that section. The complaint’s allegation of jurisdiction also does not contain a reference to the name, number, and chapter of the case under the Bankruptcy Code to which the adversary proceeding relates and to the district and division where the case is pending, as required by Bankruptcy Rule 7008(a).
*902Despite the mandatory language of the Federal Rules and the Bankruptcy Rules, defective jurisdiction allegations are technical deficiencies not grounds for dismissal if the complaint otherwise demonstrates jurisdiction. E.g., Shapiro v. Halberstram (In re Halberstram), 219 B.R. 356, 361 (Bankr.E.D.N.Y.1998). A court can find jurisdiction “even if a complaint lacks such a jurisdictional statement, so long as the complaint makes ‘references to federal law sufficient to permit the court to find ... jurisdiction,’ ” or “ ‘if the complaint says enough about jurisdiction to create some reasonable likelihood that the court is not about to hear a case that it is not supposed to have the power to hear.’ ” Scarborough v. Carotex Const., Inc., 420 Fed.Appx. 870, 873 (11th Cir.2011) (quoting Miccosukee Tribe of Indians v. Kraus-Anderson Constr. Co., 607 F.3d 1268, 1275-76 (11th Cir.2010)); see also LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 5-6 (1st Cir.1999) (Even if the jurisdiction asserted is incorrect, “federal subject matter jurisdiction may be established by reading a complaint holistically.... These general principles apply in the bankruptcy context.”).
Thus the Court can look past certain technical omissions or inaccuracies if the required information is explicitly or implicitly elsewhere. The Court knows that with a complaint to determine dischargeability under § 523, it is not about to hear a case it has no authority to hear, and the other information required by Bankruptcy Rule 7008(a) is in the complaint’s caption. There is no dispute over the main case’s name, number, chapter, district, or division, and assuming the plaintiff no longer claims this proceeding is noncore, there is no dispute over jurisdiction. Despite this leniency, complying with all Bankruptcy Rules and Federal Rules is always safer. Repeated violations of rules might be evidence that allowing future amendments would be futile. Moreover, following every rule of procedure avoids objections and saves everyone time. The plaintiff should use the opportunity to amend her complaint to ensure even technical deficiencies are corrected.
b. Matter that is Redundant, Immaterial, Impertinent, and Scandalous Under Federal Rule 12(f)
The debtor does not specify which allegation(s) are redundant, immaterial, impertinent, scandalous, vague or ambiguous. The debtor requests a wholesale striking of ¶¶ 4-33, so the Court can only assume the debtor thinks everything in all of those paragraphs falls under one or more of those adjectives. If certain statements are prejudicial, only those statements — and not the entire paragraph containing them — should be stricken. Wright & Miller, Federal Practice and Procedure: Civil Sd § 1380.
Pleadings are to be construed to do justice. And pro se pleadings are to be liberally construed. Moreover, the stage of this proceeding requires that the Court assume the truth of the complaint’s allegations and give the plaintiff the benefit of all reasonable inferences. In the face of all that, the debtor cannot indiscriminately throw a bunch of adjectives at the entire complaint and expect the Court to strike everything. Harsh words are not necessarily scandalous in a complaint alleging a history of fraud and willful and malicious injury — they might be an accurate description, and to an extent, the Court must assume they are an accurate description. Allegations of defrauding or injuring third parties are pertinent if they establish motive, intent, or plan in the transactions with the plaintiff. See Fed.R.Evid. 404(b)(2). And even if the debtor specified which allegations fall under which of Federal Rule 12(f)’s adjectives, the debtor has *903not stated how the allegations are prejudicial. The Court sees no reason to strike any of the complaint’s paragraphs. The debtor may file another, more specific, motion to strike if the debtor thinks allegations in this complaint (or a future amended complaint) prejudice him and cannot possibly, relate to the proceeding,
c. Matter that Is Vague or Ambiguous Under Rule 12(e)
The complaint’s technical and substantive defects are numerous. Allegations are not as short and plain as they could be. Misunderstanding and misapplication of the law has led to mis-citing statutes, violating local rules, alleging of causes of action the plaintiff has no standing to pursue or for which she does not state a claim, failing to state the circumstances constituting fraud with particularity, and finding legal significance in certain of the debtor’s actions where none exists. The complaint clearly needs work.
The complaint has defects not yet discussed that also make the complaint more difficult to understand than it should be. Federal Rule 10(b), applicable to adversary proceedings via Bankruptcy Rule 7010, states, “If doing so would promote clarity, each claim founded on a separate transaction or occurrence ... must be stated in a separate count....” Despite purporting to state causes of action under § 523(a)(2), § 523(a)(4), § 727(a)(4)/(d)(l), and potentially numerous causes of action under § 523(a)(6), the complaint contains no separate counts. The factual allegations begin at ¶ 4, which contains six paragraphs of background information and specific misconduct, and continue to ¶ 25. Paragraphs 26-33 are a mixture of legal conclusions and prayers for relief, with the formal prayer for relief following ¶ 33. When testing the complaint’s sufficiency, the Court is obligated to scour the pleading for minimal factual content and ignore the complaint’s organization, but complaints should not be a jigsaw puzzle where it is up to the reader to determine which allegations support which causes of action. Separate counts would promote clarity, and the plaintiff should appropriately organize a future amended complaint.
Another mistake that impedes clarity is in ¶ 18, which states, “Plaintiff realleges and reaffirms all the allegations contained in both [superior court] Complaints ... and incorporates the same by reference.” As noted in Part II.A.1, the allegations in those complaints are a mystery. They are not attached to the pleadings, so if they contain allegations making the adversary complaint more understandable, or if they contain allegations supporting the causes of action in this adversary proceeding, the Court would not know. The adversary complaint reads as though its allegations also form the basis for the superior court complaints. If that assessment is correct, the allegations in the state court complaints are redundant. Re-alleging redundant allegations would not make for a short and plain statement of the claim.
If the allegations are not redundant, amending to attach the pleadings will not help. Federal Rule 10(c), applicable here via Bankruptcy Rule 7010, says, “A statement in a pleading may be adopted by reference elsewhere in the same pleading or in any other pleading or motion. A copy of a written instrument that is an exhibit to a pleading is part of the pleading for all purposes.” Although not explicit in Federal Rule 10(c), only pleadings in the same action can be adopted by reference— not pleadings in prior actions, including actions between the same parties. Texas Water Supply Corp. v. R.F.C., 204 F.2d 190, 196 (5th Cir.1953) (“Rule 10(c) ... permits reference to pleadings and exhibits in the same case, but there is no rule *904permitting the adoption of a cross-claim in a separate action in a different court by mere reference.”)-20 Moreover, the complaint would not be a “written instrument” considered part of the adversary complaint. See, e.g., United States v. International Longshoremen’s Association, 518 F.Supp.2d 422, 465-66 (E.D.N.Y.2007) (“A ‘written instrument’ is a document evidencing legal rights or duties or giving formal expression to a legal act or agreement, such as a deed, will, bond, lease, insurance policy or security agreement.... The pleadings attached as exhibits to the Amended Complaint ... are nothing more than self-serving statements prepared by the plaintiff with no independent evidentia-ry value.”). If the superior court complaints contain information not in the adversary complaint, and the plaintiff wants the Court to consider that information, the plaintiff must put that information in the body of adversary complaint. The plaintiff can attach the superior court pleadings if she wishes, but she cannot incorporate information therein into the adversary complaint, and that complaint will not be a part of the pleadings.
The complaint also contains redundant allegations that are confusing because their redundancy is not obvious. Paragraph 17 is a multipart allegation that essentially repeats the allegations in ¶ 11 and ¶ 12 with changes in emphasis and detail. A casual reading suggests that the allegations in these paragraphs are a different set of facts.
Perhaps this opinion’s explanation and dismissal of certain causes of action disentangles issues enough for the debtor to craft a response. But the debtor should not have to cross-reference a lengthy opinion to understand a pleading. The complaint, as it stands now, verges on being a shotgun complaint. Typical characteristics of a shotgun pleading are disordered, extensive allegations and incorporation of the allegations into each claim, both of which create a maze for the other party in sorting out which allegations are intended to support which claim. E.g., Streeter v. City of Pensacola, 2007 WL 809786, at *1 (N.D.Fla.2007) (citing Byrne v. Nezhat, 261 F.3d 1075, 1128-29, 1133 (11th Cir.2001); BMC Industries, Inc. v. Barth Industries, Inc., 160 F.3d 1322, 1326 n. 6 (11th Cir.1998); Anderson v. District Board of Trustees of Central Florida Community College, 77 F.3d 364, 366 (11th Cir.1996)). Shotgun pleadings are a burden not only on opposing parties but also on courts, because “the judicial work that results from shotgun pleading is far more time consuming than the work required up front to prevent the case from proceeding beyond the pleadings until the issues are reasonably well defined.” Johnson Enterprises of Jacksonville, Inc. v. FPL Group, Inc., 162 F.3d 1290, 1333 (11th Cir.1998). While the complaint’s allegations are not lengthy or numerous, they are jumbled, confusingly repetitive in parts, incorporate allegations in other documents wholesale while not attaching the documents (while at the same time incorporating allegations that cannot be incorporated from documents that cannot be attached), and do not specify which allegations support which *905claims. And the Court has expended considerable time in parsing the complaint.
However, the complaint is not unintelligible. Her factual allegations are clear. That the plaintiffs misunderstanding of the law leads to numerous incorrect conclusions does not make her allegations unintelligible. As is implied in the Court’s discussion of each of the debtor’s objections, the complaint’s defects are best handled under other rules. For instance, a more definite statement would not help to determine whether the plaintiff states a claim under § 523(a)(2)(A) or § 523(a)(4). She clearly does not. That is a Federal Rule 12(b)(6) issue. And a more definite statement cannot be used merely to obtain greater detail about an otherwise intelligible claim, so it is an improper remedy to cure Federal Rule 9(b) particularity deficiencies. That problem is easily fixed by an amendment, which is a Federal Rule 15 and Bankruptcy Rule 7015 issue. Moreover, even if a more definite statement were appropriate, the debtor has not asked for the details desired as required by Federal Rule 12(e), and so the Court would not know what to order. The Court therefore will not order a more definite statement. The Court will allow the plaintiff to amend her complaint.
10. Summary
As the Court will more fully discuss in Part III, the plaintiff will have 21 days to amend her complaint, and the debtor will have 21 days to answer the amended complaint. The amended complaint should address the deficiencies discussed above if the plaintiff wishes to pursue those matters. Below is a summary of the Court’s discussion.
• Part II.A.1 — The Court will dismiss the § 523(a)(2)(A) claim for failing to state a claim upon which relief can be granted because the plaintiff does not allege an extension of money, credit, property or services and because the plaintiff does not allege any misrepresentations to her.
• Part II.A.2.a — The Court will dismiss the claim for attorney fees because the plaintiff does not plead the request as a claim as required by Bankruptcy Rule 7008(a).
• Part II.A.2.b — The Court will deny the motion to dismiss claim for punitive damages as inapplicable.
• Part II.A.3.a — The Court will dismiss the § 523(a)(4) claim for lack of standing and because the plaintiff does not allege a fiduciary relationship.
• Part II.A.3.b.i — The Court will dismiss § 727(d)(1) claim as to the first property on Schedule A for failing to state a claim or for not stating the circumstances constituting fraud with sufficient particularity. If the plaintiff alleges a false address, she has not stated so with sufficient particularity. If the plaintiff alleges an insufficient address, she has not alleged a false oath.
• Part II.A.3.b.ii — The Court will dismiss the § 727(d)(1) claim as to the second property on Schedule A for failing to state a claim because the alleged misrepresentation does not relate materially to the bankruptcy case.
• Part II.A.3.b.iii — The plaintiff states a claim under § 727(d)(1) as to the third property on schedule A.
• Part II.A.S.b.iv — The Court will dismiss the § 727(d)(1) claim as to the fourth property on Schedule A for failing to state a claim because the alleged misrepresentation does not relate materially to the bankruptcy case.
• Part II.A.3.b.v — The Court will dismiss the § 727(d)(1) claim as to unspecified omitted real property because a bare allegation of omitted *906property does not satisfy Federal Rule 9(b).
• Part II.A.3.b.vi — The Court will dismiss the § 727(d)(a) claim as to unspecified omitted personal property because a bare allegation of omitted property does not satisfy Federal Rule 9(b).
• Part II.A.4 — The Court will deny the motion to dismiss based on the statute of limitations because the plaintiff does not have to negate affirmative defenses in a complaint.
• Part II.A.5 — The Court will treat the debtor’s objection to his social security number being on the complaint’s Exhibit A as a request for redaction. The Court will order the Clerk of the Court to remove Exhibit A from the docket, and the plaintiff will have 14 days to file a redacted Exhibit A.
• Part II.A.6 — The complaint’s ¶ 30 is redundant and, pursuant to Federal Rule 8(a)(2), an amended complaint should not include redundant allegations.
• Part II.A.7 — The debtor’s motion for a more particular statement regarding the § 523(a)(4) claim is moot because the Court will dismiss that claim. See Part II.A.3.a.
• Part II.A.8 — Pursuant to Local Rule 9004-l(a), the plaintiff cannot combine motions for stay relief with other forms of relief, and under Bankruptcy Rule 7001, stay relief cannot be adjudicated through an adversary proceeding. Seeking stay relief in an adversary proceeding is improper and an amended complaint should omit the request from the prayer for relief.
• Part II.A.9.a — The Court will deny the motion to strike ¶¶ 3-33 because a defective allegation of jurisdiction does not make the remainder of the complaint redundant, impertinent, immaterial, or scandalous. However, the allegation of jurisdiction does not conform to Bankruptcy Rule 7008(a). An amended complaint should cure the deficient allegation.
• Part II.A.9.b — Motion to strike ¶¶ 4-33 denied because the debtor did not demonstrate that any allegation had no possible relation to the proceeding or that any allegation was prejudicial.
• Part II.A.9.C — Motion for a more particular statement denied because the complaint is not unintelligible and because the complaint’s deficiencies are more appropriately and more easily addressed by other rules.
B. The Brown Complaint
This 23-paragraph complaint generated a 21-paragraph motion seeking dismissal for failure to state claims upon which relief can be granted, a more definite statement, and to strike certain allegations. The Court will examine each objection in the same manner as with the Smith complaint.
1. Paragraph 1
The debtor claims the plaintiffs fail to state a claim under § 523(a)(2) because “there was not any extension of credit by plaintiffs or allegations of same.” As the Court stated in Part II.A.1 in response to the same objection to the Smith complaint, the debtor improperly argues a question of fact. If the debtor meant to say the plaintiffs did not allege an extension of credit, the Court again responds that § 523(a)(2) does not require an extension of credit. An extension of credit is only one possible transaction that can be the subject of a § 523(a)(2) claim. The statute also includes money, property, services, renewal of credit, and refinance of credit. The complaint alleges, in ¶ 5, that the plaintiffs paid over five thousand dollars for the real *907property that is the subject of the § 523(a)(2) claim.21
2. Paragraph 2
The debtor states the complaint fails to state a claim for punitive damages, attorney fees, and for producing documents. The Court refers to Part II.A.2 for legal standards applicable to attorney fees and punitive damages.
a.Attorney Fees
The Brown complaint, like the Smith complaint, asks for court costs, which may or may not be a request for attorney fees. If it is not a request for attorney fees, then the objection on this point is inapplicable. If it is a request for attorney fees, they have not stated a claim for them. The Browns are pro se, and they have not indicated they incurred attorney fees in the state court matter. An ambiguous request in the prayer for relief does not state a claim, and even if the Browns had specifically stated in the body of the complaint that they seek attorney fees, a claim by pro se litigants for attorney fees is not facially plausible.
b.Punitive Damages
Neither the Federal Rules nor the Bankruptcy Rules require a party to state a claim for punitive damages. The plaintiffs allege willful and malicious acts, which puts the debtor on notice that punitive damages are an issue. Moreover, the plaintiffs specifically ask for punitive damages. This is sufficient
c.Production of Documents
Paragraph (f) of the prayer for relief requests “[tjhat Defendant be required to show documentation that proves he owned the property in question.” While a party does not have to state a claim upon which relief can be granted for the production of documents, a party also cannot be awarded documents in a proceeding to determine dischargeability. Production of documents is a pretrial discovery issue. Bankruptcy Rule 7034 adopts Federal Rule 34’s procedures for the discovery of documents. If the plaintiffs want to see documents relevant to their claim, they can get them from the debtor well before trial.
3. Paragraphs 3, 4, 5, 8, 9, 12, 13, 17, and 20
These paragraphs all state, in nine different ways, that the complaint does not state the circumstances constituting fraud with particularity as required by Federal Rule 9(b).22 The plaintiffs allege claims under § 523(a)(2) and § 727(d)(1), both of which are based on fraud. The Court refers to Part II.A.3 for the applicable legal standards, and the Court will discuss the allegations supporting each claim.
a. § 523(a)(2) Claim
The allegations supporting this claim are as follows:
• “Plaintiffs ... purchased property in 2003 from Defendant ... to prevent him from bullying and harassing their family. Though Plaintiffs paid the total fee required, Defendant is attempting to take the property and has refused to provide a proper deed.” ¶4.
• “Plaintiff paid over $5,000 to the Defendant for the purchase of land located in Crosland, Colquitt County, Georgia.” ¶ 5.
*908• “Prior to the purchase of the property Defendant ... gave a false written statement to Plaintiffs claiming it represented his ownership of the property in question.” ¶ 14.
• “The statement was not in the same land district. Plaintiffs as well as Defendant live in the 9th land district which is Crosland, Georgia while the statement Defendant claimed was in the 9th land district is actually in the 8th land district. See attached EXHIBIT D.” ¶ 15.
• “Defendant deliberately used a false statement that he knew Plaintiffs would rely on for the purpose of purchasing the property.” ¶ 16.
• “Once the total fee was paid, Defendant refused to provide a warranty deed to the Browns even though Mr. Brown asked for the deed at least 10 times over a period of years.” ¶ 6.
• “Instead of providing a warranty deed, Defendant Smith filed a complaint against Plaintiffs in Magistrate Court for an additional $1,995.65 in July 2009. (See attached EXHIBIT A).” ¶ 7.
• “Following the Magistrate hearing, Defendant mailed a Quit Claim Deed to Plaintiffs in October 2009.” ¶ 8.
“The deed contained false statements which Defendant inserted for the purpose of taking financial advantage and injuring Plaintiffs.” ¶ 9.
• “The Defendant, on the deed, had deleted the driveway to the property, and Defendant claimed, about a year and a half later, that Plaintiffs would have to pay additional money for the driveway or pay rent. See attached deed, EXHIBIT B.” ¶ 10.
• “The defendant also claimed on the deed that there was a functioning water well on the property which is completely false.” ¶ 11.
These allegations do not state with sufficient particularity the circumstances constituting fraud. The allegations do not describe an understandable transaction, but perhaps the plaintiffs can cure the deficiency by simply removing the confusion. The Court does not know whether the sale of land was based on an oral or written contract. If the contract was in writing, simply attaching the contract to the pleading would answer some obvious questions, primarily the question, “What did the contract say?” Whether the contract was written or oral, the Court knows almost nothing about the transaction. Did they contract for a warranty deed? For a purchase price of five thousand dollars? For land in a particular land district? For a driveway? For a functioning water well? Were any of these terms even discussed? If the parties merely disagree on what they contracted for, this is a contract interpretation issue that will depend on the intent of the parties, and this is at most a breach of contract giving rise to a dis-chargeable debt.23 But if the debtor *909promised a warranty deed, driveway, functioning water well, etc., this might still only rise to a breach of contract, but fraud is possible if the debtor made promises he did not intend to fulfill.24
Paragraph 14 mentions a false written statement. The wording is unclear, but it appears to say the debtor falsely represented ownership through some document. Paragraph 15 mentions another false statement. The wording is again unclear, but presumably the “statement” in that paragraph is part of the false written statement of paragraph 14. It seems to say the plaintiffs thought they were buying land in Colquitt County’s 9th Land District but actually received land in the 8th Land District. But that makes no sense because the plaintiffs presumably knew the property’s location before buying it. The attached Exhibit D — which the Court assumes is the alleged false written statement — does not illuminate matters. It is an unattested, unnotarized quitclaim deed purporting to convey 0.48 acres of land in Colquitt County’s 8th Land District from one person to another person, neither of whom is the debtor. This is not a false written statement. Exhibit D appears to be a legally ineffectual conveyance between two nonparties to this proceeding of real property unrelated to this proceeding. Nothing on the exhibit represents the debtor as the owner; nothing represents the land as being in the 9th Land District.
The Court can only make sense of these allegations one of two ways. One explanation is that the plaintiffs intended to say the debtor falsely and orally represented that the document established his ownership of land in the 9th Land District-land the plaintiffs wanted to buy, and land the debtor actually owned but for some reason lied about. But if the plaintiffs actually received the land they wanted in the 9th Land District, and the debtor had the power to convey, the Court does not see Exhibit D’s relevance. The debtor might have lied about what force the document had, but if the reliance caused no damage, the plaintiffs do not state a claim. The other explanation is that the plaintiffs intended to say the debtor used the document to falsely and orally represent ownership he did not have, and the debtor had no power to convey the land the plaintiffs actually received.' If that is the case, the plaintiffs might have a claim, but they must state their case more particularly.
Paragraph 16 states the debtor “deliberately used” the above false statement because “he knew Plaintiffs would rely on for the purpose of purchasing the property.” Reliance under § 523(a)(2)(A) must be justifiable. Justifiable reliance is subjective, looking at the plaintiffs capacity, knowledge, experience, characteristics, and circumstances. See, e.g., Street v. Wilken (In re Wilken), 377 B.R. 927, 932-33 (Bankr.M.D.Fla.2006). This standard allows “a plaintiff to rely unequivocally on a representation or promise made by a debtor, without investigating the truth of the representation or promise, unless the statement is patently false.” Compass Bank v. Meyer (In re Meyer), 296 B.R. *910849, 861-62 (Bankr.N.D.Ala.2003). The plaintiffs claim to have relied on the debt- or’s statement that a document represented his ownership of certain land when the document described different land, the debtor’s name was nowhere on the document, and the document followed no formalities of a proper land conveyance. The alleged false statement verges on being patently false when compared to the document. But even simple legal documents can be intimidating and puzzling to laypeople. On a motion under Federal Rule 12(b)(6), the Court must grant the plaintiffs the benefit of all reasonable inferences, so the Court is forced to assume that the plaintiffs are quite vulnerable, imperceptive, and inexperienced, and thus the Court must assume the plaintiffs relied justifiably.25 If the debtor made any other alleged false statements the plaintiffs relied on — e.g., “You’re getting a warranty deed.” — the plaintiffs should specify.
Paragraphs 7 and 8 allude to a magistrate hearing, which might complicate matters. These allegations suggest the magistrate proceeding related to the land sale contract — a complaint “for an additional” amount of money implies the debtor sued for money owed on the contract, and the debtor mailing the deed “following the magistrate hearing” implies that the hearing resolved the dispute. If a Colquitt County magistrate judge has spoken on this issue, the parties might not be able to relitigate the contract because of res judi-cata or collateral estoppel. And if the magistrate judge did not make any findings precluding litigation, what was said at the hearing? Perhaps the parties made clear their intentions under the contract. Perhaps they reached a settlement. The Court can only speculate.
The plaintiffs, in ¶ 9, allege false statements in the quitclaim deed. The plaintiffs do not allege reliance on those statements, but even if they had, false statements made after a transaction cannot be relied upon when entering a transaction. Those statements cannot be a basis for a § 523(a)(2) claim unless the plaintiffs relied on them in a separate transaction. If, for example, the deed reduced to writing false statements the plaintiffs relied on when settling, the plaintiffs must state so with particularity.26 The allegations suggest a series of statements and transactions occurring over several years, and Court cannot ignore the possibility of a continuing fraud culminating in a later transaction supporting a § 523(a)(2)(A) claim.
The statements alleged to be false in the deed are not specified. The plaintiffs do state, in ¶ 11, that the deed falsely claims to convey a functioning water well, but it is unclear whether that is the same false statement referred to in ¶ 9 or whether the plaintiffs allege other false statements. More importantly, the Court does not know whether a water well was part of the contract. If the plaintiffs did not expect a water well, they cannot plausibly allege reliance on receiving a water well. If the plaintiffs expected a functioning water well, again, this might be a breach of contract, not fraud.
The Court has other questions, but the Court is confident that if the plaintiffs hew to the relevant legal standards, a future amended complaint will be clearer. The elements of a § 523(a)(2)(A) claim are (1) a *911false statement, (2) intent to deceive, (3) justifiable reliance on the statement, (4) damage. See, e.g., Fuller v. Johannessen (In re Johannessen), 76 F.3d 347, 350 (11th Cir.1996). Under Federal Rule 9, as applied to adversary proceedings by Bankruptcy Rule 7009, the complaint must state the circumstances of the fraud with particularity. This entails identifying “(1) the precise statements, documents or misrepresentations made; (2) the time and place of and persons responsible for the statement; (3) the content and manner in which the statements misled the plaintiff; and (4) what the Defendants gained by the alleged fraud.” West Coast Roofing and Waterproofing, Inc. v. Johns Manville, Inc., 287 Fed.Appx. 81, 86 (11th Cir.2008). The plaintiffs must identify the precise statements — oral or written or both — alleged to be false. If the statements were written, the plaintiffs should identify the documents) containing the statement; if oral, identify when and where the statements were made. Either way, the plaintiffs should describe the false statements and how the statements misled them, and the plaintiffs should specify what the debtor gained as a result of the fraud. The plaintiffs must allege justifiable reliance on the statements, and the reliance must occur before any transaction. If the plaintiffs allege the debtor falsely misrepresented multiple times over a series of transactions, leading to multiple instances of reb-anee, the plaintiffs should repeat the process set out above for each instance,
b. § 727(d)(1) Claim
The only allegation supporting this claim is the statement in ¶ 23: “Debt- or did not list ab of his assets as required in 11 U.S.C. § 521(1) on his Amended Schedule A — Real Property.” As stated in Part II.A.3.b.v, the complaint “must include more than just a bare allegation that a debtor failed to list something on his schedules.” Boan v. Damrill (In re Damrill), 232 B.R. 767, 774 (Bankr.W.D.Mo.1999). If the plaintiffs are privy to something the Court is not, the Court invites the plaintiffs to plead specific information.
4. Paragraph 6
The debtor states, “The complaint refers to alleged claims of third parties (paragraph 20) that are not material or pertinent, claims that the plaintiff cannot pursue, and claims that are over 4 years old (paragraphs 17 and 18) and barred by the statute of limitations. Therefore the complaint fails to state a claim upon which relief can be granted.” The Court wbl discuss each objection below.
a. The Complaint’s ¶ 20
This paragraph states, “Defendant has a long history of maliciously attempting to take property from others in the Crosland, Georgia area.” Whether the debtor is moving to dismiss for failure to state a claim and to strike this allegation is unclear. He alludes to concepts in Federal Rule 12(f) (materiality and pertinence) while also contending the plaintiffs do not state a claim. The Court will treat ¶ 6 as dual motions to strike and dismiss.
The Court disagrees that the plaintiffs, with this allegation, are attempting to pursue a third party’s claim. The motion to dismiss is thus inapplicable. Moreover, as stated in Part II.A.9, striking an allegation is warranted only when the allegation has no possible relation to the proceeding and the allegation is prejudicial. The Court cannot say that the allegation has no possible relation. Federal Rule of Evidence 404(b)(2) allows evidence of “crimes, wrongs, or other acts” if introduced to prove “motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident.” The plaintiffs might, for example, introduce a history of dishonesty or bad faith in real *912estate transactions to prove the debtor’s intent in their transaction. Moreover, the debtor does not state how ¶ 20 is prejudicial. Because the allegation is potentially relevant and has not been demonstrated as prejudicial, the Court will not strike it.
b. The Complaint’s ¶¶ 17 and 18
Paragraph 6 also states that the complaint’s ¶¶ 17 and 18 state claims barred by the statute of limitations and thus fail to state a claim. These paragraphs allege that the debtor has harassed, bullied, and willfully and maliciously caused ongoing financial and emotional injury over the last fifteen years. As stated in Part II.A.4, the plaintiffs are not required to negate affirmative defenses in a complaint and thus do not have to plead compliance with the statute of limitations. Dismissal would only be warranted if apparent on the complaint’s face that the claim time-barred. These allegations do not clearly establish any claim is time-barred.
5. Paragraph 7
The complaint’s ¶ 13 states, “Plaintiffs filed a complaint in Superior Court (Col-quitt County) on August 11, 2011 in an effort to resolve this matter.” Paragraph (e) of the prayer for relief asks that the plaintiffs “be awarded all other damages as specified” in the superior court complaint. The plaintiffs did not attach the complaint. The debtor claims this “results in a complaint so vague and ambiguous that the debtor cannot reasonably be expected to prepare a response, and same should be stricken.” The Court refers to Part II.A.9 for the relevant standards.
The Court will never strike an entire complaint because of a vague prayer for relief. Granting a motion to strike is a drastic remedy. But more importantly, Rule 12(f) allows a court to strike “any redundant, immaterial, impertinent, or scandalous matter,” and even then the Court will grant a motion to strike only if the implicated statements have no possible relation to the proceeding and are prejudicial. A vague prayer for relief does not meet that standard, let alone serve as the basis for striking the entire complaint. The proper motion for vague allegations is a motion for a more definite statement under Rule 12(e). As stated in Part II. A.9, Rule 12(e) is intended to remedy unintelligible pleadings rather than pleadings lacking in detail. Moreover, the Federal Rules allow “vague” prayers for relief, in the sense that a specific dollar amount is not required. See, e.g. CNW Corp. v. Japonica Partners, L.P., 776 F.Supp. 864, 869 (D.Del.1990).
The Court, however, has its own concerns about the complaint’s prayer for relief. The prayer for relief also requests a “judgment for compensatory, special and general damages be entered against Defendant in an amount decided by the Judge.” The plaintiffs cannot collect twice on their claims — they cannot get damages asked for in the superior court matter and then ask this Court to award damages stemming from the same set of facts. It is not clear whether the superior court complaint alleges the same facts supporting the § 523(a)(6) claim or whether that case solely involves the land sale contract, so awarding the damages asked for in the superior court matter and also awarding damages for willful and malicious injury is possible. But the Court cannot now say whether the prayer improperly asks to collect twice on the same set of facts.
As just noted, the plaintiffs seek special damages. But they do not state any items of special damages specifically, as required by Federal Rule 9(g). The plaintiffs cannot recover special damages they do not state specifically. E.g., Smith v. DeBartoli, 769 F.2d 451, 453 n. 2 (7th Cir.1985).
*9136. Paragraph 10
The debtor states that intent to defraud must be alleged with particularity under Bankruptcy Rule 7009 and contends that the plaintiffs do not allege intent to defraud at all. This misstates the law. Federal Rule 9, and thus Bankruptcy Rule 7009, states intent may be alleged generally. The complaint’s ¶ 16 states, “Defendant deliberately used a false statement that he knew Plaintiffs would rely on for the purpose of purchasing the property.” This sufficiently alleges intent. But this must be read in context with the Court’s discussion in II.B.3.a finding the plaintiffs do not state the circumstances constituting fraud with sufficient particularity. If the plaintiffs amend the complaint to include multiple false misrepresentations and multiple instances of reliance, the plaintiffs cannot rest solely on ¶ 16.
7. Paragraph 11
The debtor contends the plaintiffs fail to state a claim under § 523(a)(2) because the magistrate court resolved the land sale issue and because the plaintiffs accepted a quitclaim deed. With this paragraph, the debtor essentially raises the defenses of res judicata and satisfaction/payment.
a. Res Judicata
By claiming the magistrate judge resolved the land sale issue, the defendant raises the defense of res judicata. Res judicata is an affirmative defenses that cannot be raised in a Rule 12(b)(6) motion — it must be raised under Rule 8(c) in an answer. E.g., Concordia v. Bendekovic, 693 F.2d 1073, 1075 (11th Cir.1982). The same exception applies as with a Rule 12(b)(6) motion based on the statute of limitations having run: “[A] party may raise a res judicata defense by motion rather than by answer where the defense’s existence can be judged on the face of the complaint.” Id.
As discussed in Part II.B.3.a, the complaint’s allegations on what happened at the magistrate proceeding are anything but clear. The complaint does not say what happened at the proceeding, and it is not even clear to the Court whether the proceeding involved the-' real estate. Moreover, because the plaintiffs received a deed after the magistrate hearing allegedly not conforming to their expectations, the magistrate judge’s disposition of the issue would not bar subsequent litigation on the nonconforming deed. See, e.g., Federated Deptartment Stores, Inc. v. Moitie, 452 U.S. 394, 399, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981) (“A final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.”) (emphasis added); Lobo v. Celebrity Cruises, Inc. 704 F.3d 882, 892 (11th Cir.2013) (for res judicata to apply, the causes of action must be identical). If the debtor, for example, falsely represented he would deliver a warranty deed, the quitclaim deed could not have been raised at that magistrate proceeding, and the issue there could not be the same issue in front of this Court.
b. Satisfaction/Payment
The debtor claims the plaintiffs accepted a quitclaim deed, which raises either satisfaction or payment as a defense. For the Court to dismiss a complaint for failure to state a claim based an affirmative defense, the allegations in the complaint itself must establish that an affirmative defense bars recovery. E.g., Marsh v. Butler County, Alabama, 268 F.3d 1014, 1022 (11th Cir.2001).
The plaintiffs did not allege they accepted the quitclaim deed. They very well might have legally accepted the deed, and perhaps the debtor can raise payment or satisfaction as an affirmative defense in his answer. But the Court cannot assume *914acceptance when ruling on a motion to dismiss for failure to state a claim.
8. Paragraph 14
The debtor states the plaintiff failed to allege reliance and thus fails to state a claim for fraud. This is technically true. The plaintiffs do not recite the words, “The plaintiffs relied on the debtor’s false statement.” Certain allegations make no sense unless the plaintiffs relied on something the debtor said. Take, for instance, ¶ 16: “Defendant deliberately used a false statement that he knew Plaintiffs would rely on for the purpose of purchasing property.” The leniency toward pro se parties might override this technical error if it were the complaint’s only fault. But given the uncertainty surrounding the fraud allegations, the plaintiffs should be clearer in a future pleading.
9. Paragraph 15
The debtor states, “[P]aragraph 12 does not state a claim for relief relating to dischargeability or an objection to discharge.” The complaint’s ¶ 12 states, “Defendant attempted in April 2011 and in April 2012 to collect money from the Browns that is not owed.” This is not a claim for relief per se. The allegation could support the plaintiffs § 523(a)(6) claim for ongoing harassment, and the Court must assume that it does.
10.Paragraphs 16 and 18
In ¶ 16, the debtor moves to strike the complaint’s ¶¶ 4-23 because “they contain redundant, immaterial, impertinent, and scandalous matter.” He also moves for a more particular statement, stating, “The complaint is very vague, ambiguous, and confusing, and is not understandable. Debtor does not have notice of plaintiffs’ claims for relief.” In ¶ 18, the debtor moves to strike the complaint’s ¶¶ 19-22 as “immaterial, impertinent, and scandalous” because they refer to stale matters and claims of others. The Court refers to the legal standards and discussion in Part II. A.9.
a. Motion to Strike Under Federal Rule 12(D
The debtor’s objection to ¶ 16 does not specify which of the adjectives in Federal Rule 12(f) applies to which allegations, let alone explain why the adjective is apt, nor does the debtor explain how the allegations cannot possibly relate to the proceeding or how the allegations prejudice him. Paragraph 18 attempts to specify by contending certain allegations are stale or are claims of others, but two of those allegations potentially support the plaintiffs’ claims,27 and the other two are not even factual allegations — they are prayers for relief in the body of the complaint.28 The debtor has not persuaded the Court that anything should be stricken.
b. Motion for a More Particular Statement Under Federal Rule 12(e)
The entire complaint is not unintelligible, but as explained in Part II.B.3.a, the allegations supporting the plaintiffs’ § 523(a)(2)(A) claim describe an unintelligible transaction. But instead of a more particular statement, the Court will allow the plaintiffs to amend the complaint. Other courts have noted that one compliant document is often better than one deficient document and another document explaining the first one. See, e.g., Griffin v. *915Milwaukee County, 369 Fed.Appx. 741, 743 (7th Cir.2010) (“Where the operative complaint cannot stand on its own — itself a confusing morass of legal theory and limited factual assertions — an addendum would only complicate matters.”) (citing Davis v. Ruby Foods, Inc., 269 F.3d 818, 820 (7th Cir.2001)). That is the case here. Only one claim is unintelligible — a more particular statement would require the debtor and Court to switch between two documents when considering the different causes of action. And an amended complaint would allow the plaintiffs to address all the Court’s concerns in a single document instead of two (the amended complaint and the more definite statement). Particularly with pro se parties, the Court would like to avoid the complexities of multiple documents. Moreover, a practical matter, the debtor does not specify which details he desires, and so the Court would not know what to order.29
11. Paragraph 19
The debtor states “[t]hat the allegation in paragraph 21 regarding § 523(a)(6) is too vague and ambiguous for debtor to reasonably be able to prepare a response and same should be alleged with greater details.” The complaint’s ¶ 21 states, “Plaintiffs are requesting a ruling of non-dischargeability pursuant to 11 U.S.C. § 523(a)(2) and 11 U.S.C. § 523(a)(6) regarding all aspects of this complaint.”
The plaintiffs allege the following to support their § 523(a)(6) claim:
• “Defendant ... has willfully and maliciously caused on-going financial and emotional injury to Plaintiffs’ family over a period of at least 15 years.” ¶ 17.
• “Plaintiffs have been subjected to ongoing harassment and bullying for at least 15 years.” ¶ 18.
• “Defendant filed a completely false criminal trespass report against Plaintiff Terrance Brown in August 2010 because he was attempting to take property he does not own. See attached EXHIBIT E.” ¶ 19.
• “Defendant has a long history of maliciously attempting to take property form others in the Crosland, Georgia area.” ¶ 20.
Exhibit E is a copy of the criminal trespass complaint. These allegations satisfy the minimal requirements of notice pleading. This § 523(a)(6) claim is not unintelligible, and the debtor cannot use a Rule 12(e) motion merely to obtain greater detail.
12. Paragraph 21
This paragraph states, “[Pjaragraph 23 relating to § 521(1) is not material, relevant or pertinent since debtor timely filed all required documents. The local rules do not allow an automatic dismissal without a hearing.” The complaint’s ¶ 23 states, “Debtor did not list all of his assets as required in 11 U.S.C. § 521(1) on his Amended Schedule A — Real Property.”
The Court is unsure what to make of this objection. The plaintiffs allege the debtor is concealing real property, and the debtor’s response is that the debtor timely filed Schedule A. Timely filing Schedule A does not relieve the debtor of his duty to disclose real property. Moreover, the *916plaintiffs are not seeking dismissal, and they are not trying to do anything without a hearing. This is an adversary proceeding — the most formal hearing possible in a bankruptcy case — to determine the dis-chargeability of certain debts and to revoke the discharge. This objection is unintelligible.
The Court earlier found ¶ 28 insufficient to support the § 727(d)(1) claim. Assuming the plaintiffs amend to add particulars, allegations of asset concealment will be relevant.
13. Summary
As the Court will more fully discuss in Part III, the plaintiffs will have 21 days to amend their complaint, and the debtor will have 21 days to answer the amended complaint. The amended complaint should address the deficiencies discussed above if the plaintiffs wish to pursue those matters. Below is a summary of the Court’s discussion of their complaint.
• Part II.B.l — The Court will deny the motion to dismiss 523(a)(2)(A) claim based on no extension of credit because the plaintiffs allege they paid over five thousand dollars in the transaction. But as discussed in Part II. B.3.a, the Court will dismiss for other reasons.
• Part II.B.2.a — The Court will dismiss the claim for attorney fees because the plaintiff does not plead the request as a claim as required by Bankruptcy Rule 7008(a).
• Part II.B.2.b — The Court will deny the motion for failure to state a claim for punitive damages as inapplicable.
• Part II.B.2.C — The plaintiffs cannot get documents belonging to the debtor as an award in an adversary proceeding. If the plaintiffs wish to see relevant, unprivileged documents, they must request to see them during discovery.
• Part II.B.3.a — The Court will dismiss the § 523(a)(2)(A) claim because the transaction described is incomprehensible and the plaintiffs do not describe the circumstances constituting fraud with sufficient particularity.
• Part II.B.3.b — The Court will dismiss the § 727(d)(a) claim as to unspecified omitted personal property because a bare allegation of omitted property does not satisfy Federal Rule 9(b).
• Part II.B.4.a — The Court will deny the motion to strike ¶ 20 because the debt- or has not shown that the allegation has no possible relation to the proceeding and that the allegation prejudices him. The Court will deny the motion to dismiss for failure to state a claim as inapplicable.
• Part II.B.4.b — The Court will deny the motion to dismiss based on the statute of limitations because the plaintiff does not have to negate affirmative defenses in a complaint.
• Part II.B.5 — The Court will deny the motion to strike the entire complaint as inapplicable. However, the prayer for relief is potentially improper if the plaintiffs are seeking two awards under the same set of facts, and the plaintiffs do not state items of special damages specifically as required by Federal Rule 9(g).
• Part II.B.6 — The plaintiffs do not have to plead fraudulent intent with specificity. They sufficiently allege intent generally. But the sufficiency is subject to the discussion in Part II.B.3.a.
• Part II.B.7.a — The Court will deny the motion to dismiss based on res judica-ta because the plaintiff does not have to negate affirmative defenses in a complaint.
• Part II.B.7.b — The Court will deny the motion to dismiss based satisfac*917tion/payment because the plaintiff does not have to negate affirmative defenses in a complaint.
• Part II.B.8 — The plaintiffs do not sufficiently allege reliance in their § 523(a)(2)(A) claim. As discussed in Part II.B.3.a, the Court will dismiss this claim for other reasons. An amended complaint should allege reliance more clearly.
• Part II.B.9 — The Court will deny the motion to dismiss for failure to state a claim as inapplicable. The challenged allegation potentially supports a § 523(a)(6) claim.
• Part II.B.lO.a — The Court will deny the motions to strike ¶¶ 4-23 and ¶¶ 19-22 because the debtor does not explain how the allegations have no possible relation to the proceeding or prejudice him.
• Part II.B.lO.b — The Court will deny the motion for a more particular statement because allowing an amended complaint is more appropriate and because the debtor does not point out the details desired.
• Part II.B.ll — The Court will deny the motion for a more particular statement regarding the § 523(a)(6) claim because the claim is not unintelligible.
• Part II.B.12 — The Court will deny the motion to strike ¶ 23 because the motion is unintelligible.
III. Conclusion
The Court will grant the plaintiffs in both matters 21 days to amend their complaints. The debtor will have 21 days to answer the amended complaint. The Court has explained, in detail, the relevant substantive and procedural law, and so the Court hopes allowing the amendment will not result in further disputes over basic pleading matters. If the Court finds that taking the time to explain proper pleading was futile, the Court might not be as accommodating in granting future amendments. The Court will enter an order in accordance with this memorandum opinion.
. The Court will refer to the Federal Rules of Bankruptcy Procedure as "the Bankruptcy Rules” and to the Federal Rules of Civil Procedure as "the Federal Rules.” The Court will likewise refer to individual rules with these abbreviated designations. For example, Federal Rule of Civil Procedure 8 will hereinafter be referred to as "Federal Rule 8.”
. Ms. Smith is a law school graduate, but she is not licensed to practice law. The Court will consider her a typical pro se filer, but that might change for later pleadings if the Court is informed that Ms. Smith has been licensed to practice at any point.
. In Part II.A.9.C. of this opinion, the Court explains why this was improper.
. In Part H.A.9.C., the Court explains why attaching those complaints would have been improper.
. A malicious prosecution claim based on recklessness can be nondischargeable if a debtor intentionally omits the liability from his schedules. For a longer discussion on this, see footnote 20 in Part II.B.3.a.
. The plaintiff also seeks, without specifying, special damages. Federal Rule 9(g), applicable to adversary proceedings via Bankruptcy Rule 9, requires that items of special damages be specifically stated. The plaintiffs cannot recover special damages they do not state specifically. E.g., Smith v. DeBartoli, 769 F.2d 451, 453 n. 2 (7th Cir.1985).
. In another pleading in the main case, the plaintiff attached handwritten notes purporting to be from the debtor, and in those notes the debtor demands rent under authority as executor of his parents’ estate. See Motion for Relief from Stay, June 12, 2012, 12-70281, ECF No. 21. Those documents are not attached to the complaint, and thus the Court does not consider them.
. Federal law controls "[w]hether a relationship is a fiduciary relationship within the meaning of 11 U.S.C. 523(a)(4)." Tudor Oaks Ltd. Partnership v. Cochrane (In re Cochrane), 124 F.3d 978, 984 (8th Cir.1997). And "[u]n-der federal common law, executors are the type of fiduciaries that § 523(a)(4) was meant to include." Donham v. Walters (In re Walters), 2011 WL 2224616, at *8 (Bankr.N.D.W.Va.2011).
. Implicitly, Bankruptcy Rule 4004(c)(1), at subsections (B) and (E), also establishes this point. It states, "In a chapter 7 case, on expiration of the times fixed for objecting to discharge ... the court shall forthwith grant the discharge unless ... (B) a complaint ... objecting to the discharge has been filed and not decided in the debtor's favor; [or] ... (E) a motion to extend the time for filing a complaint objecting to discharge is pending.” This rule clearly seeks to resolve all objections to discharge before the discharge.
. The Court has been using "objection to discharge” in its limited meaning under § 727(c)(1) ("The trustee, a creditor, or the United States trustee may object to the granting of a discharge under subsection (a) of this section.”) and Bankruptcy Rule 4004. In a broader sense, a claim under § 727(d)(1) objects to a discharge, one already granted, and seeks of revocation.
. Of course, it is also possible that the plaintiff did not have enough time to discover the fraud before the discharge.
. These properties correspond to the first and third properties on Schedule A.
. Ms. Smith, the Browns, and the debtor all at some point mistakenly refer to 11 U.S.C. § 521(1), which does not exist. Former § 521(1) is current § 521(a), and the debtor's duty to disclose assets is in § 521(a)(l)(B)(i). This error comes up multiple times in the opinion, and hereinafter the Court will not indicate the error with “[sic].”
. This is not strictly relevant when the Court cannot look behind the pleadings. The Court is merely giving context.
. The Court uses "arguably” because the parents could still be alive and the debtor could have a future interest in the property. In that case, scheduling it was not only proper but mandatoxy, claiming to currently be a co-owner would be misleading.
. The plaintiff claims the debtor does not own the property — she apparently thinks the debtor is trying to "steal” the property through adverse possession. So the plaintiff thinks the false oath is the debtor claiming he owns property when he actually does not, rather than omitting the full extent of his interest. But this is based on the plaintiff's mistaken legal conclusion that adverse possession is tantamount to theft. That the plaintiff does not fully understand the legal significance of the affidavits does not transform a claim plausible on its face into a nonclaim.
. In ¶ 10 of the debtor’s motion, the debtor states, "[T]he plaintiff does not allege any intent on the part of the debtor to defraud, and intent to defraud is an essential element of fraud which is not alleged with particularity as required by Rule 7009.” This is a misstatement of the law. Bankruptcy Rule 7009, through Federal Rule 9(b), specifically exempts "intent” from the particularity requirement: "Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” The Federal Rules do not require magic words or specific appellations, especially from a pro se plaintiff. Alleging that the debtor is trying to manipulate and mislead the Court regarding Schedule A is sufficient to allege intent generally.
. The sufficiency of these claims are not challenged, other than indirectly through this motion to dismiss for untimeliness, and so the Court did not research and will not now discuss these claims.
. Bankruptcy judges can only enter final orders in core proceedings or in noncore proceedings if all parties consent to entry of a final disposition by the bankruptcy judge. E.g., Sheridan v. Michels (In re Sheridan), 362 F.3d 96, 99-100 (1st Cir.2004). The Court can still hear noncore matters when the parties do not consent, but the Court must propose findings of fact and conclusions of law under 28 U.S.C. § 157(c)(1) and Bankruptcy Rule 9033 rather than enter a final, appeal-able order.
. Some courts have allowed adoption by reference of pleadings in another case if the later pleading clearly sets out what is being adopted. See, e.g., Cooper v. Nationwide Mut. Ins. Co., 2002 WL 31478874, at * 5 (E.D.Pa.2002); see also United States v. Int’l Longshoremen’s Ass’n, 518 F.Supp.2d 422, 465 (E.D.N.Y.2007) (noting the disagreement). This Court, however, is bound by Texas Water Supply Corp. because decisions of the U.S. Court of Appeals for the Fifth Circuit existing before September 30, 1981 are mandatory authority in the Eleventh Circuit. See Bonner v. City of Prichard, Ala., 661 F.2d 1206, 1207 (11th Cir.1981).
. The Court is not now finding that the plaintiffs state a claim under § 523(a)(2). The Court is only finding that the objection on this basis is meritless.
. The Court has already noted ambiguous and repetitive portions of the debtor’s motions in the Smith case. The Court reminds the debtor that under Federal Rule 8(b)(1)(A), defenses must also be stated in short and plain terms.
. The debtor did not schedule the Brown superior court claim until after his discharge. Section 523(a)(3)(A) maltes debts nondis-chargeable if not scheduled in time to permit timely filing of a proof of claim and if the creditor did not know of the bankruptcy in time to file a timely proof of claim. The circuit courts of appeal are split on whether § 523(a)(3)(A) applies in no-asset Chapter 7 cases. Compare Judd v. Wolfe, 78 F.3d 110 (3rd Cir.1996) (section 523(a)(3)(A) does not apply in no-asset Chapter 7 cases), with Colonial Sur. Co. v. Weizman, 564 F.3d 526 (1st Cir.2009) (section 523(a)(3)(A) applies in no-asset Chapter 7 cases; burden on debtor to prove innocent omission). In the Eleventh Circuit, an unscheduled debt in a no-asset Chapter 7 is not discharged if the omission resulted from "fraud or intentional design." Matter of Baitcher, 781 F.2d 1529, 1534 (11th Cir.1986). Thus, a breach of contract claim can be nondischargeable under § 523(a)(3)(A) *909if omitted from the schedules fraudulently or intentionally. While the debtor did not list the plaintiffs as a potential creditor on Schedule F in time to file a proof of claim, the plaintiffs do not allege intentional omission, and so that issue is not in front of the Court.
. A nonfraudulent contract breach can create a debt nondischargeable under § 523(a)(6) if it rises to the level of willful and malicious tortious conduct. See, e.g., Lockerby v. Sierra, 535 F.3d 1038, 1040-1043 (9th Cir.2008). State law determines whether the breach also constitutes tortious behavior. See, e.g., id.
. Sufficiently alleging justifiable reliance is not the same as proving it at trial, where the plaintiffs must establish by a preponderance of the evidence that they justifiably relied on the document.
. False statements in the deed might also be relevant if offered to establish a fraudulent mental state throughout the transaction. See Fed.R.Evid. 404(b)(2).
. Paragraph 19 alleges the debtor filed a false criminal trespass report against one of the plaintiffs. Paragraph 20 alleges the debt- or has a long history of maliciously trying to take property from others.
. Paragraph 21 requests a ruling of nondis-chargeability under § 523(a)(2) and § 523(a)(6). Paragraph 22 requests a revocation of the debtor’s discharge under § 727(d)(1).
. Although this is not a Federal Rule 12(e) issue, the Brown complaint does not contain separate counts for each claim. Federal Rule 10(b) requires that claims be stated in separate counts if doing so would promote clarity. Stating each count separately would promote the complaint’s clarity because certain allegations arguably support more than one claim and the Court does not fully know which allegations support which claims. Separate counts will be even more helpful if the amended complaint adds allegations. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495765/ | MEMORANDUM AND ORDER ON MOTION TO DISMISS
LAMAR W. DAVIS, JR., Bankruptcy Judge.
This case comes before the Court on Defendant, Sea Island Bank’s, Motion to Dismiss the Chapter 7 Trustee’s 11 U.S.C. § 547 preference action.
FINDINGS OF FACT
Debtor, Stephen Collins, filed Chapter 11 bankruptcy April 22, 2010. He is the sole owner of Del-A-Rae, Inc., which had already filed Chapter 11 bankruptcy October 5, 2009. Collins’s case was converted to Chapter 7, June 3, 2011, and James L. Drake was appointed the Chapter 7 Trustee. Dckt. No. 134.1 The Trustee filed this adversary proceeding against Sea Island Bank to avoid and recover a preferential transfer. Sea Island Bank filed a Motion to Dismiss asserting the doctrine of res judicata because Collins previously sued to avoid the possibly preferential transfer under 11 U.S.C. § 547, while he was the debtor-in-possession.
In March 2006, Debtor, Stephen Collins, as President of Del-A-Rae, executed a Promissory Note between Del-A-Rae and Sea Island Bank in the amount of $2,506,260.00, maturing March 10, 2009. Case No. 09-42267, Dckt. No. 80, Ex. A. Collins was not listed as a Borrower on the Note. Id. This Note was secured by a Deed to Secure Debt from “GRANTOR: Stephen R. Collins and Del-A-Rae, Inc.” Case No. 09-42267, Dckt. No. 80, Ex. C. *920Collins signed the Deed to Secure Debt as both an individual “Borrower” and as President of Del-A-Rae, but the property conveyed, 232 Acres Highway 17, Guyton, Georgia, belonged only to Collins the individual. Id.; Case No. 09-42267, Dckt. No. 80, Ex. D.
July 2009, Sea Island Bank filed an action in Effingham County Court for a money judgment against Del-A-Rae and Collins, as an individual. Del-A-Rae filed Chapter 11 bankruptcy, October 5, 2009, during the pendency of the state court action; it appears the action was then stayed as to Del-A-Rae. The Superior Court of Effingham County entered an “Order Granting Plaintiff’s Motion for Summary Judgment Against Defendant Stephen Collins Only” (Order Granting Summary Judgment), December 16, 2010. A.P. No. 11-4088, Dckt. No. 6, Ex. A. The Judgment was for $3,029,994.28 as guarantor of Del-A-Rae and $430,962.28 for his individual debt, both with interest accruing daily.
In February 2010, Sea Island Bank executed on the Judgment by obtaining a Writ of Fieri Facias against Collins, issued by the Effingham County Clerk of Superi- or Court, and recorded it in both Effing-ham and Screven Counties, listing the amount of the debt as $3,461,091.56. Id. at Exs. B & C.
On his bankruptcy filings, Collins scheduled Sea Island Bank as a secured creditor with a disputed claim in the amount of $3,029,994.28 secured by 232 Acres Highway 17, Guyton, Georgia and by Judgment in the Superior Court of Effingham County. Schedule D, Dckt. No. 16, 10. Collins listed the 232 Acres Highway 17, Guyton, Georgia as a Real Property asset worth $3,700,000.00 and encumbered by a secured claim of $3,029,994.28. Schedule A. Dckt. No. 16, 3. Collins also scheduled two additional pieces of real property: (1) 11.6 Acres Bryans Bridge Road, Screven County, valued at $48,000.00 and unencumbered, (2) 1.69 Acres Corner Lot Little McCall & 119, Effingham County, valued at $150,000.00 and encumbered by a secured claim for $78,950,00. Id. These two tracts would be encumbered by the judgment lien under Georgia law.
Collins commenced an adversary proceeding against Sea Island Bank to determine the validity, priority, and extent of the claim created by the Judgment and Writ of Fieri Facias, January 27, 2011. Dckt. No. 115. Specifically, Collins requested the Court to “avoid the Judgment Lien of Sea Island Bank pursuant to 11 U.S.C. §§ 506 and 547.” Id. The Court granted Sea Island Bank’s Motion for a More Definite Statement with the stipulation that the adversary proceeding would be dismissed pursuant to Bankruptcy Rule 7012(b)(6) if Collins failed to file his amended complaint within fifteen days. Consent Order, A.P. No. 11-4006, Dckt. No. 12. Collins failed to file an amended complaint; instead releasing his attorney two days before the amended complaint was due, after thorough questioning and explanation by the Court that he would not receive additional time as a result of his choosing to dismiss his attorney. Still the Court exercised leniency with Collins and did not file the Order Dismissing the Adversary until May 11, 2011, thirty-five days after the entry of the Order requiring an amended complaint. A.P. No. 11-4006, Dckt. No. 17.
After the case was converted, the Trustee filed this adversary proceeding against Creditor, Sea Island Bank, again seeking to avoid the Judgment and the Writ of Fieri Facias as a preferential transfer under 11 U.S.C. § 547, to recover the transfer for the benefit of the estate pursuant to 11 U.S.C. § 550, and to preserve the avoided transfer for the estate under 11 U.S.C. *921§ 551. A.P. Dckt. No. 1. In response, Sea Island Bank filed the Motion to Dismiss on the basis of res judicata because Collins already unsuccessfully sued to avoid the Judgment and Writ of Fieri Facias as a preferential transfer under 11 U.S.C. § 547, while he was the debtor-in-possession.
CONCLUSIONS OF LAW
A. Motion to Dismiss Reviewed Under Summary Judgment Standard.
Sea Island Bank filed the Motion to Dismiss Pursuant to Federal Rule of Bankruptcy Procedure 7012(b), which makes Federal Rule of Civil Procedure 12(b) applicable in adversary proceedings, but the Court will review the facts and circumstances under the summary judgment standard, pursuant to subsection 12(d),2 which provides that a motion under either 12(b)(6) or 12(c) must be treated as a motion for summary judgment under Rule 56 when matters outside the pleadings are presented and not excluded by the court. “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.” Fed.R.CivP. 56 (incorporated into adversary proceedings by Federal Rule of Bankruptcy Procedure 7056).
The Chapter 7 Trustee does not dispute the material facts. A.P. Dckt. No. 15, 3 (Feb. 21, 2012). Therefore, the only remaining question is whether Sea Island Bank is entitled to judgment as a matter of law.
Sea Island Bank argues it is entitled to judgment based on res judicata. According to the Eleventh Circuit, res ju-dicata only applies when the movant has established all four elements are present: “(1) the prior decision must have been rendered by a court of competent jurisdiction; (2) there must have been a final judgment on the merits; (3) both cases must involve the same parties or their privies; and (4) both cases must involve the same cause of action.” Clark v. Palm Harbor Homes. Inc. (In re Clark), 411 B.R. 507, n. 2 (Bankr.S.D.Ga.2009) (Davis, J.) (quoting In re Piper Aircraft Corp., 244 F.3d 1289, 1296 (11th Cir.2001)); Evergreen Foods Inc. v. Thomas J. Lipton Co. (In re Greene), Case No. 89-1096, 15, 1992 WL 12676631 (Bankr.S.D.Ga. July 31, 1992) (Davis, J.); see Jackman v. Mortg. Elec. Registration Sys., 2011 WL 4954252 (citing Ragsdale v. Rubbermaid, Inc., 193 F.3d 1235, 1238 (11th Cir.1999)).
B. Application of Res Judicata.
1. Prior decision made by a court of competent jurisdiction. This Court entered the Order dismissing Debtor’s adversary proceeding, which Sea Island Bank relies upon in asserting res judicata.
2. Final Judgment on the Merits. The Order dismissing Debtor’s adversary proceeding is a final judgment on the merits.
Generally, dismissal of a pleading for failure to state a claim upon which relief can be granted, Rule 12(b)(6), is a *922final judgment as defined by Federal Rule of Civil Procedure 54, incorporated into adversary proceedings by Federal Rule of Bankruptcy Procedure 7054, because it is an “order from which an appeal lies.” Fed.R.Civ.P. 54; see, e.g., Branch v. Franklin, 285 Fed.Appx. 573, 573 (11th Cir.2008) (stating that Plaintiff appeals from district court’s final judgment, which dismissed his claim pursuant to 12(b)(6)); S. Entm’t Television, Inc. v. Comcast Corp., 270 Fed.Appx. 747, 747 (11th Cir.2008) (stating that Plaintiff appeals from district court’s final judgment, an order dismissing its claim according to 12(b)(6)). More specifically, “where an order dismisses a complaint with leave to amend within a specified period, the order becomes final (and therefore appealable) when the time period allowed for amendment expires.” Briehler v. City of Miami, 926 F.2d 1001, 1001 (11th Cir.1991) (citing Schuurman v. Motor Vessel “Betty K V”, 798 F.2d 442, 445 (11th Cir.1986)).
Dismissal of Debtor’s adversary proceeding was a judgment on the merits because it was a dismissal pursuant to Rule 12(b)(6). A.P. No. 11-4006, Dckt. Nos. 12 & 17. Contrary to the Chapter 7 Trustee’s argument “[rjeliance on a rule of ‘procedure’ does not foreclose the possibility that a court is ruling ‘on the merits.’ ” Borden v. Allen, 646 F.3d 785, 812 (11th Cir.2011). In fact, a dismissal for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) is, unequivocally, a judgment on the merits. Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, n. 3, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981) (“dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is a ‘judgment on the merits.’ ”) (citing Angel v. Bullington, 330 U.S. 183, 190, 67 S.Ct. 657, 91 L.Ed. 832 (1947): Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946)). The Chapter 7 Trustee admits that dismissal of Debtor’s adversary proceeding was according to Federal Rule of Bankruptcy Procedure 7012(b)(6). Plaintiffs Memorandum. A.P. Dckt. No. 15, 4 (Feb. 21, 2012); Consent Order, A.P. No. 11-4006. Dckt. No. 12 (April, 12, 2011).
3. Identity of the Parties. For the purposes of res judicata, the Parties in this action are the same parties who participated in the Debtor’s adversary proceeding because the Chapter 7 Trustee is in privity with Debtor.
Privity, a common law concept, has been interpreted to connote a “legal conclusion that the relationship between the one who is a party on the record and the nonparty is sufficiently close to afford application of the principle of preclusion.” Sw. Airlines Co. v. Texas Int’l Airlines, Inc., 546 F.2d 84, 95 (5th Cir.1977) (Fifth Circuit decisions prior to 1981 are binding upon courts on the Eleventh Circuit. Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir.1981)). Courts find the relationship to be sufficiently close in three circumstances: (1) when the non-party succeeds to a party’s interest in property; (2) when the non-party controlled the original suit; or (3) when the non-party’s interests were adequately represented by a party in the original suit. Id. The Chapter 7 Trustee treats the court’s decision in Southwest Airlines as if it creates a three part rule requiring all three components to be met; however, the Southwest Airlines Court discussed each of these three occurrences as a separate and independent cause creating or demonstrating a sufficiently close relationship.
(1) Successor in Interest. The Chapter 7 Trustee has succeeded to Collins’s interest in the property of the bankruptcy estate.
*923The bankruptcy estate comes into being at the filing of the bankruptcy petition. 11 U.S.C. § 541. While his case was in Chapter 11, Collins served as Debtor-in-Possession and exercised control over the bankruptcy estate. 11 U.S.C. § 1107. Upon conversion to Chapter 7, a trustee was appointed, and he succeeded to Debt- or-in-Possession’s interest in the bankruptcy estate. The trustee is the “successor in interest to the debtor in possession”, and “as the successor, the trustee is bound by all authorized acts of the debtor in possession.” Nicholas v. U.S., 384 U.S. 678, 692-93 and n. 27, 86 S.Ct. 1674, 16 L.Ed.2d 853 (1966) (holding Trustee responsible for paying taxes the debtor-in-possession allowed to accrue); Pollack v. FDIC (In re Monument Record Corp.), 71 B.R. 853, 862 (Bankr.M.D.Tenn.1987) (“conclud[ing] that the trustee is a successor to the debtor in possession.”); see also Albert v. Chesapeake Bank & Trust Co. (In re Linton Props., LLC), 410 B.R. 1, 12 (Bankr.D.D.C.2009) (denying Trustee’s challenge of garnishment lien because the court found he was bound by debtors-in-possession’s agreement not to challenge the garnishment lien).
(2) Control. The Chapter 7 Trustee did not control the original suit; he was not appointed until well after the Debtor’s adversary proceeding, brought as Debtor-in-Possession, had been dismissed and Debt- or’s bankruptcy case was converted from Chapter 11 to Chapter 7. Thus this element was not established. However, as noted above, the test is not whether all three standards are met.
(3) Adequately Represented Interests. The Chapter 7 Trustee’s interests were adequately represented by Debtor, as Debtor-in-Possession, in Debtor’s adversary proceeding.
The Chapter 7 Trustee argues his interests, increasing the funds in the bankruptcy estate, were not adequately represented by Debtor because Debtor’s attorney withdrew from the case two days before the deadline for filing an amended complaint. However, Debtor, who also wanted to replace his counsel, was warned of the consequences of these actions by the Court. ‘Adequately represented’ does not mean ‘successfully represented.’ In finding that the non-party’s interests had been adequately represented, the Southwest Airlines Court relied on the fact that the legal interests of the party and the nonparty did not differ; they were both attempting to enforce a public ordinance, even if they desired the enforcement for different purposes. Southwest Airlines, 546 F.2d at 100. Similarly, the Bankruptcy Court for the Middle District of Tennessee found that having “similar incentives, powers and opportunities to investigate and litigate is indicative of privity.” Pollack, 71 B.R. at 861 (citing Donovan v. Estate of Fitzsimmons, 778 F.2d 298, 301 (7th Cir.1985) (holding that the trustee was bound by the previous litigation of creditor’s motion for relief from stay against the debtor-in-possession when he attempted to void that same creditor’s lien)). Thus, it found “the interests of the estate and its creditors were represented by the debtor-in-possession” in the previous litigation. Id. The court further held that while the debtor is acting as debtor-in-possession in a Chapter 11 case, “the bankruptcy Code positions the debtor-in-possession and the creditors’ committee to protect the same legal interests as a trustee.” Id. It relied on 11 U.S.C. § 1107(a), which states that
[s]ubject to any limitations on a trustee serving in a case under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 *924of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter.
The Middle District of Tennessee reviewed the legislative history to section 1107 and found that it “confirms the alignment of the trustees and debtors-in-possession: ‘This section places a debtor in possession in the shoes of a trustee in every way.’ ” Pollack, 71 B.R. at 861. Subsection 1106(a)(1) requires the trustee appointed under Chapter 11 to perform all applicable duties of a trustee under Chapter 7, 11 U.S.C. § 704. Furthermore, Federal Rule of Bankruptcy 9001 states “the following words and phrases used in these rules have the meanings indicated ... ‘Trustee’ includes a debtor in possession in a chapter 11 case.”
I hold that identity of the parties is shown under either the successor in interest standard or the adequate representation standard.
4. Same Cause of Action. The causes of action brought by the Chapter 7 Trustee are the same causes of action that were brought, or that could have been brought, by Debtor.
According to the Eleventh Circuit, the causes of action are the same when “the primary right and duty are the same in each case.” Ragsdale v. Rubbermaid, 193 F.3d 1235, 1239 (11th Cir.1999). To determine whether the primary right and duty are the same, the “court must compare the substance of the actions” and not simply rely on the form of the actions to conclude whether the claims “arise out of the same nucleus of operative fact or [are] based upon the same factual predicate.” Id.
There exists no real question as to whether the claims brought now by the Chapter 7 Trustee arise out of the same nucleus of operative facts: the Chapter 7 Trustee relies on the same facts as Debtor did in his adversary proceeding and seeks relief based on the avoidance section — 11 U.S.C. § 547. The Chapter 7 Trustee seems to confuse the test for determining the identity of the claims element of res judicata with that of issue preclusion. He argues that res judicata does not apply because the claims he brings are not identical; however, res judicata requires only that the claims were brought or could have been brought during the prior action. The Chapter 7 Trustee’s claims under sections 550 and 551 could have been asserted by Debtor in his adversary proceeding. The application of both sections 550 and 551 is inextricably linked with the results of the section 547 claim, thus the claims arise out of the same nucleus of operative facts.
The Chapter 7 Trustee asserts that the identity of the claims is not the same because the rights and duties of the Chapter 7 Trustee are different from those of a debtor. However, the rights and duties of Debtor as debtor-in-possession do not differ from those of the Chapter 7 Trustee in a manner which creates new claims or precludes the application of res judicata. A debtor-in-possession stands in the shoes of a trustee in Chapter 11 for all purposes except the right to compensation and the duty to investigate. 11 U.S.C. § 1107(a). Title 11 sections 547, 550, and 551 all apply in both Chapter 7 and Chapter 11 and can be asserted by either the trustee or the debtor-in-possession, so the rights being asserted by the Chapter 7 Trustee do not vary from those carried out by Debtor as debtor-in-possession.
CONCLUSION
The doctrine of res judicata is meant to serve the purposes of providing the parties a “full and fair opportunity to litigate *925[which] protects a party’s adversaries from the expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by minimizing the possibility of inconsistent decisions.” Ragsdale, 193 F.3d at 1238 (quoting Montana v. U.S., 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)). The four requirements of res judicata ensure that this full and fair opportunity has been provided before the action is barred. Each of the four elements has been demonstrated and allowing the Chapter 7 Trustee to bring this adversary proceeding would offend the purposes served by the doctrine of res judicata.
Summary Judgment is appropriate because there is no factual dispute and the application of res judicata entitles Sea Island Bank to judgment as a matter of law.
ORDER
Based on the foregoing Findings of Fact and Conclusions of Law, IT IS THE ORDER OF THIS COURT that the Chapter 7 Trustee’s claims are BARRED and that Sea Island Bank’s Motion for Summary Judgment is GRANTED.
. For this Order, citations to the main bankruptcy case [10-40868] will appear as "Dckt. No. -citations to the Chapter 7 Trustee’s Adversary Proceeding [11-4082] will appear as "A.P. Dckt. No. -citations to Collins’s Adversary Proceeding [11-4006] will appear as "A.P. No. 11-4006, Dckt. No. -and citations to the Del-A-Rae bankruptcy case [09-42267] will appear as "Case No. 09-42267, Dckt. No.-”.
. Federal Rule of Civil Procedure 12(d) requires that all parties "be given a reasonable opportunity to present all the material that is pertinent to the motion.” The Court notified the Parties that the Motion to Dismiss would be reviewed under the standard for summary judgment and allowed them twenty-one days to respond. Notice on Motion for Summary Judgment, A.P) Dckt. No. 8, (Jan. 17, 2012). The Chapter 7 Trustee filed a Memorandum of Law in Support of Objection to Defendant’s Motion for Summary Judgment and Sea Island Bank filed a Reply Brief. A.P. Dckt. No. 15 (Feb. 21, 2012); A.P. Dckt. No. 17 (Mar. 7, 2012). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495766/ | MEMORANDUM DECISION RE OBJECTION TO SECURED STATUS ASSERTED BY THE PROOF OF CLAIM OF BANK OF AMERICA, N.A.
S. MARTIN TEEL, JR., Bankruptcy Judge.
Bank of America, N.A. holds a mortgage, in the form of a deed of trust, against real property in which the debtor has an interest. The bank neglected to record its deed of trust, signed by the debtor, in the land records of the District of Columbia. It then filed a civil action in the Superior Court of the District of Columbia, seeking to compel the debtor to execute the necessary forms to permit the bank to record its deed of trust. Incident to that civil action, the bank filed a notice of lis pendens. Thereafter, the debtor commenced this case under Chapter 13 of the Bankruptcy Code. Relying on In re Arnold, 483 B.R. 515 (Bankr.N.D.Ill.2012), the debtor has objected to the bank’s proof of claim’s assertion of a secured claim, on the basis that the bank’s deed of trust was not perfected by way of recordation.
I
Under District of Columbia law, the bank’s deed of trust (unless it is avoided) is enforceable against the debtor’s interest in the real property even though the deed of trust was not recorded. See D.C.Code § 42-401 (2001). The chapter 13 trustee has not sought to avoid the deed of trust.
The debtor has no power to avoid the deed of trust. The debtor has exempted her interest in the property, but under 11 U.S.C. § 522(c)(2)(A), the bank’s lien remains enforceable against the property despite the exemption unless it is avoided. Although courts are split on the issue:
The better reasoned decisions hold that, in contrast to the provisions authorizing a chapter 13 debtor to pursue causes of action that are property of the estate, none of the provisions of chapter 13 authorize a chapter 13 debtor to sue on a trustee’s avoidance powers (under, for example, 11 U.S.C. §§ 544 (unperfected liens), 547 (preferences), or 548 (fraudulent conveyances)) other than pursuant to 11 U.S.C. § 522(h).
Dawson v. Thomas (In re Dawson), 411 B.R. 1, 24 (Bankr.D.D.C.2008).1 I conclude that a chapter 13 debtor cannot exercise a trustee’s avoidance powers except to the extent authorized by 11 U.S.C. § 522(h), a provision of no applicability here.2 Accordingly, the lien remains en*3forceable as between the debtor and the bank.
The debtor relies on In re Arnold, as requiring the court to treat the bank’s lien as ineffective, but there the court interpreted a Illinois statute under which (with an exception of no relevance here):
from, the time a mortgage is recorded it shall be a lien upon the real estate that is the subject of the mortgage for all monies advanced or applied or other obligations secured in accordance with the terms of the mortgage or as authorized by law, including the amounts specified in a judgment of foreclosure in accordance with subsection (d) of Section 15-1603.
735 Ill. Comp. Stat. 5/15-1301 (emphasis added). District of Columbia law, in contrast, treats a deed of trust as an effective lien from the moment of execution, with recordation only affecting the enforceability of the deed of trust against subsequent purchasers or lienors.
In re Arnold, 483 B.R. at 522, concluded that an unrecorded mortgage does not fit within the definition of a lien in 11 U.S.C. § 101(37) because a mortgage is not a “charge against or interest in property to secure payment of a debt” unless the mortgage is enforceable against other creditors. That conclusion is readily rejected. Undeniably, a mortgage or deed of trust is intended to be a charge against the property to secure payment of a debt. Section 101(37) does not purport to require that the transferred “charge against or interest in property” be enforceable against other creditors in order for a lien to exist. Instead, the treatment of liens that are not enforceable against other creditors is addressed by the avoidance powers set forth in chapter 5 of the Bankruptcy Code. Under 11 U.S.C. § 101(54), the term “transfer” includes the creation of a lien or any other parting with an interest in property. Accordingly, the creation of a lien is a transfer to which a trustee’s avoidance powers may apply. Under 11 U.S.C. § 544, a trustee may be able to avoid a lien if it would not be enforceable against other creditors. Section 544 would be rendered surplusage if § 101(37) by itself treated unperfected mortgages (mortgages that are ineffective against other creditors) as not constituting a lien. It follows that § 101(37) does not include in the definition of “lien” that the charge against the debtor’s property have been perfected against other creditors.
Finally, as the mortgage in In re Arnold would be avoided by a chapter 7 trustee if the case were pending in chapter 7, the court concluded that the mortgagee must be treated as not having an allowed secured claim because a ruling to the contrary “would run afoul of the best-interests-of-creditors test of 11 U.S.C. § 1325(a)(4).” In re Arnold, 483 B.R. at 522. That reasoning is unpersuasive. Even though § 1325(a)(4) requires a debt- or’s plan to provide for distributions on unsecured claims equal in value to the distributions they would receive in a chapter 7 case upon the mortgagee’s lien being avoided, that does not answer the question whether the lien remains intact unless and until it is avoided. Treating the unperfeet-ed lien as not giving rise to a secured claim based on § 1325(a)(4) gives the debtor indirectly what the debtor could obtain directly only if a debtor were authorized to exercise a trustee’s avoidance powers. If the Bankruptcy Code does not authorize a debtor to exercise a trustee’s avoidance powers, the court ought not circumvent that lack of authority by treating the debt- *4or as empowered to treat the lien as ineffective (which amounts to an avoidance of the lien) by invoking § 1325(a)(4). Section 1325(a)(4) does not purport to be an avoidance power, and ought not be morphed into one.
II
The debtor has not invoked 11 U.S.C. § 502(d) as a basis for her objection to the bank’s proof of claim, but she has implicitly done so in viewing the bank’s lien as unperfected, for an unperfected lien is avoidable under 11 U.S.C. § 544. Section 502(d) provides:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
Section 502(d) does not require that the transfer have been avoided before an objection is made under that provision. The majority rule is that this is true even if the statute of limitations on an avoidance proceeding has expired. Even if the bank’s lien is avoidable under § 544, § 502(d) does not alter the outcome, for the debtor lacks standing to invoke § 502(d).
Although a debtor is entitled to object to a claim under 11 U.S.C. § 502(a) (permitting a party in interest to object to a claim), § 502(d) does not use the term “party in interest” and depends upon a showing that the lien is avoidable pursuant to a power vested only in a trustee. A debtor cannot circumvent the restriction against her exercising a trustee’s avoidance powers by objecting to the claim under § 502(d) and invoking defensively a power reserved to a trustee. Holloway v. IRS (In re Odom Antennas, Inc.), 340 F.3d 705, 709 (8th Cir.2003); Energy Income Fund, L.P. v. Compression Solutions Co. (In re Magnolia Gas Co.), 255 B.R. 900, 914-15 (Bankr.W.D.Okla.2000); United Jersey Bank v. Morgan Guar. Trust Co. (In re Prime Motor Inns, Inc.), 135 B.R. 917, 920-21 (Bankr.S.D.Fla.1992).3
Ill
For all of those reasons, an order follows overruling the debtor’s Amended Objection to Claim # S of Bank of America.4
. Stating in a footnote:
See Knapper v. Bankers Trust Co. (In re Knapper), 407 F.3d 573, 583 (3d Cir.2005); Estate Constr. Co. v. Miller & Smith Holding Co., 14 F.3d 213, 220 (4th Cir.1994); Stangel v. United States (In re Stangel), 219 F.3d 498, 501 (5th Cir.2000); Hansen v. Green Tree Servicing, LLC (In re Hansen), 332 B.R. 8 (10th Cir. BAP 2005); but see Houston v. Eiler (In re Cohen), 305 B.R. 886, 897 (9th Cir. BAP 2004).
. Even if the trustee had avoided the bank's lien, with the lien preserved for the benefit of the estate under 11 U.S.C. § 551, the debtor would not be permitted to exempt the lien under 11 U.S.C. § 522(g) (specifically because § 522(g)(1)(A) makes an exemption under § 522(g) available only if “such transfer was not a voluntary transfer of such property by the debtor”). It follows that even though the trustee has not attempted to avoid the lien, the debtor may not invoke 11 U.S.C. § 522(h) to avoid the lien, for § 522(h) applies only “to *3the extent that the debtor could have exempted such property under subsection (g)(1) of this section” if the trustee had avoided the lien.
. It is unclear whether a successful § 502(d) objection would gain the debtor much. Section 502(d) does not provide for affirmative avoidance relief. Accordingly, even if the trustee successfully objected to the claim pursuant to § 502(d), but did not avoid the lien, it would remain in place, and it arguably would be unaffected by the debtor’s plan upon the completion of the plan.
. Here, because a notice of lis pendens was on file before this case commenced, it is not clear whether the bank’s deed of trust can be avoided. The debtor does not allege that she has attempted to cause the chapter 13 trustee to pursue an adversary proceeding to avoid the bank’s deed of trust, and I do not opine whether the chapter 13 trustee is empowered to so proceed, and can be compelled to so proceed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495768/ | DECISION AND ORDER GRANTING FANNIE MAE’S MOTION FOR RELIEF FROM THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. § 362(d)(3)
JEROME FELLER, Bankruptcy Judge.
Before the Court is Fannie Mae’s motion for relief from the automatic stay *32pursuant to 11 U.S.C. § 362(d)(3) in the jointly administered, single asset real estate cases of RYYZ, LLC (“LLC”) and RYYZ 2, Corp. (“Corp.”) (together, “Debtors”). Based on the entire record and applicable law, Fannie Mae’s motion is granted. The Debtors did not demonstrate that their plan has a reasonable prospect of being confirmed within a reasonable time as required by Section 362(d)(3)(A). This conclusion is premised on the Debtors’ inability to establish (i) they can obtain acceptance of their plan by at least one validly impaired class of claims (see 11 U.S.C. §§ 1111(b), 1122, 1129(a)(10), 1129(b)(1)) and/or (ii) their plan does not violate the absolute priority rule (see 11 U.S.C. § 1129(b)(2)(B)). As the Debtors also failed to make the payments required by Section 362(d)(3)(B), relief from the stay must be granted. This Memorandum Decision and Order constitutes the Court’s findings of fact and conclusions of law to the extent required by Fed.R.Civ.P. 52, made applicable here by Fed. R. Bankr.P. 7052.
I.
The Debtors each filed petitions for relief under Chapter 11 of title 11 of the United States Code on October 18, 2012, designating their business as “single asset real estate.” ECF No. I.1 The Debtors are New York-based entities with the same principals, Joseph Jusewitz and Ne-diva Schwartz. ECF No. 30. Each debt- or owns a portion of a 495-to 500-unit rental apartment complex situated on 43 acres of land in Lake County, Gary, Indiana (“Property”). ECF Nos. 86-2 ¶ 2; 92 at 10. LLC owns Westbrook Apartments Phase I, containing some 350 rental units, and Corp. owns Westbrook Apartments Phase II and its approximately 140 units. ECF Nos. 33-6; 33-12. The bulk of the units command monthly rent between $560 and $600, and the Debtors indicate that some 400 of them are rented. ECF Nos. 86-2 ¶ 5; 92 at 10.
Fannie Mae is a secured creditor by virtue of certain multifamily notes, securi-tization instruments, and assignments (“loan documents”). ECF No. 33 (Exhs. A-Q).2 The aggregate principal sum of the notes is slightly more than $13.5 million, consisting of a $10.5 million note dated March 19, 2007, signed by Schwartz on behalf of LLC in connection with Phase I (ECF No. 33-3), and a note of just over $3 million dated January 2, 2009, executed by Jusewitz on behalf of Corp. for Phase II (ECF No. 33-9). Both notes are secured by first-priority mortgages, assignments of rents and leases, and security agreements. ECF Nos. 33-4; 33-10. In addition, Ju-sewitz and LLC are guarantors of Corp.’s Phase II note. ECF Nos. 35-15; 33-16.
In July 2012, the Debtors defaulted under the loan documents by failing to pay the sums due. ECF No. 33 ¶ 24. Fannie Mae accelerated the debt and commenced a foreclosure proceeding in Lake County Superior Court. Id. ¶¶ 24-29. That action was stayed when the Debtors filed their bankruptcy petitions. Fannie Mae filed two proofs of claim, for an aggregate claim of over $12.3 million. Case No. 12-47383 (POC 12-1); Case No. 12-47384 (POC 3-1).
Fannie Mae’s security interest extends to the post-petition rents generated by the *33Property pursuant to the assignments of rents and leases and by operation of 11 U.S.C. § 552(b). Four orders have been entered on consent of Fannie Mae authorizing the Debtors’ use of cash collateral on an interim basis pursuant to stipulated terms and in accordance with certain budgets. ECF Nos. 28; 52; 70; 87. The last order covered February 2013.
On November 19, 2012, just a month after the petition date, Fannie Mae filed a motion for relief from the stay for cause pursuant to 11 U.S.C. § 362(d)(1). ECF Nos. 31; 32; 33. The motion was couched in terms of lack of adequate protection, but Fannie Mae also argued that reorganization was impossible based on the Debtors’ insufficient cash flow. ECF No. 47 at 3-4. On December 19, the day before the scheduled hearing on the motion, the Debtors filed a plan of reorganization and disclosure statement. ECF Nos. 54; 55. As Fannie Mae had not sustained its burden of demonstrating diminution of the value of its collateral, and in light of the early stage of the case, the Court denied the motion without prejudice. ECF Nos. 61; 62 at 16:2-22.
Fannie Mae filed the present motion on January 31, 2013 (ECF Nos. 76; 77; 78; 79), the Debtors filed an objection on February 28 (ECF No. 86), and Fannie Mae filed a reply on March 5 (ECF No. 89). On March 11, the Debtors filed an amended plan and disclosure statement. ECF Nos. 91; 92. The Court held a hearing on the motion on March 14, 2013, at which counsel for Fannie Mae and the Debtors appeared and were heard, and reserved decision.
II.
The filing of a bankruptcy petition begets a stay of foreclosure proceedings brought by secured lenders to recover their collateral. 11 U.S.C. § 362(a). Unlike injunctive relief in other courts, a debtor need not demonstrate likelihood of success, irreparable harm, or any other factors to obtain stay relief; the bankruptcy stay is by name, and by nature, automatic. “However, restraining creditors from enforcing their legitimate legal rights is strong medicine and our bankruptcy laws do not sanction the stay for stay’s sake.” In re 266 Washington Assocs., 141 B.R. 275, 281 (Bankr.E.D.N.Y.) (“266 Washington”), aff'd, 147 B.R. 827 (E.D.N.Y.1992).
Accordingly, “[o]n request of a party in interest and after notice and a hearing, the court shall grant relief from the stay ... such as by terminating, annulling, modifying, or conditioning such stay....” 11 U.S.C. § 362(d). Under paragraph (1) of subsection (d), relief may be granted “for cause, including the lack of adequate protection of an interest in property of such party in interest;” and under paragraph (2), relief “with respect to a stay of an act against property” is warranted 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)(1) and (2).
Congress enacted 11 U.S.C. § 362(d)(3) in 1994 to fast-track single asset real estate cases.3 Section 362(d)(3) compels debtors to act swiftly by obligating them to *34fulfill one of two mandates by “not later than the date that is 90 days after the” petition date. 11 U.S.C. § 362(d)(3). The debtor must either (A) “file[] a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time” (11 U.S.C. § 362(d)(3)(A)), or, failing this, (B) make monthly payments “in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor’s interest in the real estate” (11 U.S.C. § 362(d)(3)(B)(ii)). Although a court may enlarge the 90-day period for cause shown, the statute carefully circumscribes this relief by requiring the order to be entered before the 90-day period expires. 11 U.S.C. § 362(d)(3).
While (d)(1) and (d)(2) have general application, (d)(3) is designed specifically for single asset real estate cases. These cases typically amount to little more than a contest between the debtor and secured lender over real property that is, or can be, the subject of a foreclosure action. As explained by one court, by enacting Section 362(d)(3) “Congress expressly attempted to avoid the usual delays experienced in Chapter 11 in single asset real estate cases, which historically have been filed to avoid a foreclosure and in the hope that the debtor can come up with some form of a miracle in order to formulate an acceptable plan.” NationsBank, N.A. v. LDN Corp. (In re LDN Corp.), 191 B.R. 320, 326 (Bankr.E.D.Va.1996) (“LDN”).
The term “miracle” is apt. With insufficient cash flow, an inability to obtain alternative financing, few creditors besides the lender, and quite often binding judgments of foreclosure, an attempt to satisfy the confirmation requirements of 11 U.S.C. § 1129 is often a fool’s errand.4 In many instances, the only real promise of a single asset real estate case is a “nasty and costly two-party dispute....” In re Union Meeting Partners, 178 B.R. 664, 681 (Bankr.E.D.Pa.1995). Under these circumstances the continuation of the automatic stay is of questionable value, and there is little reason to continue to frustrate a lender’s legitimate right to pursue its collateral.5
Section 362(d)(3) is designed to protect secured creditors by requiring debtors to act quickly, either by filing a confirmable plan within a prescribed time-frame or by compensating the creditor with statutory payments. See, e.g., LDN, 191 B.R. at 327 (stating that Section 362(d)(3) “was enacted to assist secured creditors in single asset real estate cases”); In re Heather Apts. Ltd. P’ship, 366 B.R. 45, 50 (Bankr.D.Minn.2007) (“[Wjhere the case does not early kick forward toward confirmation,” the purpose of Section 362(d)(3)(B) is to “compensate [the] mortgagee for the time-value of the mortgagee’s debt investment, by the payment of interest at the original contractual rate.”).6 *35At the same time, Section 362(d)(3) provides a window of opportunity for debtors. Section 362(d)(3)’s specific, albeit nonexclusive, criteria for stay relief ought to counsel against knee-jerk motions at the outset of the case that merely parrot the elements of “bad faith,” or other grounds for relief, just because the case involves single asset real estate.7 Its parameters often dictate how a ease proceeds, allowing debtors to focus their efforts on formulating and filing a meaningful plan and/or negotiating a compromise. Thus, Section 362(d)(3) protects secured creditors by “ ‘ensuring] that the automatic stay provision is not abused,’ ” and helps debtors by affording them an “ ‘opportunity to create a workable plan of reorganization.’ ” LDN, 191 B.R. at 326 (quoting S.Rep. No. 103-168, 1st Sess. (1993)).
III.
On a motion for relief from the automatic stay, the moving party “has the burden of proof on the issue of the debt- or’s equity in property” (11 U.S.C. § 362(g)(1)), and the debtor “has the burden of proof on all other issues” (11 U.S.C. § 362(g)(2)). See also In re Elmira Litho, Inc., 174 B.R. 892, 900 (Bankr.S.D.N.Y.1994) (distinguishing between the initial burden of going forward and the ultimate burden of persuasion). The parties are required to meet their respective burdens by a preponderance of the evidence.
The Debtors argue that in order to grant the motion, this Court must find they “can present no plan and have no likelihood of reorganizing.” ECF No. 86 at 11. They also contend Fannie Mae has the burden of proof with respect to the Property’s value, and absent submission of an appraisal, Fannie Mae cannot argue the plan is not confirmable. Id. at 7. The Debtors grossly mischaracterize the parties’ burdens and the standard for relief under Section 362(d)(3).
The proper allocation of burdens and appropriate standard under subsection (d)(3) can be illustrated by comparison to subsections (d)(1) and (d)(2). A creditor moving under Section 362(d)(2) must demonstrate lack of equity under (d)(2)(A) as this burden is squarely placed on the moving party by Section 362(g)(1). As explained by the Supreme Court, once the creditor demonstrates lack of equity, “it is the burden of the debtor to establish that the collateral at issue is ‘necessary to an effective reorganization’” under (d)(2)(B). United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 484 U.S. 365, 375, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (“Timbers ”). The debtor’s burden “is not merely a showing that if there is conceivably to be an effective reorgani*36zation, this property will be needed for it; but that the property is essential for an effective reorganization that is in prospect” Id. at 375-76, 108 S.Ct. 626. For an effective reorganization to be in prospect, “there must be a reasonable possibility of a successful reorganization within a reasonable time.” Id. at 376, 108 S.Ct. 626 (internal quotation marks omitted).
The standard announced in Timbers is quite similar to the language Congress later used in 11 U.S.C. § 362(d)(3)(A). Thus, there are many cases interpreting (d)(2)(B) that are instructive on a motion under Section 362(d)(3). See Pegasus Agency, Inc. v. Grammatikakis (In re Pegasus Agency, Inc.), 101 F.3d 882, 887 (2d Cir.1996) (“Pegasus ”) (reversing lower court and holding stay relief must be granted where “the reorganization plan’s unfounded assumptions and dubious calculations rendered it entirely unreliable, and there is, therefore, no prospect of an effective reorganization under any calculation of the debt”); John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154 (3d Cir.1993) (“John Hancock ”) (reversing order denying stay relief where plan was predicated on impermissible gerrymandering of classes); In re 18 RVC, LLC, 485 B.R. 492 (Bankr.E.D.N.Y.2012) (granting stay relief based on the debtor’s inability to confirm a plan over objection of mortgagee); 266 Washington, 141 B.R. at 278 (same).
However, there are also significant differences between (d)(2) and (d)(3). For one, Section 362(d)(3) does not contain an analogue to Section 362(d)(2)’s lack-of-equity prong. Relief from the stay can be granted under Section 362(d)(3) regardless of whether the debtor has equity in the property. This is consistent with Section 362(d)(3)’s mandate that single asset real estate cases be dealt with expeditiously. If the creditor had the burden on value, it would be required to obtain an appraisal before making a motion under Section 362(d)(3), and upon contradictory proof by the debtor, an evidentiary hearing would likely be needed. Analogously, courts have refused to read a creditor’s burden of establishing lack of equity into Section 362(d)(1). As stated by one court, “[t]he debtor’s lack of equity is an element of a § 362(d)(2) motion” and “is immaterial to the secured creditor’s case under § 362(d)(1).... ” Elmira Litho, 174 B.R. at 904. Significantly, “if the debtor raises the existence of an equity cushion to demonstrate adequate protection, the debtor— not the secured creditor — must prove it notwithstanding the provisions of § 362(g).” Id.8
Another difference between (d)(3) and (d)(2) is that Section 362(d)(3)(A) calls for scrutiny of a plan, but an analysis under (d)(2)(B) need not include consideration of an actual plan. Timbers speaks of a “reasonable possibility of a successful reorganization within a reasonable time,” but Section 362(d)(3)(A) is far more focused. It mandates stay relief unless “the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time.... ” 11 U.S.C. § 362(d)(3)(A) (emphasis added). A closely related difference is that under Section 362(d)(2), the level of scrutiny depends on the stage of the case. See generally Sumitomo Trust & Banking Co. v. Holly’s, Inc. (In re Holly’s, Inc.), 140 B.R. 643 (Bankr.W.D.N.Y.1992). Timbers recognized that bankruptcy courts require less detailed showings from debtors in re*37sponse to motions pursuant to Section 362(d)(2) that are made in the first four months of the case. 484 U.S. at 376, 108 S.Ct. 626. The relevance of this time-frame is that, as a general rule, debtors have a 120-day exclusive period to file a plan. 11 U.S.C. § 1121(b). Thus, “Mur-ing the exclusivity period, a debtor’s evi-dentiary burden is relatively light in order to allow the debtor an opportunity to negotiate a plan that is reasonably confirmable within a reasonable time.” In re Kent Terminal Corp., 166 B.R. 555, 561 (Bankr.S.D.N.Y.1994) (explaining that “[a]s time passes and the debtor’s exclusivity period expires, the debtor must meet a somewhat higher standard, i.e., that confirmation of the proposed plan is not only possible but ‘probable’ ”). By contrast, Section 362(d)(3)(A) requires a debtor to show its hand 30 days before the expiration of the exclusivity period, and that plan must have a reasonable possibility of being confirmed within a reasonable time. For this reason, Section 362(d)(3) is not as elastic as Section 362(d)(2), and does not permit a wait- and-see approach.
On a motion under Section 362(d)(3), the creditor bears the initial burden of demonstrating the quantum of its claim and its security interest in the real property. The debtor must establish that a reorganization based on its plan is in prospect. If the value of the property is dispositive of whether the plan has a reasonable possibility of being confirmed within a reasonable period of time, then the debtor bears the ultimate burden of persuasion with regard to value. In a dispute concerning the amounts required to be paid pursuant to 11 U.S.C. § 362(d)(3)(B)(ii), the creditor will have the burden of establishing it has a secured interest in the property and the amount of its claim, and the debtor will have to demonstrate it timely made or proffered payments equal to the nondefault contract rate of interest on the value of the creditor’s interest in the real estate.
As the foregoing implies, the debtor’s plan will be measured against 11 U.S.C. § 1129’s confirmation requirements. However, the debtor’s burden is less onerous under Section 362(d)(3)(A) than it is at confirmation; a debtor need not prove that its plan shall be confirmed. A mini-confirmation hearing is not required, nor is it appropriate, absent good reason to continue to restrain the lender from exercising its rights. While the debt- or’s plan does not have to be perfect, the plan, together with the evidence and the debtor’s arguments, must delineate a credible path to reorganization. Hurdles to plan confirmation must be addressed in a way that provides the court with grounds to conclude (i) it is more likely than not they will be overcome, and (ii), because there is a time element, they can be overcome promptly. Unless the plan has a true prospect of being confirmed within a reasonable time, or timely payments have been made, a secured creditor should not be compelled to endure further delay, expense, and risk.
IV.
The Debtors filed their plan on December 19, 2012, a date within the 90-day period allowed by Section 362(d)(3), and filed an untimely, amended plan on March 11, 2013.9 The plan classifies five classes *38of claims. ECF No. 91 Art. III. Of these classes, four are characterized as impaired: Class 2 (Fannie Mae’s secured claim), Class 3 (tenant security depositors); Class 4 (general unsecured claims), and Class 5 (the Debtors’ equity holders). Id. Art. IV; but see Id. Art. Ill (“Class 3 is not Impaired.”).
The plan operates under the assumption that Fannie Mae’s claim is $12,379,715.90. Id. § 4.2(1). Critically, Fannie Mae’s total claim is placed in Class 2 for the time being, subject to valuation of the Property at confirmation, at which point the deficiency claim will be classified within the general unsecured creditor class, Class 4. Id. § 4.2(3). Therefore, the plan only considers claims of $1,268,261 in Class 4, and proposes to pay roughly 5 percent of that amount. Id. § 4.4; ECF No. 86 at 6. Without separating out the secured and unsecured portions of Fannie Mae’s claim, the plan proposes to treat Fannie Mae’s Class 2 claim as follows:
(a) from the Effective Date for the next twelve months, the Debtors shall pay interest only in arrears at three percent (3%);
(b) commencing twelve months after the Effective Date, the Debtor shall make level payment based upon principal amortized over twenty-five (25) years with interest at three percent (3%);
(c) on the sixtieth (60) month following the Effective Date, the Debtor shall pay all remaining principal under the Amended Note;
(d) if Class 2 elects treatment under Section 1111(b), commencing on the effective date, the Debtor shall make a monthly payment equal to the Allowed Class 2 claim, which shall be considered the Class 2 Secured Claim, divided by three-hundred (300) for three hundred (300) months until paid in full;
(e)Class 2 shall retain its liens to the extent of its Secured Claim until paid in full.
ECF No. 91 § 4.2(3). The plan will be funded by the Debtors’ continued operations, and a $250,000 infusion of working capital by the Debtors’ equity holders to address any cash flow deficiencies. Id. § 6.8. The plan also provides that the equity holders will retain their interests in the Debtors. Id. § 4.5.
The Debtors’ plan is uninformative, speculative, and divorced from the facts of this case. Neither the plan nor the disclosure statement indicates the circumstances that caused the Debtors to default in July 2012. The Debtors’ plan and opposition papers leave the critical issues of feasibility under 11 U.S.C. § 1129(a)(ll) and fair and equitable treatment of Fannie Mae’s secured claim under 11 U.S.C. § 1129(b)(2) to be resolved after a judicial determination of the value of the Property and the presentation of evidence at a confirmation hearing. ECF No. 86 at 7-8. But there are no grounds to hold the confirmation hearing imagined by the Debtors. Fannie Mae objects to the plan, and based on the hypothetical values and projections offered by the Debtors, will hold a deficiency claim of millions of dollars. This fact creates two discreet but insoluble impediments to confirmation. The first concerns whether the Debtors can demonstrate the likelihood that at least one impaired class of claims will accept their plan. The second is whether the Debtors can establish that their plan does not violate the absolute priority rule. Rather than trundle through the minefield of problems raised *39by the Debtors’ plan, the Court will focus just on these two issues.
V.
A plan proponent has “two distinct avenues for confirmation of a reorganization plan [under 11 U.S.C. § 1129], one grounded on the consent of impaired classes of claims and the other hinged on a judicial cram down over the objections of impaired classes.” 266 Washington, 141 B.R. at 282. Consensual confirmation is possible if each requirement of 11 U.S.C. § 1129(a) is met, including (a)(8), which requires acceptance of the plan by each impaired class of claims. Class acceptance requires an affirmative vote by at least one-half in number and at least two-thirds in amount of claims casting a ballot. 11 U.S.C. § 1126(c). The existence of even one impaired dissenting class precludes consensual confirmation and necessitates resort to cramdown under Section 1129(b).
Section 1129(b) requires that all provisions of subsection (a) are met, excluding (a)(8), and that the plan does not discriminate unfairly and is fair and equitable to each dissenting impaired class. 11 U.S.C. § 1129(b)(1). Significantly, the Bankruptcy Code does not permit cram-down of a plan that is not accepted by even one impaired class. Under Section 1129(a)(10), at least one impaired class, excluding the votes of insiders, must accept the plan for a debtor to proceed to cramdown. This provision plays a vital gatekeeper function. As explained by one court, Section 1129(a)(10) “ensures that prior to embarking upon the tortuous path of cramdown and compelling the target of cramdown to shoulder the risks of error necessarily associated with a forced confirmation, there is a showing that some group hurt by the plan favors the plan.” In re Fur Creations by Varriale, Ltd., 188 B.R. 754, 760 (Bankr.S.D.N.Y.1995) (“Varriale”) (internal quotation marks omitted).
Section 1129(a)(10)’s power is often most apparent in single asset real estate cases. Consistent with the two-party nature of such disputes, the impaired classes normally include insiders, the lender, and, depending on the case, a relatively modest group of unsecured creditors. As result of this, and by operation of 11 U.S.C. §§ 506(a), 1111(b)(1), and 1122(a), lenders often dominate the relevant impaired classes and prevent satisfaction of Section 1129(a)(10).
Under Section 506(a), “a lender’s secured claim is limited to the value of its collateral; the remainder of the claim, if any, is an unsecured claim_” 266 Washington, 141 B.R. at 283. Section 1111(b)(1)(A) provides that “[a] claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 ... the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse....” 11 U.S.C. § 1111(b)(1)(A). This provision trumps 11 U.S.C. § 502(b)(1), which disallows claims, including recourse claims, if they are unenforceable under the parties’ contract or applicable law. And under Section 1111(b)(2), an undersecured creditor can elect to have its entire claim treated as secured by the debtor’s collateral, notwithstanding the actual value of the collateral and 11 U.S.C. §§ 506(a) and 502(b)(1).
An undersecured creditor will thus have both a secured claim (equal to the value of the property) and an unsecured deficiency claim (equal to the difference between the total amount of its claim and the value of the property). Unless an undersecured creditor elects to have its claim treated as fully secured under Section 1111(b)(2), it will be able to cast a vote *40based on both its secured and unsecured claims. Although single asset real estate debtors have fought this point, under 11 U.S.C. § 1122, the provision dealing with the classification of claims, a lender’s deficiency claim is classified properly within the class of general unsecured creditors. Boston Post Road, 21 F.3d at 483 (“The purpose of the Section 1111(b) election is to allow the undersecured creditor to weigh in its vote with the votes of the other unsecured creditors. Allowing ... [separate classification] would effectively nullify the option that Congress provided to undersecured creditors to vote their deficiency as unsecured debt.”). With only a relatively small number of other general unsecured claims, and no other legitimately impaired voting classes, an underse-cured creditor’s dissent will likely prevent fulfillment of Section 1129(a)(10). Said another way, a substantial deficiency claim held by a recalcitrant lender will almost always sound the death knell in a single asset real estate case.
Fannie Mae argues that based on the size of its claim, the value of the Property relied on by the Debtors in the plan, and the amount of the general unsecured claims, its deficiency claim will control the general unsecured creditor class. As Fannie Mae is steadfastly opposed to confirmation of the plan, this would render satisfaction of Section 1129(a)(10) impossible. ECF No. 77 at 6. Fannie Mae’s evidence includes its proof of claim; the declaration and exhibits, including the loan documents, attached to its first motion to lift the automatic stay (ECF No. 33); a supplemental declaration by the same affiant (ECF No. 79); the Debtors’ petition; various budgets submitted by the Debtors in connection with their use of cash collateral; and the Debtors’ plan and disclosure statement. Fannie Mae’s proofs of claim are prima facie evidence of the validity and quantum of its claims (Fed. R. Bankr.P. 3001(f)), and the Debtors did not object to these claims or present evidence to rebut them. Based on the evidence presented, including Fannie Mae’s claim, its security interest in the Property and the rents, and the facial deficiency of the Debtors’ plan, Fannie Mae has stated a prima facie case.
Prior to the hearing on the motion it appeared the Debtors’ response was that this argument was (i) premature (Fannie Mae had not yet decided if it would make a Section 1111(b)(2) election) and (ii) unsupported (Fannie Mae had not met its burden of establishing the value of the Property, and thus the extent of its deficiency claim was unknown). ECF No. 86 at 6-7. At the hearing, the Debtors raised a new concept: Class 3 was the impaired class that could satisfy Section 1129(a)(10). The Court will address these arguments separately.
Fannie Mae, the creditor with far and away the greatest stake in this case, has stated its intention in no uncertain terms to vote against the plan that has been proffered. There is no dispute as to its claim of over $12.3 million or the amount of $1,268,261 in unsecured claims. The liquidation analysis in the disclosure statement provides a $5 million foreclosure value of the Property. ECF No. 92 at 10. The Cash Flow Analysis appended to the original disclosure statement lists the projected sales prices of the Property over a five-year period: $5,049,712 in year 1; $5,310,532 in year 2; $5,928,125 in year 3; $6,351,085 in year 4; and $6,266,336 in year 5. ECF No. 55-1. The Cash Flow Analysis attached to the amended plan “spruces up” these numbers: $6,060,376 in year 1; $6,341,409 in year 2; $6,979,620 in year 3; $7,423,610 in year 4; and $7,360,312 in year 5. ECF No. 91-1. Even under the $7,423,610 value, Fannie Mae would hold approximately 80 percent of the vote, which is more than sufficient to *41block acceptance by the unsecured creditor class. Assuming all the unsecured creditors voted, and all of them voted to accept the plan, the Property would have to be worth in excess of $11.6 million (leaving Fannie Mae with a deficiency claim of less than $700,000) for those votes to satisfy the requirements of Section 1129(a)(10).
Under Section 362(d)(3)(A), the Debtors must demonstrate that they can plausibly overcome the clear obstacle to confirmation presented by Section 1129(a)(10). The Debtors’ technical arguments do not come close to fulfilling this mandate for reasons that cut far deeper than misstating the burden on the issue of value. Based on the calculations above and what the plan offers Fannie Mae, it is pure fantasy to think that Fannie Mae would make a Section 1111(b)(2) election or that an appraisal would make any difference.10 In their heart of hearts the Debtors appear to recognize this sobering reality: not only do they decline to offer an appraisal or other evidence, they do not even argue that an appraisal would be sufficient to stifle Fannie Mae’s blocking power.
But what the Debtors fail to appreciate is that if they cannot make this argument, the inquiry must end. The Debtors’ position is essentially that the case should proceed to a dual valuation/confirmation hearing just in case the Property turns out to be worth a lot more than anyone is at present willing to say it is; or just in case Fannie Mae makes a Section 1111(b)(2) election. Even under Section 362(d)(2), courts routinely grant stay relief when a debtor’s reorganization is predicated on such wishful thinking. Pegasus, 101 F.3d at 887 (citing cases).
The Debtors also have not established that Class 3, the class of tenant security depositors, is a legitimately impaired class.11 As a threshold matter, it is unclear whether Class 3 is impaired based on its proposed treatment under the plan. Under the plan, the Class 3 claims of $210,461:
[S]hall be paid in full, per Tenant, upon each tenant’s move out date, if said tenant is entitled to the repayment of said Security Deposit pursuant to the terms of his or her lease. The funding for the payments shall come from the operation and rental income of the Debtor. The claims,, if any, of the Tenants, accruing after the Petition Date shall be paid on a current basis.
ECF No. 91 § 4.3. As the plan provides for full repayment of security deposits pursuant to the leases, there does not appear to be any alteration of the tenants’ statutory or contractual rights. Cf. ECF No. 91 § 3.3 (“Class 3 consists of the Unsecured Claims of the Debtor’s Tenants ... entitled, upon termination of lease, to receive security deposits. Class 3 is not Impaired.”).
The Debtors suggested at the hearing that these claims are impaired because the tenant security deposits were not separately escrowed, but this argument is not sufficient to sustain their burden of establishing that Class 3 can be deemed a validly impaired class. Other than counsel’s vague allusions at oral argument, the Debtors have not provided any explanation or evidence concerning the “what,” “why,” and “when” of their handling of the seeuri*42ty deposits. Nor have they directed the Court to any Indiana authority that sheds light on the issue.12 See, e.g., In re All Land Invs., LLC, 468 B.R. 676, 691 (Bankr.D.Del.2012) (“The record does not reveal how the Class 1 claimants’ rights have been altered, if at all. ‘A plan which “leaves unaltered” the legal rights of a claimant is one which, by definition, does not impair the creditor.’ ”) (quoting Solow v. PPI Enter. (U.S.), Inc. (In re PPI Enter. (U.S.), Inc.), 324 F.3d 197, 204 (3d Cir.2003)). Cf. In re Gramercy Twins Assocs., 187 B.R. 112, 116 (Bankr.S.D.N.Y.1995) (“Class VI is comprised of security deposit claims by the tenants of the Property totaling • approximately $149,375.66.... [M]embers of this class will receive the full amount of their claims. As an unimpaired class, it was excluded from the vote on confirmation.”).
The Court has not tarried long on Indiana law, because under Second Circuit precedent it is clear that the Class 3 tenants do not have a claim against the Debtors’ estate as a matter of bankruptcy law. In Boston Post Road, the Second Circuit described why tenant security deposit claims are not entitled to vote when a plan, like the one in this case, is silent on the issue of acceptance or rejection of tenant leases:
In this case, the Class 3 tenant security depositors could not constitute a voting class of creditors for purposes of effecting cramdown. Any claim for return of tenant security deposits would arise from the lease between the debtor and the tenant. Under the Bankruptcy Code, unexpired leases must be assumed or rejected by the Debtor. 11 U.S.C. § 365. When, as in the instant case, the Debtor does neither, the leases continue in effect and the lessees have no provable claim against the bankruptcy estate. [Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1281 (5th Cir.1991), cert. denied, 506 U.S. 821, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992).] The obligations assumed by the debtor under the continued leases constitute post-petition administrative claims. See 11 U.S.C. § 503(b)(1)(A). Such administrative claims are defined as priority claims under 11 U.S.C. § "507(a)(1), and must be paid in full in cash pursuant to 11 U.S.C. § 1129(a)(9)(A); their holders are not entitled to vote on a plan of reorganization.
21 F.3d at 483-84; see Barakat v. Life Ins. Co. of Virginia (In re Barakat), 99 F.3d 1520, 1528 (9th Cir.1996) (same); In re Cantonwood Assocs. Ltd. P’ship, 138 B.R. 648, 656 (Bankr.D.Mass.1992) (same). But see In re Duval Manor Assocs., 191 B.R. 622 (Bankr.E.D.Pa.1996). Regardless of whether the Debtors explicitly assume the leases under 11 U.S.C. § 365 or the plan is silent on that issue, they are required to pay the tenants pursuant to the leases. In either event, the tenants do not have claims for purposes of voting on the plan.13 And rejection of the leases would give rise to tenant claims that presumptively would be classified within the general unsecured *43class, Class 4. See generally 266 Washington, 141 B.R. at 282. Even with the added tenant claims, Fannie Mae’s deficiency claim would still easily control Class 4.
Moreover, it would appear that the Debtors seek impermissibly to impair the tenant class for the sole purpose of complying with Section 1129(a)(10). As one court explains:
“Artificial” impairment occurs when a plan imposes an insignificant or de min-imis impairment on a class of claims to qualify those claims as impaired under § 1124. The chief concern with such conduct is that it potentially allows a debtor to manipulate the Chapter 11 confirmation process by engineering literal compliance with the Code while avoiding opposition to reorganization by truly impaired creditors.
In re Combustion Eng’g, Inc., 391 F.3d 190, 243 (3d Cir.2004). Courts have taken different views on de minimis impairment of claims. While some note the Bankruptcy Code does not expressly prohibit it, “the majority view continues to be that artificial impairment runs afoul of the requirements for Chapter 11 confirmation.” Fed. Nat’l Mortg. Ass’n v. Village Green I, GP, 483 B.R. 807, 817 (W.D.Tenn.2012); see In re 183 Lorraine St. Assocs., 198 B.R. 16, 30 (E.D.N.Y.1996) (noting that courts within the Second Circuit “have looked with disfavor upon the ‘artificial’ impairment of claims”).14
As a general rule, the determination of whether a class is artificially impaired requires consideration of whether the class is impaired (i) for a proper business purpose or (ii) to manipulate the voting process in order to fulfill Section 1129(a)(10). As stated by one court, “[tjhere must be a showing that the proposed impairment is necessary for economical or other justifiable reasons and not just to achieve ‘cram down.’” Varriale, 188 B.R. at 760. The Debtors do not explain or provide evidence concerning the impairment of the tenant class, and therefore have not met their burden of establishing a valid business purpose for the proposed impairment.
At the same time, there are indicia of impermissible artificial impairment. For one, based on the Debtors’ current projections and/or the purported ability of the Debtors’ principals to contribute $250,000, it would appear that the Debtors can (i) remit the de minimis security deposits on an as-needed basis or (ii) create a replacement fund. See, e.g., Id. (stating that the debtor’s admission it could pay a higher claim if necessary was “fatal to its argument that a valid business reason motivated the proposed” impairment of a lesser claim). For another, the $210,461 in tenant security deposit claims is a mere 1.7 percent of Fannie Mae’s total claim. Under these circumstances, allowing the tenant class to be used to cramdown a plan over Fannie Mae’s objection “is simply inconsistent with the principles underlying the Bankruptcy Code.” Boston Post Road, 21 F.3d at 483; see Varriale, 188 B.R. at 760 (“Allowing an ‘artificially impaired’ class to satisfy the 11 U.S.C. § 1129(a)(10) requirement would nullify the protection it was designed to provide and would promote ‘side dealing’ between debtor and selected creditors.”) (quoting Windsor on the River Assocs., Ltd. v. Balcor Real Estate Fin., Inc. (In re Windsor on the River Assocs., Ltd.), 7 F.3d 127, 132 (8th Cir.1993)).
*44VI.
Assuming the Debtors were able to overcome the seemingly insurmountable obstacle to confirmation of obtaining acceptance by a legitimately impaired class — and also be able to satisfy the other provisions of Section 1129(a), excluding (a)(8) — they would then have to demonstrate that the plan does not discriminate unfairly and is fair and equitable to each dissenting impaired class. 11 U.S.C. § 1129(b)(1). For holders of unsecured claims, fair and equitable treatment requires that such holders receive property of a value equal to the allowed amount of their claims, failing which the plan must satisfy 11 U.S.C. § 1129(b)(2)(B)(ii), which codifies the absolute priority rule. “[T]he absolute priority rule provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under a reorganization plan.” Nw. Bank Worthington v. Ahlers, 485 U.S. 197, 202, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) (internal quotation marks and alterations omitted).
Notwithstanding this rule, old equity can retain their interests in the debtor if they contribute “new value.” Under this exception, “the capital contribution by old equity must be (1) new, (2) substantial, (3) money or money’s worth, (4) necessary for a successful reorganization and (5) reasonably equivalent to the property that old equity is retaining or receiving.” BT/SAP Pool C Assocs. v. Coltex Loop Cent. Three Partners, 203 B.R. 527, 534 (S.D.N.Y.1996) (“Coltex”), aff'd, 138 F.3d 39 (2d Cir.1998). Although the absolute priority rule and the new value exception are derived from a different context altogether, they are most often addressed now in single asset real estate cases. See, e.g., Ahlers, 485 U.S. at 202, 108 S.Ct. 963; Bank of Am. Nat’l Trust and Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 443 n. 15, 119 S.Ct. 1411, 148 L.Ed.2d 607 (1999) (“LaSalle ”) (noting that single asset real estate cases are the “typical [context] in which new value plans are proposed”). The reason for this stems from the two-party nature of such cases, and is reflected in the following passage:
In essence, from the debtor’s perspective, the proposed new value is like putting money in the bank. The debtor’s principals put the money in, and presumably the value of the [property] will increase which inure[s] to the benefit of the debtor’s principals (who may “withdraw” the increased value by selling the property in the future). In the meantime, the secured creditor, who bargained for a first lien position, runs the ultimate risk of the project’s failure with no upside potential. Such a result is not fair and equitable and violates the absolute priority rule.
In re Miami Ctr. Assocs., 144 B.R. 937, 942 (Bankr.S.D.Fla.1992). Despite the uncertainty that results from the plan’s failure to address how Class 4 claims will be treated when Fannie Mae’s deficiency claim is added (see, e.g., ECF No. 91 § 4.4), it is clear that there will be substantial unsecured claims that will not be paid in full.15 Nevertheless, the plan provides that equity holders will retain their interests in the Debtors. Id. § 4.5. Thus, the plan will violate the absolute priority *45rule unless the equity holders’ contribution satisfies the new value exception.16
Fannie Mae raised this argument (ECF No. 77 at 6), but the Debtors did not respond and therefore have not met their burden of establishing that they can overcome the impediment to confirmation presented by the absolute priority rule. In any event, several factors make satisfaction of the new value exception highly improbable. First, as held by the Supreme Court in LaSalle, the Debtors’ plan is “doomed” because it “vest[s] equity” in the Debtors’ principals “without extending an opportunity to anyone else either to compete for that equity or to propose a competing reorganization plan.” 526 U.S. at 454, 119 S.Ct. 1411; see Coltex, 203 B.R. at 535 (stating that the “debtor must show not only that it needs funds to reorganize but rather that it is necessary for old equity to contribute those funds”). Second, the contribution appears to depend on a potential deficiency in the projections and therefore cannot be considered as new value. Gramercy Twins Assocs., 187 B.R. at 126-27 (concluding contingent contribution could not be considered new value). Third, the Debtors have not established that the equity holders are able to contribute $250,000 to the plan. Fourth, the Debtors’ failure to provide evidence concerning value prevents them from demonstrating reasonable equivalence. In re Multiut Corp., 449 B.R. 323, 354 (Bankr.N.D.Ill.2011) (sustaining creditor’s objection where plan failed “to adequately estimate the value of the Debtor’s assets”). Fifth, even taking the $5 million low-end “hypothetical” liquidation value, the $250,000 contribution is only 5 percent of that value. See, e.g., In re One Times Square Assocs. Ltd. P’ship, 159 B.R. 695, 708-09 (Bankr.S.D.N.Y.1993) (holding contribution equaling 12.6 percent of retained value was insufficient), aff'd, 165 B.R. 773 (S.D.N.Y.), aff'd, 41 F.3d 1502 (2d Cir.1994), cert. denied, 513 U.S. 1153, 115 S.Ct. 1107, 130 L.Ed.2d 1072 (1995). Finally, the proposed contribution is far too small relative to the unsecured debt in this case. See, e.g., In re Union Meeting Partners, 165 B.R. 553, 570 (Bankr.E.D.Pa.1994) (holding contribution of 5.9 percent of unsecured claims was not substantial), aff'd, 52 F.3d 317 (3d Cir.1995).
Based on the entire record, and for the reasons stated herein, the Debtors have failed to satisfy their burden under Section 362(d)(3)(A). Indeed, the Debtors’ attempt to woolgather their way to a confirmation hearing is exactly what Section 362(d)(3) is designed to guard against.17
*46VIL
As the Debtors did not demonstrate that the plan has a reasonable prospect of being confirmed, stay relief must be granted unless the Debtors made timely payments pursuant to 11 U.S.C. § 362(d)(3)(B). The Debtors admit that they did not commence making statutory payments within the required time (ECF No. 86-2 ¶¶ 4, 7), and therefore have not satisfied Section 362(d)(3)(B). Undaunted, the Debtors seek credit for a late payment of $18,750. Fannie Mae argues that the proper amount is over $39,000. This amount is based on a property value of $8 million and the Phase I note’s interest rate of 5.87 percent. ECF No. 77 at 7 (noting that the Phase II note’s contract rate is 6.92 percent). Even if late payments were permitted, and they are not, the Debtors have not demonstrated the sufficiency of the $18,750 payment.
The statute requires monthly payments equal to the nondefault contract rate of interest on the value of the creditor’s interest in the property. 11 U.S.C. § 362(d)(3)(B)(ii). Instead, the Debtors calculated the payment by reference to their cash flow. ECF No. 93 at 17:12-14. The stated reason for the Debtors’ alternative calculation is that the Property has not been appraised; but this is no excuse for the Debtors’ failure to determine the statutory amount due within the 90-day period. See ECF Nos. 86-2 ¶ 7; 89 at 2. A better explanation, one that is reflected in the cash collateral budgets, is that the Debtors could not make a payment within the statutory period, and in tendering their late payment, simply offered as much as they could. ECF No. 77 at 4, 7. To be sure, Section 362(d)(3)(B) does not contain a pay-what-you-can exception. Even taking the Debtors’ “hypothetical” liquidation value of $5 million and the Phase I note’s rate of 5.87 percent, the required monthly payment under the statutory formula is over $24,000.
Based on the entire record, and for the reasons stated herein, the Debtors have failed to demonstrate compliance with Section 362(d)(3)(B).
VIII.
Accordingly, based on the foregoing, Fannie Mae’s motion for relief from the automatic stay is granted pursuant to 11 U.S.C. § 362(d)(3), except Fannie Mae’s request for waiver of the 14-day stay provided by Fed. R. Bankr.P. 4001(a)(3) is denied for lack of cause shown.
SO ORDERED.
. The Court will refer to the Debtors’ filings in the singular form and, for ease of reference, record citations will be to Case No. 12-47383, unless otherwise indicated.
. The loan documents are governed by Indiana law and require disputes to be heard in the state and federal courts of Indiana. See, e.g., ECF Nos. 33-3 §§ 17, 20; 33-4 § 30; 33-6 § 21; 33-9 § 17; 33-10 § 30; 33-15 § 14.
. The Bankruptcy Code defines "single asset real estate” as:
[R]eal property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto.
11 U.S.C. § 101(5IB).
. See, e.g., In re Baxter & Baxter, Inc., 172 B.R. 198, 201 (Bankr.S.D.N.Y.1994) (stating that the Second Circuit "clearly looks upon the confirmation of a single-asset real estate case over the lender’s objection as aberrational”) (citing Boston Post Road Ltd. P'ship v. FDIC (In re Boston Post Road Ltd. P’ship), 21 F.3d 477 (2d Cir.1994) ("Boston Post Road ”), cert. denied, 513 U.S. 1109, 115 S.Ct. 897, 130 L.Ed.2d 782 (1995)).
. See, e.g., In re Shea & Gould, 214 B.R. 739, 744 (Bankr.S.D.N.Y.1997) (noting that the Second Circuit's decision setting forth the "bad faith” factors for dismissal, furthered “the court of appeals' view that in single asset real estate cases, debtors cannot manipulate the Bankruptcy Code to thwart the legitimate rights of secured creditors”) (citing C-TC 9th Ave. P'ship v. Norton Co. (In re C-TC 9th Ave. P’ship), 113 F.3d 1304 (2d Cir.1997)).
. As payments under 11 U.S.C. § 362(d)(3)(B) are based on the value of the property, and not the outstanding debt, they will often be less than what is due under the note. These payments arguably shift the risk of protracted cases from creditors to debtors. Kenneth N. *35Klee, One Size Fits Some: Single Asset Real Estate Bankruptcy Cases, 87 Cornell L.Rev. 1285, 1292 (2002) (noting they "also create[] a barrier to entry that discourages small real estate owners from filing for Chapter 11 relief”). However, the longer a case goes on an undersecured creditor may lose the power of its vote as an unsecured creditor if its claim is paid down. See generally In re South Side House, LLC, 474 B.R. 391 (Bankr.E.D.N.Y.2012).
. As one court notes, applying a "mechanical approach” to the bad faith factors "would automatically doom almost every single asset case, ab initio.” In re Willows of Coventry, Ltd. P’ship, 154 B.R. 959, 967 (Bankr.N.D.Ind.1993). Under Second Circuit precedent, the critical consideration for bad faith is whether " 'it is clear that on the filing date there was no reasonable likelihood that the debtor intended to reorganize and no reasonable probability that it would eventually emerge from bankruptcy_’” C-TC 9th Ave. P’ship, 113 F.3d at 1309 (quoting Baker v. Latham Sparrowbush Assocs. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 227 (2d Cir.1991)).
. Likewise, payments under Section 362(d)(3)(B) are not the same as or a substitute for adequate protection payments under 362(d)(1). See In re Erie Playee LLC, 441 B.R. 905, 908 (Bankr.N.D.Ill.2010).
. The amended plan does not differ from the original plan in any respect material to the Court’s analysis; the Court will consider the amended plan and disclosure statement as part of the record on this motion. To be sure, a debtor may not file a token plan within the 90-day period and then defend a lift stay motion by arguing that its late-filed amended plan can be confirmed. While 11 U.S.C. § 1127(a) allows a debtor to file an amended *38plan, this general provision cannot be used as an end-run around the more specific language in Section 362(d)(3).
. At oral argument Fannie Mae made clear it had no intention of making a Section 1111(b)(2) election.
. The Debtors list the security depositors as priority claims on Schedule E — Creditors Holding Unsecured Priority Claims (“Schedule E”). ECF No. 30. Schedule E lists 384 tenants owed security deposits ranging from $80 to $2,425, for an average of about $554 per tenant. Id.
. The Court's own research indicates that Indiana law does not explicitly prohibit the commingling of security deposits with general operating funds. See, e.g., Ind.Code § 32-31-3-9 (defining a security deposit).
. Although the Debtors’ filing may have acted as a stay against the repayment of security deposits, this would not result in impairment for plan purposes. See, e.g., In re Mangia Pizza Invs., LP, 480 B.R. 669, 690 (Bankr.W.D.Tex.2012) (“Any impairment to the funds thus far has been the result of the automatic stay provisions of the Bankruptcy Code, not because of the treatment under the Plan. Therefore, HEB’s rights remain unaltered.”).
. Courts in the Second Circuit sometimes consider this issue in the context of good faith under 11 U.S.C. § 1129(a)(3). See, e.g., In re Quigley Co., 437 B.R. 102, 126 (Bankr. S.D.N.Y.2010) (noting that the Second Circuit had not yet addressed whether artificial impairment should be considered under Section 1129(a)(10) or (a)(3)).
. See, e.g., Liberty Nat’l Enters. v. Ambanc La Mesa Ltd. P’ship (In re Ambanc La Mesa Ltd. P’ship), 115 F.3d 650, 654 (9th Cir.1997) (holding that although creditor received 100 percent of its secured and unsecured claims, the plan violated the absolute priority rule as it did not "provide for payment of interest for the post-confirmation time-value of the amount of” the creditor's unsecured claim).
. The disclosure statement indicates the Debtors "may choose to use the New Value Exception” and that "[t]he amount of such new value is not yet determined.” ECF No. 92 at 8.
. There are far more issues standing in the way of confirmation than the Court has addressed here. The Debtors cannot use rental collateral to fund plan payments over Fannie Mae's objection. See, e.g., In re Buttermilk Towne Ctr., LLC, 442 B.R. 558, 566-67 (6th Cir. BAP 2010); In re Griswold Bldg., LLC, 420 B.R. 666, 705-06 (Bankr.E.D.Mich.2009). Without knowing the value of Fannie Mae's secured claim, it is impossible to determine the appropriateness of the plan's proposed interest rate. Even so, it is doubtful the plan provides Fannie Mae with present value. See, e.g., Rake v. Wade, 508 U.S. 464, 472 n. 8, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) ("When a claim is paid off pursuant to a stream of future payments, a creditor receives the 'present value' of its claim only if the total amount of the deferred payments includes the amount of the underlying claim plus an appropriate amount of interest to compensate the creditor for the decreased value of the claim caused by the delayed payments.”). And, for yet another major problem, the Internal Revenue Service filed a claim of close to $7.2 million in Corp.'s case. Case No. 12-47384 (POC 2-1). This claim was not addressed by the parties; if valid, it is improbable Corp. can reorganize. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495770/ | MEMORANDUM DECISION PARTIALLY GRANTING AND PARTIALLY DENYING MOTION TO DISMISS THE COMPLAINT
STUART M. BERNSTEIN, Bankruptcy Judge.
The plaintiff, the chapter 7 trustee of the debtor Operations N.Y. LLC (the “Debtor”), brought this adversary proceeding to avoid and recover three transfers aggregating $279,839.61 (the “Transfers”). (See Com/plaint, dated Aug. 12, 2012 (ECF *89Doc. # 1).) The Complaint asserts claims sounding in intentional and constructive fraudulent transfer, unjust enrichment, preference and conspiracy. The defendants have moved to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (“Federal Civil Rules”) made applicable to this adversary proceeding by Fed. R. BanerP. 7012(b) for failure to state a claim upon which relief can be granted.
For the reasons that follow, the motion is granted in part and denied in part.
BACKGROUND
The Debtor was formed in 2004 by the defendants Matteo Gottardi, Michael Leen and Johannes Mahmood to import, design and sell men’s and women’s garments. (¶ 15.)1 The Debtor opened its “flagship” store at 60 Mercer Street in Manhattan in 2005 and entered into a lease with Chelsea/Village Associates LLC (“CVA”) regarding space for a second store at 50 Ninth Avenue in Manhattan in or about May 2008. (¶ 16.) The individual defendants are board members and own interests in the Debtor. (¶¶ 10-14.) The plaintiff alleges upon information and belief that the defendant Edidin and Associates (“Edidin Associates”) is an unincorporated business organization wholly owned by defendant Gary Edidin (“Gary”), the defendant Franklin Capital Holdings LLC d/b/a Franklin Capital Network (“Franklin”), is a limited liability company also owned by Gary, and both entities operate from the same location in Highland Park, Illinois. {See ¶¶ 8-9.) Gary, Franklin and Edidin Associates are sometimes referred to below collectively as the “Edidin Defendants”.
A. The Transfers
The Transfers at issue were made over the course of a year and were wired into an account in the name of Edidin Associates at Cole Taylor Bank in Chicago on the following dates and in the following amounts:
Date of Transfer Amount ($)
09/09/2008_100,000.00
09/28/2009_100,000.00
09/29/2009_79,839.61
(¶¶ 31-34 & Ex. A.)2 Documents supplied by Franklin and discussed below indicate that identical amounts were transferred on the same dates into Franklin’s account at the same bank.
The reasons for the Transfers are the subject of dispute. The plaintiff mainly contends that the Transfers were part of a scheme to transfer assets in fraud of creditors to an insider. According to the Complaint, the Debtor’s bank statements covering the period January 2006 through August 2010 do not show that the Debtor received any funds from the Edidin Defendants, (¶47), supporting the allegation, made on information and belief, that these defendants did not provide any goods or services in exchange for the Transfers. (¶ 35.)
The defendants’ motion papers, however, indicate a business rationale. The moving memorandum attached two letters dated June 6, 2012 and July 9, 2012, and the exhibits that accompanied those letters, and where appropriate, the Court will *90refer to the letters and their enclosures collectively as the “Letters.” The Complaint attached the June 6, 2012 letter as Exhibit C but omitted the enclosures. It did not attach the July 9, 2012 letter but quoted from the letter and certain of its enclosures, and ultimately based its claim against Franklin on the content of the Letters. In the June 6, 2012 letter and enclosures, the defendants’ counsel provided evidence that Franklin had entered into a Factoring Agreement, dated May 15, 2008, with the Debtor, and enclosed the Factoring Agreement and a UCC-1 financing statement, filed three weeks before the Factoring Agreement, which related to a security interest in most or all of the Debt- or’s assets.3 The July 9, 2012 letter and enclosures further explained that the September 2008 transfer repaid a letter of credit provided by Franklin. The September 2009 transfers represented the proceeds of payments by Levi Strauss & Co. that were owed to Workshop, factored by Franklin and mistakenly paid to the Debt- or. However, the invoices bore the name “Operations” — which could refer to the Debtor or Workshop — originated from the Debtor’s “flagship” Mercer Street address, and included the Debtor’s web address (operationsny.com). (July 9, 2012 letter,4 at Ex. B, C; Complaint ¶50.) Furthermore, defendant Leen had testified that Levi Strauss was a customer of the Debt- or. (Complaint ¶ 49.)
B. The Other Fraudulent Scheme
The Complaint also includes allegations of a separate scheme by the “Operations N.Y. Defendants” to defraud CVA.5 These allegations have no apparent connection to the Transfers, and the Complaint does not assert any claims or seek any relief based on this scheme. According to the plaintiff, the Debtor owed CVA $100,000 in rent arrears by the end of April 2009. On May 5. 2009, the owners of the Debtor formed Workshop, and “transferred all remaining assets of the Debtor, including client accounts, to Operations Workshop, LLC.”6 (¶ 18.) On May 7, 2009, the Debtor “secretly vacated” the Ninth Avenue store in the middle of the night to avoid eviction, taking with it all of its remaining inventory, equipment furniture and other assets. (¶ 17.) Ten months later, when CVA was about to obtain a judgment against the Debtor, Workshop and its ownership liquidated all of the Debtor’s remaining assets.7 (¶ 27.) Finally, after CVA sued the Debt- *91or, the Debtor misrepresented to the state court that the Debtor and Workshop were the same entity. (¶¶ 21-25.) The misrepresentation enabled the Debtor to avoid a pre-judgment attachment. (¶ 26.)
C. The Bankruptcy
On June 29, 2010, CVA filed an involuntary petition against the Debtor. The Court ordered relief on August 19, 2010, and the United States Trustee appointed the plaintiff to serve as chapter 7 trustee of the Debtor’s estate.
The plaintiff filed this adversary proceeding on August 3, 2012. The Complaint consists of nine counts. The first eight are asserted against the E didin Defendants and Count IX is directed against the individual defendants. Counts I through VI assert claims sounding in intentional and constructive fraudulent transfer under bankruptcy and New York law. Count VII asserts a claim of unjust enrichment, (¶¶ 94-100), Count VIII alleges an insider preference with respect to the two September 2009 transfers, (¶¶ 101-09), and Count IX charges that the individual defendants conspired to defraud the Debtor’s creditors through the Transfers and the other scheme directed against CVA. (¶¶ 110-18.)
The Defendants have moved to dismiss the Complaint for failure to state a claim under Federal Civil Rule 12(b)(6). In the main, they contend that the Complaint is based upon conelusory statements and formulaic recitations of statutory requirements without any supporting facts. They also argue that the Complaint improperly relies on “group pleading,” and fails to satisfy the pleading requirements for fraud in connection with the intentional fraudulent transfer claims.
DISCUSSION
A. Standards Governing the Motion
“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, 173 L.Ed.2d 868 (2009) (citations omitted); accord Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Iqbal outlined a two-step approach in deciding a motion to dismiss. First, the court should begin by “identifying pleadings that, because they are no more than [legal] conclusions, are not entitled to the assumption of truth.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. “Threadbare recitals of the elements of a cause of action supported by conelusory statements” are not factual. See id. at 678, 129 S.Ct. 1937. Second, the court should give all “well-pleaded factual allegations” an assumption of veracity and determine whether, together, they plausibly give rise to an entitlement of relief. Id. at 679, 129 S.Ct. 1937.
Courts do not decide plausibility in a vacuum. Determining whether a claim is plausible is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678, 129 S.Ct. 1937. A complaint that only pleads facts that are “merely consistent with a defendant’s liability” does not meet the plausibility requirement. Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955 (internal quotation marks omitted)). “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, 183 (2d Cir.2008) (citation omitted).
*92In deciding the motion, “courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The court may also consider documents that the plaintiff relied on in bringing suit and that are either in the plaintiffs possession or that the plaintiff knew of when bringing suit. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002); Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir.1991), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992); McKevitt v. Mueller, 689 F.Supp.2d 661, 665 (S.D.N.Y.2010). Where the complaint cites or quotes from excerpts of a document, the court may consider other parts of the same document submitted by the parties on a motion to dismiss. 131 Main St. Assocs. v. Manko, 897 F.Supp. 1507, 1532 n. 23 (S.D.N.Y.1995).
As noted, the Complaint attached the June 6, 2012 letter without the exhibits, and failed to attach the July 9, 2012 letter or exhibits to that letter but quoted from and relied on both. The defendants attached both letters and exhibits to their motion papers, and the plaintiff objected.8 The Court asked the parties to brief the question whether the Court could consider the documents submitted by the defendants, but only the defendants submitted a supplemental memorandum.9 This may amount to a concession by the plaintiff that the Court can consider these documents, but even without this concession, the Court may do so.
The Letters were sent to the plaintiffs counsel before she drafted the Complaint, so she obviously possessed them and knew their contents. The Complaint attached the June 6, 2012 letter which became part of the Complaint, Fed.R.CivP. 10(c), and the attachments, although omitted by the plaintiff, are referred to in and integral to understanding the import of the letter. In addition, the Complaint quoted from it. CSee ¶¶ 41-42.) The Complaint did not attach the July 9, 2012 letter, but again quoted from the letter as well as the invoices that were attached. (¶¶ 46-51.) Moreover, the plaintiff concedes that she relied on the information supplied by the defendants’ counsel to assert claims against Franklin in the Complaint. (.Plaintiffs Opposition at 13-14.) The Letters also enclosed Franklin’s bank statements showing receipt of the Transfers, and the July 9, 2012 letter discussed Franklin’s receipt of the Transfers in de*93tail. Accordingly, the Court will consider the Letters in connection with the motion to dismiss.
Before turning to the analysis of each of the claims, the Court will address the issues regarding group pleading and the insufficiency of factual detail. The group pleading objection directed at Counts I through VIII lacks merit. The Complaint, including the Letters, sets forth the role of each Edidin Defendant. Edidin Associates received the Transfers, (¶¶ 31-34), as reflected in the bank statements attached to the Complaint. The Debtor’s internal accounting documents enclosed with the July 9. 2012 letter provide additional factual support for the contention that Edidin Associates received the transfers.
The Complaint also alleges that Edidin Associates is an unincorporated business association wholly-owned by Gary. This implies that it is a sole proprietorship, making the Transfers to Edidin Associates the equivalent of transfers to Gary individually.
Finally, Franklin has provided documentary evidence that it received the Transfers on the same day that they were made. This is not necessarily inconsistent with the allegation that Edidin Associates received the Transfers in the first instance either as an initial transferee or as a conduit for Franklin as the initial transferee. The Franklin bank statements submitted with the Letters do not show the source of the funds deposited into Franklin’s account.
The defendants are correct that many of the allegations in the Complaint are made upon information and belief, are concluso-ry or amount to formulaic recitations of the statutory requirements relating to each claim. The Court has ignored these allegations. Nevertheless, there is enough factual detail amplified by the documentary evidence and discussed below to conclude that some of the claims are legally sufficient.
B. Intentional Fraudulent Transfers
Portions of Count I and Count V assert claims against the Edidin Defendants sounding in intentional fraudulent transfer and conveyance. A claim to avoid an intentional fraudulent transfer or conveyance must satisfy the pleading requirements of Federal Civil Rule 9(b) and plead the claim with particularity.10 Sharp Int'l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 56 (2d Cir.2005); Atlanta Shipping Corp., Inc. v. Chem. Bank, 818 F.2d 240, 251 (2d Cir.1987); Nisselson v. Drew Indus., Inc. (In re White Metal Rolling & Stamping Corp.), 222 B.R. 417, 428 (Bankr.S.D.N.Y.1998). Although scienter may be pleaded generally, the pleader must “allege facts that give rise to a strong inference of fraudulent intent.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994).11 The “strong inference” requirement is appropriate to ward off allegations of “fraud by hindsight.” See, e.g., Shields, *9425 F.3d at 1129 (quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978) (Friendly, J.)). A strong inference of fraudulent intent may be established “either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.” Id. at 1128; accord ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir.2007). To qualify as “strong,” “the inference of scienter must be more than merely ‘reasonable’ or ‘permissible’ — it must be cogent and compelling, thus strong in light of the other explanations.” Tellabs, 551 U.S. at 324, 127 S.Ct. 2499. The court must consider the inferences urged by the plaintiff and the competing inferences rationally drawn from the facts alleged. Id. “A complaint will survive, we hold, only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id.
Both New York law and the Bankruptcy Code permit a trustee to avoid transfers of the debtor’s property made with actual intent to defraud.12 The Complaint adequately alleges that the Debtor made the Transfers from its own property.13 In addition, for the reasons stated, the Complaint and Letters provide a factual basis for the allegations that the Transfers were made to Edidin Associates and then re-transferred to Franklin, or alternatively, made directly to Franklin.
The more difficult question relates to the sufficiency of the allegation that the Debtor intended to defraud its creditors. Fraud rarely admits of direct proof, and courts have identified certain factors or badges. These are “circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent.” Capital Distrib. Servs., Ltd. v. Ducor Express Airlines, Inc., 440 F.Supp.2d 195, 204 (E.D.N.Y.2006); accord Sharp Int'l, 403 F.3d at 56; Atateks Foreign Trade Ltd. v. Private Label Sourcing, LLC, No. 07CV6665(HB), 2009 WL 1803458, at *20 (S.D.N.Y. June 23, 2009), aff'd, 402 Fed.Appx. 623 (2d Cir.2010). These include:
(1) the lack or inadequacy of consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of possession, benefit or use of the property in question; (4) the financial condition of the party *95sought to be- charged both before and after the transaction in question; (5) the existence or cumulative effect of a pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pen-dency or threat of suits by creditors; and (6) the general chronology of the events and transactions under inquiry.
Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582-83 (2d Cir.1983); accord Wall St. Assocs. v. Brodsky, 257 A.D.2d 526, 684 N.Y.S.2d 244, 248 (1999).
The Complaint alleges that the Debtor’s bank statements show that the Debtor never received any money from or factored any accounts receivable with the Edidin Defendants. (¶ 47.) In addition, the excerpts of the Debtor’s September 2008 and 2009 bank statements attached to the Complaint show that the Debtor made the Transfers by wire to an account in the name of Edidin Associates, and the Debtor had no ostensible reason to pay Edidin Associates anything. These facts are a sufficient basis to infer that the Debtor did not receive any consideration on account of the Transfers. Franklin contends that the September 2008 transfer repaid a letter of credit, and the September 2009 transfers related to a Factoring Agreement between the Debtor and Franklin, but these factual disputes cannot be resolved on a motion to dismiss.
Some of the other badges are present, at least with respect to the two September 2009 transfers. The Complaint alleges that at least as of the end of April 2009, the Debtor was facing financial difficulty.14 At that time, the Debtor owed CVA approximately $100,000 in rent arrears. (¶ 17.) The Complaint also alleges that the Debtor engaged in a fraudulent course of conduct, albeit unrelated to the Transfers, directed at CVA. In addition, the Complaint implies that the Edidin Defendants disingenuously tried to shield themselves from the plaintiffs charges by concocting a story that the Levi Strauss invoices were generated by Workshop and factored by Franklin. Finally, the Debtor made the Transfers to Gary, an insider, d/b/a Edidin Associates.
On the other hand, the Complaint does not allege that the Debtor retained the use of or control over the funds after the Transfers, and there is no basis to infer that it did. Gary, whether individually, or as the sole owner of Edidin Associates and Franklin, was only one of five owners and directors of the Debtor. The Complaint does not allege that Gary had any control over the funds while they were in the Debtor’s bank account or that he did not operate the business of Edidin Associates and Franklin independently. The Debt- or’s lack of control after the Transfers tests the limits of plausibly inferring fraudulent intent. One is left to wonder why the Debtor would intentionally pay money it did not have to pay to a third party simply to defraud its creditors.
Nevertheless, the Court concludes that the Complaint asserts a sufficient number of badges of fraud to survive the motion to dismiss the intentional fraudulent transfer claims directed at the Edidin Defendants with respect to the September 2009 transfers. See Max Sugarman Funeral Home, Inc. v. A.D.B. Invs., 926 F.2d 1248, 1254-55 (1st Cir.1991) (“The presence of a single badge of fraud may spur mere suspicion ... the confluence of several can constitute conclusive evidence of an actual intent to defraud, absent ‘significantly clear’ evi*96dence of a legitimate supervening purpose”) (citation omitted). The intentional fraudulent transfer claims relating to the September 2008 transfer are dismissed.
C. Attorneys’ Fees
Count VI asserts a claim for reasonable attorneys’ fees under DCL § 276-a.15 Section 276-a allows a creditor to recover its attorneys’ fees if it proves that both the transferor and transferee acted with actual fraudulent intent. By its terms, DCL § 276-a is derivative of an actual fraudulent transfer claim under DCL § 276. Hence, it “stands or falls” with the disposition of that claim. Atlanta Shipping, 818 F.2d at 245 n. 1; Gowan v. Westford Asset Mgmt. LLC (In re Gowan), 462 B.R. 474, 494 (Bankr.S.D.N.Y.2011); see Starmark, Inc. v. Zaccaria, No. 91 Civ. 2764(JFK), 1992 WL 209288, at *2 (S.D.N.Y. Aug. 17, 1992) (denying motion to dismiss claim under DCL 276-a on the ground that it did not state an independent claim because the claim was dependent on plaintiffs ability to prevail on its claim under DCL § 276); Combina Inc. v. Iconic Wireless Inc., No. 4222/2011, 2011 WL 3518185, at *5 (N.Y.Sup.Ct. Aug. 11, 2011) (denying motion to dismiss a claim under DCL § 276-a because the plaintiff adequately pleaded a claim under DCL § 276 and is entitled to assert a claim for attorneys’ fees if the court finds that a fraudulent conveyance was made under DCL § 276).
Accordingly, the motion to dismiss Count VI is denied as to Edidin Defendants with respect to the September 2009 transfers and is otherwise granted.
D. Constructive Fraudulent Transfers
Among other things, Count I asserts a claim for constructive fraudulent transfer under Bankruptcy Code § 548(a)(1)(B).16 Counts II, III and IV seek to avoid the Transfers through 11 U.S.C. § 544(b) under DCL §§ 273, 274 and 275, respectively.17 The principal difference between the *97New York and bankruptcy constructive fraudulent transfer provisions concerns the burden of pleading and proving good faith. Good faith is an affirmative defense under Bankruptcy Code § 548(c) that the transferee must plead and prove. Dreier, 462 B.R. at 484 n. 10. Under New York law, good faith is an element of “fair consideration,” see DCL § 272, the analogue to “reasonably equivalent value” under the Bankruptcy Code, and hence, part of the plaintiffs affirmative case.
The Edidin Defendants have not distinguished between the state law and bankruptcy law constructive fraudulent transfer claims or argued that the plaintiff failed to plead lack of good faith. Instead, they lump all of the constructive fraudulent transfer claims together, and raise the following deficiencies: (1) the plaintiff fails to allege sufficiently that the Debtor did not receive fair consideration, (2) she alleges fraud on information and belief, (3) she fails to allege what was transferred to Gary and/or Franklin, and finally, (4) she fails to allege that the Debtor was insolvent or rendered insolvent at the time of the transfer, or facts supporting her claims under alternative financial tests imposed in DCL §§ 274 and 275. (Defendants’ Memo at 12-14.)
As noted earlier, the Complaint sufficiently alleges that the Transfers were not supported by fair consideration or reasonably equivalent value. In addition, the Complaint together with the Letters adequately allege alternative theories that Gary through Edidin Associates initially received the Transfers and Franklin subsequently received the Transfers, or Franklin initially received the Transfers. Furthermore, the Complaint and Letters contained sufficient facts, not alleged on information and belief, to support the claims to the extent noted. The remaining objection relates to the allegations concerning the financial tests.
1. Insolvency
DCL § 273 and Bankruptcy Code § 548(a)(l)(B)(ii)(I) impose a financial test of insolvency. Under New York law, “[a] person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.” DCL § 271(1). This is a “balance sheet test.” See In re Gordon Car & Truck Rental, Inc., 59 B.R. 956, 961 (Bankr.N.D.N.Y.1985). Similarly, bankruptcy law insolvency is determined by the “balance sheet test” under which the debt- or is insolvent if its assets exceeded its liabilities at the time of the transfer. Universal Church v. Geltzer, 463 F.3d 218, 226 (2d Cir.2006) (citing 11 U.S.C. § 101(32)(A)), cert. denied, 549 U.S. 1113, 127 S.Ct. 961, 166 L.Ed.2d 706 (2007). Under New York law, the debtor who transfers property without fair consideration is presumed to be insolvent, and the burden shifts to the transferee to rebut the presumption. Feist v. Druckerman, 70 F.2d 333, 334 (2d Cir.1934); Geron v. Schulman (In re Manshul Constr. Corp.), No. 97 Civ. 8851, 2000 WL 1228866, at *53 (S.D.N.Y. Aug. 30, 2000); MFS/Sun Life Trust-High Yield Series v. Van Dusen *98Airport Servs. Co., 910 F.Supp. 913, 938 (S.D.N.Y.1995); Silverman v. Paul’s Landmark, Inc. (In re Nirvana Restaurant, Inc.), 337 B.R. 495, 505 (Bankr.S.D.N.Y.2006). The same presumption has been applied to constructive fraudulent transfer litigation under 11 U.S.C. § 548. See Mendelsohn v. Jacobowitz (In re Jacobs), 394 B.R. 646, 672 (Bankr.E.D.N.Y.2008). The Complaint alleges facts showing that the Debtor did not receive reasonably equivalent value or fair consideration for the Transfers, and accordingly, pleads insolvency.
2. Unreasonably Small Capital
Under DCL § 274 and Bankruptcy Code § 548(a)(l)(B)(ii)(II), the plaintiff must plead facts supporting the allegation that at the time of the transfers, the Debtor was engaged in or about to engage in a business or a transaction that would leave it with unreasonably small capital. This test denotes a financial condition short of equitable insolvency, Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1070 (3d Cir.1992); MFS/Sun Life, 910 F.Supp. at 944, and “is aimed at transferees that leave the transferor technically solvent but doomed to fail.” MFS/Sun Life, 910 F.Supp. at 944; accord Manshul, 2000 WL 1228866, at *54. The relevant factors include the transferor’s debt to equity ratio, historical capital cushion, and the need for working capital in the trans-feror’s industry. Manshul, 2000 WL 1228866, at *54; see In re Taubman, 160 B.R. 964, 986 (Bankr.S.D.Ohio 1993) (Bankruptcy Code § 548(a)(l)(B)(ii)(II) requires an analysis involving an examination of the debtor’s cash flow and available operating capital through its ability to generate enough cash from operations to pay its debts and remain financially stable); Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply, Inc.), 100 B.R. 127, 137 (Bankr.D.Mass.1989) (Courts look “to the ability of the debtor to generate enough cash from operations or asset sales to pay its debts and still sustain itself’).
The Complaint does not adequately allege that the Debtor was technically insolvent at the time of the Transfers. At most, the Complaint alleges that the Debtor had failed to pay rent on the Ninth Avenue store. It does not allege that the Debtor failed to pay any other debts or that it lacked the capital to do so. Furthermore, although the Complaint alleges that the Debtor transferred all of its property and business to Workshop in May 2009, the excerpts of the September 2009 bank statement attached to the Complaint indicate that substantial funds were moving in and out of the Debtor’s bank account, and a number of the payees appear to be trade vendors. Moreover, the Complaint implies that the Debtor still had assets and continued to operate the Mercer Street store until March 1, 2010, ten months after the transfer of all its assets to Workshop. (¶ 27.) Finally, the Complaint does not allege any facts relating to the Debtor’s sales, its ability to generate cash or its ability to pay its debts and sustain itself. Accordingly, the constructive fraudulent transfer claim asserted in Count I, to the extent it is based on the “unreasonably small capital” test, and Count III are legally insufficient, and are dismissed.
3. Ability to Pay
Under DCL § 275 and 11 U.S.C. § 548(a)(1)(B)(ii)(III), a transfer is fraudulent, inter alia, if the debtor intends or believes that it will incur debts that it will be unable to pay as they become due. This is generally referred to as equitable insolvency. MFS/Sun Life, 910 F.Supp. at 943. Although the constructive fraudulent *99transfer provisions of New York and bankruptcy law do not require proof of intent to defraud, the “ability to pay” financial test requires proof of the transferor’s subjective intent or belief that it will incur debt it cannot pay at maturity. See id. (noting support for the view that § 275 requires proof of subjective intent); In re Best Prods. Co., 168 B.R. 35, 52 n. 28 (Bankr.S.D.N.Y.1994) (DCL § 275 requires proof of the transferor’s subjective belief that it will incur debts beyond its ability to pay), aff'd, 68 F.3d 26 (2d Cir.1995); Taubman, 160 B.R. at 986 (“This prong of § 548(a)(2)(A)&emdash;(B) requires the court to undergo a subjective, rather than an objective, inquiry into a party’s intent.”).
The plaintiff has failed to plead facts satisfying the “ability to pay” test. First, the Complaint does not allege any facts relating to the Debtor’s intent to incur debt that it believed it would be unable to pay. Second, the Complaint’s allegations regarding the Debtor’s ability to pay its future debts is deficient for the same reason that her allegations of “unreasonably small capital” failed. Accordingly, the constructive fraudulent transfer claim asserted in Count I, to the extent it is based on the “ability to pay” test, and Count IV are legally insufficient, and are dismissed.
E. Unjust Enrichment
Count VII asserts a claim sounding in unjust enrichment. “To prevail on a claim for unjust enrichment in New York, a plaintiff must establish 1) that the defendant benefitted; 2) at the plaintiffs expense; and 3) that ‘equity and good conscience’ require restitution.” Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir.2000); accord Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 919 N.Y.S.2d 465, 944 N.E.2d 1104, 1110 (2011). The “essence” of such a claim “is that one party has received money or a benefit at the expense of another.” City of Syracuse v. R.A.C. Holding, Inc., 258 A.D.2d 905, 685 N.Y.S.2d 381, 381 (1999); accord Grossman, 202 F.3d at 616. The determination that one has been unjustly enriched is “a legal inference drawn from the circumstances surrounding the transfer of property and the relationships of the parties.... ” Sharp v. Kosmalski, 40 N.Y.2d 119, 386 N.Y.S.2d 72, 351 N.E.2d 721, 724 (1976). “Although privity is not required for an unjust enrichment claim, a claim will not be supported if the connection between the parties is too attenuated.” Mandarin Trading, 919 N.Y.S.2d 465, 944 N.E.2d at 1111; accord Sperry v. Crompton Corp., 8 N.Y.3d 204, 831 N.Y.S.2d 760, 863 N.E.2d 1012, 1018 (2007).
Each side devotes no more than a page to the sufficiency of the unjust enrichment claim. The Edidin Defendants essentially argue that it duplicates the fraudulent transfer claims and should be dismissed for the same reason. (Defendants’ Memo at 14.) The plaintiff recognizes that the claim is quasi-contractual, but ultimately relies on the same facts and seeks the same remedy as the fraudulent transfer claims. (See Plaintiffs Opposition at 24-25.)
“The doctrine of fraudulent conveyance rests on principles of unjust enrichment.” Restatement (ThiRd) of RestitutioN & Unjust ENRICHMENT § 48 cmt. a (2011); accord id. § 1 cmt. g (“[T]he law of fraudulent conveyance (or ‘fraudulent transfer’) is obviously based on principles of unjust enrichment and associated equitable remedies.”); id. § 67 cmt. i (“The law of fraudulent conveyance, which long antedates the statutes, is manifestly derived from principles of unjust enrichment developed in equity jurisprudence.”). Thus, fraudulent transfer and unjust enrichment claims ov*100erlap, and as this case shows, both parties essentially view them as substitutes for each other.
That said, it is conceivable that the plaintiff could recover under one theory but not the other. For example, the plaintiff brings the claim for unjust enrichment as statutory successor to the Debtor, enjoying the same rights but facing the same obstacles. Under New York law, the statute of limitations pertaining to an unjust enrichment claim is six years from the wrongful act, Coombs v. Jervier, 74 A.D.3d 724, 906 N.Y.S.2d 267, 269 (2010), and is not subject to the two year bankruptcy statute of limitations that governs avoidance actions under 11 U.S.C. § 546(a). In addition, the plaintiff does not have to demonstrate actual or constructive intent to defraud, or pass a financial test, to recover under principles of unjust enrichment. On the other hand, thé Debtor’s inequitable conduct in connection with the Transfers may bar the plaintiff from seeking restitution under principles of unjust enrichment. See Restatement (Third) of Restitution & Unjust Enriohment § 63 cmt. b (2011) (“The denial of restitution to fraudulent grantors — distilled in the rule that a fraudulent conveyance is effective between the parties, though ineffective against the grantor’s creditors — furnishes the most prominent potential application of the rule of this section.”). Thus, the stronger the intentional fraudulent transfer case, the weaker the right to restitution based on unjust enrichment.
Based on the foregoing, and in light of the inadequate briefing regarding this claim, the motion to dismiss Count YII is denied.
F. Preferences
Count VIII seeks to recover the September 2009 transfers to the Edidin Defendants as preferential transfers pursuant to 11 U.S.C. § 547, which states:
(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made — (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The preference claims asserted against Franklin on the one hand and Gary/E didin Associates on the other raise different issues and are analyzed separately below.
1. Franklin
A trustee can avoid preferential transfers made within 90 days of the petition date, but if the transferee is an insider, the trustee can recover transfers made within one year of the petition date. 11 U.S.C. § 547(b)(4). The September 2009 transfers were made between 90 days and one year before the petition date. Hence, the Complaint must plead, among other elements, that the transferee was an insider of the Debtor. The Complaint alleges that Gary is a director and “owner” of the Debtor, and he is, therefore, an insider. The Complaint also pleads the insider sta*101tus of Edidin Associates, Gary’s wholly-owned unincorporated association. It falls short, however, in alleging Franklin’s insider status.
In the case of a corporate debtor, “[t]he term ‘insider’ includes ... (i) director of the debtor; (ii) officer of the debtor; (in) person in control of the debt- or; (iv) partnership in which the debtor is a general partner; (v) 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).18 This list is not exhaustive, and courts have recognized other relationships that give rise to the status as an insider, viz. the non-statutory insider. See Schubert v. Lucent Techs., Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382, 395 (3d Cir.2009). A non-statutory insider does not have to exercise actual control over the debtor; “rather, the question ‘is whether there is a close relationship [between debtor and creditor] and ... anything other than closeness to suggest that any transactions were not conducted at arm’s length.’ ” Id. at 396-97 (quoting Anstine v. Carl Zeiss Meditec AG (In re U.S. Med.), 531 F.3d 1272, 1277 (10th Cir.2008)); accord In re So. Beach Secs., Inc., 606 F.3d 366, 377 (7th Cir.2010); Hirsch v. Tarricone (In re A. Tarricone), 286 B.R. 256, 262 (Bankr.S.D.N.Y.2002) (collecting cases).
The plaintiff argues that Franklin is an insider because it is owned by insider Gary. In addition, although the defendants produced a “generic Factoring Agreement,” UCC-1 Statements and invoices bearing an “alleged” stamp that they were payable to Franklin, they have failed to produce bank statements of Edidin Associates “that would demonstrate to the Trustee that payment was indeed remitted to Franklin and that the Debtor’s notations are inaccurate.” (Plaintiffs Opposition at 27.) From this, the plaintiff reasons that “[a] lack of proper documentation evidencing a transaction is a factor which can be considered by a Court in determining whether a transferee is a non-statutory insider.” (Id. (citing cases).)
Neither argument is persuasive. A corporation that is wholly-owned by an insider of the debtor is not, per se, also an insider of the debtor. Miller Ave. Prof'l & Promotional Servs., Inc. v. Brady (In re Enter. Acquisition Partners, Inc.), 319 B.R. 626, 632 (9th Cir. BAP 2004); Glassman v. Heimbach, Spitko & Heckman (In re Spitko), Adv. Pro. No. 05-0258, 2007 WL 1720242, at *8-9 (Bankr.E.D.Pa. June 11, 2007). The Complaint must allege something more.19 Furthermore, while the plaintiff criticizes Franklin’s “lack of documentation,” its informal document production shows that Franklin and the Debtor were parties to a Factoring Agreement, Franklin eventually received the Transfers (regardless of whether they first passed through Edidin Associates’ account), and the payments correspond to the two factored invoices attached to the July 9, 2012 letter and stamped payable to Franklin. Thus, the production meets all of the alleged deficiencies cited by the plaintiff. Accordingly, the Complaint fails *102to allege facts demonstrating that Franklin is an insider of the Debtor.
This does not, however, end the inquiry. As noted, the Letters indicate that Franklin may be the subsequent transferee of Edidin Associates. If the plaintiff can avoid the September 2009 transfers to Ed-idin Associates, she may still be able to recover their value from Franklin. See 11 U.S.C. § 550(a)(2).
2. Edidin Associates
Aside from the allegations of insider status discussed above, the Edidin Defendants identify two deficiencies in the preference claim. The Complaint fails to plead' that the September 2009 transfers were made in payment for an antecedent debt owed by the Debtor to Edidin Associates, 11 U.S.C. § 547(b)(2), and that the transfers either enabled Edidin Associates to receive more than if this were a chapter 7 case, or the transfers were never made and Edidin Associates instead received payment on the debt pursuant to the provisions of the Bankruptcy Code. 11 U.S.C. § 547(b)(5).
Both arguments have merit. The Complaint fails to plead any facts suggesting that the September 2009 transfers satisfied a debt that the Debtor owed to Edidin Associates. The Complaint includes factual allegations, discussed earlier, that the Transfers were not supported by consideration. Furthermore, the Complaint does not hint at any debt owed by the Debtor to Edidin Associates (or Gary). The Letters support a claim that the Debtor might have owed a debt to Franklin because of the Factoring Agreement or because the Debtor received payment of the Levi Strauss invoices by mistake, but that debt would have been owed to Franklin, not Edidin Associates.
The Complaint also fails to plead facts suggesting that Edidin Associates received a “greater amount” on its debt than it would have received in a hypothetical chapter 7 case. Bankruptcy Code § 547(b)(5) essentially imposes an improvement of position test, and the plaintiff must plead facts showing that that there are creditors in the same class that would receive less than 100% of their claims from the bankruptcy estate. See United Rentals, Inc. v. Angell, 592 F.3d 525, 531 (4th Cir.), cert. denied, — U.S. -, 131 S.Ct. 121, 178 L.Ed.2d 32 (2010); Savage & Assocs., P.C. v. Mandl (In re Teligent, Inc.), 380 B.R. 324, 339 (Bankr.S.D.N.Y.2008). The Complaint does not include any allegations regarding the Debtor’s assets and liabilities on the petition date, the starting point for the analysis.20 Moreover, the plaintiff did not respond to the Edidin Defendants’ argument that the Complaint failed to plead facts supporting the “greater amount element under § 547(b)(5), and the failure to respond is deemed to constitute an abandonment of the claim.” See Bonilla v. Smithfield Assocs. LLC, No. 09 Civ. 1549(DC), 2009 WL 4457304, at *4 (S.D.N.Y. Dec. 4, 2009) (Chin, J.).
Accordingly, Count VIII fails to state a claim sounding in preference against the Edidin Defendants, and is dismissed.
G. Conspiracy
Count IX asserts that the defendants were engaged in a conspiracy to defraud *103the Debtor’s creditors by creating Workshop to take over the Debtor’s business and shield its remaining assets from the Debtor’s existing creditors, taking contradictory positions regarding the connection between the Debtor and Workshop and making the Transfers. (¶¶ 113-15.) Although the parenthetical title of Count IX states that it is asserted “against all defendants,” it appears instead to be limited to the individual defendants. It refers to the individuals as the “Operations N.Y. Defendants,” and attributes the wrongful conduct that forms the conspiracy to the “management” and “owners” of the Debt- or. (See ¶¶ 113-15.) Finally, the penultimate paragraph of the Complaint avers that “[e]aeh of the individual defendants conspired together and intentionally participated in this course of action.” (¶ 117.)
“Under New York state law, a plaintiff may claim civil conspiracy alongside an ‘otherwise actionable tort.’ ” Haber v. ASN 50th St. LLC, 847 F.Supp.2d 578, 588 (S.D.N.Y.2012). The plaintiff must “demonstrate the underlying tort, plus the following four elements: (1) an agreement between two or more parties; (2) an overt act in furtherance of the agreement; (3) the parties’ intentional participation in the furtherance of a plan or purpose; and (4) resulting damage or injury.” Treppel v. Biovail Corp., No. 03 Civ. 3002(PKL), 2004 WL 2339759, at *19 (S.D.N.Y. Oct. 15, 2004); accord Haber, 847 F.Supp.2d at 589; Fisk v. Letterman, 424 F.Supp.2d 670, 677 (S.D.N.Y.2006).
Even where Federal Civil Rule 8(a) supplies the standard for pleading, the complaint must specify what each conspirator did. “To state a claim for conspiracy, the amended complaint must set forth facts supporting the claim that each of the alleged co-conspirators knowingly participated in the conspiracy. [Citations omitted.] Moreover, it is not sufficient to merely identify an individual as a corporate officer. Rather, a corporate officer’s participation in a conspiracy must be specifically set forth.” Lippe v. Bairnco Corp., 230 B.R. 906, 919 (S.D.N.Y.1999); see New York v. Dairylea Coop., Inc., 570 F.Supp. 1213, 1216 (S.D.N.Y.1983) (complaint that pled a conspiracy by all individual defendants failed to comply with Federal Civil Rule 8(a) because “before a corporate officer or employee should be required to undergo the rigors and expense of defending an action of such sweeping scope, the plaintiff has the obligation to state with some specificity allegations of conduct which would, if proved, render such an individual liable as a participant in the alleged conspiracy”).
Initially, the only possible tortious conduct that the Complaint pleads relates to the fraudulent nature of the Transfers.21 *104Although the Complaint includes other allegations of wrongdoing stemming from the Debtor’s alleged transfer of assets to Workshop and its dispute with CVA, it does not purport to state a claim or seek relief for those acts. Furthermore, the Complaint does not specify how each individual defendant participated in the conspiracy. “[T]o state a claim for conspiracy to commit a fraudulent conveyance, a plaintiff must allege facts showing that the conspirator committed an overt act that furthered the conveyance itself.” Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs.), 379 B.R. 5, 36 (Bankr.E.D.N.Y.2007). Instead, Count IX “group pleads” the conspiracy charge lumping the defendants together. Accordingly, Count IX is dismissed.
CONCLUSION
The motion to dismiss Count I is denied insofar as it asserts an intentional fraudulent transfer claim regarding the September 2009 transfers and a constructive fraudulent transfer claim based on the Debtor’s insolvency, and is otherwise granted. The motion is granted with respect to Counts III, IV, VIII and IX, and denied with respect to Counts II and VII. Finally, the motion to dismiss Counts V and VI is denied insofar as these Counts assert claims based on intentional fraudulent conveyance regarding the September 2009 transfers, and is otherwise granted. The parties are directed to consult regarding a discovery schedule and contact chambers to schedule a pre-trial conference. Settle order on notice.
. Unless stated otherwise, parenthetical citations to paragraphs and exhibits refer to the Complaint.
. The Edidin Defendants insist that the transfers were made to Franklin and the only evidence of transfers to Edidin Associates is notations in the Debtor’s books and records. (See ¶¶ 41-42.) They are wrong. The excerpts of the bank statements attached to the Complaint, which were redacted apparently to hide the account numbers, show the Transfers were wired into Edidin Associates’ account.
. The June 6, 2012 letter also enclosed a UCC-1 Financing Statement filed July 17, 2009. The debtor identified in the statement is Operations Workshop LLC ("Workshop”), an affiliate of the Debtor. According to this UCC-1, Workshop operated from the Mercer Street location, which was also the Debtor's store.
. The July 9, 2012 letter is attached as Exhibit A to the Defendant's Memorandum of Law in Support of Their Motion to Dismiss the Complaint, dated Sept. 13, 2012 (“Defendants’ Memo’’) (ECF Doc. # 7).
. The Operations N.Y. Defendants refer to defendants in a pre-petition state court action brought by CVA, (¶ 20), and described in the succeeding text. The only Operations N.Y. Defendants specifically identified in the Complaint are Matteo Gottardi and Leen. (IT 21.) The Operations N.Y. Defendants may also include Gary, Claudio Gottardi and Johannes Mahmood, i.e., all of the individual defendants. (See ¶¶ 112-13.)
. According to the Complaint, Workshop was the lessee under the lease for the Mercer Street Store. (¶ 16 n. 1.) The Debtor opened the Mercer Street store in 2005, four years before Workshop was formed.
. The Complaint alleged that the Debtor had transferred all of its assets to Workshop in May 2009. The Complaint does not identify the assets of the Debtor that were liquidated in March 2010. In addition, the Complaint does not allege that the liquidation proceeds were fraudulently transferred.
. See Memorandum of Law in Opposition to Defendants Edidin and Associates, Franklin Capital Holdings LLC D/B/A Franklin Capital Network, Gary Edidin, Claudio Gottardi, Michael Leen, Hamid Johannes Mahmood and Matteo Gottardi’s Motion to Dismiss Adversary Proceeding, dated Oct. 16, 2012, at 16 n. 7 ("Plaintiffs Opposition") (ECF Doc. # 11).
. By sheer coincidence, and as the Court was putting the finishing touches on this opinion, plaintiffs counsel submitted an email to chambers today that purported to attach a November 29, 2012 letter brief on the same issues. According to the email, plaintiffs counsel sent the letter brief to the wrong email address (Bernstein.chambers@nysd. uscourts.gov) on November 29, 2012. Anything sent to the email address identified by the plaintiff's counsel would have "bounced back” and the plaintiff should have known immediately that the Court did not receive it. Moreover, the plaintiff never filed the letter brief on the docket. Accordingly, the Court will not consider it.
. Rule 9(b) states:
(b) Fraud or Mistake; Conditions of Mind. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.
. The discussion that follows borrows heavily from case law interpreting the standard for pleading scienter in securities fraud actions brought under the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Congress adopted the Second Circuit's “strong inference” standard when it enacted the PSLRA. Tellabs, 551 U.S. at 321, 127 S.Ct. 2499. The same standard has been applied in this Circuit to non-securities fraud claims. See Serova v. Teplen, No. 05 Civ. 6748(HB), 2006 WL 349624, at *8 (S.D.N.Y. Feb. 16, 2006).
. Section 276 of the New York Debtor & Creditor Law ("DCL”), available to a trustee through the operation of 11 U.S.C. § 544(b), provides:
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.
Bankruptcy Code § 548(a)(1)(A) provides in pertinent part:
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 or became, on or after the date that such transfer was made or such obligation was incurred, indebted.
. The July 9, 2012 letter stated that the September 2009 payments were made from funds that were held in constructive trust for Franklin, and were not made from the Debtor’s property. The Edidin Defendants moving memorandum made a passing reference to this idea without discussion of the provisions of the Factoring Agreement or citation to any legal authority. {Defendants’ Memo at 2, 18.) Accordingly, the Court will not consider the contention.
. The Complaint does not allege or imply that the Debtor was facing any financial problems when it made the September 2008 transfer. Moreover, the Complaint alleges that the Debtor entered into a ten-year lease for the Ninth Avenue store in May 2008.
. DCL § 276-a provides in pertinent part:
In an action or special proceeding brought by a ... trustee in bankruptcy ... 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 ... trustee in bankruptcy ... shall recover judgment, the justice or surrogate presiding at the trial shall fix the reasonable attorney's fees of the ... trustee in bankruptcy ... in such action or special proceeding, and the ... trustee in bankruptcy ... shall have judgment therefor against the debtor and the transferee who are defendants in addition to the other relief granted by the judgment....
. Section 548(a)(1)(B) provides, in relevant part, that the trustee can avoid an obligation or transfer where the debtor:
(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; (II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; [or] (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debt- or’s ability to pay as such debts matured.
.DCL § 273 provides:
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
DCL § 274 provides:
Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property re*97maining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.
DCL § 275 provides:
Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.
. An "insider” also includes an "affiliate, or insider of an affiliate as if such affiliate were the debtor.” 11 U.S.C. § 101(31)(E). The plaintiff has not relied on this provision in arguing the insider status of any of the Edidin Defendants.
. The Complaint alleges "[u]pon information and belief, Defendants Gary Edidin, Edidin and Associates and/or Franklin possessed a professional or business relationship with the Debtor and are 'insiders’ of the Debtor pursuant to the Bankruptcy Code.” (¶ 104.) This conclusoiy allegation is not entitled to any consideration.
. The plaintiff had benefitted from the presumption of insolvency at the time of the transfer to support her constructive fraudulent transfer claims, but does not get the same presumption on her preference claim. The Bankruptcy Code expressly limits the insolvency presumption to transfers made within 90 days of the petition date. See 11 U.S.C. § 547(f). Furthermore, the relevant inquiry under § 547(b)(5) is solvency on the petition date and not on the date of the transfer.
. Technically, a fraudulent conveyance is not a tort under New York law. United States v. Franklin Nat’l Bank, 376 F.Supp. 378, 384 (E.D.N.Y.1973). Nevertheless, courts have recognized that a fraudulent conveyance may serve as the predicate for a civil conspiracy claim. See Excelsior Capital LLC v. Allen, No. 11 Civ. 7373(CM), 2012 WL 4471262, at *13 (S.D.N.Y. Sept. 26, 2012) ("At least one court in this district has explicitly recognized a cause of action for a conspiracy to commit a fraudulent conveyance”) (citing UFCW Local 174 Commercial Health Care Fund v. Homestead Meadows Foods Corp., No. 05 Civ. 7098(DLC), 2005 WL 2875313, at *2 (S.D.N.Y. Nov. 1, 2005) ("The plaintiff in this case has pled a conspiracy to commit fraudulent conveyance, which is a species of tort, as well as the substantive claim of fraudulent conveyance.”)); cf. Fundación Presidente Allende v. Banco de Chile, No. 05 CV 9771(GBD), 2006 WL 2796793, at *3 (S.D.N.Y. May 29, 2006) ("A fraudulent conveyance conspiracy claim cannot survive absent a showing that defendants had control over the transferred assets or that they benefited from the conveyance.”); FDIC v. Porco, 75 N.Y.2d 840, 552 N.Y.S.2d 910, 552 N.E.2d 158, 160 (1990) (The DCL does not create a *104remedy against non-transferees who are not alleged to have dominion or control over the conveyed assets or benefitted from the conveyance). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495771/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
HOUSER, Bankruptcy Judge.
Before the Court is the Complaint to Determine Debt Owed to Plaintiff and to Determine Dischargeability of Debts Owed to Plaintiff (11 U.S.C. § 523) (the “Complaint”) filed by plaintiff S & S Food Corporation (“S & S”) against the debtor Sa-druddin Sherali (“Debtor” or “Sherali”). Sherali answered the Complaint on October 6, 2012. A Joint Pretrial Order was submitted by the parties and entered by the Court on February 11, 2013. The parties appeared at trial docket call on February 5, 2013 and announced ready for trial, which the Court set for February 13-14, 2013.
Thereafter, on Februáry 6, 2013 counsel for Sherali filed a Motion for Leave to File Amended Answer. The Court set this motion for leave to amend for hearing at the outset of trial. S & S opposed the motion, arguing that (i) it had decided to drop certain of the claims initially pled in the Complaint based upon the issues preserved for trial by Sherali in the Joint Pretrial Order, (ii) it would be prejudiced by granting leave to amend under these circumstances, and (iii) Sherali’s motion was untimely. Of significance, counsel for Sherali was unable to provide any legitimate reason for his delay in filing the motion or in raising an affirmative defense that should be considered any time a client is sued. The timing of the motion for leave to amend, along with the timing of a late-filed pretrial brief, which the Court had to direct Sherali’s counsel to file at trial docket call and which was filed three *110days after docket call and less than three business days before trial was scheduled to commence, strongly suggests that the first time counsel considered whether S & S’ claims were barred by the applicable statutes of limitations was when he prepared the pretrial brief. Given the late filing, the lack of a legitimate reason for the late filing, and the prejudice to S & S, the Court denied Sherali’s motion for leave to amend.
Trial of the adversary commenced as scheduled on February 13, 2013 and concluded the next day. At the conclusion of trial, the Court requested the filing of post-trial briefs on certain issues not addressed in the parties’ pretrial briefs. After the submission of those post-trial briefs, the Court took the matter under advisement. After carefully considering the live pleadings and the evidence introduced at trial, along with the post-trial briefs, the Court is prepared to issue its findings of fact and conclusions of law, which are set forth below.1
FINDINGS OF FACT
1. Sherali is the debtor in Case No. 12-34480-bjh-7 pending in this Court.
2. S & S was incorporated in Texas in 1988 and is a Texas for-profit corporation.
3. S & S is a creditor of Sherali (holding an unliquidated claim as of the commencement of trial) and is the Plaintiff in this adversary proceeding.
4. At all times from January 1, 2006 until December 9, 2011 (the “Relevant Period”), Sherali was the sole officer, director and shareholder of S & S. In his capacity as the sole officer, director and shareholder of 5 & S, Sherali exercised total control over S & S.
5. As the sole officer and director of S 6 S during the Relevant Period, Sherali had a fiduciary duty to S & S.
6. On December 9, 2011, Sherali ceased being an officer, employee, director and shareholder of S & S when Dominic W. Lam, Inc. was the high bidder at an auction of the stock of a reorganized S & S. The auction was conducted in connection with a hearing on confirmation of S & S’ Second Amended Plan of Reorganization in its bankruptcy case pending before this Court as Case No. 11-32325-bjh-ll. The Court confirmed S & S’ plan of reorganization and Dominic W. Lam, Inc. became the sole shareholder of S & S when the plan became effective.
7. The Court heard the testimony of five witnesses at trial. Jim Xu (“Xu”), a certified public accountant who was hired by Sherali and S & S to prepare, and who in fact prepared, financial statements for S & S and tax returns for S & S and Sherali during the Relevant Period, testified credibly about the financial condition of S & S, his preparation of financial statements and tax returns, and how he was directed by Sherali to treat certain payments S & S made to Sherali during the Relevant Period. Khalid Abdul Haq, a representative of S & *111S following confirmation of the S & S plan of reorganization and who has considerable experience in the gasoline/convenience store industry, -testified credibly about the condition of S & S’ assets, including the convenience store and laundromat, when he took over the day-today operation of those assets following confirmation of the S & S plan of reorganization. Dominic Lam, the President of S & S following confirmation of the S & S plan of reorganization, also testified credibly about several matters including, most importantly, a detailed accounting of the cash sales of S & S from December 1-9, 2011, and .monies that remained unaccounted for during that final period of operation of S & S by Sherali. Gaddy Wells, S & S’ counsel, testified credibly about the attorney’s fees he incurred in prosecuting certain claims pled in the Complaint. Finally, Sherali testified. Unlike the other trial witnesses, Sherali was not a credible witness. Much of his testimony was self-serving, which was to be expected. However, much of his testimony was also either (i) contradicted by documentary evidence, (ii) contradicted by the testimony of more credible witnesses, or (iii) impeached on cross-examination. He was evasive on cross examination, attempting to avoid difficult questions and only responding directly when forced to do so. As a result, the Court discounts much of his testimony.
8. S & S took no action to be governed by the Texas Business Organizations Code prior to its effective date of January 1, 2010.
9. Until January 1, 2010, S & S was governed by the Texas Business Corporation Act.
10. Since January 1, 2010, S & S has been governed by the Texas Business Organizations Code.
11. During the Relevant Period, Shera-li, as the sole director of S & S, caused S & S to make the following distributions (collectively, the “Distributions”) to himself as the sole shareholder of S & S:
Calendar Year Amount of Distribution to Sherali
2006 $199,299
2007 $144,500
2008 -0-
2009 $ 81,106
2010 $155,951
2011 $ 89,500
Total - Distributions $670,356
12.While Sherali now wants this Court to find that the Distributions were really compensation to him for services he rendered to S & S, that request is unsupported either factually or legally. During the Relevant Period, neither Sherali nor S & S accounted for any part of the Distributions as compensation to Sherali for services he rendered to S & S on S & S’ financial statements or tax returns. Nor did Sherali account for the Distributions as compensation to himself on his personal tax returns. Rather, the Distributions were accounted for as distributions to Sherali on account of his stock ownership in S *112& S. In fact, Sherali elected to take the monies as distributions on account of his stock ownership for tax reasons. If the monies had been paid to Sherali as compensation for services rendered to S & S, S & S would have had to pay payroll taxes on the amounts paid, among other things, and Sherali would have had substantially higher W-2 income to report and pay tax on to the United States Treasury. To avoid these burdens, Sherali made the decision to cause S & S to make the Distributions to himself on account of his status as the sole shareholder of S & S. Now that he has come to realize the ramifications of his actions, he wants the Court, without citing any legal authority, to re-characterize the payments as wages instead of stock distributions.
13.The Court declines to do so here for at least three reasons. First, S & S, as the maker of the Distributions has not agreed to any such recharacterization. Second, it is simply too late for such a recharac-terization to occur as S & S and its creditors would be prejudiced by such a recharacterization. If the Court recharacterized the five years of payments to Sherali as wages, S & S would have to file amended tax returns for each of those years and make the required tax payments on those amounts. S & S has commitments to its creditors under its confirmed plan of reorganization whose rights would be adversely impacted by imposing such an obligation on S & S now. Moreover, Sherali would have to amend his personal tax returns, giving rise to new claims by the IRS for unpaid taxes, together with penalties and interest no doubt. Finally, there is simply no legal or factual basis in the record to support such a request. Sherali caused S & S to make the Distributions to himself on account of his stock ownership and the Court will . analyze the Distributions as such.
14. Under the Texas Business Corporation Act, S & S was insolvent during the Relevant Period because it could not pay its debts as they became due in the ordinary course of business during that period. The credible evidence at trial established that S & S was not able to pay the amounts owing to at least two creditors during the Relevant Period — ie., debts owing to Zipco, Inc., a gasoline supplier, and to Wilshire State Bank, a secured creditor whose collateral was not worth the amounts owing to it, at least during the course of S & S’ most recent chapter 11 case.
15. During the Relevant Period, the stated capital of S & S was only $1,000.
16. During the Relevant Period, S & S had a negative net worth because its total liabilities exceeded its total assets.
17. Under the Texas Business Corporation Act, now repealed, and the current Texas Business Organizations Code, a corporation’s surplus is the amount by which the net assets of a corporation exceed the stated capital of the corporation. During the Relevant Period, S & S had a negative surplus because it had negative net assets — ie., its total assets were less than its total liabilities.
18. During the Relevant Period, despite S & S having a negative net *113worth and a negative surplus, Sher-ali caused S & S to make the Distributions to himself. The Distributions were for Sherali’s personal benefit and took from S & S cash that it could have used to pay creditors in the ordinary course of business.
19. The Distributions that Sherali caused S & S to make to himself while S & S had a negative net worth and a negative surplus were not fair to S & S.
20. The Distributions that Sherali caused S & S to make to himself while S & S was insolvent were not fair to S & S.
21. During the Relevant Period, Shera-li breached his fiduciary duty to S & S by causing S & S to make the Distributions to himself for his personal benefit to the detriment of S &S.
22. Because Sherali caused S & S to make the Distributions to himself for his personal benefit during the Relevant Period, S & S was unable to pay its undisputed debt to Zipeo, Inc. and Wilshire State Bank.
23. As a result of Sherali causing S & S to make the Distributions to himself and S & S being unable to pay its debts as - they accrued in the ordinary course of business, on or about May 6, 2008, S & S commenced a case under chapter 11 of the Bankruptcy Code in this Court (Case No. 08-32225-bjh-ll). That ease was dismissed by an order entered on June 18, 2009 for S & S’ failure to comply with 11 U.S.C. §§ 1121(e) and 1129(e).
24. As a result of Sherali causing S & S to make the Distributions to himself and S & S being unable to pay its debts as they accrued in the ordinary course of business, on or about April 4, 2011, S & S commenced another case under chapter 11 of the Bankruptcy Code in this Court (Case No. 11-32325-bjh-ll). As found previously, a plan of reorganization was confirmed and consummated in that case, although the confirmation order is on appeal to the District Court. No stay of the Confirmation Order was sought or obtained by Sherali or any other party.
25. From January 1, 2006 to January 1, 2010, all of the Distributions in the amount of $424,905 that Sherali caused S & S to make to himself were unlawful under Article 2.38 of the Texas Business Corporation Act because (i) S & S was insolvent during that period, and (ii) S & S had a negative surplus.
26. Under Article 2.41 of the Texas Business Corporation Act, Sherali is liable to S & S for the amount of the unlawful Distributions of $424,905 that he consented to as the sole director of S & S in calendar years 2006, 2007, and 2009.
27. From January 1, 2010 to December 9, 2011, all of the Distributions in the amount of $245,451 that Sherali caused S & S to make to himself were unlawful under § 21.303(a) & (b) of the Texas Business Organizations Code because (i) S & S was insolvent during that period, and (ii) S & S had a negative surplus.
28. Under § 21.316(a) of the Texas Business Organizations Code, Sher-ali is liable to S & S for the amount of the unlawful distributions of $245,451 in calendar years 2010 and 2011 that he consented to as the sole director of S & S.
*11429. None of the Distributions that Sherali caused S & S to make to himself during the Relevant Period were permitted by the Texas Business Corporation Act Article 2.38 or by the Texas Business Organizations Code § 21.303.
30. None of the Distributions that Sherali caused S & S to make to himself during the Relevant Period were in S & S’ best interests.
31. Sherali’s conduct in causing S & S to make the unlawful Distributions to himself under the Texas Business Corporation Act and the Texas Business Organizations Code during the Relevant Period constituted a willful neglect of his fiduciary duties to S & S.
32. Sherali’s conduct in causing S & S to make the unlawful Distributions to himself under the Texas Busi-ness Corporation Act and the Texas Business Organizations Code during the Relevant Period was not fair to S & S and constituted a breach of fiduciary duty.
33. Sherali is liable to S & S for $670,356 for consenting to and causing S & S to make the unlawful Distributions to himself in violation of the Texas Business Corporation Act and the Texas Business Organizations Code during the Relevant Period.
34. Sherali is liable to S & S for $670,356 for breach of his fiduciary duty to S & S for causing S & S to make the unlawful Distributions for his personal benefit and to S & S’ detriment.
35. The purchase price of the 2003 Honda Element shown in the 2003 purchase contract was $23,249.40.
36. From December 31, 2004 to the present, S & S has shown the 2003 Honda Element as an asset on its balance sheets.
37. From December 31, 2004 to the present, S & S has shown depreciation of the 2003 Honda Element on its balance sheets.
38. Sherali signed the schedules associated with the S & S 2008 bankruptcy case (Case No. 08-32225-bjh-ll) under penalty of perjury. Schedule B showed a Honda automobile as an asset of S & S.
39. The operating statements signed by Sherali under penalty of perjury and filed in Case No. 08-32225-bjh-ll for each month from June 2008 through May 2009 show an automobile as an asset of S & S at a cost of $23,249.40.
40. The operating statements signed by Sherali under penalty of perjury and filed in Case No. 11-32325-bjh-11 for each month from April 2011 through October 2011 show an automobile as an asset of S & S at a cost of $23,249.40.
41. Since December 9, 2011, Sherali has wrongfully possessed and claimed ownership of the 2003 Honda Element that belongs to S & S as his own and has refused to return it to S & S.
42. Sherali is estopped from claiming that the 2003 Honda Element is his after taking the position since 2004 that the vehicle is an asset of S & S.
43. The net cash sales of S & S from December 1-9, 2011 were $79,207.16.
44. Sherali deposited $57,981.68 of the receipts of S & S’ cash sales from December 1-9, 2011 in S & S’ bank accounts.
*11545. On December 9, 2011, Sherali took all of the cash in S & S’ convenience store and all of the cash in the money changers in S & S’ laundromat.
46. Sherali failed to credibly account for and return $21,225.48 of S & S’ net cash sales from December 1-9, 2011.
47. Sherali converted $21,225.48 of S & S’ net cash sales from December 1-9, 2011.
48. Sherali converted S & S’ 2003 Honda Element.
49. Sherali’s conversion of S & S’ property proximately caused damages to S & S in the amount of $24,000.
50. Sherali committed theft as defined in Texas Civil Practices and Remedies Code Chapter 134 by intentionally and unlawfully appropriating $21,225.48 of S & S’ net cash sales from December 1-9, 2011 with the intent to deprive S & S of the cash and by intentionally and unlawfully appropriating S & S’ 2003 Honda Element with the intent to deprive S & S of the vehicle.
51. Sherali’s theft of S & S’ property proximately caused damages to S & 5 in the amount of $24,000.
52. Sherali’s conduct proximately caused total damages to S & S in the amount of $694,356.
53. Sherali was grossly negligent in causing S & S to make the unlawful Distributions to himself during the Relevant Period in breach of his fiduciary duty to S & S.
54. Given Sherali’s conduct here, an award of exemplary damages to S 6 S in the amount of $500,000 is reasonable.
55. S & S incurred $15,000 in attorney’s fees in bringing its theft claims against Sherali. Those fees are reasonable and were necessarily incurred.
56.To the extent a finding of fact contains a conclusion of law, it shall also be considered a conclusion of law.
CONCLUSIONS OF LAW
A. Jurisdiction/Constitutional Authority
1. In his answer, Sherali has objected to this Court’s “jurisdiction” to hear and finally determine the issues raised in the Complaint, relying largely on the Supreme Court’s decision in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). For the reasons explained briefly below and explained fully in this Court’s decision in Farooqi v. Carroll (In re Carroll), 464 B.R. 293 (Bankr.N.D.Tex.2011), which was recently affirmed by the District Court on appeal in Carroll v. Farooqi, 486 B.R. 718, 720 (N.D.Tex.2013), this Court overrules Sherali’s objection, concluding that it has the Constitutional authority to hear and finally determine the issues raised in this adversary proceeding.
2. As noted previously, this is an adversary proceeding to liquidate S & S’ claims against Sherali and then to determine if those claims are excepted from Sherali’s bankruptcy discharge under 11 U.S.C. § 523(a)(4),
3. From this Court’s perspective, Stem does not implicate the grant of subject matter jurisdiction over bankruptcy cases and proceedings arising in the bankruptcy case, arising under the Bankruptcy Code *116(like this adversary) or related to the bankruptcy case under 28 U.S.C. § 1334. That subject matter jurisdiction is, and has been since 1984, vested in the United States District Court for the Northern District of Texas under 28 U.S.C. § 1334. Then, under 28 U.S.C. § 151, Congress granted bankruptcy courts the power to “exercise” certain “authority conferred” upon the district courts by Title 28, but bankruptcy courts were not granted their own independent subject matter jurisdiction over bankruptcy cases and proceedings. Congress also provided further procedures in 28 U.S.C. § 157 pursuant to which the district court may refer bankruptcy cases and proceedings to the bankruptcy courts for either final determination or proposed findings and conclusions. So, as relevant here, this Court exercises authority "with respect to Sherali’s underlying chapter 7 bankruptcy case and this adversary pursuant to a standing order of reference adopted in this District on August 3,1984.
4. From this Court’s perspective, Stem simply clarified bankruptcy courts’ constitutional power, not their subject matter jurisdiction. The Court in Stem discussed this critical distinction at length, 131 S.Ct. at 2606-08, and expressly clarified that 28 U.S.C. § 157 is not jurisdictional. Id. at 2607 (“Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. That allocation does not implicate questions of subject matter jurisdiction.”). So, while Sherali has couched his arguments as an attack on the subject matter jurisdiction of this Court, that argument is premised upon an inaccurate reading of Stem. The district court clearly has subject matter jurisdiction over this adversary. Nothing in Stem has changed that or challenged the propriety of that; rather, Stem specifically addresses the Constitutional authority of this Court, as an Article I tribunal, to hear and finally determine a debt- or’s common-law counterclaim to a proof of claim filed against the bankruptcy estate. Because this Court explained Stem in detail in its Carroll decision, that explanation will not be repeated here.
5. With this background, this Court will address Sherali’s arguments about its lack of “subject matter jurisdiction” or, as properly framed by this Court, its alleged Constitutional inability to hear and finally determine the claims asserted in this adversary. Stated most simply, Stem does not implicate this Court’s authority to hear and finally determine whether a creditor’s claim is excepted from a debtor’s discharge by 11 U.S.C. § 523(a)(4), even if the Court is required to first liquidate the creditor’s claim in that process. In analyzing this argument and the claims at issue in this adversary, the Court notes that there are two distinct issues. First, is a debt owed to S & S based upon the state law claims it asserts against Sherali? Second, if a debt is owed, is that debt excepted from Sherali’s discharge under 11 U.S.C. § 523(a)(4)?
6. Taking the second issue first, there can be little doubt that this Court, as an Article I tribunal, has the Constitutional authority to *117hear and finally determine what claims are non-disehargeable in a bankruptcy case. Determining the scope of the debtor’s discharge is a fundamental part of the bankruptcy process. As noted by the court in Sanders v. Muhs (In re Muhs), 2011 WL 3421546 (Bankr.S.D.Tex. Aug. 2, 2011), “[t]he 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 debtor a ‘fresh start’ by releasing him, her, or it from further liability for old debts.’ ” Id. at *1 (citing Central Va. Cmty. College v. Katz, 546 U.S. 356, 363-64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006)). Congress clearly envisioned that bankruptcy courts would hear and determine all core proceedings, 28 U.S.C. § 157(b)(1), which include, as relevant here, “determinations as to the dischargeability of particular debts.” 28 U.S.C. § 157(b)(2)(I). The Supreme Court has never held that bankruptcy courts are without Constitutional authority to hear and finally determine whether a debt is dischargeable in bankruptcy. In fact, the Supreme Court’s decision in Stem clearly implied that bankruptcy courts have such authority when it concluded that bankruptcy courts have the Constitutional authority to decide even state law counterclaims to filed proofs of claim if the counterclaim would necessarily be decided through the • claims allowance process. Stern, 131 S.Ct. at 2618.
7. So, the question becomes, does the analysis of Constitutional authority change if the bankruptcy court must first liquidate the claim? For the reasons explained below, this Court concludes it does not, as it similarly concluded in Carroll.
8. First, under Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 593, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985), a right closely integrated into a public regulatory scheme may be resolved by a non-Article III tribunal. This is the so-called “public rights exception” discussed by the Supreme Court in Stem. There is no question that liquidating S & S’ state law claims against Sherali is “closely integrated” into the Bankruptcy Code. See In re Carroll, 464 B.R. at 312; see also In re Laughlin, 09-35842-H4-07, 2012 WL 1014754, *8 (Bankr.S.D.Tex. Mar. 23, 2012) (“Determinations of whether a debtor meets the conditions for a discharge are integral to the bankruptcy scheme, and the Bankruptcy Court has the authority to make such determinations.”).
9. Second, the Fifth Circuit has already determined that this Court has the authority to enter a judgment on an unliquidated claim when determining the discharge-ability of that debt in a bankruptcy case. In In re Morrison, 555 F.3d 473, 478-79 (5th Cir.2009), the Fifth Circuit held that a bankruptcy court has the authority to liquidate a state law claim and enter a monetary judgment against a debt- or when deciding if that claim or judgment is nondischargeable in a debtor’s bankruptcy case. In de*118ciding this question, the Fifth Circuit followed several other circuit courts that had concluded that bankruptcy courts had the power to enter a judgment in exactly this manner. See, e.g., Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir.1997); Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir.1993); Abramowitz v. Palmer, 999 F.2d 1274, 1280 (8th Cir.1993); N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496, 1508 (7th Cir.1991). As the court in Christian v. Kim (In re Kim), 2011 WL 2708985, at *2 (Bankr.W.D.Tex. July 11, 2011) noted: “[t]he defendant overreads [Stem ] and its application to this proceeding. Even if the defendant were right, however, the court would be compelled to follow existing Fifth Circuit precedent as set out in Morrison ... as this court cannot ignore (much less ‘overrule’) existing binding circuit precedent, even if that precedent is thought to be inconsistent with a later decision by the Supreme Court. Only the circuit itself can overrule its own precedents.” Like the Kim court, until the Fifth Circuit overrules Morrison, this Court will rely upon Morrison for its authority to liquidate S & S’ state law claims against Sherali and enter a judgment on such claims.
10. Finally, other courts have come to the same conclusion, i.e., that Stem does not hold, directly or indirectly, that an Article I tribunal is without the Constitutional authority to liquidate a creditor’s claim against a debtor through entry of a final dollar judgment and then determine whether that judgment is dis-chargeable in the debtor’s bankruptcy case. See, e.g., Pearson Education, Inc. v. Almgren, 685 F.3d 691, 695 (8th Cir.2012) (finding that a bankruptcy court can enter a money judgment in connection with a dischargeability action as it is “integral to the restructuring of the debtor-creditor relationship” and that Stem does not dictate a different result); Deitz v. Ford (In re Deitz), 469 B.R. 11, 23-24 (9th Cir. BAP 2012) (the court concluded that the holding of Stem was not irreconcilable with existing precedent that “a bankruptcy court may liquidate a debt and enter a final judgment in conjunction with finding the debt nondischargeable.... We hold that, even after Stern, the bankruptcy court had the constitutional authority to enter a final judgment determining both the amount of Fords’ damage claims against Deitz, and determining that those claims were excepted from discharge.”); Dragisic v. Boricich (In re Boricich), 464 B.R. 335, 337 (Bankr.N.D.Ill.2011) (“Stem left intact the authority of a bankruptcy judge to fully adjudge a creditor’s claim. In this case, the claim was an adversary proceeding against debtor to bar dischargeability of a debt due to Plaintiff. Therefore, the authority to enter a final dollar judgment as part of the adjudication of nondischargeability, as recognized in Hallahan,2 was not impaired by Stern ”).
*11911. For all of these reasons, this Court concludes that it has the Constitutional authority to (i) liquidate S & S’ state law claims against Sherali through the entry of a money judgment following trial, and (ii) determine whether that judgment is nondischargeable in Sherali’s chapter 7 bankruptcy case.
B. Burden of Proof
12. S & S bears the burden of proving, by a preponderance of the evidence, that the debts at issue are excepted from Sherali’s discharge under 11 U.S.C. § 523(a)(4). Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Acosta, 406 F.3d 367, 371 (5th Cir.2005). Exceptions to discharge are to be strictly construed against the moving creditor, here S & S, and liberally construed in favor of the debtor Sherali. FNFS, Ltd. v. Harwood (In re Harwood), 637 F.3d 615, 619 (5th Cir.2011); Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355, 356 (5th Cir.1997).
C. The Distributions Were Not Permitted By Texas Corporation Law
13. The Texas Business Corporation Act was the law governing the corporate affairs of S & S and Sherali as its director until January 1, 2010. Tex. Bus. Orgs.Code Ann. § 402.005(a). '
14.From January 1, 2006 until January 1, 2010, S & S could not legally make distributions to Sherali as a shareholder if (i) the distribution caused S & S to be insolvent, as defined by the Texas Business Corporation Act, or (ii) if the amount of the distribution exceeded the distribution limit of the amount of the surplus of S & S. Tex. Bus. Corp. Act Art. 2.38
15. Under the Texas Business Corporation Act “ ‘[ijnsolvency’ means inability of a corporation to pay its debts as they become due in the usual course of its business.” Tex. Bus. Corp. Act Art. 1.02(16).
16. Under the Texas Business Corporation Act, “‘[surplus’ means the excess of the net assets of a corporation over its stated capital.” Tex. Bus. Corp. Act Art. 1.02(27).
17. In addition to any other liabilities imposed by law upon directors of a corporation, Sherali is liable to S & S for the amounts that he consented to and caused S & S to distribute to himself from January 1, 2006 until January 1, 2010 since all such distributions (i) exceed the surplus of S & S during that period, which was always a negative amount, and (ii) were made while S & S was insolvent or caused S & S to become insolvent.3 Tex. Bus. Corp. Act Art. 2.41.
18. Since S & S was formed before January 1, 2006 and took no action to elect to adopt the Texas Business Organizations Code, from and after January 1, 2010, the Texas *120Business Organizations Code applied to S & S and to Sherali for all actions taken as the managerial officials, owners, or members of the entity, except as otherwise expressly provided by Title 8 of the Code. Tex. Bus. Orgs.Code Ann. § 402.005(a).
19. “Insolvent” under the Texas Business Organizations Code means a person who is unable to pay the person’s debts as they become due in the usual course of business or affairs. Tex. Bus. Orgs.Code Ann. § 1.002(40).
20. “Surplus” under the Texas Business Organizations Code means the amount by which the net assets of a corporation exceed the stated capital of the corporation. Tex. Bus. Orgs.Code Ann. § 21.002(12).
21. From January 1, 2010 to the present, S & S could not legally make distributions to Sherali as a shareholder if (i) the distribution caused S & S to be insolvent, as defined by the Texas Business Organizations Code, or (ii) if the amount of the distribution exceeded the distribution limit of the amount of the surplus of S & S, also as defined by the Texas Business Organizations Code. Tex. Bus. Orgs.Code Ann. § 21.303(a) & (b).
22. Sherali is liable to S & S for the amounts that he caused S & S to distribute to himself from January 1, 2010 to the present since all such distributions (i) exceeded the surplus of S & S, which was always a negative amount, on the date of the distributions, and/or (ii) were made when S & S was insolvent, or caused S & S to become insolvent. Tex. Bus. Orgs.Code Ann. § 21.316(a).
D. Conversion and Theft of S & S Property
23. Under Texas law, conversion is the unauthorized and unlawful assumption and exercise of dominion and control over the personal property of another which is to the exclusion of, or inconsistent with, the owner’s rights. Waisath v. Lack’s Stores, Inc., 474 S.W.2d 444, 446 (Tex.1971).
24. Sherali’s taking of the net cash sales of S & S from December 1-9, 2011, which he failed to account for, constitutes conversion.
25. Sherali’s taking of the 2003 Honda Element constitutes conversion.
26. A person who converts property is liable to the property’s owner for damages. See Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 651 (5th Cir.1991).
27. Under the Texas civil theft statute, “theft” means unlawfully appropriating property or unlawfully obtaining services as described by Sections 31.03, 31.04, 31.05, 31.06, 31.07, 31.11, 31.12, 31.13, or 31.14 of the Penal Code. Tex. Civ. Prac. & Rem.Code § 134.002(2).
28. A person commits an offense if he unlawfully appropriates property with the intent to deprive the owner of that property. Tex. Penal Code § 31.03(a). Appropriation of property is unlawful if it is without the owner’s effective consent. Tex. Penal Code § 31.03(a).
29. A person who commits theft is liable for the damages resulting from the theft. Tex. Civ. Prac. & Rem.Code § 134.003(a). Moreover, a person who has sustained dam*121ages resulting from a theft may also recover from the person who commits the theft statutory damages of up to $1,000. Id. at § 134.005(a)(1). Finally, “[e]ach person who prevails in a suit under this chapter shall be awarded court costs and reasonable and necessary attorney’s fees.” Id. at § 134.005(b). The award of attorney’s fees under this section to the prevailing party is mandatory. Corral-Lerma v. Border Demolition & Environmental, Inc., — S.W.3d -,-, 2012 WL 1943763, at *1 (Tex.App.-El Paso 2012).
30. Sherali committed theft as defined in the Texas Civil Practices and Remedies Code by (i) intentionally and unlawfully appropriating $21,225.48 of S & S’ net cash sales from December 1-9, 2011 with the intent to deprive S & S of the cash, and (ii) intentionally and unlawfully appropriating S & S’ 2003 Honda Element with the intent to deprive S & S of the vehicle.
E. Liquidation of S & S’ Claim against Sherali
31. Sherali is liable to S & S for $670,356 for consenting to and causing S & S to make the unlawful Distributions to himself in violation of the Texas Business Corporation Act and the Texas Business Organizations Code during the Relevant Period.
32. Sherali is liable to S & S for $670,356 for breach of his fiduciary duty to S & S for causing S & S to make the unlawful Distributions for his personal benefit and to S & S’ detriment.
33. Sherali is liable to S & S for the $21,225.48 of S & S’ net cash sales from December 1-9, 2011 that he converted.
34. Sherali is liable to S & S for the value of the 2003 Honda Element that he converted.
35. Sherali’s conversion of S & S’ property proximately caused damages to S & S in the amount of $24,000.
36. Sherali is liable to S & S for his theft of $21,225.48 of S & S’ net cash sales from December 1-9, 2011 and for his intentional and unlawful appropriation of S & S’ 2003 Honda Element with the intent to deprive S & S of the vehicle.
37. Sherali’s theft of S & S’ property proximately caused damages to S & S in the amount of $24,000.
38. Sherali’s conduct proximately caused actual damages to S & S totaling $694,356.
39. S & S is entitled to recover its reasonable and necessary attorney’s fees in bringing the theft claim against Sherali in the amount of $15,000.
40. Under Texas law, exemplary damages are those awarded as a penalty or by way of punishment but not for compensatory purposes. Tex. Civ. Prac. & Rem. Code § 41.001(5).
41. Sherali’s intentional breach of fiduciary duty is a tort for which S & S may recover exemplary damages. Lesikar v. Rappeport, 33 S.W.3d 282, 310 (Tex.App.Texarkana 2000, pets, denied). Where, as here, a fiduciary gains a benefit by breaching his fiduciary duty, willful and fraudulent acts may be pre*122sumed. Id. An intentional breach may be found where the fiduciary intends to gain an additional benefit for himself. Id.
42. Moreover, a finding of conversion that was either malicious or willfully done gives rise to a recovery of exemplary damages. Tex. Civ. Prac. & Rem.Code Ann. § 41.003(a); Green Intern., Inc. v. Solis, 951 S.W.2d 384, 391 (Tex.1997). Malice may be proven by circumstantial evidence. Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex.1994). Malice may be implied from the conversion of another’s property when the defendant knew or should have known he had no legal right to the property. Kinder Morgan N. Tex. Pipeline, L.P. v. Justiss, 202 S.W.3d 427, 447-48 (Tex.App.-Texarkana 2006, no pet.).
43. Based on these precedents, S & S is entitled to recover exemplary damages for Sherali’s conduct in the amount of $500,000. The United State Supreme Court has established three factors to be considered in granting exemplary damages: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Bunton v. Bentley, 153 S.W.3d 50, 53 (Tex.2004) (citing State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 418, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003)). Although courts do not use a strict mathematical rule in calculating exemplary damages, typically such damages will not exceed a 4:1 ratio of exemplary to actual damages. Bennett v. Reynolds, 315 S.W.3d 867, 873 (Tex.2010). In this case, the Court finds that the award of exemplary damages is appropriate in this case and that the ratio of $500,000 in exemplary damages to $694,356 of actual damages is reasonable.
F. Nondischargeability of the Debt owed to S & S under 11 U.S.C. § 523(a)(4)
44. 11 U.S.C. § 523(a)(4) provides that “[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 ... for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
G. Defalcation While Acting in a Fiduciary Capacity Under 11 U.S.C. § 523(a)(4)
45. Under Texas law, corporate officers and directors owe fiduciary duties to the corporations they serve and must not allow their personal interests to prevail over the interests of the corporation. In re Harwood, 637 F.3d at 620.
46. A corporate officer is a fiduciary of a corporation within the meaning of 11 U.S.C. § 523(a)(4). Angelle v. Reed (In re Angelle), *123610 F.2d 1335, 1335-41 (5th Cir.1980) (officer of a corporation owed common law fiduciary duty to corporation and stockholders sufficient to satisfy requirements of § 523(a)(4)); In re Jackson, 141 B.R. 909, 915 (Bankr.N.D.Tex.1992).
47. Under Texas law, an officer or director of a corporation owes a fiduciary duty to the corporation. In re Jackson, 141 B.R. at 915 (citing Faour v. Faour, 789 S.W.2d 620 (Tex.App.-Texarkana 1990, writ denied)).
48. Under Texas law, a corporate officer or director owes a duty to the corporation to act only in the corporation’s best interests. Id. (citing Hughes v. Houston Nw. Med. Ctr., Inc., 680 S.W.2d 838, 843 (Tex.App.-Houston [1st Dist.] 1984, writ ref d n.r.e.)).
49. Any transactions between the officers or directors and the corporation are subject to strict scrutiny. Id. at 916.
50. The burden is on the officer or director to establish the fairness of the transaction between him and the corporation. Id. (citing Henger v. Sale, 357 S.W.2d 774, 778 (Tex.App.-Waco 1962), aff'd in part, rev’d in part on other grounds, 365 S.W.2d 335 (Tex. 1963)).
51. When a corporate officer or director diverts assets of the corporation to his own use, he breaches his fiduciary duty of loyalty to the corporation, and the transaction is presumptively fraudulent. Roth v. Mims, 298 B.R. 272, 287 n. 2 (N.D.Tex.2003) (citing GNG Gas Systems, Inc. v. Dean, 921 S.W.2d 421, 427 (Tex.App.-Amarillo 1996, writ denied)).
52. Any misappropriation of corporate property by a corporate officer or director is a fiduciary defalcation within the meaning of § 523(a)(4). In re Jackson, 141 B.R. at 918-19 (citing inter alia John P. Maguire & Co. v. Herzog, 421 F.2d 419, 422 (5th Cir.1970)).
53. Under Texas law, Sherali, as a director of S & S, was conclusively presumed to know S & S’ condition, its business, its receipts and expenditures and all the general facts which go to make up that condition and business, as shown by the entries on its regular books. Merchants’ & Manufacturers’ Sec. Co. v. Wright, 59 S.W.2d 1097, 1098 (Tex.Civ.App.-Amarillo 1933, writ refused).
54. “A director of a corporation, actively engaged in the conduct of its business, and to whom the books are open and accessible for inspection at all times, is chargeable with the facts that the books disclose.” McLendon Hardware Co. v. Black, 264 S.W. 1011, 1013 (Tex.App.-Austin 1924, no writ).
55. As the sole officer and director of S & S during the Relevant Period, Sherali had a fiduciary duty to S & S.
56. Sherali is presumed to have known that S & S had a negative net worth and negative surplus during the Relevant Period.
57. All persons are presumed to know the law and are charged with knowledge of provisions of statutes. N. Laramie Land Co. v. Hoffman, 268 U.S. 276, 283, 45 S.Ct. 491, 69 L.Ed. 953 (1925); Greater Houston Transp. Co. v. *124Phillips, 801 S.W.2d 523, 525 n. 3 (Tex.1990).
58. Thus, Sherali is presumed to have known of the prohibition under Texas law of a corporation making distributions to its shareholders (i) in amounts that exceed the corporation’s surplus, or (ii) when insolvent or which cause the corporation to become insolvent.
59. “ ‘Defalcation’ for the purposes of 11 U.S.C. § 523(a)(4) ‘is a willful neglect of duty, even if not accompanied by fraud or embezzlement.’ ” In re Harwood, 637 F.3d at 624 (citation omitted).
60. “Willful neglect ‘does not require actual intent, as does fraud,’ and is ‘essentially a recklessness standard.’” Id. (citation omitted). “Willfulness in this context ‘is measured objectively by reference to what a reasonable person in the debtor’s position knew or reasonably should have known.’ ” Id. (citation omitted).
61. The Distributions that Sherali wrongfully caused S & S to make to himself during the Relevant Period constitute a willful neglect of his fiduciary duty as an officer and director of S & S that constitute “defalcations” for the purposes of 11 U.S.C. § 523(a)(4). This is so because Sherali is presumed to have known that the Distributions were unlawful under the applicable Texas corporation statutes because S & S had a negative surplus and/or was insolvent during the Relevant Period.
62. Sherali’s breach of fiduciary duty as an officer and director of S & S renders his debt arising from self-dealing transactions non-discharge-able under 11 U.S.C. § 523(a)(4). Moreno v. Ashworth (In re Moreno), 892 F.2d 417, 421 (5th Cir.1990).
63. Sherali’s actions in causing S & S to make the unlawful Distributions to himself during the Relevant Period constitute defalcation of his fiduciary duty as an officer and director of S & S and render his debt to S & S in the amount of $670,356 non-dischargeable under 11 U.S.C. § 523(a)(4). Id.
H. Larceny Under § 523(a)(4)
64. For purposes of 11 U.S.C. § 523(a)(4), “larceny” means the fraudulent and wrongful taking and carrying away of the property of another with intent to convert such property to the taker’s use without the consent of the owner. Smith v. Williams (In re Smith), 253 F.3d 703, 2001 WL 498662, *2 (5th Cir.2001) (unpublished); In re Barrett, 156 B.R. 529, 533 n. 3 (Bankr.N.D.Tex.1993).
65. A finding of violation of a civil theft statute satisfies the requirements for nondischargeability under 11 U.S.C. § 523(a)(4). In re Smith, 2001 WL 498662, at *2 (citing In re Padgett, 235 B.R. 660, 663 (Bankr.M.D.Fla.1999) (holding that a court finding of liability under Florida civil theft statutes satisfies the requirements of 11 U.S.C. § 523(a)(4))).
66. As noted previously, under the Texas civil theft statute, “theft” means unlawfully appropriating property or unlawfully obtaining services as described by Sections 31.03, 31.04, 31.05, 31.06, 31.07, 31.11, 31.12, 31.13, or 31.14 of the Penal Code. Tex. Civ. Prac. & Rem. Code Ann. § 134.002(2). A person *125commits an offense if he unlawfully appropriates property with the intent to deprive the owner of that property. Tex. Penal Code Ann. § 31.03(a). Appropriation of property is unlawful if it is without the owner’s effective consent. Tex. Penal Code Ann. § 31.03(a).
67. Sherali’s actions in converting and appropriating S & S’ cash and 2003 Honda Element without S & S’ consent constitute larceny under the Bankruptcy Code and render his debt to S & S in the amount of $24,000 non-dischargea-ble under 11 U.S.C. § 523(a)(4). In re Smith, 2001 WL 498662, at *2.
I. Attorneys Fees and Exemplary Damages are also Non-Dischargeable
68. Attorneys fees and exemplary damages are also non-dis-chargeable. In Gober v. Terra Corp. (In re Gober), 100 F.3d 1195, 1208 (5th Cir.1996), the Fifth Circuit held that “[w]hen the primary debt is nondischargeable due to willful and malicious conduct, the attorney’s fees and interest accompanying compensatory damages, including post judgment interest, are likewise nondis-chargeable. Stokes v. Ferris (In re Stokes), 150 B.R. 388, 393 (W.D.Tex.1992) (holding all debts awarded by a Texas court, including punitive damages, legal fees, and post judgment interest, to be nondischargeable), aff'd, 995 F.2d 76 (5th Cir.1993).” Further, the Supreme Court has stated that “the text of § 523(a)(2)(A), the meaning of parallel provisions in the statute, the historical pedigree of the fraud exception, and the general policy underlying the exceptions to discharge all support our conclusion that any debt ... for money, property, services, or ... credit, to the extent obtained by ... fraud encompasses any liability arising from money, property, etc., that is fraudulently obtained, including treble damages, attorney’s fees, and other relief that may exceed the value obtained by the debtor.” Cohen v. de la Cruz, 523 U.S. 213, 223, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). Applying these binding precedents, this Court finds that the attorneys fees and exemplary damages awarded in this case are non-dischargeable.
68. To the extent a conclusion of law contains a finding of fact, it shall also be considered a finding of fact.
Based upon the foregoing findings of fact and conclusions of law, S & S is entitled to a judgment against Sherali for actual damages of $694,356, exemplary damages of $500,000, and attorney’s fees of $15,000. These amounts are excepted from Sherali’s discharge under 11 U.S.C. § 523(a)(4).
A judgment consistent with these findings of fact and conclusions of law will be entered separately.
. The Court declines to address two claims preserved by S & S in the Joint Pretrial Order — i.e., the money had and received claim and the constructive trust claim. Given the Court’s rulings with respect to S & S' other claims, there is no need to address these claims.
. Like the Fifth Circuit held in Morrison, the Seventh Circuit held in Hallahan that a bankruptcy court could enter a final dollar judgment against a debtor as part of a nondis-chargeability action.
. Sherali argues in his post-trial brief, without citation to any legal authority, that S & S was not insolvent as defined by the applicable statute because S & S must not have been able to pay its debts as they become due and the debts to Zipco, Inc. and Wilshire Bank were insufficient as a matter of law. While "debts” certainly suggests at least two unpaid creditors are required, the evidence here satisfies the literal language of the statute. Moreover, even if Sherali is correct, it doesn't change the outcome here, because the Distributions made exceeded the surplus of S & S during the Relevant Period. On that basis alone, the Distributions were unlawful. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495772/ | MEMORANDUM DECISION RE MOTION TO REOPEN CASE AND VACATE DISCHARGE
S. MARTIN TEEL, JR., Bankruptcy Judge.
The court will reopen this case but deny the debtor’s request to obtain an order vacating his discharge.
*127I
The debtor filed a voluntary petition commencing this case on August 10, 2010. His schedules reflected that he:
• owned two real properties, both of which were worth far less than the amount of mortgage debts against them;
• was leasing a car pursuant to which he owed $3,003.54;
• owed tax debts to the District of Columbia and the United States; and
• owed a student loan of $43,087.65.
The debtor received a discharge on December 2, 2010. The chapter 7 trustee filed a report of no distribution, and the case was closed on February 14, 2011, with no distribution being made to creditors.
On April 3, 2013, the debtor filed his motion to reopen this case to obtain an order vacating his discharge. The motion states in relevant part:
5. Debtor’s main reason for filing his bankruptcy was to obtain relief from his tax debt. Debtor believed that his tax debt was indeed discharged in the Chapter 7 case.
6. The Internal Revenue Service (“IRS”) recently notified Debtor that his 2004 and 2005 tax debts were not discharged in his 2010 bankruptcy due to a technicality.
7. In the normal course of a Chapter 7 bankruptcy, Debtor’s 2004 and 2005 taxes, which were timely filed, would have been discharged in the bankruptcy.
8. In Debtor’s efforts to mitigate his tax debt and avoid filing for bankruptcy, Debtor retained the services of various tax relief companies. Unbeknownst to the Debtor, his efforts resulted in an extension of the rules set forth in 11 U.S. [sic] 523(a) and 11 U.S.C. Section 507(a)(8)(A)(ii); 507(a)(8)(G), preventing him from being discharged.
9. Had Debtor been aware that his tax debt was not dischargeable, he would not have filed for bankruptcy.
10. Allowing the Debtor to vacate his Chapter 7 discharge will not result in an abuse of the bankruptcy system or prejudice his creditors.
If the discharge remains in place, the debt- or will be barred from receiving a discharge in a new chapter 7 case for eight years after he commenced this case. 11 U.S.C. § 727(a)(8). In the meantime, the tax liabilities will likely become of a dis-chargeable character well before the end of that eight-year period. I will reopen the case to consider the debtor’s request to vacate the discharge, but on the merits I will deny that request.
II
A bankruptcy court has the authority under Fed.R.Civ.P. 60(b) to vacate a discharge when the discharge order was mistakenly entered in contravention of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, or an order extending the deadline before which a discharge could be issued. See, e.g., Disch v. Rasmussen, 417 F.3d 769, 779 (7th Cir.2005); Cisneros v. United States (In re Cisneros), 994 F.2d 1462, 1466 (9th Cir.1993). The debtor’s motion does not present that type of case. The discharge was not entered in error.
Although 11 U.S.C. § 727(d) permits a discharge to be revoked on certain grounds, a debtor lacks standing to seek revocation of discharge under § 727(d). Markovich v. Samson (In re Markovich), 207 B.R. 909, 911 (9th Cir. BAP 1997). Accord, In re Gomez, 456 B.R. 574 (Bankr.M.D.Fla.2011); In re Williams, 2012 WL 843210, at *2 (Bankr.D.D.C. Mar. 12, 2012).
*128Moreover, a court lacks authority to vacate the discharge pursuant to Fed. R.Civ.P. 60(b) in order for a debtor to attempt to obtain approval of a waiver of the entry of a discharge. A debtor must seek approval of a waiver before the court proceeds to enter a discharge. As stated in Grabowski v. Amerieredit (In re Grabowski), 462 B.R. 534, 538 (Bankr.W.D.Pa. 2011):
the very structure of Section 727(a)(10) makes clear that the proposed “waiver” of a discharge is forward-looking and must be presented to the Court before a discharge has been granted. (“The court shall grant the debtor a discharge, unless — the court approves a written waiver of discharge executed by the debtor after the order of relief under this chapter.”) Thus, “[w]hile no deadline has been expressly stated by the Code or Rules, the vesting of rights following the entry of discharge is a circumstance which Debtor could reasonably anticipate and which will be deemed to preclude the exercise of Debtor’s right to waiver of [sic] the discharge.” In re Bailey, 220 B.R. 706, 710 (Bankr.M.D.Ga.1998).
Once the discharge has been entered, it is too late for the debtor to seek approval of a waiver of the discharge. Requests after discharge to vacate the discharge and to then waive the entry of a discharge so that a new case can be later filed when tax claims have become dischargeable has been rejected on this basis by at least two decisions. See In re Nader, 1998 WL 767459 (Bankr.E.D.Pa. Oct. 30, 1998); In re Bailey, 220 B.R. 706 (Bankr.M.D.Ga. 1998).1 There are decisions opining that a debtor may still waive a discharge once a discharge has been entered. See, e.g., In re Starling, 359 B.R. 901 (Bankr.N.D.Ill.2007); In re Magundayao, 313 B.R. 175, 179 n. 6 (Bankr.S.D.N.Y.2004) (“If the Code permits the debtor to refuse to accept his discharge, it should also allow him to give it back.” (dicta)); In re Jones, 111 B.R. 674, 680 (Bankr.E.D.Tenn.1990). These decisions, however, fail to address the point that § 727(a) contemplates that approval of a waiver of a discharge must be sought before a discharge is entered.
Congressional intent would be frustrated by allowing a debtor to obtain a vacating of the discharge. A discharge carries consequences of finality for the debtor-creditor relationship (such as being a bar to obtaining a discharge in a new case filed within a specified statutory period of time later). The debtor’s present and future creditors are entitled to certainty regarding whether those consequences are in place, a certainty achieved by the requirement that if a debtor is going to waive her discharge, she must seek approval of such a waiver before a discharge *129is entered. As stated in In re Gomez, 456 B.R. at 577:
The discharge injunction is permanent; it forever enjoins a debtor’s creditors from pursuing the debtor for discharged debts. Debtors and their creditors rely upon the permanency of the discharge and the discharge injunction. Aurora received a Chapter 7 discharge more than two years ago and has enjoyed the benefits of the discharge and the discharge injunction. Her creditors have relied upon the permanency of her discharge and the discharge injunction.
A debtor ought not be allowed to reap the advantages of a discharge and to later obtain a vacating of the discharge when she realizes the discharge has adverse consequences as well. See In re Gomez, 456 B.R. at 577 (debtor not allowed to obtain vacating of chapter 7 discharge in order to undo the bar of 11 U.S.C. § 1328(f) against obtaining a discharge in a later chapter 13 case filed within four years of the filing of the chapter 7 case).2
Similarly, allowing a debtor to obtain a vacating of a discharge can lead to other consequences that are contrary to congressional intent. Sometimes a debtor seeks to vacate a discharge, with the discharge to be entered anew later, so that the debtor can enter into a reaffirmation agreement even though she was required under 11 U.S.C. § 524(c)(1) to enter into such an agreement before a discharge was entered. As this court concluded in In re Williams, supra, it is inappropriate to defeat congressional intent and circumvent that requirement by vacating the discharge.
Ill
For all of these reasons, although the case will be reopened to permit the court to consider the request to vacate the discharge, that latter request must be denied, and the clerk will be directed to close the case anew upon the expiration of the time for an appeal of this order if no appeal is taken, and upon the disposition of any appeal if a timely appeal is pursued. An order follows.3
. Another decision, McDaniel v. United States (In re McDaniel), 350 B.R. 616 (Bankr.M.D.Fla.2006), aff d sub nom. United States v. McDaniel (In re McDaniel), 363 B.R. 239 (M.D.Fla.2007), dismissed a case and vacated the discharge when the debtor had mistakenly thought that his tax debts would be discharge-able, but the parties and the court appear to have assumed that upon dismissal of the case a discharge is automatically to be vacated. A dismissal of a case, however, does not result in the discharge being vacated pursuant to 11 U.S.C. § 349 (dealing with effect of dismissal). See, e.g., Pavelich v. McCormick, Barstow, Sheppard, Wayte & Carruth LLP (In re Pavelich), 229 B.R. 777, 780 (9th Cir. BAP 1999). ("[T]he omission of an order from the list in § 349(b) ordinarily means that dismissal does not affect the omitted order.... We conclude that the dismissal order, without more, did not automatically revoke the debtors’ discharges.”); In re Russo, 2008 WL 5412106, at *5 (Bankr.E.D.Pa. Oct. 20, 2008). The court in McDaniel neglected to address whether it was too late to seek a waiver of discharge once the discharge order had been entered.
. This case illustrates ways in which a vacating of the discharge is inimical to the goals served by finality:
• Here, there were likely dischargeable debts owed by the debtor for tax penalties and mortgage deficiency claims. The holders of such claims have been barred by the discharge injunction of 11 U.S.C. § 524(a) for more than two years from pursuing those claims and executing on any wages of the debtor or other assets of the debtor acquired in those two years.
• Not only creditors who held claims in the case but entities who hold claims arising after the commencement of the case could be prejudiced. Such entities may have extended credit in reliance upon the eight-year bar against the debtor obtaining a new chapter 7 discharge.
If it was to the debtor’s advantage to waive the discharge in order to file a later case at a time that his tax claims would be dischargea-ble, he ought to have sought approval to waive the discharge before it was entered.
. Because this court lacks authority to vacate the discharge, it is unnecessary to hold a hearing to address the debtor’s contention that no creditors would be prejudiced by the vacating of the discharge. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495774/ | MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is the “Trustee’s Objection to Debtor’s Homestead Exemption” (the “Objection”) filed by David W. Os-trander, the Chapter 7 trustee (the “Trustee”) in this Chapter 7 case filed by Eleanor Marie Vierstra (the “Debtor”). The Objection challenges the Debtor’s exemption asserted under Massachusetts General Laws ch. 188, §§ 1 ei seq. (the “Homestead Statute”) and Massachusetts General Laws ch. 235, § 34(14) (together, the “Homestead Exemption”). Among the issues presented is whether the Trustee’s Objection is timely in light of Newman v. White (In re Newman), 428 B.R. 257 (1st Cir. BAP 2010), and the subsequent amendment of Federal Rule of Bankruptcy Procedure Rule 2003(e).1 For the reasons set forth herein, the Court concludes that the Objection raised by the Trustee is untimely and must therefore be overruled.
1. FACTS AND POSITIONS OF THE PARTIES
Although there is a dispute regarding the credibility of the Debtor’s stated intention to return to the subject property, the facts necessary to decide this matter are free from material dispute.
The Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on October 12, 2012. On the petition, she listed as her “street address” a location in Easthampton, Massachusetts and as her “mailing address” a post office box in Northampton, Massachusetts. In identifying her interests in real property on Schedule A, however, the Debtor listed a tenancy by the entirety interest in real estate located in Florence, Massachusetts (the “Florence Property”). She further described the Florence Property as “subject to a Declaration of Homestead,” recorded in 2008. In her Schedule C — Property Claimed as Exempt (“Schedule C”), the Debtor claimed that her interest in the Florence Property was exempt pursuant to Massachusetts General Laws (“MGL”) ch. 235, § 24(14) and ch. 188. The Debtor values the Florence Property at $100,000,2 and on Schedule D — Creditors Holding Secured Claims, lists outstanding encumbrances on the Florence Property totaling $35,497.
*148A meeting of creditors under § 341 of the Code (the “341 Meeting”)3, was scheduled for and held on November 6, 2012. At that meeting, and in subsequent communications between the Debtor and the Trustee, the Debtor disclosed that she and her now estranged spouse acquired the Florence Property in 1988, but she has lived in Easthampton since 2008. Her husband has resided in the Florence Property continually since 2008, except for approximately one year when he lived in Las Vegas to attend to his father’s health problems. Even during her husband’s absence from the Florence Property, however, it remained vacant; the Debtor did not return to the Florence Property during that time. After the Trustee finished his examination at the 341 meeting, he reportedly announced that the meeting was adjourned, but not concluded. No date was at that time, or subsequently, set for a continuation of that meeting.
On December 28, 2012, the Trustee filed the instant Objection. There, he contends that the Homestead Exemption for the Florence Property is not available to the Debtor. The Trustee maintains that, even though the Debtor filed a Declaration of Homestead for the property, the Homestead Exemption is available only to “the owner and the owner’s family members who occupy or intend to occupy the home as a principal residence.” The Trustee argues that, by her actions, the Debtor long ago abandoned the Florence Property as her principal residence.
The Debtor takes a different view, grounded in three arguments. First, she contends that she has always viewed the Florence Property as her home, and has resided in Easthampton with her son solely because she became estranged from her non-debtor spouse. Accordingly, she says that, on the date the bankruptcy case was commenced, she had a future intention to occupy the Florence Property as her principal residence. Second, the Debtor argues that, because her spouse has resided in the Florence Property as his principal residence and co-owns the property, she is entitled to the benefit of his automatic exemption under the Homestead Statute as his “family member.”4
And third, she says that the Trustee’s Objection is untimely because it was not filed within 30 days from the conclusion of the 341 Meeting, as required by Bankruptcy Rule 4003(b)(1). In the Debtor’s view, the 341 Meeting, which was not continued to a specific date and time, was concluded on November 6, 2012, thus establishing December 6, 2012 as the deadline for filing objections to the Debtor’s claimed exemptions. Accordingly, the Debtor says, the Objection — not filed until December 28, 2012 — is untimely and must be overruled.
II. DISCUSSION
Pursuant to § 541 of the Bankruptcy Code, all of a debtor’s prepetition property, with certain exceptions not here material, become property of the debtor’s bankruptcy estate. See 11 U.S.C. § 541(a). However, pursuant to § 522(b)(1), a Massachusetts debtor may exempt interests in certain property from the bankruptcy estate by electing either the exemption scheme set forth in § 522(b)(2) (those listed in § 522(d)) or *149§ 522(b)(3) (the “non-bankruptcy exemptions”).5 11 U.S.C. § 522(b)(1), (2), (3).
Section 522(i) directs the debtor to ñle a list of his or her claimed exemptions (the debtor’s “Schedule C”) and provides that “unless a party in interest objects, the property claimed as exempt on such list is exempt.” 11 U.S.C. § 541(i); see also Fed. R. Bankr.P. 4003(a). Here, the Debt- or opted for the exemptions available under non-bankruptcy law pursuant to § 522(b)(3), enabling her to claim under the Massachusetts Homestead Statute. The Homestead Statute provides, in relevant part, that:
[a]n estate of homestead to the extent of the declared homestead exemption in a home may be acquired by 1 or more owners who occupy or intend to occupy the home as a principal residence.
MGL ch. 188, § 3 (emphasis supplied).
Undisputed is whether the Homestead Exemption was properly listed on Schedule C (it was); whether the exemption was properly declared or not (it was); the amount of the exemption (if entitled to the exemption, there is no question that Debt- or qualified to claim as much as $500,000 in equity of the Florence Property as exempt); or the Debtor’s interest in the Florence Property (she enjoyed an undivided interest as tenant by the entirety). Rather, the issue raised by the Trustee is whether, in light of the Debtor’s absence from the property since 2008, she could reasonably claim that on December 12, 2012, the date of case commencement, she “intend[ed] to occupy [the Florence Property] as [her] principal residence.” But the Debtor argues that that issue need never be reached, because the Objection was untimely.
The deadline within which a party in interest may object to a claim of exemption is governed by Bankruptcy Rule 4003(b)(1), which provides in relevant part:
... a party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under § 34.1(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. The court may, for cause, extend the time for filing objections if, before the time to object expires, a party in interest files a request for an extension.
Fed. R. Bankr.P. 4003(b)(1) (emphasis supplied).
Strict adherence to the deadline, unless extended by the Court on a request made before expiration of that deadline, is critical. If no timely objection to an unambiguously-described and duly-listed exemption is filed, the property claimed as exempt is deemed exempt, regardless of whether the debtor had a colorable basis for claiming the exemption in the first place. Taylor v. Freeland & Kronz, 503 U.S. 638, 642-44, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992); Mercer v. Monzack, 53 F.3d 1, 3 (1st Cir.1995) (distinguishing Taylor on other grounds).
Here, the Trustee did not seek an extension of the original deadline to object to the Debtor’s claimed exemptions. Ac*150cordingly, the deadline for filing an objection was fixed at BO days after the 341 Meeting was concluded. But there lies the problem: how does one determine when a 341 Meeting has concluded, absent an affirmative statement by the Chapter 7 trustee that such an event has occurred? The answer to that question has divided the courts for some time.
As well-described by the Bankruptcy Appellate Panel for the First Circuit (the “BAP”), three approaches developed among the courts:
Under the “bright-line” approach, a meeting continued without a follow-up date w[ould] be deemed to have been concluded on the date of the initial meeting for the purpose of determining the beginning of the thirty-day objection period.
Under the “case-by-case” approach, the facts and circumstances w[ould] be examined to determine the conclusion date of the § 341 meeting.
[Under t]he “debtor’s burden” approach ... a § 341 meeting w[ould] not terminate until “the trustee so declares or the court so orders”....
Newman v. White (In re Newman), 428 B.R. 257, 262-63 (1st Cir. BAP 2010) (collecting cases) (citations omitted).
In Newman, the BAP Panel did not agree on the appropriate disposition of the appeal. All did agree that the “debtor’s burden” approach should be rejected — that is, the approach which had been applied by the bankruptcy court below to declare that the 341 meeting in that case had not been concluded. The majority then went on to decide that the bankruptcy court’s analysis was flawed regardless of whether analyzed under the “bright-line” approach or the “case-by-case” approach. Accordingly, they voted to reverse, reasoning that the disposition of the appeal did not necessitate a choice between the two remaining approaches. The dissent disagreed, however, opting to adhere to the “case-by-case” approach. And, employing that approach, the dissent found the facts sufficient to support the bankruptcy court’s decision below. Accordingly, the dissent would have affirmed, albeit on grounds different than those employed by the bankruptcy court.
Had there been no further developments, this Court would likely have had to choose between the “bright-line” and “case-by-case” approaches in evaluating the facts of this case (or avoid the choice as did the BAP in Newman). But there has been a further development — namely, the amendment of Bankruptcy Rule 2003(e). Rule 2003 governs the 341 meeting. In its previous iteration, subsection (e) provided:
(e) Adjournment. The meeting may be adjourned from time to time by announcement at the meeting of the adjourned date and time without further written notice.
The language of the Rule had a permissive flavor. Newman, 428 B.R. at 262; Rentas v. Puerto Rico Electric and Power Authority (In re PMC Marketing Corp.), 482 B.R. 74, 80 (Bankr.D.P.R.2012). The lack of any requirement to provide written notice to the debtor or creditors portrayed an informality which belied the requirement to actually announce the date and time of the adjourned meeting. Even the policy of the Executive Office of the United States Trustee (as stated in its “Handbook for Chapter 7 Trustees”) described the requirement to announce a specific date and time of the continued meeting in language that suggested the announcement was more an important goal than a requirement.
*151The trustee should not routinely continue § 341(a) meetings when the debtor appears. If a trustee must continue the meeting, however, the trustee must, if at all possible, announce the continued date to all parties present at the initial meeting, and advise the United States Trustee and, if necessary, the clerk of the bankruptcy court of the continued date.
Newman, 428 B.R. at 262 (emphasis supplied.)
But effective December 1, 2011, the language of Rule 2003(e) was amended as follows:
(e) Adjournment. The meeting may be adjourned from time to time by announcement at the meeting of the adjourned date and time without- further written — notice. The presiding official shall promptly file a statement specifying the date and time to which the meeting is adjourned.
Fed. R. Bankr.P. 2003(e) (emphasis supplied).
The amendment to Rule 2003(e), approved by the Supreme Court of the United States, and now requiring that the date and time of an adjourned meeting be identified in advance and filed in the case docket, inexorably leads this Court to the conclusion that the “bright-line” approach to determining when a 341 meeting is concluded has been finally adopted to the exclusion of any other. Accordingly, this Court holds that the only method for adjourning a 341 meeting is by complying with the terms of Rule 2003(e) — i.e., announcing the continued date and time at the meeting to be continued, coupled with the prompt filing of that announcement on the case docket. Accord In re Ramon, 2012 WL 1344353, *2 (Bankr.D.P.R. April 17, 2012).
Here, the 341 Meeting was held on November 6, 2012. No adjournment to a specific date and time was announced at the meeting. Nothing in that regard was filed in the case docket. Therefore, this Court finds and rules that: the 341 Meeting “concluded” on November 6, 2012; the deadline for filing an objection to the Debtor’s exemptions was December 6, 2012; and the Trustee’s objection filed on December 28, 2012 was untimely.6
III. CONCLUSION AND CODA
For the reasons set forth herein, the Trustee’s Objection to the Debtor’s Homestead Exemption -will be overruled as untimely. And to the extent that one believes that, absent that infirmity, the Objection would have been sustained, one could reach the conclusion that this decision constitutes a windfall for the Debtor and presages a boon to debtors in general. The latter conclusion would be shortsighted. If the Chapter 7 trustee must announce at the 341 meeting the date and time to which it will be continued, then, unless later excused by the Trustee, the debtor and his or her counsel must appear at that continued meeting or risk court sanction. The inconvenience to the trustee of conducting such a continued meeting is not great; the continued meeting is likely to be set for a date and time that the trustee is already scheduled to conduct 341 meetings in other cases. There is, therefore, little additional burden for Chapter 7 trustees. Far greater impacts of such continuances may be visited on the debtor (who may miss an additional day’s work and pay) and debtor’s counsel (possibly unable to *152justify or collect additional compensation for an additional appearance at the continued meeting). Yet, those burdens are almost always avoidable if debtor’s counsel properly prepares — with the benefit of the supporting documentation which should already be in counsel’s file and presumably used to prepare the debtor’s Schedules and Statement of Affairs — for the Trustee’s questions which debtor’s counsel should be able to reasonably anticipate.7
In any event, all now know where they stand in cases assigned to this Court. The Chapter 7 trustee knows what he or she must do to adjourn a 341 meeting, and debtors and debtors’ counsel know that the key to reducing cost and aggravation is to properly prepare for the 341 meeting on the date originally scheduled.
An Order consistent with this Memorandum will be entered forthwith.
ORDER
For the reasons set forth in this Court’s Memorandum of Decision of even date, the “Trustee’s Objection to Debtor’s Homestead Exemption” is OVERRULED.
. All references to the “Bankruptcy Code” or to Code sections are to the United States Bankruptcy Code unless otherwise specified, see 11 U.S.C. §§ 101 et seq.; all references to "Bankruptcy Rule” or "Rule” are to the Federal Rules of Bankruptcy Procedure.
. In his papers, the Trustee has expressed doubt with respect to the accuracy of that valuation.
. In practice, this meeting is most often between the Chapter 7 trustee and the debtor, with few, if any, creditors in attendance.
. The non-debtor spouse is not a co-signatory on the Declaration of Homestead. Nevertheless, the Debtor is correct that a homestead exemption, albeit in a lesser amount, is now available to Massachusetts homeowners, regardless of whether they have filed a declaration of homestead. See MGL ch. 188, § 4 (eff. March 16, 2011).
. Electing the exemption scheme under § 522(b)(2) permits a debtor to claim the exemptions set forth in § 522(d), while electing the nonbankruptcy exemptions under § 522(b)(3) allows a debtor to claim those exemptions available under nonbankruptcy law (including relevant state exemptions). See In re Gordon, 479 B.R. 9, 12 (Bankr. D.Mass.2012), aff'd 487 B.R. 600 (1st Cir. BAP 2013). "A debtor's ability to claim the federal bankruptcy exemptions is precluded in those states that have opted out of the federal exemptions scheme. Massachusetts has not 'opted out,’ and debtors filing in Massachusetts may elect either of the two alternatives.” Id. at n. 6.
. Perhaps of solace (or not) to the Trustee, the facts of this case mirror those described in In re Goulakos, 456 B.R. 729 (Bankr.D.Mass. 2011), a well-reasoned decision in which the Trustee’s objection of the same type was overruled on the merits.
. Chapter 7 trustees also frequently advise debtors and their counsel in advance of the 341 meeting as to what documentation should be made available. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495775/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the Motion filed by Beacon Investment, LLC (“Beacon”) and United Express Wireless, Inc. (“United”) (collectively the “Creditors”) to Dismiss the Chapter 13 case of Kevin J. Cunningham (the “Debtor”) filed on February 19, 2013. The Creditors argue that the Debtor is ineligible for Chapter 13 relief as his debts exceed the debt limitations provided for under 11 U.S.C. § 109(e). The Debtor filed a Memorandum in Opposition to the Creditors’ Motion to Dismiss on March 14, 2013. The Court heard the Motion on March 28, 2013. The facts necessary to decide the Motion are not in material dispute and neither party requested an evidentiary hearing. The Court will decide the Motion on the submissions and arguments of counsel.
II. FACTUAL BACKGROUND
The Debtor filed a voluntary Chapter 13 petition on December 19, 2012 and filed Schedules of Assets and Liabilities on January 3, 2013. The Debtor’s Schedule D-Creditors Holding Secured Claims reveals that Bank of America holds first and second mortgages in the amounts of $378,562 and $185,983, respectively, on the Debtor’s residence located at 27 Hale Road, Stow, Massachusetts, which the Debtor valued at $475,000. Bank of America’s claims total $595,469, resulting in a partially secured second mortgage and an unsecured deficiency claim of $89,545. On Schedule F-Creditors Holding Unsecured Nonpriority Claims, the Debtor listed total unsecured claims of $661,125.08.
Of those claims, the Debtor listed the Creditors’ unsecured claims, each in the sum of $82,205.75, as contingent, unliqui-dated and disputed. The Debtor also listed the claims of the following creditors as contingent, unliquidated and disputed: Ford Motor Credit Company LLC ($2,371); Productive Construction Services ($215,184.06); RBS Citizens ($170); RBS Citizens Bank ($-0-); Sunbelt Rental ($3,489.64); Tessco, Inc. ($35,339); and Verizon Credit ($-0-). Excluding those claims, as well as the claims of the Creditors, results in total noncontingent, liquidated and undisputed debt of $329,704.88.
The Debtor’s Schedules contain the names and addresses of creditors as well as the dates the debts were incurred and a brief description of the nature of the claims. On February 19, 2013, the Creditors filed a Motion to Dismiss Chapter 13 *154Case pursuant to which they sought dismissal of the Debtor’s Chapter 13 case on the ground that his unsecured debt exceeds the limit set forth in 11 U.S.C. § 109(e), i.e., $360,475.
In their Motion, the Creditors referenced litigation pending in the United States District Court for the District of Maine, Beacon Invs. LLC v. Cunningham, CM No. 2:11-CV-00420-JAW (the “District Court action”) against multiple defendants, including the Debtor. The Creditors set forth the procedural history of the District Court action which initially was commenced in the United States Bankruptcy Court for the District of Maine where the Chapter 11 case of an entity called MainePCS, LLC was pending.
This Court takes judicial notice of the docket and pleadings filed in the District Court action where both parties reference selective pleadings filed in that action. See Fed.R.Evid. 201. In the District Court action, the Creditors settled with all other defendants except the Debtor against whom they asserted the following direct (i.e., non-derivative) claims arising under Delaware law:
(Count XI) — Breach of Duty of Loyalty;
(Count XII) — Breach of Fiduciary Duty;
(Count XIII) — Participation in Fraud,
Deceit, and Breach of Contract;
(Count XVII) — Participation in Breach of Fiduciary Duty;
(Count XVTII) — -Aiding and Abetting Breach of Fiduciary Duty.
The Creditors asserted that the Debtor failed to comply with discovery requests and orders, although they disclosed that his attorney was permitted to withdraw from representation due to non-payment of fees.
The Creditors filed a Motion for Default Judgment1 seeking a default judgment *155against the Debtor for repeated failures to comply with a court-imposed scheduling order, stating:
Here, Cunningham has repeatedly disregarded his litigation obligations and failed to timely and meaningfully participate in the adversarial process. Despite numerous requests, opportunities, and directives: (i) he has failed and refused to serve his Initial Disclosures in violations of the Amended Scheduling Order and the Court’s directive at the August 2 Telephonic Conference; (ii) he has failed and refused to respond to Plaintiffs’ settlement demand in violation of the Amended Scheduling Order; and (iii) he has failed and refused to respond in any timely, appropriate, or meaningful way to the Discovery Requests, all in contravention of the August 3 Order and the applicable Rules. Moreover, he has done so persistently over the course of the last 6 months, and even though he has been given many opportunities to come into compliance with his obligations and duties as a party in this case.
The Creditors initially sought a default judgment against the Debtor in the amount of $628,881.05, representing the amount of legal fees and costs that the Creditors incurred from September 11, 2010 (the date of the failure of MainePCS’s Chapter 11 Plan) through June 8, 2012 (the date of the Creditors’ settlement demand letter to the Debtor), all “as a result of his tortious, fraudulent, and other wrongful conduct as alleged in the Complaint.” Id.
The District Court conducted a hearing on August 28, 2012 at which it stated: “[t]his matter was scheduled for a Rule 56(h) Conference and Defendant Kevin Cunningham failed to appear. The Court will schedule a hearing on sanctions after the response time has elapsed on the pending motion for default and default judgment.” On September 21, 2012, the District Court entered a clerk’s default against the Debtor, see Fed.R.Civ.P. 55(a).
On October 17, 2012, the Creditors submitted to the District Court a Memorandum in support of the entry of a default judgment for sanctions against the Debtor in the amount of their attorneys’ fees and costs seeking the total amount of $719,039.49, stating:
Here, Plaintiffs, as members of Mai-nePCS, assert that their out-of-pocket legal fees and costs are their own individualized damages incidental to and caused by the post-confirmation breaches and other tortious conduct of Cunningham as alleged in further detail in the Complaint. As in Cantor, Plaintiffs have expended significant resources to address and counteract Cunningham’s egregious conduct with regard to Mai-nePCS and the only expenditures readily capable of quantification are their attorney fees and costs. Awarding Plaintiffs their attorney fees and costs would serve the underlying principles of Delaware law, which unequivocally seek to discourage acts of disloyalty of fiduciaries. Moreover, failing to award Plaintiffs these fees and costs would amount to penalizing Plaintiffs *156for taking proper action to redress the harm inflicted by Cunningham’s actions.
On October 19, 2012, the District Court conducted a hearing on the assessment of damages and ordered the Creditors to file a Supplemental Memorandum. In their Supplemental Memorandum, the Creditors addressed the following issues:
(i) under a conflict of laws analysis, does Maine or Delaware substantive law apply to Plaintiffs’ claims; (ii) notwithstanding which substantive law applies, are Maine and Delaware substantive law in alignment with respect to the duties of loyalty and care of managers and members of limited liability companies; (iii) whether the “bad faith” exception to the American Rule concerning fee shifting applies under both Maine law and federal jurisprudence; and (iv) the precise extent of Plaintiffs’ claims for damages against Cunningham, in the form of their attorney fees, which, upon reconsideration following the October 19 hearing, Plaintiffs assert total $164,411.50.
On December 5, 2012, the Debtor filed an Opposition to the Motion for Default Judgment and Request to Vacate Entry of Judgment. On December 26, 2012, a Suggestion of Bankruptcy was filed in the United States District Court for the District of Maine. On February 13, 2013, the District Court entered an “Order on Status” in which it stated that it did not enter a default judgment against the Debtor, adding “[t]he current status of the case is that a default has been entered against Mr. Cunningham but no default judgment has issued.”
Section 109(e), as in effect on the petition date, provided:
(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400 may be a debtor under chapter 13 of this title.
11 U.S.C. § 109(e).2
Based upon the foregoing record, the Court finds that the debts owed to the Creditors were unliquidated at the commencement of the Debtor’s case.
III. LEGAL PRINCIPLES AND ANALYSIS
In determining a debtor’s eligibility for a Chapter 13 case, the court does not count a debt that is unliquidated as of the petition date in calculating the debt limitations under Code § 109(e). See In re Slack, 187 F.3d 1070 (9th Cir.1999); Matter of Knight, 55 F.3d 231 (7th Cir.1995). A debt arising out of a debtor’s alleged breach of fiduciary duty that is the subject of litigation is considered liquidated only where the amount of the debt is readily ascertainable from testimony in the litigation. See In re Adams, 373 B.R. 116, 122 (10th Cir. BAP 2007). However, if the amount of the claim is subject to a future *157exercise of discretion by a trier of fact, the debt is considered unliquidated. Id.
In Elliott v. Papatones (In re Papatones), 143 F.3d 623 (1st Cir.1998), the United States Court of Appeals for the First Circuit considered whether a debtor was eligible for Chapter 13 relief where a judgment against him had not been entered on the docket prior to the filing of his bankruptcy petition and thus, in the debtor’s view, was not liquidated. The First Circuit rejected the debtor’s argument that the debt was not liquidated because the presiding justice who had entered the judgment had
repeatedly and categorically disavowed any ambivalence in announcing the $276,606.87 award and directing entry of judgment before concluding the eviden-tiary hearing: (i) initially, by adverting to “the money judgment that will be entered today ... ”; (ii) then, after relating detailed findings of fact, by announcing: “I’m going to award the following judgment ... actual damages in the amount of one hundred and seventy-six thousand six hundred and six dollars and eighty-seven cents[.]”; and (iii) following further findings, by stating: “... for punitive or exemplary damages, I’m going to award a hundred thousand dollars.” Finally, the presiding justice added: “And with no hesitation, and no doubt on my part, I’m going to impose that judgment.”
143 F.3d at 624 n. 3.
The circumstances present in the Maine District Court case are readily distinguishable from those present in Papa-lones. In the first place, the Creditors initially sought a judgment against the Debtor in excess of $700,000. The District Court did not enter the judgment initially requested by the Creditors, ordering the filing of a Supplemental Memorandum to address a number of issues, including the amount of attorneys’ fees to which the Creditors were entitled. In response, the Creditors reduced the amount of their requested judgment by almost 80%. In addition, the Debtor had filed a Motion to Vacate the Default and had filed an Opposition to the amount of the judgment. Finally, the District Court in its Order on Status expressly indicated that it had not entered a judgment, without intimating in any way how it perceived the positions of the parties.
In De Jounghe v. Mender (In re De Jounghe), 334 B.R. 760 (1st Cir. BAP 2005), the court stated:
Generally, eligibility for Chapter 13 is based upon debts as of the petition date and not upon post-petition events such as allowed claims, filed claims, or treatment of claims in a confirmed Chapter 13 plan. Therefore, Chapter 13 eligibility is usually determined by the debtor’s schedules. As long as a debtor’s schedules are completed after the exercise of due diligence and are filed in good faith, the schedules will determine a debtor’s eligibility for Chapter 13.
334 B.R. at 768 (citations omitted).
In the present case, the Creditors did not establish that the Debtor’s noncontin-gent, liquidated unsecured debts exceeded $360,475. The Court rejects the Creditors’ argument that their “damages case was fully submitted to the District Court prior to the commencement of this case, and the District Court was poised and ready to issue a judgment against Debtor in the Civil Action following the damages hearing” and that “this is evidence of the liquidated nature of the Debtors’ [sic] debts to creditors.” The liability of the Debtor to the Creditors is not readily ascertainable from either the schedules or a review of the record in the District Court action. Moreover, the Creditors’ damages were *158subject to further action by the District Judge.
IY. CONCLUSION
The liability of the Debtor to the Creditors was not liquidated as of the petition date and accordingly, the Court shall enter an order denying the Creditors’ Motion to Dismiss.
. In their Motion for a Default Judgment, the Creditors stated:
As the Court is aware, this litigation stems from the failed reorganization of Mai-nePCS LLC ("MainePCS”), which filed a Chapter 11 case with the Bankruptcy Court on December 10, 2009. On August 27, 2010, the Bankruptcy Court confirmed Mai-nePCS’s Chapter 11 Plan, but that Plan essentially collapsed two weeks later when MainePCS failed to make certain so-called Effective Date payments (totaling approximately $1,000,000) to creditors under the Plan. MainePCS did not make those payments because Cunningham’s former business, Maxton Technology, Inc. (“Maxton”), through Cunningham, failed to meet its funding obligations under the Plan.
As a consequence of that failure and other allegedly tortious post-confirmation conduct, on February 15, 2011, Plaintiffs commenced an Adversary Proceeding in the Bankruptcy Court against Maxton, Cunningham, and MainePCS. In its initial complaint, Plaintiffs alleged essentially state-law breach of contract and fiduciary duty claims against those three Defendants.
On May 10, 2011, Plaintiffs filed the now-operative Complaint in this action. In that Complaint, Plaintiffs asserted 21 direct and 14 derivative claims against all Defendants on behalf of themselves individually and for the benefit of MainePCS’s estate.
On November 3, 2011, this Court issued its Order withdrawing the reference of the Adversary Proceeding. A few weeks later, Maxton [Technology, Inc.] commenced its own Chapter 7 case in the United States Bankruptcy Court for the District of Massachusetts.
Magistrate Judge Kravchuk held a telephonic conference on August 2, 2012 (the "August 2 Telephonic Conference”). To the surprise of Plaintiffs' counsel, as he heard nothing from Cunningham literally until minutes before the scheduled conference, Cunningham personally participated in the August 2 Telephonic Conference.
During that conference, Cunningham "indicated that he was unaware that [Plaintiffs’] discovery initiatives [had] not been responded to.” See August 3 Order, p 1. Consequently, the Court granted Cunningham until August 10, 2012 to "fully respond” to Plaintiffs’ Discovery Requests. *155Id. at 2. During the August 2 Telephonic Conference, Plaintiffs' counsel requested that Cunningham serve his Initial Disclosures by that date as well.
Pursuant to the August 3 Order, the parties (jointly or independently) were also required to file a status report by August 15, 2012 to inform the Court of the status of Cunningham’s compliance with his obligations under the August 3 Order. The August 3 Order also provides that "[i]f the status report does not report that progress has been made, plaintiffs are granted leave to file a motion for default for failure to respond to discovery initiatives.” Id. (emphasis added).
. On April 1, 2013, the dollar amounts of the debt limitations under § 109(e) were adjusted to reflect the change in the Consumer Price Index. The amounts were adjusted to $383,175 with respect to unsecured debts and $1,149,525 with respect to secured debts. See 11 U.S.C. § 104(a). The adjusted debt limitations do not apply in this case which was commenced prior to April 1, 2013. See 11 U.S.C. § 104(c). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495776/ | MEMORANDUM OF DECISION
SEAN EL LANE, Bankruptcy Judge.
Before the Court is the Debtors’ motion under Sections 363, 503(b), and 105(a) of the Bankruptcy Code for approval of an agreement to merge the Debtors and U.S. Airways Group, Inc. (“US Airways”), and related relief. (ECF Doc. No. 6800) (the “Motion”). The merger would create the world’s largest airline and has the wide support of stakeholders in this case, as demonstrated by the statements filed in support by the Official Committee of Unsecured Creditors (the “UCC”), an Ad Hoc Committee of AMR Corporation Creditors, and the unions for the pilots at both American Airlines and U.S. Airways. In addition to combining the operations of the two airlines, the merger proposes certain employee arrangements, including a proposed severance payment of $20 million to Thomas Horton, the Chief Executive Officer of Debtor AMR Corporation (“AMR”).
The U.S. Trustee (“UST”) objects to the Motion. While raising no objection to the merger transaction itself, the UST argues that the proposed employee arrangements do not meet the requirements of Section 503(c) of the Bankruptcy Code, which places restrictions upon compensation paid to insiders during a bankruptcy case. The Debtors contend that Section 503(c) does not apply because these employee arrangements are conditioned on the closing of the merger and will be paid by the new enterprise created by the merger (“Neweo”), not the Debtors. For the reasons stated below, however, the Court finds that Section 503(c) prohibits the authorization of the $20 million severance payment to Mr. Horton.
BACKGROUND
The merger is an agreement among AMR, AMR Merger Sub, Inc., and U.S. Airways. Under the terms of the Agreement and Plan of Merger, dated February 13, 2013 (the “Merger Agreement”), AMR Merger Sub, Inc., a wholly owned subsidiary of AMR that was formed to effectuate the merger, will be merged into U.S. Airways. US Airways will continue to survive as a direct, wholly owned subsidiary of AMR. Upon the effective date of the merger, AMR will be named “American Airlines Group Inc.” and the combined company will operate under the “American Airlines” name.
As consideration for the merger, the shareholders of U.S. Airways will receive 28% of the diluted equity of the merged enterprise. The remaining 72% will be distributed to the Debtors’ stakeholders pursuant to a plan of reorganization. The value of the aggregate diluted equity of the parent of the merged airlines to be distributed to the stakeholders of the Debtors as a result of the merger is approximately $8 billion, based upon the implied equity value of U.S. Airways’ stock as of February 13, 2013.
The merger is subject to and effective upon the confirmation and consummation of the Debtors’ chapter 11 plan of reorga*161nization.1 Specifically, the merger will be implemented by the plan and the value achieved by the merger will be distributed through the plan. The closing of the merger and the effective date of the plan will occur at the same time. Neither a disclosure statement nor a plan of reorganization has yet been filed, and the Motion explicitly states that all parties in interest reserve all of their rights with respect to such plan. While the consummation of the merger remains subject to the Debtors’ plan being confirmed and consummated and satisfaction of the conditions in the Merger Agreement, approval of the Merger Agreement by the Court will bind the Debtors to its terms retroactive to its execution date of February 13, 2013.
The merger is the culmination of many months of negotiations between the Debtors, the UCC, U.S. Airways and numerous other constituencies. It has the overwhelming support of the UCC, the Consenting Creditors, the Ad Hoc Committee and the Debtors’ labor unions.
Employee Arrangements
In connection with the merger, the Motion seeks approval of certain employee compensation and benefit arrangements— referred to as the “Employee Arrangements” — contained in Section 4.10 of the Merger Agreement and Section 4.1(o) of the American Disclosure Letter.2 These fall into three categories: (i) Ordinary Course Changes; (ii) Employee Protection Arrangements; and (iii) the CEO severance payment.
The first category of Ordinary Course Changes provides for base wage increases for non-union employees as set forth in Section 4.1(o) of the American Disclosure Letter.3 Eligible employees include: (i) AA agents, reservation and planners, AA support staff, and Eagle support staff; (ii) Eagle agents; (iii) management levels 9 through 11 (Vice Presidents, Senior/Executive Vice Presidents, and President); and (iv) front line management at AA and AMR Eagle. The Debtors state that all of these changes are being made in the ordinary course of business. They will become effective immediately and will be paid by the Debtors prior to the closing of the merger.
The second category of Employee Protection Arrangements is also set forth in Section 4.1(o) of the American Disclosure Letter.4 These include Short-Term Incentive Plans, 2013 Long-Term Incentive Plans, Alignment Awards, Severance Arrangements, a Key Employee Retention Program, and a Level 5/6 Long-Term Incentive Program. While the Motion states that these Employee Protection Arrangements will be instituted prior to the consummation of the merger (Motion ¶ 76), *162the Debtors have clarified that they are subject to and will only become effective upon consummation of the merger, and thus they will be paid by Newco and not the Debtors. See Hr’g Tr. 13:5-11. These Employee Protection Arrangements are designed to achieve pay and benefit parity between the Debtors’ employees and those of U.S. Airways.
The details for the individual programs within this second category vary. The Short-Term Incentive Plans, for example, include a profit sharing arrangement in 2013 for those employees that are level 5 and below, which covers analysts, supervisors, and managers. In lieu of profit sharing, these employees may receive an increase in base wages or similar compensation. Also included is a short-term incentive plan effective for 2013 for managers at level 6 and above (the “STI”), which covers senior managers or directors, managing directors, vice presidents, senior/executive vice president, and president. Eighty percent of the STI is based on a sliding scale of performance objectives linked to 2013 pre-tax profit margins. The remaining twenty percent of the STI is not specifically outlined, but is instead based on operational performance metrics that are to be determined by AMR.
Another Employee Protection Arrangement, the 2013 Equity LTIP Award, is a long-term incentive program award (“LTIP”) that will be made to approximately 60% of level 6 managers (senior managers or directors) and 100% of level 7 managers and above in amounts that are equal to the dollar amounts to be awarded to similarly situated U.S. Airways managers. The 2013 Equity LTIP will be in the form of stock-settled restricted stock units, but may be in the form of cash awards under certain circumstances. The vesting schedule is in accordance with that of similarly situated U.S. Airways managers, with the first vesting date in April 2014. Similar to the LTIP, the Alignment Award is a long-term incentive program award that will be available to approximately 60% of level 6 managers and 100% of level 7 managers and above. The amount of the award will be calculated based on a multiple of the prepetition target award value applicable to the recipient’s position. One third of the award will vest upon each of the closing of the merger, 12 months after closing, and 24 months after closing. The alignment awards for 2013 will be in the form of stock-settled restricted stock units, but may be in the form of cash awards under certain circumstances.
The third category of Employee Arrangements is the severance payment to Mr. Horton. The payment is provided for in a letter agreement attached as Exhibit G to the Merger Agreement (the “American CEO Letter Agreement”). The American CEO Letter Agreement provides, among other things, that upon closing of the merger, the employment of Mr. Horton as AMR’s Chief Executive Officer will terminate and he will be appointed as the Chairman of the Board of Directors for Newco. It further states that, at the closing of the merger, Mr. Horton will be paid “severance compensation” of $19,875,000, which will be paid 50% in cash and 50% in Newco common stock. See Merger Agreement, Exh. G. The proposed severance of $20 million is “in recognition of Mr. Horton’s effort in leading the Debtors’ restructuring and his role in enhancing the value of the Debtors and overseeing the evaluation and assessment of the potential strategic alternatives that culminated in the [mjerger, at the [cjlosing, [and] subject to the execution of a standard release by Mr. Horton against AMR and its [sjubsidiar-ies.” See Motion ¶ 89. The terms of the American CEO Letter Agreement are conditioned on closing of the merger, and it specifically states that “[ijf the [cjlosing *163does not occur, this Agreement shall be null and void ab initio and of no force and effect.” See Merger Agreement, Exh. G.
Relevant Procedural History
The Debtors filed this Motion on February 22, 2013. On March 15, 2013, the UST filed a blunderbuss objection to all the proposed Employment Arrangements. With their reply brief filed March 22, 2013, the Debtors submitted three declarations in support of the Motion. The first declaration from Beverly K. Goulet5 provides a general overview of the merger and its projected benefits, as well as background on the process leading to the formulation of the merger. The second declaration from Denise Lynn6 explains the negotiation and formulation of the Employee Arrangements. The third declaration of Douglas J. Friske7 addresses the formulation of the Employee Arrangements.
In a sur-reply filed on the evening of March 25, 2013, the UST dropped its objections to the first category of Ordinary Course Changes and to all but four of the Employee Protection Arrangements.
A hearing on the Motion was held on March 27, 2013. At the hearing, counsel to the Debtors and the UCC described in detail the terms of the Employee Protection Arrangements. In addition to the testimony provided in their three declarations, the Debtors’ counsel confirmed by proffer that the purpose of all these Employee Protection Arrangements is to move towards compensation parity between employees of the Debtors and those of U.S. Airways. See Hr’g Tr. 90:15-17, 117:1-10, March 27, 2013.8 On that basis, the UST withdrew its objections to all of the Employee Protection Arrangements subject to the Court’s determination that they did not violate Section 503(c) of the Bankruptcy Code. For the reasons stated at the hearing, the Court found these Employee Protection Arrangements to be permissible because there is a legitimate business reason for seeking similar pay arrangements among employees at Newco that perform similar tasks. See Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070-71 (2d Cir.1983); Comm. of Asbestos-Related Litigants v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 616 (Bankr.S.D.N.Y.1986); see also Declaration of Denise Lynn ¶ 6 (“Additionally, both senior management teams of American and U.S. Airways, as well as the UCC and its retained professionals, have agreed that, to the extent possible, it is essential to treat managers of the Debtors fairly and with parallel compensation structures relative to managers of U.S. Airways in order to ensure a smooth transition. Indeed, in my opinion, for similarly situated employees of the two carriers to be treated differently would be an untenable circumstance and value destructive.”).
*164Given the developments at the hearing, the sole remaining UST objection was to the CEO severance payment.9 In light of that fact, and based on the evidence before the Court, the Court at the hearing approved the merger in all respects except for Mr. Horton’s severance and -informed the parties that the Court would issue this decision to address that question.
DISCUSSION
Applicable Legal Standard
Debtors seek approval of all aspects of the merger under Section 363, which provides, in relevant part, that “[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). Although Section 363 of the Bankruptcy Code does not set forth a standard for determining when it is appropriate for a court to authorize the sale, disposition, or other use of a debtor’s assets, courts in the Second Circuit and elsewhere have required that it be based upon the sound business judgment of the debtor. See Comm. of Unsecured Creditors of LTV Aerospace & Defense Co. v. LTV Corp. (In re Chateaugay Corp.), 973 F.2d 141 (2d Cir.1992) (holding that a judge reviewing a Section 363(b) application must find from the evidence presented a good business reason to grant such application); Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir.1983) (same); In re Chrysler LLC, 405 B.R. 84 (Bankr.S.D.N.Y.2009), aff'd Ind. State Police Pension Trust v. Chrysler LLC (In re Chrysler LLC), 576 F.3d 108 (2d Cir.2009) (same); In re Gen. Motors Corp., 407 B.R. 463 (Bankr.S.D.N.Y.2009) (same).
The present dispute concerns the applicability of Section 503 to the proposed severance payment. Generally, Section 503 has “two overriding policy objectives: (i) to preserve the value of the estate for *165the benefit of its creditors and (ii) to prevent the unjust enrichment of the estate at the expense of its creditors.” In re Journal Register Co., 407 B.R. 520, 535 (Bankr.S.D.N.Y.2009). Section 503(c) curtails payment of retention incentives or severance to insiders of a debtor. Id. at 536. The section states:
Notwithstanding subsection (b), there shall neither be allowed, nor paid—
(1)a transfer made to, or an obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor’s business, absent a finding by the court based on evidence in the record that—
(A) the transfer or obligation is essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation;
(B) the services provided by the person are essential to the survival of the business; and
(C) either—
(i) the amount of the transfer made to, or obligation incurred for the benefit of, the person is not greater than an amount equal to 10 times the amount of the mean transfer or obligation of a similar kind given to nonmanagement employees for any purpose during the calendar year in which the transfer is made or the obligation is incurred; or
(ii) if no such similar transfers were made to, or obligations were incurred for the benefit of, such nonmanagement employees during such calendar year, the amount of the transfer or obligation is not greater than an amount equal to 25 percent of the amount of any similar transfer or obligation made to or incurred for the benefit of such insider for any purpose during the calendar year before the year in which such transfer is made or obligation is incurred;
(2) a severance payment to an insider of the debtor, unless—
(A) the payment is part of a program that is generally applicable to all full-time employees; and
(B) the amount of the payment is not greater than 10 times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made; or
(3) other transfers or obligations that are outside the ordinary course of business and not justified by the facts and circumstances of the case, including transfers made to, or obligations incurred for the benefit of, officers, managers, or consultants hired after the date of the filing of the petition.
Section 503(c) was added to the Bankruptcy Code in 2005 as part of the BAPCPA amendments to “eradicate the notion that executives were entitled to bonuses simply for staying with the [cjompa-ny through the bankruptcy process.” In re Velo Holdings, Inc., 472 B.R. 201, 209 (Bankr.S.D.N.Y.2012) (citing In re Global Home Prods., LLC, 369 B.R. 778, 783-84 (Bankr.D.Del.2007)). When Senator Edward Kennedy proposed the amendment, he expressed. concern over the “glaring abuses of the. bankruptcy system by the executives of giant companies like Enron Corp. and WorldCom, Inc. and Polaroid Corporation, who lined their own pockets, but left thousands of employees and retirees out in the cold.” In re Dana Corp., 358 B.R. 567, 575 (Bankr.S.D.N.Y.2006) (citing Statement of Senator Edward Kennedy on the Bankruptcy Bill (March 1, *1662005)). The effect of adding the section was to put in place “a set of challenging standards” and “high hurdles” for debtors to overcome before such payments could be paid. Global Home Prods., 369 B.R. at 784-85.
Notably, prior to the enactment of Section 503(c), a debtor needed only to satisfy the business judgment standard under Section 363 to authorize retention or severance payments to insiders. See Dana, 358 B.R. at 576 (citing In re Nobex Corp., 2006 WL 4063024 (Bankr.D.Del. Jan. 19, 2006) (noting courts previously authorized transfers outside the ordinary course of business based on the business judgment of the debtor). Courts now apply the business judgment standard to motions seeking to pay employees pursuant to Section 503(c)(3) for payments that do not concern retention or severance payments to insiders. Dana Corp., 358 B.R. at 576. But “to the extent a proposed transfer falls within sections 503(c)(1) (citation omitted) or (c)(2) (citation omitted), then the business judgment rule does not apply, irrespective of whether a sound business purpose may actually exist.” In re Dana Corp., 351 B.R. 96, 101 (Bankr.S.D.N.Y. 2006)) (“Dana /”). Given the history and intent of Section 503(c), courts disfavor attempts to bypass the requirements of section 503(c). Velo Holdings, 472 B.R. at 209.
It should be noted, however, that “Section 503(c) was not intended to foreclose a Chapter 11 debtor from reasonably compensating employees, including ‘insiders/ for their contribution to the debtors’ reorganization.” Dana Corp., 358 B.R. at 575 (emphasis in original) (citations omitted). “Accordingly, [Sjection 503(c)(3) gives the court discretion as to bonus and incentive plans, which are not primarily motivated by retention or in the nature of severance.” Id. at 576.
As used in Section 503, the term “insider” covers directors, officers, general partners, and persons in control of a corporate debtor. See 11 U.S.C. § 101(31); In re Borders Group, Inc., 453 B.R. 459, 467-68 (Bankr.S.D.N.Y.2011). Courts evaluate who is an insider on a case-by-case basis from the totality of the circumstances, including whether the individual has “at least a controlling interest in the debtor or ... exercisefs] sufficient authority over the debtor so as to qualifiably dictate corporate policy and disposition of corporate assets.” In re Velo Holdings Inc., 472 B.R. 201, 208 (Bankr.S.D.N.Y. 2012) (quoting In re Babcock Dairy Co., 70 B.R. 657, 661 (Bankr.N.D.Ohio 1986)).
The Proposed Severance to Mr. Horton
The UST objects to Mr. Horton’s severance payment as violating Section 503(c)(2), which specifically covers any “severance payment to an insider of the debtor....” If covered by Section 503(c)(2), a severance payment is permissible only if it satisfies the two pronged test of Section 503(c)(2)(A) and (B): (i) the payment is part of a program that is generally applicable to all full-time employees; (ii) the amount of the payment is not greater than 10 times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made.
There is no dispute that Mr. Horton qualifies as an insider. There also can be little doubt that the proposed payment to Mr. Horton is “severance.” It is identified as such in both the Debtors’ Motion and in the American CEO Letter Agreement. The American CEO Letter Agreement specifically states that Mr. Horton “shall be paid at the [cjlosing severance compensation of $19,875,000.” See Merger Agree*167ment, Exh. G.10 Moreover, the Debtors do not argue that the severance payment meets the requirements of Section 503(c). Rather, the Debtors contend that Mr. Horton’s severance payment is not subject to the requirements of that section because the payment will be paid by Newco and not the Debtors’ estate. Given that Section 503 is titled “Allowance of Administrative Expenses,” the Debtors argue that it cannot apply to funds being paid after the effective date of the plan because those funds will no longer be part of the Debtors’ estate, but instead will be funds of Newco. In support of their position, the Debtors rely on two cases from this court: In re Journal Register Co., 407 B.R. 520 (Bankr.S.D.N.Y.2009) and In re Dana Corp., 358 B.R. 567 (Bankr.S.D.N.Y.2006).
It is true that the court in Journal Register found that post-emergence incentive payments need not comply with Section 503(c). But the Debtors ignore the context for that conclusion. The court in Journal Register was presented with a proposed plan of reorganization, with the post-emergence incentive payments to be made pursuant to the plan. As the court noted, “[b]y including the [i]ncentive [p]lan in their [p]lan of [reorganization, the [djebtors have subjected the [incentive [p]lan to the heightened disclosure, notice, and hearing requirements of the [p]lan confirmation process, and they have given the affected parties the opportunity to vote on it.” Journal Register, 407 B.R. at 536-37. As the payments were to be made under the confirmation order itself, the court concluded that they did not fall under Section 503(c) which covers only expenses to be paid as an administrative expense of the case. Id. at 535-36. As the court explained, “a confirmed plan takes on the attributes of a contract,” (citing Charter Asset Corp. v. Victory Markets, Inc. (In re Victory Markets, Inc.), 221 B.R. 298, 303 (2d Cir. BAP 1998)) “by which the estate ceases to exist, [and] ‘a reorganized debtor’ comes into being....” Id. at 536. (citing In re Cottonwood Canyon Land Co., 146 B.R. 992 (Bankr.D.Colo.1992); Blumenthal v. Clark (In re Hiller), 143 B.R. 263 (Bankr.D.Colo.1992)).
Rather than being governed by Section 503, the court in Journal Register observed that “there is a subsection of [Section] 1129 [governing the confirmation of a plan] that is directly applicable” to such payments, with Section 1129(a)(4) setting forth requirements for “any payment made or to be made by the proponent, by the debtors ... for services or for costs and expenses in or in connection with the case....” Id. at 537. By presenting their request as part of a proposed plan of confirmation, the debtors in Journal Register took the proposed incentive payments outside of the coverage of Section 503 and placed them within the confines of Section 1129(a)(4).
The result in Journal Register is consistent with the decision in Dana. In Dana, the debtors proposed a $3 million post-emergence bonus to their CEO through an employee incentive plan. They made a nearly identical argument as the Debtors in this case, stating that because the proposed payment would be made after emergence from Chapter 11, the payment was not subject to Section 503(c). In declining to approve the post-emergence payment, *168the Dana court noted that “to the extent that the $3 million payment is subject to further review and must be passed upon as a provision in a disclosure statement and plan of reorganization, the [c]ourt cannot, at this early point in the cases, guarantee that the payment will be ultimately approved.” Dana Corp., 358 B.R. at 579.
In contrast to Journal Register and Dana, the Debtors here seek the Court’s approval of this severance payment now, notwithstanding the fact that the Debtors’ expected effective date of the merger (and plan) is some six months away. See Hr’g Tr. 26:3-7. Indeed, a plan and disclosure statement have yet to be filed. And there is a real consequence to such approval today: the UCC conceded at the hearing, and the Debtors did not contest, that approval now would resolve this issue for purposes of this bankruptcy case and preclude any challenge to the merits of the severance payment during the confirmation hearing on a plan of reorganization. Hr’g Tr. 63:24-25; 64:1-2.
Moreover, during the hearing on the Motion, the Debtors conceded that Mr. Horton’s payment — as part of the larger employee payments being sought under the merger — was essentially an expense necessary to preserve and realize value for the Debtors’ estates.11 See Journal Register, 407 B.R. at 535 (noting that Section 503 is designed to “preserve the value of the estate for the benefit of its creditors”) (citing Trustees of Amalgamated Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 101 (2d Cir.1986)). The Debtors hang their hat, however, on the fact that the payment will be paid by Newco. Of course, the Debtors are correct in noting that the payment technically will not come from the Debtors’ estate. But that is somewhat of a legal fiction. It is clear that the severance payment relates to Mr. Horton’s employment at AMR, where he currently serves as CEO, and not from Newco, which does not yet exist and where Mr. Horton will take on a new position only after the merger is finalized and the proposed severance is paid.12 As a practical matter, moreover, the proposed severance would be paid without any action from Newco, an entity that will consist of 72% of the property of the reorganized Debtors.13 *169In any event, the Debtors’ argument fails because the statute speaks in terms of “allowance” of a payment. If the Court’s approval today means anything — and all parties seem to agree that it does — the request for approval fits comfortably within the notion of a severance that would be “allowed” as contemplated by the first sentence of Section 503(c).14
During the hearing, the Debtors offered to amend the Merger Agreement to require that the board of Newco vote on the severance payment before such a payment could be made. But that suggestion only highlights the fact that, once created, Newco can make a severance payment to Mr. Horton without any approval from this Court. Although the Court is constrained by Section 503’s requirements in considering the proposed severance now, Newco will not have such restrictions and instead will answer only to its shareholders. It is unclear what purpose would be served by the Court’s approval of the severance if Newco could later veto the severance through a vote of its board. Indeed, under this proposed amendment, there is little reason for the Court to be involved at all.
Seeking to avoid the strictures of Section 503, the Debtors contend that Section 363 provides a basis for immediate approval of this severance payment. But that scenario is exactly what Congress sought to prevent by enacting Section 503(c) of the Bankruptcy Code. As noted above, pri- or to the enactment of Section 503(c), compensation payments outside the ordinary course were governed by the business judgment standard of Section 363(b). Dana, 358 B.R. at 576. Section 503(c) was specifically enacted to change that practice by establishing a higher standard to justify retention or severance payments to insiders during the pendency of bankruptcy cases. Velo Holdings, 472 B.R. at 209. Given this clear legislative intent, the Debtors’ reliance on the business judgment standard to justify approval of this severance payment must fail. See id. at 209 (courts disfavor attempts to bypass the requirements of section 503(c) given its legislative history) (citing Dana I, 351 B.R. at 102 (Bankr.S.D.N.Y.2006)); id. at 209 (noting that Section 503 was added to “eradicate the notion that executives were entitled to bonuses simply for staying with the [cjompany through the bankruptcy process”) (citing In re Global Home Prods., LLC, 369 B.R. 778, 783-84 (Bankr.D.Del.2007)).
Finally, the Debtors argue that the payments they propose for Horton are customary in situations analogous to the one *170now before the Court, citing the payments made pursuant to mergers of United and Continental Airlines and of • Delta and Northwest. This argument misses the point. Both of those mergers occurred outside of the Chapter 11 context where parties are not subject to the requirements of the Bankruptcy Code.15 Although these two examples may inform the Court as to market salaries for a severance payment in major airline mergers, they do nothing in the way of satisfying Section 503(c)’s requirements.
CONCLUSION
For the reasons stated above, the Court grants the Debtors’ Motion in all respects except for denying the proposed severance to Mr. Horton.16
.The Debtors have entered into a Support and Settlement Agreement, dated February 13, 2013 (the "Support Agreement”), with certain members of the Ad Hoc Committee and other large creditors holding approximately $1.2 billion of prepetition unsecured claims against the Debtors (the “Consenting Creditors”). The parties to the Support Agreement have agreed to support a plan of reorganization that implements the merger, incorporates a settlement of certain issues and guarantees a minimum distribution of 3.5% of the common equity of the parent of the merged airlines to the holders of AMR’s existing equity interests, with the potential to receive additional shares. Approval of the Support Agreement is not currently before the Court.
. Unless otherwise specified, capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Motion or the American Disclosure Letter.
. AMR’s Chief Executive Officer is specifically excluded from these Employee Arrangements.
. AMR's Chief Executive Officer is also specifically excluded from these Employee Arrangements.
. Ms. Goulet currently serves as the Senior Vice President and Chief Integration Officer of American Airlines, Inc.
. Ms. Lynn currently serves as the Senior Vice President-People of American Airlines, Inc.
. Mr. Friske is the Global Line of Business Leader for Executive Compensation for Towers Watson Pennsylvania Inc., a professional services firm engaged by the Debtors as an executive compensation consultant.
. In fact, the proposed changes to compensation will not achieve such pay parity now, although it would constitute a significant step in that direction. See Hr'g Tr. 91:1-11, March 27, 2013 (As noted by Mr. Butler, counsel to the UCC, "[t]hey actually don’t bring them to exact parity with Airways.... So they bring them up towards parity but it’s not actual parity. It’s something less than actual parity.”).
. Several pro se individuals filed letters objecting to the Motion: Scott Cmajdalka (ECF Doc. No. 6852), HG Plog (ECF Doc. Nos. 6947, 7159), John L. Cheek (ECF Doc. No. 7057), Bahir Browsh (ECF Doc. No. 7056), Robert Steven Mawhinney (ECF Doc. No. 7052), Yaniris Diaz (ECF Doc. No. 7051), Robert Mueller (ECF Doc. No. 7050), Willie Ray Williams (ECF Doc. Nos. 7055, 7117, 7257), Joan Hoffman (ECF Doc. No. 7049), Leo Brandon Farnsworth (ECF Doc. No. 7076), Glen E. Simmerly (ECF Doc. No. 7126), Wayne Tremble (ECF Doc. No. 7128), a group of American Airlines Agents (ECF Doc. No. 7161), Dan Lee Davis (ECF Doc. No. 7158), Lawrence G. D'Oench (ECF Doc. No. 7254), Gail Allen (ECF Doc. No. 7255), Roise Kennedy (ECF Doc. No. 6849), Joyce A. Mueller (ECF Doc. No. 6853), Patricia A. Landrum (ECF Doc. No. 6856), Clyde W. Loveless (ECF Doc. No. 7127) and Richard Kijewski (ECF Doc. No. 7260). Edward E. Anderson filed an objection through counsel (ECF Doc. No. 7132). Additionally, Robert Pagoni appeared at the hearing pro se to voice his objection to the Motion. Many of these filings raise objections to the proposed severance payment for Mr. Horton. See, e.g., ECF Doc. Nos. 6852, 7056, 7049, 7128, 7161, 7254 and 7260. Other than the objections to the proposed severance, these filings raised a variety of objections to the merger that are unrelated to the merger itself and that do not provide a basis for denial of the merger. See, e.g., ECF Doc. No. 7255 (requesting exercise of stock options), ECF Doc. Nos. 6947, 7159 (plan objections), ECF Doc. No. 7132 (requesting a position on UCC or, in the alternative, that the stay be lifted). Accordingly, the Court overruled these objections at the hearing. See Hr’gTr. 151:6-13.
Three other parties, specifically Citibank N.A. (ECF Doc. No. 7120), U.S. Bank National Association (ECF Doc. No. 7121) and U.S. Bank Trust National Association (ECF Doc. Nos. 7133, 7137), filed reservations of rights in connection with the Motion. The Debtors have indicated that all parties’ rights are reserved with respect to any support agreement, disclosure statement, or plan filed by the Debtors.
. At the hearing, the UCC stated that the payment to Mr. Horton is an aggregate payment that included not only severance, but also other types of remuneration. But there is no evidence on that issue from the Debtors, and there is also no dispute that the payment includes severance. Hr'g Tr. 47:6-25 March 27, 2013. Thus, the Court does not believe it is necessary or appropriate to look behind the Debtors’ characterization of this payment as severance for purposes of this decision.
. See Hr'g Tr. 35:20-25; 36: 1-6 (Mr. Ka-rotkin: "I will tell you from the standpoint of the [DJebtors' board of directors, they were deeply concerned, as we indicated in our pleadings that, about affecting this merger and realizing the value and how critical it was to have these employees focused on them, and that they, they were not under the circumstances in a position to agree to that transaction, and put at risk the ability to achieve the value that everybody believes can be achieved. And that is why these employee arrangements are in the agreement, that is why they are a condition to moving forward with the agreement....").
. The Court recognizes the unique nature of this merger serving as a basis for the plan and the proposed severance. But there is almost always a “newco" once a Chapter 11 debtor emerges from bankruptcy. One can think of other circumstances where a severance payment might be structured to be authorized— but not paid — during a bankruptcy case, which counsels strongly against the creation of an exception to Section 503(c) here.
. Although not cited by any of the parties, the Court did find one case where a court approved retention bonuses to a debtor's insiders during the course of a Chapter 11 case. See In re Airway Industries, Inc., 354 B.R. 82 (Bankr.W.D.Pa.2006). But that case is easily distinguishable. In Airway Industries, the funding for the insider bonuses came from an outside third-party, and it was uncontested that the third-party would have no claim against the debtor’s estate on account of the bonuses. The payments to insiders here will come from Newco, which is comprised of 72% of the reorganized Debtors' assets. Moreover, in Airway Industries, the third-party providing funding for the bonuses had entered into the bonus agreements before the *169bankruptcy was filed and before the 2005 BAPCPA changes went into effect. As the court in that case recognized, “the timing of the sale, the bankruptcy filing, and the changes in the Bankruptcy Code created a unique situation likely never to occur again.” Id. at 86.
. The terms "allow” and "allowed” are not defined in Section 503 or in Bankruptcy Code definitions found in Section 101 of the Bankruptcy Code. But Merriam-Webster defines the term "allow” as a transitive verb in five different ways, with the most applicable definition being to "permit.” See Merriam-Webster.com. 2013. http://www.merriam-webster.com (April 13, 2013). Thus, the Court is persuaded that the circumstances here are covered by the plain language of Section 503. See Anderson v. Conboy, 156 F.3d 167, 178 (2d Cir.1998) (judicial inquiry is complete where the words of the statute are unambiguous). But even to the extent that the language of the statute is unclear in these circumstances, the clear intent of Congress supports the Court’s conclusion. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) ("The plain meaning of legislation should be conclusive, except in the 'rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’ ”); accord Anderson, 156 F.3d at 178.
. See Hr’g Tr. 68:20-23 (Mr. Baker, counsel to U.S. Airways: "I too have never seen this set of facts occur in this way, i.e., the merger of two public companies to be effectuated through confirmation of a [C]hapter 11 plan.”).
. To the extent that the Debtors subsequently invoke Section 1129(a)(4) as a basis to justify a post-emergence payment to Mr. Horton, the Court today does not have a view on that issue. It is premature to consider such a request without a proposed plan of reorganization and an appropriate record. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495777/ | MEMORANDUM
ERIC L. FRANK, Chief Judge.
I.
In this chapter 13 case, Debtor Stephanie Umstead (“the Debtor”) has filed objections to three (3) unsecured proofs of claim. All three (3) claims are for debts arising from open-end consumer credit accounts, i.e., credit card debt. The Debtor raises the same objection for all three (3) claims. She disputes whether the claimant is the owner of the credit card account at issue and whether each claimant is a “creditor.”
*189At the hearing on the objections, the Debtor presented no evidence disputing the validity or amount of the underlying debts. Nor did the Debtor present any evidence relating to the identity of the proper holder of each claim. Her position is that none of the three (3) proofs of claim is self-sustaining and therefore, each proof of claim should be disallowed.
These contested matters present a common question that arises regularly in proof of claim litigation in consumer bankruptcy cases: what is the minimum amount of information that must accompany a proof of claim filed by an assignee of a debt arising from an open-end credit card account for the claim to be treated as prima facie valid and therefore, allowable over an objection that is not supported by any evidence?
Fed. R. Bankr.P. 3001 addresses this issue and there is much case law on the matter. In fact, I discussed the subject in a lengthy opinion less than three (3) years ago in In re O’Brien, 440 B.R. 654, 665 (Bankr.E.D.Pa.2010).
Recently however, Rule 3001(c) was amended and has materially modified the filing obligations of credit card claimants. This case presents my first opportunity to examine and apply the new amendment since O’Brien. As explained below, in comparison to the prior version of the Rule 3001, as I construed it in O’Brien, I perceive current Rule 3001 as increasing the obligations of credit card claimants in some respects and easing their obligations in other respects.
Based on my review of all three (3) of the Debtor’s objections under the current rule, I find that all three (3) claims are prima facie valid. Because the Debtor presented no evidence to contest the validity or amount of the claims, her objections will be overruled and all three (3) claims will be allowed as filed.
II.
The Debtor commenced this chapter 13 bankruptcy case on June 28, 2012. On July 19, 2012, the Clerk issued a notice advising creditors that December 26, 2012 was the deadline for filing proofs of claim (except for governmental units). Before I analyze the Debtor’s objections, I will describe each claim at issue — Claim Nos. 12, 13 & 14 — all of which were timely filed.
A. Claim No. 12
On October 10, 2012, an attorney acting on behalf of an entity named Keystone Recovery Partners, Series A (“Keystone”) filed a proof of claim in the amount of $680.45. On its face, the proof of claim stated that the basis for the claim was “creditcard/other.” The proof of claim form was accompanied by an account summary which included the following information: 1
Balance at Time of Filing: Principal Balance: Interest $680.45 $403.71 $37.74
Fees, Expenses, or Other Charges Last Payment Date: Last Payment Amount: $239.00 February 9, 2011 $408.01
Last Purchase Date:
Last Purchase Amount:
Merchant: US AIRWAYS
*190Issuer: Barclays Bank
Assignor: Barclays Bank
Account Number: XXXXXXXXXXXX4195
Open Date: 12/26/2008
On January 3, 2013, a notice of Transfer of Claim Other than for Security was filed, indicating that Keystone transferred Claim No. 12 to Keystone Recovery Partners, Series II (“KRP”).2 See Fed. R. Bankr.P. 3001(e)(2) (governing the transfer of a claim other than security after a proof of claim has been filed).
On February 5, 2013, KRP (the assign-ee) filed an Amended Claim No. 12 (“Amended POC No. 12”). Amended POC No. 12 included an amended account summary, which supplemented the original account summary with the following additional information:
Last Purchase Date: 2/13/12
Last Purchase Amount: $13.90
Charge Off Date 8/23/12
In addition, KRP attached the following documentation to the amended proof of claim:
(1) a bill of sale effective October 5, 2012 between Barclays Bank Delaware and Ophrys, LLC (referencing a “Bankruptcy Forward Flow Purchase Agreement” dated January 30, 2012 between the same parties);
(2) an assignment transferring on October 5, 2012 “all of the accounts” in a particular named data file from Ophrys, LLC to Keystone;
(3) an assignment transferring on December 27, 2012 “all of the accounts” in a particular named data file from Keystone;
(4) a document titled a “PurchaseFile” that references Ophrys, Barclays and the Debtor and that appears to summarize the status of the account at issue and the Debtor’s bankruptcy status;
(5)copies of credit card account statements for ten (10) months during the period ranging between January 2011 through July 2012 for a U.S. Airways credit card issued by Barclay’s Bank, with an account number matching the account number listed on Debtor’s Schedule F.
B. Claim No. 13
Portfolio Recovery Associates, LLC (“PRA”) filed Claim No. 13 on December 28, 2012 through its agent, PRA Receivables Management, LLC (“PRA Receivables”). Attached to the proof of claim is an Account Summary that states that:
• the Account Number is *5432;
• Capital One, NA was the original creditor and the entity from whom PRA acquired the account;
• Capital One, NA was the owner of the account as of the last transaction;
• the date of the last transaction was 11/16/2011;
• the date of the last payment was 11/16/2011;
• the charge-off date was 7/30/2012;
• both the claim balance and principal are $3,7946.76;
• the interest and fee amounts are $0.00.
Also, attached to the proof of claim was the following additional documentation:
(1) a “Limited Power of Attorney” to the proof of claim authorizing PRA Receivables to file proofs of claim on behalf of PRA; and
*191(2) a bill of sale from Capital One Bank (USA) to PRA, with a closing date of August 24, 2012 (and with the purchase price and the identity of the assigned accounts redacted).3
C. Claim No. 14
PRA Receivables filed a second proof of claim for PRA on December 28, 2012, Claim No. 14. Similar to Claim No. 13, Claim No. 14 attached an Account Summary that included the following information:
• the Account Number is *6343;
• the debt type was “credit card”
• Fred Meyer was the original creditor;
• Citibank was the entity from whom PRA acquired the account;
• Citibank, NA was the owner of the account as of the last transaction;
• the “loan open” date was 7/27/11;
• the last transaction is “N/A;”
• the date of the last payment was left blank;
• the charge-off date was 8/2/12;
• both the claim balance and principal are $1,552.10;
• the interest and fee amounts are $0.00.
Also attached to Claim No. 14 were the following documents:
(1) a “Limited Power of Attorney” to the proof of claim authorizing PRA Receivables to file proofs of claim on behalf of PRA;
(2) a bill of sale and assignment dated August 28, 2012 providing for the transfer from Citibank to PRA of certain accounts described in “Exhibit 1 and the final electronic file,” neither of which are attached; and
(3) a Littman Jewelers/Barclay Jewelers Account Statement, account number *6343, with a statement closing date of 7/16/12, a balance of $1,552.10 and a past due amount of $224.00.4
D. The Debtor’s Objections
On January 7, 2013, the Debtor filed separate objections to all three (3) claims asserting the same basis: “the claimant is not a creditor of the debtor [and has not] provided any evidence that the debt was assigned to [the claimant].” (Doc. # s 18, 19 & 20, at ¶ 4). With respect to Claim No. 12, the Debtor also objected on the ground that the proof of claim “does not provide any basis for” the $239.00 in fees, expenses and other charges and the $37.74 in interest. (Doc. # 18 at ¶ 3).
KRP filed a response to the Debtor’s objection to Claim No. 12.5 In its response filed on February 7, 2013, KRP pointed out that the Debtor scheduled a Barclays Bank debt for an amount slightly less than that claimed in Amended Claim No. 12 and asserted that the Debtor neither raised an objection cognizable under 11 U.S.C. § 502(b) nor produced any evidence that the claim was not due and owing.6
*192Hearings on the objections were held on February 12, 2013. Debtor’s counsel appeared, but presented no evidence, instead contending that all three (3) proofs of claim should be disallowed because they are not self-sustaining. No one appeared at the hearing on behalf of the claimants.
III.
To analyze the merits of the Debtor’s objection to these three (3) proofs of claim, I must consider both the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. The most relevant rule, Fed. R. Bankr.P. 3001, was amended, effective December 1, 2012. To appreciate fully the effect of that amendment, it is necessary to place the changes to the rule in a larger context. I will begin with a brief overview of the claims allowance process as it applies to claims of the sort at issue here and pre-amendment Rule 3001. Then, I will consider and apply the Rule, as amended.
A.
The claims allowance process “mirrors, but does not slavishly conform to, the formalities of conventional civil litigation.” O’Brien, 440 B.R. at 665. This is because the process is intended to “facilitate the efficient, economical resolution of claims allowance disputes.” In re Sacko, 394 B.R. 90, 99 (Bankr.E.D.Pa.2008).
The fundamental purpose of the claims allowance process and the various rules for filing of proofs of claim and allocating burdens of proof is to provide a fair and inexpensive procedure for the proper determination of claims on the merits. Those rules and procedures are not properly invoked with regard to a claim unless there is an actual or potential dispute about the debtor’s liability vel non or its amount. The bankruptcy rules contemplate resolution of objections to claims as contested matters, not as adversary proceedings. Thus, they envision much simpler, expedited proceedings without all the trappings of normal civil litigation.
Id. (quoting In re Shank, 315 B.R. 799, 814 (Bankr.N.D.Ga.2004)).
A proof of claim is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a). Further, Fed. R. Bankr.P. 3001(f) provides:
Evidentiary Effect. A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.
In In re Wells, 463 B.R. 320, 326 (Bankr.E.D.Pa.2011), I summarized the effect of Rule 3001(f) as follows:
“[I]f a proof of claim complies with the Rules of Court and is self-sustaining (ie., it sets forth the facts necessary to state a claim and is not self-contradictory), it is prima facie valid and the objecting party has the burden of producing evidence to refute the claim.” [Sacko, 394 B.R. at 98]. That evidence, “if believed, [must] refute at least one of the allegations that is essential to the claim’s legal sufficiency.” In re Allegheny Int’l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992). If the objector meets that burden of production, the claimant must produce evidence to prove the validity of the claim, id. at 174, because “the ultimate burden of persuasion is always on the claimant,” In re Holm, 931 F.2d 620, 623 (9th Cir.1991).
A common dispute arising in claims litigation is whether the proof of claim complies with Fed. R. Bankr.P. 3001(c) and whether the claim is entitled to prima facie evidentiary effect pursuant to Rule 3001(f).
Prior to its amendment effective in December 2012, Rule 3001(c) provided that if *193a claim is “based on a -writing,” a copy of the writing must be attached to the proof of claim, unless it has been lost or destroyed, in which case a statement of the “circumstances of the loss or destruction” must be filed with the claim. In addition, because Rule 3001(a) instructs that a proof of claim “conform substantially to the appropriate Official Form,” and the appropriate form (Official Form No. 10) authorizes, in some circumstances, the attachment of a “summary,” arguably, it also was possible to comply with the rules by attaching a summary, rather than the documents on which the claim was based. See, e.g., In re Plourde, 418 B.R. 495, 503-04 (1st Cir. BAP 2009).7
Determining the scope of the Rule 3001(c) document attachment requirement is extremely important in bankruptcy practice due to the sheer volume of proofs of claim that are subject to its requirements. Unfortunately, as one commentator observed, the requirements of Rule 3001(c) “are more complex than may be first thought.” William L. Norton, Jr., Norton Bankruptcy Rules 2012-18, Rule 3001 Editors’ Comment, at 219 (2012). In particular, the application of Rule 3001(c) to claims based on open-end credit card accounts that have been assigned by the original creditor to an assignee-claimant (perhaps multiple times) have been problematic, generating a substantial amount of litigation.
In O’Brien, I considered the requirements of Rule 3001(c) (prior to the 2012 amendment) in a contested matter involving an objection to a credit card claim held by an assignee and drew the following legal conclusions:
• A credit card debt is based on a writing, such that a creditor filing a proof of claim must attach to its proof of claim the “writing” on which the claim is based, in order for the claim to be entitled to prima facie evidentiary effect pursuant to Rules 3001(c) and (f). See 440 B.R. at 661.
• For purposes of Rule 3001(c), a proof of claim filed by an assignee is “based,” in part, on the assignment; therefore, to satisfy Rule 3001(c) and obtain prima facie evidentiary status under Rule 3001(f), an assignee filing a proof of claim must attach the written assignment or set forth a summary of the document. Id. at 662.
• A proof of claim that attempts to satisfy Rule 3001(c) by providing a summary rather than attaching the assignment documents must describe the chain of title leading to the assignee in detail and in a clear and coherent manner. Id.8
*194• The failure to comply with Rule 3001(c), and the absence of prima fa-cie evidentiary status under Rule 3001(f) is not, by itself, grounds for disallowance of a claim. Id. at 663-66.
• A proof of claim may be prima facie valid despite noncompliance with Rule 3001(c) if it provides sufficient indicia of the claim’s validity and amount to justify imposing on the objector the burden and expense of responding with contrary evidence. Id. at 666.9
• In evaluating whether a non-conforming proof of claim is nonetheless prima facie valid, the court may consider both the proof of claim itself and information in the bankruptcy record that is subject to judicial notice, including the debtor’s bankruptcy schedules. Id.10
• In light of the substantial variation in the content of proofs of claim and the information supplied to the court by debtors in their bankruptcy schedules, no hard and fast rules can be set out describing when information in the record may fill in the gaps for proofs of claim that might otherwise lack pri-ma facie evidentiary status under Rule 3001(f); these determinations can be made only on a case-by-case basis. Id. at 666-67.
B.
Effective December 1, 2012, Rule 3001(c) was amended to provide as follows:
(1) Claim Based on a Writing. Except for a claim governed by paragraph (3) of this subdivision, when a claim, or an interest in property of the debtor securing the claim, is based on a writing, a copy of the writing shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.
* * *
(3) Claim Based on an Open-End or Revolving Consumer Credit Agreement.
*195(A) When a claim is based on an open-end or revolving consumer credit agreement — except one for which a security interest is claimed in the debtor’s real property — a statement shall be filed with the proof of claim, including all of the following information that applies to the account:
(i) the name of the entity from whom the creditor purchased the account;
(ii) the name of the entity to whom the debt was owed at the time of an account holder’s last transaction on the account;
(in) the date of an account holder’s last transaction;
(iv) the date of the last payment on the account; and
(v) the date on which the account was charged to profit and loss.
(B) On written request by a party in interest, the holder of a claim based on an open-end or revolving consumer credit agreement shall, within 30 days after the request is sent, provide the requesting party a copy of the writing specified in paragraph (1) of this subdivision.
On its face, Rule 3001, in its current form, has established separate requirements for proofs of claim arising from open-end consumer credit agreements. The general requirement that a writing be attached has been replaced with two (2) other requirements:
(1) the disclosure of specified information regarding the status of the account and the assignee’s purchase of the account (as set forth in (3)(A)(i)-(iv)); and
(2) the obligation to provide the documents on which the claim is based to a party in interest, but only upon request
If the claimant complies with these requirements, the proof of claim constitutes prima facie evidence of the validity and the amount of the claim pursuant to Rule 3001(f). Advisory Committee Note, Rule 3001 (2011).11
After the 2012 amendment, the focus of the claimant’s obligation under the rule has shifted from the attachment of documents to the disclosure of particular information regarding the credit card account that the drafters of the Rule deemed most pertinent in the assessment by the debtor (or trustee) of the validity or proper amount of the claim. Specifically, because credit card accounts are frequently assigned, sometimes multiple times, prior to the filing of a proof of claim, the new disclosures are designed to “assist the debtor in associating the claim with a known account,” id., thereby assisting the debtor in evaluating whether grounds exist to object to the claim.12
At the same time that Rule 3001(c), as amended, has imposed the new disclosure obligations on holders of open-end credit accounts described above in lieu of *196the former “document-attachment” requirement, it has de-emphasized the “assignment history” requirement that some courts have imposed under the prior version of the rule. For example, in O’Brien, I held that the former Rule 3001(c) required assignees to attach documentation verifying the chain of title to the account back to the original creditor, or at least to set out a coherent summary thereof. As of December 1, 2012, this is no longer necessary under the rule. The rule requires only disclosure of the identities of the original creditor and the entity that transferred the account to the claimant. If there were multiple transfers of the account, the rule does not mandate a comprehensive disclosure of the identities of the intermediate transferors and transferees. In short, under the amended rule, a proof of claim without a complete description of the chain of title may be entitled to prima facie evidentiary effect, if the disclosure satisfy Rule 3001(c)(3)(A)(i)-(v).
This is where Rule 3001(c)(3)(B) comes into play. In balancing the competing interests of the parties, the drafters of the amended rule appear to have concluded that once the debtor (or trustee) has sufficient information regarding the identity and the transactional history of the account, as well as the identity of the most immediate account transferor, the burden of putting the assignee’s status as owner of the right to payment at issue lies with the debtor or trustee, who is aided in developing rebutting evidence by the right to make a written request under Rule 3001(c)(3)(B) (without formal discovery) for all of the corroborating documentation.
One other aspect of Rule 3001(c), as amended, warrants comment.
Rule 3001(c)(2)(D) provides objectors with remedies for a claimant’s noncompliance with Rule 3001(c): preclusion from offering additional evidence and/or attorney’s fees and expenses.13 As written, Rule 3001(c)(2)(D) provides the court with discretion in determining the appropriate response to a claimant’s noncompliance with Rule 3001(c). Id. (the court “may” take ... take ... the following actions). If not precluded by judicial action, the rule assumes that the court can consider additional evidence “in any form.” Id. Therefore, I do not read the current Rule as overriding prior law insofar as courts have held that the failure to comply with Rule 3001(c), and the absence of pri-ma facie evidentiary status under Rule 3001(f), is not, by itself, grounds for disal-lowance of a claim. Nor do I perceive any intent to override those court decisions that have held that a proof of claim may be prima facie valid despite noncompliance with Rule 3001(c), if information included in the proof of claim, or other evidence in the bankruptcy case record, provides sufficient indicia of the claim’s validity and amount to justify imposing on the objector the burden and expense of responding with contrary evidence. In my view, both of these legal principles, which were articulated in O’Brien, retain their vitality.
With these principles in mind, I will now consider the three (3) proofs of claim at issue in this case.
*197IV.
Claim No. 12
Amended Claim No. 12 does not strictly comply with all of the requirements of Rule 8001(c)(8)(A). Nevertheless, as explained below, I find that the claim is prima facie valid.
In comparing Amended POC No. 12 with the requirements of Rule 3001(c)(3)(A), I find only one shortcoming. It fails to state the identity of the entity to whom the debt was owed at the time of the Debtor’s last transaction on the account. See Fed. R. Bankr.P. 3001(c)(3)(A)(ii). In all other respects, the proof of claim is compliant with the rule.
The missing information, the identity of the creditor at the time of the last transaction, bears some logical relationship to the Debtor’s objection, i.e., that KRP has not established that it is the rightful creditor on this account, in that the missing information is related to the chain of title.14 However, after reviewing the bankruptcy record (1.e the documents attached to the proof of claim and the Debtor’s schedules), see O’Brien, 440 B.R. at 666, I conclude that the evidentiary gap has been filled by admissions in the Debtor’s schedules and information in the attachments the proof of claim.
The Debtor’s Schedule F lists an undisputed “Barclay” credit card debt in an amount very close to that stated in Amended POC No. 12. The debt is listed in Schedule F with an account number ending in 4195, the same account number referenced in Claim No. 12. KRP also attached to Amended POC No. 12 ten (10) months of account statements for a credit card issued by Barclays Bank in the Debt- or’s name, also with an account number ending in 4195. Further, attached to the amended proof of claim were assignment documents showing that Barclays Bank assigned accounts to Ophrys, LLC, that Ophrys, LCC assigned accounts to Keystone and that Keystone had assigned accounts to KRP.
The correlation between the account statements and the Debtor’s schedules, along with the assignment documents attached to proof of claim, provide a reasonable basis for tracing the from debt from this credit card account from Barclays to KRP, even in the absence of all of the information required by Rule 3001(c). In the situation presented, the omission of identity of the entity to whom the debt was owed at the time of the Debtor’s last transaction on the account appears relatively insignificant.
For these reasons, I am satisfied that Amended Claim No. 12 should be accorded prima facie evidentiary status and that it is appropriate that the Debtor bear the burden of producing evidence to rebut KRP’s claim that it is the rightful creditor on this account. Because the Debtor offered no evidence to dispute KRP’s creditor status I will overrule that ground of the objection.
Amended Claim No. 12 being prima fa-cie valid, the Debtor’s other objection to the claim — that it “does not provide any basis for” the $239.00 in fees, expenses and other charges and the $37.74 in interest— also must be overruled. The burden of production rested with the Debtor and she came forward with no evidence on the issue.15
*198Claim No. 13
An extended discussion is not necessary with respect to Claim No. 13 filed for PRA by PRA Receivables. Although no response to the Debtor’s objection was filed, Claim No. 13 satisfies all of the requirements of Rule 3001(c)(3). Therefore, it is entitled to prima facie evidentiary status. I will overrule the objection and allow the claim in full because the Debtor offered no evidence disputing the validity or amount of Claim No. 13.
Claim No. 14
On its face, Claim No. 14 does not strictly comply with the Rule 3001(c)(3). Specifically, the Account Summary attached to the proof of claim does not disclose the “last payment date;” that information was left blank.16 Also, the “last transaction date” was stated as “N/A,” which is not a meaningful disclosure. (If there was a debt, there had to be at least one (1) transaction and one (1) transaction date). Notwithstanding these deficiencies, in the circumstances presented here, I conclude that the proof of claim suffices to make out a prima facie case for allowance of the claim.
Rule 3001(c)(3)’s requirement that the last transaction date be disclosed appears to be designed to assist the debtor in evaluating: (1) the timeliness of the claim, (2) whether the amount of the claim is consistent with the debtor’s recollection of his or her use of the credit card and, perhaps also even (3) identification of the particular credit card account.
In this case, the last four digits on Claim No. 14 (6343) and the supporting documentation match a debt listed on the Debtor’s Schedule F as owing to “Barclay Liitman” [sic]. (Doc. # 1, Schedule F) Thus, identification of the proper account referenced in Claim No. 14 could not have been problematic for the Debtor.
As for the timeliness and the amount of the claim, those defenses are not at issue. The Account Summary states that the loan was opened on July 27, 2011, far too recently to give rise to a statute of limitations defense. Further, in Schedule F, the Debtor admitted that she is liable on the Barelay/Littman account in an amount very close to that stated in Claim No. 14. Thus, it is fair to read the Debtor’s schedules and her objection as conceding she owes a debt to the holder of the account in roughly the amount in Claim No. 14. Her objection is limited to the issue whether the claimant (PRA) is the rightful holder of the account. The particular information required by Rule 3001(c) that was omitted from Claim No. 14 bears little, if any, relation to this issue.
The question, then, is whether Claim No. 14 sets forth sufficient information with respect to PRA’s asserted status as the rightful account holder as to impose on the Debtor the burden of producing evidence disputing PRA’s creditor status. I conclude that it does.
It is true that Claim No. 14, and the attached documentation, do not trace the entire path of the account from the original creditor to A as O’Brien may have required under the prior version of Rule 3001.17 However, as discussed in Part *199III.B, supra, Rule 3001(c), in its current form, does not mandate the disclosure of the complete link from the initial creditor to the claimant. So long as the claimant identifies the original claimant and the entity that transferred the account to the claimant, the claimant has complied with the Rule. Claim No. 14 does so. In these circumstances, I see no reason to deny prima facie evidentiary status to Claim No. 14 or to disallow the claim in the absence of evidence rebutting the validity or amount of the claim. In my view, the proof of claim provided the Debtor with sufficient information regarding the assignment history of the account to impose the burden of invoking her rights under Rule 3001(c)(3)(B) and producing evidence negating the existing evidence that PRA is the rightful owner of the account.
y.
In this case, I have evaluated with the proofs of claim at issue are entitled to prima facie evidentiary status by engaging in the two-step analysis described in my earlier opinion in O’Brien. The first step is a kind of mechanical application of Rule 3001(c) and (f). If the proof of claim fails to achieve prima facie status after the first step, I consider all of the information in the proof of claim and bankruptcy record (usually the schedules) in a holistic fashion to determine whether it is appropriate to impose the burden on the objector of producing evidence to dispute the validity or amount of the claim or the assignee’s status as the owner of the claim.
Based on that process, and for the reasons set forth above, the Debtor’s objections to Proof of Claim Nos. 12, 13 and 14 will be overruled and the claims will be allowed as filed.
ORDER
AND NOW, and for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that the Debtor’s Objections to Proof of Claim Nos. 12, 13 and 14 are OVERRULED and the claims are ALLOWED as filed.
. I have omitted certain information included on the account summary that is not material to the issue at hand.
. The notice indicates that the transferor and transferee were being represented by a single law firm, the law firm that filed Claim No. 12 on behalf of Keystone.
. One other document was attached to Claim No. 13. It appears to be an undated computer printout titled "Capital One Cycle Facsimile Report” that has the Debtor’s name on it and sets forth certain information regarding a redacted account number (such as "New-Balance,” "Minimum Payment” and "Interest-YTD”). The purpose of this attachment to the proof of claim is unclear.
. On its face, the Littman Jewelers/Barclay Jewelers Account Statement includes the following statement: “This Account is issued by Citibank, N.A.”
. Neither the Federal Rules of Bankruptcy Procedure nor our local rules require that a claimant file a written response to an objection to a proof of claim.
. KRP attached to its response the same five (5) sets of exhibits that KRP attached to Amended Claim No. 12, in supplementing the original Claim No. 12.
. See also In re Torres, 2011 WL 4592029, at *4 (1st Cir. BAP Jan. 19, 2011) (pointing out that “[t]he sufficiency of a summary attached to a proof of claim must be analyzed on a case-by-case basis, taking into account the detail provided, the content of the schedules, and the identity of the objector”). As one court has explained: “To comply with Rule 3001 and be entitled to prima facie evidentia-ry status, ... a claim based on a writing must attach one of two things: (1) the writing forming the basis for the claim or a duplicate or (2) a sufficient explanation or summary.” In re Pursley, 451 B.R. 213, 220 (Bankr.M.D.Ga.2011).
Since O’Brien and Pursley were decided, the scope of the document "summary” option may have been circumscribed. Paragraph 7 of the Instructions to Official Form No. 10 now states that the claimant "may attach a summary in addition to the documents themselves.” (emphasis added). See Advisory Committee Note (2011 Amendment) (stating that a summary may be attached "only” in addition to the documents themselves).
. The documentation must be enough for the debtor to fairly trace the path of their account from the original creditor to the claimant. See, e.g., In re Rochester, 2005 WL 3670877, at *5-6 (Bankr.N.D.Tex., May 24, 2005) (blanket *194assignment documents and original account statements were sufficient for debtor to trace account if name of assignor matched scheduled creditor and assignee matched claimant).
. This principle is analogous to the standard that has developed in federal courts in ruling on motions to dismiss complaints under Fed. R.Civ.P. 12(b)(6). Since the Supreme Court’s decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), federal courts have measured the sufficiency of a complaint by determining whether its allegations state a plausible claim for relief. In claims litigation, the analysis is similar, albeit arising in a somewhat different context. Under Rule 12(b)(6), the courts are evaluating the allegations in a pleading and deciding if the allegations are sufficient to impose the burden of filing an answer (i.e., another pleading) on the defendant. In the claims litigation context, the court is deciding whether the proof of claim (and possibly other evidence in the bankruptcy record) constitutes sufficient evidence of the validity of the claim to justify imposing on the objector the burden of production of contrary evidence. While this difference is significant, the court’s overall evaluation process is similar in both situations.
. Another way to conceptualize this principle and the preceding principle in the text is to view Rule 3001(f) as a non-exclusive “safe-harbor” for a proof of claim to obtain prima facie status. Because, traditionally, a proof of claim is treated, not merely as a pleading, but more like a "verified complaint or deposition,” O’Brien, 440 B.R. at 665, other information included in the proof of claim, or otherwise available in the bankruptcy record, may suffice to support the claim and impose the burden of producing rebuttal evidence on the objector.
. In addition, as the Advisory Committee points out, to obtain prima facie evidentiary effect under Rule 3001(f), a proof of claim based on an open-end consumer credit agreement also must satisfy the requirements of the applicable provisions of Rule 3001(b), (c)(2) and (e).
. The Advisory Committee Note refers, in particular, to the potential objector’s assessment of the timeliness of the claim. This is not surprising. With some frequency, claims are disallowed upon objection because they are unenforceable under applicable nonbank-ruptcy law due to the expiration of the statute of limitations. See 11 U.S.C. § 502(b)(1); In re Keeler, 440 B.R. 354, 360 (Bankr.E.D.Pa. 2009); In re Michael Angelo Corry Inn, Inc., 297 B.R. 435, 438-39 (Bankr.W.D.Pa.2003).
. Rule 3001(c)(2)(D) provides:
If the holder of a claim fails to provide any information required by this subdivision (c), the court may, after notice and hearing, take either or both of the following actions:
(i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
(emphasis added).
. In some cases, the information also may assist the debtor in identifying the account.
. I note further that a proof of claim need not include all of the evidence in support of the components of the claim. Rule 3001(c)(3) requires only that those components be itemized. KRP complied with that requirement. Had KRP not done so, the outcome may have been different.
. I also note that the “last transaction date” was described as "N/A.” I infer that this means that there was only one (1) transaction on the account. Therefore, I do not consider the proof of claim noncompliant with Rule 3001(c)(3)(A)(iv).
. The proof of claim inexplicably refers to the original creditor as "Fred Meyer” while attaching only a Barelay/Littman account statement and does not explain the connection between Fred Meyer and Barclay/Litt-man. Claim No. 14 does, however, provide some link between Barelay/Littman and Citi*199bank, Citibank being the entity that assigned the account to PRA. See n.4, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495778/ | ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT STEVEN R. WICKER’S MOTION, VACATING SUMMARY JUDGMENT ORDER AS TO STEVEN R. WICKER ONLY AND REMANDING REMAINING CAUSES OF ACTION, DEFENSES AND COUNTERCLAIMS
HELEN E. BURRIS, Bankruptcy Judge.
On appeal, the U.S. District Court for the District of South Carolina granted appellant Steven R. Wicker’s Motion to Remand and denied appellee SCBT, N.A.’s (“SCBT”) Motion to Dismiss the appeal.1 On remand this Court must determine if any relief should be granted as a result of Wicker’s request for reconsideration.2 For the reasons discussed below, Wicker’s request is granted in part and denied in part. As a result, the Court’s Summary Judgment Order and corresponding Judgment entered February 29, 2012 (“February 29, 2012 Summary Judgment Order”)3 are vacated as to Wicker only, individually, and all remaining matters in this lawsuit are remanded to the state court for conclusion.
FACTS AND PROCEDURAL HISTORY
A recitation of the complicated factual and procedural history of this proceeding is amply set forth in this Court’s pre-appeal records.4 However, the matter before the Court presents an unusual set of circumstances that warrant a restatement of many of the pre and post-appeal events in sufficient detail.
The Chapter 11 Bankruptcy Case of Earth Structures, Inc.
Earth Structures, Inc., (“ESI”) filed a Chapter 11 petition for relief in this court on May 19, 2009.5 The petition indicates that ESI is a corporation. Wicker signed the voluntary petition on behalf of ESI as its president. The bankruptcy schedules indicated that ESI borrowed money from Bank Meridian, N.A. (“Bank Meridian”), *203that Wicker and Timothy Bailey were also contractually obligated to repay debts owed by ESI (including debts to Bank Meridian), that Wicker and Bailey each owned 50% of the stock of ESI, and that there was litigation pending between Wicker and Bailey as well as pending litigation involving Bank Meridian.6
The Chapter 11 Plan was confirmed a year later on May 20, 2010.7 The confirmed plan provides repayment or other treatment for twenty-nine classes of creditors and interest holders, including the following for Bank Meridian:
Class Number 6: This class consists of the secured claim of Bank Meridian which has a lien on the accounts receivable and cash collateral of the Debtor [ESI] along with real -property not belonging to the Debtor but to another entity, Ultra Holdings. Creditor filed a claim on October 7, 2009 in the amount of $171,111.91, but there is litigation pending in this Court that may affect that amount. The Debtor will pay the Creditor $2,260 monthly as provided in the cash collateral order to be applied toward the debt obligation until the pending lawsuit is resolved. Bank Meridian will retain a lien on the accounts receivable and cash collateral. Once the balance due and owing under the Note has been determined by settlement of the parties or litigation, the Debtor will pay the debt over 10 years amortized over 25 years at prime interest and Bank Meridian will retain its first priority lien on the accounts receivable and cash collateral and on the remaining real estate owned by Ultra Holdings. Bank Meridian is hereby authorized to file any document necessary to continue perfection of its security interest. Upon payment of the court ordered obligation in full, creditor will satisfy its lien as to the Debtor and any codebtors. This class is secured, impaired.8
The plan and 11 U.S.C. § 1141 bind the parties to this lawsuit and add new contractual terms to any pre-existing relationships. Wicker signed the plan documents as president of ESI and counsel for ESI signed as well. The filings provided that Bailey was not participating in the business at the time the plan was filed and confirmed, but disclosed that Bailey still owned 50% of the stock. Per the plan terms, upon confirmation Bailey forfeited his ownership rights in ESI but ESI continued as a reorganized, corporate debtor and new stock would be issued. Through the plan Debtor ESI retained the right to continue to prosecute and defend any causes of action and provided this Court shall retain jurisdiction to, among other things, “[djecide or resolve any motions, adversary proceedings, contested or litigated matters and any other matters[.]”9
A Final Order Closing Case was entered on October 1, 2010 as the bankruptcy case of ESI had been fully administered and debt repayment terms had been established.10
The Litigation Remaining After the Bankruptcy Case Was Closed
When the Final Order Closing Case was entered, various disputes related to ESI’s bankruptcy and outlined in adversary proceedings remained for resolution. That *204Order provided that “the court’s jurisdiction is ended except as provided in 11 U.S.C. § 1142 and the confirmed plan” including continued jurisdiction over ESI’s pending adversary actions.
As of December 2011, all adversary proceedings pending when the case was closed, other than the above captioned lawsuit, were concluded.11
This lawsuit began when Bank Meridian filed a complaint in state court in 2009, shortly before the bankruptcy case was filed.12 It was a state law action to collect debts and/or recover collateral from Defendants Ultra Holdings, LLC (“Ultra”), ESI, Wicker and/or Bailey. The lawsuit’s relationship with federal courts began when Debtor/Defendant ESI, through counsel, removed it from state court.13 Thereafter, ESI’s counsel in the Chapter 11 case also represented ESI in this lawsuit in this Court.14 A significant portion of the lawsuit was separated and quickly returned to state court for various reasons including: the involvement of multiple parties of which ESI was the only party that had filed bankruptcy at that time;15 a number of issues raised in the lawsuit were not subject to the automatic stay of 11 U.S.C. § 362 and therefore could proceed in state court; properties involved in the recovery action were not owned by ESI; and the remanded portions of the lawsuit did not directly affect the administration of the bankruptcy estate of ESI.16 Thereafter, the portion of this proceeding that remained in state court moved forward unencumbered by the bankruptcy. Those state court proceedings also involved Bank Meridian, Ultra, Bailey and Wicker.
This Court did not remand the following causes of action stated in the original complaint: (1) Breach of Note 2 (seeks judgment against Ultra as a result of a promissory note executed by Ultra); (2) Foreclosure of Mortgage 1 Encumbering Real Property (seeks to recover on a mortgage executed by Ultra to secure Note 2, and judgment against Ultra and guarantors Bailey and Wicker for any deficiency); (3) Breach of Note 4 (seeks judgment against ESI as a result of a promissory note executed by ESI); (4) Breach of Security Agreement 1 and Security Agreement 2 and Collection of Accounts (seeks to collect the accounts of ESI as a result of ESI’s granting of a security interest in accounts to secure Note 4); (5) Foreclosure of Mortgage 3 Encumbering Real Property (seeks to recover on a mortgage executed by Ultra to secure Note 4 given by Ultra, also includes cross-collateralization provision and seeks deficiency against ESI and guarantors Bailey and Wicker); (6) Foreclosure of Mortgage 4 Encumbering Real Property (seeks to recover on a mortgage executed by Ultra to secure Note 4, also includes cross-collateralization provision and seeks deficiency against ESI, and guarantors Bailey and Wicker); (7) Collection of Rents (seeks declaratory judgment against Ultra and deficiency against ESI, Bailey and Wicker); (8) Injunction— Accounts Receivables (seeks ESI’s accounts); (9) Injunction — Rents (seeks *205rents of mortgaged properties not owned by ESI); and (10) Accounting (demands that ESI account for funds).17
ESI and Wicker had filed an Answer and Counterclaim challenging enforcement of the documents in question and seeking to recover from Bank Meridian for negligent misrepresentation, constructive fraud, fraud and misrepresentation, breach of contract, breach of contract accompanied by a fraudulent act, interference with contractual relationship, conversion, breach of fiduciary duty and unfair trade practices under South Carolina law.
After a lengthy discovery period and near the time ESI’s Chapter 11 bankruptcy case was closed, Bank Meridian filed the first Motion for Summary Judgment regarding the removed causes of action, defenses and counterclaims. Some minor issues raised in the pleadings were concluded as a result18 and the causes of action remaining here proceeded toward trial. In the proposed Joint Pre-Trial Order presented to the court and signed by Wicker, pro se, as well as counsel for Bank Meridian, counsel for ESI, and counsel for Ultra and Bailey, the parties indicated that they were prepared for trial. The proposed order also included a listing of undisputed facts about the loans in question.19 After various scheduling issues, the portion of the lawsuit that remained in this court was scheduled for an August 29, 2011 trial. At that trial the Court was to determine the remaining issues, including whether ESI and Wicker were due any amount as a result of their counterclaims against Bank Meridian and whether any defenses asserted relieved ESI or Wicker from any liability for the obligations.
The Failure of Bank Meridian and the Addition of SCBT to the Lawsuit
On July 29, 2011, the Office of the Comptroller of the Currency closed Bank Meridian and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. Bank Meridian’s counsel promptly reported this fact and the August trial was postponed. SCBT contracted to purchase certain assets owned by Bank Meridian from the FDIC, including the documents and resulting rights relevant to this lawsuit. Bank Meridian’s counsel filed a document titled “Motion for Continuance to Allow Adequate Time for Determination on Assignment of Special Powers, a Notice of Motion to Substitute Plaintiff and a Motion for Leave to File a Supplemental Reply to the Counterclaims of Defendants Earth Structures, Inc. and Steven R. Wicker.”20 In the motions, counsel advised the Court that:
Plaintiff has submitted a specific request to the ... FDIC for permission to assert certain “special powers” in response to the counterclaims and defenses asserted in this matter by ... ESI and ... Wicker.... The special powers have been enacted and interpreted to protect the FDIC and its assignees from various types of defenses and claims of borrowers or guarantors. Based on the Plaintiff’s belief that the special powers *206are designed to protect the FDIC, as Receiver, and its assignees from the defenses and counterclaim asserted by the Defendants, the Plaintiff has requested permission to assert the special powers in this matter.21
The motions represented to the Court that time was needed “to allow the FDIC to finalize its analysis as to the assignment of the applicable special powers[.]”22 The motions also asked that SCBT, as purchaser of the documents and rights asserted by Bank Meridian in this lawsuit, be substituted as Plaintiff, and that SCBT be allowed to amend the pleadings to assert the “special powers” in response to ESI and Wicker’s defenses and as a bar to the counterclaims.
The pleadings referenced the Financial Institutions Reform, Recovery and Enforcement Act of 1989 “(FIRREA”), allegedly applicable after the failure of Bank Meridian. As a result of the Motions and after a contested hearing, the Court entered an Order allowing SCBT, as successor in interest to Bank Meridian, to join the lawsuit, adding SCBT as an additional party (“October 25, 2011 Order”).23 This Court found that Wicker and ESI
[CJannot proceed against Bank Meridian in this or any other court until they have exhausted their administrative remedies [under the FIRREA claims process]. Therefore, while the Court will not remove Bank Meridian as a named party in this suit, all proceedings against that party are suspended indefinitely .... Applicable law precludes Wicker and ... [ESI] from asserting their counterclaims against Bank Meridian in this proceeding at this time.24
No party filed a timely challenge to this ruling. The October 25, 2011 Order recognized that “[t]he remaining parties as of [October 2011] were BankMeridian, Ultra Holdings, LLC, Earth Structures, Inc., Steven R. Wicker and Timothy Bailey. Kenneth C. Anthony, Jr. [attorney for Ultra and Bailey], made an appearance [at the hearing] on behalf of Ultra Holdings, LLC and Timothy Bailey, and reported that those parties do not plan to participate in the trial of this matter” going forward.25
Amendment of the Pleadings in the Remaining Lawsuit
Thereafter SCBT amended the pleadings to join in the proceeding and to assert the “special powers.” The October 25, 2011 Order also allowed Wicker and ESI to amend their pleadings as they requested. ESI’s counsel filed amended pleadings and signed the documents for ESI.26 Wicker filed amended pleadings pro se asserting his individual claims and defenses.27 ESI and Wicker’s amended pleadings were substantially similar. The amendments added defenses of unclean hands, estoppel and unjust enrichment, fraud in the inducement and duress. Counsel that had represented Bank Meridian continued to represent SCBT and active participation in *207this case by Bank Meridian, Ultra and Bailey ceased.
SCBT clearly stated as early as October 14, 2011 28, that it intended to swiftly pursue summary judgment after the amendments to use the “special powers” to defeat ESI and Wicker’s counterclaims and defenses and proceed to collect the debts in question free of those claims. Despite this change of course in the lawsuit, no party filed any request seeking additional discovery and the original discovery deadline had long since expired.
SCBT’s Summary Judgment Motion
SCBT filed a Motion for Summary Judgment on November 21, 2011.29 That Motion stated that SCBT is the party entitled to enforce any obligations formerly held by Bank Meridian against ESI, Wicker and others, and that 12 U.S.C. § 1823(e)30 bars recovery on any defenses and counterclaims against SCBT. SCBT further argued that no act of SCBT led to any damages to ESI or Wicker because, as a separate and distinct entity from Bank Meridian, there is no evidence that SCBT is liable for Bank Meridian’s actions.31 SCBT sought judgment in its favor in an attempt to recover its collateral and collect the sums due under the notes that originated with Bank Meridian.
Opposition to SCBT’s Summary Judgment Motion
Defendant ESI filed a response through counsel.32 The response summarized the remaining disputes:
The purpose of the trial in this case is to determine the amount, if any, owed by ESI to Bank Meridian or its successor. See Class Number Six of ESI’s Approved Bankruptcy Plan Docket Numbers 135, 150 and 221. If successful at trial, the defenses and counterclaims asserted by ESI and Mr. Wicker against Bank Meridian and/or its successor SCBT, N.A., would serve to offset or obviate the liability, and could result in excess damages being awarded to ESI and/or Mr. Wicker.
33
The response did not request any relief to allow ESI to obtain further evidence about the details of the assignment of the loans by the FDIC to SCBT, or to acquire any *208additional information before decision on the matter. Wicker was not represented by counsel and did not file a timely written response to the Motion for Summary Judgment, but he did appear at the summary judgment hearing.
Post Hearing Events and Entry of a Summary Judgment Order in Favor of SCBT
At the conclusion of the summary judgment hearing, and after the record was closed, the Court took the matter under advisement and invited competing proposed orders from the parties. Approximately forty-five days after the hearing, ESI’s counsel filed a document titled “Supplemental Brief and Exhibits in Support of Debtor’s Response to SCBT, N.A.’s Motion for Summary Judgment and Memorandum in Opposition” (“Brief’).34 That document, filed on January 31, 2012, included what ESI’s counsel alleged was newly discovered evidence impacting the matter under advisement. ESI stated that the new information was received directly from the FDIC and that SCBT should have been aware of it, but had not produced the documents or evidence in question. The Brief stated that information attached indicated that “SCBT, N.A. has contracted with the FDIC to assume the liability of the instant litigation.”35 The Brief explained that this lawsuit appeared on an “Inherited Litigation Report” obtained from the FDIC and that the relevant agreements between SCBT and the FDIC provide that SCBT has “assumed the litigation liabilities of Bank-Meridian set forth in the Purchase and Assumption Agreement with the FDIC.”36 The applicable agreement provides for assumption of “all asset-related offensive litigation and all asset-related defensive litigation liabilities, but only to the extent such liabilities relate to assets subject to a Shared-Loss Agreement[.j”37 Much of the “new evidence” consisted of print outs of emails that were vague in meaning and unauthenticated. ESI asserted that as a result of these documents a material factual dispute remained and summary judgment should be denied.
Wicker, individually, had not filed any response to the November 2011 Motion for Summary Judgment. Despite this fact on February 8, 2012, he filed a letter with the Court stating that he joined in ESI’s post-hearing filings.38
SCBT filed a Motion to Strike the pleading and the “new evidence,” asserting that the post-hearing submission, which included new alleged facts and legal arguments, was improper.39 SCBT also asserted that the documents in question were unauthenticated and inadmissible.40 The Court agreed — the documents were insufficient and untimely' — and shortly thereafter en*209tered an Order Granting Motion to Strike (“Strike Order”) on February 6, 2012.41
The February 29, 2012 Summary Judgment Order entered thereafter relied on the record before the Court found in the pre-hearing pleadings and the legal arguments made at the hearing.42 It includes findings that “Defendants’ attempt to hold SCBT responsible for alleged acts or omissions of Bank Meridian employees has not been supported by portions of the record or applicable legal authorities.”43 It found that “the [FIRREA] administrative claims process affords the Defendants a means by which to assert their claims against Bank-Meridian’s assets” and that § 1823(e) bars recovery.44 The February 29, 2012 Summary Judgment Order covered other matters as well, but the backbone of the decision was based on these findings.
ESI’s Post-Judgment Motions
Meanwhile, in response to the Strike Order, on February 29, 2012, ESI, through counsel, filed a timely Motion and Memorandum in Support to Alter or Amend Pursuant to Rule 59(e) F.R.C.P.45 ESI’s counsel argued that the documents ESI wished to add to the record by the filing of its Brief proved that “there is a material question of fact as to whether SCBT, N.A., is contractually obligated to be responsible for Bank Meridian’s torts.”46 The pleading further argued that SCBT had represented “to Defendants and to the Court that it has no contractual liability for Bank Meridian’s torts” and that the documents attached to the Brief prove otherwise. At that point ESI still had not provided any admissible evidence of its allegations to support the Motion. SCBT denied these allegations.47
On March 12, 2012, ESI’s counsel filed a timely Motion requesting relief from the February 29, 2012 Summary Judgment Order.48 This is the last document filed by counsel on behalf of ESI. SCBT responded.49 A hearing was held on March 27, 2012, three months after the summary judgment hearing. Even then, ESI did not properly authenticate the “new evidence,” and even if. authenticated there were no additional facts in the record to adequately explain the evidence and its effect on SCBT’s liability for any act of or litigation against Bank Meridian. SCBT argued that no liability existed.50 On April 19, 2012, the Court entered an Order Denying Motion to Alter or Amend Judgment and Motion for Relief from Summary Judgment Order, and Remanding Remaining Causes of Action (“April 19, 2012 Order”) 51 finding that ESI had not adequately supported its Motions and finding that *210the February 29, 2012 Summary Judgment Order should remain in effect. The Court found there had been no showing that the Strike Order was inappropriate, that the documents in question should be considered, or that they constitute previously unavailable or newly discovered evidence as those items are defined by applicable law. The Court found that “ESI was unable to reliably show the Court the purpose, meaning, completeness, or context of the documents even as late as the date of that hearing.”52
Remand of Remaining Matters to State Court
The April 19, 2012 Order also, after notice and a hearing, remanded the remainder of the lawsuit to state court pursuant to 28 U.S.C. § 1452(b).53 The Court found that the remaining disputes were primarily causes of action arising from state law that are within the expertise of the state court. The April 19, 2012 Order further directed that “[s]hould the state court determine that any amount addressed in ESI’s confirmed plan of reorganization remains due, it shall be paid to the noteholder in accordance with the terms of the [confirmed Chapter 11] plan.”54
The April 19, 2012 Order concluded all matters in this lawsuit requiring resolution in bankruptcy court. The confirmed plan terms governed repayment of ESI’s debt that originated with Bank Meridian. The state court would be required to determine the exact amount of the debt in question to plug into that plan treatment, free of ESI’s counterclaims and defenses to enforcement of the note.
Wicker’s Post-Judgment Filings
Until this point in time, Wicker had failed to adequately, properly and timely challenge the November 2011 Motion for Summary Judgment.55 Wicker also did not file any pleading joining in ESI’s Motion to Reconsider or Motion to Strike to timely challenge the resulting February 29, 2012 Summary Judgment Order. On May 3, 2012, he filed a Notice of Motion Reconsider.56 The document stated “Steven R Wicker and Earth Structures, Inc., the defendants have filed a Motion to Reconsider the Judgment entered in this adversary proceeding on the 19th day of April, 2012.” The document was signed “Steven R. Wicker, Pro Se.” It did not include any legal or factual grounds for reconsideration. Although Wicker mentioned ESI in his pleading, ESI’s counsel did not file any challenge to the April 19, 2012 Order. The Court entered an Order Denying Motion to Reconsider on May 7, 2012,57 having already ruled on similar requests. There has been no appeal from, or challenge to, that denial by any party.
Previously on May 3, 2012, Wicker did file a Notice of Appeal of prior decisions.58 That Notice stated that Wicker and ESI appeal “from [the] Motion for Summary *211Judgment, Remand, and Motion to alter or amend Judgment entered in this adversary-proceeding on the 19th day of April, 2012.”59 It was also signed by “Steven R. Wicker, Pro Se.” Although ESI was represented by counsel at that time, counsel did not sign the document and did not initiate any appeal on behalf of ESI.
■ Wicker’s reasons for the appeal, found in his May 18, 2012, Statement of Issues to be Presented on Appeal,60 are worthy of inclusion here as they shed light on his disagreements with the Court’s rulings. The document reads as follows:
Pursuant to Rule 60(b) of the Federal Rules of Civil Procedure the court may relieve a party from a final judgment, ifi
* * newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b)
* * fraud, misrepresentation, or misconduct by an opposing party
Earth Structures nor Steven R. Wicker were allowed sufficient time to authenticate neivly discovered evidence, which was received on February 27th, one day prior to the Motion for Summary Judgment Hearing. SCBT’s own affidavit states that they were unable to obtain this document which should validate that it tvas previously unattainable.
I am in the process of obtaining the authenticated documents, which I be-Heve will show that SCBT was in possession of the “Inherited Litigation” document in question and was fully aware of their liability, but refused the courts [sic] demand to produce this evidence for nearly six months, thereby committing fraud, misrepresentation, and misconduct.
I believe that in light of the new evidence and it’s unavailability to the defense, that the ruling was in error as it was the court’s responsibility to rule in a manner most favorable to the non moving party.
I, Steven R Wicker, believe that I was denied Due Process as provided by the Fifth Amendment to the U.S. Constitution. I was neither addressed nor given the opportunity to be heard during the Motion for Summary Judgment hearing as the record will show.
I, Steven R Wicker, feel that I have been misrepresented by my attorneys. The court gave ESI the opportunity several times during the Motion for Summary Judgment hearing to ask for more time to authenticate the newly discovered “Inherited Litigation” document. Each time I instructed my attorney to ask the Court for more time, and each time my attorney refused to do so.
I specifically instructed my attorneys in writing to file an appeal on behalf of Earth Structures, Inc. and they failed to *212do so.61
ESI’s counsel did not sign any of these documents on behalf of ESI and counsel had not been granted leave to withdraw at the time they were filed.
Wicker then filed a Motion for Stay Pending Appeal on May 18, 2012.62 SCBT objected, stating, among other things, that Wicker had ample opportunity to authenticate and explain the documents in question and failed to do so.63 Counsel for ESI did not join in this filing. Instead, ESI’s counsel filed a Motion to Withdraw as Attorney for ESI on May 29, 2012, because counsel and ESI “disagree on what is in the best interest for Earth Structures, Inc., in reaching a resolution of this case, which may differ from the interests of Mr. Wicker personally.”64
The SCBT Letter
A hearing was scheduled for June 4, 2012 to consider the stay request and ESI counsel’s request to withdraw. A review of the pleadings the day before the hearing indicated insufficient grounds for a stay pending appeal given that the alleged “new evidence” remained vague and unauthenticated.
However, immediately before the hearing, SCBT electronically filed a letter (the “SCBT Letter”) indicating that recently discovered new information may require modification of the Court’s February 29, 2012 Summary Judgment Order.65 The SCBT Letter includes the following:
I wanted to take a moment to bring to the Court’s attention some new information that has been relayed to SCBT and its attorneys this morning. During the last few days, Joe Sargent, acting on behalf of Defendant Wicker, has contacted the FDIC with regard to this matter. It appears that Mr. Sargent was seeking information with regard to the “Inherited Litigation Report” that has been a point of discussion at several hearings. That interaction led the FDIC to take another look at this matter and to contact SCBT and its counsel in an effort to clarify a couple of issues.
During a conference call that took place between 10:30-11:30 a.m. this morning, SCBT and its attorneys were informed by Stephen Pruss and Edward C. Parker, both of who are attorneys with the FDIC, that, since the transaction between the FDIC and SCBT was a loss share transaction, that it is the FDIC’s position that SCBT assumed liability with regard to the Defendants’ claims in this matter subject to the special powers.
Obviously, this was new information and a new position that came as a surprise to SCBT and its attorneys. As had been relayed to the Court on various occasions, given the nature of the assigned special powers SCBT and its counsel has sought and obtained approval from the FDIC prior to the submission of any pleadings or proposed orders related to this matter. Prior to today’s conference call, SCBT and its counsel had no reason to believe that the FIRREA claims process was inapplicable or that any liability for acts or omissions of BankMeridian flowed through to SCBT subject to the special powers. Based on the foregoing, it appears that portions of the Court’s Summary Judgment Order may need to be modified.
*213SCBT and its undersigned wanted to bring this to the Court’s attention before proceeding with any hearings or other Proceedings regarding the appeal of the Summary Judgment Order and/or related orders.66
The June 4, 2012 Hearing in Bankruptcy Court
A lengthy hearing followed within the hour after the filing of the SCBT Letter. The hearing was held before the record was transmitted to the District Court for consideration of the appeal and approximately seven months after the summary judgment hearing.67 Wicker, counsel for SCBT and counsel for ESI were present. The Court questioned all parties about various matters, including the effect of the SCBT Letter on the proceedings and the scope of any assumption of liability, how that assumption impacts the FIRREA claims process and application of § 1823 as a shield to liability, and regarding how the SCBT Letter affects pursuit of any claims against BankMeridian or its assets. The parties provided few, if any, answers.
At the same hearing, the Court granted the request of ESI’s counsel to withdraw as all agreed that there was a dispute between Wicker and counsel as to how they should proceed in representing the interests of ESI.68 This Court then entered an Order Granting Motion for Stay Pending Appeal (“Stay Order”) as a result of the SCBT Letter.69 On the record the Court suggested to the parties that Wicker dismiss the appeal and that SCBT agree to allow this Court to review the February 29, 2012 Summary Judgment Order given the SCBT Letter, or take some similar action. Despite this suggestion, the appeal proceeded. No further relief was requested from the Bankruptcy Court at that time and the record on appeal was transmitted to the District Court on July 19, 2012.70 The Stay Order stayed the effect of the April 19, 2012 Order while the appeal was pending.71
Proceedings in the District Court
The District Court promptly entered an order notifying the parties of the bankruptcy appeal and directing Wicker to file a brief within fourteen days.72 However, instead of filing a brief, Wicker filed a Motion to Remand to the Bankruptcy Court in light of new evidence.73 Subsequently, SCBT filed a Motion to Dismiss the appeal as a result of Wicker’s failure to timely file a brief, even though he was granted an extension of time to do so.74 In Wicker’s response to the Motion to Dismiss he recognized that ESI may not be a party to the appeal since he filed the appeal pro se, and he requested more time to *214find counsel for ESI.75 On January 14, 2013, the Honorable Timothy M. Cain entered an order denying SCBT’s dismissal request and granting Wicker’s remand motion.76 The Order found: “While it appears that despite the new evidence, Wicker’s claims may be barred by § 1823(e), as noted by the Bankruptcy Court in a footnote in her order, the court declines to rule on this prior to the Bankruptcy Court’s revisions, if any, to the order granting SCBT summary judgment.”77 When the matter was returned to this Court on remand in January of 2013, only “Steven R. Wicker” was listed as an appellant.
Wicker’s August 27, 2012 Motion to Reconsider
As discussed in the District Court’s Order, Wicker filed a Motion to Reconsider All Rulings/Judgments Upon Remand from the Appellate Court in Light of New Evidence (‘Wicker Motion”)78 in this Court in August of 2012 while the appeal was pending in the District Court. The Motion is very brief:
Defendant, Steven R. Wicker, would respectfully request Reconsideration of all Rulings/Judgments in the above case in light of new evidence provided by Plaintiff and attached hereto.
a) To the extent necessary with regard to Earth Structures Inc., Steven R. Wicker, and Ultra Holdings, LLC.
b) Remand of claims to the Spartan-burg Master-in-Equity concerning the properties of Ultra Holdings, LLC
c) With regards to personal judgments against Steven R. Wicker
d) With regards to Legal Representation of Earth Structures, Inc. and Ultra Holdings, LLC giving defendant time to find new legal counsel
The document is signed by Wicker, individually and it attaches a copy of the Motion for Remand filed in District Court and the SCBT Letter. No legal authority or further grounds are provided. After the District Court’s remand to this Court approximately five months later, an Order was entered providing that any documents supporting the Wicker Motion must be filed on or before February 5, 2012.79 Subsequently, Wicker submitted a Memorandum in support.80 To date, no appearance has been made by counsel on behalf of ESI. The only document submitted since remand has been submitted and signed by Wicker, pro se. The last appearance on behalf of counsel for ESI was made at the June 4, 2012 hearing. Wicker’s Memorandum begins “COMES NOW *215the Debtor Steven R Wicker (SRW) by and through its undersigned counsel, who hereby submits this Memorandum in Support of Steven R Wicker’s Motion to Reconsider[.]”
Wicker is not a “Debtor” in any proceeding in this Court, and despite reference to “undersigned counsel” the document is signed by Wicker, “Pro SE” as an individual. Wicker states that he
asks the Court to reconsider any and all prior rulings which may have been affected by the banks [sic] failure to submit evidence of its position with respect to owning liability for the loans in this case. While SRW admits freely that SCBT, N.A., did not become involved in the loans in question until the summer of 2011, SCBT, N.A., has voluntarily subjected itself to potential liability for SR W’s defenses and counterclaims in this matter by its choice to become a party and pursue claims against certain Defendants based upon loans it acquired following Bank Meridian’s failure.
Much of the remainder of Wicker’s Memorandum is an attempt to re-litigate the summary judgment matter in its entirety on the underlying facts, not as a result of new evidence. He also levels allegations against the attorneys involved in this case, including counsel for ESI.
SCBT responded to Wicker’s filing, arguing that Wicker cannot meet the requirements of Rules 59(e) or 60(b).81 SCBT further argues that “[t]he SCBT Letter does not contain nor can it be construed as new evidence, it merely advises the Court of the FDIC’s position as to whether or not the FIRREA claims process applied to Defendants’ counterclaims against BankMeridian.” SCBT argues that even given the SCBT Letter Wicker cannot prevail at trial on his claims and defenses as a matter of law. Overall, the pleadings provide the Court with little information in this record to explain the meaning of the SCBT Letter.
Discussion and Conclusions of Law
Rule 59(e)
An earlier judgment may be amended pursuant to Fed.R.Civ.P. 59(e) for the following reasons: (1) to accommodate an intervening change in the controlling law, (2) to account for previously unavailable evidence, or (3) to prevent manifest injustice. See Hutchinson v. Staton, 994 F.2d 1076, 1081 (4th Cir.1993); Pac. Ins. Co. v. Am. Nat’l Fire Ins. Co., 148 F.3d 396, 403 (4th Cir.1998). “In general ‘reconsideration of a judgment after its entry is an extraordinary remedy which should be used sparingly.’ ” Id. (quoting 11 Wright et al., Federal Practice and Procedure, § 2810.1, at 124 (2d ed.1995)). A party’s mere disagreement with the Court’s ruling does not warrant a Rule 59(e) motion. See Hutchinson, 994 F.2d at 1082 (citing Atkins v. Marathon LeTourneau Co., 130 F.R.D. 625, 626 (S.D.Miss.1990)). A motion pursuant to Rule 59(e) must be filed by mov-ant within fourteen days after entry of the judgment. See Fed. R. Bankr.P. 9023.
SCBT argues that Wicker failed to file a timely motion pursuant to Rule *21659(e).82 It is true that Wicker, individually, did not file any pleading or present any challenge to the February 29, 2012 Summary Judgment Order or its effect prior to the expiration of the period set forth in Rule 59(e).
ESI did file a timely request for relief, through counsel. The Court denied the requested relief in the April 19, 2012 Order.83 Thereafter, counsel for ESI did not pursue the matter further in any way, but instead moved to withdraw after the Rule 59(e) deadline expired. Wicker, individually, filed a Notice of Motion to Reconsider84 within the time restrictions of Rule 59(e) stating that it was filed on behalf of Wicker and ESI. However, the Court previously disposed of that request by the Order Denying Motion to Reconsider entered on May 7, 2012.85 No challenges to that order followed.
Therefore, no relief can be granted pursuant to Rule 59(e) as there is no timely request pending before the Court. Failure to make a request within the appropriate timeframe bars relief under Rule 59(e). See e.g. Miracle of Life, L.L.C. v. N. Am. Van Lines, Inc., 447 F.Supp.2d 519, 521 (D.S.C.2006) (finding that “[ultimately, because the filing period in Rule 59(e) is mandatory and jurisdictional, and because Plaintiffs’ failed to file their motion within that time period, the court is without jurisdiction to entertain Plaintiffs’ motion to reconsider”).
Rule 60(b)
The Court can view any request to reconsider, alter or amend as a request made under Fed.R.Civ.P. 60(b). The Court may relieve a party from a final judgment or order for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief.
“In order to obtain relief under Rule 60(b), the moving party must demonstrate at least one of the six grounds for relief listed in Rule 60(b).” Robinson v. Wix Filtration Corp. LLC, 599 F.3d 403 (4th Cir.2010). Properly applied, Rule 60(b) strikes a balance between serving the ends of justice and preserving the finality of judgments. House v. Secretary of Health and Human Services, 688 F.2d 7, 9 (2d Cir.1982); Seven Elves, Inc. v. Eskenazi 635 F.2d 396, 401 (5th Cir.1981). Since 60(b) allows extraordinary judicial relief, it is invoked only upon a showing of *217exceptional circumstances. Ben Sager Chemicals Intern. v. E. Targosz & Co., 560 F.2d 805, 809 (7th Cir.1977); Hoffman v. Celebrezze, 405 F.2d 833, 835 (8th Cir.1969); Rinieri, 385 F.2d at 822. A motion seeking such relief is addressed in the sound discretion of the Court with appellate review limited to determining whether that discretion has been abused. Griffin v. Swim-Tech Corp., 722 F.2d 677, 680 (11th Cir.1984); Matter of Emergency Beacon Corp., 666 F.2d 754, 760 (2d Cir.1981).
“In determining whether a judgment should be set aside under the standard of Rule 60(b), the Court must engage in a two-pronged process. First, the moving party must satisfy three requirements: (1) the motion must be timely filed; (2) the moving party must have a meritorious defense to the action; and (3) the setting aside of the judgment must not unfairly prejudice the nonmoving party. Once the requirements of the first prong have been met, the moving party must next satisfy one of the six grounds for relief set forth in Rule 60(b).” See In re Air S. Airlines, Inc., 249 B.R. 112, 115-16 (Bankr.D.S.C.2000) (internal citations omitted).
The only motion before the Court to satisfy Rule 60(b) is the Wicker Motion filed on August 27, 2012.86 While Wicker may represent himself in this lawsuit, there is no evidence in this record that Wicker is qualified to represent other parties under applicable law. See e.g. Palazzo v. Gulf Oil Corp., 764 F.2d 1381 (11th Cir.1985) (“The rule is well established that a corporation is an artificial entity that can act only through agents, cannot appear pro se, and must be represented by counsel.”); In re Tamojira, 20 Fed.Appx. 133 (4th Cir.2001) (finding that “it is well settled that a corporation must be represented by an attorney in federal court”) (internal citations omitted). The record reflects that Wicker is fully aware that he can only represent himself, yet he has continued to file documents captioned and signed individually that demand or hint of relief for ESI and others.87 Given that ESI and any other Defendant have had more than enough time to obtain new counsel since the rulings made in February and April of 2012, as a result of the failure of any appropriate pleading filed on behalf of ESI or any Defendant other than Wicker to challenge the Court’s prior Orders, and pursuant to applicable law, the Court finds that only Wicker, individually, is due any consideration as a result of the Wicker Motion. This conclusion seems obvious from the pleadings filed, but given Wicker’s appearance pro se, the Court has devoted a great deal of review and analysis to this issue in an extraordinary effort to reach a fair result. The conclusion: Wicker is the only movant.
ESI and any others had ample opportunity to pursue relief post-judgment and having failed to do so Rule 60(b) “may not be used as a substitute for a timely appeal.” United States v. O’Neil, 709 F.2d 361, 372 (5th Cir.1983); Rinieri v. News Syndicate Co., 385 F.2d 818, 822 (2d Cir.1967). This Court cannot find that ESI is entitled to the extraordinary remedies of Rule 60(b) when that party has failed to *218pursue any request to reconsider or any appeal. See e.g. Dowell v. State Farm, Fire & Cas. Auto. Ins. Co., 993 F.2d 46, 48 (4th Cir.1993) (holding that the “voluntary, deliberate, free [and] untrammeled choice” not to appeal the original judgment or order cannot establish a basis for Rule 60 relief) (quoting Ackermann v. United States, 340 U.S. 193, 200, 71 S.Ct. 209, 95 L.Ed. 207 (1950) (alteration in original)); In re Burnley, 988 F.2d 1, 8 (4th Cir.1992) (“A Rule 60(b) motion may not substitute for a timely appeal”). Absent an appropriate and timely motion and prosecution thereof, the extraordinary relief provided under Rule 60(b) must be denied as to any other party.
Applicable law allows, but does not require, the Court to raise Rule 60(b) sua sponte after notice and an opportunity for hearing. See In re Jack Kline Co., Inc., 440 B.R. 712, 729 (Bankr.S.D.Tex. 2010). However, nothing in this record motivates this Court to do so. All parties to this proceeding had notice of the relevant judgments and the SCBT Letter long ago, and more than nine months have passed since ESI’s counsel was allowed to withdraw. Any relief requested on behalf of Ultra must clearly be denied. That Defendant has not made a proper appearance in this case since 2011. On these facts the court cannot find exceptional circumstances warranting relief from a judgment sua sponte.
Applying Rule 60(b) to the Wicker Motion, the February 29, 2012 Summary Judgment Order is Vacated as to Wicker Only
Turning now to the substance of the Wicker Motion, the Court finds that the SCBT Letter is previously unavailable evidence. The letter itself recognizes that SCBT’s position and defenses in this lawsuit are based on a contract between SCBT and the FDIC. It further recognizes that some of the contract terms, or the interpretation of those terms by the FDIC, were not previously known or understood even by SCBT’s counsel until the letter was filed. This is sufficient cause to include the SCBT Letter in the summary judgment record for Wicker and to review the February 29, 2012 Summary Judgment Order as it relates to Wicker only. With the SCBT Letter, the record indicates that the Wicker Motion is premised on a meritorious defense to summary judgment, that there is no prejudice to the opposing party because SCBT contributed to the confusion in this matter, that Wicker timely requested relief thereafter, and the SCBT Letter presents exceptional circumstances given Wicker’s timely motion.
The February 29, 2012 Summary Judgment Order granted relief in favor of SCBT, primarily as a result of the application of § 1823(e). The SCBT Letter added to the summary judgment record gives the Court some evidence that some form of liability could have been assumed by SCBT. Although there is insufficient information to determine the exact impact, it is enough to deny summary judgment against Wicker upon reconsideration. Adding the SCBT Letter to the summary judgment record, the Court simply cannot determine how any such contract terms interact with § 1823(e). In light of the SCBT Letter, the Court can no longer say that a review of the record indicates that no act of SCBT could give rise to liability for Wicker’s counterclaims asserted in this litigation, and further the Court cannot determine how the defenses asserted by Wicker may be affected until the details of any assumption are understood. Summary judgment is not appropriate if there is some material fact in dispute regarding the application of § 1823(e) to bar counterclaims and defenses asserted by Wicker. Absent an assumption of liability it ap*219pears that § 1823(e) would control, but given the SCBT Letter, any potential assumption of liability by SCBT and the effect on the application of § 1823(e) has not been sufficiently explained.
The Court notes that the meritorious defense relates to the summary judgment request and is analyzed only on the record before the Court at this time. This is a far lesser burden than Wicker will face on the merits of the matter at trial.
While the Court finds that the SCBT Letter by itself provides sufficient grounds to take another look at the February 29, 2012 Summary Judgment Order as it relates to Wicker, that letter is the only new evidence the Court considered. To the extent that Wicker seeks to rely on any prior submissions of purported new evidence,88 none have been adequately authenticated or properly explained with admissible evidence even now — over a year after the Brief was filed, seven months after the SCBT Letter and two months after remand. The Memorandum filed in support of the Wicker Motion attaches various documents, but none except the SCBT Letter appear to involve any new and previously unattainable evidence.89
As a result of the Wicker Motion, the February 29, 2012 Summary Judgment Order will be vacated as to Wicker only. No other party has properly pursued further relief and therefore, all prior orders discussed herein remain in full force and effect as to any other Defendants.
This means that Ultra, ESI and any party other than Wicker, remain bound by *220the prior decisions of this Court. No counterclaims or defenses can be asserted by anyone but Wicker. Wicker may continue to pursue those defenses and counterclaims to the extent that they are applicable to him, individually. As stated above, when properly applied Rule 60(b) strikes a balance between serving the ends of justice and preserving the finality of judgments. House v. Secretary of Health and Human Services, 688 F.2d 7, 9 (2d Cir.1982); Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 401 (5th Cir.1981). On these facts the scales tip in favor of honoring the finality of the judgment and against parties that have not timely and properly challenged the final orders and judgment.
All Remaining Disputes in this Lawsuit are Remanded to State Court
Pursuant to 28 U.S.C. § 1452(b)90 a proceeding may be remanded to state court based on equitable grounds. When considering equitable remand, bankruptcy courts generally “consider judicial economy, comity, respect for state court capabilities, and the effect on administration of the estate.” American Inv. Life Ins. Co. v. Salinas (In re Salinas), 353 B.R. 124 (Bankr.D.S.C.2006) (quoting In re Olympia Holding Corp., 215 B.R. 254, 256 (Bankr.M.D.Fla.1997)).
The Court previously returned the remaining portions of this lawsuit to state court for completion in the April 19, 2012 Order. This finding remains appropriate even after the relief granted to Wicker herein. The lawsuit was removed to this Court from state court due only to the involvement of Chapter 11 Debtor ESI. Thereafter, the bulk of this lawsuit was quickly remanded to state court because state law claims were presented, and also because this Court was not the proper forum to determine all issues raised in the original suit involving state law foreclosure, claims against non-debtor parties and recovery of collateral that was not property of ESI. All matters involving ESI and others that must be resolved by this Court are now concluded. Although various disputes involving Wicker, individually, and Plaintiffs remain after entry of this Order, and although resolution of the disputes could result in a recovery in his favor, those matters do not directly impact administration of a bankruptcy case. Wicker may continue to seek recovery for himself or reduction of any personal contractual liability as a result of his defenses and counterclaims in state court. Further, SCBT may continue to pursue its remaining claims in state court. The state court can determine the amount of any debts in question owed, free of ESI’s counterclaims and defenses as pursuit thereof by any party other than Wicker was ended by the February 29, 2012, Summary Judgment Order.
Payment of any amount owed by ESI is to be made pursuant to the terms of the confirmed Chapter 11 plan and pursuit of any collateral owned by ESI likewise is governed by the plan. The contractual terms of that plan bind the parties as they would any debtor and creditor post-confirmation and post-bankruptcy and can be incorporated by the state court into any rulings to be issued in the remaining actions. That court can liquidate collateral of parties other than ESI, if it determines such an act is appropriate, and therefore is in a better position to determine the final balance of the debt after application of any proceeds. While this Court does not have the ability to litigate all issues remaining in this lawsuit, the state court does. *221Therefore, all remaining matters should be returned to the state court pursuant to 28 U.S.C. § 1452(b). The remaining matters do not involve active bankruptcy case administration. Therefore, the federal court’s involvement in this matter should end.
IT IS THEREFORE, ORDERED, THAT
1. Any Relief requested pursuant to Fed.R.Civ.P. 59(e) to alter or amend a judgment, made applicable to this proceeding by Fed. R. Bankr.P. 9023, is hereby DENIED;
2. Any relief requested pursuant to Fed.R.Civ.P. 60(b), made applicable to this proceeding by Fed. R. Bankr.P. 9024, is hereby DENIED except as expressly granted herein;
3. Defendant Steven R. Wicker’s Motion to Reconsider All Rulings/Judgments Upon Remand From the Appellate Court in Light of New Evidence, filed August 27, 2012,91 pursuant to Fed.R.Civ.P. 60(b), made applicable to this proceeding by Fed. R. Bankr.P. 9024 is GRANTED IN PART to allow Wicker relief from the final judgment and order of this Court entered on February 29, 2012, titled Summary Judgment Order.92 The Order shall not apply to any claims against, defenses asserted by or counterclaims pursued by Wicker, individually, in this lawsuit;
4. Except as expressly granted in this document, any additional relief requested in any Motion pending before this Court is DENIED and this and prior orders remain in full force and effect as to all other Defendants;
5.All remaining causes of action in this lawsuit are hereby REMANDED to the Spartanburg County Court of Common Pleas in the State of South Carolina pursuant to 28 U.S.C. § 1452(b).
IT IS SO ORDERED.
. See Doc. No. 163, filed January 14, 2013. The last two defendants listed in the caption have not actively participated in this proceeding in this Court.
. Doc. No. 162, filed August 27, 2012 (Motion to Reconsider All Rulings/Judgments Upon Remand from the Appellate Court in Light of New Evidence).
. Doc. Nos. 119 and 120, signed February 28, and entered February 29, 2012.
. See Doc. Nos. 43, 119, and 135.
. C/A No. 09-03768-hb, Doc. No. 1.
. Id. at Doc. Nos. 16, 17, 135, 150, 184 and 215 (Chapter 11 Plan and Disclosure Statement and amendments); see also, Adv. Proc. Nos. 09-80126 and 09-80127.
. C/A No. 09-03768-hb, Doc. Nos. 221, 150, 184 and 215.
. C/A No. 09-03768-hb, Doc. No. 215.
. Id. at Doc. No. 150.
.Id. at Doc. No. 261.
. See generally C/A No. 09-03768-hb Docket.
. C/A No. 2009-CP-42-0793, Spartanburg County Court of Common Pleas for South Carolina, filed February 9, 2009.
. C/A No. 09-03768-hb, Doc. No. 54, Notice of Removal, filed August 4, 2009, by Earth Structures, Inc.
. C/A No. 09-03768-hb.
. Bailey filed a Chapter 7 bankruptcy petition on May 14, 2010, C/A No. 10-03470-hb.
. Doc. No. 13, Order Granting Motion for Remand, filed October 29, 2009.
. Id. The original pleadings indicate that "Note 2" is a promissory note from Ultra to Bank Meridian for $202,000. "Note 4” is a promissory note from ESI to Bank Meridian for $650,000.
. Doc. No. 43, Order Granting in Part and Denying in Part Plaintiff’s Motion for Summary Judgment, filed October 26, 2010. The order granted judgment against Defendants on the appraisal statute defense and the over collateralization defense, granted judgment against Wicker on the interference with contractual relationship claim and against Defendants on the breach of fiduciary duty claim.
. Doc. No. 66, filed May 23, 2011.
. Doc. Nos. 86, 91 and 92.
. Doc. No. 86, filed October 14, 2011.
. Id.
. Doc. No. 96, Med October 25, 2011.
. Id.
. Doc. No. 96, entered October 25, 2011. Ultra Holdings and Bailey’s participation to this point in this adversary proceeding had been limited.
. Doc. No. 99, Amended Answer and Counterclaim of Earth Structures, Inc., filed November 10, 2011.
. Doc. No. 100, Amended Answer and Counterclaim of Steven R. Wicker, filed November 14, 2011.
. See Doc. No. 86, Motion to Continue Hearing, filed October 14, 2011.
. Doc. No. 103, Motion for Summary Judgment and Memorandum in Support of Motion for Summary Judgment, filed November 21, 2011.
. Further reference to 12 U.S.C. § 1823 will be by section number only. 12 U.S.C. § 1822(e)(1) (2011) provides as follows:
No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section or section 1821 of this title, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement — •
(A) is in writing,
(B) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution,
(C)was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and has been, continuously, from the time of its execution, an official record of the depository institution.
. Doc. No. 103, Motion for Summary Judgment, filed November 21, 2011.
. Responses were due by December 9, 2011. (Doc. No. 104). ESI filed a timely response on that date. (Doc. No. 106).
. Doc. No. 106, filed December 9, 2011. ESI’s Response to SCBT, N.A.'s Motion for Summary Judgment and Memorandum in Opposition.
. Doc. No. 112; see also Proposed Orders at Doc. Nos. Ill and 113, all filed January 31, 2012.
. Doc. No. 112, filed January 31, 2012.
. Id.
. Doc. No. 112, Exhibit A.
. Doc. No. 117, filed February 8, 2012. When a Proposed Joint Pretrial Order was submitted for consideration (Doc. No. 66) in May of 2011, Wicker signed separately representing himself. On November 16, 2011, counsel for ESI filed a letter stating that ESI is the only party counsel represented in this adversary proceeding. Wicker was aware of the fact that counsel only represented ESI. These issues were discussed in various records of hearings held before the Court and he also filed numerous pleadings, discussed herein, which he filed on his own behalf without the assistance of counsel.
. Doc. No. 114, filed February 1, 2012.
. Id.
. Doc. No. 115, filed February 6, 2012.
. Doc. Nos. 119 and 120.
. Id.
. Id.
. Doc. No. 118, filed February 29, 2012.
. Id. at page 2.
. Doc. No. 127, Response to Motion, filed March 15, 2012 (including Affidavit of William M, Aiken, III, Senior Vice President, Manager of Special Assets, SCBT, N.A.).
. Doc. No. 125, filed March 12, 2012; see also Doc. No. 135, filed April 19, 2012.
. Doc. No. 130, filed March 20, 2012.
. See Recording of hearing held March 27, 2012.
. Doc. No. 135, Order Denying Motion to Alter or Amend Judgment and Motion for Relief from Summary Judgment Order, and Remanding Remaining Causes of Action, filed April 19, 2012 (This Order details the documents that ESI wanted the Court to consider and their shortcomings and SCBT's response that it had no idea what these documents were or what they mean to this litigation).
. Id.
. Id. (internal citations omitted).
. Id.
. Wicker’s letter indicated that he joined in the filing of the Brief and ESI's Proposed Order, but noting was filed thereafter.
. Doc. No. 137, filed May 3, 2012.
. Doc. No. 140.
.Doc. No. 138, filed May 3, 2012. Fed. Rule of Bankr.Proc. 8002(a) provides that "the notice of appeal shall be filed with the clerk within 14 days of the date of the entry of the judgment, order, or decree appealed from. If a timely notice of appeal is filed by a party, any other party may file a notice of appeal within 14 days of the date on which the first notice of appeal was filed[.]” The rule also provides that if certain post-order motions are filed, the appeal period runs from disposition of those motions.
. Id.
. Doc. No. 145. The Court notes Wicker states that information was received on February 27, 2012, the day before the summary judgment hearing. Actually the record reflects that the summary judgment hearing was held on December 15, 2011. The Summary Judgment Order was entered on February 29, 2012, after the matter was under advisement for some time. The Brief filed January 31, 2012, indicates that on or about January 12, 2012, the FDIC sent information to ESI’s counsel, followed by more information on January 26, 2012. Wicker’s Motion for Reconsideration does attach documents from the FDIC dated March 27, 2012 (not February 27), the day of the hearing on the Motion to Alter or Amend Judgment. These appear to be produced as the result of a subpoena issued by counsel for ESI on March 26, 2012. See Doc. Nos. 110, 118, 119, 120, 132, and 162.
. Doc. No. 145, filed May 18, 2012.
. Doc. No. 143, filed May 18, 2012.
. Doc. No. 148, filed May 30, 2012.
. Doc. No. 147, filed May 29, 2012.
. Doc. No. 154, filed June 4, 2012.
. Id.
. Fed. Rule of Bankr.Proc. 8005 requires that the stay request ordinarily be directed to the bankruptcy court.
. Doc. No. 156, filed June 6, 2012.
. See Doc. No. 157, Order Granting Motion for Stay Pending Appeal, filed June 6, 2012.
. Doc. No. 160.
. Doc. No. 157, filed June 6, 2012. The appeal is no longer pending so the stay is now inapplicable.
. C/A No. 7:12-cv-01958-TMC, Doc. No. 34, filed July 19, 2012. See also Doc. No. 42, filed August 7, 2012 (The District Court then granted Wicker an extension to file the brief until August 27, 2012. However, Wicker never filed the brief.).
. Id. at Doc. No. 46, filed August 27, 2012. This document was filed by “Defendant, Steven R. Wicker” and signed by Wicker individually.
. Id. at Doc. No. 48, filed September 12, 2012.
. Doc. No. 166, Exhibit D.
. Id. at Doc. No. 64, Order Ruling on Report and Recommendation, filed January 14, 2013; see also Doc. No. 57, Report and Recommendation, filed November 15, 2012 (The Honorable Jacquelyn D. Austin recommending that SCBT’s Motion to Dismiss the appeal be granted and Wicker’s Motion to Remand be denied, but The Honorable Timothy M. Cain declined to adopt this recommendation opting for remand instead); see also C/A No. 09-80118-hb, Doc. No. 163, filed January 14, 2013.
. Id. at Doc. No. 64, Order Ruling on Report and Recommendation, filed January 14, 2013.
. Doc. Nos. 162 and 166. This Motion attaches a copy of the Motion for Remand filed in the District Court. It is filed by "Defendant, Steven R. Wicker" and signed by Wicker individually.
. Doc. No. 164, filed January 18, 2013.
. Doc. No. 166, filed February 5, 2013. Large portions of this document appear to be copies of ESI’s Response to SCBT, N.A.’s Motion for Summary Judgment and Memorandum in Opposition, Doc. No. 106 filed by ESI’s counsel in December of 2011. However, Wicker changes "ESI” to "Wicker” or "SRW" or "ESI/(SRW)” as needed.
. Doc. No. 167, filed February 19, 2013. Rules 59 and 60 are made applicable to bankruptcy proceedings by Fed. R. Bankr.P. 9023 and 9024. Rule 9023 provides that "Rule 59F.R.Civ.P. applies in cases under the Code. A motion for a new trial or to alter or amend a judgment shall be filed, and a court may on its own order a new trial, no later than 14 days after entry of judgment.” Rule 9024 provides that Rule 60 applies in cases under the code, with limited exceptions that are not applicable here.
.The motion must be filed within fourteen days after entry of the judgment. See Rule 9023 and 9006. Rule 9023 was amended effective December 1, 2009, to change the time for filing from ten to fourteen days. The time period under Rule 59 was changed from thirty to twenty eight days as well, but Rule 9023 makes the fourteen day period the appropriate time in bankruptcy proceedings.
. Doc. No. 135, Order Denying Motion to Alter or Amend Judgment and Motion for Relief from Summary Judgment Order, and Remanding Remaining Causes of Action, filed April 19, 2012.
. Doc. No. 137.
. Doc. No. 140.
. Doc. No. 162.
. See, e.g., Recording from Hearing on Motion to Withdraw as Counsel for ESI held June 4, 2012; Doc. Nos. 166-5, Copy of Response to SCBT’s Motion to Dismiss (Appellant’s Appeal "Court should grant ESI the right to appeal as well and time to find counsel and file the necessary documents to proceed."); Doc. 162, filed August 27, 2012 (Wicker stated he needed “time to find new legal counsel” to represent ESI and Ultra Holdings); see also C/A No. 7:12-cv-01958-TMC, Doc. Nos. 37, 40, 44, and 48.
. See Doc. No. 166, Memorandum and Exhibits B-I, filed February 5, 2013.
. The first notice on this docket of BankMer-idian’s demise and the potential assertion of special powers as a bar to recovery was filed on October 14, 2011. See Doc. No. 86. The Order on the Motion to Substitute Plaintiff was entered on October 25, 2011 (Doc. No. 96) and the Summary Judgment hearing was held on December 15, 2011. Wicker's Motion attaches the following in the order they appear on the Court’s docket: 1) The SCBT Letter; 2) A typed note on FDIC letterhead dated March 27, 2012 regarding documents produced; 3) A Business Records Affidavit dated March 27, 2012, stating only that the affiant is a custodian of records and that certain records (not identified specifically) are originals or exact duplicates. No further explanation is provided; 4) A copy of a letter from counsel for ESI to an FDIC employee in Jacksonville, Florida, dated March 26, 2012. The letter and enclosed subpoena attempt to require the appearance of the FDIC at a hearing scheduled for the next day, March 27, 2012; 5) A Memorandum marked ''confidential” on FDIC letterhead dated July 29, 2011, discussing BankMeridian and inherited litigation; 6) The Affidavit of Shane W. Rogers dated October 20, 2011; 7) the Memorandum of Purchase and Assumption Agreement and Assignment dated August 26, 2011 and recorded October 21, 2011 on the public records in Mortgage Book 4509, Page 668 in the Spartanburg County Register of Deeds; 8) A copy of Wicker's Response to SCBT's Motion to Dismiss; 9) Affidavit of William M. Aiken, III, dated March 13, 2012; 10) Copy of an Appraisal dated May 10, 2011 along with letter from Appraiser dated May 18, 2011 and all or a portion of an Appraisal dated September 22, 2011; 11) Print outs of emails dated in April of 2012 between Wicker and counsel for ESI evidencing disputes; 12) Similar emails from May of 2012; 13) A copy of a proposed consent order allowing withdrawal of counsel for ESI; 14) An email from June 4, 2012 between Wicker and counsel for ESI; and 15) Emails from August and July of 2008 between Wicker and BankMeridian. At the various hearings that came after the December 2011 summary judgment hearing there was no showing that any of this information, other than the SCBT Letter, could not have been obtained prior to the summary judgment hearing if a timely request had been made. Wicker's Motion does not explain why the documents are "new evidence.” See also recording of hearing held June 4, 2012, wherein the Court asked for an explanation from ESI and Wicker about the failure to ask for or obtain documents prior to the summary judgment hearing.
. 28 U.S.C. § 1452(b) provides in part: "The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground.”
. Doc. Nos. 162 and 166.
. Doc. Nos. 119 and 120. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495779/ | ORDER GRANTING SCBT’S MOTION FOR PARTIAL SUMMARY JUDGMENT
DAVID R. DUNCAN, Chief Judge.
This matter is before the Court on a motion for partial summary judgment entered by defendant SCBT, N.A. f/k/a South Carolina Bank and Trust, N.A. (“SCBT”) on January 4, 2013. Defendant Crop Production Services, Inc. (“CPS”) responded in opposition. The Court held a hearing on the motion for summary judgment on January 22, 2013. After careful consideration, the Court grants SCBT’s motion for partial summary judgment for the reasons set forth below.
FACTS
The debtor, Wesley O’Neal Davis (“Debtor”) filed a petition under chapter 12 of the Bankruptcy Code on September 28, 2011. Debtor filed this adversary proceeding on July 27, 2012, to determine the value and priority of liens creditors hold on three parcels of real property located in Orangeburg County, South Carolina in which Debtor owns a 50% interest. Creditors named as defendants in the adversary proceeding are SCBT, CPS, Helena Chemical Co. (“Helena”), Blakes Service Center, and Meherrin Agricultural and Chemical Co. Blakes Service Center and Meherrin Agricultural and Chemical Co. did not answer the complaint, the Clerk of Court entered their default, and the Court entered an Order valuing their judgment liens at zero. SCBT, CPS, and Helena answered the complaint. In its answer, CPS asserted counterclaims to which SCBT responded and treated as cross-claims. SCBT moved for summary judgment on the issue of priority of the various lien holders with respect to their interests in the three parcels of real estate, and CPS was the only party to respond in opposition.
The facts surrounding this dispute are essentially not in question. Between 2005 and 2008, Debtor executed at least three promissory notes and two mortgages to SCBT. First, Debtor and his wife, Mary *224Jane Davis, executed a promissory note dated June 2, 2005, to SCBT in return for a loan in the amount of $191,375. As security for the loan, Mr. and Mrs. Davis executed a mortgage dated June 2, 2005, on the three parcels of property in Orangeburg County, and the mortgage was recorded. The June 2005 mortgage defines borrower as “WESLEY ONEAL DAVIS AND MARY JANE DAVIS JOINTLY” and contains a future advances clause that states “[t]he lien of this Security Instrument shall secure the existing indebtedness under the Note and any future advances made under this Security Instrument up to 150% of the original principal amount of the Note plus interest thereon, attorneys’ fees and court costs.”
Second, Debtor executed a promissory note dated March 14, 2007, to SCBT in return for a loan in the amount of $138,600. In the area for describing the security for the note, the note states “SEE ADDENDUM.” The addendum to the March 14, 2007 note is signed by Debtor and lists various security agreements Debtor executed during the preceding years, including the entry: “Mortgage dated 06-02-2005 in the name of Wesley O’Neal Davis and Mary Jane Davis.” Mrs. Davis did not execute either the March 14, 2007 note or the addendum. There is also no indication these two documents were ever recorded.
Third, Debtor executed a promissory note dated May 6, 2008, in return for a loan in the amount of $316,000. In connection with this promissory note, Mr. and Mrs. Davis executed a mortgage dated May 6, 2008, which was recorded. The May 2008 mortgage, under “DATE AND PARTIES,” lists “WESLEY O’NEAL DAVIS and Mary Jane Davis.” It also states in paragraph 2 that “[flor good and valuable consideration, the receipt and sufficiency of which is acknowledged, and to secure the Secured Debt (hereafter defined), Mortgagor grants, bargains, conveys and mortgages to Lender the following described property.” The described property is the three parcels in Orange-burg County. Under paragraph 4, the mortgage provides that “[t]he term ‘Secured Debt’ includes, but is not limited to, the following: ... [a]ll obligations Mortgagor owes to Lender, which now exist or may later arise, to the extent not prohibited by law-” Additionally, it defines secured debt as including “[a]ll future advances from Lender to Mortgagor or other future obligations of Mortgagor to Lender under any promissory note, contract, guaranty, or other evidence of debt existing now or executed after this Mortgage whether or not this Mortgage is specifically referred to in the evidence of debt.” The mortgage further states in connection with future advances that “[i]f more than one person signs this Mortgage as Mortgagor, each Mortgagor agrees that this Mortgage will secure all future advances and future obligations described above that are given to or incurred by any one or more Mortgagor, or any one Mortgagor and others.” Under a clause entitled “JOINT AND INDIVIDUAL LIABILITY; CO-SIGNERS; SUCCESSORS AND ASSIGNS BOUND,” the May 2008 mortgage provides:
All duties under this Mortgage are joint and individual. If Mortgagor signs this Mortgage but does not sign the Evidence of Debt, Mortgagor does so only to mortgage Mortgagor’s interest in the Property to secure payment of the Secured Debt and Mortgagor does not agree to be personally liable on the Secured Debt.
“Evidence of Debt” is defined under paragraph 4.A. as the “NOTE DATED 05-06-2008 I/A/O $316,000.00 I/N/O WESLEY O’NEAL DAVIS WITH A MATURITY DATE OF 05-06-2015.”
*225With respect to Helena, Mr. and Mrs. Davis executed a promissory note dated May 29, 2009, in return for a loan in the amount of $35,957.35. As security for the note, they signed a mortgage dated May 29, 2009, on the three Orangeburg County parcels. As for CPS, a judgment in its favor in the amount of $98,711.15 against Debtor was recorded on March 5, 2010 in Orangeburg County. This judgment is against Debtor and Davis Farms and not against Mary Jane Davis. Subsequently, Blakes Service Center and Meherrin Agricultural and Chemical Co. recorded judgments in Orangeburg County.
SCBT filed several claims in Debtor’s bankruptcy case, including a secured claim in the amount of $132,597.31 with the June 2, 2005 note and mortgage attached as proof of the claim; a secured claim in the amount of $125,814.49 with the May 6, 2008 note and mortgage attached as proof of the claim; and a secured claim in the amount of $98,655.79 with the March 14, 2007 note, the June 2, 2005 mortgage, the May 6, 2008 mortgage, two UCC financing statements, and a commercial security agreement attached as proof of the claim. CPS filed a claim in the amount of $106,112.03 based on its judgment. Helena submitted a claim based on its promissory note and mortgage in the amount of $40,000, which it later amended to $40,561.26.
Debtor asserts in the complaint that all three of SCBT’s claims and corresponding interests in Debtor’s real property are entitled to priority, that Helena has second priority, and that CPS has third priority. SCBT agrees with Debtor’s contentions.
CPS does not dispute the priority of SCBT’s $125,814.49 claim and $132,597.31 claim arising from the June 2005 and May 2008 notes and mortgages or that these claims are secured.- CPS does dispute the priority and secured status of the $98,655.79 claim arising from the March 14, 2007 note. CPS argues that SCBT’s claims arising from the May 2008 and June 2005 notes and mortgages have first priority, that Helena’s claim has second priority, and that its claim has third priority.
SUMMARY JUDGMENT STANDARD
Pursuant to Federal Rule of Civil Procedure 56(a), made applicable by Bankruptcy Rule 7056, the moving party is entitled to summary judgment if the pleadings, responses to discovery, and the record reveal that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” A genuine dispute of material fact exists “if the evidence is such that a- reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). As the party seeking summary judgment, the moving party bears the initial responsibility of informing this Court of the basis for its motion. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). This requires that the moving party identify those portions of the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,” which it believes demonstrate the absence of a genuine dispute of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548; see also Anderson, 477 U.S. at 249, 106 S.Ct. 2505.
Though the moving party bears this initial responsibility, the nonmoving party must then produce “specific facts showing that there is a genuine issue for trial.” Celotex, 477 U.S. at 324, 106 S.Ct. 2548; see Fed. R. Civ. P. 56(e). In satisfying this burden, the nonmoving party must offer more than a mere “scintilla of evidence” that a genuine dispute of material fact exists, Anderson, 477 U.S. at 252, 106 *226S.Ct. 2505, or that there is “some metaphysical doubt” as to material facts, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Rather, the nonmov-ing party must produce evidence on which a trier of fact could reasonably find in its favor. See Matsushita, 475 U.S. at 587, 106 S.Ct. 1348.
In considering a motion for summary judgment, this Court construes all facts and reasonable inferences in the light most favorable to the nonmoving party. See Miltier v. Beorn, 896 F.2d 848, 852 (4th Cir.1990). Summary judgment is proper “[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there [being] no genuine issue for trial.” Matsushita, 475 U.S. at 587, 106 S.Ct. 1348 (internal quotations omitted).
ANALYSIS
In its responsive memorandum, CPS asserts summary judgment should be denied because this Court earlier denied a motion to value claims secured by properties of the estate filed in the underlying bankruptcy. CPS argues SCBT presents no new information or evidence in its motion for summary judgment beyond what was provided in connection with the motion to value. However, CPS misapprehends the Court’s ruling on the motion to value. Debtor sought relief in the form of a motion filed in the underlying bankruptcy requesting a determination of the extent, validity, and priority of various liens. The Court denied the motion because Bankruptcy Rule 7001 requires the filing of an adversary proceeding for the purpose of determining the validity, priority, or extent of a lien or other interest in property.
A. Priority
A mortgage is a contract between the parties who entered into it. “The cardinal rule of contract interpretation is to ascertain and give legal effect to the parties’ intentions as determined by the contract language.” Schulmeyer v. State Farm Fire & Cas. Co., 353 S.C. 491, 579 S.E.2d 132, 134 (2003). “Where an agreement is clear on its face and unambiguous, ‘the court’s only function is to interpret its lawful meaning and the intent of the parties as found within the agreement.’ ” Miles v. Miles, 393 S.C. 111, 711 S.E.2d 880, 883 (2011) (quoting Smith-Cooper v. Cooper, 344 S.C. 289, 543 S.E.2d 271, 274 (Ct.App.2001)). “However, if the agreement is ambiguous, it is the court’s duty to determine the intent of the parties.” Id. “It may do so by examining extrinsic evidence.” Id. “An agreement is ambiguous if it is susceptible to more than one interpretation or its meaning is unclear.” Id. “The interpretation of an unambiguous contract is a question of law.” Id. “Similarly, whether a contract is ambiguous is a question of law.” Id. “If the court finds it necessary to examine extrinsic evidence to discern the intent of the parties, the determination of intent is a question of fact.” Id.
When applying state law, federal courts have a duty “to ascertain from all the available data what the state law is and apply it.” West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237, 61 S.Ct. 179, 85 L.Ed. 139 (1940); see also Comm’r of Internal Revenue v. Bosch, 387 U.S. 456, 464, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). In this regard, a state’s highest court is “the best authority on its own law.” Bosch, 387 U.S. at 464, 87 S.Ct. 1776; see also West, 311 U.S. at 237, 61 S.Ct. 179 (“[T]he highest court of the state is the final arbiter of what is state law.”); Liberty Mut. Ins. Co. v. Triangle Indus., Inc., 957 F.2d 1153, 1156 (4th Cir.1992) (“The best evidence to this effect would be, of course, a decision *227by the highest court of New Jersey which addresses the contract interpretation issues now before us, but that court has not spoken to many of these questions.”). When a state’s highest court has not spoken on an issue, a federal court must “predict how that court would rule if presented with the issue.” Private Mortgage Inv. Serv., Inc. v. Hotel & Club Assoc., Inc., 296 F.3d 308, 312 (4th Cir.2002); see also Bosch, 387 U.S. at 464, 87 S.Ct. 1776 (“If there be no decision by [a state’s highest] court then federal authorities must apply what they find to be the state law after giving ‘proper regard’ to relevant rulings of other courts of the State.”). Neither the parties nor the Court has located a South Carolina appellate court decision that is dispositive of the issues before the Court.
In the complaint initiating this advisory proceeding, Debtor, who is one of the mortgagors under the June 2005 and May 2008 mortgages and the obligor under the March 2007 note, asserts that the March 2007 note is secured by both mortgages. Of course, SCBT, who is the other party to these contracts, agrees that the March 2007 note is secured by both mortgages. Debtor also did not respond in opposition to SCBT’s motion for summary judgment in which it argues the March 2007 note is secured by both mortgages.1 Mary Jane Davis, who is the other mortgagor under both mortgages, is not a party to this adversary proceeding or a debtor in the underlying bankruptcy. Consequently, the issue of whether the March 2007 note encumbers her 50% interest in the real estate is not properly before the Court. Regardless, the Court need not decide this issue to resolve the dispute between CPS and SCBT because CPS does not have a judgment against Mary Jane Davis. Its judgment is against Debtor and Davis Farms.
Moreover, the Court finds that the consensus between Debtor and SCBT that their intent was both mortgages would secure obligations such as the March 2007 note, at least to the extent of Debtor’s 50% interest in the property, is consistent with the language in the mortgages. The June 2005 mortgage contains a future advance clause which states “[t]he lien of this Security Instrument shall secure the existing indebtedness under the Note and any future advances made under this Security Instrument up to 150% of the original principal amount of the Note plus interest thereon, attorneys’ fees and court costs.” Although the June 2005 mortgage defines the mortgagors under it as “WESLEY ONEAL DAVIS AND MARY JANE DAVIS JOINTLY,” Debtor through the complaint indicates his intent was that future advances to him made under the June 2005 mortgage would encumber his 50% interest in the real property. Again, SCBT, which is the other party to the June 2005 mortgage and March 2007 note, agrees with Debtor regarding the parties’ intent under these agreements. Further*228more, Debtor does not dispute that the reference to the June 2005 mortgage in the addendum to the March 2007 note is enough to make that note a “future advance[ ] made under” the June 2005 mortgage.
Similarly, the May 2008 mortgage defines the debt being secured as not only the contemporaneous note but also “[a]ll obligations Mortgagor owes to Lender, which now exist or may later arise, to the extent not prohibited by law.” Again, while the May 2008 mortgage lists the Mortgagors under it as ‘WESLEY O’NEAL DAVIS and Mary Jane Davis.”2 Debtor, who is the plaintiff in this adversary proceeding, indicates in the complaint his intent was that the March 2007 note, which was a debt he owed individually, was an existing obligation that, through the May 2008 mortgage, encumbered his 50% interest in the property. He does not assert that only debts owed by both he and his wife were existing obligations secured by the May 2008 mortgage. SCBT, who is the other party to the May 2008 mortgage, agrees with this interpretation.
The issue before the Court with respect to CPS, a subsequent judgment lien holder, is whether the June 2005 and May 2008 mortgages, which it does not dispute were properly recorded before its judgment lien, provide notice that they secure debts such as the March 2007 note. South Carolina’s recording statute is a “race-notice” statute which provides protection to a subsequent purchaser or creditor that records first. See S.C.Code Ann. § 30-7-10; Leasing Enter., Inc. v. Livingston, 294 S.C. 204, 363 S.E.2d 410, 412 (Ct.App.1987). In addition, South Carolina Code Annotated Section 29-3-50(A) provides that:
Any mortgage or other instrument conveying an interest in or creating a lien on any real estate, securing existing indebtedness or future advances to be made, regardless of whether the advances are to be made at the option of the lender, are valid from the day and hour when recorded so as to affect the rights of subsequent creditors, whether lien creditors or simple contract creditors, or purchasers for valuable consideration without notice to the same extent as if the advances were made as of the date of the execution of the mortgage or other instrument for the total amount of advances made thereunder, together with all other indebtedness and sums secured thereby, the total amount of existing indebtedness and future advances outstanding at any one time may not exceed the maximum principal amount stated therein, plus interest thereon, attorney’s fees and court costs.
“[R]ecording is the method by which a third party without actual notice is alerted to the possible transfer of interests in real property.” Leasing Enter., 363 S.E.2d at 412. Recording also provides constructive notice to others of the interest recorded. Ex parte Johnson, 147 S.C. 259, 145 S.E. 113, 122 (1928). “Constructive notice is a legal inference which substitutes for actual notice.” Strother v. Lexington County Recreation Comm’n, 332 S.C. 54, 504 S.E.2d 117, 122 n. 6 (1998). “It is notice imputed to a person whose knowledge of facts is sufficient to put him on inquiry; if these facts were pursued with due diligence, they would lead to other undisclosed facts.” Id.
The Court finds that the language in the June 2005 and May 2008 mortgages *229provided constructive notice that those mortgages secured debts such as the March 2007 note, at least to the extent of the 50% interest in the property of the obligor under that note. Particularly, the May 2008 mortgage indicates it secures “[a]ll obligations Mortgagor owes to Lender, which now exist or may later arise, to the extent not prohibited by law.” Through the exercise of reasonable diligence, a creditor who sees this mortgage could contact SCBT to find out if there are other obligations owed by the mortgagors besides the note executed contemporaneously with the respective mortgage. Additionally, with respect to an obligation one mortgagor owes but not the other, the mortgage would put a creditor on notice that the obligation the individual mortgagor owes may, at a minimum, encumber that mortgagor’s interest in the property. Likewise, the future advance clause in the June 2005 mortgage provides notice that a future advance to one of the mortgagors which references the June 2005 mortgage may encumber that mortgagor’s interest in the property.3
South Carolina Code Annotated Section 29-3-50(A) states that “the total amount of existing indebtedness and future advances outstanding at any one time may not exceed the maximum principal amount stated [in the mortgage], plus interest thereon, attorney’s fees and court costs.” The maximum principal amount under the May 2008 mortgage is $316,000. The note executed contemporaneously with the May 2008 mortgage was for a loan of $316,000. However, SCBT has filed a claim for $125,814.49 arising out of the May 2008 note and a claim for $98,655.79 arising out of the March 2007 note. The total of these two amounts does not exceed $316,000. The claim for $132,597.31 arising out of June 2005 note is secured by its own security instrument. Consequently, the amount that SCBT asserts is secured by the May 2008 mortgage at this time does not exceed the maximum principal amount stated in the mortgage. CPS has not asserted or presented authority demonstrating a different interpretation of section 29-3-50(A) controls.
In sum, the Court finds that the March 2007 note is secured by the June 2005 and May 2008 mortgages. The Court also concludes that the liens created by these security instruments and the debts they secure have first priority with respect to Debtor’s 50% interest in the three parcels of real property at issue, Helena’s lien has second priority, and CPS’s judgment lien has third priority.4
*230B. Valuation
Debtor asserts in the complaint that the value of the three parcels of real property in Orangeburg County is $423,000, meaning the value of Debtor’s 50% interest is $211,500. No party appears to dispute this valuation, but no party has moved for summary judgment on the issue either.
Debtor also asserts valuations of the defendants’ liens in the complaint. The Court has valued the judgment liens held by Blakes Service Center and Meherrin Agricultural and Chemical Co. at zero as a result of their defaults. No party has moved for summary judgment on the issue of the value of the liens held by SCBT, CPS, and Helena. Additionally, Debtor asserts valuations based on Mary Jane Davis’s 50% interest in the real property being encumbered by the notes and mortgages held by SCBT and Helena, including the March 2007 note held by SCBT that only Debtor signed. It does not appear to be proper for the Court to make a finding that Mary Jane Davis’s interest in the real property at issue is encumbered by these obligations in light of the fact she is not a party to this adversary proceeding.
CONCLUSION
SCBT’s motion for partial, summary judgment on the issue of priority is granted. The Court finds that the March 2007 note is secured by the June 2005 and May 2008 mortgages. The Court also concludes that the liens created by these security instruments and the debts they secure have first priority in Debtor’s 50% interest in the three parcels of real property at issue, Helena’s lien has second priority, and Crop Production Services’ judgment lien has third priority.
If the valuation of the liens on the real property and Debtor’s interest in the real property is an issue that needs to be resolved prior to dismissing this adversary proceeding, a party must indicate such in a status report filed within ten (10) days of the entry date of this Order. If filed, this status report should contain a proposal regarding how to proceed toward a resolution of the valuation issue, taking into consideration that Mary Jane Davis is not a party to this adversary proceeding. If no status report is submitted, this Order shall constitute a final judgment of the Court, and the claims not resolved in this Order will be dismissed.
AND IT IS SO ORDERED.
. It is not entirely clear what standing CPS has to dispute the apparent consensus between SCBT and Debtor, who are both parties to the contracts at issue, regarding what they intended to be secured by the June 2005 and May 2008 mortgages. Cf. Professional Bankers Corp. v. Floyd, 285 S.C. 607, 331 S.E.2d 362, 364-65 (Ct.App.1985) ("The general rule at common law is that an action on a contract must be brought by the party in whom the legal interest is vested, and this legal interest is ordinarily vested only in the promisee or promisor. Consequently, they or those in privity with them are generally the only persons who can sue on the contract.”). Along a similar vein, even if the Court were to find the mortgages ambiguous and consider other evidence of the parties’ intent, Debtor has already indicated what his intent was under the mortgages through the complaint initiating this proceeding and his non-response to SCBT’s motion for summary judgment.
. Notably, the May 2008 mortgage does not say Wesley O'Neal Davis and Mary Jane Davis jointly.
. As a practical matter, because CPS's interest in the property is a judgment lien and there is no indication that the obligation which is the basis of the judgment was secured, CPS is most likely not a creditor that relied on a search of real property records prior to extending credit to Debtor.
. In January 2011, SCBT initiated a foreclosure action against the real property at issue. CPS and Helena were named as defendants in the action. The Master in Equity for Orange-burg County, South Carolina entered an order and judgment of foreclosure and sale in favor of SCBT, which was executed on September 6, 2011, and filed of record on September 8, 2011. The Master in Equity included what was owed on the March 2007 note in the amount that was to be paid to SCBT from the proceeds of the foreclosure sale prior to the other lien holders, including CPS, receiving any funds. No party to the foreclosure action appealed this order. Debtor included these facts in the estoppel section of the complaint where he asserts other creditors are estopped from litigating the issue of whether the March 2007 note is secured. SCBT also includes the facts related to the Master in Equity's order in a footnote to its motion for summary judgment. CPS asserts in its answer to the complaint that it did not appeal the Master in Equity’s order because Debtor filed bankruptcy before the time for filing an appeal expired and because pursuing an appeal at that point would have been a violation of the automatic *230stay. No party has moved for summary judgment on the issue of whether collateral estop-pel applies to the matter before the Court. See Zurcher v. Bilton, 379 S.C. 132, 666 S.E.2d 224, 226 (2008) ("Under the doctrine of collateral estoppel, also known as issue preclusion, when an issue has been actually litigated and determined by a valid and final judgment, the determination is conclusive in a subsequent action whether on the same or a different claim. The doctrine may not be invoked unless the precluded party has had a full and fair opportunity to litigate the issue in the first action.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495780/ | MEMORANDUM OPINION
MARVIN ISGUR, Bankruptcy Judge.
Wells Fargo’s Motion for Summary Judgment, (ECF No. 15), is denied.
Nguyen’s cause of action for negligent misrepresentation is dismissed for lack of standing.1
Facts2
Plaintiff Viet Quoc Nguyen and Phung Vu are husband and wife and previously owned a home at 1112 Missouri St., South Houston, Texas 77587. This real property had a mortgage and was secured by a deed of trust to Wells Fargo Home Mortgage. As of the petition date, the home was appraised for tax purposes at $110,286.00. Nguyen owed Wells Fargo just under $80,000.00 in principal on September 4, 2012. (ECF No. 20 at 2).
At all relevant times, Nguyen resided at the 1112 Missouri Street residence. Nguyen received notice from Wells Fargo in late August 2012 that the property would be foreclosed upon if Nguyen failed to remit arrearages in the amount of $6,405.56.
Nguyen erroneously sent Wells Fargo a personal check for this amount, a method of payment not accepted by Wells Fargo. Nguyen spoke with Wells Fargo on several subsequent occasions and was told on each occasion that the payment was being processed.
On September 4, 2012, Wells Fargo foreclosed on the property. Wells Fargo was the successful purchaser with a bid of $91,161.24 for the property.
On October 2, 2012, Nguyen filed a voluntary petition for relief under chapter 7. (Case No. 12-37497, ECF No. 1). Nguyen seeks to avoid the foreclosure sale under § 547, arguing that Wells Fargo (as transferee) received more via the judicial foreclosure sale than it would have received in a hypothetical chapter 7 case in which the prepetition transfer did not occur.
Summary Judgment Standard
“The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Fed. R. Bankr.P. 7056 incorporates Rule 56 in adversary proceedings.
A party seeking summary judgment must demonstrate: (i) an absence of evidence to support the non-moving party’s claims or (ii) an absence of a genuine dispute of material fact. Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326 (5th Cir.2009); Warfield v. Byron, 436 F.3d 551, 557 (5th Cir.2006). A genuine dispute of material fact is one that could affect the outcome of the action or allow a reasonable fact finder to find in favor of the non-moving party. Brumfield v. Hollins, 551 F.3d 322, 326 (5th Cir.2008).
A court views the facts and evidence in the light most favorable to the non-moving *233party at all times. Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir.2009). Nevertheless, the Court is not obligated to search the record for the non-moving party’s evidence. Malacara v. Garber, 353 F.3d 393, 405 (5th Cir.2003). A party asserting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record, showing that the materials cited do not establish the absence or presence of a genuine dispute, or showing that an adverse party cannot produce admissible evidence to support the fact.3 Fed. R.Civ.P. 56(c)(1). The Court need consider only the cited materials, but it may consider other materials in the record. Fed.R.Civ.P. 56(c)(3). The Court should not weigh the evidence. A credibility determination may not be part of the summary judgment analysis. Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir.2007). However, 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. Fed.R.Civ.P. 56(c)(2).
“The moving party bears the burden of establishing that there are no genuine issues of material fact.” Norwegian Bulk Transp. A/S v. Int’l Marine Terminals P’ship, 520 F.3d 409, 412 (5th Cir.2008). The evidentiary support needed to meet the initial summary judgment burden depends on whether the movant bears the ultimate burden of proof at trial.
If the movant bears the burden of proof on an issue, a successful motion must present evidence that would entitle the movant to judgment at trial. Malacara, 353 F.3d at 403. Upon an adequate showing, the burden shifts to the non-moving party to establish a genuine dispute of material fact. Sossamon, 560 F.3d at 326. The non-moving party must cite to specific evidence demonstrating a genuine dispute. Fed.R.Civ.P. 56(c)(1); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The non-moving party must also “articulate the manner in which that evidence supports that party’s claim.” Johnson v. Deep E. Tex. Reg’l Narcotics Trafficking Task Force, 379 F.3d 293, 301 (5th Cir.2004). Even if the movant meets the initial burden, the motion should be granted only if the non-movant cannot show a genuine dispute of material fact.
If the non-movant bears the burden of proof of an issue, the movant must show the absence of sufficient evidence to support an essential element of the non-mov-ant’s claim. Norwegian Bulk Transp. A/S, 520 F.3d at 412. Upon an adequate showing of insufficient evidence, the non-mov-ant must respond with sufficient evidence to support the challenged element of its case. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. The motion should be granted only if the nonmovant cannot produce evidence to support an essential element of its claim. Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 197 (5th Cir.2005).
Analysis
I. Standing
Nguyen lacks standing to bring the negligent misrepresentation cause of action, but does not lack standing to bring the § 547 cause of action.
At the February 14, 2013 hearing, the Court ruled that Nguyen did not own the cause of action seeking affirmative re-*234lief for negligent misrepresentation. When Nguyen filed for bankruptcy, all of his legal and equitable interests (including the alleged cause of action against Wells Fargo for prepetition negligent misrepresentation) became property of the bankruptcy estate. 11 U.S.C. § 541(a). Nguyen did not schedule a cause of action against Wells Fargo seeking affirmative relief for negligent misrepresentation. When the Trustee abandoned the assets of the estate, this asset was not abandoned back to Nguyen as it had not been declared. See Love v. Tyson Foods, Inc., 677 F.3d 258, 269 (5th Cir.2012) (“If property was not properly scheduled by the debtor, it is not automatically abandoned at the end of the case.... Even after the case is closed, the estate continues to retain its interest in unscheduled property.”) (quoting Collier on Bankruptcy ¶ 554.03 (16th ed. 2011)). Nguyen acknowledged this fact at the February 14, 2013 hearing and accepted this ruling.4
Nguyen has standing to bring the § 547 cause of action pursuant to § 522(h). Section 522(h) allows a debtor to avoid a transfer of exempt property if the trustee could have avoided the transfer under § 547 (among other sections) and the trustee does not do so. Both of those requirements are met in this situation.
II. Wells Fargo’s 12(b)(6) Motion
Nguyen has stated a cause of action for which relief may be granted by alleging that Wells Fargo is the transferee of a § 547 preferential transfer.
Nguyen has alleged facts, along with evidentiary support for such facts, to prevail on a § 547 preferential transfer claim. The Court does not understand Wells Fargo’s argument to the contrary. The only element of a preferential transfer that appears to be at issue is § 547(b)(5)—that a creditor (here Wells Fargo) received more via the preferential transfer than the creditor would have in a chapter 7 case.
Nguyen alleges, and Wells Fargo agrees, that the property was appraised for tax purposes at $110,286.00. (ECF No. 1 at 3). Wells Fargo agrees that this is correct. (ECF No. 9 at 2).
Nguyen alleges that the principal amount of the debt owed at the time of foreclosure was less than $80,000.00, and thus that Wells Fargo would not have received more than the amount of the debt in a chapter 7 case. (ECF No. 1 at 3). Wells Fargo disagrees, and points to the fact that it bid $91,161.24 at the foreclosure sale. (ECF No. 15 at 9). Whether or not this was a credit bid is a disputed issue of fact. Even taking the larger figure as a credit bid, these facts constitute some evidence that Wells Fargo received more via the foreclosure sale than it would have in a case under chapter 7 (i.e., through a sale, not necessarily an auction or foreclosure process, conducted by a chapter 7 trustee in an orderly manner).
This ruling implicitly rejects Wells Fargo interpretation of the Supreme Court’s BFP v. Resolution Trust Corp. opinion. If BFP’s reasoning applied to § 547(b)(5), then Nguyen (who does not allege improprieties in the foreclosure procedure) would not have alleged facts sufficient to state a claim for which relief may be granted. The reasoning behind the Court’s rejection of Wells Fargo’s interpretation is set out in more detail below.
III. Wells Fargo’s Motion for Summary Judgment
As the Court understands Wells Fargo’s Rule 56 Motion for Summary *235Judgment as to the § 547 preferential transfer cause of action, there are three primary arguments: (i) this Court’s Villarreal opinion was incorrectly decided; (ii) the facts of this case are materially distinguishable from Villarreal; and (iii) judicial estoppel prevents Nguyen from prosecuting this cause of action. These arguments are not persuasive.
a.Revisiting Villarreal
This Court previously addressed the applicability of § 547(b) preferential transfers to prepetition foreclosure sales. In re Villarreal, 413 B.R. 633 (Bankr.S.D.Tex.2009). The Court specifically addressed whether the transferee of a foreclosure sale might receive more than they would in a case under chapter 7 (i.e., the § 547(b)(5) element) in light of the Supreme Court’s BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) opinion. In re Villarreal, 413 B.R. at 640 (holding that BFP’s analysis was not applicable as the plain language of § 547 was materially different than § 548, which was at issue in BFP). Additionally, the Court addressed the stare decisis effect of opinions of the United States District Court for the Southern District. In re Villarreal, 413 B.R. at 640 (adopting the majority view that bankruptcy courts, as units of district courts, are not bound by the decisions of district courts — but that great deference should be shown).
Much of Wells Fargo’s Motion for Summary Judgment is simply an argument that Villarreal was incorrectly decided as to one or more of the above issues. (ECF No. 15 at 5-7). However, Wells Fargo does not put forth any new arguments or cite to any new controlling cases — other than making a passing reference to Stern v. Marshall.
b.Distinguishing Villarreal
Wells Fargo attempts to distinguish the present case from Villarreal. (ECF No. 15 at 9). It is true that in Villarreal the difference between the amount of value received by the transferee in the foreclosure sale and the amount transferee would have received in a chapter 7 case was of a much greater magnitude ($3,250,000.00 to $100,000.00, for a difference of $3,150,000.00). 413 B.R. at 637. Although the magnitude is smaller in this case (and therefore it may be more difficult for Nguyen to prove the § 547(b)(5) element), there remains a genuine issue of material fact as to whether Wells Fargo received a greater amount via the foreclosure sale than it would have in a chapter 7 case,
c.Judicial Estoppel
As stated at the February 14, 2012 hearing, Wells Fargo’s judicial estoppel argument is not applicable to the § 547 cause of action.
Nguyen has always maintained that he owned the home and that Wells Fargo’s foreclosure was unlawful. The Court finds that he has not taken inconsistent positions as to the § 547 cause of action.
In any event, judicial estoppel would be inapplicable. Nguyen’s standing for the § 547(b) hinges on § 522(h). Section 522(h) allows a debtor to avoid a transfer of exempt property if the trustee could have avoided the transfer under § 547 (among other sections) and the trustee does not do so. As the property sought to be avoided is exempt, Nguyen is the only potential beneficiary of this § 547 cause of action. Therefore, Nguyen had no motive for concealing this claim from his creditors and, as noted by Wells Fargo, judicial estoppel is inapplicable where debtors lack a motive for concealing a claim. Love v. Tyson Foods, Inc., 677 F.3d 258, 262 (5th Cir.2012).
*236
Conclusion
The Court will enter an order in accordance with this Memorandum Opinion.
. As stated below, the Court believes that all parties acknowledged and agreed to this at the February 14, 2013 hearing.
. A court views the facts and evidence in the light most favorable to the non-moving party at all times. Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir.2009). This factual section is taken primarily from Nguyen’s complaint, unless there is contradictory evidence.
. If a party fails to support an assertion or to address another party's assertion 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, taking the undisputed facts into account, the movant is entitled to it; or (4) issue any other appropriate order. Fed. R.Civ.P. 56(e).
. That Nguyen amended his schedules to include the § 547 preference action but not the action for negligent misrepresentation is further evidence of this fact. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495781/ | MEMORANDUM-OPINION
JOAN A. LLOYD, Bankruptcy Judge.
This matter is before the Court on the Motion for Summary Judgment of Plaintiff Alicia C. Johnson in her capacity as Chapter 7 Trustee (“Trustee”) against Defendant The Bank of New York Mellon (“The Bank”) and the Response and Cross-Motion for Summary Judgment of The Bank. The Court considered the Trustee’s Motion and Supporting Memorandum of Law, the Response of The Bank and the Cross-Motion for Summary Judgment and Memorandum of Law in Support of the Bank’s Motion and the entire record before the Court. For the following reasons, the *238Court will enter the accompanying Order denying the Trustee’s Motion for Summary Judgment and granting the Cross-Motion for Summary Judgment of The Bank.
UNDISPUTED FACTS
1. On April 2, 2001, Debtor Charles Eugene Williams (“Debtor”) executed a mortgage with The CIT Group/Consumer Finance, Inc. (“CIT Group”) in the amount of $59,432.16 secured by property described as “1924 Lawrence Road, Olm-stead, Kentucky 42265.” The mortgage was not recorded.
2. On November 11, 2003, Debtor filed a Voluntary Petition seeking relief under Chapter 7 of the United States Bankruptcy Code with this Court under Case No. 03-12429 (“First Chapter 7 Case”).
3. On Schedule D to the Petition in Debtor’s First Chapter 7 case, Creditors Holding Secured Claims, Debtor listed Fairbanks Capital Corp. Loan Servicing Center as the holder of the mortgage on his mobile home and one acre located at 1924 Lawrence Road, Olmstead, Kentucky.
4. On March 12, 2004, an Order of Discharge was entered in Debtor’s First Chapter 7 Case and the case was closed.
5. During the course of Debtor’s First Chapter 7 Case, no motions to avoid any liens were filed.
6. On October 18, 2011, the CIT Group recorded its mortgage with the Debtor in the Office of the Logan County Clerk.
7. On October 18, 2011, Vericrest Financial, Inc. Successor In Interest to CIT Group assigned the Debtor’s mortgage to the Bank.
8. On May 7, 2012, Debtor filed his second Voluntary Petition for relief under Chapter 7 of the United States Bankruptcy Code.
9. On August 3, 2012, Trustee initiated this adversary proceeding setting forth three causes of action. Two of the causes of action, whether Debtor was entitled to an exemption and whether the Bank had perfected its interest in Debtor’s mobile home, have been resolved.
10. On January 28, 2013, the Trustee filed her Motion for Summary Judgment seeking an order declaring that the Bank’s mortgage which was recorded in 2011 was void as a matter of law and that the Trustee may administer the real estate located at 1924 Lawrence Road for the benefit of Debtor’s bankruptcy estate.
11. On January 31, 2013, the Bank filed a Response to the Trustee’s Motion for Summary Judgment and a Cross-Motion for Summary Judgment seeking an Order declaring that the Bank’s mortgage interest survived the Debtor’s First Chapter 7 Case and the Bank may pursue an in rem foreclosure action against Debtor’s real property.
LEGAL ANALYSIS
The purpose of a motion for summary judgment is to determine if genuine issues of material fact exist to be tried. Lashlee v. Sumner, 570 F.2d 107, 111 (6th Cir.1978). The party seeking summary judgment bears the initial burden of asserting that the pleadings, depositions, answers to interrogatories, admissions and affidavits establish the absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir.1989). The burden on the moving party is discharged by a “showing” that there is an absence of evidence to support a non-moving party’s case. Celotex Corp., 477 U.S. at 325, 106 S.Ct. 2548. Summary Judgment will be appropriate if the non-moving party fails to establish the existence of an *239element essential to its case, and on which it bears the burden of proof. Celotex Corp., 477 U.S. at 322. Thus, the ultimate burden of demonstrating the existence of genuine issues of material fact lies with the nonmoving party. Lashlee, 570 F.2d at 110-111.
The fact that the parties have filed cross-motions for summary judgment does not change the standards on which this Court must evaluate summary judgment motions. Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991). Courts still must resolve each motion on its own merits drawing all reasonable inferences against the moving party in each instance. Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1391 (Fed.Cir.1987). If genuine issues of material fact remain, neither motion should be granted. Id.
The issue before the Court is whether a mortgage recorded after the personal liability of the debtor is discharged can be avoided in the debtor’s second Chapter 7 case? The Trustee contends that the discharge in Debtor’s First Chapter 7 Case extinguished the debt thereby prohibiting the Bank from recording its mortgage subsequent to abandonment of the property by the trustee in the First Chapter 7 Case and closure of the case.
The Bank contends that the discharge in the Debtor’s First Chapter 7 Case enjoined the Debtor’s in personam liability for the debt; however, once the case was closed, the Bank was free to record the mortgage and pursue in rem foreclosure of the subject property. The Court finds that bankruptcy and Kentucky law support the Bank’s position.
In Kentucky, an unrecorded mortgage is not void but is valid between the parties to such transaction, but not to purchasers who had no notice thereof. Armstrong & Taylor v. Reynolds, 1874 WL 6773, 8 Ky.Op. 169 (Ky.1874); Eastern Const. Co. v. Carson Const. Co.’s Trustee, 242 Ky. 648, 47 S.W.2d 67 (Ky.1932). The failure to record the mortgage only affects the priority of creditor, claims against the property. See, E.S. Bonnie & Co. v. Perry’s Trustee, 117 Ky. 459, 78 S.W. 208, 25 Ky.L.Rptr. 1560 (1904).
In the case at bar, the unrecorded mortgage was not avoided in Debt- or’s First Chapter 7 filing. The Supreme Court has stated that liens that are not otherwise avoided for the benefit of the estate or a debtor under Sections 522, 544, 545, 547, 548, 549 or 724(a), pass through bankruptcy unaffected. Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). The Chapter 7 discharge only enjoins enforcement of the personal liability of the debtor on the mortgaged debt. Discharge does not constitute payment or satisfaction of that debt. The holder of the unavoided mortgage retains a liquidation preference in the proceeds from the sale of the mortgaged property. Id.; Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1991).
In the case at bar, the Trustee in Debt- or’s First Chapter 7 Case could have avoided the unrecorded contractual lien under 11 U.S.C. § 544(a)(3) on Debtor’s property, but no such action was undertaken. The Bank’s right to foreclose on the mortgage in rem passed through and survived the bankruptcy. See, Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886); Rupert v. Ohio Valley Nat. Bank, 2003 WL 22359514 (Ky.App.2003). Upon abandonment of the property by the Trustee to Debtor, title to the real estate revested in the Debtor, subject to Debtor’s contractual mortgage lien granted to the Bank.
*240The Bank recorded the mortgage in 2011, well after the Debtor’s First Chapter 7 Case was closed and therefore the recording was not prohibited by the automatic stay of Section 362(c)(2)(C). Once recorded, the mortgage became entitled to priority over any future bonafide purchasers for value. Recording the mortgage was not an attempt to recover the debt personally from the Debtor, rather it was to preserve the Bank’s right to its contractual liquidation preference from the proceeds of the property. Therefore, recording the mortgage did not violate the discharge injunction of 11 U.S.C. § 524(a).
The Trustee’s Motion for Summary Judgment seeking to have the mortgage declared void must be denied. As a matter of law, the discharge injunction simply prohibits future enforcement of the Debt- or’s discharged personal liability. The Bank, however, was entitled to record the mortgage after the case was closed and may proceed against the property in an in rem foreclosure action. Accordingly, the Trustee’s Motion for Summary Judgment seeking to have the mortgage declared void will be DENIED. The Court will GRANT the Cross-Motion for Summary Judgment of the Bank.
CONCLUSION
For all of the above reasons, the Court will enter the attached Order denying the Motion for Summary Judgment of the Trustee and granting the Cross-Motion for Summary Judgment of the Bank.
ORDER
Pursuant to the Memorandum-Opinion entered this date and incorporated herein by reference,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment of Plaintiff Alicia C. Johnson, in her capacity as Chapter 7 Trustee, be and hereby is, DENIED.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED based upon the undisputed facts and the applicable law that the Defendant The Bank of New York Mellon’s Motion for Summary Judgment, be and hereby is, GRANTED.
This is 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/8495782/ | MEMORANDUM OPINION REGARDING MOTION OF DEBTOR, SHERRY L. CREIGHTON, TO PARTIALLY SEAL BANKRUPTCY RECORDS
KAY WOODS, Bankruptcy Judge.
Before the Court is Motion of Debtor, Sherry L. Creighton, to Partially Seal Bankruptcy Records (“Motion to Seal”) (Doc. #46) filed by Debtor Sherry L. Creighton (“Mrs. Creighton”) on February 12, 2013. Mrs. Creighton seeks an order requiring the Clerk of the Bankruptcy Court “to delete or redact all references to Mrs. Creighton’s individual name on the bankruptcy docket and all filings in the above-captioned matter, such that her bankruptcy will fail to appear when the bankruptcy docket or any other source of public records is searched under her individual name[.]” (Mot. to Seal at 1.)
Daniel M. McDermott, the United States Trustee for Region 9 (“UST”), filed United States Trustee’s Objection to Debt- *243or’s Motions [sic] to Seal Bankruptcy Records (“Response”) (Doc. # 47) on February 19, 2013. The UST argues that Mrs. Creighton has failed to overcome the presumption in 11 U.S.C. § 107(a) that papers filed in a bankruptcy court are public records open to examination. Specifically, the UST contends that Mrs. Creighton has failed to establish that her bankruptcy records are “ ‘scandalous or defamatory’ ” or create “ ‘undue risk of ... unlawful injury.’” (Resp. ¶ 9 (citing 11 U.S.C. § 107(b)(2) and (c)(1)(A)).)
The Court held a hearing on the Motion to Seal on March 21, 2013 (“Hearing”), at which Jeremy R. Teaberry, Esq. appeared on behalf of Mrs. Creighton. Based upon a review of the Motion to Seal, the Response and the arguments of Mr. Teaber-ry, at the conclusion of the Hearing, the Court issued an oral ruling denying the Motion to Seal and advised that it would enter this Memorandum Opinion and accompanying Order to memorialize that ruling.
This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and the general orders of reference (Gen. Order Nos. 84 and 2012-7) entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The following constitutes the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I. BACKGROUND AND ARGUMENTS
A. Background
On January 5, 2005, Mrs. Creighton, along with her husband Ralph M. Creighton (collectively, “Debtors”), filed a voluntary petition pursuant to chapter 7 of Title II, United States Code. On May 2, 2005, the Court entered Discharge of Debtor in a Chapter 7 Case (Doc. # 14), which granted the Debtors a discharge. After distribution to creditors by the Chapter 7 Trustee, on March 18, 2008, the Court issued Final Decree (Doc. # 40), which closed the Debtors’ chapter 7 case.
On January 2, 2013, Mrs. Creighton filed Motion of Debtor, Sherry L. Creighton, to Reopen BankruptcyCase [sic] (Doc. # 42), which was granted by the Court on February 5, 2013 (Doc. # 43). Thereafter, Mrs. Creighton filed the Motion to Seal.
B. Argument of Mrs. Creighton
With the Motion to Seal, Mrs. Creighton filed Memorandum in Support (“Memo in Support”), which states that Mrs. Creighton is a certified high school teacher who has taught business courses in the Can-field local school district since 1998. She alleges that she has been subjected to ridicule because of her 2005 bankruptcy filing.
Recently, Mrs. Creighton has been experiencing incessant ridicule from several students, parents, and even fellow teachers, solely because of her bankruptcy filing. The ridieulers became aware of Mrs. Creighton’s previous bankruptcy only because her filings are public records, and thus, readily accessible over a multitude of sources, including the internet. The constant, invasive, and ubiquitous nature of the ridicule that Mrs. Creighton receives has unduly caused her severe emotional distress, and now unduly threatens her job performance and, ultimately, her ability to earn a living.
(Memo in Support ¶ 4.)
Mrs. Creighton alleges that the ridicule occurs in the classroom, the teachers’ lounge and the community at large. She further states that, since the alleged ridicule occurs primarily at work, it hinders *244her ability to effectively perform her job, which may affect her ability to earn a living.
While recognizing that § 107 expressly provides that papers filed in a case under Title 11 and the dockets of a bankruptcy court are public records, Mrs. Creighton asserts that her situation requires protection, as set forth in § 107(b)(2) and (c)(1).
C. Argument of the UST
The UST, on the other hand, contends that Mrs. Creighton has failed to establish any basis pursuant to § 107(b)(2) or (c)(1) to seal her bankruptcy records from public inspection. In particular, the UST states that Mrs. Creighton voluntarily filed her petition for relief and obtained the benefits of a chapter 7 discharge.
II. LEGAL ANALYSIS
A. Applicable Statute
Section 107, which governs public access to papers, provides that all papers filed in a bankruptcy case and the dockets of a bankruptcy court are public records except for certain limited exceptions.
(a) Except as provided in subsections (b) and (c) and subject to section 112, a paper filed in a case under this title and the dockets of a bankruptcy court are public records and open to examination by an entity at reasonable times without charge.
(b) On request of a party in interest, the bankruptcy court shall, and on the bankruptcy court’s own motion, the bankruptcy court may—
(1) protect an entity with respect to a trade secret or confidential research, development, or commercial information; or
(2) protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title.
(c)(1) The bankruptcy court, for cause, may protect an individual, with respect to the following types of information to the extent the court finds that disclosure of such information would create undue risk of identity theft or other unlawful injury to the individual or the individual’s property:
(A) Any means of identification (as defined in section 1028(d) of title 18) contained in a paper filed, or to be filed, in a case under this title.
(B) Other information contained in a paper described in subparagraph (A).
* * *
11 U.S.C. § 107 (West 2013).
B. Burden of Proof
At the Hearing, Mr. Teaberry expressly acknowledged that Mrs. Creighton (i) was seeking an extraordinary remedy; and (ii) had to overcome a high burden of proof. As the party seeking to have her name redacted or deleted from the bankruptcy record or otherwise have her bankruptcy record sealed, Mrs. Creighton must overcome the presumption of public access to all bankruptcy documents. This is not an easy burden.
Because all papers filed with the Court are presumptively available for inspection by the public, the party seeking to seal or redact papers filed bears the burden of proof. It is not an easy burden nor should it be. The burden has been described in a variety of ways. The party seeking impoundment must submit “evidence that filing under seal outweighs the presumption of public access to court records.”
In re Gitto/Global Corp., 321 B.R. 367, 373 (Bankr.D.Mass.2005), aff'd, 422 F.3d 1 (1st Cir.2005), (quoting In re Muma Servs. *245Inc., 279 B.R. 478, 485 (Bankr.D.Del.2002)) (parenthetical omitted).
C. Risk of Unlawful Injury
Mrs. Creighton first argues that this Court should protect her, pursuant to § 107(c)(1), because she is subjected to undue ridicule as a result of “unfettered public access to her bankruptcy filings” and such ridicule creates “ ‘an undue risk of unlawful injury’ to both her mental health and her ability to earn a living.” (Memo in Support ¶ 12.) Mrs. Creighton, however, has conflated the ridicule to which she is subjected with public access to her bankruptcy information. These are two entirely different things.
For purposes of the Motion to Seal, the Court will assume the truth of Mrs. Creighton’s allegations of ridicule by several of her students, their parents and her fellow teachers and that such ridicule is having an adverse effect on her mental health, which may lead to her inability to adequately perform her job. The problem is that these alleged adverse effects are not caused by public access to information about Mrs. Creighton’s bankruptcy filing; the adverse effects are the result of the way in which these people have used information about Mrs. Creighton’s bankruptcy filing to taunt her. As acknowledged at the Hearing and in the Memo in Support, the public has had unfettered access to information about Mrs. Creighton’s bankruptcy since January 5, 2005, but it has been only “[rjecently [that] Mrs. Creighton has been experiencing incessant ridicule from several students, parents, and even fellow teachers.” (Id. ¶ 4 (emphasis added).) Prior to the “recent” past, Mrs. Creighton apparently had no problem as a result of the public’s unfettered access to her bankruptcy information. As a consequence, it is clear that unfettered public access to information about her bankruptcy filing is not the cause of her alleged emotional distress and potential employment difficulties. Such adverse effects stem from the ridicule she receives, not from public access to her bankruptcy information.
Assuming, arguendo, that the adverse effects Mrs. Creighton is suffering as a result of the ridicule are sufficient to constitute unlawful injury,1 she has failed to provide a causal link between the alleged injury and public access to her name on the bankruptcy docket and documents therein.2 Indeed, Mrs. Creighton expressly recognizes that information about her chapter 7 bankruptcy is “readily accessible over a multitude of sources, including the internet.” (Id.) Even if this Court were to take the action Mrs. Creighton requests by ordering her name to be redacted or deleted from her bankruptcy case, this action would only relate to the PACER system, but such information would still be available in other parts of the public domain. Additionally, the “students, parents, and even fellow teachers” (id.) would continue *246to have the knowledge and information they are currently using to ridicule Mrs. Creighton. That bell cannot be unrung. Because the alleged adverse effects stem from the ridicule itself rather than the public access to information, sealing Mrs. Creighton’s bankruptcy record or redacting or deleting her name from the record would serve no useful purpose.
Moreover, it is not clear that the alleged injury is, indeed, “unlawful injury,” as required by § 107(c)(1). If the “ridicule” Mrs. Creighton suffers deals only with the true fact that she filed for bankruptcy protection, that speech is protected and cannot result in unlawful injury. Truth is a complete defense to defamation. Welling v. Weinfeld, 113 Ohio St.3d 464, 866 N.E.2d 1051, 1056-57 (2007) (“In defamation law only statements that are false are actionable[;] truth is, almost universally, a defense.”) (quotation marks and citation omitted).
As set forth above, Mrs. Creighton filed a voluntary petition pursuant to chapter 7 and received a discharge. Such circumstances stand in stark contrast to the debt- or who obtained expunction of an involuntary bankruptcy petition in In re Doe, Case No. 03-04291, 2012 WL 401076 (Bankr.E.D.N.C. Feb. 7, 2012). John Doe moved to reopen his bankruptcy case and dismiss the case ab initio because, in 2003 — when John Doe was a minor — Kenneth Jones filed a chapter 13 bankruptcy petition on his behalf. Because there was no record that Jones was John Doe’s guardian, the chapter 13 trustee moved the court for appointment of a guardian ad litem. Prior to the bankruptcy court hearing the motion for appointment of a guardian, the chapter 13 case was dismissed for failure to make plan payments. In moving to reopen and dismiss, John Doe alleged that Jones was never his guardian and had no authority to file the bankruptcy petition. John Doe further alleged that the record of the improperly filed bankruptcy case had detrimentally affected his life. The bankruptcy court held:
The court finds that by continuing to harm the debtor’s credit, the record of the improperly filed bankruptcy case creates an undue risk of unlawful injury to the debtor and his property, and therefore, § 107(c)(1) protection is warranted. However, the court does not find dismissing the case ab initio to be the most practical or appropriate remedy in this case, as such action would call into question the fees paid and the distributions made. Given the specific facts and harm suffered in this case, the court finds expunction of the record to be the more appropriate remedy.
Id. at *2 (n.4-5 omitted).
In re Doe was a unique situation and called for an extraordinary remedy. Unlike John Doe, who was subjected to an involuntary bankruptcy filing by a person who was not authorized to file on his behalf, Mrs. Creighton voluntarily sought and obtained bankruptcy protection. The facts of Mrs. Creighton’s case are not out of the ordinary and do not warrant extraordinary relief despite her characterization that public access to her bankruptcy records creates an undue risk of unlawful injury.
D. Scandalous Information
In order to fall within the exception to the statutory mandate that bankruptcy filings and dockets are public records, Mrs. Creighton attempts to shoehorn herself into § 107(b)(2) by arguing that “it is absolutely apparent to any reasonable onlooker that, within the Canfield local school district and its related communities, as well as the surrounding areas, a bankruptcy filing by a high school business teacher is considered ‘scandalous,’ so as to *247warrant limited protection from disclosure as requested herein.” (Memo in Support ¶ 15.) She argues that she is experiencing severe emotional distress and that “continued unfettered public access to her previous bankruptcy records poses a permanent threat to her ability to continue her profession at any other Ohio school in the same or a similarly-minded school district.” (Id. ¶ 17.)
For purposes of section 107(b) and Rule 9018, scandalous or defamatory material has been defined as material that would cause “a reasonable person to alter their [sic] opinion of [a party] based on the statements therein, taking those statements in the context in which they appear.” If the information is true, it cannot be scandalous or defamatory. “The dissemination of truthful matter cannot be enjoined merely because the matter is prejudicial; section 107(b)(2) requires that the matter be scandalous or defamatory. Moreover information that is prejudicial or embarrassing is not necessarily scandalous or defamatory.
In re Gitto/Global Corp., 321 B.R. 367, 374 (Bankr.D.Mass.2005), aff'd, 422 F.3d 1 (1st Cir.2005), (internal citations omitted).
In the instant case, Mrs. Creighton alleges that the mere fact that she has filed a bankruptcy case is scandalous. This argument appears to be one of first impression — this Court could not find any reported decisions concerning a debtor’s request to have her name redacted, deleted or otherwise sealed so that it would appear that she had never filed a bankruptcy case. Nonetheless, this Court has no trouble finding that voluntarily filing a bankruptcy petition — on its face — cannot constitute scandalous matter. To find otherwise would turn the law on its head.
In Neal v. Kansas City Star (In re Neal), 461 F.3d 1048 (8th Cir.2006), the chapter 7 debtor was a former municipal judge who wanted the court to seal that portion of the list of her creditors containing the names of attorneys who had lent her money while she was a sitting judge, on the grounds that such information was defamatory and scandalous. After the bankruptcy court granted the debtor’s request, a newspaper moved to vacate, arguing that the public had a right to know the names of such attorneys. The bankruptcy court denied the newspaper’s motion, which holding was reversed and vacated by the district court. Thereafter, the debtor and unnamed creditors appealed to the Eighth Circuit Court of Appeals, which affirmed the district court and stated,
The creditors list is just that — a list of persons or entities to whom Neal owes money. Potential scandal only surfaces when one looks “outside the lines” of the bankruptcy proceeding, looks outside the context of this bankruptcy filing, and speculates as to motives of the creditor and the debtor. Moreover, there is no allegation that the list of Neal’s creditors was filed for an improper purpose, such as to gratify public spite or promote public scandal. The creditors list was filed because the bankruptcy law requires it to be filed and apparently contains no information other than as required by law.... In looking at the context of the filing, we evaluate the filer’s purpose, not what a third party’s purpose will be in gaining access to that filing. Here, Neal’s purpose in filing her list of creditors was to comply with the rules of the bankruptcy court to facilitate her bankruptcy discharge.
The unintended, potential secondary consequence of negative publicity to attorney creditors is regrettable but not a basis for sealing the filing. There is no indication or allegation that any of the information contained in Neal’s list of creditors is false, defamatory, or scan*248dalous. In cases analyzing § 107(b)(2), courts have repeatedly stated that injury or potential injury to reputation is not enough to deny public access to court documents.
Id. at 1054 (internal citations and paren-theticals omitted) (emphasis added).
Unlike the present case, where Mrs. Creighton voluntarily filed for chapter 7 protection, the creditors in the Neal case did not voluntarily bring themselves into the public arena of the bankruptcy court. Despite the creditors’ lack of voluntary disclosure and the potential negative impact on their reputations and future earnings, the Eighth Circuit Court of Appeals expressly found that the list of creditors was not subject to being sealed because it was not false, defamatory or scandalous. This analysis is even more compelling to the facts presented in the Motion to Seal. In the same way that the list of creditors was simply a list, Mrs. Creighton’s name standing alone is just that — her name— and certainly does not constitute scandalous matter. The fact that Mrs. Creighton’s name appears on the bankruptcy docket and the caption of all papers filed in the instant case does not and cannot constitute scandalous matter.
Moreover, Mrs. Creighton could not have obtained the protection of the Bankruptcy Code without disclosing her name. Disclosure was required by law and was not done for any improper purpose. As set forth in the Neal case, it is the filer’s purpose — not what a third party’s purpose will be in gaining access to that filing— that determines the context of whether a matter is scandalous. As a consequence, the mere fact that people with access to Mrs. Creighton’s name may ridicule her based on her prior bankruptcy filing does not make her name in the case scandalous matter.
The current facts are also distinguishable from the facts before this Bankruptcy Court in Phar-Mor, Inc. v. Defendants Named Under Seal (In re Phar-Mor, Inc.), 191 B.R. 675 (Bankr.N.D.Ohio 1995). In the Phar-Mor case, the Court sealed the complaint and other papers in an adversary proceeding filed by the chapter 11 corporate debtor against its former president, Michael I. Monus, and other defendants. The publisher of a local newspaper moved to intervene to oppose the permanent sealing of the documents. Prior to Phar-Mor’s bankruptcy filing, Mr. Mon-us’s employment was terminated, allegedly based on inappropriate conduct with respect to financial affairs of Phar-Mor while Mr. Monus was president. Subsequent to Phar-Mor’s bankruptcy filing, Mr. Monus filed his own personal chapter 11 bankruptcy and was indicted and eventually convicted and sentenced on 109 separate criminal counts involving his activities as president of Phar-Mor.
The unnamed defendants argued that Phar-Mor had filed the adversary proceeding just before expiration of the statute of limitations when Mr. Monus was protected by the automatic stay in 11 U.S.C. § 362 and could not be named as a defendant. The adversary proceeding made numerous allegations of wrongdoing by a business entity in which Mr. Monus was a general partner and the unnamed defendants were limited partners. The unnamed defendants argued that the allegations of wrongdoing were directed only to activities of Mr. Monus, but not them. The Court analyzed whether the complaint contained scandalous matter pursuant to § 107(b)(2) and concluded that it did.
Upon review, the Court concludes that the statements contained in the complaint do constitute scandalous or defamatory matters as to Defendants under the above-referenced standard. The complaint was filed for several stra*249tegic reasons which would not be apparent, on its [sic] face, to a reasonable lay person: a need to preserve some cause of action or be barred by a statute of limitations, a desire to promote settlement which led to a stay of all further action immediately upon filing and the inability to prosecute the real party in interest, Mr. Monus, due to the protection of the automatic stay in his Chapter 11 case. The Defendants each have a positive reputation in the local business community. The Court concludes that a reasonable person would alter their [sic] opinion of Defendants based on a reading of the complaint, because it contains allegations of wrongdoing against the Defendants for, in essence, the acts of Mr. Monus, without an explanation of the underlying rationale for filing the complaint in this fashion.
Id. at 679-80.
The facts currently before this Court are not even remotely similar to the Phar-Mor facts. Here, Mrs. Creighton filed a voluntary chapter 7 petition more than eight years ago and received a discharge more than seven and one-half years ago. Her case had been closed for nearly five years. She availed herself of the protection of the Bankruptcy Code and received the benefits of a discharge. Unlike the unnamed defendants in the Phar-Mor case, Mrs. Creighton has not been accused of wrongdoing that should be attributed to someone else. The only alleged scandalous matter that Mrs. Creighton has cited is the mere fact that her name appears on a bankruptcy petition and other papers in a bankruptcy case that she voluntarily filed. Having made her own name a matter of public concern by filing a bankruptcy petition, Mrs. Creighton cannot now be heard to argue that having her name in the public domain constitutes scandalous matter.
III. CONCLUSION
Mrs. Creighton filed her chapter 7 bankruptcy case more than eight years ago and received a discharge more than seven and one-half years ago. She alleges that “recently” she has been subjected to ridicule, which has led to emotional distress and which may adversely impact her ability to earn a living. Mrs. Creighton alleges that the ridicule is a result of the public’s unfettered access to information about her 2005 bankruptcy filing and, as a consequence, she argues that the Court should protect her from such public access on the basis that her name in the public record constitutes scandalous matter.
It is lawful to file a bankruptcy petition and receive a discharge in bankruptcy, as Mrs. Creighton did in 2005. The public has a right to access information about Mrs. Creighton’s bankruptcy filing. She has presented no basis for this Court to find that disclosure of her name in the public record constitutes scandalous matter or that such disclosure will cause unlawful injury.
Moreover, redacting, deleting or sealing the bankruptcy records so that Mrs. Creighton’s name does not appear in her bankruptcy case will not provide the relief that she evidently wants, which is to be free from being ridiculed about her prior bankruptcy filing. As Mrs. Creighton expressly acknowledges in the Motion to Seal, many students, parents, fellow teachers and others in the community already know about her bankruptcy filing. To the extent that such information has been in the public record for more than eight years, many people have had access to the information. These people could have copied that information and further disseminated it. As Mrs. Creighton further expressly states, information about her bankruptcy filing is available from a multi*250tude of sources, including the internet. Removing Mrs. Creighton’s name from the bankruptcy docket on the PACER system would not and could not stop the ridicule to which she claims to be subjected. There is no reason to believe that sealing the record so that her name will not come up in any new search of the public record will stop the ridicule.
As a consequence, the Court will deny the Motion to Seal. An appropriate order will follow.
ORDER DENYING MOTION OF DEBTOR, SHERRY L. CREIGHTON, TO PARTIALLY SEAL BANKRUPTCY RECORDS
Before the Court is Motion of Debtor, Sherry L. Creighton, to Partially Seal Bankruptcy Records (“Motion to Seal”) (Doc. # 46) filed by Debtor Sherry L. Creighton (“Mrs. Creighton”) on February 12, 2013. Daniel M. McDermott, the United States Trustee for Region 9, filed United States Trustee’s Objection to Debtor’s Motions [sic] to Seal Bankruptcy Records (Doc. # 47) on February 19, 2013.
The Court held a hearing on the Motion to Seal on March 21, 2013, at which Jeremy R. Teaberry, Esq. appeared on behalf of Mrs. Creighton.
For the reasons set forth in this Court’s Memorandum Opinion Regarding Motion of Debtor, Sherry L. Creighton, to Partially Seal Bankruptcy Records entered on this date, the Court hereby:
1. Finds that Mrs. Creighton’s bankruptcy filing is not scandalous or defamatory matter pursuant to 11 U.S.C. § 107(b)(2);
2. Finds that public access to Mrs. Creighton’s bankruptcy filing does not create undue risk of unlawful injury to Mrs. Creighton or her property pursuant to 11 U.S.C. § 107(c)(1);
3. Finds that Mrs. Creighton has failed to meet the burden of proof to overcome the presumption of public access to her bankruptcy filing; and
4. Denies the Motion to Seal.
. Ohio recognizes a tort for intentional infliction of serious emotional distress and has adopted the following standard: "One who by extreme and outrageous conduct intentionally or recklessly causes severe emotional distress to another is subject to liability for such emotional distress, and if bodily harm to the other results from it, for such bodily harm.” Yeager v. Local Union 20, Teamsters, 6 Ohio St.3d 369, 453 N.E.2d 666, 671 (1983) (quoting Restatement (Second) of Torts § 46(1) (1965)).
. At the Hearing, Mr. Teaberry conceded that he had no idea if any of the people who subjected Mrs. Creighton to ridicule had ever accessed the PACER (Public Access to Court Electronic Records) system or the bankruptcy docket. He offered no explanation concerning the source of the knowledge concerning Mrs. Creighton’s bankruptcy filing although he acknowledged that Mrs. Creighton herself made the bankruptcy filing public knowledge in 2005. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495786/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
JACK B. SCHMETTERER, Bankruptcy Judge.
Debtor Leigh Ann Daymon (“Defendant”) filed her petition for relief under chapter 7 of the Bankruptcy Code. Plaintiff Chicago Patrolmen’s Federal Credit Union instituted the above-entitled Adversary Proceeding seeking determination of nondischargeability of debt against Defendant under 11 U.S.C. § 523(a)(8). This matter was tried on Plaintiffs Complaint (12 A 01021, Dkt. No. 1, hereinafter the “Complaint”). In addition to evidence previously admitted into the record,1 the Court heard testimony from James Pigott, one of Plaintiffs witnesses, and from Defendant herself. Both sides rested after presentation of evidence and argument. Based thereon, the following Findings of Fact and Conclusions of Law are made and entered, pursuant to which judgment will be separately entered in favor of Plaintiff.
FINDINGS OF FACT
1. Plaintiff Chicago Patrolmen’s Federal Credit Union (the “Credit Union”) is a financial institution located in Chicago, Illinois.
2. Defendant Leigh Ann Daymon is an individual currently residing in Chicago, Illinois.
3. Defendant was employed by the Credit Union from about October 16, 2006, until December 21, 2009.
4. During Defendant’s employment, the Credit Union sponsored a program that provided reimbursement of tuition expenses for eligible employees (the “Tuition Assistance Program”).
5. To receive reimbursement under the Tuition Assistance Program, an eligible employee must go through two stages of approval: first, the employee must request pre-approval from his or her immediate manager and provide a written explanation of how a proposed class will enhance the employee’s job performance. Second, within 45 days after completing such class, the employee must submit proof of grades and tuition cost to human resources for final approval.
6. One of the stated purposes of the Tuition Assistance Program is to support self development and educational efforts of the Credit Union’s employees.
7. Participation in the Tuition Assistance Program is voluntary.
8. In January 2008, Defendant began taking classes at DeVry University Keller Graduate School of Management. She was ultimately awarded a Masters in Business Administration degree (“MBA”) in 2009.
9. DeVry University is an independent institution and not affiliated with the Credit Union.
10. Shortly after enrolling at DeVry, Defendant was promoted to Assistant Manager in the Credit Union’s *334Accounting and Finance Department.
11. From November 29, 2007, through May 18, 2009, Defendant submitted nine separate written requests for approval to participate in the Tuition Assistance Program in connection with her graduate business studies at DeVry (collectively, the “Approval Request Forms”).
12. Eight of the Approval Request Forms were executed by Defendant on or before the date the coursework proposed in each form was to begin.
13. In each request for approval, Defendant agreed in writing that by participating in the Tuition Assistance Program she would be required to remain employed with the Credit Union for a certain minimum period of time (the “Mandatory Service Obligation”) starting from the date of the final reimbursement payment under the program. Defendant further agreed that if she failed to uphold the Mandatory Service Obligation, she would repay all amounts she received under the Tuition Assistance Program (the “Tuition Repayment Obligation”).
14. In connection with each Approval Request Form, the Credit Union reimbursed Defendant directly for tuition on nine separate occasions from March 19, 2008, to September 2, 2009. Reimbursement for each requested class was made within 72 days after each class’s start date.
15. Based on Defendant’s voluntary participation in the Tuition Assistance Program, the Credit Union paid Defendant a total of $33,037.87.
16. Defendant received her last payment under the Tuition Assistance Program on September 2, 2009.
17. Defendant voluntarily terminated her employment with the Credit Union on December 21, 2009, to accept new employment.
18. Defendant failed to meet the Mandatory Service Obligation required by her participation in the Tuition Assistance Program.
19. In February 2010, the Credit Union sued Defendant in the Circuit Court of Cook County, Illinois, to collect monies owed under the Tuition Repayment Obligation.
20. The state court entered judgment against Defendant on July 16, 2010, in the amount of $33,037.87, which represents the total amount reimbursed to Defendant under the Tuition Assistance Program.
21. Defendant voluntarily filed for relief under chapter 7 of the Bankruptcy Code on May 23, 2012.
22. As of the date of trial on the Adversary Complaint, Defendant has not repaid any amounts owed under the Tuition Repayment Obligation.
23. Additional facts set forth in the Conclusions of Law will stand as additional Findings of Fact.
JURISDICTION AND VENUE
Jurisdiction lies over this proceeding under 28 U.S.C. § 1334(b), and the proceeding has been referred here by Internal Operating Procedure 15(a) of the District Court. The Complaint seeks to determine dischargeability of debt and is therefore a core proceeding .under 28 U.S.C. § 157(b)(2)(I). Venue is properly placed in this court under 28 U.S.C. § 1409(a).
*335CONCLUSIONS OF LAW
Standard of Review under Section 523(a)(8)
The Adversary Complaint seeks determination of nondischargeability of Defendant’s Tuition Repayment Obligation under section 523(a)(8) of the Bankruptcy Code, which provides in part that a debtor shall not be discharged from a debt for “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” 11 U.S.C. § 523(a)(8)(A)(ii).2 The party seeking to establish an exception to discharge of a debt bears the burden of proof. In re Harasymiw, 895 F.2d 1170, 1172 (7th Cir.1990). The United States Supreme Court has held that the burden of proof required to establish an exception to discharge is a preponderance of evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). To provide an “honest but unfortunate debtor” with a fresh start, courts will construe exceptions to discharge strictly against a creditor and liberally in favor of the debtor. Id. at 286-87, 111 S.Ct. 654. The Credit Union argues that the funds Defendant received from the Tuition Assistance Program were an educational benefit under section 523(a)(8) (A) (ii), which would make Defendant’s obligation to repay those funds nondischargeable. (Pl.’s Prop. Findings of Fact & Concls. of Law 9.) To prevail on this theory, the Credit Union must show by preponderance of evidence that said funds constituted an educational benefit under the statute.
The Tuition Assistance Program Provided an Educational Beneñt to Defendant
The term “educational benefit” is not defined by the Code, and there is no controlling case law in this Circuit that addresses whether employer-sponsored tuition reimbursement is a nondischargeable educational benefit under § 523(a) (8) (A) (ii). Many opinions have held that when a student accepts funds intended as financial assistance for education in exchange for an agreement to perform a service, an obligation to repay those funds arising from the student’s failure to perform is nondischargeable. See, e.g., In re Burks, 244 F.3d 1245, 1246 (11th Cir.2001) (finding obligation to repay educational stipend nondischargeable due to debtor’s failure to fulfill teaching obligation for three-year period after obtaining graduate degree).3 However, reimbursement of tuition expenses already incurred for classes previously completed raises an issue as to whether such reimbursement is educational in nature. ' Compare Resurrection Med. Ctr. v. Lakemaker (In re Lakemaker), 241 B.R. 577, 580 (Banrk.N.D.Ill.1999) (holding that salary advanced to repay employee’s tuition was *336merely an inducement to employment and did not avail employee of any educational opportunity or benefit) with In re Busson-Sokolik, 635 F.3d 261, 266-67 (7th Cir.2011) (applying a “purpose driven test” to find that a loan was “educational” when it was part of a program specifically designed to provide financial support to students working to complete their education).
In interpreting provisions of the Bankruptcy Code, courts must “look to the provisions of the whole law, and to its object and policy.” Hiatt v. Ind. State Student Assistance Comm’n, 36 F.3d 21, 23 (7th Cir.1994) (quoting Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986)). Section 523(a)(8) was added to the Bankruptcy Code to address perceived abuses by student borrowers who sought to discharge their student loan debts by filing bankruptcy shortly after graduation, before making any significant attempts at repayment. Id. Congress believed that the solvency of government-backed student loan programs would be jeopardized unless such loans were made nondischargeable, and by protecting these loans from discharge, Congress intended to promote a policy of ensuring availability of educational financing for students. See In re Chambers, 348 F.3d 650, 653-54 (7th Cir.2003).
Discharge ' exceptions under § 523(a)(8) have been expanded to cover other educational debts. Id. at 654. Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 523(a)(8) only applied to obligations for funds received from governmental or nonprofit institutions. See Sensient Techs. Corp. v. Baiocchi (In re Baiocchi), 389 B.R. 828, 831-32 (Bankr.E.D.Wis.2008). By amending § 523(a)(8), Congress intended to broaden the scope of nondis-chargeable debts under that section to recognize an important role played by private institutions in providing educational funding for students. In addition to private scholarships and stipends, employer-sponsored tuition reimbursement programs, such as the Tuition Assistance Program in this case, provide an alternative to prospective students who may be unwilling or unable to finance their education out-of-pocket or with traditional student loan options. Moreover, the incentives to provide these programs would be radically altered if employees could renege on their contractual obligations and immediately discharge any resulting liability through bankruptcy. This loophole is characteristic of the same abuses that led Congress to enact § 523(a)(8) in the first place. These parallels provide support for finding an “educational benefit” in employer-sponsored tuition reimbursement. Furthermore, tuition reimbursement programs suffer the same vulnerabilities as obligations to repay educational scholarships and stipends, which are expressly made nondischargeable by § 523(a)(8)(A)(ii). Reimbursed tuition is in every respect the same as a school scholarship except for when and from whom the funds are paid, and the obligation to repay it is treated the same under the statute.
In this case, the Credit Union’s disbursements under the Tuition Assistance Program were an educational benefit to Defendant. Defendant voluntarily participated in the Credit Union’s Tuition Assistance Program to finance her graduate education. Defendant was eligible to apply for a student loan from the Credit Union, but she did not apply. (Def.’s Prop. Findings of Fact & Concls. of Law ¶¶ 19-20.) Instead, by participating in the program, Defendant was able to pursue and obtain a graduate business degree without having to take out loans or spend her own money for tuition.
*337Defendant argues that her participation in the Tuition Assistance Program was all for the Credit Union’s benefit and not her benefit because the Credit Union had planned to promote her to management. This argument is not persuasive. Defendant chose to enroll in the DeVry MBA program because she believed it would advance her career generally as well as with the Credit Union. She further chose to finance this decision through the Tuition Assistance Program instead of applying for loans, for which she admits she was eligible. Defendant knew the terms of the program and any limitations thereunder and accepted them. Defendant’s allegation that she was hired on a “fast-track” to management does not make her decision any less voluntary; it simply provided her an incentive to seek a graduate education. Every dollar received by Defendant from the Tuition Assistance Program was specifically requested by her. She can hardly deny that she benefitted by earning an MBA. Moreover, as discussed below, this was an “educational benefit” as contemplated by § 523(a)(8).
Defendant argues that she did not receive an educational benefit since reimbursement occurred only after she had already completed each class. This argument ignores the reality that the Credit Union’s reimbursement obligations under the Tuition Assistance Program were set in motion every time Defendant submitted a written request for approval to participate in the program. Eight out of nine times, Defendant submitted such a request on or before the date her proposed classes were to begin. Provided that Defendant complied with various requirements of the program, she could expect to be reimbursed for her tuition expenses shortly after completing each class. Simply because she received the money after she completed a class does not invalidate the educational nature of the funds she received. See Hiatt, 36 F.3d at 23 (determining that consolidation loans made after a student completes her education are still “educational” in nature and nondischargeable under § 523(a)(8)).
This conclusion also comports with the Seventh Circuit’s purpose driven test set forth in Busson-Sokolik. The purpose of the funds disbursed under the Credit Union’s Tuition Assistance Program was to provide financial assistance to Defendant for her graduate studies at DeVry. The record shows that reimbursement under the program was limited to educational expenses. Furthermore, tuition was only reimbursed after Defendant successfully completed each course and submitted proof of grades to human resources. These limitations demonstrate the educational purpose of the Tuition Assistance Program. Nor does the fact that the Credit Union may also have benefitted from Defendant’s participation in the program invalidate the educational nature of the benefit received by Defendant. Defendant offers no precedent or logic supporting her proposition that a benefit ceases to be educational when there in a “significant nexus with employment.” An MBA is a generally-applieable degree, and Defendant admitted at trial that she has found new employment and her MBA has made her more marketable as an employee.
Therefore, because the funds disbursed to Defendant under the Tuition Assistance Program were received as an educational benefit, Defendant’s obligation to repay those funds to the Credit Union is nondis-chargeable under section 523(a)(8)(A)(ii).4
*338
The Rooker-Feldman Doctrine
Defendant’s obligation to repay the funds she received from the Credit Union under the Tuition Assistance Program has already been established by a prior state court judgment. Defendant does not challenge the judgment or its amount. (Br. in Supp. of Def.’s Prop. Findings of Fact & Concls. of Law 2.) But Defendant argues that the Rooker-Feldman doctrine does not require this Court to treat the adjudicated debt as “all or nothing” when determining dischargeability. Id.
The Rooker-Feldman Doctrine instructs that “lower federal courts lack subject matter jurisdiction over claims that seek to review or modify a state court judgment.” See Bozich v. Mattschull (In re Chinin USA, Inc.), 327 B.R. 325, 333 (Bankr.N.D.Ill.2005). The applicability of the doctrine depends on whether a federal litigant seeks to set aside a state court judgment. Id. at 335 (citing GASH Assocs. v. Vill. of Rosemont, 995 F.2d 726, 728 (7th Cir.1993)). Dischargeability of debt is a matter separate from the merits of the debt itself. Id.
Defendant offers no factual or legal basis to parse or reduce the underlying judgment amount. The state court judgment of $33,037.87 in favor of the Credit Union redressed only the amounts reimbursed to Defendant under the Tuition Assistance Program. The conclusion here must be that the entire amount is nondis-chargeable under § 523(a)(8) so as not to disturb that prior judgment. The nature of the debt involved makes dischargeability in this case “all or nothing.”
CONCLUSION
Pursuant to the foregoing Findings of Fact and Conclusions of Law, judgment will be entered by separate order in favor of Plaintiff Chicago Patrolmen’s Federal Credit Union against Defendant Leigh Ann Daymon on Plaintiffs Complaint. Defendant’s repayment obligation to Plaintiff under the Tuition Assistance Program and state court judgment thereon in the amount of $33,037.87 will thereby be held nondischargeable.
. Prior to trial, both parties had filed cross-motions for summary judgment (Dkt. Nos. 13, 16), which were both denied; however, pursuant to Local Rule 7056, the undisputed facts and exhibits presented in connection with the motions were ordered admitted for purposes of the trial.
. Debts under § 523(a)(8) may only be discharged if excepting such debts from discharge would impose an undue hardship on the debtor and the debtor’s dependants. 11 U.S.C. § 523(a)(8). Defendant does not assert that she would suffer an undue hardship if the Tuition Repayment Obligation is not discharged. (Mem. in Supp. of Def.’s Mot. for Summ. J. 8.)
. The Eleventh Circuit opinion in Burks also cites various cases involving a physician’s failure to repay funds received to finance medical training after breaching an agreement to practice medicine in areas designated to have a shortage of physicians. Those opinions found the repayment obligations nondis-chargeable. See, e.g., U.S. Dept. of Health & Human Servs. v. Smith, 807 F.2d 122 (8th Cir.1986); In re Lipps, 79 B.R. 67 (Bankr.M.D.Fla.1987); U.S. Dept. of Health & Human Servs. v. Brown, 59 B.R. 40 (Bankr.W.D.La.1986); U.S. Dept. of Health & Human Servs. v. Vretis, 56 B.R. 156, 157 (Bankr.M.D.Fla.1985); U.S. Dept. of Health & Human Servs. v. Avila, 53 B.R. 933, 937 (Bankr.W.D.N.Y.1985).
. Because Defendant’s debt is found to be nondischargeable under subsection (A)(ii) for the reasons stated herein, it is not necessary to address the Credit Union's alternative argument for nondischargeability and determine whether or not the tuition reimburse*338ments received by Defendant from the Credit Union constituted an educational loan from a nonprofit institution under subsection (A)(i). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495788/ | MEMORANDUM DECISION ON OLIVE PORTFOLIO, LLC, AS AS-SIGNEE TO BMO HARRIS BANK, NA’s MOTION FOR RELIEF FROM THE AUTOMATIC STAY AND ABANDONMENT
MARGARET DEE McGARITY, Bankruptcy Judge.
On November 8, 2012, 4848, LLC, a single asset real estate debtor, filed a chapter 11 bankruptcy petition to stave off foreclosure on its property. Before the Court is the motion for relief from the automatic stay and abandonment filed by BMO Harris Bank, NA,1 as it relates to the real property owned by the debtor. This Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(G). The parties briefed the matter, an evidentiary hearing was held on February 14, 2013, and the Court rendered an oral ruling on the motion on March 14, 2013. Based on the same, as well as the pleadings and other documents on file, the Court issues this Memorandum Decision, which constitutes its findings of fact and conclusions of law as required by Fed. R. Bankr.P. 7052.
BACKGROUND
The debtor, 4848, LLC, was formed in 2000 and owns one parcel of real estate located at 4848 S. 76th Street, Greenfield, Wisconsin. The property contains approximately 28,830 square feet of rentable space, 17,407 square feet of which is currently leased to three separate commercial tenants. The debtor retains a third party management company, Siegel-Gallagher, to oversee the books, coordinate renovations and maintenance of the property, and negotiate with and place tenants into the property. Along with the general downturn in the economy, the debtor’s occupancy and operating income decreased during the past few years.
The debtor had first executed a mortgage and General Business Security Agreement securing two promissory notes on December 29, 2000. That credit was subsequently renewed with the movant *345when the debtor executed a variable rate promissory note in the amount of $3,450,667.63 on December 10, 2004, along with another variable rate promissory note in the amount of $250,000.00 on January 1, 2008. Both notes were secured by perfected mortgages on the debtor’s real property.
Although the notes matured on December 10, 2008, the debtor and BMO Harris entered into a forbearance agreement on April 28, 2010, wherein the outstanding obligations on the notes were due and payable on or before December 30, 2010. The forbearance agreement included the following provision:
Relief from the Automatic Stay. As a material inducement to Lender to enter into this Agreement, Borrower hereby stipulates and agrees that Lender shall be entitled to relief from the automatic stay imposed by 11 U.S.C. § 362 or any similar stay or suspension of remedies under any other federal or state law in the event Borrower becomes subject to a bankruptcy or other insolvency proceeding, to allow Lender to exercise its rights and remedies with respect to the Collateral.
(Agreement Regarding Loans executed April 28, 2010, ¶ 13, p. 16). BMO Harris commenced a foreclosure action against the debtor on October 12, 2012.
A company related to the debtor due to similar ownership, 200 Ryan, LLC, another single asset debtor, is also obligated to BMO Harris pursuant to a mortgage note. The debtor is a guarantor of 200 Ryan’s indebtedness, and BMO Harris filed a contingent claim against the debtor for the deficiency amount owed by 200 Ryan. A foreclosure action regarding 200 Ryan’s real property is currently pending. As of the petition date, BMO Harris was owed $2,869,383.79, including fees and costs, on the 4848 Notes and $3,654,586.61, including fees and costs, on the 200 Ryan Note. The sale of the Ryan property, which will reduce the overall claim, has yet to occur.
The debtor filed a plan and disclosure statement on February 6, 2013, wherein it proposed that its property and equity interests would be sold via a public auction after at least 90 days of marketing2 and within 120 days from the effective date of the plan. The debtor would submit the opening bid at the auction in the amount of $3,000,000, and third parties would be allowed to exceed that bid, with the next bid being at least $3,100,000. BMO Harris would have the option to credit bid at the auction. If the debtor became the winning bidder, the debtor would repay the opening bid amount, over time, to BMO Harris. The debtor would also auction its equity interests, with the equity interest holders opening the bids in the amount of $50,000 if the debtor became the winning bidder for the property or $10,000 if the debtor was not the winning property bidder.
ISSUES
Two legal issues were raised by BMO Harris Bank’s motion for relief from the automatic stay: (1) whether a prepetition stay waiver within a forbearance agreement between the debtor and BMO Harris amounts to “cause” for relief from the automatic stay under 11 U.S.C. § 362(d)(1), and (2) whether relief from the automatic stay should be granted because the single asset real estate debtor’s proposed plan does not have “a reasonable possibility of being confirmed within a rea*346sonable time” under 11 U.S.C. § 362(d)(3)(A).
ARGUMENTS
Debtor’s Argument Regarding Prepetition Stay Waiver.
The debtor contends the prepetition stay waiver contained in the forbearance agreement is void as a matter of law and unenforceable as against public policy. To enforce the policies of the Bankruptcy Code, the relief available to a debtor must not be circumvented by contract, and in this case, the prepetition stay waiver. A prepetition stay waiver is an ipso facto clause triggered upon the borrower’s filing of a bankruptcy petition, and because the “purpose of the stay is to protect creditors as well as the debtor, the debtor may not waive the automatic stay.” Ostano Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206 (2d Cir.1986). The public policy behind the automatic stay outweighs the policies of freedom of contract and encouraging out of court workouts.
BMO Harris Bank’s Argument Regarding Prepetition Stay Waiver.
The public policy goal of encouraging out of court restructuring and settlement supports the enforceability of the prepetition waiver of the automatic stay included in the forbearance agreement. See In re Cheeks, 167 B.R. 817, 818 (Bankr.D.S.C.1994). In this case, the debtor received substantial consideration from the lender in exchange for the prepetition stay waiver, including an additional eight months under the forbearance agreement to pay the obligation, which originally matured in 2008. As stated in the agreement, the stay waiver was a material inducement to the lender entering into said agreement.
Debtor’s Argument Regarding Plan Con-firmability.
The debtor argues the real property is undisputedly necessary in order to proceed with its proposed plan and an effective reorganization is likely. The plan satisfies the requirements of the Code, including the “best interests” test and the “fair and equitable” standard in a cram down. The debtor’s plan proposes to auction the property and the equity interests in the debtor in the open national marketplace, which will determine the actual value of the property. If the property is sold to a third party, BMO Harris will receive the proceeds from its collateral, thus receiving at least the same value of what it would receive in a liquidation, meeting the “best interests” test. Should BMO Harris believe the property is worth more than the $3,000,000 opening bid, it has the opportunity to credit bid. The auctions also comply with the “fair and equitable” requirements of the Code. Should the debtor’s opening bid be the winning bid, BMO Harris will retain its liens until the balance of its secured claim is paid in full, satisfying section 1129(b)(2)(A)(i)(D & (II). Should the property be sold to a third party in a cash sale or to BMO Harris in a credit sale, section 1129(b)(2)(A)(ii) is satisfied.
The debtor asserts that it can make necessary payments if it is the winning bidder at $3,000,000 and the creditor makes a section 1111(b) election because: (1) The electing creditor would receive a lien equal to the total amount of its allowed claim, $5,189,970 (the filed claim less the assumed value for 200 Ryan, LLC, property); (2) The electing creditor would receive an aggregate stream of payments at least equal to the electing creditor’s allowed total claim3; and (3) The present *347value of the electing creditor’s stream of payments would equal the present value of the collateral.
The debtor also argues the auction procedures comply with the Code. Regarding the property auction, even though the debtor’s opening bid is not a cash bid, it would be repaid subject to sections 1129(a)(7) and 1129(b)(2)(A). By not proposing to use a third-party stalking horse bidder, the debtor avoids the costly obligation for break-up fees. Additionally, regarding the equity interest auction, value is maximized for the benefit of the estate. When a creditor is paid less than it is owed and does not accept the plan, section 1129(b)(2)(B)(ii) provides that equity holders cannot retain any equity interests on account of their old investments unless an auction is held. The equity auction in the debtor’s plan satisfies this requirement.
BMO Hams Bank’s Argument Regarding Plan Confirmability.
BMO Harris argues the debtor’s plan does not provide a reasonable possibility of a successful reorganization within a reasonable time. See DB Capital Holdings, LLC, 454 B.R. 804, 819 (Bankr.D.Colo.2011); see also 11 U.S.C. § 362(d)(3)(A). The debtor’s proposed auction arbitrarily sets an opening bid amount of $3,000,000, without any grant of authority within the Bankruptcy Code or state laws and without any reliable proof of value. The alternatives of allowing the lender the right to credit bid or a sale to a third party can be achieved via a sheriffs sale at a greatly reduced cost of sale to the lender. Furthermore, the debtor’s requested 120 days of marketing after the effective date of the plan, whenever that might be, will only cause further delay without different results since the debtor has had four years since the original maturity of the notes to sell the property.
Notably, the plan fails to disclose the identity of Daniel Walsh, the managing member of the debtor’s sole member, as a principal of both 4848, LLC, and Siegel-Gallagher Management Co., the proposed marketer, contrary to section 1129(a)(5).
The lender further argues that under the debtor’s own liquidation analysis, the amount available to pay secured debts would be $4,012,108, which is more than the present value of deferred payments to the bank under the plan. The plan does not satisfy section 1129(a)(7)(A), since the lender would likely not receive “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.”
The bank argues the plan does not satisfy a section 1111(b) election either; assuming an allowed secured claim of $5,166,000, the total principal and interest payments amortized over 25 years would equal only $5,002,432.30. Moreover, the debtor cannot prove its ability to execute a refinance or full payment by the maturity date of the plan should the debtor be the winning bidder, requiring further reorganization, which fails to meet the requirement for confirmation in section 1129(a)(ll). The plan also violates section 1122(a) because the lender’s unsecured claim is not in the *348same class as the remaining unsecured creditors; the debtor’s creation of an impaired class of unsecured creditor to approve the plan unfairly discriminates against the lender.
Finally, BMO Harris contends the debt- or’s plan is unsustainable. Should the debtor be the winning bidder, $3,000,000 amortized over 25 years at 4.5% interest (the rate provided in the plan for payment), with a balloon payment after 84 months, equals $16,675 per month. This is the exact monthly payment amount in the projections attached to the plan. However, the proposal does not appropriately protect the risk to the lender as the budgeted expenses have fluctuated, and shortfall is likely. Income projections are unsupported. If the lender were able to prove the value of the property is equal to the tax bill amount of $4,268,200 — as opposed to allowing the “auction” to value the property — the required monthly payments would be $23,724.04.
DISCUSSION
Under 11 U.S.C. § 362(d)(2), a secured party is entitled to relief from the automatic stay of an act against property if “the debtor does not have any equity in such property ... and such property is not necessary for an effective reorganization.” Although the debtor agreed that it has no equity in the property over and above the amount of the bank’s secured claim, there is no real dispute that the property is necessary for an effective reorganization.
Alternative grounds for granting relief from the automatic stay include “for cause,” 11 U.S.C. § 362(d)(1), or when the single asset real estate debtor has failed to timely “file a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time,” 11 U.S.C. § 362(d)(3)(A). Pursuant to 11 U.S.C. § 362(g), the party requesting relief from stay has the burden of proof on the issue of equity and the party opposing the relief from stay has the burden of proof on all other issues.
The parties first dispute whether a pre-petition stay waiver within a forbearance agreement between the debtor and BMO Harris amounts to “cause” for relief under section 362(d)(1). There appears to be an emerging trend to enforce such stay waiver agreements, although the majority of courts in earlier cases addressing the issue have determined that neither the debtor nor a creditor may waive or limit the protection of the automatic stay. 9 Norton Bankr. L. & Prac. 3d § 175:10. Most of the more recent decisions have concluded that a prepetition agreement waiving defenses to relief from stay may be considered as a factor in deciding whether relief from stay for cause should be granted. E.g., In re Desai, 282 B.R. 527, 532 (Bankr.M.D.Ga.2002) (“Although prepetition agreements waiving the protection afforded by the automatic stay are enforceable, such waivers are not per se enforceable, nor are they self-executing.”).
One court has found that a prepetition stay waiver may not be enforceable in a single asset case because the enforcement of such a waiver could approximate a prohibition against filing for bankruptcy protection, which is contrary to public policy. In re Jenkins Court Assocs., 181 B.R. 33, 37 (Bankr.E.D.Pa.1995) (waiver not enforced absent complete evidentiary hearing concerning whether debtor commenced bankruptcy case in bad faith, and whether circumstances or market conditions had changed during period between execution of waiver and filing of petition). Here, there have been no allegations that market conditions have changed since the waiver agreement was entered into. In addition to these factors, at least one other court holding a waiver may be enforceable has *349posited a list of considerations in determining whether to lift the stay when the parties have agreed prepetition to waive the stay in a later bankruptcy.
The Vermont bankruptcy court proposes the following considerations: (1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor’s risk and length of time the waiver covers; (3) whether other parties are affected including unsecured creditors and junior lienholders; (4) the feasibility of the debtor’s plan; (5) whether there is evidence that the waiver was obtained by coercion, fraud, or mutual mistake of material factors; (6) whether enforcing the agreement will further the legitimate public policy of encouraging out of court restructurings and settlements; (7) whether there appears to be a likelihood of reorganization; (8) the extent to which the creditor would be otherwise prejudiced if the waiver is not enforced; (9) the proximity in time between the date of the waiver and the date of the bankruptcy filing and whether there was a compelling change in circumstances during that time; and (10) whether the debtor has equity in the property and the creditor is otherwise entitled to relief from stay under section 362(d). In re Frye, 320 B.R. 786, 791 (Bankr.D.Vt.2005).
Bad faith is touched upon in this ease only in the sense that the debtor is causing unreasonable delay and unnecessary expense in thwarting the creditor’s legitimate rights, resulting in prejudice to the creditor if the waiver is not enforced. More nefarious aspects of bad faith usually require an evidentiary hearing, as was pointed out in Jenkins Court Assocs., 181 B.R. at 36, but the delay that is complained of here can be objectively determined from the present record. Some of the other considerations, listed in Frye, 320 B.R. at 791, are not seriously at issue. The managing member of the debtor’s managing member is admittedly a sophisticated business person, and no coercion, fraud or mutual mistake is alleged. No compelling change in circumstances is apparent, other than the expiration of a considerable length of time, plus the pending foreclosure of another property, which will determine the lender’s claim, and movement in the overall economy. The effect on unsecured creditors is negligible as they will probably receive nothing or almost nothing under any scenario. Other aspects of the feasibility and confirmability of the proposed plan are discussed below.
The public policy arguments made by both sides are relatively balanced in this case. The debtor claims the clause is unenforceable per se because the protection afforded is of fundamental and vital importance to any debtor. In the case of a single asset real estate debtor, like this one, the entire disposition of the case depends on not being able to waive the stay as an early loss of the only property in the estate dooms reorganization. The Court does not take this policy lightly and would be dismayed if such clauses were used routinely. Nevertheless, the Desai court and others have persuasively held that a waiver can be a consideration in determining “cause” for relief from stay. It is not the only consideration and must be only one of many possible circumstances that can constitute cause. This Court finds this latter approach is the better view.
The lender argues that such a clause facilitated the out of court workout in this ease because it would not have entered into a forbearance agreement without it. Protecting the bank from the expense and delay of a full blown chapter 11 was important consideration. While the forbearance agreement with this waiver was being negotiated, the bank put off foreclosing for almost a year and a half. *350After the agreement with the waiver was executed, the bank still waited almost two and a half years to foreclose. In all, between December 10, 2008, when the notes matured, and October 12, 2012, when the foreclosure was filed, the debtor gained almost four years to try to turn this operation around by either selling it or refinancing, however difficult that might have been in the current economy. The Court holds it is not fair to delay this creditor any longer. The debtor has already had considerable advantage from the forbearance agreement and the waiver, and it is highly doubtful an additional four months of marketing will result in a better scenario than lifting the stay now.
The Court has also considered the arguments of the parties concerning the debt- or’s proposed plan, namely factors numbered (4) and (7) in Frye, 320 B.R. at 791; that is, whether the debtor’s plan is feasible and whether there is a likelihood of reorganization. Even though this Court has held that the waiver of the automatic stay is enforceable, a facially confirmable and feasible plan might have tipped the scales in the debtor’s favor. This proposed plan did not do so.
The debtor argues that if the debtor is the buyer, the plan can satisfy the requirements of section 1129(b)(2) and even survive a section 1111(b) election by the creditor — which is only a factor if the asset is retained, not sold — because the creditor will retain its lien and will receive payments equaling the present value of the creditor’s interest in the property, valued at confirmation. 11 U.S.C. § 1129(b)(2)(A)®. The other two subpara-graphs of that subsection are met because the plan provides that the creditor can credit bid, as required by section 1129(b)(2)(A)(ii), and no “indubitable equivalent” is offered, rendering section 1129(b)(2)(A)(iii) inapplicable. Unfortunately, the technical requirements of confirmation can only be met by applying the debtor’s mathematical sleight of hand. Failure is still probable as practical contingencies play out.
The debtor’s position with respect to the plan’s qualification for confirmation in the face of an 1111(b) election may be mathematically correct, but its assumptions are built on shifting sands. It argues the creditor will receive at least the total amount of its allowed claim, $5,189,970 (filed claim less the assumed value for 200 Ryan, LLC property, which has a tax estimate of $1,334,000), and it reaches this conclusion by multiplying $14,417 per month for 360 months. This is not the proposed payment or the proposed term of the plan, but it is mathematically what is needed to support the $3,000,000 value, the bid that would award the debtor the property. The debtor then applies the present value of the electing creditor’s total stream of payments to arrive back at the present value of the collateral. The debtor uses a discount rate of 4% (for 360 months? Probably, since that was the term used to get to the total claim), and the present value of stream of payments equal to $3,019,715, which is at least equal to the $3,000,000 present value of the collateral. The “value” of the property and the opening bid set by the debtor appear to be the capitalized amount of slightly less than what the debtor can afford. Circular reasoning like this is not persuasive, especially when it bears no resemblance to the proposed plan terms.
BMO Harris argues, and this Court agrees, that the debtor’s plan is too speculative and too attenuated to comprise a reasonable possibility of a successful reorganization within a reasonable time. See DB Capital Holdings, LLC, 454 B.R. 804, 819 (2011); see also 11 U.S.C. § 362(d)(3). The opening bid of $3,000,000 is completely *351arbitrary. The monthly revenues predicted rise from $84,260 to $41,368 over the course of 2013 (see Addendum 4 to Plan), but Mr. Walsh’s testimony about hoped for tenants did not inspire confidence that this will occur. Much of the increase in revenue appears to be an increase in real estate tax charges to tenants, which should be a mere pass through. The tight budget is not sustainable, especially if anticipated revenues are not attained.
The alternatives of allowing the lender the right to credit bid or a sale to a third party can be achieved via a sheriffs sale at a greatly reduced expense to the lender (due to the 6% broker fees, commissions, 2.5% auctioneer fees, advertising costs, title company fees, and other necessary costs to be incurred under the debtor’s proposal, which the bank estimates to be approximately $255,000). The debtor’s requested 120 days of marketing after the effective date of the plan will only cause further delay without different results, since the debtor has already had four years since the original maturity of the notes to sell the property. Determining the exact amount of the claim, which affects feasibility, would probably take even longer. If the claim is higher, the plan is instantly unfeasible, and the creditor would have been further delayed. The debtor’s numbers are only realistic if the 200 Ryan, LLC, property sells at 100% of its tax assessed value, so the feasibility of the debtor retaining the property is pure speculation.4
The plan also violates section 1122(a) because the lender’s unsecured claim is not in the same class as the remaining unsecured creditors; the debtor’s creation of an impaired class of unsecured creditors to approve the plan unfairly discriminates against the lender.
The debtor’s proposed plan for a “sale” to set value is, to say the least, creative. However, apart from the numbers outlined above, other flaws show the plan cannot be confirmed. The debtor’s proposal, if it is the only bidder, is not a sale at all; it is a cram down, and not a feasible one at that, as shown above. A sale under section 363(f), assuming all the subsection requirements are met, results in a transfer of property, and the proceeds are then subject to the secured creditor’s interest. That would not happen under this plan because a “sale” to the debtor, which defines itself as a “qualified bidder,” would result in no proceeds. The lender would, in essence, be forced to finance the retention by the debtor. That is a cram down, not a sale. Other qualified bidders, as defined in the Auction Procedures, have to submit a deposit of $150,000 and be able to make a cash offer of $3,100,000, which the debtor clearly cannot do. This procedure discriminates unfairly in favor of the debt- or. Thus, the debtor’s proposed sale is not fair and equitable, as is required by section 1129(b)(1).
Marketing by Mr. Walsh’s management company, Siegel-Gallagher, is a non-starter. First, the relationship is not disclosed and probably would not survive the appointment process under 11 U.S.C. § 327(a). While its commission might be higher if the property is sold to a third party, it has conflicting motivations to not widely market the property because the equity security holder who is a principal of *352both the debtor and the management company might prefer to keep it. The Court must infer that is the case; otherwise, he would let this property go.
The debtor proposes alternatives of sale to a third party or the bank’s credit bid, and apparently this was intended to meet Code requirements involving secured creditor protections, provided the debtor retains the property. If the cram down provisions appeared reasonable, the plan might pass muster, but not in this case. Indeed, these alternate provisions disclose weaknesses that support immediate lifting of the stay. If only the debtor bids, the bank could easily obtain the property with a credit bid, but will have lost at least four months that it could have saved by completing the pending foreclosure. The same is true if it believes third party bids are not high enough. Given the limited pool of buyers of this magnitude, the bank might well have attracted the same pool of bidders at foreclosure, with the same result. Furthermore, the bank has not consented to use of its cash collateral (rents) for the costs of sale, which it has stated are unreasonable and unnecessary as proposed, thereby generating further litigation. Cf. 11 U.S.C. § 506(c).
To summarize, the debtor’s plan is sustainable only if every eventuality — in life and in court — falls the debtor’s way. The debtor would require a substantial increase in revenue to meet it’s own projections. Budgeted expenses are very tight with payments at $16,675. There is insufficient cushion for capital improvements for new tenants or for a dry period when a tenant is lost. Any of these uncertainties could be fatal, and a lot can happen in seven years, the plan’s proposed due date for refinancing. Therefore, the need for further reorganization is highly probable. See 11 U.S.C. § 1129(a)(ll).
The allowance of the credit bid by the bank shows the futility of allowing this plan to go forward. If the retention of the property by the debtor at the value stated is not acceptable to the bank, and it is not, it could easily credit bid more than the debtor’s initial bid. Retention by the debt- or under this proposal is essentially consensual, and it is not. This makes the retention option by the debtor pointless. Third party bids could be obtained by the bank through the foreclosure process, and the bank could control expenses. The debt- or’s right to a surplus, which appears to be highly unlikely, would be protected, again by the foreclosure process. There is no good reason to make the bank credit bid against either the debtor or third parties so it can have what it should have now. The bank is the only creditor with anything to lose, and any further delay and expense does it no justice.
For the reasons stated above, the Court granted the motion for relief from the automatic stay filed by Olive Portfolio, LLC, as assignee to BMO Harris Bank.
. During the briefing phase, the note changed hands and the movant's official designation became: Olive Portfolio, LLC, as assignee to BMO Harris Bank N.A. i/kjz. Harris N.A., successor by merger to Community Bank Group f/k/a Lincoln State Bank.
. On February 14, 2013, Daniel Walsh, the managing member of TerraMed, LLC, the debtor’s managing member, testified that the debtor intended to use its related management and investment company, Siegel-Galla-gher, to market the real property for auction.
. This is explained in the debtor's brief as follows: “If the Debtor made equal monthly payments of $14,417 for 360 months, the aggregate stream of payments would equal *347$5,190,120, in compliance with § 1129(b)(2)(A)(i)(II). Finally, using a discount rate of 4% the net present value of that stream of payments would equal $3,019,715, which is at least equal to the present value of the collateral. The Debtor's proposed budgets as part of the Plan can support a monthly payment to BMO in an amount more than $14,417 per month.” (Brief in Support of Debtor's Objection to BMO Harris Bank NA’s Motion for Relief filed 3/1/2013, p. 12). The discount rate, term, and monthly payment amount differ from the interest rate, term, and monthly payment amount proposed in the plan. (See Plan of Reorganization filed 2/6/2013, ¶ 2.3(b)(ii)).
. The debtor values the 4848 property at 70% of its tax assessed value (the debtor's principal testified he is contesting the assessment), but predicts a sale of the 200 Ryan property at 100% of its tax estimate, maximizing reduction of the creditor’s claim. Given the limits of the debtor's cash flow, all uncertainties — the value of the 200 Ryan property, the interest rate, the calculation of payments— would have to go the debtor's way, or the plan becomes unfeasible. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495789/ | DECISION ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
MARGARET DEE McGARITY, Bankruptcy Judge.
On January 3, 2012, Amanda Jaeger-Jacobs commenced the instant bankruptcy case by filing a voluntary petition under chapter 7 of the Bankruptcy Code. On March 27, 2012, Ryan Jacobs filed a complaint against his former wife, asking the Court to determine nondischargeable, pursuant to 11 U.S.C. § 523(a)(5) and/or 11 U.S.C. § 523(a)(15), debts assigned to the debtor by the terms of the parties’ Marital Settlement Agreement. The debtor answered the complaint, admitting the terms of the MSA but denying that the debts were nondischargeable under section 523(a)(5) and/or section 523(a)(15).
On February 28, 2013, the plaintiff filed a motion for summary judgment, accompanied by a brief, affidavit, and copies of documents in support of his motion. On March 14, 2013, the debtor filed a summary judgment brief,1 accompanied by an attorney’s declaration and exhibit. The Court has jurisdiction over this proceeding by virtue of 28 U.S.C. § 1334(b) and this is *355a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
BACKGROUND
The parties do not dispute the relevant facts. The debtor petitioned for dissolution of her marriage to the plaintiff on November 12, 2009, and the petition was granted by the state court on October 15, 2010. The parties entered into a first partial Marital Settlement Agreement (“MSA”) on May 13, 2010, and a second partial MSA on October 15, 2010. Both MSA’s were incorporated into the state court’s findings of fact, conclusions of law, and judgment of divorce entered on November 4, 2010. Pursuant to the second MSA, the parties were each assigned specific debts and financial responsibilities. With respect to the marital debt, the parties equalized their obligations, with the debtor bearing responsibility for paying the Kohls charge card, Wells Fargo credit card, and CitiCard credit card. (October 15, 2010, Partial Marital Settlement Agreement, Debts and Financial Obligations § VII.A.3.). Wells Fargo is a debt for which both parties were clearly personally liable. There is no evidence as to the personal liability of the other two debts assigned the defendant, but they were acknowledged as debts incurred during the marriage and may be recoverable by Kohl’s and CitiCard under Wis. Stat. § 766.55(2m). The terms of the MSA included the following:
With respect to each party’s responsibility for the payment of certain debts and obligations, and the obligation to hold the other party harmless for the payment of those debts and obligations, the parties understand and agree that their obligations shall constitute a Domestic Support Obligation under 11 U.S.C. § 523(a)(5) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, these obligations being part of the final financial support settlement of both parties. These financial obligations on the part of both parties are not part of the property settlement.
(October 15, 2010, Partial Marital Settlement Agreement, Debts and Financial Obligations § VII.C.).
After the debtor stopped making payments on the Wells Fargo credit card, and the default was reported negatively on the plaintiffs credit report, the plaintiff began making payments to the creditor, totaling $4,907.17, which included an accidental overpayment in the amount of $47.36. The plaintiff has not, as of yet, made any payments on the Kohls charge card or Citi-Card credit card. None of the creditors have sued or threatened to sue the plaintiff to collect the obligations owed to them.
ARGUMENTS
The plaintiff argues the debt owed to him as a result of his repayment of the Wells Fargo credit card is nondischargeable. The plaintiff further requests a finding that the other obligations allocated to the debtor in the MSA — to the extent that the plaintiff may be required to pay them in the future — are nondisehargeable, as well. According to the plaintiff, the obligations satisfy the conditions for nondis-chargeability set forth in 11 U.S.C. § 523(a)(5); and if not, then the obligations are nondisehargeable under 11 U.S.C. § 523(a)(15). The plaintiff also seeks an order allowing him to recover the costs of bringing and maintaining this action, including attorney’s fees.
The debtor argues she is not liable to reimburse the plaintiff for the voluntary payments he made to Wells Fargo to protect his credit rating. The debtor did not agree under the MSA to indemnify the plaintiff for any voluntary payments he might make to protect his credit. Addi*356tionally, the plaintiff breached his duty to mitigate his damages by voluntarily making the payments, instead of waiting until the creditor threatened to sue him or take other action to collect the debt. See Wis. Stat. § 802.02(2). The debtor asserts that the bankruptcy court lacks jurisdiction to consider the plaintiffs claim relative to the Kohls charge card and CitiCard credit card debts because no justiciable controversy exists as to either debt, and any decision by the bankruptcy court would be advisory in nature based on hypothetical facts. See Commonwealth Plaza Condo. Ass’n v. City of Chicago, 693 F.3d 743, 748 (7th Cir.2012). In the event the debtor is liable to the plaintiff, the obligations are not domestic support obligations under 11 U.S.C. § 523(a)(5). Finally, should the Court rule in the plaintiffs favor, the debt- or claims he is not entitled to an award of attorney’s fees because the MSA provides that each party is responsible for the payment of their own attorney’s fees.
DISCUSSION
Summary judgment is appropriate when the pleadings, discovery, disclosures, and affidavits establish 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. .56(a) (made applicable by Fed. R. Bankr.P. 7056); Winsley v. Cook Cnty., 563 F.3d 598, 602-03 (7th Cir.2009). A genuine issue of material fact exists when, based upon the evidence, a reasonable trier of fact could find in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Sections 523(a)(5) and (a)(15) of the Bankruptcy Code provide in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
(5) for a domestic support obligation;
(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit[.]
11 U.S.C. § 523(a)(5) & (a)(15). As this Court has previously noted, “[tjhere is a fine distinction in the provisions for exception to discharge under sections 523(a)(5) and (a)(15).” In re Georgi, 459 B.R. 716, 719 (Bankr.E.D.Wis.2011). Section 523(a)(5) excepts a debt from discharge if it is a domestic support obligation. A domestic support obligation includes a debt that is owed to or recoverable by a spouse. 11 U.S.C. § 101(14A)(A). Section 523(a)(15), on the other hand, excepts a debt to a spouse. Thus, “a debt to a spouse and one recoverable by a spouse in the context of divorce related obligations is a distinction without a difference, and they mean the same thing.” Georgi, 459 B.R. at 719.
By contrast, section 523(a)(15) governs the dischargeability of property settlement debts as opposed to support obligations. This exception was intended to negate the distinction between support and property division provisions (except in Chapter 13 cases) by making both support and nonsupport debts nondischargeable. Georgi, 459 B.R. at 720. All debts owed to a spouse, former spouse, or child of a debtor are nondischargeable if incurred in the course of a marital dissolution proceeding. In re Hying, 477 B.R. 731, 735 (Bankr.E.D.Wis.2012).
*357The material facts do not clearly establish that the debts are or are not “domestic support obligations” within the meaning of sections 523(a)(5) and 101(14A). The MSA says they are, but there are not enough facts to determine whether they function as such, and other provisions, such as the denial of maintenance, imply they are not. However, if the debts are not “domestic support obligations,” they are still excepted from the debtor’s discharge under section 523(a)(15). Therefore, it is not necessary for this Court in the context of this chapter 7 case to determine whether they are nondischargeable under sections 523(a)(5) or 523(a)(15). See In re Tarone, 434 B.R. 41, 49 (Bankr.E.D.N.Y.2010) (“[I]t is irrelevant whether those awards constitute true support obligations, because even if not encompassed within § 523(a)(5), they are nondischargeable pursuant to § 523(a)(15)”); In re Golio, 393 B.R. 56, 62 (Bankr.E.D.N.Y.2008) (“[T]his Court need not make a determination on whether the amounts awarded under the Judgments at issue constitute domestic support obligations under 11 U.S.C. § 523(a)(5) if the Plaintiff can demonstrate that the Judgments would be nondis-chargeable in any event under 11 U.S.C. § 523(a)(15) because each Judgment constitutes a debt (1) owed to or recoverable by ‘a spouse, former spouse, or child of the debtor’ and (2) ‘is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record.’ ”).
Were the applicability of sections 523(a)(5) and/or (a)(15) the sole issue, the inquiry would end here. However, the fundamental dispute is whether the debt- or’s obligation to the plaintiff was extinguished when the plaintiff paid the obligation prior to actually being sued or threatened with suit by the creditor. She claims she has no debt to him under these circumstances.
A provision in a divorce decree to hold harmless or indemnify a spouse for joint obligations incurred during a marriage creates a “new” debt, running solely between the former spouses. In re Schweitzer, 370 B.R. 145, 150 (Bankr.S.D.Ohio 2007). While this “new” debt is “incurred” through the divorce decree; the parties’ personal liability with respect to their joint third party creditors remains unless discharged. In re Williams, 398 B.R. 464, 469 (Bankr.N.D.Ohio 2008). As explained in the case of In re Clark:
the exception to discharge for “hold harmless” agreements may not provide protection from creditors for the non-debtor spouse. The debts owed to the joint creditors are discharged as to the debtor only. The obligation that is not dischargeable in these situations is a debtor’s responsibility to hold his non-debtor, ex-spouse harmless. The non-debtor ex-spouse may look to the debtor for reimbursement pursuant to any non-dischargeable “hold harmless” obligations, but the non-debtor ex-spouse is not immune from pursuit by the primary joint creditors.
207 B.R. 651, 657 (Bankr.E.D.Mo.1997).
The debtor incurred that “new debt” when the judgment incorporating the MSAs was granted. The liability of the plaintiff on any joint debts or debts subject to recovery under marital property law continued to exist as to him, even though she was assigned payment of those debts in the decree. Since he was legally hable, his payments to Wells Fargo were not “voluntary.” Voluntary payments are payments made by someone who is not legally liable to the payee. See 70 C.J.S. Payment § 107 (2013) (“A payor is a volunteer if, in making payment, he or she has no right or interest of his or her own to *358protect and acts without moral or legal obligation”). The payments made by the plaintiff were to pay his liability, and he had already experienced a negative impact on account of the existence of this unpaid liability. Perhaps there is no negative impact yet on account of his non-payment of Kohl’s and CitiCard, but that does not make him any less liable to those creditors, nor does it mean he has to wait for legal action by the creditors for the defendant’s obligation to him to arise.
For these reasons, it is the decision of this Court that the debtor’s obligations to the plaintiff meet the necessary elements for exception to discharge of her obligation to her former husband under section 523(a)(15). The plaintiff may continue to enforce his legal rights against the debtor with respect to her obligations to him under the decree of dissolution, notwithstanding the entry of discharge in this case.
The debtor argues that the plaintiff failed to mitigate his damages by paying the obligation prior to actually suffering the threat of suit or actually being sued. This argument is without merit. In fact, the plaintiff did mitigate damages'—-to himself and the debtor—by paying the obligation and stopping the accrual of additional interest and charges owed to the creditor, as well as the cost of any collection action that could have been brought by the creditor.
Although the debtor is correct in that this Court does not give advisory opinions, this issue is ripe for decision with respect to the Kohl’s and CitiCard obligations. The obligation incurred by the debtor under the judgment of dissolution of their marriage is in existence now and does not arise in the future. Thus, whatever present obligation she has is excepted from discharge. The judgment can be enforced at any time by the state court. The appropriate remedy is also for the state court.
The plaintiff has requested an order allowing him to recover the cost of bringing and maintaining this action, including reasonable attorney’s fees and costs. This Court finds that an award of costs is appropriate and the plaintiff may submit a bill of costs to the Clerk of Bankruptcy Court on notice to the other party. See Fed. R. Bankr.P. 7054(b).
However, without specifying a judgment, statute, rule or other grounds, the plaintiff is not entitled to an award of attorney’s fee in this bankruptcy proceeding. See Fed.R.Civ.P. 54(d)(2). Under the MSA, each party was responsible for his or her individual attorney’s fees, with no contribution required of either party. (October 15, 2010, Partial Marital Settlement Agreement, Attorneys Fees § IX.). Nevertheless, just prior to filing her petition, the debtor was ordered to appear and show cause why she should not be found in contempt of court due to her failure to pay her obligations to the plaintiff pursuant to the MSA. (December 13, 2011, Dodge County Court Order to Show Case and Affidavit for Finding of Contempt, Case No. 09 FA 491). Whether the plaintiff is entitled to attorney’s fees in a future state court action is for the state court to decide.
The plaintiffs motion for summary judgment is granted as to all issues, except on the issue of whether the debtor’s obligation is a Domestic Support Obligation, which determination is unnecessary to affect the outcome, and the defendant’s motion for summary judgment is denied. A separate order will be entered.
. The debtor filed a document entitled "Defendant’s Summary Judgment Brief,” wherein she opposed the plaintiffs motion for summary judgment and requested the Court grant summary judgment in her favor, dismissing the plaintiff’s claims relative to the Wells Fargo payments and Kohls and CitiCard debts, as well as characterizing the Wells Fargo debt as a non-domestic support obligation. The Court will treat her submission as a cross motion for summary judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495790/ | NAIL, Bankruptcy Judge.
Debtor David L. Juve (“Debtor”) appeals the final judgment of the bankruptcy court awarding David Heide (“Heide”) $350,490.00 and determining that amount to be nondischargeable under 11 U.S.C. § 523(a)(2)(A). We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b). For the reasons set forth below, we reverse in part, affirm in part, and remand for proceedings consistent with this opinion.
BACKGROUND
Debtor and his wife (collectively, “the Juves”) filed a petition for relief under chapter 7 of the bankruptcy code. Heide, his wife, and their daughter (collectively, “the Heides”) commenced an adversary proceeding against the Juves, seeking both a determination that certain debts they claimed the Juves owed them were nondis-chargeable under 11 U.S.C. § 523(a)(2), (4), or (6) and a denial of the Juves’ discharges under 11 U.S.C. § 727(a)(2) — (6).1
*361On the Heides’ motion for summary judgment, the bankruptcy court found Debtor owed Heide $400,000, determined that debt was nondischargeable under § 523(a)(2)(A), and granted partial summary judgment in favor of Heide against Debtor. In the same order, the bankruptcy court ruled in favor of the Juves on the Heides’ remaining causes of action under § 523 and reserved for trial the Heides’ cause of action under § 727.
Before the trial was held, the parties stipulated to the entry of a final judgment incorporating the bankruptcy court’s disposition of the Heides’ causes of action under § 523 and dismissing the Heides’ cause of action under § 727. In the stipulation, the parties preserved Debtor’s right to appeal the judgment of nondischarge-ability against him. The bankruptcy court entered a judgment in accord with the parties’ stipulation, and Debtor timely appealed.
On appeal, we determined the bankruptcy court had erred in granting summary judgment when two questions of fact remained, ie., whether the automobile financing arrangement should be treated as one between Heide and Debtor or one between Heide and Imports Plus, Inc., and whether Debtor obtained the majority of the funds from Heide at the time of the alleged misrepresentations regarding encumbrances (or the absence thereof) on the subject vehicles. Consequently, we reversed and remanded. Heide v. Juve (In re Juve), 455 B.R. 890 (8th Cir. BAP 2011).
On remand, and following trial, the bankruptcy court entered a judgment awarding Heide $350,490.00 and determining that amount to be nondischargeable under § 523(a)(2)(A).2 Debtor timely appealed. On appeal, Debtor raises three issues: (1) whether the bankruptcy court’s factual findings were supported by substantial evidence; (2) whether the bankruptcy court erred in concluding the debt was excepted from discharge pursuant to § 523(a)(2)(A); and (3) whether the bank*362ruptcy court erred as to the amount of damages awarded.
STANDARD OF REVIEW
We review the bankruptcy court’s legal conclusions regarding the dis-chargeability of a debt under § 523(a)(2)(A) de novo and its findings of fact for clear error. First Nat. Bank of Olathe, Kan. v. Pontow, 111 F.3d 604, 609 (8th Cir.1997). Whether each element necessary to establish a debt is excepted from discharge under § 523(a)(2)(A) is present is a determination of fact. Anastas v. American Savings Bank (In re Anastas), 94 F.3d 1280, 1283 (9th Cir.1996) (cited in Merchants Nat. Bank of Winona v. Moen (In re Moen), 238 B.R. 785, 790 (8th Cir. BAP 1999)). “Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.” Fed.R.Bankr.P. 8013 (in pertinent part). A finding of fact is clearly erroneous when, although there may be evidence to support it, the appellate court, after reviewing the entire record, is left with a definite and firm conviction a mistake has been made. DeBold v. Case, 452 F.3d 756, 761 (8th Cir.2006) (citations therein omitted); Shaffer v. U.S. Dept. of Education (In re Shaffer), 481 B.R. 15, 18 (8th Cir. BAP 2012).
DISCUSSION
Heide, as the plaintiff, bore the burden of proving, by a preponderance of the evidence, his claim against Debtor fell within the § 523(a)(2)(A) exception to discharge. Grogan v. Garner, 498 U.S. 279, 286-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). As discussed in Islamov v. Ungar (In re Ungar), 429 B.R. 668, 673 (8th Cir. BAP 2010) (citations therein), aff'd, 633 F.3d 675 (8th Cir.2011), we must narrowly construe exceptions to discharge, to protect the fresh start policy of the bankruptcy code.
To prove nondischargeability under § 523(a)(2)(A), Heide had to demonstrate (1) Debtor made a representation, (2) with knowledge of its falsity, (3) deliberately for the purpose of deceiving Heide, (4) who justifiably relied on the representation, (5) which proximately caused Heide damage. Treadwell v. Glenstone Lodge, Inc. (In re Treadwell), 637 F.3d 855, 860 (8th Cir.2011). Further, by the express terms of § 523(a)(2)(A), the false representation must have been a statement “other than a statement respecting the debtor’s or an insider’s financial condition.”
The testimony3 at trial revealed Heide and Debtor became friends when both sold vehicles at a car dealership. In the summer of 1996, with Debtor’s encouragement, Heide became a commission-only salesperson at a different auto sales business called Imports Plus, Inc., which was owned by Dennis Borgen.4 Various people, including Borgen and Debtor, owned vehicles on the Imports Plus, Inc. lot. Debtor traveled a great deal, buying vehicles at wholesale for himself and others. Heide had access to all business records at Imports Plus, Inc., except the vehicle titles, which Debtor kept at his home.
Heide and Debtor entered into an oral agreement, pursuant to which Heide would lend Debtor or Imports Plus, Inc. money to purchase vehicles.5 When one of those *363vehicles was sold, Heide would be repaid the principal plus interest. He would also receive a small agreed sum ranging from $20 to $50 and, if he sold the vehicle, a sales commission.6 Heide made the first such loan in February 1998. While Heide did not take a security interest in the vehicles purchased with his money, he understood from Debtor there was sufficient equity in the vehicles on the lot to protect his loans. Heide did not understand or believe any other person or entity held a security interest in the vehicles purchased with the funds he had loaned.7
In late 2000 or 2001, the parties mutually agreed to modify the oral agreement. Going forward, the deal would no longer be “per vehicle”: Heide would receive monthly interest payments on the money he loaned.8 The parties, however, did not specify when or how Heide was to be repaid the principal. When the parties entered into the modified oral agreement, Heide did not have any concerns about the safety of his funds, because he had a trusting relationship with Debtor and because Debtor had told him he would be able to get his money back upon request, as long as he did not want it all at once. Heide continued to believe the vehicles Debtor purchased remained unencumbered; Debt- or thought Heide always knew Debtor had other lenders with a security interest in some of the vehicles, because Heide came in contact with the lenders’ agents at the car lot.
When the parties modified the oral agreement, Heide had loaned $186,250 for the purchase of vehicles that had not been repaid, and he loaned another $13,750, to increase the total loan to an even $200,000. In 2003, when Imports Plus, Inc. moved to a nicer lot that would permit it to carry more vehicles and more valuable vehicles, Heide loaned another $50,000. Finally, in 2004, Heide loaned another $50,000, bringing the total principal amount owed under the modified oral agreement to $300,000.9 At that time, both Heide and Debtor believed the car lot inventory was sufficient to cover this debt.
Under both the original oral agreement and the modified oral agreement, Heide received regular interest payments on the agreed terms. Imports Plus, Inc. issued 1099 federal income tax statements to Heide for interest payments for tax years 2001 through 2008. Heide and his wife were also permitted to use a vehicle from the Imports Plus, Inc. lot whenever they needed to take a long car trip.
In 2005, Heide asked Debtor to name him as the beneficiary under a life insurance policy. Heide wanted the policy to *364cover the amount of the loans and to make it easier for Debtor’s wife to pay Heide in the event Debtor passed away before the loans were repaid. Debtor agreed to do so, but he did not fulfill his promise at that time.
By Debtor’s own admission, he and Imports Plus, Inc. encountered financial difficulties beginning in 2006 and 2007, and by sometime in 2006, 2007, or 2008, the equity in the vehicle inventory at Imports Plus, Inc. had eroded to the point it could no longer fully support Heide’s $300,000 claim. Debtor did not advise Heide of this change in circumstances.
In October 2008; Debtor approached Heide with yet another deal. Debtor proposed to borrow money from Heide to purchase vehicles in Las Vegas, hold the vehicles until their value increased after the first of the new year, then re-sell them and split the profit evenly with Heide. Heide agreed to the new deal. In November 2008, Debtor told Heide he had bought six specific vehicles, and Heide gave Debt- or $50,490 for them, noting the descriptions of the vehicles on the two checks, he gave Debtor. The two checks listed Imports Plus, Inc. as the payee, and both were deposited in Imports Plus, Inc.’s bank account.
In entering into the original oral agreement in 1998, the modified oral agreement in late 2000 or 2001, and the separate Las Vegas deal in 2008, Heide did not request any documentation from Debtor regarding encumbrances on the vehicles on Imports Plus, Inc.’s car lot. He did not request his own security interest in Imports Plus, Inc.’s assets or in Debtor’s personal assets to secure the money he was lending. He did not request a financial report or other business records for Imports Plus, Inc. or for Debtor personally.
Beginning in late 2008 or early 2009, Heide became concerned about the collect-ability of his loans. While he was on a trip to California in late 2008, he received a number of telephone calls from buyers saying they had not received titles to vehicles they had purchased. When he returned home, Heide learned Debtor had cleaned out his office at Imports Plus, Inc. About this same time, Heide also asked Debtor to repay $10,000 of his principal, but Debtor told him he was unable to do so at the time.
In mid-January 2009, Heide flew to Florida to meet with Dennis Borgen and discuss his concerns. Heide advised Bor-gen Debtor had encumbered all the vehicles on the lot, buyers were not receiving their titles, and Debtor was not paying off the encumbrances on vehicles as they were sold. In Heide’s presence, Borgen called Debtor to discuss the problems. Heide got on the telephone and told Debtor he wanted the titles to the six vehicles recently purchased in Las Vegas. Debtor then admitted to Heide he had never actually purchased those vehicles.
Upon Heide’s return from Florida, Heide and others had a few meetings with Debtor. As a result of those meetings, Debtor presented some, but not all, of the business records Heide wanted to see, and Debtor signed a one-page document prepared by Heide and Heide’s wife in which Debtor admitted personal liability to Heide for the debt.10 On January 20, 2009, in compliance with his earlier promise, Debt- or finally made Heide the beneficiary on a life insurance policy. Debtor also gave Heide the titles to four or five unencumbered vehicles, which Heide liquidated for about $10,000. Imports Plus, Inc. eventually closed, with almost all the vehicles *365being liquidated to pay its secured creditors.
At trial, Debtor admitted some of Heide’s principal was used for business expenses other than the purchase of vehicles for resale. However, Heide did not establish the extent to which Debtor used Heide’s loans for such other business expenses or when Debtor began to do so.
In its decision, the bankruptcy court, as it had on summary judgment, found the modified oral agreement provided each time Debtor used Heide’s money, there was a re-extension of credit and an attendant assertion by Debtor that the inventory was sufficient to satisfy the funds owed to Heide.11 The record does not support that finding. Heide himself never testified that under the terms of the modified oral agreement each use of the loan proceeds constituted a renewal of credit and created a corresponding obligation for Debtor to advise Heide if the equity in the vehicles on the lot was insufficient to support this renewed loan. First Nebraska Educators Credit Union v. Hetrick (In re Hetrick), Bankr.No. 11-80283, Adv. No. 11-8045, 2012 WL 694553, at *3 (Bankr.D.Neb. March 1, 2012). Heide even acknowledged Debtor never promised he could repay Heide’s principal all at once, should he demand its return. What the record did show, when the parties made the modified oral agreement, was Heide was no longer lending money on a per vehicle basis, he increased his loan to an even $200,000, he agreed to be paid monthly interest on that sum at a specified rate, and the money would continue to be used to purchase inventory for the car lot. The record does not show the modified oral agreement contained any other specific terms.
Further, when the modified oral agreement was made, to the extent Debtor made a representation there was sufficient equity in the vehicles on the lot to repay the $200,000, the record does not show that statement was false. When Heide’s loan reached a total of $300,000 under the modified oral agreement, to the extent Debtor made a representation there was sufficient equity in the vehicles on the lot to repay the $300,000, again the record also does not show that statement was false. In fact, both Heide and Debtor testified they believed equity in the lot’s vehicles was sufficient to support Heide’s full claim when he made his last loan in 2004.
As to Debtor’s use of the funds other than for the agreed purpose of purchasing vehicles for the car lot’s inventory, Heide did not establish when or the extent to which Debtor used the loans other than for purchasing inventory. Heide also did not establish Debtor’s use of the funds other than for purchasing inventory constituted more than a breach of contract. See Belfry v. Cardozo (In re Belfry), 862 F.2d 661, 663 (8th Cir.1988).
In sum, the record does not support the bankruptcy court’s finding that Debtor made a fraudulent representation to Heide concurrent with Heide’s loans under the modified oral agreement. We are thus left with a definite and firm conviction a mistake has been made. Marcusen v. Glen (In re Glen), 639 F.3d 530, 532-33 (8th Cir.2011), Reingold v. Shaffer (In re Rein-*366gold), Bankr.No. 10-24329, Adv. No. 10-01903, 2013 WL 1136546, at *5-6 (9th Cir. BAP March 19, 2013); and Aslakson v. Freese (In re Freese), 472 B.R. 907, 917-19 (Bankr.D.N.D.2012). Accordingly, we reverse the bankruptcy court’s judgment to the extent it determined $300,000 of the amount Debtor owes Heide is nondis-chargeable.12
We reach a different conclusion, however, regarding the $50,490 Heide loaned Debtor under the Las Vegas deal. The record demonstrates the Las Vegas deal was separate and apart from Heide’s $300,000 loan under the modified oral agreement. Under the Las Vegas deal, Heide and Debtor agreed Debtor would buy several vehicles of a certain type, hold them in Las Vegas until prices improved, and resell them in Las Vegas. The vehicles were never intended for Imports Plus, Inc.’s lot. Debtor took the money under false pretenses, having knowingly represented to Heide he had already purchased the agreed vehicles in Las Vegas, when he had not.13 Heide, who had some business acumen and at least a basic knowledge of the wholesale auto business, justifiably relied on Debtor’s representations regarding the Las Vegas deal, since no red flags were present and nearly all his prior dealings with Debtor had been fruitful. Field v. Mans, 516 U.S. 59, 70-71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (whether a creditor’s reliance on a debtor’s false representation is “justifiable” is a subjective question dependent upon the qualities and characteristics of the particular creditor and the circumstances of the particular case; the creditor’s conduct need not conform to the standard of the reasonable man). Finally, in light of the other terms of the Las Vegas deal, neither the fact that Heide’s checks were made out to Imports Plus, Inc. nor the fact that those checks were deposited in a corporate account is sufficient to warrant the conclusion that the bankruptcy court erred in finding the Las Vegas deal was between Heide and Debtor, not Heide and Imports Plus, Inc.14
The record amply supports the bankruptcy court’s conclusion that the $50,490 debt arising from the 2008 Las Vegas deal was a personal debt incurred by Debtor that should be excepted from discharge pursuant to § 523(a)(2)(A). Finding no clear error in that regard, we affirm the bankruptcy court’s judgment to that extent.
CONCLUSION
The record does not support a finding that the $300,000 loan under the modified oral agreement was made in reliance on a fraudulent representation Debtor made concurrently with the creation of the debt. Thus, that portion of Heide’s claim cannot be excepted from discharge under § 523(a)(2)(A), and we must reverse the bankruptcy court to that extent.
*367On the other hand, the record does support a finding that the Las Vegas deal was between Heide and Debtor individually and the further finding that Heide established each of the required elements under § 523(a)(2)(A) with respect to the $50,490 he loaned Debtor pursuant to that agreement. Consequently, we affirm the bankruptcy court’s determination of nondis-chargeability to the extent of that $50,490.
We remand the matter to the bankruptcy court for proceedings consistent with this opinion.
. In their complaint, the Heides denominated the defendants as "David L. Juve and Imports *361Plus, Inc.” In their amended complaint, the Heides denominated the defendants as "David L. Juve[,] d/b/a Juve Buying Service, d/b/a Imports Plus, Inc.[,] and Mona Juve.” While the issue is not directly related to the appeal before us, we question whether an individual can in fact "do business as” a corporation.
. The bankruptcy court’s judgment was entered September 28, 2012. The bankruptcy court entered an amended judgment on January 25, 2013, while this appeal was pending. It appears "Debtor” was changed to "Debt- or(s)” and “Defendant” was changed to "Defendant(s)” in the caption of the amended judgment, and the middle initial "L.” was added to David Juve’s name in two places in the body of the amended judgment. Because it does not appear our leave was obtained before these apparent clerical corrections were made, as required by Fed.R.Bankr.P. 9024 and Fed.R.Civ.P. 60(a), the amended judgment is without effect. See Hartis v. Chicago Title Ins. Co., 694 F.3d 935, 949-50 (8th Cir.2012).
The underlying purpose of [Rule 60(a) ], we believe, is to protect the administrative integrity of the appeal, i.e., to ensure that the issues on appeal are not undermined or altered as a result of changes in the [trial] court's judgment, unless such changes are made with the appellate court’s knowledge and authorization. We note that after the appellate court has ruled on the appeal, the [trial] court still has the power under Rule 60(a) to clarify and correct omissions in its judgment to reflect what the court originally intended, without leave of the appellate court, "so long as the Court's corrections do not alter or amend anything expressly or implicitly ruled on by the [appellate court].” United States v. Mansion House Center Redevel. Co., 118 F.R.D. 487, 490 (E.D.Mo.1987), aff’d, 855 F.2d 524, 527 (8th Cir.), cert. denied, 488 U.S. 993, 109 S.Ct. 557, 102 L.Ed.2d 583 (1988).
Kopolow v. P.M. Holding Corp. (In re Modern Textile, Inc.), 900 F.2d 1184, 1193 (8th Cir.1990).
. The exhibits received at trial were not included in the record on appeal.
. In 2001, Debtor became a 75% owner of Imports Plus, Inc.; Dennis Borgen retained the other 25% interest.
.Heide maintains his agreement was with Debtor; Debtor maintains Heide's agreement was with Imports Plus, Inc.
. Both Heide’s and Debtor’s testimony regarding the "agreed sum” Heide was to receive was not entirely clear. At times, they appeared to be referring to Heide’s sales commission rather than a separate component of their oral agreement.
. Heide stated several times during his testimony he believed the vehicles purchased with his loan funds would remain unencumbered and Debtor often reassured him his funds were safe. At some point, however, Heide apparently learned other creditors had been given a security interest in the vehicles, since he testified he told Borgen in January 2008 Debtor had "encumbered all the cars.”
. Once during his testimony, Heide indicated even after the parties entered into the modified oral agreement, he also continued to receive a fixed $20 per car sold.
. All Heide’s loans were made by checks. It is not clear from the testimony whether the payee on these checks was Imports Plus (a “d/b/a” used by Debtor) or Imports Plus, Inc. (a separate corporate entity), and there was no testimony regarding where these checks were deposited. That information may have been included in the exhibits, but, as noted above, the exhibits were not included in the record on appeal.
. Debtor claims he signed this document under duress.
. The bankruptcy court's finding was, “In other words, as Heide vehicles were sold, instead of being repaid the principal as was his right at any particular time, Heide re-extended the credit and use of the proceeds to [Debtor], and [Debtor] repeatedly borrowed those funds anew, all based upon [Debtorfs ongoing assertions of the equity and liquidity of the Heide inventory sufficient to satisfy the entire balance of funds owning [sic ] to Heide.”
. We do not reach the issue of whether the bankruptcy court correctly found the $300,000 was an obligation owed by Debtor or the related issue of whether the bankruptcy court correctly concluded the corporate veil could and should be pierced if the $300,000 debt was instead owed by Imports Plus, Inc.
. Heide was adamant Debtor told him he had already purchased the vehicles at the time Heide issued the checks for $50,490; Debtor did not dispute Heide's testimony.
.The bankruptcy court did not find Heide had loaned money to Imports Plus, Inc. It instead found piercing the corporate veil was appropriate and necessary if such a veil existed. Having found the record was sufficient to support the bankruptcy court’s finding that the $50,490 debt under the Las Vegas deal was incurred by Debtor personally, we do not reach the issue of whether the bankruptcy court correctly pierced the corporate veil as to that claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495791/ | SCHERMER, Bankruptcy Judge.
National Bank of Kansas City (“NBKC”) appeals from a grant of summary judgment by the bankruptcy court in favor of Bank of the West (“BOW”), rejecting NBKC’s requests for equitable relief, and ruling that BOW had a first priority lien on a piece of the debtor’s equipment and is entitled to proceeds from the sale of that equipment.1 We have jurisdiction over this appeal from the final judgment of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.
ISSUE
The issue in this appeal is whether the bankruptcy court properly granted summary judgment to BOW.
BACKGROUND
A. Procedural History
This appeal arises from a dispute regarding the existence, validity and priority of liens of three lenders on a piece of equipment that was owned by the debtor, and the proceeds from the sale in bankruptcy of that equipment. The procedural history is complex. We provide a simplified description of such history in an effort to facilitate an understanding of it.
BOW filed a multi-count amended complaint against several defendants. In Count VII, BOW sought a declaration that it held a first lien on a piece of the debtor’s equipment, senior to that of Kraus-Anderson Capital, Inc. (“Kraus-Anderson”). It also sought a determination that it was entitled to the proceeds from the sale of that equipment. NBKC *370intervened, maintaining it was entitled to priority in the proceeds from the equipment based on principles of equity. BOW and NBKC each filed a motion for summary judgment. BOW moved for summary judgment on Count VII of the amended complaint, as well as all counterclaims and cross-claims related to the equipment and its proceeds. NBKC sought summary judgment with respect to its counterclaim for equitable relief.
The bankruptcy court entered orders on December 8, 2011 and January 4, 2012,2 granting BOW summary judgment regarding the equipment and its proceeds. The court denied NBKC’s motion for summary judgment.
NBKC appealed the December 8, 2011 and January 4, 2012 orders of the bankruptcy court. We dismissed the appeal as premature because those orders did not dispose of all of the claims in the adversary proceeding, and we denied NBKC leave to appeal the interlocutory orders. After the bankruptcy court entered an order in November 2012, NBKC again appealed the December 8, 2011 and January 4, 2012 orders. In its notice of appeal, NBKC stated that “These Orders became final pursuant to the Order of the Court entered November 20, 2012.” Once again, we dismissed the appeal because the November 2012 order was not a final order. Our order directed NBKC to “return to the bankruptcy court and request it enter a judgment which disposes of all of the plaintiffs claims against all of the defendants, as well as all of the defendants’ counterclaims and cross claims.”
On April 3, 2013, the bankruptcy court entered such a judgment. This appeal represents the third effort of NBKC to appeal the orders entered in 2011 and 2012. NBKC apparently does not understand that it can only appeal from a final judgment, and there is but one in this case, the April 3, 2013 judgment. The notice of appeal purports to appeal from the same two interlocutory orders the appellant appealed from previously. We construe the appeal to be from the April 3, 2013 judgment.3
B. Facts
The relevant facts are not in dispute. By a loan and security agreement dated June 2005, the debtor granted BOW a security interest in the debtor’s personal property. BOW properly perfected its security interest by filing a financing statement with the Missouri Secretary of State. In 2007, when the debtor purchased two 2006 Road Mobile Trommels, serial numbers HT-182M-1007 (the “Trommel 1007”) and HT-182-M-1008 (the “Trommel 1008”), BOW’s blanket security interest attached to both pieces of equipment.
In February 2007, the debtor executed a promissory note and a commercial security agreement in favor of NBKC, granting NBKC a security interest in the Trommel 1008. NBKC properly perfected its security interest by filing a financing statement *371with the Missouri Secretary of State. BOW disputes NBKC’s claim that the debtor used the loans proceeds to purchase the Trommel 1008. However, because it did not affect the outcome, the bankruptcy court assumed NBKC held a purchase money security interest, senior to BOW’s blanket security interest, in the Trommel 1008.
In March 2007, the debtor executed a promissory note in favor of Kraus-Anderson, granting Kraus-Anderson a security interest in the Trommel 1007. Kraus-Anderson properly perfected its security interest by filing a financing statement with the Missouri Secretary of State. The debtor used the loan proceeds to purchase the Trommel 1007. Consequently, Kraus-Andersen held a purchase money security interest, senior to BOW’s blanket security interest, in the Trommel 1007.
Thereafter, and before filing its bankruptcy petition, the debtor sold the Trom-mel 1008. The debtor, in error, paid the proceeds from the sale of the Trommel 1008 to Kraus-Anderson (a party whose loan was secured by the Trommel 1007), rather than to NBKC (a party whose loan was secured by the Trommel 1008). By doing so, the debtor paid off the loan from Kraus-Anderson.
On September 15, 2010, the debtor filed its petition for relief under Chapter 11. In February 2011, BOW commenced its adversary proceeding, which led to this appeal. In March 2011, the bankruptcy court granted the debtor’s third motion for approval of the sale of the Trommel 1007. The sale proceeds were greater than the amount the debtor owed to NBKC, but less than the amount the debtor owed to BOW. The sale order allowed the debtor to pay the sales commission and to partially satisfy BOW’s lien. In addition, the order stated that “[t]he balance of the proceeds shall be held in the [debtor’s DIP account pending a resolution of the dispute over who holds the first priority lien and to pay the balance owed to [BOW] on its second priority lien.”
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. Lange v. Mutual of Omaha Bank (In re Negus-Sons, Inc.), 460 B.R. 754, 755 (8th Cir. BAP 2011), aff'd per curiam 701 F.3d 534 (8th Cir.2012). We review a grant of summary judgment de novo. Paul v. Allred (In re Paul), 488 B.R. 104, 2013 WL 709562, *1 (8th Cir. BAP 2013) (citing Peter v. Wedl, 155 F.3d 992, 996 (8th Cir.1998)); Negus-Sons, Inc., 460 B.R. at 755.
DISCUSSION
Summary judgment is appropriate where there is no genuine dispute as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(a), applicable pursuant to Fed. R. Bankr.P. 7056; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
We view the summary judgment record in the light most favorable to NBKC, the nonmoving party, and afford it all reasonable inferences. Ryan v. Capital Contractors, Inc., 679 F.3d 772, 776 (8th Cir.2012). BOW’s summary judgment “burden ... may be discharged by ‘showing’- — -that is, pointing out ... that there is an absence of evidence to support the nonmoving party’s case.” Celotex, 477 U.S. at 325, 106 S.Ct. 2548; Paul, 488 B.R. 104, 2013 WL 709562, *1 (“The burden on the moving party ‘is only to demonstrate, i.e., to point out ..., that the record does not disclose a genuine dispute on a material fact.’ ”) (quoting City of Mt. Pleasant, Iowa v. Assoc. Elec. Cooperative, Inc., 838 F.2d 268, 273 (8th Cir.1988) (citation, internal *372quotation marks omitted)). “[T]he non-moving party must set forth specific facts sufficient to raise a genuine issue for trial and cannot rest on allegations in the pleadings.’ ” Ryan, 679 F.3d at 776 (quoting Northwest Airlines, Inc. v. Astraea Aviation Servs., Inc., 111 F.3d 1386, 1393 (8th Cir.1997) (internal marks omitted) (citing Celotex, 477 U.S. at 324, 106 S.Ct. 2548)); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (the nonmov-ing party must “do more than simply show that there is some metaphysical doubt as to the material facts.”).
A. The bankruptcy court correctly held that BOW held a senior security interest in the Trommel 1007.
We agree with the bankruptcy court’s decision that, after the sale of the Trommel 1008 and the erroneous use of the proceeds to pay off the loan from Kraus-Anderson, BOW, who previously held a second priority security interest in the Trommel 1007, moved into the senior secured position. “A security interest cannot exist independent of the obligation it secures.” Negus-Sons, Inc., 460 B.R. at 758 (quoting In re Advanced Aviation, Inc., 101 B.R. 310, 313 (Bankr.M.D.Fla. 1989)) (citations omitted). And, Kraus-Anderson did not appeal the bankruptcy court’s ruling that Kraus-Anderson’s security interest in the Trommel 1007 was “extinguished” when the debtor paid off its loan using the proceeds of the Trommel 1008. The bankruptcy court then properly determined that, as a matter of law, NBKC did not have a claim against the Trommel 1007. NBKC’s remedies were to seek relief from parties other than BOW and with respect to equipment other than the Trommel 1007; it could seek to enforce its rights against the buyer of the Trom-mel 1008 or the proceeds of such equipment, or it could file a claim in the debtor’s bankruptcy case. Mo. Rev. Stat. § 400.9-315(a)(1) and (2).
B. The grant of summary judgment to BOW on NBKC’s claims for equitable relief was proper.
The bankruptcy court granted summary judgment to BOW, determining, as a matter of law, that NBKC was not entitled to relief on its equitable claims for imposition of an equitable lien and reformation based on mutual mistake.
NBKC bore the burden of proving its equitable claims at trial. See Fee v. Eccles (In re Eccles), 393 B.R. 845, 854 (Bankr.W.D.Mo.2008), aff'd 407 B.R. 338 (8th Cir. BAP 2009) (claims for equitable relief failed when party did not allege or establish why legal remedy was insufficient, and party did not prove elements for an equitable lien); Commerce Bank, N.A. v. Tifton Alum. Co., Inc. (In re Win-Vent, Inc.), 217 B.R. 803, 810 (Bankr.W.D.Mo.1997) (summary judgment where counter-claimant “fail[ed] to establish necessary elements of’ his claim for equitable lien), aff'd 217 B.R. 798 (W.D.Mo.1997); State ex rel. General Dynamics Corp. v. Luten, 566 S.W.2d 452, 460 (Mo.1978) (en banc) (“As a condition for obtaining equitable relief, petitioner must show in a usual case that he has no adequate remedy at law. It is required that such must affirmatively appear from the face of the pleadings and from the evidence.”) (citation omitted); Thompson v. Koenen, 396 S.W.3d 429, 434, 2013 WL 1197486, at *3 (Mo.Ct.App.2013) (party seeking reformation based on mutual mistake must show necessary elements) (quoting Will Invs. v. Young, 317 S.W.3d 157, 164-65 (Mo.Ct.App.2010)). Reformation based on mutual mistake and imposition of an equitable lien are extraordinary remedies. See Win-Vent, 217 B.R. at 810 (“Imposition of an equitable lien is an extraordinary remedy.”); Ethridge v. Tier-One Bank, 226 S.W.3d 127, 132 (Mo.2007) *373(citation omitted) (“Reformation of a written instrument is an extraordinary equitable remedy and should be granted with great caution and only in clear cases of fraud or mistake.”) (quoting Morris v. Brown, 941 S.W.2d 835, 840 (Mo.Ct.App.1997) (internal marks omitted)).
NBKC argues that summary judgment was improper because BOW failed to adequately support its motion. NBKC claims that the “bankruptcy court appears to have concluded that if NBKC was unable to set forth sufficient uncontroverted facts to obtain summary judgment on its counterclaim against [BOW], then it was axiomatic that [BOW] should prevail on all claims asserted between the parties.” According to NBKC, its equitable claims should have proceeded to trial. We disagree. The bankruptcy court properly examined the record, and we find no error with its decision to grant summary judgment to BOW.
NBKC’s arguments focus largely on the portion of the bankruptcy court’s ruling that “as an overarching bar to any equitable relief,” NBKC’s claims must fail because it had an adequate remedy at law. Relevant law shows that the grant of summary judgment to BOW was proper. See O’Neal v. Southwest Mo. Bank of Carthage (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1253 (8th Cir.1997) (“Generally, equity will not interceded if there is an adequate remedy at law.”) (quoting Hammons v. Ehney, 924 S.W.2d 843, 847 (Mo.1996) (en banc) (marks omitted)). The bankruptcy court pointed to a section of the Missouri Uniform Commercial Code, providing that a security interest continues in collateral after its sale to a third party. See Mo. Rev. Stat. § 400.9-315(a)(l). It also cited the provision of the Missouri Uniform Commercial Code, stating that a security interest attaches to the identifiable proceeds of the collateral. See Mo. Rev. Stat. § 400.9-315(a)(2). In addition, the court noted that NBKC could file an unsecured proof of claim in the debtor’s case, a case in which the confirmed plan proposed 100% payment to unsecured creditors. We agree with the bankruptcy court’s decision that, based on the record, NBKC had adequate remedies at law.
In addition, with respect to the merits of NBKC’s request for an equitable lien, the bankruptcy court examined the record and determined that “there [was] no factual basis to impose an equitable lien on the Trommel 1007 in NBKC’s favor.” It correctly stated the law regarding equitable liens, borrowing NBKC’s citation to the definition of it: “An equitable hen is merely an encumbrance on property that is construed based on the express agreement of the parties or with reference to the situation of the parties at the time of the contract and by the attendant circumstances.” Tobin v. Ins. Agency Co., 80 F.2d 241, 243 (8th Cir.1935). It also recognized that an equitable lien can arise based on the parties’ agreement or in the interest of justice. Exchange State Bank v. Fed. Surety Co., 28 F.2d 485, 487 (8th Cir.1928). Separated into its elements, the required showing for an equitable lien is: “1) a duty or obligation owing by one person to another; 2) a res to which that obligation fastens, which can be identified or described with reasonable certainty; and (3) an intent, express or implied, that the property serve as security for the payment of the debt or obligation.” TierOne Bank, 226 S.W.3d at 134 (quoting Estate of Ripley v. Mortgage One Corp., 16 S.W.3d 593, 596 (Mo.Ct.App.1999) (internal marks omitted)).
We agree with the bankruptcy court’s rejection of NBKC’s request for an equitable lien. The parties never agreed that NBKC’s loan for the purchase of the Trommel 1008 would be secured by a totally separate piece of equipment, the Trom-mel 1007. And, there is no reason based *374on the record to say that BOW should be barred from enforcing its second lien position where the debtor mistakenly paid to Kraus-Anderson of the proceeds from Trommel 1008, rather than paying such proceeds to NBKC. The bankruptcy court correctly said that the similarity between the Trommel 1007 and 1008 is not a basis upon which to impose an equitable lien. There is no basis upon which to reverse the bankruptcy court’s decision that imposition of an equitable lien was not merited.
Likewise, the bankruptcy court’s grant of summary judgment to BOW on NBKC’s cause of action for reformation of the agreement for mutual mistake was proper. To reform a contract based on mutual mistake, “there must be ‘clear, cogent and convincing evidence’ of (1)a preexisting agreement between [the parties] ..., (2) a scrivener’s mistake in drafting the agreement, and (3) that the mistake was mutual as between the [parties].” TierOne Bank, 226 S.W.3d at 132 (citation omitted). As the bankruptcy court recognized, there is no basis for reforming NBKC’s security agreement with the debtor to grant NBKC a first priority lien on the Trommel 1007. The court correctly ruled that none of the required elements for a showing of mutual mistake is present. NBKC’s loss of its interest arises from nothing other than the debtor’s unilateral mistake when applying the proceeds from NBKC’s collateral, the Trom-mel 1008.4
CONCLUSION
The decision of the bankruptcy court is AFFIRMED.
. The Honorable Jerry W. Venters, United States Bankruptcy Judge for the Western District of Missouri, was the author of a Memorandum Opinion and relevant orders entered in this case. The Honorable Cynthia A. Norton, United States Bankruptcy Judge for the Western District of Missouri, authored the April 3, 2013 judgment that serves as the basis for this appeal.
. The bankruptcy court entered two orders on January 4, 2012. One order denied motions to reconsider the court's December 8, 2011 order, filed by NBKC and Kraus-Anderson. That order stated that the court would amend its December 8, 2011 order to clarify the disposition of NBKCs and Kraus-Anderson’s counterclaims and cross-claims. The second January 4, 2012 order clarified that BOW was entitled to summary judgment on NBKC’s counterclaim and counterclaims filed by Kraus-Anderson. The court also stated that it would abstain from hearing NBKC’s and Kraus-Anderson’s cross-claims against each other.
. Because the parties had already stated their arguments, we consider this case based on the briefs filed in January and February 2013, in NBKC’s previous appeal.
. The bankruptcy court also aptly noted that "reforming the security agreement would have absolutely no effect on the UCC financing statements filed with the Missouri Secretary of State, so any reformed securily agreement would be unperfected....” We agree. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495792/ | ORDER
THAD J. COLLINS, Chief Judge.
This Court held trial in this adversary on August 29, 2012. Desiree A. Kilburg appeared for Plaintiff, Joseph E. Sarachek, in his capacity as Chapter 7 Trustee. Laura Seaton and Lynn Hartman appeared on behalf of Defendant Garnavillo Gospel Hall Association (“Garnavillo Gospel”). Ron Wahls appeared pro se. The Court took the matter under advisement and provided time, at Trustee’s request, for additional briefing. The briefs were filed and the case is ready for disposition. This is a core proceeding under 28 U.S.C. § 157(b)(2)(F).
STATEMENT OF THE CASE
Trustee initially sought to recover preferential or fraudulent transfers from Debt- or to Defendants totaling $164,375.22. At trial, Trustee proceeded only on the fraudulent conveyance theory, and the parties stipulated that the checks at issue totaled $141,700.25. Garnavillo Gospel argued that, at most, it and its President Ron Wahls were a conduit for the transfers, which cannot be recovered from them as fraudulent transfers. Garnavillo Gospel alternatively argues that if it cannot be a conduit, Ron Wahls acted outside his authority — and not as Church President — on this matter, and Trustee can recover only against Wahls. Trustee claims he proved his case, and argued the Defendants could not be considered mere conduits. The Court disagrees with Trustee and decides the case for Defendants.
BACKGROUND
Debtor owned and operated one of the nation’s largest kosher meatpacking and food-processing facilities in Postville, Iowa. On November 4, 2008, Debtor filed a Chapter 11 petition in the Bankruptcy Court for the Eastern District of New York. Debtor’s bankruptcy petition and accompanying documents recited that its financial difficulties resulted from a raid conducted by U.S. Immigration and Customs Enforcement. A total of 389 workers at the Postville facility were arrested. The raid led to numerous federal criminal charges, including a high-profile case against Debtor’s President, Sholom Ru-bashkin. Debtor’s Petition also stated it had over 200 creditors and assets and liabilities in excess of $50,000,000.
The court eventually approved the appointment of Joseph E. Sarachek as the Chapter 11 trustee. The court concluded that appointing a trustee was necessary in part “for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management” under § 1104(a)(1). After hearings in a later proceeding, the court transferred the case to this Court on December 15, 2008. This Court eventually *379converted the case to a Chapter 7 bankruptcy. The U.S. Trustee for this region retained Mr. Sarachek as the Chapter 7 trustee.
On November 2, 2010, Trustee filed a Complaint to avoid fraudulent conveyances and preferential transfers. Trustee alleged that within two years of the petition date, Defendants received seventy-seven checks totaling $164,375.22 from Agripro-cessors, Inc. or Cottonballs, LLC. Trustee asked the Court to declare the payments recoverable as fraudulent conveyances under § 548 or preferences under § 547(b). Garnavillo Gospel filed its answer and affirmative defenses on February 8, 2011. Wahls did not make any filings.
On December 12, 2011, Garnavillo Gospel filed a Motion for Summary Judgment. The Court held a hearing on the Motion on January 20, 2012. In response to the Motion, Trustee argued the Court should defer ruling until Trustee took the deposition of Ron Wahls and/or finished other discovery. The Court granted Trustee’s request and gave Plaintiff until February 3, 2012, to complete discovery and until February 10, 2012, to supplement the resistance to the Motion for Summary Judgment. The Court extended these deadlines after Wahls failed to appear for the first scheduled deposition. Wahls’s deposition was eventually taken.
After the deposition, Garnavillo Gospel renewed its Motion for Summary Judgment. Trustee resisted. The Court held another hearing on the merits of the Motion and took the matters under advisement. The Court issued a ruling denying Garnavillo Gospel’s Motion for Summary Judgment and Renewed Motion for Summary Judgment. Sarachek v. Wahls (In re Agriprocessors, Inc.), Bankr. No. 08-2751, Adv. No. 10-09196, 2012 WL 1945701 (Bankr.N.D.Iowa May 30, 2012).
The case proceeded to trial on August 29, 2012. Trustee and Garnavillo Gospel submitted post-trial briefs.
FINDINGS OF FACT
Ron Wahls is President of Garnavillo Gospel — a chureh/faith community in Gar-navillo, Iowa. Ron Wahls is also a school counselor at Postville Community School District. In his school counselor job, he dealt extensively with immigrant families and students. Many of the parents or household heads worked at the Agripro-cessors plant in Postville.
Wahls got to know Sholom Rubashkin, the President of Agriprocessors, through the school’s interface with the plant. This interface was mainly to get a hold of parents working at the plant when they were needed for school-related matters — mainly sick kids, student absence issues, and the like. Rubashkin assisted Wahls with setting up better communication between the school and the plant for these situations.
Wahls and Rubashkin developed a friendship and continued to work together on things related to the school and families in the community. Rubashkin donated money for key school needs. Wahls appreciated his help.
The matters relevant to this case arose when Rubashkin asked Wahls if he knew of some families in Postville that needed some work. Rubashkin was in need of workers to build chicken barns for one of Agriprocessors’ related entities — Cotton-balls, Inc. Wahls stated that Rubashkin contacted him because Wahls helped many of the immigrant families and would know who needed and/or might be available for work.
Wahls arranged a group of workers for Rubashkin. When they finished, Rubash-kin sent payment to Wahls and asked him to distribute the money to the workers. *380Wahls did not think anything of it, and did so. This process — Rubashkin asking Wahls to help get workers for the chicken barns, Wahls arranging the workers, and Rubashkin making payment to or through Wahls — continued on through the duration of the chicken barn project.
Rubashkin sent the checks to Wahls. They were originally made out to Wahls only. As time went on, some were made out to Wahls and some to Garnavillo Gospel. Most of the checks came from Cot-tonballs, but some were from Agriproces-sors. No matter how the checks were made out, or which entity they were from, Wahls cashed them at his personal bank (not the Church’s bank) and distributed the sums owing to each worker.
Wahls testified that there was usually some list with the checks that indicated hours worked and/or how the funds should be divided and paid. Wahls admits that he might, with 20/20 hindsight, have asked more questions about this payment arrangement. However, he noted his real concern at the time was to help members of the immigrant community (many with language barriers) get work and get paid. He knew if he handled the role of receiving and distributing the money, the workers would get paid.
Wahls never involved anyone from Gar-navillo Gospel with this business or arrangement. No one from Garnavillo Gospel knew about it while it was occurring. He had no authority from Garnavillo Gospel to act in this role.
Wahls admits that many checks were made out to him as President of Garnavillo Gospel, or just to Garnavillo Gospel. He did from time to time wonder why the checks were made out in that fashion. However, he never seriously questioned it. He stated again and again that his biggest concern was getting the workers paid. Knowing that the checks he received were always for that purpose and came with instructions on who to pay and how much, he continued forward. He admits that he was able to cash the checks to Garnavillo Gospel because he was known as the President and was trusted at his small-town bank. Although he generally does not handle financial matters, he did have the power to write and deposit checks for Gar-navillo Gospel.
Neither Wahls nor Garnavillo Gospel got anything — not a single penny — for Wahls’ actions. Wahls never deposited the checks into his or Garnavillo Gospel’s bank accounts, and neither he nor Garnavillo Gospel kept any of the money. Agriproces-sors never paid Wahls for his services. Wahls did the whole thing himself out of a sense of obligation to the workers, and to his very deeply held Christian faith. All the money went to the workers for the work they did for Cottonballs and/or Agri-processors.
The Court specifically finds Wahls to be an exceptionally credible witness. The Court essentially accepts his testimony in its entirety. The Court also finds John Kregel, the treasurer of Garnavillo Gospel, to be a very credible witness. John Kre-gel testified that Wahls acted entirely on his own, without involving the Church at all, and without any authority from the Church to do those things. He noted that he and the other Church members found out about this only after the Trustee sued them alleging the Church’s involvement in the fraudulent transfer. He said people were shocked, but totally support Wahls because he acted as a good Christian trying to serve vulnerable members of the community.
CONCLUSIONS OF LAW
I. Recovering Transfers from Defendants: Fraudulent Conveyances and the Mere Conduit Exception
The key issue is whether Trustee may avoid the checks provided to Wahls as *381fraudulent conveyances, and if so, whether Trustee may recover the transfers from either or both of the Defendants. Section 548 of the Bankruptcy Code provides, in part:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debt- or in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) 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) ...
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
11 U.S.C. § 548(a)(1)(B) (emphasis added).
Here, the parties do not dispute that Agriprocessors wrote checks to Garnavillo Gospel or Wahls within two years of the petition. The parties also agree that Debtor was insolvent during the two years before filing its bankruptcy petition. The Court concludes, however, that the Trustee has failed — among other things — to prove Debtor received less than a reasonably equivalent value.
A. Cottonballs and/or Agriprocessors Received Reasonably Equivalent Value
Whether Debtor received reasonably equivalent value is a question of fact. Meeks v. Don Howard Charitable Remainder Trust (In re S. Health Care of Ark, Inc.), 309 B.R. 314, 319 (8th Cir. BAP 2004) (citing Jacoway v. Anderson (In re Ozark Rest. Equip. Co.), 850 F.2d 342, 344 (8th Cir.1988)). Value “means property, or satisfaction or securing of a present or antecedent debt of the debt- or....” 11 U.S.C. § 548(d)(2). Reasonably equivalent value, however, is not defined in the Bankruptcy Code. BFP v. Resolution Trust Corp., 511 U.S. 531, 535, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). Generally, courts look to whether there has been a “fair exchange” in the transaction. Pummill v. Greensfelder, Hemker & Gale (In re Richards & Conover Steel, Co.), 267 B.R. 602, 612 (8th Cir. BAP 2001); see also BFP, 511 U.S. at 545, 114 S.Ct. 1757 (noting that “outside of the foreclosure context,” reasonably equivalent value is “similar to fair market value”).
Trustee has the burden of proving by a preponderance of the evidence that the transfer was not for reasonably equivalent value. S. Health Care of Ark., Inc., 309 B.R. at 319; Richards & Conover Steel, Co., 267 B.R. at 612. “This requires analysis of whether: (1) value was given; (2) it was given in exchange for the transfers; and (3) what was transferred was reasonably equivalent to what was received.” Richards, 267 B.R. at 612.
There is no bright line rule used to determine when reasonably equivalent value is given.” See In re Lindell, 334 B.R. 249, 255-56 (Bankr.D.Minn.2005), citing In re Ozark Restaurant Equipment Co., Inc., 850 F.2d 342, 345 (8th Cir.1988) (determination of reasonably equivalent value is based on a “totality of the circumstances”); Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir.1997) (standard for reasonable equivalence should depend on all the facts of each case). “A determination of reasonably equivalent value is ‘fundamentally one of common sense, meas*382ured against market reality.’” Lindell, 334 B.R. at 256, citing In re Northgate Computer Sys., Inc., 240 B.R. 328 (Bankr.D.Minn.1999). “When evaluating a transfer for reasonable equivalency under 11 U.S.C. § 548(a)(1)(B)(i) a court must examine the entire situation.” Lindell, 334 B.R. at 255, citing Ozark Restaurant, 850 F.2d at 344-45.
Sullivan v. Schultz (In re Schultz), 368 B.R. 832, 836 (Bankr.D.Minn.2007). Reasonably equivalent value may be demonstrated by showing the effect that the transfer had on the debtor. Id. at 836-37 (finding that transferring funds into a trust constituted reasonably equivalent value because it ensured that a third party would continue to provide services to the debtor).
A debtor receives reasonably equivalent value when it receives a direct or indirect economic benefit. Id. at 836 (“When evaluating a transfer for reasonable equivalency of value as compared to a money payment, a court must examine the whole transaction and measure all the benefits — whether they be direct or indirect.” (quoting S. Health Care of Ark, Inc., 309 B.R. at 319)). An economic benefit, and therefore reasonably equivalent value, exists when a debtor pays an antecedent debt. Stalnaker v. Gratton (In re Rosen Auto Leasing, Inc.), 346 B.R. 798, 805 (8th Cir. BAP 2006); Schultz, 368 B.R. at 837. The debtor receives an economic benefit even if the payment does not go directly from a debtor to the person or entity the debtor owes. See Schoenmann v. BCCI Constr. Co. (In re Northpoint Commc’ns Grp.), 361 B.R. 149, 161 (Bankr.N.D.Cal. 2007); Tidwell v. Galbreath (In re Galbreath), 207 B.R. 309, 325 (Bankr.M.D.Ga.1997).
For example, in In re Galbreath, the debtor sold his dental practice and gave the proceeds of the sale to his wife, who deposited the $128,500.00 from the sale into her account. 207 B.R. at 315. The debtor was not required to transfer these funds to his wife. Id. at 323. The debt- or’s wife used $112,495.27 of the funds to pay the debtor’s obligations. Id. at 314. The trustee attempted to recover the transfer from the debtor-husband to the wife as a fraudulent transfer. Id. at 324. The court denied the trustee’s attempt to avoid the $112,495.27, finding that “these payments conferred a direct economic benefit upon [d]ebtor by reducing his obligations.” Id. at 325. Similarly, in In re Northpoint Communications Group, a debtor owed money to several entities that had worked on construction projects for the debtor. 361 B.R. at 153. A general contractor agreed to collect payment for three subcontractors although the general contractor “was not itself obligated” to the subcontractors. Id. The debtor transferred funds to the general contractor for those subcontractors, which the bankruptcy trustee eventually sought to recover from the general contractor as a fraudulent conveyance. The court found that the conveyance was not fraudulent, noting, that the debtor received reasonably equivalent value “because the payments were promptly transferred to the [subcontractors] in satisfaction of [the debtor’s] obligations to those” subcontractors. Id. at 161.
Here, facts presented at trial show conclusively that Debtor received reasonably equivalent value for all the checks it wrote. The only evidence in the record shows Debtor (assuming for the moment Cottonballs and Agriprocessors are really one entity1) received the full *383benefit of what it paid for: the construction of chicken barns. In reality, Debtor simply paid its debt for labor on the project through each of the seventy-seven transfers at issue here. Debtor owed the workers for their work. On its face, this cannot be considered a fraudulent transfer of any sort.
Trustee appears to be attempting to avoid these undisputed facts and the obvious legal conclusion they bring by asking the Court to simply ignore the workers, the work they did, and the fact they got paid for that work. Instead, Trustee focuses solely on the fact that Ron Wahls, Present of Garnavillo Gospel, received the funds from Debtor — and neither Wahls nor Garnavillo Gospel provided some equivalent value to Debtor in return. The Court declines Trustee’s invitation to ignore the reality that this transaction amounts to nothing more than Debtor paying an antecedent debt — a debt it owed for services it indisputably received. Other courts dealing with even less obvious benefits to debtors have concluded there was no fraudulent transfer. As such, this Court finds Trustee has failed to meet his burden of proving that these transfers were for less than a reasonably equivalent value.2 The transfers were not fraudulent, *384and Trastee may not avoid them under § 548(a).3
B. Wahls Is Not an Initial Transferee
Even if the Court were to assume that somehow Debtor received no benefit from the transfers and the transfers were constructively fraudulent, there would still be an issue about whether Trustee could recover the transfers from Defendants. If there is an avoidable transfer, Trastee may recover the property from “the initial transferee of such transfer or the entity for whose benefit such transfer was made.” 11 U.S.C. § 550(a). Section 550 of the Bankruptcy Code does not define the term “initial transferee,” but the Eighth Circuit requires that “to be liable under 550(a), the party must have the right to exercise dominion and control over the funds.” Wahls, 2012 WL 1945701, at *4 (citing Luker v. Reeves (In re Reeves), 65 F.3d 670, 676 (8th Cir.1995)) (emphasis added). An initial transferee does not include a party who “acts only as a conduit in a transfer and acquires no beneficial interest in the property.” Id. (quoting Brandt v. Hicks, Muse & Co. (In re Healthco Intern., Inc.), 195 B.R. 971, 982 (Bankr.D.Mass.1996)) (emphasis added).
The Eighth Circuit has noted that the test to determine who is an initial transferee depends on the person’s “dominion and control” over the funds transferred. Reeves, 65 F.3d at 676. Other courts have pulled these terms apart and looked at them as two different approaches to determining who is an initial transferee. Universal Serv. Admin. Co. v. Post-Confirmation Comm. of Unsecured Creditors (In re Incomnet, Inc.), 463 F.3d 1064, 1069 (9th Cir.2006) (recognizing that there are two different approaches to initial transferee analysis and explaining the differences between the two). The first approach, known as the dominion test, focuses on whether the party possessed the unrestricted legal authority to the use the money or asset. Id. at 1069-70; see Abele v. Modern Fin. Plans Servs., Inc. (In re Cohen), 300 F.3d 1097, 1102 (9th Cir.2002) (“[A] transferee is one who, at a minimum, has ‘dominion over the money or other asset, the right to put the money to one’s own purposes.’ ” (quoting Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir.1988))). The second approach, known as the control test, focuses more on the equities of the transaction as a whole “to determine, who, in reality, controlled the funds.” Id. at 1070-71; see Nordberg v. Societe Generate (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1199 (11th Cir.1988) (“The control test, then, as adopted by this circuit, simply requires courts to step back and evaluate a transaction in its entirety to make sure that their conclusions are logical and equitable.”).
The dominion test looks to whether “an entity had legal authority over the money and the right to use the money however it wished.” Id. at 1070. The Seventh and Ninth Circuits utilize the dominion test, which is based on the Seventh Circuit’s decision in Bonded Financial Services. Id. at 1069-70. In Bonded Financial Services, a debtor wrote a check to a bank and included a note ordering the bank to deposit the check into Michael Ryan’s account. Bonded Fin. Servs., 838 F.2d at 891. The bank deposited the money into *385Ryan’s account, and several days later, Ryan told the bank to debit Ms account and apply the money to an outstanding loan balance that he owed to the bank. Id. The debtor filed for bankruptcy protection shortly afterwards, and the trustee sought to recover the transfer from the debtor to the bank. Id. The Seventh Circuit held that the trustee could not recover from the bank because the bank was not an initial transferee under § 550. Id. at 893. The court stated that an initial transferee needs to have “dominion over the money or other asset, the right to put the money to one’s own purposes.” Id. The bank did not have dominion when it received the check from the debtor because the bank was a “financial intermediary” that was required to follow the instructions that came with the check. Id. The bank did not have dominion over the money until Ryan told it to apply the money to his loan obligations; until that time, Ryan had dominion over the money and the ability to do what he wanted with it. Id. at 893-94.
Rather than focusing on the legal authority to use money, the control test is more equitable and “evaluate^] the defendant’s status in light of the entire transaction.” Chase & Sanborn Corp., 848 F.2d at 1199. The Eleventh Circuit uses the control test in its initial transferee analysis. Id.; see also Inconmnet, 463 F.3d at 1071. One example comes from a case where a debtor transferred funds to a bank to eliminate an overdraft on an account. In re Chase & Sanborn Corp., 848 F.2d at 1198. The bankruptcy trustee sought to recover a transfer from a bank as a fraudulent conveyance. Id. In discussing the control test, the court stated that “[t]he control test ... simply requires courts to step back and evaluate a transaction in its entirety to make sure that their conclusions are logical and equitable.” Id. at 1199. “The test articulated by our court is a very flexible, pragmatic one....” Id. “[T]he outcome of the cases turn on whether the [receiving parties] actually controlled the funds or merely served as conduits, holding money that was in fact controlled by either the trans-feror or the real transferee.” Id. at 1200. Looking at the entire transaction, including the timing of the transfers and the parties’ intentions, the court concluded that the bank was not an initial transferee. Id. at 1200-02.
The Eighth Circuit has not as clearly articulated whether its approach leans towards one or is in fact a combination of the two. See Luker v. Reeves (In re Reeves), 65 F.3d 670, 676 (8th Cir.1995) (stating only that “[a]t least seven other circuits have held that, to be an initial transferee, a party must have dominion and control over the transferred funds” (citing Malloy v. Citizens Bank of Sapulpa (In re First Sec. Mortg. Co.), 33 F.3d 42, 43-44 (10th Cir.1994); Sec. First Nat’l Bank v. Brunson (In re Coutee), 984 F.2d 138, 140-41 (5th Cir.1993))).
Courts within the Eighth Circuit have not strictly applied one test over the other. See, e.g., Miller v. T.C. Sheet Metal Control Bd. Trust Fund (In re Curran V. Nielsen Co.), Bankr. No. 4-92-6328, Adv. No. 4-95-164, 1995 WL 711268, at *3 (Bankr.D.Minn.1995) (referring to both Bonded Financial Services and Chase & Sanborn). Some lower courts gravitate towards the dominion test. See Sullivan v. Gergen (In re Lacina), 451 B.R. 485, 491-92 (Bankr.D.Minn.2011) (finding that mother of debtor was an initial transferee when her daughter deposited a check into her account because the mother had “legal authority to do what she liked with the funds” (quoting Taunt v. Hurtado (In re Hurtado), 342 F.3d 528, 535 (6th Cir.2003))). These courts still recognize that not every transferee is an initial transferee. Iannacone v. IRS (In re Bauer), 318 *386B.R. 697, 700, 703-04 (Bankr.D.Minn.2005) (explaining that an initial transferee is one who has an “unfettered legal right” to use funds, which indicates a standard closer to the dominion test, but still finding that an entity was a conduit and not an initial transferee).
Other cases support the “logical and equitable” standard of the control test. See Leonard v. First Commercial Mortg. Co. (In re Circuit Alliance, Inc.), 228 B.R. 225, 233 (Bankr.D.Minn.1998) (“While not always articulated as such, the “mere conduit” exception is supported by basic fairness as well as public policy considerations: regardless of the lack of qualifying language in § 550(a), the broadest application of the concept of “transferee” under it would inappropriately subject mere stakeholders, bailees, and intermediaries to liability, where they had never stood to gain personally from the funds momentarily in their possession.” (citations omitted)); see also Brown v. First Nat’l Bank of Little Rock, Ark., 748 F.2d 490, 492 n. 6 (8th Cir.1984) (“The mechanics of the transfer may not necessarily be determinative. The paramount consideration is whether there has been a diminution in the bankrupt’s estate as a result of the transfer.”); Bergquist v. Anderson-Greenwood Aviation Corp. (In re Bellanca Aircraft), 96 B.R. 913, 915-16 (Bankr.D.Minn.1989) (looking at all of the components of the transaction — including the agreement between the parties, where the funds were deposited, whether the funds were comin-gled, whether there were any restrictions on the use of the funds, the length of time the debtor held onto the money, and how the debtor used the money — to determine whether a debtor had an interest in property).
This Court need not attempt to further articulate the proper test because it finds that under either test — or both tests — Defendants are mere conduits and not initial transferees. Under the “dominion test,” the facts in the record show Defendants were not initial transferees. There is no evidence Wahls ever had the right to put the money to his own use. He certainly never thought that he did. He believed he was duty bound to get the money' — all of it — to the workers. He considered it their wages. He testified that the checks were issued with directions on who to pay and how much. Wahls’s understanding, quite clearly, was that he was at most a “financial intermediary” that was required to follow the instructions that came with the check. Bonded Financial Servs., 838 F.2d at 893. Trustee presented no evidence to the contrary. Trustee simply suggests that because the checks were made out to Wahls or the Church Wahls served, Wahls and that Church could have used the money how they pleased. This suggestion has no support in the record, which seems to clearly contradict it. Wahls and Garnavillo Gospel believed Wahls had the absolute duty to pay that money to the workers — and that if he kept it he would essentially be stealing it. The facts show Rubashkin directed the transaction and Wahls did not have the unrestricted right to do what he wanted with the money. See Bauer, 318 B.R. at 703-04 (applying what appeared to be a dominion test and finding that an insurance company was not an initial transferee because the debtor “directed the transfer ... merely through” the insurance company and the debtor retained “ultimate authority over the funds”).
Under the control test, Defendants are even more clearly not initial transferees. Wahls accepted checks from Rubashkin, cashed them, and distributed the money to individual workers. He was not accepting the checks for his own benefit, no funds ever entered his bank account, and he did *387not keep any of the money for himself. Rather, he gave the money to individuals who had earned it by working for Debtor. The money was never really his to keep; he was acting as an intermediary between Rubashkin and the workers. Although Wahls held on to the money for a short period of time, Rubashkin actually controlled where the funds went. Looking at the transaction as a whole, it is logical and equitable to find that Wahls was not an initial transferee, but a mere conduit.
1. Good Faith
In his post-trial brief, Trustee argued— for the first time — that Wahls can only be considered a mere conduit if he acted in good faith. Trustee asserts that Wahls did not act in good faith. The Eighth Circuit has not discussed whether good faith is necessary to avoid initial transferee status. See Reeves, 65 F.3d at 676 (accepting the idea that a transferee needs to have either dominion or control, but not discussing good faith). District and bankruptcy courts citing Reeves do not focus on good faith. See, e.g., Ramsay v. Sunmark Contract Staffing, Inc. (In re Oldner), 224 B.R. 698 (Bankr.E.D.Ark.1998).
Assuming good faith is an element of the mere conduit exception, the next question would be whether Wahls acted in good faith. While the Eighth Circuit has not discussed good faith in the context of determining transferee status, it has discussed good faith in similar situations. See Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348, 1355 (8th Cir.1995) (discussing good faith as it applies to § 548 and citing cases applying good faith to § 550(b) and § 549(c)). The Eighth Circuit has said: “The Bankruptcy Code does not define good faith. Good faith is not susceptible of precise definition and is determined on a case-by-case basis.” Id. (citing In re Roco Corp., 701 F.2d 978, 984 (1st Cir.1983)). “[A] transferee does not act in good faith when he has sufficient knowledge to place him on inquiry notice of the debtor’s possible insolvency.” Id. (citing In re Anchorage Marina, Inc., 93 B.R. 686, 693 (Bankr.D.N.D.1988)); see also Meeks v. Red River Entm’t of Shreveport (In re Armstrong), 285 F.3d 1092, 1098 (concluding that a party did not act in good faith because it should have known that the debtor was insolvent). The only cases discussing “good faith” in the initial transferee context have used a similar test. See, e.g., Huffman v. Commerce Sec. Corp. (In re Harbour), 845 F.2d 1254, 1258 (4th Cir.1988) (finding a lack of good faith when a transferee “aggressively ignored facts which would have put her on notice”); Wirum v. Owen Bird Law Corp. (In re Plusfive Holdings, L.P.), Bankr. No. 06-10307, Adv. No. 07-1076, 2008 WL 5749937, at *2 (Bankr.N.D.Cal.2008) (stating that “[a] person loses the claim to mere conduit status by ignoring facts which puts him on notice”).
Based on the facts of this case and the testimony at trial, the Court finds that Wahls acted in good faith. He did not receive any direct or indirect benefit from the transfers, nor did anyone that he was close to. He did not keep any of the money, Agriprocessors did not pay him, and the individuals who were ultimately paid for their work were not relatives or church members. Wahls was not distributing the money because he wanted to help Debtor or gain a benefit for himself, his family members, or his associates. He genuinely believed that he was helping these workers and paying them what they deserved. Although it was an unconventional way of paying workers, Wahls did not “turn a blind eye” to the facts. He was not willfully ignoring actions that could have indicated that the transfers were fraudulent; he was simply doing what he thought was right. Unlike the *388individuals in Armstrong who should have known that the debtor was insolvent, Wahls was not aware of facts that would have notified him of Debtor’s insolvency. There was no “fraud” here the way Trustee argues it. There was no reason for Wahls to suspect that Debtor was fraudulently paying the individuals — he knew they worked and earned their money. Wahls’s only possible inquiry might have been whether the transaction was all being done the right way, but there is no indication that he should have known it could be fraud. In fact, Trustee does not even argue — and certainly presented no evidence — that the payments to the workers were fraudulent in any way. Again, Trustee simply asks the Court to ignore the reality of the transaction — a payment to workers for work done — and instead treat this arrangement as a transaction only involving Agriprocessors and Wahls. If good faith is a requirement of the mere conduit exception, Wahls has more than met that standard. He is not an initial transferee from whom the Transferee could recover; he was a mere conduit who was acting in good faith.
II. Standing to Recover Checks Written by Cottonballs
Even if the Court is incorrect in finding the Trustee cannot recover at all, the Court additionally and alternatively finds that any potential recovery would be significantly limited and reduced for additional reasons.
Trustee is seeking to avoid checks to Garnavillo Gospel and Ron Wahls written by either Agriprocessors or Cottonballs. At trial, the parties stipulated that Wahls accepted sixty-nine checks totaling $141,700.25. The checks written from Agriprocessors total $14,420.30, and the checks written on Cottonballs’ account total $127,279.92. During the trial, Trustee argued that Agriprocessors controlled Cot-tonballs and that Cottonballs was essentially an asset of Agriprocessors. In a previous adversary, however, Trustee argued that Cottonballs was a creditor of Agriprocessors. Saracheck v. Cottonballs, LLC (In re Agriprocessors, Inc.), Bankr. No. 08-2751, Adv. No. 10-09124, 2012 WL 2411869 (Bankr.N.D.Iowa June 26, 2012). In that adversary, Trustee sought to avoid $3,570,584.40 as a fraudulent conveyance or preferential transfer. Id. at *1, *4. Trustee’s expert, Marc Ross, stated that there was no consideration or new value exchanged for the payments. Id. at *4. The Court granted judgment in favor of Debtor, concluding that the $3,570,584.40 constituted a fraudulent transfer. Id.
First and foremost, Trustee is judicially estopped from making the argument it attempts here — that Cottonballs and Agriprocessors are basically the same entity. Judicial estoppel “prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.” Knigge v. SunTrust Morg., Inc. (In re Knigge), 479 B.R. 500, 507 (8th Cir. BAP 2012) (quoting Equal Emp’t Opportunity Comm’n v. CRST Van Expedited, Inc., 679 F.3d 657, 679 (8th Cir.2012)) (internal quotation marks omitted). Trustee here is trying to take these opposing positions and the Court will not allow it.
Moreover, Trustee can only avoid transfers of the debtor’s property. See 11 U.S.C. § 548(a)(1) (stating that a trustee “may avoid any transfer ... of an interest of the debtor in property”). Trustee lacks standing to avoid transfers from separate entities. See Ries v. Firstar Bank Milwaukee (In re Spring Grove Livestock Exch.), 205 B.R. 149, 156 (Bankr.D.Minn. 1997) (“[Trustee] seeks relief to which he is not entitled. As trustee for the [debtor], [trustee] lacks standing to recover trans*389fers from [debtor’s corporation].”); see also Miller v. Barenberg (In re Bernard Techs., Inc.), 398 B.R. 526, 529 (Bankr.D.Del.2008) (stating that a trustee could not avoid transfers made from a “separate and distinct” non-debtor subsidiary because “the transferred assets were not property of the [d]ebtor”). Trustee has already treated Cottonballs as a separate entity, and the Court has accepted this characterization. Since Cottonballs is a separate entity, Trustee does not have the power to recover the transfers made from Cottonballs. Therefore, the only money left at issue is the $14,430.25 that Agripro-cessors itself transferred to Garnavillo Gospel and/or to Ron Wahls, individually.
III. Recovering from Garnavillo Gospel
Even if trustee could make some recovery in this case, the issue remains as to whether Garnavillo Gospel is liable for the transfers, enabling Trustee to seek recovery against it. Trustee argues that Wahls was acting as Garnavillo Gospel’s agent, so his actions bound Gar-navillo Gospel and made it liable for the transfers. Courts determine whether an agency relationship exists by looking to state law. Wahls, 2012 WL 1945701, at *5. An agency relationship “results from (1) manifestation of consent by one person, the principal, that another, the agent, shall act on the former’s behalf and subject to the former’s control and, (2) consent by the latter to so act.” Soults Farms, Inc. v. Schafer, 797 N.W.2d 92, 100 (Iowa 2011) (quoting Pittsburg Co. v. Ward, 250 N.W.2d 35, 38 (Iowa 1977)) (internal quotation marks omitted). An agent may have actual authority to act on the principal’s behalf, which may be either express authority or implied authority. AgriStor Leasing v. Farrow, 826 F.2d 732, 737 (8th Cir.1987). An agent may also have apparent authority based on authority that “although not actually granted, has been knowingly permitted by the principal or which the principal holds the agent out as possessing.” Magnusson Agency v. Pub. Entity Nat’l Co.-Midwest, 560 N.W.2d 20, 25-26 (Iowa 1997).
“A fundamental principle of agency law is that whatever an agent does, within the scope of his or her actual authority, binds the principal.” Id. at 25. However, there is a limit to what actions can bind the principal. Soults, 797 N.W.2d at 100-01 (“Logically, the scope of an agency relationship must have boundaries as a principal cannot be held liable for all actions an agent takes while going about his daily life.... Stated another way, when the agent is not transacting on behalf of the principal, the principal is not liable for the agent’s transactions.”).
Wahls is the President of Garna-villo Gospel. While Garnavillo Gospel’s treasurer handled most financial matters, as President, Wahls had the power to write and deposit checks for Garnavillo Gospel’s benefit. Although he may have had authority to cash checks written to Garnavillo Gospel, he was not acting on the church’s behalf when he cashed the checks from Debtor. Wahls did not ask Rubash-kin to write the checks to Garnavillo Gospel, and no one else at Garnavillo had any knowledge of the checks. Wahls cashed the checks at his personal bank, not at Garnavillo Gospel’s bank, and the money never entered Garnavillo Gospel’s account. Neither Garnavillo Gospel nor Wahls kept any of the cash for their own benefit. Rather, per Rubashkin’s instructions, Wahls distributed the money to individuals who performed work for Debtor. These workers were not members of Garnavillo Gospel. The only connection that Garna-villo Gospel has to the transfers is being listed as payee on a majority of the checks. *390This is not enough to find that Wahls was acting as an agent for Garnavillo Gospel. Wahls was acting in his individual capacity, and was “not. transacting on behalf of the principal.” See id. at 100. Since Wahls was not acting on Garnavillo Gospel’s behalf, he did not bind Garnavillo Gospel, and Garnavillo Gospel is not liable for any potentially fraudulent transfers.
CONCLUSION
For all these reasons, the Court finds Trustee has failed to prove his claim against Defendants. WHEREFORE, judgment is entered in Defendants’ favor.
. Even if Cottonballs and Agriprocessors are separate entities, Debtor received reasonably equivalent value. Generally, when a debtor pays the debt of a third party, there is not *383reasonably equivalent value to the debtor. Richards & Conover Steel, Co., 267 B.R. at 613-14. There is an exception to this general rule when a transfer on behalf of a third party benefits the debtor, and when that "indirect benefit constitutes reasonably equivalent value to the debtor, a trustee cannot avoid the transfer as fraudulent.” Id. (quoting Gill v. Brooklier (In re Burbank Generators, Inc.), 48 B.R. 204, 206-07 (Bankr.C.D.Cal.1985)) (internal quotation marks omitted). For example, a debtor that pays a bank for a shareholder’s line of credit receives reasonably equivalent value when it is obligated to pay the shareholder. Harman v. First Am. Bank. of Md. (In re Jeffrey Bigelow Design Grp., Inc.), 956 F.2d 479, 481, 484-85 (4th Cir.1992) (deciding that the debtor received reasonably equivalent value because it was obligated to pay the shareholder’s debts and the transfers did “not result[] in the depletion of the bankruptcy estate”). A debt- or that makes a payment on an obligation that it has guaranteed receives an economic benefit that is reasonably equivalent in value. Memory v. Alfa Mut. Fire Ins. Co. (In re Martin), 205 B.R. 646, 648 (Bankr.M.D.Ala.1993) (denying a trustee's fraudulent transfer claim on a debtor's payment of a promissory note for which debtor was a guarantor because the "[djebtor was a contingent creditor by virtue of his guaranty, who received reasonably equivalent value in the satisfaction of an antecedent debt of the debtor”), aff'd, 184 B.R. 985 (M.D.Ala.1995), aff'd, 101 F.3d 708 (11th Cir.1996) (unpublished table decision).
If the Court were to treat Cottonballs and Agriprocessors separately, it appears that the direct benefit went to Cottonballs, but Agri-processors also benefited from the transfers. Agriprocessors was closely related to Cotton-balls, and having the ability to buy chickens from Cottonballs gave Debtor the assurance of a constant supply of chickens near the Debtor's location. Additionally, Trustee's expert Marc Ross testified that Agriprocessors guaranteed all of Cottonballs debts, and Cot-tonballs usually owed money to Debtor. If Cottonballs had not paid the workers, Agri-processors would have been ultimately responsible for doing so. Debtor received an economic benefit by directly paying the workers on a debt that Debtor would be obligated to pay as a guarantor. Debtor received reasonably equivalent value.
. Trustee asked Wahls about the number of workers that he was paying and asked about the number of barns built. Wahls responded that the number of workers varied week to week, from two to twenty, and that Debtor had around twelve barns, but he did not know how many barns were built by those workers. Wahls testified that the first week two men worked to unload trucks for Rubashkin, taking about five hours, and that he encouraged Rubashkin to pay them $10-$ 12 per hour. Trustee did not introduce evidence about whether the wages paid to these individuals, or the other workers that Wahls paid, was a fair value for the work. Further, Trustee did not provide information about the value of Wahls's promise to pay and performance of his promise.
. Even if the focus was solely on Wahls and the benefit he provided to Debtor, it is not at all clear that Trustee satisfied his burden. The record shows Wahls provided some economic benefit to Debtor — he found a few workers for Rubashkin, promised to pay workers with the checks that Rubashkin gave Wahls, and performed what he promised. Trustee did not introduce evidence explaining the value of Wahls's services or what impact there would have been on Cottonballs or Debtor if Wahls stopped paying the workers. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495793/ | MEMORANDUM DECISION
SARAH SHARER CURLEY, Bankruptcy Judge.
I. INTRODUCTION
PMM Investments, LLC, the Plaintiff, filed its Complaint commencing this action against the Debtors, Robert and Rebecca Campbell, on September 16, 2010. In the Complaint, the Plaintiff asserted four claims for relief against the Debtors under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). The Debtors filed an Answer on September 28, 2010. The Court held the trial over a number of days, commencing on January 31, 2012, and concluding on December 13, 2012.1 At the conclusion of the trial, the Court directed the parties to file simultaneous opening and responsive memoranda of law by January 25, 2013, with the matter being deemed under advisement at that time.
In this Memorandum Decision, the Court has set forth its findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. The issues addressed herein constitute a core proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334(b) and 157(b) (West 2012).
II. FACTUAL BACKGROUND
In 2005, the Plaintiff, PMM Investments, LLC (“PMM”) through its member, Mike Marsillo (“Marsillo”) made a $1,000,000 capital contribution to Lone *393Mountain Landing, LLC (“LML”), a company formed to develop a condominium project known as Bali Watergardens (the “Project”). Robert Campbell (“Campbell”) and Steve Kurth (“Kurth”) were the initial members of LML. In addition to PMM, New Horizons Villas, LLC (“NHV”), a Kurth entity, and JQC Development, LLC (“JQC”) were to become members of LML. The members of JQC consisted of Robert and Rebecca Campbell, the Debtors herein.
On or about June 10, 2005, Marsillo and Kurth met to discuss an investment in the Project. The Project was to be built at 12th Street and Devonshire in Phoenix, Arizona. However, the real property was then owned by a third party, Sid Rosen or an entity controlled by him (“Rosen”). On July 14, 2005 SC Homes, a company owned by Kurth and JQC entered into a purchase agreement with Rosen, whereby SC Homes and JQC were to purchase the property located at 12th Street and Devon-shire for $7,500,000.00.2 However, this purchase agreement was amended, from time to time, by the parties.
The Restated and Amended Operating Agreement of LML (“Operating Agreement”) was signed on September 7, 2005,3 by Kurth, as Manager of NHV, Robert Campbell, the Debtor, as Manager of JQC, and Patti Marsillo, as Manager for PMM Investment.4 The purpose of LML is set forth as:
[LML] has been formed to own, manage, develop, lease, sell, hypothecate and otherwise deal with real property, and may engage in any activities suitable or proper for the accomplishment of this purpose or any purpose later established by the unanimous vote of its Members.5
The term of the Operating Agreement commenced upon execution of the Agreement, and did not terminate until all Members agreed in writing or until a Withdrawal Event occurred as defined under the Arizona Limited Liability Company Act.6
Pursuant to the Operating Agreement, membership in LML was conditioned on each member making an “Initial Capital Contribution” within the time period required by the Manager. The initial capital contribution of NHV and JQC consisted of the assignment to LML of the Addendum to Escrow Instructions and Real Property Purchase Agreement, dated July 14, 2005 (“Addendum”), whereby LML would have the right to purchase certain real property located at 12th Street and Devonshire Street (the “Property”).7 However, the Addendum was not the final agreement of the parties concerning the purchase of the Property. Rosen and the other parties to the Addendum continued to negotiate as to the terms of the purchase as set forth more fully hereinafter.
Acquiring the Property was important to LML to proceed with the operation of its business. For instance, numerous Kurth entities were required to be utilized by LML concerning the construction of homes, providing architectural and interior design services, and the marketing and *394sale of the homes on the Property.8 These provisions of the Operating Agreement were not to be changed without the unanimous vote of all Members of LML entitled to vote.9 The facts reflect that these provisions were never changed.
Upon the initial capital contribution being made, NHV and JQC would each own 45% interest in LML. The initial capital contribution of PMM was set forth as a cash contribution of $1,000,000 made in full within five months from the date of the Agreement.10 Upon said contribution being made in full, PMM obtained a 10% interest in LML. The Operating Agreement required that the initial capital contribution of PMM be returned to PMM, without interest, within two years of the date of the Agreement. Even after the return of the Contribution, PMM was to retain the 10% interest in LML.11
PMM made the initial capital contribution in five (5) monthly installments, with the first installment payment made on August 16, 2005 and the last on December 6, 2005.12 According to the LML Operating Account Ledger regarding M & I Bank Account No. 33951225 the following payments were made:
August 16,2005 $300,000
September 9, 2005 $150,000
October 10, 2005 $150,000
November 10, 2005 $200,000
December 6, 2005 $200,00013
It does not appear that NHV or JQC ever formally assigned the Addendum or any purchase agreement to LML, as required by the Operating Agreement. Since their membership in LML was conditioned on their making a specific initial capital contribution, it does not appear that either entity ever became an official member of LML.
However, the Operating Agreement stated that the business and affairs of LML were to be managed exclusively by its Manager. The Manager was to “direct, manage and control the business of [LML] to the best of its ability” and had “full and complete authority, power and discretion to make any and all decisions and to do any and all things which the Manger shall deem to be reasonably required to accomplish the business and objectives of [LML]. No member other than a Manager [would] have the authority to act for or bind [LML].”14 The Agreement provided that there could be more than one Manager for LML, yet the Agreement stated that if there was more than one manager, they would be referred to collectively as “Manager” in the Agreement.15 According to the terms of the Operating Agreement, Kurth and Campbell, not their entities, were the initial Managers of LML.16 They were to remain Managers until the next annual meeting of the Members or until a successor or successors were elected and qualified.17 The evidence reflects that Kurth and Campbell served as the Managers of LML, and that no one succeeded them.
Pursuant to the Operating Agreement, the Manager(s), in the furtherance of the business objectives of LML, were author*395ized to perform a number of functions, including:
... [Ejxecute on behalf of the Company all instruments and documents including, without limitation, checks, drafts, notes, and other negotiable instruments; mortgages or deeds of trusts; security agreements, financing statements; documents providing for the acquisition, mortgage or disposition of the Company’s property; assignments; bills of sale; leases; partnership agreements; and any other instruments or documents necessary, in the opinion of the Manager, to do business of the Company. When there is more than one Manager of the Company, the signature of each Manager shall be required on the above-referenced instruments and documents.18
Soon after the deposit of PMM’s initial capital contribution, Kurth began withdrawing nearly all of the funds in a series of transactions. The funds were transferred to Kurth and various related business entities.
During the spring of 2006, Marsillo was informed that the Project was no longer viable. In lieu of returning the initial capital contribution, Kurth and Campbell sought to have PMM invest in two other projects: one was on 44th Street and McDowell and the other one was located at Union Hills and 14th Street. Marsillo declined the offers and requested the return of PMM’s $1,000,000. On or about November 2006, PMM received $250,000.00 as a partial return of its investment.
Steven Kurth filed a petition for relief under Chapter 7 of the Bankruptcy Code on July 2, 2009.19 PMM commenced an adversary proceeding on August 20, 2009 seeking to have its debt of $1,000,000 be excepted from discharge. Summary judgment was entered against Kurth in the sum of $1,050,000.20
The Debtors filed a petition for relief under Chapter 7 of the Bankruptcy Code on August 23, 2010.
On January 31, 2012, Rosen, an Arizona attorney for many years, testified at the trial as to his involvement with the Project. He owned the Property at 4323 N. 12th Street, Phoenix, AZ, previously described as the 12th Street and Devonshire property. Through an acquaintance, Ro-sen first met Campbell in January or February 2005. He talked to Campbell about creating an exotic water garden, similar to what he had found in Bali, Indonesia, in Phoenix, Arizona. The Project was to be a show place for the arts and culture of Indonesia. Rosen described the project as “a high-end condo project.” Both Campbell and Kurth, excited about the Project, traveled to Indonesia to get a better understanding of how the Project would be created. Rosen agreed to sell the Property for the Project to Campbell and Kurth, or their entities.
At the trial, Rosen focused on the purchase agreement, the Addendum, stating that while Campbell and Kurth were responsible for the drafting of the Addendum, Rosen did engage in extensive editing of the various drafts.21 Rosen stated that he had inserted the initial purchase price for the Property of $7,500,000.22 The *396Addendum provided that Rosen, as seller, would receive a 40 percent “limited partnership” interest in the “net profit of the entire development.”23 Campbell executed the Addendum on behalf of JQC Development Company.24
The Addendum provided for a closing date of March 8, 2006.25 The Campbell and Kurth entities could extend the closing date, but they had to pay additional consideration to do so.26 The parties anticipated that prior to the close of escrow, the Campbell and Kurth entities would commence construction on the Property, incurring certain out-of-pocket expenses, such as preparing financial projections, putting together proposals for financing, conducting surveys, conducting marketing studies, preparing feasibility studies, obtaining final site plan approval, and obtaining final appraisals for the building plans, including filing the blueprints for the Project.27 According to the Addendum, Campbell and Kurth estimated that the aforesaid costs, or entitlements for the Project, might cost as much as $200,000 to $800,000.28
As the closing approached, Rosen became concerned that little or no work had been done on the Project. He asked the parties for information about investors, and generally what had been done on the Project. Rosen stated that he received little if any information to his repeated inquiries.
Rosen testified that the Project, and the closing concerning the Property, had been delayed by the parties’ inability to finalize an operating agreement for the Project. Rosen stated that such an agreement was required, since his interest in the Project depended on the net profits to be received in the future. Subsequently, Rosen was presented with the operating agreement for the 12th Street Development Investors LLC that related to the Project.29 Rosen stated he was livid upon a review of the agreement. He felt that he had been defrauded. For instance, one paragraph provided that additional members could be added as and when additional capital was required.30 However, if additional members were added, it would dilute Rosen’s interest in the limited partnership. In fact, the agreement provided an example. If an additional member contributed capital sufficient for a 10 percent interest in the limited partnership, Rosen’s interest of 40 percent would be diluted to 36 percent, and the interest of LML would be diluted from 60 percent to 54 percent.31 Rosen stated that this requirement of additional members providing additional capital was “contrary to every discussion” that he had had with Campbell and Kurth on the Project. Moreover, Campbell wanted to have the Property transferred to LML, then assigned to 12th Street Development. Ro-sen rejected this proposal, since he had no interest in LML.
The parties continued with their discussions concerning the Project. More drafts of the 12th Street Development Investors Operating Agreement were prepared. By November 21, 2005, they were still work*397ing on the agreement.32 Any requirement of an additional capital contribution by Ro-sen had been eliminated. Moreover, the agreement also provided that Rosen was no longer financially responsible, on a pro rata basis, if Campbell was unable to raise the money for the Project.33 The agreement now provided that Campbell and Kurth would be the initial managers of 12th Street Development.34
By January 17, 2006, the parties were still attempting to finalize the 12th Street Development Investors Operating Agreement.35 Rosen stated he drafted this version of the agreement, tired of the ongoing dispute with the parties. Part of the disagreement focused on the sales price of the Property from Rosen to the Campbell and Kurth entities. Given the market, Rosen believed the Property had increased in value from $7.5 million to $12.5 million. The parties were unable to finalize the terms, and this agreement was never executed. The parties were never able to close escrow on the Property.
Of importance to the Court is Rosen’s testimony that Campbell was to obtain the financing for the Project. Rosen’s father had advised Campbell of a contact at the National Bank of Arizona. However, Ro-sen stated that Campbell never met with the contact. When Rosen inquired, from time to time, as to what progress Campbell had made in obtaining financing for the Project, he would receive no concrete information. Rosen stated that the foregoing reflected Campbell’s lack of good faith.
The Court concludes that Rosen was a credible witness. He testified as to a lack of information and a lack of progress concerning the purchase of the Property and the realization of the Project. His testimony reflects that Campbell was the financial person on the Project, yet Campbell showed no real interest or ability in obtaining financing for the Project. The Court concludes that Rosen’s testimony reflects circumstances indicating fraud by Campbell.
On January 31 and February 1, 2012, Kurth also testified at the trial. He stated that he had been a general contractor for 10 to 15 years, and that he was then remodeling or renovating residential properties- for the purpose of resale. He initially was engaged in the new construction of apartments, condominiums, and town-homes. However, after 2006, the market became an issue, and he had to switch to remodels and renovations. For the Project, he was responsible for the design, build and development. Kurth stated that Bali Watergardens was the largest project on which he had ever worked.
He stated that he and his wife were initially to participate in the Project, with one of their entities, New Horizon Villas, having an interest in LML. He had created LML previously as a vehicle for future projects, but it was a “shelf company,” or a company that had been created with no operations, at the time of the initial negotiations for the Project. Kurth decided to use LML as the vehicle that he, Campbell, and their respective spouses would utilize for the development of the Project. LML was also to be the vehicle to obtain additional members and capital for the Project.
He and Campbell started the Bali Wat-ergarden Project in 2005. They had previ*398ously worked on one or more projects together. Kurth described himself as the “construction guy,” while Campbell was the “finance guy.” He testified that Campbell was to obtain any financing for the Project.
In June 2005, Kurth met Marsillo, who was being treated by Kurth’s wife, a physical therapist. He told Marsillo about the Project and that he was looking for “seed money” in the amount of $1,000,000. There was no agreement as to any type of investment at the end of their first meeting. Kurth did not recall much about any subsequent meetings, such as the dates, places, or times of the meetings. He only remembered that at some point, he provided Marsillo with the Operating Agreement for LML, after Marsillo had expressed interest in the Project. Kurth conceded that most, but not all, of the meetings concerning PMM’s investment were between him and Marsillo. He also conceded that Campbell was certainly at one or more of the meetings at which the parties were negotiating. He did think that he met with Marsillo out at the Property to describe the Project in more detail. Kurth stated that PMM’s investment in the Project was always set at $1,000,000.
The attorney for Campbell and Kurth, Marvin Davis, drafted the Operating Agreement. Kurth was not familiar with the Operating Agreement, but he conceded that he or one of his entities was required to assign his/its interest in the Property as a capital contribution to LML. Kurth was certain that Marsillo, Campbell, and he would have talked about the Operating Agreement before any one of them signed the Agreement. However, he was unsure how many meetings occurred at which the three of them were present. Ultimately the Operating Agreement was executed by all parties, the PMM investment was accepted jointly by Campbell and Kurth, and the capital contribution was paid by PMM, over time, and placed in the LML deposit account. As noted previously, the Operating Agreement required that Campbell and Kurth execute any checks concerning the LML deposit account.
Kurth was not credible on certain points. For instance, he would recall little, if anything, as to the substance of the meetings that he had with Marsillo or the meetings with Marsillo, Campbell and himself concerning PMM’s investment, but he was sure that he would have told Marsillo that Rosen was also to be a limited partner in the entity that would ultimately operate the Project. He was also sure that he had advised Marsillo that rather than having a 10 percent interest in LML, PMM would have a 10 percent interest in LML that would have a 60 percent interest in an entity to be created. These statements lack credibility. Particularly in light of Kurth’s inability to remember details of the transactions concerning the purchase of the Property, the assignment of the Property, and PMM’s investment.
Kurth also did not advise Marsillo of the purchase of the office building located at 4222 N. 12th Street in Phoenix, Arizona, although Kurth intended to use the building as the base of operations for the salespeople for the Project and had utilized funds deposited by PMM for the purchase of the building. When Kurth was asked to review the LML Operating Agreement at trial, he realized, and so testified, that the purchase of the office building would have required an affirmative vote of all the members and that no such vote had occurred.36
*399Of critical importance to the Court is Campbell’s involvement and understanding of the negotiations with Rosen and Marsil-lo. Although Campbell attempted to distance himself from the negotiations with Marsillo, stating that Marsillo was Kurth’s investor and that Kurth provided all of the information that an investor would require, Campbell was not credible. Both Marsillo and Kurth testified that Campbell was involved in the negotiations with Marsillo, particularly when it involved the financing or operations of the Project. Even Campbell conceded that he was the one who conducted the primary negotiations with Rosen as to the acquisition of the Property. Campbell was also the person who understood finance and was able to understand the multiple and conflicting promises that he was making to Rosen and Marsillo. For instance, pursuant to the LML Operating Agreement, Campbell knew that his entity would have a 45 percent interest, Kurth’s entity would have a 45 percent interest, and PMM would have a 10 percent interest in LML. He also knew that LML could not effectively operate unless he, as the primary negotiator for the purchase of the Property, ensured that the Property was purchased from Rosen. He also knew that Rosen wanted an interest in the Project before Rosen would sell the Property to LML or to any other entity controlled by Campbell and Kurth. In essence, Campbell held the keys to ensuring that the Project was a reality. When he could not close the transaction with Rosen, he should have notified Marsillo and immediately returned the investment to PMM. He did neither.
Campbell also knew that he was negotiating two separate transactions that posed a dilution of the interests of both Rosen and PMM. As Rosen testified, the 12th Street Development Investors, LLC provided that Rosen’s or his entity’s interest could be diluted from 40 percent to 36 percent if an additional investor were obtained. Campbell also knew, since he had executed the LML Operating Agreement, that PMM only had a 10 percent interest in LML and that said interest would be diluted from 10 percent to 6 percent, if LML became a member of 12th Street Development and only 12th Street Development held title to the Property.37 However, Campbell provided no disclosure of this information to anyone.
The facts reflect that soon after the funds were deposited into the LML deposit account, Kurth engaged in a series of self-dealing withdrawals. Some of the funds went to short term loans designated for him. Other funds went to his other business ventures. The most significant transactions occurred during the five(5-) month period that PMM was making its initial capital contributions. Notably, a $68,100 payment was made to JQC, an entity controlled by Robert and Rebecca Campbell, on September 12, 2005. The subject transactions include, but are not limited to the following:
Date Recipient Amount
8/12/2005 SC Homes $100,000
9/2/2005 Steven’s Custom, Inc. $ 6,000
9/12/2005 JQC $ 68,100
9/29/2005 Kurth $ 80,000
10/13/2005 Kurth $120,000
11/14/2005 Kurth $190,000
12/14/2005 Kurth $100,000
12/15/2005 Kurth $100,000
3/14/2006 New Horizon Villas $ 30,000
*4003/15/2006 SC Homes $ 13,000
3/17/2006 Kurth $ 2,500
6/8/2006 Steven’s Custom $ 6,000
7/6/2006 Steven’s Custom $ 6,133
7/6/2006 Steven’s Custom $ 10,000
7/19/2006 Kurth $ 3,000
8/22/2006 SC Home Design $ 3,600
10/3/2006 Steven’s Custom $ 15,957
10/3/2006 Steven’s Custom $ 86,099
10/3/2006 SC Home Design $ 11,413
10/17/2006 SC Home Design $ 20,000
The transactions also exhibit a troubling pattern. On August 6, 2005, the LML account had a negative balance of $99,218.74. On August 16, 2005, PMM, through Marsillo, made a capital contribution of $300,000.00.38 On September 2, 2005, the LML account only had a balance of $3,394.44, yet on the same date, PMM, through Marsillo, made a capital contribution of $150,000.00.39 On October 4, 2005, the LML account only had a balance of $2,502.12, yet on October 10, 2005, PMM, through Marsillo, made a capital contribution of $150,000.00.40 On October 26, 2005, the LML account had a balance of only $606.06, yet on November 10, 2005, PMM, through Marsillo, made a capital contribution of $200,000.00.41 On December 6, 2005, the LML account had a balance of $1,103.34, yet on the same day, PMM, through Marsillo, made a capital contribution of $200,000.00.42 Thus, PMM’s capital contributions were used to replenish the account of LML, and the funds were transferred to the entities controlled by the Campbells (JQC) and Kurth (SC Home Design, Steven’s Custom Homes, or New Horizon Villas) or Kurth directly.
Campbell testified that he had no access to the LML account in the fall of 2005 and that Kurth kept the checkbooks in his sole possession. First, Campbell lacks credibility on these points. Moreover, as a Co-Manager of LML, it was Campbell’s responsibility, pursuant to the Operating Agreement, to have access to the account.
The evidence does not support the testimony of the former controller as to how the funds in the LML account were being deposited or expended. Jonni DeAnda (“De Anda”) was hired as a controller in early 2006 for an associated entity, Visions West. DeAnda also did the books for LML.43 According to DeAnda, when Campbell was notified of the diversion of funds, Kurth’s access to the LML account, as well as other shared accounts was cut off. However, the evidence reflects otherwise. The record reflects that Kurth continued to sign and receive checks, from the LML account, without Campbell’s signature. As illustrated above, substantial amounts of money were being paid or transferred to Kurth, and his entities, even after Campbell was allegedly aware of Kurth’s misappropriation.44 Thus, the continued use of the LML account by Kurth for purposes other than the Project, coupled with Campbell’s duty of being Manager of LML, reflect Campbell’s complicity in the misappropriation.
III. DISCUSSION
In the Complaint, PMM asserted four claims for relief against the Debtor under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). PMM contends that Campbell, as a manager of LML, failed to abide by the terms of LML’s Restated and Amend*401ed Operating Agreement, and failed to disclose material information to PMM regarding the acquisition of the property on which the Project was to be developed. Furthermore, PMM alleges that Campbell misappropriated all or part of PMM’s $1,000,000 initial capital contribution. PMM did not pursue the claims for fraud in a fiduciary capacity under 11 U.S.C. § 523(a)(4), or willful and malicious injury under 11 U.S.C. § 523(a)(6). Therefore, the Court will only determine if the underlying debt should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A) and/or 11 U.S.C. § 523(a)(4) for embezzlement. The Court will review each ground, seriatim, to determine whether relief should be granted.
A. DISCHARGE OF DEBT UNDER § 523(a)(2)(A)
Pursuant to 11 U.S.C. § 523(a)(2)(A), a monetary debt is nondis-chargeable “to the extent obtained by false pretenses, a false representation, or actual fraud.” In the Ninth Circuit, to prove nondischargeability under § 523(a)(2)(A), the Plaintiff needs to show “(1) that the debtor made the representations; (2) that at the time he knew they were false; (3) that he made them with the intention and purpose of deceiving the creditor; (4) that the creditor justifiably relied on such representations; and (5) that the creditor sustained alleged loss and damage as the proximate result of such representations.” In re Sabban, 600 F.3d 1219, 1222 (9th Cir.2010); In re Diamond, 285 F.3d 822, 827 (9th Cir.2002). The Plaintiff must establish the nondischargeability of a debt by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Stern, 345 F.3d 1036 (9th Cir.2003).
For a debt to be excepted from discharge, the debtor must actually intend to defraud the creditor. In re Tsurukawa, 258 B.R. 192, 198 (9th Cir. BAP 2001). However, direct evidence of an intent to deceive is rarely shown. Hence, intent may be “inferred and established from the surrounding circumstances.” In re Hultquist, 101 B.R. 180 (9th Cir. BAP 1989); In re Anastas, 94 F.3d 1280, 1285 (9th Cir.1996); In re Dakota, 284 B.R. 711, 721 (Bankr.N.D.Cal.2002). The court must consider whether the totality of the circumstances paints a picture of deceptive conduct by the debtor that indicates an intent to deceive the creditor. In re Basham, 106 B.R. 453, 457 (Bankr.E.D.Va. 1989). Because no single objective factor is dispositive, the assessment of intent is, thus, left to the fact-finder. In re Jacks, 266 B.R. 728, 742 (9th Cir. BAP 2001). The intent to defraud a creditor is a finding of fact. In re Rubin, 875 F.2d 755, 759 (9th Cir.1989).
PMM asserts that Campbell affirmatively represented that PMM’s initial capital contribution was to be used solely for the development of the Project. Furthermore, PMM alleges that Campbell failed to disclose information to PMM that was material to its decision to invest, and continue investing in LML. Specifically, PMM argues that Campbell was aware that the Addendum for the purchase of the property was not enforceable and required an additional agreement before the property could be purchased. According to PMM, Campbell knew that negotiations with Rosen were not going as planned, and failed to advise PMM of this essential fact, even as PMM continued to make its contributions.
No doubt the facts of this case are troubling. Although neither Marsillo nor Campbell were clear as to when and where they met, concerning the LML investment, the evidence reflected that they did meet on several occasions. They also both exe*402cuted the Operating Agreement for LML, through their respective entities. As noted previously, Campbell was involved in negotiations with Rosen, so Campbell had critical information as to whether the Property would ever be acquired. Campbell knew that if the Property were not assigned to LML, the Project could not proceed. Campbell knew that Rosen required an interest in any entity that would acquire the Property. This required that PMM’s interest in LML ultimately be diluted for the reasons explained in the factual discussion. Campbell disclosed none of this critical information to Marsillo. As noted previously, the evidence reflects that Campbell withheld this information from Marsillo, even as PMM continued to make capital contributions to LML. Thus, Campbell made false representations, or withheld information that would have been critical to PMM, and Campbell knew at the time that the representations were false or that he was withholding critical information from PMM that would have been relied on by PMM in determining whether to make or continue to make the LML investment. Factors 1 and 2 of the test have been met. Next, PMM, not being involved in the negotiations with Ro-sen, would have justifiably relied on the representations made by Campbell or would have justifiably relied on the limited information provided by Campbell, in making or continuing to make the investment in PMM. Factor 4 has been met.
However, as to factor 3, the Plaintiff failed to present sufficient evidence demonstrating that Campbell made the false representations or omitted to disclose information with the intent to defraud. The problem is that although Campbell was withholding information that should have been disclosed, the Court cannot find that Campbell intended to defraud PMM. Given the market conditions at the time, which allowed Rosen to increase the purchase price of the Property from $7,500,000 to $12,500,000, Campbell might have believed that he would ultimately be able to accommodate the interests of both Rosen and Marsillo.
The Court is also unconvinced that PMM has presented sufficient evidence in support of Factor 5. Returning to the market conditions at the time, it is unclear whether the loss sustained by PMM was proximately caused by the false representations or withholding of information by Campbell. Certainly some loss or damage may have occurred, but the Court is unable to quantify that loss or damage based upon the evidence presented. Therefore, the Court must deny the claim for relief under Section 523(a)(2)(A).
B. DISCHARGE UNDER § 523(a)(1)
Embezzlement in the context of nondischargeability has often been 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.” Moore v. United States, 160 U.S. 268, 269, 16 S.Ct. 294, 40 L.Ed. 422 (1885). Thus, for nondischargeability purposes under Section 523(a)(4), embezzlement requires three elements: “(1) property rightfully in the possession of a nonowner; (2) nonowner’s appropriation of the property to a use other than which [it] was entrusted; and (3) circumstances indicating fraud. In re Wada, 210 B.R. 572 (9th Cir. BAP 1997); In re Littleton, 942 F.2d 551 (9th Cir.1991); “Circumstances indicating fraud” can be situations where the debtor intended to conceal the misappropriation. In re Hatch, 465 B.R. 479 (Bankr.W.D.Mich.2012). Embezzlement does not require the existence of a fiduciary relationship. In re Wada, 210 B.R. 572 (9th Cir. BAP 1997).
*403The Plaintiff has set forth a sufficient basis under an embezzlement theory to be accorded relief. PMM contributed $1,000,000 in an initial capital contribution during the course of five months, beginning in August 2005 and ending in December 2005.45 Pursuant to the Operating Agreement, the parties contemplated that Kurth and Campbell would acquire the Property from Rosen. In turn, Marsillo was advised that PMM’s Initial Capital Contribution would be used to develop the Project in Phoenix, Arizona. The facts reflect that PMM anticipated the funds were to be used solely for the development of the Project by LML. Campbell and Kurth were the designated Managers of LML. The initial capital contribution was entrusted to LML, and Campbell, as a Manager, to be used to finance the Project. The funds were deposited into LML’s M & I Bank Account No. 33951225, over which Campbell as a Manager had complete control. Campbell’s statements that he did not have control over the Account were not credible. Thus, the first prong of the test has been met.
Pursuant to the Operating Agreement, both Managers, Kurth and Campbell, were required to execute, on behalf of LML, any checks, drafts, notes, or other instruments.46 According to Marsillo, this provision was specifically added at the suggestion of his legal counsel to prevent one Manager from fraudulently or improperly depleting the funds of LML. However, it does not appear that any of the checks were signed by both Managers.47 The failure of Campbell to execute any of the checks allowed Kurth to use the Account for his personal use or to pay expenses, including payments to one or more of Campbell’s entities, that were not associated with the Project. PMM had entrusted the funds in the Account to Campbell to ensure that the funds would be expended only on the Project. That did not occur. The evidence reflects a misappropriation of property, with the complicity of Campbell, for a purpose other than which the funds were entrusted. Normally one would expect the funds to be entrusted to one individual and to have that individual misappropriate the funds. In this case, although Campbell received arguably only $68,100 through JQC, the entity of him and his wife, he was required as the Manager of LML to co-sign every check on the account. Thus, he was a part of the misappropriation of funds as if he had improperly executed the checks. The Court concludes that given the unique facts of this case, the second prong has been met.
As to the third prong, it is clear to the Court that the circumstances indicate fraud. Specifically, the Court finds that even after Campbell became aware of the diversion of the funds by Kurth, this information was concealed from PMM. Campbell’s failure to provide financial information to Marsillo, even after repeated requests, further indicates an intent to conceal the misappropriation. Campbell’s failure to comply with his duties as a Manager of LML, as set forth in the Operating Agreement, also leads this Court to conclude that Campbell was engaged in activity indicating fraud As a Co-Manager, Campbell was equally responsible for the operations and management of LML. This dereliction of duty by Campbell, and the total disregard of the fraudulent behavior that had been perpetuated upon LML is of great concern to the Court. Therefore, the Court concludes that facts of this case illustrate circumstances indi-*404eating fraud. Accordingly, the third prong of the test has been met.
Finally, the Court concludes that although Campbell was the Manager of LML on behalf of the marital community, JQC Development was an entity controlled by him and his wife, and JQC received at least one improper payment in the amount of $68,100, the misappropriation of funds are the actions of only Mr. Campbell. There is enough evidence, given the involvement of an entity controlled by both Debtors, to hold the community property of the Debtors, and the sole and separate property of Mr. Campbell, liable for the community debt arising as a result of this decision. Tsurukawa v. Nikon Precision (In re Tsurukawa), 287 B.R. 515, 519 (9th Cir. BAP 2002); In re Rollinson, 322 B.R. 879 (Bankr.D.Ariz.2005). However, there is no indication that the actions of Ms. Campbell are such that her sole and separate property should be liable for the PMM obligation.
IV. CONCLUSION
Based upon the foregoing, the Court concludes that Mr. Campbell and the community property of the Debtors shall be liable to PMM in an amount to be determined later under Section 523(a)(4) as a result of the embezzlement by Mr. Campbell of funds invested by PMM Investments, LLC. Although PMM obtained a judgment against Steven Kurth, there may have been payments by Kurth that would have reduced the amount of the liability. The Court understands that the PMM investment was $1,000,000; however, the parties may be able to complete the accounting that now reflects, with appropriate setoffs, what is currently due and owing on the obligation. The Court denies any relief to the Plaintiff under Section 523(a)(2)(A). The Court shall execute a separate order incorporating this Memorandum Decision.
. The illness of Plaintiff's counsel and scheduling issues required that the trial be conducted over a number of days. The days of the trial were January 31, February 1, April 24, September 20, and December 13, 2012.
. See Exhibit 11.
. See Exhibit 1.
. See Exhibit 1, p. 24-25.
. See Exhibit 1, Section 1.5 at p. 2.
. See Exhibit 1, Sections 1.6, 1.9(a), 1.9(x), and 9.1, at pp. 2, 5, and 20. See A.R.S. § 29-733 which sets forth a number of occurrences that qualify as an event of withdrawal, whereby a person ceases to be a member of a limited liability company.
. See Exhibit 1, Section 2.1.1 atp. 6.
. See Exhibit 1, Sections 4.3.2, 4.3.3, 4.3.4, and 4.3.5 atpp. 13-14.
. Id.
. See Exhibit 1, Section 2.1.2 at p. 6.
. See Exhibit 1, Section 2.5.1 at p. 7.
. See Exhibit 2.
. Id.
. See Exhibit 1, Section 4.1 atp. 11.
. See Exhibit 1, Section 4.2 atp. 11.
. See Exhibit 1, Section 4.2 atp. 11.
. See Exhibit 1, Section 4.2 atp. 11.
. See Exhibit 1, Section 4.3.1 (i) at p. 12-13.
. See Case No. 2:09-bk-15251-RTBP.
. See Case No. 2:09-ap-00961-RTBP; Docket Entry No. 48. At trial, Kurth conceded that a nondischargeability judgment had been entered against him in the amount of at least $750,000.
. Exhibit 11.
. See Exhibit 11, ¶ 3 at p. 3.
. See Exhibit 11, ¶ 3 at p. 3.
. See Exhibit 11 atp. 18.
. Id., ¶ 4 at p. 4.
. Id., ¶7.1 atp. 6.
. Id., ¶ s 6.3 and 24 at pp. 6 and 18.
. Id., ¶24 atp. 18.
. See Exhibit 3.
. See Exhibit 3, ¶ 2.1.2 at p. 6. Also see ¶ 2.2.1 at p. 6, that provided for the infusion of additional capital.
.Id.
. See Exhibit 4.
. Id., ¶ 2.1 at pp. 5-6.
. Id., ¶ 4.3.5 at p. 15. Rosen, in his individual capacity or as trustee, was no longer a member. Rosen had substituted an entity, Bali Watergardens on 12th LLC, in his place.
.See Exhibit 5.
. See Exhibit 11, ¶ 4.3 at p". 11. Arguably PMM would have been the only member enti-tied to vote on the purchase of the office building. Since the Property was never as*399signed by Kurth, Campbell, or their entities, to LML, they were not members. However, Kurth and Campbell were Managers of LML, from the time of the execution of the Operating Agreement, so they would have had an affirmative duty to notify PMM, through Mar-sillo, what they intended to do and get PMM’s approval of the office building purchase.
. 10 percent of a 60 percent is 6 percent.
. See Exhibit 2.
. Id.
. Id.
. Id.
.Id.
. DeAnda prepared the LML Operating Account Ledge regarding M & I Account No. 33951225.
. See Exhibit 18.
. See Exhibit 2.
. See Exhibit 1, Section 4.3.1(i) at p. 12-13.
.See Exhibit 18. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495794/ | *406ORDER SUSTAINING OBJECTION BY AMERICAN EXPRESS TO SECOND AMENDED CHAPTER 13 PLAN
STEPHEN L. JOHNSON, Bankruptcy Judge.
Creditor American Express Centurion Bank and American Express Bank, FSB (“American Express”) objected to confirmation of Debtors’ plan on the grounds of failure to comply with the disposable income test of 11 U.S.C. § 1325(b)(1)(B) and lack of good faith pursuant to 11 U.S.C. § 1325(a)(3) based on Debtors’ expenses on a timeshare ownership.1
The court heard argument on the objection on November 15, 2012. Patrick Calhoun appeared for Debtors and Cheryl Rouse appeared for American Express. For the reasons noted below, the court will sustain American Express’s objection to confirmation, without prejudice to the filing of a revised chapter 13 plan and the submission of appropriate evidence to support that plan.
I. FACTUAL BACKGROUND
Steven Enabnit and Carol Enabnit (“Debtors”) commenced this case by filing a voluntary petition under chapter 13 of the Bankruptcy Code on June 29, 2012. In Schedule B, under the category “other personal property,” Debtors listed a timeshare lease with a value of $30,000. In Schedule G, Debtors identified the lessor as Diamond Resorts, located in Las Vegas, Nevada, and the timeshare as Kaanapali Beach Club located in Maui, Hawaii. The contract was signed in 2004, and payments are $1,084 per month, plus maintenance *407fees of $841 per month. Debtors did not identify any real property in Schedule A. They listed Diamond Resorts as holding a secured claim in the amount of $44,729 in Schedule D. The only other secured claim is for Debtors’ vehicle, a Honda Civic. Debtors owe $314,170 in unsecured debts, the majority of which are credit card debts.
Schedule I shows Steven Enabnit works as a project manager, earning $7,593 per month after taxes and deductions, and Carol Enabnit works as a medical assistant earning net income of $2,274 per month. Debtors’ income is above the median for a household of the same size as Debtors’ household. They do not own a home.
On October 2, 2012, Debtors filed their Amended Chapter 13 Statement of Current Monthly and Disposable Income (Form 22C) (the “Form 22C”). It shows Debtors’ current monthly income in the amount of $15,375.08 and monthly disposable income of $2,238.60. If they contribute that sum to their plan, they could pay as much as $134,316 to unsecured creditors over sixty months.
A summary of Debtors’ Form 22 follows:
$15,375.08 Part I Monthly Income
5 years Part II Commitment Period
Part IV Deductions from Income
Subpart A IRS Allowed Expenses
$1,029.00 Food, Apparel
120.00 Health Care
503.00 Non-Mortgage Expenses
2,761.00 Mortgage/Rent
812.00 Transportation
341.12 Automobile Ownership Costs
4,204.01 Other Expenses: Taxes
418.85 Other Expenses: Life Ins.
30.00 Other Expenses: Health Care
70.75 Other Expenses: Telecom
Subpart B Other Additions
Health Insurance 00 03 oi 1-H CO
Additional Food & Clothing o o io CO
Total Subpart B
Subpart C Future payments — Secured Debts
Honda
Diamond Resorts
Payments on Priority Debts 1> LO CO
Ch. 13 Admin. Expenses 00 O rH
$1,705.47 Total Subpart C
Disposable Income Calculation
$15,375.08 Current Monthly Income
-787.00 Qualified Retirement Deductions
-12,349.48 Total of Deductions (subparts A-C)
$2,238.60 --1 Monthly Disposable Income Part VI Additional Expense Claims
$840.66 Timeshare Maintenance
Total Costs of Timeshare (Boxed Above) $1,924.66
*408Debtors’ Second Amended Plan (“Plan”), filed on October 31, 2012, requires them to contribute $1,025 for each of the first six months, and $1,500 for the balance of the 60 months the Plan will run, for a total of $87,150. The Plan provides for $1,084 per month to be paid outside the Plan to Diamond Resorts on account of the timeshare obligation. It states that general unsecured creditors will receive a minimum of $50,943.20.
American Express filed an objection to the original plan on August 10, 2012, and a supplemental objection to confirmation of the amended Plan on November 1, 2012 (collectively “Objection”). The essence of American Express’s Objection is that Debtors are not paying enough to unsecured creditors under their Plan. American Express asserts that Debtors are paying only 17% on unsecured claims if they pay the amount proposed in their Plan, despite the fact that they make $15,375.08 per month. American Express complains that Debtors intend to spend $1,924.66 per month on a Hawaiian timeshare, which American Express asserts is neither reasonable nor necessary. American Express calculates that if that money was plowed back into the Plan, Debtors would pay $115,479.60 ($1,924.66 x 60 months) more to unsecured creditors.
The timeshare creditor, Diamond Resorts, did not file a proof of claim. Debtors did not submit a declaration or any evidence in response to the Objection. The gist of Debtors’ argument in response to American Express’s complaints is that chapter 13 trustee does not object to the deductions for the timeshare.
At the hearing on the Objection, Debtors’ counsel stated that he was not sure if the timeshare was a shared fee ownership, but asserted the claim of Diamond Resorts is secured by the real property.
II. DISCUSSION
A. Burden of Proof
The burden of proof on confirmation of a plan lies with the debtor. In re Davis, 239 B.R. 573, 577 (10th Cir. BAP 1999); In re Padilla, 213 B.R. 349, 352 (9th Cir. BAP 1997).
B. Chapter 13 Confirmation Standards
1. Disposable Income Test
A chapter 13 plan that does not pay unsecured creditors in full cannot be confirmed if a creditor objects and the debtor is not paying “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). For the purposes of § 1325(b), “disposable income” means current monthly income “less amounts reasonably necessary to be expended — (A)(i) for the maintenance and support of the debtor or a dependent of the debtor ...” § 1325(b)(2) (emphasis added). Amounts that are “reasonably necessary” are determined with reference to 11 U.S.C. § 707(b)(2)(A) and (B) if the debtor’s income is above the median for the state, as they are here. In re Ransom, 577 F.3d 1026, 1028 (9th Cir.2009), aff'd — U.S. -, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011). Section 707(b)(2)(A) provides that an above-median debtor’s expenses be calculated using under National Standards and Local Standards issued by the Internal Revenue Service.2 These National Standards and Local Standards provide for common expenses such as housing, *409utilities, food, clothing, and health insurance.
2. Payments on Secured Debts are Allowed Generally
Debtors are permitted to deduct secured debt payments to arrive at their projected disposable income. Section 707(b)(2)(A)(iii) provides, “The debtor’s average monthly payments on account of secured debts shall be calculated as the sum of — (I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the filing of the petition; ... divided by 60.” 11 U.S.C. § 707(b)(2)(A)(iii). “Read together, § 707(b)(2)(A)(ii) and (iii) have been understood to allow a debtor to deduct from current monthly income those expenses set out in the IRS standards, and also any payments on secured debt that will come due in the sixty months after the petition date.” In re Welsh, 465 B.R. 843, 849 (9th Cir. BAP 2012).
American Express argued that the timeshare is a luxury item and not reasonable or necessary under the disposable income test. This issue was addressed in Welsh, 465 B.R. at 848-51, which held that § 707(b)(2)(A) “allows a debtor to deduct from current monthly income payments on secured debts, averaged over sixty months as provided in § 707(b)(2)(A)(iii), regardless of whether the collateral is necessary.” Welsh, 465 B.R. at 850. This conclusion is supported by a leading bankruptcy treatise. See Collier on Bankruptcy, ¶ 707.04[3][c] (“it is clear that the contractual payments are not limited to only those secured debts that are for necessary property.”). As pointed out in Welsh, the only instances where payments for secured debts cannot be deducted under § 707(b)(2)(A)(iii) occur when the debtor is surrendering the property or avoiding the lien securing the claim. Welsh, 465 B.R. at 851.
C. The $1.081 Monthly Payment for the Timeshare
Debtors contend the $1,084 payment to Diamond Resorts is permissible because it is a secured debt. The record in this case does not adequately support this assertion. Diamond Resorts did not file a proof of claim. The Debtor’s schedules are internally inconsistent, offering no assistance in the determination. Debtors listed the claim of Diamond Resorts as secured in Schedule D but did not describe the property subject to the lien, as required in Schedule D. Adding to the confusion, Debtors listed the timeshare interest as personal property in Schedule B and not real property on Schedule A. It is difficult to conclude on the record presented that Debtors’ proposed payments to Diamond Resorts for the timeshare are on account of a secured claim.
Property interests are defined by state law. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Without the timeshare contract or any other evidence, the court cannot determine whether the Debtor’s interest in the timeshare is determined under California law, Nevada law where Diamond Resorts is located, Hawaii law where the timeshare apparently is located, or some other jurisdiction.
For purposes of discussion, under California law, a timeshare interest may include interest in real property or it may not. See Bus. & Prof.Code § 11210 et seq.; see, e.g., Berrien v. New Raintree Resorts Int’l, LLC, 276 F.R.D. 355, 357 (N.D.Cal.2011) (Plaintiffs, who are California residents, purchased vacation timeshare but did not own an interest in any real property because the timeshare interest is a “beneficial trust interest in a specific Club resort property”). California defines a *410“time-share estate” as a right to occupy a timeshare property plus a freehold estate interest, whereas a “time-share use” only has a right to occupy a timeshare property. Bus. & Prof.Code § 11212(x); see also Bus. & Prof.Code § 11213 (only a timeshare estate constitutes an interest in real property for tax purposes).
If the claim of Diamond Resorts is not secured under applicable state law, Debtors cannot take the deduction under § 707(b)(2)(A)(iii). Moreover, because Debtors propose to pay Diamond Resorts in full, it is possible the Plan discriminates against other unsecured creditors without any supporting reason. See 11 U.S.C. § 1322(b)(1); In re Wolff, 22 B.R. 510 (9th Cir. BAP 1982) (providing a four-part test for determining whether discrimination among classes of claims violates § 1322(b)(1)).
D. The $811 Per Month Timeshare Maintenance Fees
In addition to the monthly payment on the secured debt for the timeshare, Debtors also deducted $840.66 under Other Expenses in Form 22C. This category provides: “List and describe any monthly expenses, not otherwise stated in this form, that are required for the health and welfare of you and your family and that you contend should be an additional deduction from your current monthly income under § 707(b)(2)(A)(ii)(I).” That section states that a debtor may deduct “actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief ...” 11 U.S.C. § 707(b)(2)(A)(ii)(I). In other words, unlike the secured payments on the timeshare, Debtors must show that expenses in this category are required for the health and welfare of Debtors.
The Internal Revenue Manual (“IRM”) lists sixteen categories of expenses which may be considered necessary under certain circumstances. See IRM § 5.15.1.10, It also provides that other expenses may be considered if they meet the necessary expense test, i.e. they provide for the health and welfare of the taxpayer or provide for the production of income. IRM § 5.15.1.7 and 5.15.1.10; In re Egebjerg, 574 F.3d 1045, 1051 (9th Cir.2009). The language in Form 22C for Other Expenses allows a deduction for expenses that are “required for the health and welfare” of debtors and their family and parallels the necessary expense test in the IRM.
The maintenance fees for Debtors timeshare do not appear to fit within any of the IRM’s listed categories. Additionally, because Debtors did not offer any arguments or evidence that the maintenance fees for the timeshare, or the timeshare itself, is necessary for Debtors’ health and welfare, Debtors did not carry their burden to show that these fees are permissible deductions under Other Expenses.3
E. The Good Faith Requirement
American Express argues in the alternative that Debtors’ Plan was not proposed in good faith. A Chapter 13 plan shall be confirmed if, among other factors, the plan has been proposed in good faith *411and not by any means forbidden by law. 11 U.S.C. § 1325(a)(3). A finding of good faith is mandatory for confirmation of a Chapter 13 plan. In re Chinichian, 784 F.2d 1440, 1442-44 (9th Cir.1986). In Welsh, the Bankruptcy Appellate Panel found that so long as a deduction for secured debts met the requirements of § 707(b), it could not be a basis for finding a plan was not proposed in good faith. In other words, compliance with § 1325(b)(3) and § 707(b)(2) leads to a finding of good faith under § 1325(a)(3).
The court does not accept that conclusion. Judge Pappas’ dissent in Welsh, notes that “it is the long-standing law in the Ninth Circuit that, when there is a contest about a chapter 13 debtors’ good faith, the bankruptcy court must focus upon whether the debtor’s plan treats their creditors ‘equitably.’ ” Welsh, 465 B.R. at 858, citing In re Goeb, 675 F.2d 1386, 1390 (9th Cir.1982). The test for good faith is the totality of the circumstances on a case-by-case basis, including taking into consideration “the substantiality of the proposed repayment” and “all militating factors.” Id. at 859. Judge Pappas concluded in Welsh, that even if current payments comply with the means test, the bankruptcy court still must determine whether a plan treats debtors’ other creditors equitably. Id. at 860-61 n. 22 (listing cases finding § 1325(a)(3) requires the court to examine the nature and amount of secured debt).
This court, and at least one other court in the Ninth Circuit, agrees with Judge Pappas’ dissent on this point.4 See In re Vandenberg, 2012 WL 1854298 (Bankr.D.Ariz.2012). As Judge Pappas correctly noted, the means test calculation incorporated in § 1325(b) and the good faith analysis in § 1325(a)(3) are “distinct plan confirmation requirements.” Welsh, 465 B.R. at 861.
As indicated above, for the good faith requirement, the court applies a “totality of the circumstances” test. To find a lack of good faith, “a bankruptcy court need not decide that the debtor is acting with fraudulent intent, ill will directed to creditors, or that the debtor is affirmatively attempting to violate the law.” Id. at 858 n. 13, citing In re Leavitt, 171 F.3d 1219, 1224-25 (9th Cir.1999).
The record here is not sufficient to make a finding that Debtors have proposed their Plan in good faith. The Diamond Resorts claim is either secured or it is not secured. The record does not support a finding on that point. Even if the claim is secured, the court cannot determine if paying the expense constitutes bad faith. The record does not show why Debtors need the property, why it makes sense for them to retain it, or other options they might consider that do not cost almost $2,000 per month. On this record, Debtors have not carried their burden to show that the Plan was proposed in good faith.
III. CONCLUSION
, For the foregoing reasons, the Objection of American Express to the confirmation *412of Debtor’s Second Amended Plan is SUSTAINED.
IT IS SO ORDERED.
. At the hearing on this matter, the court sustained American Express’s objection that Debtors plan needed to take account of a car payment that would no longer be necessary once the note was paid in full, and directed Debtors to modify the plan accordingly.
. See http://www.justice.gov/ust/eo/bapcpa/ meanstesting.htm
. Although the IRM appears to allow other expenses so long as they meet the necessary expense test, the plain language of § 707(b)(2)(A)(ii)(I) expressly limits deductions for other expenses to "the categories specified as Other Necessary Expenses issued by the Internal Revenue Service.” See Egeb-jerg, 574 F.3d at 1051. Like the Ninth Circuit in Egebjerg, the court does not decide whether other expenses must fit within one of the enumerated categories in IRM § 5.15.1.10 for purposes of the means test because Debtors have not shown the expenses at issue pass the necessary expense test.
. "The decisions of the Bankruptcy Appellate Panel of the Ninth Circuit (‘BAP’) do not carry the weight of stare decisis. Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 471 (9th Cir.1990). The decisions of the BAP are binding only on the judges whose orders have been reversed or remanded by the BAP in that particular dispute. In all other instances, the decisions of the BAP are effective only to the extent they are persuasive.” In re Locke, 180 B.R. 245, 254 (Bankr.C.D.Cal.1995); see also In re Rinard, 451 B.R. 12, 20-21 (Bankr.C.D.Cal.2011) (“BAP decisions are not binding on bankruptcy courts, as district court decisions are not.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495795/ | MEMORANDUM OPINION ON DEFENDANTS’ MOTIONS TO DISMISS
LAUREL M. ISICOFF, Bankruptcy Judge.
This matter came before me on July 11, 2012, on motions to dismiss the Second Amended Complaint filed by four of the named defendants.1 The Plaintiff, the AASI Creditors Liquidating Trust by and through its Liquidating Trustee (“Plaintiff’), initiated this adversary proceeding on April 24, 2009 with its first Complaint, as amended (ECF # 2) (the “First Amended Complaint”). I previously granted in part and denied in part various motions to dismiss and to abstain (ECF # 280).2
The Plaintiff filed his Second Amended Complaint on July 28, 2010 (ECF # 802) (the “Complaint”). The Plaintiff has settled with, or dismissed from the Complaint, many of the defendants. Each of Oracle USA, Inc. (f/k/a PeopleSoft USA, Inc.) (“Oracle”), CSS, Inc. (a/k/a CSS International, Inc.) (“CSS”); Global Group Technologies, Inc. (“GGT”) and Global Systems Integration, Inc. (“GSI”) (together the “Defendants”),3 have all filed motions to dismiss the Plaintiffs Complaint (the “Motions to Dismiss”).4 The Plaintiff in turn has responded to the motions to dismiss in an omnibus response (ECF # 477) (the “Omnibus Response”) and the Defendants have all filed replies to the Plaintiffs Omnibus Response.5 For the *424reasons more fully described below, the Defendants’ Motions to Dismiss are granted in part and denied in part.
FACTUAL ALLEGATIONS
Each of the Defendants has been sued for its part in the alleged negligent design, installation, and implementation of an inventory management system, referred to as an Enterprise Resource Planning System (the “ERP System”), the failure of which, according to the Plaintiff, was a material, if not the principal, cause of the financial collapse of All American Semiconductor Inc. and its various subsidiaries and affiliates (collectively “AASI”).6 The Complaint alleges that the ERP System, after a two year delay and running over budget, went live on or about February 7, 2006 even though the system was not working properly, and, as a result, AASI’s business was completely paralyzed for two weeks, AASI was never able to properly function again, and revenues decreased substantially — all of which lead the demise of AASFs business.7
a. Oracle8
The Complaint alleges that PeopleSoft USA, Inc. (“PeopleSoft”) was the “architect of the ERP System.” On June 30, 2004 AASI entered into a contract with PeopleSoft to provide the platform of the ERP System and to provide maintenance, service, and support of the ERP System throughout all stages of its implementation (the “License Agreement”). The Complaint further alleges that PeopleSoft failed to perform under the License Agreement, that PeopleSoft failed to provide services consistent with generally accepted industry standards, that the ERP System was unable to handle the volume of transactions that PeopleSoft promised it could, and that PeopleSoft acted negligently and recklessly throughout the ERP System’s creation and implementation.
b. CSS .
AASI hired CSS to be “the primary consultant, architect, engineer, installer, integrator, trainer, and full service consultant in connection with the installation, integration, implementation, and ultimate delivery of the ERP system.” The Complaint alleges that CSS failed to perform under the contract with AASI, that CSS failed to provide services consistent with generally accepted industry standards, *425that CSS acted recklessly, and that CSS was ultimately not qualified to implement the ERP System. The Complaint further charges CSS with constantly changing the personnel assigned to AASI, with knowing that the ERP System was a failure, and, along with PeopleSoft, with recommending that AASI hire Gary Kirk as Chief Information Officer of AASI, even though Gary Kirk lacked the necessary skills to do the job.
c. GGT
The Complaint alleges that, at the recommendation of PeopleSoft and CSS, AASI hired GGT to provide consultants to help implement the ERP System. The Complaint alleges that GGT failed to provide services consistent with generally accepted industry standards and that GGT acted recklessly and with gross lack of care. The Complaint further alleges that GGT failed to conduct adequate testing or training, and that GGT failed to provide a backup system in case the ERP System failed.
d. GSI
The Complaint alleges that, at the recommendation of PeopleSoft and CSS, AASI also hired GSI to provide software development and consulting services. GSI’s duties included architecture optimization, implementation, and demand support services for the ERP System. The Complaint alleges that GSI failed to provide services consistent with generally accepted industry standards and that GSI acted recklessly and with gross lack of care. The Complaint alleges in more detail that GSI knew that the ERP System was not performing correctly, that GSI failed to conduct adequate testing or training, and that GSI failed to provide a backup system in case the ERP System failed.
JURISDICTION AND STANDARD OF REVIEW
I have jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b). As I discussed in more detail in my prior opinion dismissing the First Amended Complaint, this adversary proceeding involves intertwined core and non-core matters.9 The preference and fraudulent transfer counts in the Complaint are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(F).10 The state law claims, *426which existed prior to and independent of this bankruptcy, are non-core matters, but are related to this bankruptcy and the preference/fraudulent transfer counts pursuant to 28 U.S.C. § 157(c)(2).
In evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), I must accept all factual allegations in the Complaint as true. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). “[T]he relevant question for purposes of a motion to dismiss under Rule 12(b)(6) is ‘whether, assuming the factual allegations are true, the plaintiff has stated a ground for relief that is plausible.’ ” In re Luca, 422 B.R. 772, 775 (Bankr.M.D.Fla.2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 696, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations ... a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citations omitted).
In evaluating a motion to dismiss under Rule 12(b)(6) courts must also determine whether a complaint states a cause of action and usually begin “by taking note of the elements a plaintiff must plead to state a claim.” Iqbal, 556 U.S. at 675, 129 S.Ct. 1937. Federal Rule of Civil Procedure 8(a) requires that a party make “a short and plain statement of the claim showing that the pleader is entitled to relief’ and make “a demand for the relief sought.”
Lastly, in evaluating a motion to dismiss under Rule 12(b)(6) on statute of limitations grounds, a court must determine “if it is ‘apparent from the face of the complaint’ that the claim is time-barred.” La Grasta v. First Union Sec., Inc., 358 F.3d 840, 846 (11th Cir.2004) (citations omitted).
ANALYSIS
The Defendants raise various arguments in support of dismissal of various counts of the Complaint. Some of the arguments raised by the four Defendants are the same. I will address any collective arguments together rather than each motion to dismiss in turn, other than Oracle’s Motion to Dismiss, which I am granting in full, with prejudice, for the reasons that follow.
a. Any Suit Against Oracle is Time Barred
Oracle seeks dismissal of all counts against it, on the basis that the claims are time barred. Oracle asserts that the one year statute of limitations in the License Agreement11 bars all claims arising from *427or related to the License Agreement.12
The Plaintiff, in its response to Oracle’s Motion to Dismiss, argues that the statute of limitations in the License Agreement is not binding because: 1) a one year statute of limitations for the relief sought in the Complaint is void under Florida law; 2) the one year statute of limitations in the License Agreement is unreasonable under California law; and 3) the claims did not accrue until later and the Complaint was, therefore, timely filed.
Florida law does not apply to the License Agreement. The License Agreement specifically provides that it will be governed by the laws of the State of California; the Plaintiff has not argued that the choice of law provision in the License Agreement is invalid. Thus, even if under Florida law the contractual limitation period of one year would be void because it is shorter than the applicable statutory limitation,13 Florida recognizes and will enforce a shortened statute of limitations period if such a period is enforceable under the state law applicable to the dispute. See Burroughs Corp. v. Suntogs of Miami Inc. 472 So.2d 1166 (Fla.1985) (A contract with a statute of limitations period void under Florida law, but enforceable under Michigan law, the law applicable to the contract, is enforceable in Florida and does not violate Florida’s public policy); see also Maxcess, Inc. v. Lucent Technologies, Inc., 433 F.3d 1337, 1340-1341 (11th Cir.2005). Therefore, I do not need to address whether the one year statute of limitations is enforceable under Florida law, but only whether it is enforceable under California law.
The one year statute of limitations period in the License Agreement is shorter than the applicable California statute of limitations.14 Under California law, shortened statutes of limitations are enforced unless they are unreasonable. See William L. Lyon & Assoc. Inc. v. Superior Court, 204 Cal.App.4th 1294, 139 Cal.Rptr.3d 670, 679 (2012) (“Under California law parties may agree to a provision shortening the statute of limitations, qualified, however, by the requirement that the period fixed is not in itself unreasonable or it is not so unreasonable as to show imposition or undue advantage.”). Under California law, “ ‘[i]t is a question of law whether a case or a portion of a case is barred by the statute of limitations....’” Id. at 677 (citations omitted). Thus, a court does not need to look at the particular facts of a case to determine if a shortened limitations period is reasonable, a court must only determine if “the period of limitation, in itself, [is] unreasonable.” Id. at 679.
The Plaintiff relies on Western Filter Corp. v. Argan, Inc., 540 F.3d 947, 952 (9th Cir.2008) (“Western Filter ”), arguing that, while shortened limitations periods are allowed in California, they are “not favored” and should be “construed with strictness against the party invoking *428them.” However, the Western Filter decision did not hold that the use of a shortened statute of limitations was prohibited; the court held that if parties contract for, and then rely on, a shortened statute of limitations, that the clause in the contract must be clear and explicit; a shortened statute of limitations will be enforced unless the contractual language is ambiguous. Id. at 952-954.
The language in the License Agreement is clear and explicit: “no action, regardless of form, arising out of, relating to or in any way connected with the Agreement, Software, Documentation or Services provided or to be provided by Peo-pleSoft may be brought by either party more than one (1) year after the cause of action has accrued.” The Plaintiff does not suggest that this clause is ambiguous. Nonetheless, the Plaintiff argues that the one year statute of limitation period is unreasonable and is therefore not enforceable under California law. However, many California courts have upheld unambiguous contractual one year statutes of limitations as fair and reasonable.15
In this case, while it is true that the ERP system was “complex,” as the Plaintiff argues, Oracle’s alleged responsibility for its failure was not difficult to adduce. The Complaint alleges that PeopleSoft was the “chief architect of the ERP System, along with CSS” and the initial party that AASI approached when AASI decided to explore implementing the ERP System. The Complaint also describes a process that was disorganized, disjointed and chaotic, long before the system “went live” in February, 2006. Indeed, the Complaint alleges, things got so out of hand that AASI first had to add GSI and then GGT to the design team. This Complaint does not describe a “breach of duty ... more difficult to detect.” Accordingly, I find that the one year statute of limitations in the License Agreement is enforceable under California law.
The Plaintiffs last argument in opposition to Oracle’s statute of limitations defense is that, even if the one year statute of limitations applies to this case, the causes of action against Oracle did not accrue until several months after the “Go Live Date” of February 7, 2006. Under California law, a cause of action for breach of contract accrues at the time the contract has been breached, regardless of whether any damage is apparent or whether the injured party is aware of the right to sue. Kourtis v. Cameron, 419 F.3d 989 (9th Cir.2005) (applying California law). Assuming the facts in the Complaint as true, the causes of action against Oracle accrued no later than, and probably before, the “Go-Live Date,” given that the Plaintiff alleges that the shortcomings of the ERP System where known prior to the “Go Live Date,” that the ERP System immediately failed as soon as it went online, and that AASI hired GSI and GGT due to People-*429Soft’s failure to perform adequately under the License Agreement.
It is undisputed that all the counts in the Complaint against Oracle relate to the License Agreement and that the causes of action accrued no later than February of 2006. It is also clear that any action against Oracle relating to the License Agreement had to have been brought prior to the Petition Date.16 Accordingly, all the counts against Oracle are dismissed with prejudice.17
b. The Economic Loss Rule Bars all the Counts for Negligence, Gross Negligence and Strict Liability.
CSS, GGT, and GSI18 each seek to dismiss the counts for negligence, gross negligence, strict liability, and misrepresentation 19 (together the “Tort Claims”) based on the economic loss rule. Each defendant argues that the Complaint seeks to recover only economic damages and that each of them was in contractual privity with AASI and therefore each count of the Complaint based on tort must be dismissed.
The economic loss rule “is a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses.” Indemnity Ins. Co. v. American Aviation, Inc., 891 So.2d 532, 536 (Fla.2004) (“Indemnity Insurance ”). In Florida, “the economic loss rule bars a [tort] action to recover solely economic damages only in circumstances where the parties are either in contractual privity or the defendant is manufacturer or distributor of product.” Id. at 544.20 However, even where the parties are in contractual privity, Florida law permits tort actions under two circumstances — for a tort committed independent of the contract breach, such as fraud in the inducement; and, when a plaintiff is suing a defendant for professional negligence. Id. at 537.21 Moreover, the economic loss rule will not bar an action against the manufacturer or distributor of a product where the damage caused is to, persons or “other property.” Id. at 544.
*430The Plaintiff argues that, under Florida law,22 the economic loss rule does not bar recovery because the defective product, the ERP System, caused damage to other property, AASI’s goodwill. The Plaintiff further argues that the economic loss rule does not bar professional malpractice claims, and because the Tort Claims against CSS, GGT, and GSI arise from professional malpractice, such claims are not barred by the economic loss rule.
i. Damage to Goodwill and Reputation is not Damage to Other Property
The Plaintiff alleges that the ERP System caused the loss of all of AASFs goodwill and the destruction of its reputation, and that therefore, the loss of the business falls under the damage to “other property” exception to the economic loss rule. The Defendants argue that “goodwill” and “reputation” do not constitute “other property” for purposes of avoiding application of the economic loss rule.
Several eases outside of Florida have rejected the argument that damage to reputation or goodwill avoids application of the economic loss rule. “[I]f the loss to goodwill results from the failure of a product to perform as expected, and not from injury to another person or other property those losses are commercial and are not recoverable in tort ... [a]ny other holding would swallow the economic loss doctrine; parties would be able to end-run the law of contract and the Uniform Commercial Code by the simple expedient of pleading that their commercial losses — repair costs, lost profits and the like — included damage to business goodwill.” Cooper Power Systems, Inc. v. Union Carbide Chemicals & Plastics, Co., 123 F.3d 675, 681-682 (7th Cir.1997) (citations omitted). See also Gentek Bldg. Products, Inc. v. Sherwin-Williams, Co., 2005 WL 6778678 (N.D.Ohio Feb. 22, 2005); Zurich Ins. Co. v. Let There Be Neon City, Inc., 33 Conn. L. Rptr. 603, 2002 WL 31762010 (Conn.Super.Ct.2002).
Conversely, a Florida federal judge recently rejected a defendant’s argument that allegations of loss of goodwill do not avoid the economic loss rule unless the alleged damage was caused by a separate and distinct tort claim. “Defendants ... confound the two exceptions of the economic loss rule and misread those cases, which establish that it is precisely the allegations of other property damage that render a tort claim independent of a contractual breach.” Gomez Packaging Corp. v. Smith Terminal Warehouse Co., 2011 WL 5547146, at *5 (S.D.Fla. Nov. 14, 2011). See also Mobil Oil Corp. v. Dade County Esoil Mgt. Co., 982 F.Supp. 873, 880 (S.D.Fla.1997) (“[T]he economic loss rule does not apply to this cause, because Mobil has alleged damage to the goodwill of its trademark and brand name.”); Anthony Distributors, Inc. v. Miller Brewing Co., 904 F.Supp. 1363, 1366 (M.D.Fla.1995) (“Damage to Miller’s property [trademark] is alleged to have caused damage distinct from the damages flowing from the contractual breach. Consequently, the economic loss rule does not bar the action for fraud.... ”).
*431Who is right? Is goodwill “other property” or is it merely a measure of damage arising from “disappointed economic expectations”? In revisiting and clarifying the scope of the economic loss rule, the Florida Supreme Court emphasized that, with respect to the contractual economic loss rule, “no cause of action in tort can arise from a breach of a duty existing by virtue of contract.” Indemnity Insurance., 891 So.2d at 537 (citing Weimar v. Yacht Club Point Estates, Inc., 223 So.2d 100, 103 (Fla. 4th DCA 1969)). Moreover, as the Florida Supreme Court clarified in Indemnity Insurance, the “other property” exception only applies in connection with the product liability economic loss rule, that is, in an action against the manufacturer or distributor of a product; it does not apply in cases involving the contractual economic loss rule. I hold that goodwill is not “other property” the damage to which would avoid application of the economic loss rule, but rather, goodwill is a measure of disappointed economic expectations.
Moreover, even if there was a scenario in which goodwill could be viewed as “other property”, in this ease, the Complaint does not allege that any of CSS, GGT or GSI is a manufacturer or distributor of a product; the Complaint merely makes general allegations that each Defendant was a “typical provider of the goods and services.” However, as more fully discussed later in this opinion, the Complaint did not include a copy of any of the agreements with CSS, GGT, or GSI, and the allegations of the Complaint as to each Defendant describe the obligations of each of these Defendants as “support services,” and “technical consulting,” not as the provider or manufacturer of anything.
Thus, even if damage to goodwill did constitute “damage to other property” for purposes of avoiding the consequences of the economic loss rule, the exception would not apply in this case because the Complaint does not adequately plead the predicate applicability of the “other property” exception to the economic loss rule — that is, that any of the Defendants are providers or manufacturers of a product.
I find that the Seventh Circuit interpretation is consistent with Florida law. The damage to AASI’s goodwill and the destruction of its reputation does not constitute damage to “other property” for purposes of eliminating applicability of the contractual economic loss doctrine, and the Complaint does not allege that the Defendants are liable as providers or manufacturers of a product. Damage to AASFs goodwill is an element of its damages,
ii. An Action in Professional Malpractice May only be Brought Against Individuals, not Entities and only Against Professionals.
Nonetheless, damage to other property is not necessary to avoid application of the economic loss rule where the claim for damage arises from an independent tort or exception to the contractual economic loss rule “such as for professional malpractice, fraudulent inducement, and negligent misrepresentation. ...” Indemnity Insurance, 891 So.2d at 543 (citations omitted).
The Plaintiff argues that the services provided by the Defendants fall within the professional malpractice exception to the contractual economic loss rule. The Defendants counter that the Complaint does not allege the services provided by the Defendants were “professional services” and, even if the Plaintiff had alleged that the Defendants provided professional services, the Complaint is deficient because it fails to sue the engineers individually as required by the exception.
The Florida Supreme Court recognized a claim for professional malpractice as an exception to the economic loss rule in Mor-*432ansais v. Heathman, 744 So.2d 973 (Fla.1999) (“Moransais ”). Mr. Moransais hired an engineering firm, Bromwell & Carrier, Inc. (“BCI”) to inspect a house Mr. Moransais wished to buy. Two engineers, Mr. Jordan (“Jordan”) and Mr. Sauls (“Sauls”), actually perforihed the inspection. Notwithstanding their “okay to purchase” advice, Mr. Moransais discovered serious defects after closing, defects, he alleged, Jordan and Sauls should have discovered, defects that rendered the home uninhabitable. In addition to suing BCI for breach of contract, Mr. Moransais sued Jordan and Sauls for professional negligence.
In ruling that the suit against Jordan and Sauls was not barred by the economic loss rule notwithstanding that they were employees of a party with whom the plaintiff was in contractual privity, and notwithstanding there was no personal injury or property damage23 the court held that, as professionals, Jordan and Sauls owed an independent duty to the plaintiff both under common law and the Florida Statutes.24 “[T]he economic loss rule may have some genuine, but limited value, in our damages law, we never intended to bar well-established common law causes of action, such as those for neglect in providing professional services.” Id. at 983. The court also held that the fundamental principles underlying causes of action for professional malpractice would be undermined if such actions were barred in the absence of damage to person or property.25
What is significant about the holding in Moransais for purposes of these motions to dismiss is that Moransais is limited specifically to professionals. The Supreme Court cited to Garden v. Frier, 602 So.2d 1273 (Fla.1992) which defines a “professional” as a person engaged in a vocation requiring at a minimum a four-year college degree before licensing is possible. A vocation is not a profession if there is any alternative method of admission that omits the required four-year undergraduate degree or graduate degree, or a state license is not required at all. Id. at 1276.
Finally, the professional malpractice exception only applies to the professionals themselves, not to their employers or corporate entities with whom they are affiliated. Indeed, in truth, although, in Indemnity Insurance, the Florida Supreme Court describes the professional malpractice exception as distinct from the “separate and independent tort” exception, it is really a subset of the independent tort exception. Since the Plaintiff failed to sue the individual professionals, or include specific allegations that the individuals were professionals, the Complaint fails to adequately plead that the professional negligence exception to the economic loss rule applies in this case.
*433Therefore, Counts XXXVI, XXXVII and XXXVIII (negligence), Counts XLVII, XLVIII and XLIX (gross negligence), and Counts XXV, XXVI and XXVII (strict liability) are dismissed.
c. The Count for Misrepresentation is not Barred by the Economic Loss Rule
Finally the Plaintiff argues that its claim for misrepresentation is not barred by the economic loss rule because it involves tortious acts independent of the contract breaches. CSS argues in response that the Plaintiff fails to allege any act outside of a contract breach and that the Plaintiff is simply reiterating its dissatisfaction with the quality of services provided by CSS.
Count LIV of the Complaint alleges that PeopleSoft and CSS misrepresented “the quality of the services and products they were to provide.” If this were all that was alleged in the Complaint I would agree with CSS that this count is barred by the economic loss rule.
However, the actual descriptive paragraphs of the Complaint allege that CSS represented that it was “exceedingly well qualified” and “certified ... to provide the services and products that would successfully achieve All American’s goals ... that [CSS] would be able to properly integrate into the ERP system the various third party software .... ” (¶¶ 39 and 40). And yet, the Complaint alleges, “CSS was not qualified to design and implement the ERP System for All American. In fact, despite its claimed reputation of qualified aid and expertise ... CSS was completely and woefully incapable of delivering the final product.” (¶ 131).
In Florida to state a cause of action for negligent misrepresentation a plaintiff must allege that:
(1) The defendant made a misrepresentation of material fact that he believed to be true but which was in fact false;
(2) The defendant was negligent in making the statement because he should have known the representation was false;
(3) The defendant intended to induce the plaintiff to rely and [sic] on the misrepresentations; and
(4) Injury resulted to the plaintiff acting in justifiable reliance upon the misrepresentation.
Simon v. Celebration Co., 883 So.2d 826, 832 (Fla. 5th DCA 2004).
As I already noted, the Florida Supreme Court has specifically recognized negligent misrepresentation is an independent cause of action that falls outside the economic loss rule. I find (a) the Plaintiff has adequately pled a claim for negligent misrepresentation and (b) this claim is not barred by the economic loss rule. Therefore Count LIV, as it applies to CSS, is not dismissed.
d. Breach of Implied Warranty and the “Product” Requirement
CSS additionally seeks dismissal of the Plaintiffs breach of implied warranty claim on the basis that a breach of implied warranty claim is inapplicable to a contract for services, and, CSS argues, services are all it provided.26 The Plaintiff appears to *434concede that an action for breach of implied warranty requires that the defendant have provided goods; the Plaintiff argues that the Complaint adequately alleges that CSS agreed to provide, and that CSS actually provided, goods, because computer software programs are “goods” under the Uniform Commercial Code, and CSS was a merchant of programming products.
Because the Complaint does not include a copy of the agreement with CSS, I must look at how the Complaint describes what CSS agreed to provide to AASI. The Complaint alleges generally that CSS provided goods and services (¶¶ 125 and 126). However, the more detailed portions of the Complaint describe those goods and services as:
Specifically, CSS was hired to be the lead consultant on-site at All American, ensuring all the various elements, components, hardware and software were adequately integrating into the ERP system.
Goods are defined as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (chapter 678) and things in action.” Fla. Stat. § 672.105(1). Often contracts are both for goods and services. When faced with a “hybrid contract” Florida courts use the predominant factor test to determine whether a contract is for goods or services. BMC Industries, Inc. v. Barth Industries, Inc., 160 F.3d 1322, 1330-1331 (11th Cir.1998) (applying Florida law). Whether a contract is predominantly for goods or services is generally a question of fact, but when there is no genuine issue of material fact concerning a contract’s provisions, a court may determine the issue as a matter of law.27
The Complaint, in defining the contractual relationship between AASI and the CSS, describes the relationship solely in terms of services. Even if the contract between AASI and CSS included the sale of goods, in applying the predominant factor test, it is clear that, as pled, the primary purpose of the contract between AASI and CSS was for consulting services. The Plaintiff attempts to recharacterize the nature of the relationship between AASI and the CSS by referring to the services provided by CSS as “programming products.” Nonetheless, based on the descriptions in the Complaint of the agreement between CSS and AASI, there is no factual ambiguity; the nature of the “product” provided by CSS to AASI is a service.
Because AASI contracted with CSS for services, the Complaint fails to state a cause of action under Count XXI' — breach of implied warranty. Therefore, Count XXI is dismissed.
e. Breach of Warranty
Both Oracle and GGT seek dismissal of the Breach of Warranty counts.28 GGT seeks dismissal of Count XIV because, according to GGT, the Complaint contains no facts about what services GGT allegedly wrongfully performed or how those services allegedly contributed to the failure of the ERP system. In order to sustain an action for breach of warranty in Florida, the complaint must allege the facts in respect to sale of goods, the type *435of warranty created, the facts giving rise to the creation of the warranty, notice of breach, and injury. Dunham-Bush, Inc. v. Thermo-Air Service, Inc., 351 So.2d 351, 353 (Fla. 4th DCA 1977).
I have already noted that the Complaint failed to attach a copy of AASI’s contract with GGT. I have also already noted that, as drafted, the Complaint describes the contract with GGT as one that primarily, if not exclusively, provides for services. Moreover, while the Plaintiff appears to specifically describe those acts which could constitute a breach of warranty under a contract, nowhere does the Plaintiff describe what goods were to be provided, if any, how specifically those goods failed, and how those failures caused damage to AASI. Therefore, Count XIV is dismissed.
f. Lack of Specificity in Pleading the Fraudulent Transfer Claims
CSS, together with GGT and GSI by way of joinder, seek dismissal of the Plaintiffs claims under 11 U.S.C. § 548 (Count LV) and Fla. Stat. §§ 726.105(1)(B) and 726.108 (Count LVI) because the claims, as pled, are not facially plausible. CSS states that the Plaintiff fails to allege any of the circumstances surrounding the alleged transfer, and fails to allege when and how AASI became insolvent.
The Complaint alleges that all the transfers to each of the Defendants described in Exhibit A of the Complaint were paid in connection with the ERP System, and since the ERP System “completely failed and eviscerated the value of All American,” AASI did not receive reasonably equivalent value in exchange for the payments. Since this is the theory of recovery, that is, what AASI “bought” had no value, I find that this portion of the fraudulent transfer claim states a cause of action.
As for insolvency, while the Defendants are correct that the Complaint includes a recitation of the elements of insolvency, in Count LVI, ¶ 544, the Plaintiff also alleges “All American became insolvent as a result of the payments to the Defendants in connection with the ERP System.” There is no similar paragraph in Count LV.
Generally, insolvency is a factual determination not appropriate for resolution in a motion to dismiss. See e.g., Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 35 (2d Cir.1996) and Adelphia Commc’ns Corp. v. Bank of America, N.A. (In re Adelphia Commc’ns. Corp.), 365 B.R. 24, 37 (Bankr.S.D.N.Y. 2007). Nonetheless, Count LV makes no specific allegation of insolvency. Accordingly, Count LV is dismissed.
GGT, by way of joinder to Oracle’s Motion to Dismiss, also seeks dismissal of the fraudulent transfer claims because AASI, as Oracle claims, received reasonably equivalent value for the transfers. What is “reasonably equivalent value” is predominantly a factual determination. Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA Inc.), 680 F.3d 1298, 2012 WL 1673910 (11th Cir. May 15, 2012); Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588, 593 (11th Cir.1990). Accordingly, Count LVI is not dismissed.
g. Preferential Transfers Pursuant to 11 U.S.C. § 547
CSS seeks dismissal in part of the Plaintiff’s claim for recovery of certain preferential transfers. CSS argues that, according to Exhibit B of the Complaint, certain transfers to CSS occurred 98 days before AASI filed for bankruptcy, and therefore falls outside the 90 day preferen*436tial transfer period of 11 U.S.C. § 547. The Plaintiff responds that even though the check was issued on January 17, 2007 by AASI to CSS, 98 days prior to bankruptcy, the check did not clear until February 12, 2007, within the 90 day prejudice period, and that for purposes of section 547, it is the date a check clears that counts as the date of the transfer.
In Barnhill v. Johnson 503 U.S. 393, 394-95, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) the Supreme Court held that “a transfer by check is deemed to occur” on the date the drawee bank honors [the check], “not the date when the check is presented to the payee.” However, the Complaint relies on Exhibit B, which lists a check issue/wire date, and does not indicate a separate “honor date.” Therefore, on the face of the Complaint, it is not clear whether the date the payment was honored fell within or outside the preference period. Although Plaintiffs response states the payment was by check and honored within the preference period, those facts are not pled. Thus, on its face the Complaint fails to state a cause of action. Therefore, Count LVII is dismissed as to CSS.
GGT objects to the Plaintiffs preference claim against it, based on the ordinary course of business defense. The ordinary course defense to a preference action is an affirmative defense. Affirmative defenses are not properly considered on a motion to dismiss, unless the “complaint affirmatively and clearly shows the conclusive applicability of the defense to bar the action.” Jackson v. BellSouth Telecomm., 372 F.3d 1250, 1277 (11th Cir.2004). The Complaint does not conclusively establish that GGT is entitled to the ordinary course of business defense. Therefore, Count LVII is not dismissed as to GGT.
h. The Omnibus Objection to Claim does not Comply with Rule 3007.
CSS moves also to dismiss Count LVIII, the Plaintiffs objection to claim, because it does not meet the requirements of Federal Rule Bankruptcy Procedure 3007 or Local Rule 3007.1. CSS is correct. Therefore, Count LVIII is dismissed.
CONCLUSION
In summary, all the counts against Oracle, Counts I, XII, XXIV, XXXV, XLVI, LIV, LV, LVI, and LVII, are dismissed with prejudice with respect to Oracle. Counts XIV, XXI, XXV, XXVI, XXVII, XXXVI, XXXVII, XXXVIII, XLVII, XLVIII, XLIX, LVIII, and LV are dismissed with leave to amend.
There is no question that the ERP System failed. And there is no question that the failure is the fault of those responsible for providing the ERP System to AASI. However, the Plaintiff continues to suffer from an inability to describe properly what exactly it is that each remaining defendant was required to do, and at least, in general, describe how those particular obligations of that particular defendant were breached. I understand that, with respect to certain providers, it is difficult to describe in exhausting, technical detail, that which occurred or didn’t occur. Moreover, with respect to many parts of the Complaint, the Plaintiff has managed to meet the obligations of Federal Rules of Civil Procedure 8 and 12. And so, I will give the Plaintiff one more opportunity to get it right. Perhaps attaching copies of the operative agreements will be of some assistance to the Plaintiff and the remaining defendants, as well as myself, in determining what causes of action arising from what circumstances, are viable. Nonetheless, this is the last opportunity.
The Plaintiff will have 30 days from the date of this order to file a new amended *437complaint that corrects the deficiencies (if the facts make it possible) of the counts I have dismissed without prejudice. The remaining defendants shall have 21 days to file any response to what will now be the Third Amended Complaint.
. Motion of CSS, Inc. to Dismiss Counts XXI, XXV, XL VII, and LIV of Plaintiff's Second Amended Complaint Pursuant to Fed.R.Civ.P. 12(b)(6) and/or Fed.R.Civ.P. 9(b) (ECF # 363); Supplement to Motion of CSS, Inc. to Dismiss Plaintiff’s Second Amended Complaint Pursuant to Fed.R.Civ.P. 12(b)(6) (ECF # 463); Defendant Global Group Technologies, Inc.’s Motion to Dismiss the Second Amended Complaint (ECF # 364); Defendant Global Group Technologies, Inc.'s Notice of Filing (ECF # 462), Defendant GSI's Motion to Dismiss Counts XV, XXVII, XXXVIII, XLIV, LV and LVI of the Plaintiff's Second Amended Complaint (ECF # 459); Defendant Oracle USA Inc.’s Motion to Dismiss Second Amended Complaint for Failure to State a Cause of Action and Supporting Memorandum of Law (ECF # 464), Plaintiff's Response to Defendants’ Motion to Dismiss (ECF # 477)
. In In re All American Semiconductor, Inc., 2010 WL 2854153 (Bank.S.D.Fla. July 20, 2010), I dismissed the First Amended Complaint primarily due to the Plaintiff’s failure to specify which operative facts and claims were asserted against which defendants. In sum, the First Amended Complaint alleged that AASI had been ruined and that each of the named defendants had contributed to that ruin in some way; however the complaint did not specify how each defendant was responsible. In the motions to dismiss the Second Amended Complaint the Defendants once again raise issues relating to the precision of the allegations, arguing, as set forth in their various motions that the Second Amended Complaint still fails to meet the pleading standards required by Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Because I have granted the motions to dismiss on other grounds (except with respect to Count XIV, Count XXI, and Count LV) I will not address those issues in this opinion.
. GGT and GSI both join CSS's and Oracle’s motions to dismiss to the extent those motions seek to dismiss claims that are also applicable to GGT and GSI.
. See Supra note 1.
. Defendant GSI’s Reply to Plaintiff's Response to GSI's Motion to Dismiss Counts XV, XXVII, XXXVIII, XLIV, LV and LVI of the *424Plaintiff's Second Amended Complaint (ECF # 483); Defendant CSS, Inc.'s Reply to Plaintiffs Response to CSS, Inc.’s Motion to Dismiss (ECF # 490); and Defendant Oracle USA, Inc.’s Reply to Plaintiffs Response to Defendants' Motions to Dismiss (ECF # 495).
.The break-down of the counts in the Complaint by cause of action and party is listed below: Breach of Contract: (Count I — Oracle), (Count II — CSS), (Count III — GGT), and (Count IV — GSI). Breach of Warranty: (Count XII — Oracle), (Count XIII — CSS), (Count XIV — GGT), (Count XV — GSI). Breach of Implied Warranty: (Count XXI— CSS).
Strict Liability: (Count XXIV — Oracle), (Count XXV — CSS), (Count XXVI — GGT), (Count XXVII — GSI). Negligence: (Count XXXV — Oracle), (Count XXXVI — CSS), (Count XXXVII — GGT), (Count XXXVIII — GSI). Gross Negligence: (Count XLVI — Oracle), (Count XLVII — CSS), (Count XLVIII — GGT), (Count XLIX — GSI). Misrepresentation: (Count LIV — Oracle and CSS)
Avoidance and Recovery of Fraudulent Transfers under 11 U.S.C. §§ 548(a)(1)(B) and 550: (Count LV — All Defendants).
Avoidance and Recovery of Fraudulent Transfers under Fla. Stat. §§ 726.105(l)(b) and 726.108: (Count LVI — All Defendants).
Avoidance and Recovery of Preferential Transfers under 11 U.S.C. §§ 547(b) and 550: (Count LVII — CSS and GGT).
. The ERP System at no point in time worked properly.
. Oracle purchased PeopleSoft USA, Inc. (“PeopleSoft”) months after PeopleSoft contracted with the Plaintiff.
. Memorandum Opinion on Orders Granting in Part and Denying in Part Motions to Dismiss or Abstain Filed by Various Defendants (EOF # 280) (In re All American Semiconductor, Inc., 2010 WL 2854153 (Bankr.S.D.Fla. July 20, 2010)):
The Plaintiff also argues that the non-core and core matters are intertwined. The Defendants do not disagree, arguing however that the core proceedings are derivative of the state law issues. I agree. Indeed this underscores the inefficiency, if not the difficulty, of separating the core from the non-core claims, thereby making abstention inappropriate. .. .To the extent any jury trial demands survive the pretrial process, bifurcation can be effectuated immediately prior to trial.
(citations omitted).
. In the motions to dismiss that I addressed in my earlier opinion, no party questioned my jurisdiction over non-core claims. Nor did the District Court, affirming my decision, make any determination that my exercise of jurisdiction was inappropriate. Sirius Computer Solutions, Inc. v. AASI Creditor Liquidating Trust, 2011 WL 3843943 (S.D.Fla. Aug. 29, 2011). Since my prior opinion, and, in fact, subsequent to the filing of the Complaint and all the pleadings I have considered in connection with this opinion, the Ninth Circuit has decided Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553 (9th Cir.2012) ("Bellingham "). In Bellingham the Ninth Circuit held, based on Stern v. Marshall,-U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), that fraudulent conveyance actions, although identified as core proceedings in 28 U.S.C. § 157(b)(2)(H), *426nonetheless are not, generally, proceedings in which the bankruptcy court may enter a final judgment. However, whether the relief sought by Plaintiff in Counts LV, LVI and LVII are truly core, or core without final adjudicative authority, I have jurisdiction over these counts in accordance with 28 U.S.C. § 1334.
. Paragraph 13 of the License Agreement provides:
Except for actions for: (i) Licensee’s failure to assume its obligations for taxes; (ii) nonpayment of amounts owed to either party; or (iii) breach of People Soft’s or its li-censors’ rights in the Software or Documentation or either party’s Confidential Information obligations, no action, regardless of form, arising out of, relating to or in any way connected with the Agreement, Software, Documentation or Services provided or to be provided by PeopleSoft may be brought by either party more than one (1) year after the cause of action has accrued.
. The License Agreement is referenced in the Complaint, but is not attached. A copy of the License Agreement is attached to Oracle’s Motion to Dismiss. A document referenced in a complaint that is central to a plaintiff’s claim is considered part of the complaint for purposes of a Rule 12(b)(6) motion, even if such document is not physically attached to the complaint. Day v. Taylor, 400 F.3d 1272, 1276 (11th Cir.2005).
. Fla. Stat. § 95.03 provides that "[a]ny provision in a contract fixing the period of time within which an action arising out of the contract may be begun at a time less than that provided by the applicable statute of limitations is void.”
. The California statute of limitations is four years for an "action upon any contract, obligation or liability founded upon an instrument in writing....” Cal. C.C.P. § 337.
. See e.g., Morning Star Packing Co., L.P. v. Crown Cork & Seal Co. (USA), Inc., 303 Fed.Appx. 399, (9th Cir.2008) (Applying California law, the reduction of a statute of limitations period to one year was enforceable); Moreno v. Sanchez, 106 Cal.App.4th 1415, 1440, 131 Cal.Rptr.2d 684 (2003) ("California courts have uniformly enforced provisions shortening the four-year statutory limitations period for breach of a written contract ... to one year.” (citations omitted)); C & H Foods Co. v. Hartford Ins. Co., 163 Cal.App.3d 1055, 1064, 211 Cal.Rptr. 765 (1984) ('"[a] covenant shortening the period of limitations is a valid provision of an insurance contract and cannot be ignored with impunity as long as the limitation is not so unreasonable as to show imposition or undue advantage. One year was not an unfair period of limitation.’ ” (citations omitted)); Girardi v. Princess Cruises, No. B217192, 2010 WL 3310360, at *4 (Cal.App. 2d Dist. Aug. 24, 2010) (“[0]ne-year limitations have been upheld repeatedly by the courts as reasonable and fair.”).
. The AASI bankruptcies were filed on April 25, 2007.
. Because I find that the statute of limitations in the License Agreement bars all the claims against Oracle in the Complaint, I do need not address Oracle’s other arguments for dismissal.
. In their respective motions to dismiss GGT and GSI adopt by reference the arguments raised by CSS in its motion to dismiss.
. The count for misrepresentation only seeks relief against CSS and Oracle.
. Economic damages are “ 'disappointed economic expectations,' which are protected by contract law, rather than tort law.” Casa Clara Condominium Ass’n v. Charley Toppino & Sons, Inc., 620 So.2d 1244, 1246 (Fla.1993) ("Casa Clara ”) (citations omitted).
. When parties are in contractual privity, the purpose of the economic loss doctrine is to "prevent parties to a contract from circumventing the allocation of losses set forth in the contract by bringing an action for economic loss in tort.” Indemnity Insurance, 891 So.2d at 536. "[Pjarties to a contract have allocated the economic risks of nonperformance through the bargaining process ... [a] party to a contract who attempts to circumvent the contractual agreement by making a claim for economic loss in tort is, in effect, seeking to obtain a better bargain than originally made.” Id. With respect to product liability actions, "the economic loss rule ... prohibits tort recovery when a product damages itself, causing economic loss, but does not cause personal injury or damage to any property other than itself.” Casa Clara, 620 So.2d at 1246. This exception was "developed to protect manufacturers from liability for economic damages caused by a defective product beyond those damages provided for by warranty law.” Indemnity Insurance, 891 So.2d at 538.
. Florida law applies to the tort claims because the torts are alleged to have occurred in Florida (Complaint ¶ 27). Absent a significant relationship to another state, "[t]he state where the injury occurred would, under most circumstances, be the decisive consideration in determining the applicable choice of law.” Bishop v. Fla. Specialty Paint Co., 389 So.2d 999, 1001 (Fla.1980). I further note that none of CSS, GTI, GGT have argued that Florida law does not apply or that a different state has a more significant relationship to the alleged tortious acts.
.There were two certified questions considered by the Florida Supreme Court:
1) Where a purchaser of a home contracts with an engineering corporation, does the purchaser have a cause of action for professional malpractice against an employee of the engineering corporation who performed the engineering services?
2) Does the economic loss rule bar a claim for professional malpractice against the individual engineer who performed the inspection of the residence where no personal injury or property damage resulted?
. Fla. Stat. § 621.07 and § 471.023.
. "[BJecause actions against professionals often involve purely economic loss without any accompanying personal injury or properly damage, extending the economic loss rule to those cases would effectively extinguish such causes of action." Id. at 983.
. CSS, together with GGT and GSI by virtue of their joinder, also argue that the counts for strict liability cannot stand because an action based on strict liability requires that a defendant provide goods, not services. Because I already dismissed the strict liability counts (Count XXV, Count XXVI, and Count XXVII) based on the economic loss rule, I will not address these counts here. However, having ruled that based on the allegations of the *434Complaint, the primary purpose of the applicable agreements was to provide services, not goods, the strict liability counts would be dismissed on these grounds as well.
. See Allmand Assocs., Inc. v. Hercules Inc., 960 F.Supp. 1216, 1223 (E.D.Mich.1997)
. Oracle’s Motion to Dismiss is granted for the reasons stated above. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496329/ | OPINION AND ORDER
SUSAN D. BARRETT, Chief Judge.
Débtor’s Motion to Waive Reopening Fee having been read and considered is denied. While waiver of the reopening fee is authorized under “appropriate circumstances,” the reasons cited by Debtor do not constitute appropriate circumstances. See 28 U.S.C. § 1930(f)(2) and (3); Bankruptcy Court Miscellaneous Fee Schedule ¶ 11 reprinted in 28 U.S.C. § 1930. First, Debtor failed to establish that she falls within the in forma pauperis status of 28 U.S.C. § 1930(f). See In re Baumler, 2010 WL 3239354, *2 (Bankr.N.D.Ohio Aug. 16, 2010)(stating the debt- or had failed to submit evidence that the debtor would meet the requirements for proceeding in forma pauperis). Second, Debtor has not provided grounds for the waiver. Lack of funds to pay the fee is not the sole consideration for determining “appropriate circumstances.” • Id.; In re Miskimon, 2006 WL 3194075, *3 (Bankr.D.Md. Oct. 24, 2006)(rejecting waiver of the reopening fee in cases in which the debtor’s income would have made the debtor eligible to apply for a waiver where the debtor provided no explanation as to why the debtor failed to file the certificate within the allotted time); Bankruptcy Court Miscellaneous Fee Schedule ¶ 11 reprinted in 28 U.S.C. § 1930 (“The reopening fee must be charged when a case has been closed without a discharge being entered.”).
Certain responsibilities and obligations accompany the fresh start provided by a bankruptcy discharge and one of these responsibilities is to timely tender evidence of debtor’s completion of the personal financial management course. See 11 U.S.C. § 111 and § 727(a)(ll); Fed. R. Bankr.P. 1007(b)(7). Pursuant to Bankruptcy Rule 1007(c), Debtor was required to file a statement of her completion of the course concerning personal financial management within 60 days after the first date set for the meeting of creditors, in this case August 5, 2013. Fed. R. Bankr.P. 1007(c); Dckt. No. 9; Dckt. No. 35 (Clerk’s Entry noting the Financial Management Certificate was due August 5, *3832013). There is no evidence that Debtor is not responsible for the failure to timely file the certificate. Under these circumstances, waiving the reopening fee is inappropriate. See e.g. In re Baumler, 2010 WL 3239354, at *2; In re Miskimon, 2006 WL 3194075, at *3; In re Deterville, 2012 WL 1509148 (Bankr.M.D.Fla. April 30, 2012)(finding waiver appropriate where the debtor’s failure to complete the financial management course was due to being called to active military service).
For these reasons, Debtor’s Motion to Waive the Reopening Fee is ORDERED denied. Debtor shall tender the fee to the Clerk’s office within 14 days of the entry of this order or her Motion to Reopen shall be denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496333/ | CARL L. BUCKI, Chief Judge.
In complaints with multiple causes of action, plaintiffs have traditionally included into each successive cause of action an initial paragraph that incorporates all of the prior allegations. See Citibank v. Hyland (In re Hyland), 213 B.R. 631 (Bankr.W.D.N.Y.1997). The debtor in this case followed this practice in drafting a complaint that challenges the validity of premiums for private mortgage insurance. On the present motion, the mortgagee and insurer seek the dismissal of two causes of action: one that alleges a violation of New York Insurance Law § 6504(c) and another that alleges a violation of New York Banking Law § 6-Z. Even if these causes of action do not state a “stand alone” basis for relief, an incorporation of prior allegations into the later cause of action will serve to deny the motion of the mortgagee.
The parties do not dispute many of the essential facts of this case. On June 28, 2006, Amy B. Hamm purchased her residence at 9587 Quebec Street in the Town of Angola, New York. On that same day, she also executed a note and mortgage in favor of Century 21 Mortgage, an entity now known as PHH Mortgage Corporation (“PHH”). The note stated a principal obligation of $139,600, which Hamm agreed to repay with interest at a rate of 8.094%, by means of monthly payments in the amount of $1,033.50. Because the note financed the entire purchase price of the home, the mortgagee required as a condition for its lending that Amy Hamm also procure private mortgage insurance. This private mortgage insurance was issued by United Guaranty Mortgage Indemnity Company (“United Guaranty”), which then charged a monthly insurance premium of $486. Meanwhile, to reduce its exposure, United Guaranty purchased reinsurance coverage from Atrium Insurance Corporation. The *407defendants acknowledge that Atrium is a subsidiary of PHH.
After Amy Hamm defaulted in making payments due under the note, PHH commenced foreclosure proceedings in August 2010. Before a foreclosure sale could occur, however, Hamm filed a petition for relief under Chapter 13 of the Bankruptcy Code on May 9, 2011. Then in October of 2011, Hamm commenced an adversary proceeding against PHH, United Guaranty and the Federal National Mortgage Association. Previously, the court dismissed all claims against the Federal National Mortgage Association, and nine of the original thirteen causes of action have either been withdrawn or dismissed. In their present motions, PHH and United renew requests to dismiss the fourth and sixth causes of action.
The debtor’s fourth cause of action alleges a violation of Insurance Law § 6504, which prohibits a mortgage insurer from paying various forms of compensation to affiliates of an insured lender. In particular, the statute states that “[i]n connection with the placement or renewal of any insurance, a mortgage insurer shall not permit any compensation to be paid to, or received by: any insured lender ... or other entity in which an insured ... has a financial interest.” N.Y. Ins. Law § 6504(c) (McKinney, 2000). In the present transaction, United Guaranty and PHH are respectively the mortgage insurer and insured lender. Hamm argues that by reason of its payment of reinsurance premiums to Atrium, United Guaranty violated the prohibition against payment of compensation to an entity in which the insured has a financial interest. Consequently, Amy Hamm now seeks an order prohibiting the collection of any premiums for private mortgage insurance, awarding damages equal to the sums that she already paid for such insurance premiums, and reducing the mortgage balance to the extent that it includes any such insurance premiums.
In her sixth cause of action, the debtor seeks damages for an alleged violation of New York Banking Law § 6-1, which imposes special underwriting and disclosure requirements for high-cost home loans. Hamm argues that under the facts of the instant case, the private mortgage insurance premiums represent a cost that should qualify her mortgage as a high-cost loan. She further contends that PHH violated the mandates of Banking Law § 6-1, in that it made the loan without regard to the debtor’s ability to pay and without the delivery of various notices to the debtor. By reason of these alleged violations, Amy Hamm seeks damages equal to all payments made on account of the note, together with an order enjoining PHH from enforcing its mortgage.
United Guaranty and PHH have filed separate motions to dismiss. Together, these motions present four principal arguments: that the filed-rate doctrine precludes any claim under Insurance Law § 6504; that section 6504 establishes no private right of action; that Banking Law § 6-1 exempts premiums for private mortgage insurance as a cost factor; and that the voluntary payment doctrine bars any cause of action to secure a return of payments made.
The filed-rate doctrine is a “rule forbidding a regulated entity ... to charge a rate other than one on file with the appropriate ... regulatory authority.” Blaok’s Law DictionaRY 704 (9th ed. 2009). PHH argues that the New York Insurance Department must approve rates for private mortgage insurance and reinsurance; that United Guaranty and Atrium charged only the rates that were so approved; and that because these rates complied with applicable regulations, Amy Hamm may *408not now challenge the premiums that she paid. This argument, however, does not address any issue that is now before this court. The plaintiff does not challenge the rate used to calculate her premiums, but argues instead that in choosing a reinsurer, United Guaranty violated a prohibition against payment of compensation to an entity that is affiliated with PHH. As to this issue, the filed-rate doctrine has no relevance.
Amy Hamm adequately alleges a violation of Insurance Law § 6504. That violation, however, does not necessarily create a basis for liability. Section 6504 merely imposes a prohibition that the Insurance Department may enforce. Otherwise, the statute does not establish any private right of action. See Walts v. First Union Mortgage Corp., 259 A.D.2d 322, 686 N.Y.S.2d 428 (1st Dept.1999), aff'g Bauer v. Mellon Mortgage Co., 178 Misc.2d 234, 680 N.Y.S.2d 397 (Sup.Ct.1998). Nor does the plaintiff advance any other theory for liability under section 6504, such as by reason of civil conspiracy or otherwise. Standing alone, therefore, the fourth cause of action fails to assert a basis for relief.
The sixth cause of action is different, in that its statutory predicate expressly allows a private right of action. Banking Law § 6-1 (5) provides that “any party to a high-cost loan may enforce the provisions of this section.” Further, the statute allows a borrower to recover from her lender both actual and statutory damages, as well as “reasonable attorneys’ fees.” N.Y. Banking Law §§ 6-1 (7) and (8)(McKinney Supp.2011). Acknowledging that the statute may establish a private right, PHH contends nonetheless that the disputed note does not qualify as a high-cost home loan.
Banking Law § 6-1 (l)(d) defines a “High-cost home loan” as a home loan that exceeds either of two statutory thresholds. The plaintiff relies upon the second such threshold, which occurs when the total points and fees surpass “five percent of the total loan amount if the total loan amount is fifty thousand dollars or more.” N.Y. Baniíing Law § 6-1 (l)(g)(ii)(McKinney Supp.2011). The debtor concedes that her loan will meet this standard only if we treat at least the reinsurance portion of her private mortgage insurance as a point or fee. Incorporating a portion of the federal definition of finance charges, Banking Law § 6-1 (l)(f)(i) states that “points and fees” include the first four of six items listed in 15 U.S.C. § 1605(a). Hamm argues that the reinsurance portion of her premium qualifies under the first category as an “amount payable under a ... system of additional charges.” 15 U.S.C. § 1605(a)(1). PHH counters that 15 U.S.C. § 1605(a)(5) references a “Premium or other charge for any guarantee or insurance protecting the creditor against the obligor’s default or other credit loss.” Because the definition of fees and points expressly includes only the items listed in section 1605(a)(1) through (4), PHH contends that by implication, premiums for private mortgage insurance are excluded.
For purposes of statutory interpretation, New York law recognizes the principle that expressio unius est exclusio alter-ius. “That is, to say, the specific mention of one person or thing implies the exclusion of other persons or thing.” N.Y. Stat. Law § 240 (McKinney 1971). By declining to include premiums for private mortgage insurance into the definition of fees and points, the Banking Law excludes the consideration of any such legitimate expense. In the present instance, the debtor’s sixth cause of action incorporates the allegations of the fourth cause of action arising under the Insurance Law. Although it might not establish a private *409right of action, Insurance Law § 6504 serves to identify whether a contract qualifies to establish a cognizable and legitimate policy of private mortgage insurance. To the extent that the private mortgage insurance does not here comply with the mandates of Insurance Law § 6504, its premiums may not fully qualify for the exclusion from the total of points and fees needed to establish liability under the high-cost home loan provisions of Banking Law § 6-1.
The requirements of Insurance Law § 6504 coincide with the practical and mortgage insurance can serve legitimately to reduce the risk of default. Similarly, reinsurance can serve legitimately to reduce the exposure that the primary insurer would otherwise assume. But when the reinsurer is itself the lender or its affiliate, that lender effectively re-assumes the very risk that private mortgage insurance was designed to dissipate. In some such circumstances, the reinsurance will negate the purpose of private mortgage insurance, thereby allowing an assumption of risks that law and/or prudence would reject. Essentially, the “private mortgage insurance” loses its character as insurance, but becomes a device whereby the lender derives additional compensation. This is not to say that captive reinsurance arrangements will necessarily represent an illegitimate transfer of risk in every instance. See Circular Letter No. 2, N.Y. Insurance Department, Feb. 1, 1999.1 For now, it suffices to conclude that Amy Hamm should be allowed opportunities at trial to demonstrate whether to incorporate reinsurance premiums into the calculation of the cost of a high-cost loan.
PHH argues also that because the debt- or paid premiums voluntarily and without protest, she lacks the ability now to challenge those payments. When a statute merely prohibits certain activity, this voluntary payment doctrine might preclude a claim for the return of any voluntary advances. Banking Law § 6-1 does more, however, in that it expressly creates a cause of action to recover damages, including specifically a refund for “any amounts paid.” N.Y.BaNking Law § 6-1 (7)(b)(McKinney 2011). Consequently, to the extent that Amy Hamm can establish a violation of the statute, Banking Law § 6-i will allow a recovery of payments made voluntarily.
Banking Law § 6-i imposes liability upon lenders and not upon mortgage insurers. Presumably for this reason, the debtor’s sixth cause of action does not seek recovery from United Guaranty. Accordingly, with regard to United Guaranty, the debtor’s fourth cause of action stands alone. Because Insurance Law § 6504 does not establish a private cause of action, the court will grant the motion of United Guaranty to dismiss the only outstanding claim against it. In contrast, by reason of the incorporation of all prior allegations into the sixth cause of action, the fourth and sixth causes of action stand together to state a cause of action as against PHH. Although Hamm must still prove several *410essential elements of her claim, she adequately asserts that Insurance Law § 6504 may serve to identify costs that necessitate the application of Banking Law § 6-1. Accordingly, the motion of PHH to dismiss those causes of action is denied.
So ordered.
. In Circular Letter No. 2, the Insurance Department states that it "has reviewed and reconsidered Sections 2324(a) and 6504(c) of the Insurance Law and has determined that under certain circumstances lender captive reinsurance arrangements do not fall within the prohibitions articulated in those statutes.” By implication, this letter acknowledges that in certain other circumstances, section 6504 would prohibit such arrangements. The Department further stated that it was "in the process of developing guidelines and, if appropriate, a regulation which will articulate the parameters under which these reinsurance arrangements will be permitted.” To the best of the court’s awareness, no such guidelines or regulations have been issued during the fourteen years that have passed since the issuance of Circular Letter No. 2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496334/ | MEMORANDUM OF DECISION
Determining Amount and Administrative Priority of Storage Charges, Overruling the Debtor’s Objection to the Ac-countings, and Fixing Allowed Amount of the Storage Company Claims
COLLEEN A. BROWN, Bankruptcy Judge.
This Court previously determined that the Sheriffs of Rutland and Washington county were custodians for purposes of this case because they levied machinery belonging to R. Brown & Sons, Inc. (the “Debtor”), and had control and possession of that machinery on the date the Debtor filed this bankruptcy case. The Court also determined that the two companies that stored the levied property, LaRoche Towing & Recovery, Inc. and New England Quality Service, Inc., d/b/a Earth Waste & Metal Systems, acted as the custodians’ agents and therefore had the same rights and responsibilities as the custodians for purposes of the Bankruptcy Code. The questions now before the Court with respect to the custodians and their agents are whether the charges relating to the levy and storage of the Debtor’s equipment must be paid in this bankruptcy case, and if so, whether the full amount set forth in the accountings must be paid and with what priority. Additionally before the Court are the Debtor’s motions to determine the amount and priority of the pre-petition and post-petition storage charges. The Debtor asserts the charges the custodians’ agents seek are unreasonable and should therefore be disallowed.
For the reasons set forth below, the Court determines that, with respect to the accountings: (1) LaRoche Towing & Recovery, Inc. and Earth Waste & Metal Systems must be paid pursuant to 11 U.S.C. § 543; (2) all charges entitled to payment under § 543 are entitled to administrative expense priority under § 503, if they were actually and necessarily incurred and are reasonable; and (3) La-Roche Towing & Recovery, Inc. and Earth Waste & Metal Systems have demonstrated that the sums they seek meet these criteria. Therefore, the Court overrules the Debtor’s objection to the accountings. With respect to the Debtor’s motion for allowance of claims, the Court allows both LaRoche Towing & Recovery, Inc.’s and Earth Waste & Metal Systems’ charges, with administrative expense priority under §§ 503 and 507, subject to the Debtor’s right to timely seek an offset for any damage the storage companies caused to the stored equipment.
I. JURISDICTION
This Court has jurisdiction over these contested matters pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered by Chief Judge Christina Reiss on June 22, 2012. This Court declares these contested matters, relating to treatment of custodian charges under § 543 and allowance of the storage companies’ claims under § 502, to be core proceedings under 28 U.S.C. § 157(b)(2)(A) and (E) and § 157(b)(2)(B), respectively. The Court further declares it has authority to enter a final judgment in each of these core proceedings.
II. PROCEDURAL BACKGROUND
On February 7, 2013, judgment creditor Rathe Salvage, Inc. (“Rathe”) obtained a writ of possession for ten pieces of the Debtor’s machinery and equipment, valued *429at approximately $400,000 (the “Equipment”). On or about March 16, 2013, the Rutland and Washington county Sheriffs (the “Sheriffs”) levied the property, pursuant to 12 V.S.A. § 2731. Thereafter, at Rathe’s direction, the pieces of equipment that had been at the Debtor’s Moretown location (in Washington county) were stored with LaRoche Towing & Recovery, Inc. (“LRT”) in Barre, Vermont (in Washington county), and the pieces of equipment that had been at the Debtor’s Pitts-ford location (in Rutland county) were stored with Earth Waste & Metal Systems (“EWS”) in Castleton, Vermont (in Rut-land county). According to the account-ings (doc. ##71, 76), EWS and LRT charged $50 to $100 per day to store each piece of equipment. EWS’s accounting shows a total cost of $55,100, with $45,125 due for pre-petition charges, and $9,975 due for post-petition charges. LRT’s accounting shows a total cost of $29,000, with $23,750 due for pre-petition charges, and $5,500 due for post-petition charges.1
The Debtor, a scrap metal recycling and transporting business, filed a petition under Chapter 11 of the Bankruptcy Code (doc. # 1) on June 18, 2013. The Debtor filed an emergency motion for turnover (doc. # 17) on June 21, 2013, seeking return of the Equipment, which the Debtor alleged was vital to operation of its business. On July 9, 2013, the Debtor and Rathe entered into a stipulation (doc. # 34) (the “Stipulation”) which resulted in the turnover of the Equipment to the Debtor. The Stipulation includes the following terms:
(a)EWS and LRT would release all seized equipment except the 2008 Lincoln Towncar (titled in the name of Robert Brown, individually);
(b) the Debtor would have full use of the remaining nine pieces of equipment, subject to the restrictions imposed by the Bankruptcy Code and the execution lien of Rathe;
(c) the Towncar could be moved to a location determined by Rathe, where no further storage fees would accrue;
(d) Rathe would not schedule a sale until after August 31, 2013, but unless there was a Court order directing otherwise, it could sell the Towncar anytime after August 31, 2013;
(e) the Debtor would immediately give a certified check to Rathe for $10,000, to be applied toward storage fees, pro rata, with the issue of whether the storage fees are reasonable, and with what priority they shall be paid, to be determined by this Court;
(f) the Debtor would not oppose allowance of all post-petition storage fees as administrative expenses to the extent approved by this Court;
(g) the Debtor would pay $750 per week to Rathe as adequate protection payments, commencing on July 10, 2013;
(h) the Debtor would file a disclosure statement and Chapter 11 plan by July 31, 2013, and the plan would pay a 100% dividend to all creditors, with failure of the Debtor to comply with these requirements constituting grounds for Rathe to seek dismissal or conversion of this case and proceed with an immediate sale of Mr. Brown’s Towncar;
*430(i) Rathe would retain its lien on the Equipment as it existed on the date of the bankruptcy filing and could file a copy of the Stipulation in any public office it deemed necessary to perfect and protect its interest in that Equipment;
(j) the Debtor would purchase and retain insurance on the Equipment in the amount of at least $400,000, name Rathe as a loss payee on the policy insuring the Equipment, and provide Rathe with proof of such insurance; and
(k) the Debtor reserved the right to seek a credit, against storage fees, for any damage LRT or EWS caused to the Equipment.
(see doc. # 34). The U.S. Trustee, as well as all non-insider creditors, consented to entry of the Stipulation (doc. ##36, 42 and electronic consent filed July 9, 2013). The Court entered an Order approving the Stipulation on July 9, 2013 (doc. # 39).
On July 16, 2013, the Debtor filed motions for determination and allowance of pre-petition and post-petition storage claims of EWS and LRT (doc. ## 44, 45), disputing the reasonableness of the fees that both entities were seeking. Rathe filed a response (doc. # 54) asking the Court to allow the storage companies’ charges in full and grant those charges administrative expense priority to the extent permitted by the Bankruptcy Code. Following a hearing on July 23, 2013, this Court issued a memorandum of decision with accompanying order (doc. ## 62, 63) finding:
(l) the Sheriff of Rutland and the Sheriff of Washington county are “custodians” in this case, as that term is defined in 11 U.S.C. § 101(11), and therefore, each is required to perform the duties of a custodian as set out in the Bankruptcy Code and Rules;
(2) Earth Waste & Metal Systems, and LaRoche Towing and Recovery, Inc. are agents of these custodians for purposes of this bankruptcy case;
(3) these four entities must each file an accounting in satisfaction of the requirements of § 543 and Bankruptcy Rule 6002; and
(4) these four entities are entitled to reimbursement and compensation, pursuant to § 543(c)(2), to the extent they apply for it and demonstrate that the sums they seek are reasonable.
That ruling (doc. ## 62, 63) also directed each of the four entities to file a statement establishing the reasonableness of the sums they included in their accountings.
Subsequently, LRT filed a motion for reconsideration and memorandum of law in support thereof (doc. ##74, 88), advancing two arguments. First, LRT argued that the Court erred in making a factual finding that the Sheriffs hired LRT and EWS to store the seized equipment. In support of this argument, LRT relied on affidavits from both Washington county Sheriff W. Samuel Hill and the owner of LRT affirming that it was Mr. Rathe who contacted LRT to make the arrangements for towing and storage, and when LRT contacted Sheriff Hill asking to whom the bill should be sent, Sheriff Hill advised him to bill Rathe. Second, LRT argued that the Court’s decision would have a deleterious effect on Vermont’s system of enforcing writs of execution, newly placing responsibility for the costs of execution on Sheriffs, rather than the judgment creditors.
On August 23, 2013, the Court denied LRT’s motion for reconsideration (doc. ## 96, 97). In its memorandum, the Court stated:
*431It is not the role of this Court to determine the rights the Sheriffs and/or the storage companies might have against Rathe, whether Rathe entered into a contract with the storage companies assuming liability for their services, or whether Sheriffs acting under the pertinent Vermont statute may seek reimbursement or compensation from parties other than the judgment debtor ...
Whether some other party may have secondary or contingent liability for the storage fees or other expenses the Sheriffs incurred in carrying out their levy on the Debtor’s equipment does not alter this Court’s determination that the storage companies were acting as the Sheriffs’ agents in storing the equipment. The statute is clear that the duty to keep the property safe through the date the property is sold or the execution is satisfied falls squarely and solely on the custodian (here, the Sheriffs) ...
Accordingly, the Court’s order designating EWS and LRT as agents of the custodian for purposes of § 543 stands
(doc. # 96, p. 4-6).
Both LRT and EWS have filed account-ings (doc. ## 71, 76). Neither of the Sheriffs has filed an accounting; each of them has indicated that his claim was paid in full by Rathe2 (doc. ##84, 85). The Debtor filed a response to the accountings (doc. # 86) objecting to the sums LRT and EWS seek, describing the charges as unreasonable, and asking the Court to disallow them (the “Debtor’s Objection to Ac-countings”).
On August 27, 2013, the Court conducted an evidentiary hearing regarding both the sufficiency and import of the storage companies’ accountings, and the Debtor’s motions for determination and allowance of pre-petition and post-petition storage claims. The evidence and arguments regarding both the accountings and claims allowance motions focused primarily on the reasonableness of the storage companies’ charges. Six witnesses testified and both LRT and the Debtor introduced documentary evidence. At the conclusion of the hearing, the Court offered the parties the opportunity to file memoranda of law and all parties declined. Accordingly, the matter is fully submitted.
III. ISSUES PRESENTED
These contested matters raise four overlapping issues. First, does § 5433 require that LRT and EWS, as agents of the custodians, be paid in this bankruptcy case? Second, if so, what is the proper classification of those pre-and post-petition charges under the Bankruptcy Code? Third, which party bears the burden of proof, what is that burden, and has that party satisfied it? Fourth, what role does the pertinent state statute play in this Court’s allowance of the levy-related charges in this bankruptcy case?
TV. DISCUSSION
A. The Controlling Statutes
In addressing the rights and duties of custodians and their agents, the controlling provision of the Bankruptcy Code is § 543, and it provides, in pertinent part:
*432Turnover of property by a custodian
(a) A custodian with knowledge of the commencement of a case under this title concerning the debtor may not make any disbursement from, or take any action in the administration of, property of the debtor, proceeds, product, offspring, rents, or profits of such property, or property of the estate, in the possession, custody, or control of such custodian, except such action as is necessary to preserve such property.
(b) A custodian shall—
(1) deliver to the trustee any property of the debtor held by or transferred to such custodian, or proceeds, product, offspring, rents, or profits of such property, that is in such custodian’s possession, custody, or control on the date that such custodian acquires knowledge of the commencement of the case; and
(2) file an accounting of any property of the debtor, or proceeds, product, offspring, rents, or profits of such property, that, at any time, came into the possession, custody, or control of such custodian.
(c) The court, after notice and a hearing, shall—
(1) protect all entities to which a custodian has become obligated with respect to such property or proceeds, product, offspring, rents, or profits of such property;
(2) provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian; and
(3) surcharge such custodian, other than an assignee for the benefit of the debtor’s creditors that was appointed or took possession more than 120 days before the date of the filing of the petition, for any improper or excessive disbursement, other than a disbursement that has been made in accordance with applicable law or that has been approved, after notice and a hearing, by a court of competent jurisdiction before the commencement of the case under this title.
11 USC § 543(a)-(c) (emphasis added). The pertinent provision of state law which guides this Court’s application of § 543 to the instant facts sets out the process for post-judgment levies on personal property:
Levy on Personal Property
When the execution with costs is not paid on demand the officer shall levy the same upon the goods or chattels of the debtor or such as are shown him by the creditor, and the same shall be safely kept by the officer at the debtor’s expense, until sold or the execution is otherwise satisfied.
12 V.S.A. § 2731.
B. The Accountings
The issues at bar with respect to the two accountings present a question of first impression in this District, the state law aspects of which have not been addressed by the Vermont Supreme Court and the bankruptcy law aspects of which have no jurisprudence directly on point. One recent bankruptcy case, however, has remarkably similar facts and is therefore quite instructive. In In re Ohakpo, 494 B.R. 269 (Bankr.E.D.Mich.2013), the following events occurred pre-petition: (1) the state court issued an order directing a court officer to seize property of one of the debtors and sell it to satisfy a judgment; (2) the officer seized two vehicles from the debtors’ residence; (3) the officer hired *433two towing companies to remove the vehicles from the debtors’ residence and then store the vehicles until they could be sold; (4) the officer posted a notice of sale advertising sale of the vehicles pursuant to state law; (5) the debtors filed bankruptcy before the vehicles could be sold; (6) upon that filing, the debtors’ attorney requested of the officer and judgment creditor that the vehicles be returned; and (7) post-petition, the officer turned over the vehicles to the Chapter 7 trustee.
The bankruptcy court set forth a thorough and methodical analysis that included four inquiries that are applicable here: (a) whether the court officers who levied the property were “custodians” for purposes of the Bankruptcy Code; (b) whether it was the court officer, or the towing company he employed to carry out the levy, that was eligible to be paid as a custodian; (c) whether state law authorized payment of the costs associated with the levy under the facts presented; and (d) whether the amount the custodian claimed satisfied the legal criteria for treatment as an administrative expense. The Ohakpo court found that first, the court officers who levied the property were “custodians” for purposes of § 543; second, since the court officer had already paid the towing companies, the court officer was the party entitled to payment under § 543(c); third, Michigan law does not permit a levying court officer to be paid unless and until the property is sold; and fourth, to qualify as an administrative expense under § 503(b)(3)(E), the amount due must have been actually incurred, necessary and reasonable, and the services underlying the charges must have benefited the estate. The Ohakpo holding does not answer the questions presented here because the salient Vermont statute is materially different from the Michigan statute, and the legal positions advocated by the parties at bar are quite dissimilar to the positions taken by the Ohakpo parties. However, since the facts in Ohakpo are so close to the facts underlying the legal issues raised here, and the same bankruptcy statutes and principles govern the issues presented in the two cases, that case provides useful guideposts for exploring the terrain the parties find themselves in.
1. § 543 Requires that the Sheriffs’ Agents be Paid Through This Bankruptcy Case.
(i) The Sheriffs are custodians, and LRT and EWS are their agents, for purposes of § 5J$.
The Ohakpo court engaged in a thorough analysis of what constitutes a custodian under the Bankruptcy Code. Based on the definition of custodian in § 101(11)4 of the Code, the Ohakpo declared that to be a custodian one must be an “agent under applicable law,” acting pursuant to an appointment or authorization to take charge of the property of the debtor, and take charge of the debtor’s property “for the purpose of enforcing a lien against such property, or for the purpose of general administration of such property for the benefit of the debtor’s creditors.” 494 B.R. at 277-78. After an examination of the evidence and relevant Michigan statutes, the court concluded *434that the officer there was an agent of the state court, which appointed and authorized him to act as a court officer; that the state court order authorized the court officer to seize the debtor’s property; and the seizure was for the purpose of enforcing a lien against the debtor’s property.5
Here, the analysis is equally straightforward. As set out in this Court’s memorandum of decision dated July 26, 2013, and further detailed in its subsequent memorandum of decision dated August 23, 2013 (doc. # 96), the relevant state statute is clear:
The controlling Vermont statute is unequivocal that the judgment debtor is responsible for the costs of the levy and of the safe keeping of property upon which the designated officer (here, the county sheriff) levies, and the officer is charged with the duty of levying upon and protecting the property:
Levy on Personal Property: When the execution with costs is not paid on demand the officer shall levy the same upon the goods or chattels of the debtor or such as are shown him by the creditor, and the same shall be safely kept by the officer at the debtor’s expense, until sold or the execution is otherwise satisfied.
12 V.S.A. § 2731 (emphasis added).
(doc. # 96, p. 5).
Based on an analysis similar, though not identical, to that of the Ohakpo court, this Court found that the custodians in this case are the Rutland county Sheriff and the Washington county Sheriff who, acting pursuant to the state court writ of execution, seized and took charge of the Debt- or’s property for the purpose of enforcing Rathe’s lien against it. The Court further found that the Sheriffs entered into arrangements with EWS and LRT to store the Equipment, and that, until it was released, EWS and LRT were responsible for the storage of the Equipment. Although the parties later demonstrated that Rathe, rather than the Sheriffs, made the arrangements with EWS and LRT, this does not change the Court’s conclusion that EWS and LRT are agents of the Sheriffs with respect to possession and storage of the Equipment, because it was they who effectuated the custodial duties that the state statute imposes upon the Sheriffs.
(ii) As agents of the custodian, LRT and EWS are entitled to payment in this case, under § 5b§.
The Vermont statute makes clear that the judgment debtor is liable for the costs of safe-keeping the property upon which the court officer has levied. As of the petition date, the Sheriffs had not paid their agents. Therefore, as of the petition date, the Debtor owed the agents for all charges relating to the levy upon, and storage of, the Equipment. The pertinent bankruptcy statute is also clear: under § 543, any custodian in possession of property of the estate on the date of the filing of the petition must turn over that property to the trustee and file an accounting. See 11 U.S.C. § 543(b)(1). The agents were in possession of the Debtor’s property on the date of the filing and were thus required to release the Equipment and file an accounting. See 11 U.S.C. § 543(b)(2). They were also eligible to be paid the charges reflected on the accountings. See § 543(c)(2).
This latter provision states that the Court, “after notice and a hearing, shall *435provide for payment of reasonable compensation for services rendered and costs and expenses incurred by such a custodian.” 11 U.S.C. § 543(c)(2) (emphasis added). Although LRT has filed an accounting, it has not filed a proof of claim, and instead, appears focused on preserving its right to collect payment from judgment creditor Rathe. EWS has filed a proof of claim but has taken no further action to pursue payment from the Debtor. What rights the storage companies may have against the judgment creditor in state court is, as previously stated, a matter outside this Court’s jurisdiction. However, as mandated by § 543(c), the Court can, and must, provide for payment, in this case, of the debt the Debtor owes to LRT and EWS in their capacity as agents of the custodians.6
The custodian statute is silent as to how, or from whom, payment shall be made. Ohakpo, 494 B.R. at 284. One means of providing for payment would be to direct Rathe to pay LRT and EWS and then add the sum of those payments to Rathe’s secured claim. However, no party has requested that approach, and in the absence of an agreement among the parties to do this, the Court lacks Constitutional authority to compel Rathe to do this. The only payment the court may “provide” is to direct a party who is both obligated on the debt and subject to this Court’s jurisdiction to make payment in a manner consistent with the Bankruptcy Code. Germane to this issue are the two Bankruptcy Code provisions which describe the process for allowance and treatment of administrative expenses in Chapter 11 cases:
Allowance of administrative expenses
(a) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—
(1) (A) the actual, necessary costs and expenses of preserving the estate ...
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by—
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian....
Confirmation of plan
(a) The court shall confirm a plan only if all of the following requirements are met:
(9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that— (A) with respect to a claim of a kind specified in section 507(a)(2) [administrative expenses] or 507(a)(3) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash *436equal to the allowed amount of such claim.
11 U.S.C. §§ 503(b)(3)(E), 1129(a)(9)(A). Therefore, to the extent the charges incurred by LRT and EWS are allowed as administrative expenses, confirmation of the Debtor’s plan shall be conditioned upon the Debtor paying the allowed administrative expense on the effective date of the plan (unless LRT and EWS consent to different treatment).
2. The Sums Due the Sheriffs’ Agents under § 543 are Eligible for Treatment as Administrative Expenses Under § 503.
The parties did not specifically address the extent to which the charges should be treated as administrative expenses. In the Stipulation with Rathe, the Debtor agreed not to oppose administrative expense priority for any post-petition storage fees approved by the Court (doc. # 39, p. 3). The Debtor seeks a determination of the pre- and post-petition storage charges, and invokes Bankruptcy Code sections 501, 502, and 503 (doc # 44, 45). In its response, Rathe requests the Court grant administrative expense priority to the charges “to the extent permitted by the Bankruptcy Code” (doc # 54 at ¶ 7).
Addressing first the post-petition storage charges, the key statute is § 503(b)(1)(A). It provides administrative expense priority for the actual, necessary costs and expenses of preserving the estate. Since there is no estate until the filing of a bankruptcy petition, only post-petition expenses typically qualify for administrative expense treatment under § 503(b)(1)(A). See Helen-May Holdings, LLC v. Geltzer (In re Kollel Mateh Efraim, LLC), 456 B.R. 185, 192 (S.D.N.Y.2011). Pursuant to this general rule with respect to post-petition charges, the storage charges incurred post-petition are eligible for treatment as administrative expense priority claims. See § 503(b)(1)(A); see also In re R & G Props., 2009 WL 1396285 at *4-5, 2009 Bankr.LEXIS 1318 at *12 (Bankr.D.Vt. April 30, 2009).
Next, the Court turns to the pre-petition storage charges. As noted above, generally only the charges incurred post-petition would be treated as administrative expenses. However, the treatment of pre-petition charges allocable to a custodian’s fees and expenses is an exception to the general rule. The salient statute unequivocally allows administrative expense priority for custodian charges incurred pre-petition. See In re 215 Assocs., 188 B.R. 743, 748 (Bankr.S.D.N.Y.1995) (holding § 503(b)(3)(E) applies solely to pre-petition services). Each court that has considered the issue has concluded, in part in reliance upon the legislative history, that § 503(b)(3)(E) is intended to provide administrative expense priority for a custodian’s pre-petition fees and expenses. See, e.g., In re Lake Region Operating Corp., 238 B.R. 99, 101 (Bankr.M.D.Pa.1999); 215 Assocs., 188 B.R. at 748; In re Kenval Marketing Corp., 84 B.R. 32, 34 (Bankr.E.D.Pa.1988).
While § 503 generally only accords an ‘administrative expense’ priority status to claims for post-petition services, § 503(b)(3)(E) “expressly authorizes compensation for the prepetition services of a custodian or receiver superseded under 11 U.S.C. § 543 and is an exception to the general rule with respect to the allowance of compensation for exclusively postpetition activities as an administrative expense.”
Szwak v. Earwood (In re Bodenheimer, Jones, Szwak, & Winchell L.L.P.), 592 F.3d 664, 672 (5th Cir.2009) (citing In re Snergy Props., Inc., 130 B.R. 700, 704 (Bankr.S.D.N.Y.1991)). Therefore, the storage charges incurred pre-petition are *437also eligible for administrative expense priority.
3. The charges of LRT and EWS may only be accorded administrative expense priority if they were actually and necessarily incurred and are reasonable.
Whether the agents’ charges were incurred pre-petition or post-petition, in order to qualify for administrative expense priority, they must have been actually and necessarily incurred. See R & G Props., 2009 WL 1396285 at *3, 2009 Bankr.LEX-IS 1318 at *8.7 Numerous other courts have concluded similarly. See In re TYS, Inc., 425 B.R. 26, 38 (Bankr.D.Mass.2010); 215 Assocs., 188 B.R. at 748.
A third requirement is that the charges must be reasonable. The custodian statute provides for “payment of reasonable compensation for services rendered and costs and expenses incurred by [a] custodian.” § 543(c)(2). At the eviden-tiary hearing, counsel for Rathe argued that the adjective “reasonable” modifies only the clause “compensation for services rendered,” and specifically does not modify “costs and expenses.” It was his position that § 543(c)(2) provides payment only of reasonable compensation but of all costs and expenses — reasonable or not.
The parties have not presented, and the Court has not found, any case law explicitly addressing this potential ambiguity in the text of § 543(c)(2). However, every case the Court has found has imposed a reasonableness requirement on all charges sought under § 543(c)(2). See In re Sevitski, 161 B.R. 847, 856 (Bankr.N.D.Okla. 1993) (denying custodian’s request for administrative expense priority for his fees and expenses because they were unreasonable and excessive); In re Posadas Assoc., 127 B.R. 278, 280 (Bankr.D.N.M.1991) (holding that the' Court shall provide for the payment of expenses incurred by the custodian in preparation for the turnover if they are reasonable). Ohakpo does not squarely address the question, but states “Section 543(c)(2) requires the Court to provide for the payment of a custodian’s reasonable fees and expenses.” 494 B.R. at 284. In all of these cases, the courts appear to read the adjective “reasonable” to modify both the compensation and costs and expenses components of § 543(c)(2), and the Court finds this reading to most soundly implement the overall and equity-based mandates of the Bankruptcy Code.
Some courts have analogized payments sought by custodians to compensation sought by professionals. The statute governing compensation of professionals states in pertinent part that only “(A) reasonable compensation for actual, necessary services ... and (B) reimbursement for actual, necessary costs” will be allowed. 11 U.S.C. § 330(a)(1)(A) and (B). As in § 543(c)(2), one might read this to mean that only the compensation allowed under § 330 must be reasonable. But, the courts have consistently interpreted this provision to require that expenses as well as compensation be reasonable, see, e.g., In re Fibermark, Inc., 349 B.R. 385, 401, 412 (Bankr.D.Vt.2006) (holding that, across a myriad of categories, a professional’s expenses may only be reimbursed if they are reasonable). Moreover, it is unlikely Congress would have intended to limit the *438expenses of professionals employed in a bankruptcy case to actual and necessary expenses that are reasonable, while authorizing unlimited reimbursement of all expenses to superseded custodians.
For all of these reasons, the Court determines that LRT and EWS may be paid its expenses, pursuant to § 543, only to the extent their charges were actually and necessarily incurred and are reasonable.
4. LRT and EWS bear the burden of proof, it is a preponderance of evidence, and LRT and EWS have met that burden.
This Court has ruled that the custodian has the burden of proof with respect to allowance of the custodian’s charges. R & G Props., 2009 WL 1396285 at *3, 2009 Bankr.LEXIS 1318 at *8. This comports with the decisions of other courts, see Sevitski, 161 B.R. at 854 (holding burden on custodian to show his entitlement to an administrative expense priority), and applies here as well. The custodian or its agent must establish these criteria by a preponderance of the evidence. In re HNRC Dissolution Co., 343 B.R. 839, 843 (Bankr.E.D.Ky.2006) (holding claimant has the burden of proving entitlement to an administrative expense by a preponderance of the evidence). “ ‘Preponderance of the evidence’ has been defined as the weight, credit, and value of the aggregate evidence on either side.” In re Smith, 2013 WL 665991, at *6-7, 2013 Bankr.LEXIS 687, at *18-19 (Bankr.D.Vt. Feb. 22, 2013) (citing Glinka v. Bank of Vermont (In re Kelton Motors, Inc.), 130 B.R. 170, 174 (Bankr.D.Vt.1991) (citing 30 Am.Jur.2d, Evidence, § 1164, at 339 (2d Ed. 1967))). This standard requires the custodian or agent to prove their case as “upon all the evidence ... more probably true than false.” Smith, 2013 WL 665991 at *7, 2013 Bankr.LEXIS 687 at *19 (citing Nis-sho-Iwai Co., Ltd. v. M/T Stott Lion, 719 F.2d 34, 38 (2d Cir.1983)).
Here, the burden is on LRT and EWS to demonstrate, by , a preponderance of the evidence, that their charges were actually and necessarily incurred and are reasonable. The Court will therefore review the evidence presented to ascertain whether the agents have satisfied this burden.
(i) The charges were actual and necessary.
The evidence shows that the Equipment was stored for a total of 116 days, of which 95 were pre-petition and 21 were post-petition. During the 21-day period following the Debtor’s petition, the Debtor was actively engaged in negotiations with judgment creditor Rathe regarding adequate protection payments and conditions of turnover, and did not request that the Court rule on the turnover motion during this time. The parties entered into the Stipulation and immediately thereafter LRT and EWS released the levied property to the Debtor. No one has disputed the Debtor’s statement that the Equipment is vital to its business (doc. # 17 ¶ 5). Likewise, the record is clear that if Rathe had liquidated the Equipment rather than turning it over, the Debtor would not have been able to operate or generate income from which to fund a plan.
There is also no dispute in the record, and there was no evidence presented contesting, that the storage charges at issue were actually incurred or that they were necessary to effectuate the writ of execution upon which the Sheriffs were acting. Hence, the record establishes that the charges LRT and EWS were actually and necessarily incurred.
(ii) The charges were reasonable.
At the evidentiary hearing, the parties directed most of their arguments and evidence to the question of whether *439the storage fees LRT and EWS charged were reasonable. Representatives from both LRT and EWS testified that the rates they charged were their normal, customary rates for storage of this type of equipment. The EWS representative also testified that he was not aware of any other facility within Rutland county capable of storing property as large as the Debtor’s Equipment. The Washington county Sheriff testified that, based upon his experience, the rates LRT and EWS charged were comparable to those customarily charged for storage of this type, and were reasonable given the size of the Equipment. Sheriff Hill also testified that it was his understanding that property seized by a county sheriff must remain within that Sheriffs county.8 The Court finds that the testimony of the LRT representative, the EWS representative, and Sheriff Hill was clear, credible and persuasive. Based upon this evidence, the Court determines that LRT and EWS proved by a preponderance of the evidence that their charges were reasonable.
Debtor’s counsel failed to present sufficient evidence to call into question the facts established by the storage companies. Debtor’s counsel introduced three witnesses, including the Debtor’s principal, in support of its position that the fees LRT and EWS charged were not reasonable. One witness, Russell Dimmick, owner of Lucky’s Trailer Sales, Inc. and Lucky’s Leasing, testified he charges a much lower long-term storage rate, $50 per month, at his facilities in South Burlington. However, Mr. Dimmick also testified he had previously stored a large vehicle, on a short-term basis, after a tow truck delivered it to his facility, and in that instance, he charged $100 per day, a price identical to that charged by LRT and EWS. He explained that he charged that higher fee because he understood $100 per day was the customary storage rate under those circumstances. Additionally, Mr. Dimmick testified that his only experience with property levied by a sheriff or other court officer was in selling it, typically pursuant to an arrangement with a bank. And, when he sold property for a bank, he did not charge any fees for storing that property. Mr. Dimmick was credible, but did not effectively challenge the reasonableness of the LRT and EWS storage charges.
One of the Debtor’s other witnesses, Thomas J. Hirchak, III, an auctioneer and the vice president of The Thomas Hirchak Company, testified that his company regularly stores all types of personal property at its facility, located in Williston, Vermont (in Chittenden county). He testified that his company charges a significantly lower daily rate of under $10 per day, ie., 80-90% less than what EWS and LRT charged for storing the Debtor’s Equipment. However, he made this statement in the context of his description of a large, pre-established contract with the U.S. Marshal Service, to store and sometimes sell a wide variety of seized assets. Additionally, Mr. Hirchak testified that his company waives all storage fees for property that it sells. The Debtor did not elicit testimony from Mr. Hirchak to elucidate the storage fees that the Hirchak Company charges for independent storage, or what portion of its business is devoted to storage of property it does not sell. Mr. Hirchak did testify that, although his company does not distinguish between long and short-term storage in setting storage rates, there is a wide variation in how long *440property is stored at his facility, and there is usually no way of determining at the outset of the storage term how long the property will actually be there. He specifically recalled some instances in which his company had stored property a county sheriff had seized, and said in those instances he always stored property in a facility which was in the same county from which the sheriff had seized it. Mr. Hirc-hak declined to offer an opinion on an appropriate rate for storing equipment seized by a sheriff in a county other than where his facilities are located, and therefore did not shed any light on the specific question of the reasonableness of the fees LRT and EWS charged in Washington and Rutland counties for the pieces of equipment seized in those counties.
The Debtor’s owner, Robert Edward Brown, testified that his company also stores equipment, and it charges $100 per month for storage of tractor trailers and mobile homes — in stark contrast to the EWS and LRT charges of $50 to $100 per day. The Debtor’s counsel did not elicit testimony from Mr. Brown about whether this storage rate applied to long-term or short-term storage, or whether the Debtor had ever stored equipment on which a sheriff had levied, or whether Mr. Brown believed $100 per month to be a reasonable rate for storage of property levied by a sheriff. While Mr. Brown’s testimony came across as sincere, competent and credible, it did not directly address the particular charges at issue.
The only significant evidence the Debtor elicited that bears on the reasonableness of the rates EWS and LRT charged is that neither EWS nor LRT differentiate between long-term and short-term storage in setting their rates. However, even if the Court were to find the Debtor had presented evidence that proved some companies offer long-term storage rates and they are substantially lower than the rates LRT and EWS charged, the Debtor neither proved that the Sheriffs had the option of storing the equipment with out-of-county storage sites nor that the Sheriffs were aware of, or required to hire, the less expensive entities.9 This Court “will not penalize attorneys, receivers or other professional persons, on the basis of hindsight, but rather will measure ‘reasonableness’ and ‘benefit’ prospectively, as of the date the services were rendered.” R & G Props., 2009 WL 1396285 at *3-4, 2009 Bankr.LEXIS 1318 at *9 (citing Sevitski, 161 B.R. at 856). This is important because LRT, EWS, and the Sheriff of Washington county all credibly testified that use of the EWS and LRT storage facilities, as well as the fees EWS and LRT charged, were typical and customary for storage of property that had been levied by a sheriff.
Additionally, in determining what fees are to be paid in this bankruptcy case to state officers who levied the Debtor’s property pre-petition and were still in possession of that property on the date the Debtor filed its bankruptcy petition, the Court must take into account the state statute under which the court officers were proceeding. See Ohakpo, 494 B.R. at 282. The controlling state statute, 12 V.S.A. § 2731, requires that the property “shall be safely kept by the officer at the debtor’s expense, until sold or the execution is otherwise satisfied.” Notably, it is silent as to how the officer is to accomplish this. It leaves to the court officer’s discretion the best means for safely keeping the proper*441ty. In this ease, then, the Sheriffs had discretion to hire the storage companies which they determined were best suited to store and keep safe the Equipment.10 Although the question presented, under § 543, is one of federal law, the Court must be cognizant of the standards under which the court officers were acting, and especially take into account the fact that the state statute does not impose a reasonableness standard.11 Where, as here, the evidence regarding the accountings in general, and their reasonableness in particular, is light, the Court finds that adding in deference to the judgment of the court officers tips the scale in favor requiring the custodians and their agents be paid in this case.
In sum, the Court finds that, with respect to the accountings, the Court must provide for payment of LRT’s and EWS’s pre-petition and post-petition storage charges as administrative expenses because LRT and EWS have established by a preponderance of the evidence that the storage fees set out in their accountings were actually and necessarily incurred and are reasonable; and the Debtor’s objection must be overruled.
C. The Debtor’s Motions for Allowance of the Storage Company Claims
The Court turns next to the Debtor’s motions (doc. ## 44, 45) seeking a determination of the amount and priority of the claims of LRT and EWS. The Court has found it must provide payment to LRT and EWS in this case, pursuant to § 543, and that the accountings which LRT and EWS have filed, along with the other proof they presented, establish that their charges are entitled to administrative expense priority under § 503. Therefore, LRT’s and EWS’s pre-petition and post-petition charges will be allowed in full as administrative expenses, and unless the Debtor establishes an offset due to damage to the Equipment or LRT and EWS consent to different treatment, the Debtor must provide for payment of these charges in the manner described in § 503 to meet the confirmation requirements of § 1129.
Fixing the amount of each claim requires resolution of discrepancies between the values set forth in the accountings and the Debtor’s motions, including the duration of the storage, whether to allow charges for the Towncar and Pine Box Trailer, and how to treat the $10,000 payment the Stipulation required the Debtor to make to the storage companies. The parties presented no proof on these issues at the hearing and the Court therefore relies on the record to ascertain the amount due and the agents’ right to allowance on these four components of the ac-countings.
The Court finds first, that EWS and LRT are the most reliable sources for fixing the term of the storage and they both describe the storage term to be 116 days, that the Debtor’s 117-day storage term is an error, and will compute the claim using a storage term of 116 days.
*442Second, since there is no dispute that the Towncar belongs to Mr. Brown individually, and is not the Debtor’s property, and the custodian statute only applies to the property of a debtor, payment of the storage charges attributable to the Town-car will be denied.
By contrast, no one disputes that the Pine Box Trailer is the Debtor’s property. In its accounting (doc. # 71), EWS states that it could have, but failed to, list this item on its original invoice to the Debtor (apparently through an oversight). Since EWS included the Pine Box Trailer in its accounting and it was in the control of the custodian on the date of the petition, the storage charges allocable to this item will be allowed.
Last, if the Debtor made the $10,000 payment described in the Stipulation that sum must be subtracted from the total storage charges to be paid. There is nothing in the record to indicate that the Debt- or is in default of its obligations under the Stipulation, so the Court presumes that both LRT and EWS received their pro rata share of this $10,000 payment and will compute the amount due accordingly.
In reliance upon these determinations, the Court allows the claim of EWS as an administrative expense in the amount of $48,000 (computed as 116 days at $425 per day, minus the payment of $6,300), and allows the claim of LRT as an administrative expense in the amount of $25,300 (computed as 116 days at $250 per day, minus the payment of $3,700).
In the Stipulation, the Debtor preserved its right to seek an offset to the amount it owes to the storage companies for damages it alleges EWS and LRT caused to the Equipment (doc. # 34 at p. 3). The Debtor has not yet commenced actions seeking this relief; to the extent it timely initiates a proceeding and obtains a judgment against EWS and LRT, it would be an offset against the claims allowed in this ruling.
V. CONCLUSION
For the reasons set forth above, the Court reaches the following conclusions of law with respect to the accountings before the Court. First, the Court must provide for payment to LaRoche Towing & Recovery, Inc. and Earth Waste & Metal Systems, pursuant to § 543, for the charges incurred in connection with the levied Equipment. Second, all pre-petition and post-petition charges LaRoche Towing & Recovery, Inc. and Earth Waste & Metal Systems list in their accountings, except for the Towncar, are eligible for administrative expense priority, under § 503, because they were actually and necessarily incurred and are reasonable. Third, La-Roche Towing & Recovery, Inc. and Earth Waste & Metal Systems, as the custodians’ agents, had the burden of proof with respect to the accountings, were required to prove their right to payment by a preponderance of the evidence, and they have done so. Last, under the controlling state statute, the Sheriffs had discretion to hire the entities they deemed best suited to assist them in carrying out their duty to take control of, and protect, the levied property, there is nothing in the record to indicate that they abused that discretion, and this factor weighs in favor of allowing payment of all charges incurred in connection with the levy of the Debtor’s property. Consequently, the Court overrules the Debtor’s Objection to the Accountings.
With respect to the Debtor’s motions for a determination of the amount and priority of the storage companies’ charges, the Court allows the LaRoche Towing & Recovery, Inc. and Earth Waste & Metal Systems claims with administrative expense priority in the amount of $25,300 *443and $43,000, respectively, subject to the Debtor’s right to timely demonstrate a right of offset.
This constitutes the Court’s findings of fact and conclusions of law.
ORDER
Determining Amount and Administrative Priority of Storage Charges, Overruling the Debtor’s Objection to the Ac-countings, and Fixing Allowed Amount of the Storage Company Claims
For the reasons set forth in the memorandum of decision of even date, IT IS HEREBY ORDERED
1. pursuant to 11 U.S.C. § 543(C)(2), the Debtor must pay LaRoche Towing & Recovery, Inc. and Earth Waste & Metal Systems the allowed pre-petition and post-petition charges related to the levy and storage of the Debtor’s Equipment1 and must pay all of these storage charges as administrative expenses;
2. the Debtor’s Objection to the Ac-countings is overruled;
3. LaRoche Towing & Recovery, Inc. is allowed a claim in this case in the amount of $25,300;
4. Earth Waste & Metal Systems is allowed a claim in this case in the amount of and $43,000; and
5. both allowed claims reflect a credit for the $10,000 payment required by the Stipulation and are subject to the Debtor’s right to timely demonstrate a right of offset.
SO ORDERED.
. The figures in Debtor’s motions (doc. ## 44, 45) differ slightly from these. First, the Debtor counted the total storage period to be 117 days and the towing companies counted it to be 116 days. Second, the Debtor excludes from its calculation an additional box trailer, as well as a Towncar which belongs to the Debtor's principal rather than the Debtor. The Court will address these discrepancies in the context of the Debtor’s claim allowance motion, in Section III(C) of this opinion.
. The Sheriff of Rutland county stated in his response that he does not concede he is a custodian under 11 U.S.C. § 101(11) or subject to § 543, but that in any event he had been paid in full by Rathe and is owed nothing in connection with his levy of the Equipment.
. All statutory citations refer to Title 11 of the United States Code (the "Bankruptcy Code”) unless otherwise indicated.
. (11) The term "custodian” means—
(A) receiver or trustee of any of the property of the debtor, appointed in a case or proceeding not under this title;
(B) assignee under a general assignment for the benefit of the debtor's creditors; or
(C) trustee, receiver, or agent under applicable law, or under a contract, that is appointed or authorized to take charge of property of the debtor for the purpose of enforcing a lien against such property, or for the purpose of general administration of such property for the benefit of the debtor’s creditors.
11 U.S.C. § 101(11).
. The court held that a second court officer, whom the first officer brought along as “backup,'' did not qualify as a custodian, as the state court had not authorized him to take charge of the property.
. Typically, a custodian would be the party to file the accounting and it would seek payment on behalf of its agents. This was the case in Ohakpo, where the custodian requested the Court to order payment to the Court Officers in an amount sufficient to enable them to pay Sparks Towing Inc. However, the custodians here assert (notwithstanding 12 V.S.A. § 2731) that it is the judgment creditor, rather than the custodians, who is liable for the payment due to the agents. As this Court has already observed, the issue of how much the judgment creditor owes to the custodians’ agents, if anything, is a state law question outside this Court’s jurisdiction. For purposes of applying § 543 in this bankruptcy case, whether the charges are due the custodians or their agents is immaterial.
. The Court also required the custodian in the R & G Properties case to demonstrate that the fees were of benefit to the estate. The Court notes that "the ‘benefit’ requirement has no independent basis in the Code, however, but is merely a way of testing whether a particular expense was truly necessary’ to the estate: If it was of no ‘benefit,’ it cannot have been ‘necessary.’ ” Szwak, 592 F.3d at 672 (citing In re H.L.S. Energy Co., 151 F.3d 434, 437 (5th Cir.1998)). That criterion will be addressed below.
. Debtor's counsel stated at the conclusion of the hearing that he did not believe Vermont law limits the Sheriffs' respective "jurisdiction” in this way, but presented no evidence or case law to support this position.
. There was also no evidence presented on what the corresponding increase in towing charges would have been if the Equipment had been towed to storage locations in other counties.
. The fact that, in the instant case, the judgment creditor, rather than the Sheriffs, actually made the arrangements for the towing and storage of the levied property does not change the fact that it is the court officer who has the discretion to make this decision under the state statute. See Buck v. Ashley, 37 Vt. 475, 476-77 (Vt.1865) (deputy sheriff found negligent for storing attached goods in freight depot that was not a safe or suitable place to keep goods). While the actual practice in Vermont may be for judgment creditors to make these logistical arrangements as a condition of sheriffs levying, nothing in the statute required the Sheriffs to use the storage entities the judgment creditor selected.
. Nowhere in 12 V.S.A. §§ 2731-2747 (personal property, levy, and sale) does a statute use the word reasonable.
. All capitalized terms in this order shall have the same meaning that they are ascribed in the memorandum of decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496335/ | OPINION1
ROBERT N. OPEL, II, United States Bankruptcy Judge.
The instant Adversary Proceeding was brought by the Chapter 7 Debtor, Ms. Treena Lienhard (“Plaintiff’ or “Debtor”), against the Defendant, Lehighton Ambulance Association, Inc. (“Defendant” or “Lehighton”), for alleged violations of the automatic stay and discharge injunction. A trial on the merits was held on February 22, 2013. For the reasons stated herein, I find that the Defendant did not willfully violate the stay pursuant to 11 U.S.C. § 362(k). Additionally, I find that the Defendant did not violate the discharge injunction pursuant to 11 U.S.C. § 524(a)(2).
I. Jurisdiction
This Court has jurisdiction pursuant to 28 U.S.C. § 1334(b). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (G), and (0).
II. Facts and Procedural History
John and Treena Lienhard filed their voluntary petition for Chapter 7 protection on July 26, 2011. The Chapter 7 Trustee reported to the Court that this was a no asset case on August 30, 2011, and they subsequently received their discharge on October 31, 2011.
Prior to their discharge being entered, the Plaintiff filed this Adversary Proceeding on her own behalf. Her Complaint, dated October 26, 2011, states a claim against the Defendant for a violation of the automatic stay pursuant to 11 U.S.C. § 362(k).2 It alleges that the Defendant received notice of the Plaintiffs bankruptcy filing on July 30, 2011, as did the rest of her creditors. Pl.’s Compl. ¶ 7. Notwithstanding this notice, the Defendant mailed billing statements to the Debtor’s residence on or about August 25, 2011 (“Bill 1”), and September 28, 2011 (“Bill 2”). Id. at ¶ 9. Upon receipt of Bill 1 and Bill 2, the Plaintiff alleges that she suffered the following damages: 1) anxiety; 2) nervousness; 3) fear; 4) worry; 5) intimidation; 6) emotional distress; and, 7) loss of income. Id. at ¶ 10.
Lehighton filed its responding paper, i.e. Answer, Affirmative Defenses, and Counterclaim of Defendant (“Answer”), on November 23, 2011. Among the affirmative *446defenses listed in the Answer, the Defendant claims it had no actual notice of the Lienhards’ bankruptcy until October 6, 2011, a date after both bills were sent. Def.’s Answer 4. On this date, Plaintiffs counsel personally informed Lehighton of the bankruptcy filing. Id. at 5. Counsel gave notice in person because his office is allegedly “close to Defendant’s place of business.” Ibid. Additionally, the Defendant claims to have discontinued all collection efforts once it received the notice of the bankruptcy filing on October 6, 2011. Id. at 6.
The Answer also includes a counterclaim which sought to reinstate a debt already discharged by this Court in the amount of $1,080.36. Lehighton provided an “advanced life support transport” to the Debt- or on June 4, 2011. Id. at 7. An invoice for these services was sent to the Debtor’s insurer. Ibid. Instead of paying Lehigh-ton directly, the insurer forwarded a check to the Debtor on July 11, 2011, for the specific purpose of paying Lehighton. Ibid. The Defendant alleges that the Debt- or converted the check upon receipt and failed to remit any portion to it. Id. at 8. Lehighton contends that the funds should have been held in trust for them and not discharged in Plaintiffs bankruptcy. Ibid.
On December 13, 2011, Plaintiff filed her response to the Answer: a Motion to Dismiss and Motion to Strike Defendant’s Counterclaim (“Motion to Strike”). The Motion to Strike has a unique basis in that it claims the counterclaim, on its own, “is an attempt to collect a debt discharged in Debtor’s bankruptcy.” Def.’s Mot. to Strike ¶ 8. Hence, the Plaintiff contends that the mere filing of the counterclaim is in direct violation of the discharge injunction under § 524(a)(2), id. at ¶ 17, and thus, originates a contempt claim against the Defendant. Plaintiff filed a Motion for Contempt Citation and Damages (“Contempt Motion”) in the Debtors’ Chapter 7 case on that same day. The Contempt Motion alleges a violation of the discharge injunction on the same grounds given in the Motion to Strike and seeks the reward of damages and attorney’s fees.
Defendant’s answers to both the Motion to Strike and Contempt Motion were filed on January 9, 2012, in the Adversary Proceeding and the Chapter 7 case, respectively. Along with its general answers and denials to the statements made in the Motion to Strike, Lehighton defends its right to file the counterclaim on the same proposition as before: Lehighton has legal and equitable title to the funds from the insurer. Def.’s Answer to Pl.’s Mot. to Strike ¶¶ 5-6, 8-9, 14. The Defendant bases its argument on the fact that the counterclaim was only filed after the Plaintiff had filed the instant Adversary Proceeding; one day after the dischargeability claim deadline had run. Id. at ¶ 14. Up until notice of the Complaint, the Defendant was unaware of the payment by the insurer to the Debtor, and had no opportunity to compel its return; therefore, the argument goes, the counterclaim was the Defendant’s first opportunity to assert its rights. Id. at ¶¶ 5, 14. In the alternative, Lehighton states that the counterclaim can be treated as a request for a relief from stay pursuant to the ruling in Creative Conservation, Inc. v. Northern Lehigh School District (In re Creative Conservation, Inc.), No. 91-0734S, 1991 WL 261706 (Bankr.E.D.Pa. Dec. 5,1991).
A few weeks later, the Defendant changed course and filed its Motion to Permit Amended Answer and Affirmative Defenses and to Withdraw Counterclaim. Filed with this Motion was a draft version of an amended answer which retained all affirmative defenses in the original Answer but removed the counterclaim language. Def.’s Mot. to Permit Am. Answer Ex. A. *447However, the “Wherefore clause” which originally followed the counterclaim remained in the paper. Its existence essentially prayed for the same relief notwithstanding the removal of the counterclaim grounds. The error in this filing led to the Plaintiffs filing another Motion to Strike the same day. Eventually, the Defendant filed an Amended Motion to Permit Amended Answer, on February 2, 2012, to correct the error.
At this point, the Court proposed mediation with the hope to bring the parties to a mutually agreeable settlement. This effort bore no fruit as the Defendant filed correspondence on March 6, 2012, stating the parties agree that mediation “will serve little purpose.” Def.’s Correspondence Regarding Mediation, Mar. 6, 2012. The Court Appointed Mediator filed a report stating same a few days later.
A trial on the merits was held on February 22, 2013. At the beginning of the hearing, all sides agreed to a consolidated record on both the Adversary Proceeding and the Contempt Motion. Trial Tr. 5:6-18. In addition, based on the parties’ agreement, I entered an Order in the Adversary Proceeding granting leave to Defendant to amend its answer. Trial Tr. 7:20-24. This Order effectively replaces the original Answer with the Amended Answer proposed on February 2, 2012, which removes the counterclaim and the second wherefore clause from the text. Trial Tr. 7:24-25; 8:1.
The majority of this dispute’s background facts are presented in the pre-trial briefs and to which I turn now before discussing oral testimony. The Defendant is a non-profit, 26 U.S.C. § 501(c)(3) charitable organization which provides life support and ambulance services in and surrounding Lehighton, Pennsylvania. Def.’s Trial Mem. 2. On June 4, 2011, Defendant transported Plaintiffs son from Gnaden Huetten Hospital to Lehigh Valley Hospital. Id. An invoice for these services was sent to Plaintiffs insurer on June 22, 2011. Id. Knowing that payment by the insurer would not be made to it directly, Lehigh-ton sent an invoice for the services on July 7, 2011. Id. It is alleged that Plaintiff did in fact receive a check in the amount of $1,080.36 on or about July 11, 2011, from the insurer for the purpose of reimbursing Defendant. Id. at 3. However, the Plaintiff never remitted any of the funds to the Defendant and the present location of those proceeds is presently unknown. Id.
The invoice sent to Plaintiff, and the copies sent after she filed her Chapter 7 petition, are the root of the Adversary Proceeding and the Contempt Motion. The first witness to testify was Ms. Lien-hard, the Plaintiff.
Ms. Lienhard works from her home as a sales representative for The Hartford. Trial Tr. 9:9-21. During the course of a regular work day, she interacts with prospective customers over the telephone. Trial Tr. 9:17-24. She signs into work by logging into her home computer and signing into the company’s system. Trial Tr. 10:13-17.
The Plaintiff lives with her sister and her two sons, ages fourteen and five. Trial Tr. 11:10-11. Her eldest son suffers from spastic cerebral palsy which leaves him in need of constant assistance with his daily needs, such as eating or walking. Trial Tr. 11:17-23; 12:1-6. She, along with three employed health aides, assist the boy with his everyday activities throughout the week. Trial Tr. 12:17-25; 13:1-3. Her sister, Deann Lambert, is one of those health aides. Trial Tr. 13:4-9.
While working at home, the Plaintiff received Bill 1 from the Defendant on August 25, 2011. Trial Tr. 18:4-5. She described her reaction upon receiving the *448invoice as such: “I felt panic. I felt overwhelmed. I felt anxiety. I cried. And I felt nauseated and went to the bathroom and started to vomit.” Trial Tr. 18:11-13. She testified to having a similar reaction when Bill 2 was received on September 28, 2011. Trial Tr. 19:2-7. She later testified under cross examination that the only time she vomited was the date of receipt of Bill 1, and she did not seek medical attention after suffering any of her alleged symptoms. Trial Tr. 41:11-25. The Plaintiffs sister, Deann Lambert, later corroborated the Plaintiffs symptoms upon receipt of Bill 1. Trial Tr. 84:1-3.
Due to her belief that her mood would have a potential negative effect on her work, the Plaintiff took the remainder of the work day off on August 25, 2011. Trial Tr. 19:10-22. Although she could not recall her hourly wage rate at the time of the incident, she testified that her current hourly wage is $15.57 per hour. Trial Tr. 20:21. She further stated that her hourly wages in 2011, i.e. at the time of receipt of both invoices, was “slightly less” than this amount. Trial Tr. 20:22-24.
During cross examination, the Plaintiff testified that the first invoice she received relating to the June 4, 2011, ambulance services for her son was received on July 7, 2011. Trial Tr. 36:6-8. Posted at the bottom of that invoice was a sticker that the Plaintiff read into the record which states in all capital letters: “PAYMENT WILL COME DIRECTLY TO YOU. PLEASE FORWARD THE PAYMENT AND A COPY OF THE EXPLANATION OF PAYMENT/ BENEFITS TO THE ADDRESS LISTED ABOVE.” Trial Tr. 34:8-10; Def.’s Ex. 3. Plaintiff contends, in contrast to Defendant’s pleadings, that she received the check from the insurer after she filed her bankruptcy petition. Compare Trial Tr. 36:17-25 (check received after bankruptcy filing), with Def.’s Answer 7 (“Plaintiffs insurer ... forwarded reimbursement directly to Plaintiff on or about July 11, 2011_”). In any event, upon receipt, the Plaintiff cashed the check and “locked it in a safe deposit box.” Trial Tr. 37:11-13.
After Ms. Lienhard cashed the check, the only other direct contact she had with the Defendant was Bill 1 which was sent on August 25, 2011. Trial Tr. 39:19-21. She did not call the Defendant after receiving the statement, she did not ask her lawyer to call the creditor, and she made no attempt to inform the ambulance company that she received the funds from the insurer. Trial Tr. 39:5-25. She also made no contact with the Defendant at the time of the receipt of Bill 2, dated September 28, 2011. Trial Tr. 40:12-25.
On cross examination, the Plaintiff was also questioned on the hours of work she missed. While she does not remember the exact amount of hours missed, she admitted to only missing a couple of hours in the afternoon. Trial Tr. 47:4-16. Similarly, she had no recollection of the amount of work time missed, if any, on September 28, 2011. Trial Tr. 46:20-24.
The balance of the trial testimony focused on the mail procedures of the Defendant. The first witness in this regard was Ms. Ann Yeastedt, the office manager of Lehighton. Trial Tr. 50:15-17. She testified that the address listed on the Plaintiffs Section 341 meeting bankruptcy notice, i.e. Plaintiffs Exhibit 1, was incorrect in two ways: (1) the last four digits of the zip code; and, (2) the true name of the Defendant is “Lehighton Ambulance Association,” whereas the notice only says “Le-highton Ambulance.” Trial Tr. 52:22-25; 53:1-12; 54:8-13. Although Ms. Yeastedt is the primary person responsible for retrieving the mail, she testified to being away on vacation during the week in which *449the bankruptcy notice allegedly arrived in Defendant’s mailbox. Trial Tr. 55:1-6.
As far as the actual procedures of the office, the mail is separated into two categories: “correspondence for patients or billing” and “bills that [are] owed.” Trial Tr. 56:19-25. Ms. Yeastedt is responsible for all correspondence, and would have been in charge of the bankruptcy notice if and when it came to the Defendant. Trial Tr. 56:19-25; 57:1-17. All correspondence sent to the office is processed twice a week, but there is no procedure to confirm whether a client of Lehighton filed bankruptcy. Trial Tr. 62:4-10; 61:11-23.
When asked directly if she received the bankruptcy notice, or, to her knowledge, if anyone else in the office received it, she gave an unequivocal “no.” Trial Tr. 68:2-19; 69:20-23. In contrast, Ms. Yeastedt stated that she did not learn of the Plaintiffs bankruptcy until a letter came from Plaintiffs counsel, on October 5, 2011. Trial Tr. 68:2-11. In support of this statement, Ms. Yeastedt points to Exhibit M-5, a billing statement with personal comments typed at the bottom. Trial Tr. 64:17-25. These comments, which were later admitted into evidence without objection, state explicitly that the Defendant first learned of Plaintiffs bankruptcy filing upon receipt of the “threatening” letter by Plaintiffs attorney on October 5, 2011, and that no further statements will be sent to the Plaintiff thereafter. See Movant’s Ex. 5 (Ms. Yeastedt’s comments read: “[I] explained that we have not received the notice [Plaintiffs counsel] states was mailed to us.... [I] also added that we would cease sending statments [sic] at this point.”). She also described the phone call between her and Plaintiffs counsel. During the conversation on October 5, 2011, Ms. Yeastedt stated that the Defendant’s practice upon receipt of a bankruptcy notice is to cease sending statements and to write-off the debt immediately. Trial Tr. 71:12-25; 72:1-5. She also told Plaintiffs counsel, as well as the Court, that in her twenty years of working for the Defendant, she never received a call from an attorney seeking compensation for a stay violation. Trial Tr. 72:1-3.
Next, Ms. Yeastedt testified as to the Plaintiffs “Patient Summary Report.” This report, admitted as Defendant’s Exhibit 6, shows all of Lehighton’s transaction history with the Plaintiff and her family. Trial Tr. 72:8-25; Def.’s Ex. 6. The final three entries are the most important to the case: they list the creation dates of the two statements at issue, followed by a transaction description from October 6, 2011, that reads “WRITE OFF TO BAD DEBT.” Def.’s Ex. 6; Trial Tr. 73:21-25; 75:4-20.
After her conversation with Plaintiffs counsel, Ms. Yeastedt conducted a search of all the Defendant’s records to see if any bankruptcy notice existed. Trial Tr. 20-24. No such record was found. Trial Tr. 76:20-25; 77:1, 11-21. She stated that, had the bankruptcy notice been received, neither Bill 1 nor Bill 2 would have been sent. Trial Tr. 74:21-25; 75:1-25; 76:1-5, 16-19.
Therese O’Donnell was the next Lehigh-ton employee to testify. She corroborated the fact that all bankruptcy notices go into the “correspondence” pile for mail. Trial Tr. 89:17-22. She also has specific knowledge of what an envelope from the bankruptcy court looks like, and knows to put it immediately in the “correspondence”- pile for her supervisor (Ms. Yeastedt) to review. Trial Tr. 89:20-25; 90:4-13. Finally, she stated that the first time she was personally aware of Plaintiffs bankruptcy was on October 5, 2011, when Plaintiffs counsel’s letter arrived via facsimile transmission. Trial Tr. 91:5-9.
*450The final witness was Ms. Joni Gestl, the administrator of Lehighton. Trial Tr. 93:14-18. It is her duty to pay the bills for the company and monitor the budget. Trial Tr. 93:19-23. Like the other Lehigh-ton employees before her, she had no specific recollection of receiving the Plaintiffs bankruptcy notice. Trial Tr. 94:16-22. Furthermore, she too testified that she only learned about the Plaintiffs bankruptcy upon receipt of Plaintiffs counsel’s letter on October 5, 2011. Trial Tr. 98:8-16.
The remainder of the trial consisted of proffers of evidence based on the discharge-injunction violation issue. Trial Tr. 111-121. As I have taken judicial notice of the docket entries, pursuant to Federal Rule of Evidence 201, a prolonged discussion of this evidence is not necessary at this time.
Both parties submitted post-trial briefs in lieu of closing argument. This case is now ripe for disposition.
III. Discussion
A. Alleged Intentional Stay Violation Pursuant to 11 U.S.C. § 362(k)
A fundamental protection afforded to debtors under the Bankruptcy Code is the automatic stay. Under § 362(a)(6), “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case” is stayed by the filing of a petition. For those instances where an entity does not abide by rules set forth in § 362, section 362(k) provides an independent cause of action for a variety of damages based on a “willful violation of the stay.” 11 U.S.C. § 362(k)(l).
To succeed on a “willful” stay-violation claim, the debtor must prove: (1) a violation of the stay occurred; (2) the creditor had knowledge of the bankruptcy case when acting; and, (3) the violation caused actual damages. Linsenbach v. Wells Fargo Bank (In re Linsenbach), 482 B.R. 522, 526 (Bankr.M.D.Pa.2012); Wingard v. Altoona Reg’l Health Sys. (In re Wingard), 382 B.R. 892, 900 (Bankr.W.D.Pa.2008). A debtor must prove these elements by a preponderance of the evidence. Wingard, 382 B.R. at 900 n. 6 (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)).
i. Violation of 11 U.S.C. § 362(a)(6)
Here, the parties do not dispute that a stay violation occurred, and the Court agrees. Sending invoices to the Plaintiff on August 25, 2011, and September 28, 2011, was an “act to collect” a pre-petition claim by Defendant which is forbidden under § 362(a)(6). While they may only be “single-page invoices,” Trial Tr. 41:1-2, their creation and receipt by the Debtor make them a stay violation nonetheless. Thus, the Plaintiff has proven the first element of the test.
ii. Lehighton Had No Knowledge of the Bankruptcy Filing
The major dispute in this case focuses on whether the Defendant had knowledge of the Plaintiffs bankruptcy case before mailing the invoices, thereby making the act “willful.” A “deliberate action after having knowledge of the automatic stay” will suffice when proving a willful violation of a stay under § 362(k). Thomas v. City of Philadelphia (In re Thomas), 497 B.R. 188, 202 (Bankr.E.D.Pa.2013) (citing In re Lansdale Family Rests., Inc., 977 F.2d 826, 829 (3d Cir.1992)). In essence, mere “knowledge of the existence of the bankruptcy case” equates to knowledge of the stay. Thomas, 497 B.R. at 202.
*451To support her argument that the Defendant had knowledge of the bankruptcy case, the Plaintiff seeks to invoke the common law “mailbox rule.” See Rosenthal v. Walker, 111 U.S. 185, 193, 4 S.Ct. 382, 386, 28 L.Ed. 395 (1884) (describing the general rule and the policy behind it). Under this rule, “proof of mailing raises a rebuttable presumption that the mailed item was received.” Camathan v. The Ohio Nat’l Life Ins. Co., No. l:06-CV-999, 2008 WL 2578919, at *3 (M.D.Pa. June 26, 2008) (citing Samaras v. Hartwick, 698 A.2d 71, 73 (Pa.Super.Ct.1997)). Once established, the party challenging presumption of receipt must present credible evidence “demonstrating that the mailing was not in fact received.” Pondexter v. Allegheny Cnty. Hons. Auth., No. 11-857, 2012 WL 3611225, at *7 (W.D.Pa. Aug. 21, 2012) (citing Harasty v. Pub. Sch. Employee’s Ret. Bd., 945 A.2d 783, 787 (Pa.Cmwlth.2008)); See also Cub Cadet Corp., Inc. v. Rosage (In re Rosage), 189 B.R. 73, 79 (Bankr.W.D.Pa.1995) (“The presumption is rebuttable only by a showing that in reality the mailing was not accomplished.”).
One form of evidence that has successfully been used to refute the mailbox-rule presumption of receipt is an office’s procedures in handling the mail. See, e.g., In re Robinson, 228 B.R. 75, 82 (Bankr.E.D.N.Y.1998) (citing In re Cassell, 206 B.R. 853, 857 (Bankr.W.D.Va.1997)) (“Although the mere denial of receipt does not rebut the presumption, testimony denying receipt in combination with evidence of standardized procedures for processing the mail can be sufficient to rebut the presumption.”); In re Hobbs, 141 B.R. 466, 468 (Bankr.N.D.Ga.1992) (citing Merrill Lynch v. Dodd (In re Dodd), 82 B.R. 924, 929 (N.D.Ill.1987)) (“[Djirect testimony of non-receipt, particularly in combination with evidence that standardized procedures are used in processing claims, ... [is] ... sufficient to support a finding that the mailing was not received, and thereby rebut the presumption accorded a proper mailing.”); Baldwin v. Bd. Of Chiropractors, 318 Mont. 188, 79 P.3d 810, 812 (2003) (court not persuaded where “mail handling protocols or other office procedures” not presented by addressee on issue of nonre-ceipt); Elec. Servs. Int’l, Inc. v. Silvers, 233 A.D.2d 361, 362, 650 N.Y.S.2d 243 (1996) (affidavits from employees describing “strict procedures” for placement of notices enough to rebut presumption of receipt).
Furthermore, rebutting the presumption of receipt is an issue of fact which is decided on the evidence presented. Rendina v. Northrop, 399 B.R. 376, 380 (D.Vt.2008) (citing In re Eagle Bus. Mfg., Inc., 62 F.3d 730, 735 (5th Cir.1995)). It is well-settled law in this circuit that a “strict evidentiary standard—a strong presumption—applies only when a notice ... is sent by certified mail, and that a weaker presumption of receipt applies when such a notice is sent by regular mail.” Santana Gonzalez v. Attorney General of U.S., 506 F.3d 274, 279 (3d Cir.2007) (emphasis in original). As the bankruptcy notice in this case was sent by regular mail, the weaker evidentiary standard applies.
In the case at bar, I find that the Defendant successfully met its burden and rebutted the presumption of receipt by providing the following evidence to the Court: (1) written proof of the imprecise address of the Defendant as listed on the bankruptcy notice; (2) unrebutted oral testimony from three credible witnesses on the non-receipt of the notice and of the general mail-handling office procedures of the Defendant; and, (3) personalized notes transcribed when the witnesses first learned of the bankruptcy.
*452First, the Defendant raised doubt over whether the bankruptcy notice was delivered to it by showing the deficiencies in the bankruptcy notice. As Ms. Yeastedt testified, the name of the defendant was incorrect: the notice said “Lehighton Ambulance” although the technical name of the Defendant is “Lehighton Ambulance Association.” Trial Tr. 54:8-13. Also, the last four digits of the Defendant’s alleged zip code were incorrect. Trial Tr. Trial Tr. 53:1^1. Looking at these two facts, it is conceivable that the bankruptcy notice was not delivered to Lehighton; a doubt that aids the Defendant in rebutting the presumption of receipt.
Next, and most supportive of Defendant’s case, was the testimony by the three employees of Lehighton. These are the only individuals responsible for mail handling in the entire company, and all three of them categorically denied ever receiving the bankruptcy notice. Trial Tr. 68:9-11; 91:5-9; 100:15-17. They also described the specific office protocols for handling the mail on the record. Trial Tr. 56:7-25. Because of this persuasive testimony provided by the Defendant, I find that it has successfully met its burden of rebutting the mailbox rule’s presumption of receipt. My finding .that all three witnesses appeared to be credible and truthful strengthens this result.
Finally, the written notes on Exhibit M-5 further corroborate Defendant’s statement that the bankruptcy notice was never received. The notes give a clear description, as transcribed by Ms. Yeastedt, of the office’s response upon learning of the bankruptcy filing on October 5, 2011, more than two months after the petition date. Trial Tr. 64:17-25; 65:5-15. Plaintiff did not challenge the authenticity of the document; in fact, she was the party that admitted it into evidence. I find this document definitively shows that the Defendant learned of the bankruptcy filing only after Plaintiffs counsel’s letter. This finding is supported by the Plaintiffs Patient Summary Report, Exhibit D-6, which presents the same dates on a more formal document.
I recognize the continuing need for the mailbox rule, particularly in bankruptcy where nearly all notices and summonses are sent by mail. However, the mailbox rule is not absolute. It only creates a rebuttable presumption of delivery which, as seen here, can be defeated. In sum, the substantial amount of evidence presented by the Defendant successfully rebuts the presumption of the receipt of the July 30, 2011, bankruptcy notice. Thus, I find that the Defendant had no knowledge of the bankruptcy filing when sending the billing statements and therefore did not willfully violate the automatic stay.
iii. No Damages Will Be Awarded
It has long been held that “technical and unintended” violations of the automatic stay do not warrant the imposition of monetary damages. Brown v. Penn. State Emps. Credit Union (In re Brown), 49 B.R. 558, 560 (Bankr.M.D.Pa.1985). Here, without the Defendant’s knowledge of the bankruptcy filing, a similar result follows.
I also note that the Plaintiff, or her counsel, could have easily sent a cease- and-desist letter, by regular or certified mail, to the Defendant after receipt of Bill 1 or Bill 2 to prevent further distress and prevent litigation. Hand delivery of a cease-and-desist letter could also have been easily accomplished. None of these actions were taken here.
B. Alleged Discharge Injunction Violation Pursuant to 11 U.S.C. § 524(a)(2)
A discharge in bankruptcy creates an injunction which protects the debt- *453or from any personal liability on a discharged debt. In re Antonious, 373 B.R. 400, 406 (Bankr.E.D.Pa.2007) (citing Matter of Paeplow, 972 F.2d 730, 733 (7th Cir.1992)). Unlike a willful violation of the stay, the Code does not provide an explicit statutory private right of action to enforce the injunction. Antonious, 373 B.R. at 407. As a result, bankruptcy courts turn to the common law remedy of civil contempt to enforce the discharge injunction. See, e.g., id,.; In re McNeil, 128 B.R. 603, 607 (Bankr.E.D.Pa.1991).
To find a violation of the discharge injunction, clear and convincing evidence must show (1) a valid order of the court existed; (2) the defendant had knowledge of the order; and, (3) the defendant disobeyed the order. Cal. Coast Univ. v. Aleckna (In re Aleckna), 494 B.R. 647, 654 (Bankr.M.D.Pa.2013); In re Meyers, 344 B.R. 61, 65 (Bankr.E.D.Pa.2006).
From the facts presented, and based on the equities of this case, I cannot find that Defendant’s action — in filing the ultimately withdrawn counterclaim — was contemptuous. First, I have already held that the Defendant had no knowledge of the bankruptcy case until October 5, 2011. With no knowledge of the case it had no opportunity to present defenses or assert additional claims but for its answer. Although it is the law of this circuit that the claims bar date is a strict statute of limitations for filing claims, Althouse v. RTC, 969 F.2d 1544, 1545 (3d Cir.1992), I refuse to expand that doctrine to make contemptuous the mere raising of such a claim in a responsive pleading.
This holding is further supported by the fact that the Defendant withdrew the counterclaim. By doing so, I find the Defendant has purged itself of any civil contempt claims. See Int’l Union, United Mine Workers of America v. Bagwell, 512 U.S. 821, 114 S.Ct. 2552, 2558, 129 L.Ed.2d 642 (1994) (“[T]he contemnor is able to purge the contempt and obtain his release by committing an affirmative act, and thus carries the keys of his prison in his own pocket.”).
IV. Conclusion
For the reasons stated above, I find that Lehighton Ambulance Association, Inc. did not willfully violate the automatic stay under 11 U.S.C. § 362(k). I also find that the Defendant did not violate the discharge injunction pursuant to 11 U.S.C. § 524(a). An Order will be entered consistent with the foregoing Opinion.
. Drafted with the assistance of Joseph C. Barsalona II, Law Clerk.
. Unless otherwise noted, all future statutory references are to the Bankruptcy 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 ("BAPCPA”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496338/ | OPINION
DUNCAN W. KEIR, Bankruptcy Judge.
Defendant Michael E. McLean (hereinafter “Debtor”) filed a voluntary Petition commencing a Chapter 7 bankruptcy case on September 9, 2010 (the “Petition Date”). On January 18, 2011, Creditor Airpack, Inc. (“Airpack”) commenced Adversary Proceeding No. 11-039 by the filing of a “Complaint Objecting To Discharge Of Certain Debt.” That complaint asserted that Airpack held a judgment *529debt against Debtor in the amount of $230,013.71 as of the Petition Date and that Airpack was the plaintiff in a case filed on August 2, 2010 and pending in the Circuit Court for Anne Arundel County, Maryland wherein Airpack was alleging that Debtor and others had fraudulently transferred assets (hereinafter referred to as the “Fraudulent Conveyance Case”).1 The gravamen of the Fraudulent Conveyance Case was that Debtor and the other defendants had committed fraud in transferring and hiding assets to prevent collection by Airpack of its judgment. In Adversary Proceeding No. 11-039, Airpack requested that the indebtedness it asserted against Debtor in the Fraudulent Conveyance Case be found nondischargeable pursuant to 11 U.S.C. § 523(a)(6).2 However after a Motion to Dismiss was filed by Debtor, the parties filed a Notice of Stipulated Dismissal.3
On March 23, 2011, the Chapter 7 Trustee commenced this adversary proceeding against Debtor and the non-debtor defendants4 seeking avoidance of alleged fraudulent transfers pursuant to Section 548 and Md. ANN. Code, Com. Law §§ 11-504 and 11-507, turnover of property, recovery of property, as well as counts for aiding and abetting and conspiracy. Plaintiff filed an Amended Complaint on October 11, 2011 and then filed a belated Motion to Amend Complaint on October 21, 2011 that was subsequently granted by this court. The Amended Complaint added a count requesting in the alternative that a declaratory judgment be entered determining that the allegedly fraudulently conveyed property was the Debtor’s property on the Petition Date and thus is included as a part of the bankruptcy estate. The Amended Complaint asserts that the causes of action are “core” as defined by 28 U.S.C. § 157 and the Answers filed by all defendants do not assert that any pleaded cause is non-core. In addition, on December 13, 2012, defendants filed a Joint Line consenting to the entry of final orders and judgments by the bankruptcy court. Also on December 13, 2012, Plaintiff filed a line consenting to the entry of final orders and judgments by the Bankruptcy Court. To the extent that any of the pleaded causes of action are non-core, pursuant to 28 U.S.C. § 157(c)(2), the consent of all parties permits the entry of final orders and judgments by the bankruptcy judge. Furthermore, this court holds that the expressed consent of all parties permits the bankruptcy judge to enter final orders and judgments in core matters that otherwise would be found to exceed the constitutional limitations on the judicial powers exercised by an “Article I *530judge” as enunciated by the United Supreme Court in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Therefore orders and judgments entered by the bankruptcy court in accordance with this Opinion shall be entered as final orders and judgments.5
Defendants subsequently filed a Motion for Partial Summary Judgment which was granted in part and denied in part by the court by an order entered September 26, 2012.6 In that order, the court granted summary judgment for the defendants as to the avoidance count brought pursuant to Section 548 for all alleged transfers occurring more than two years prior to the Petition Date. The court denied summary judgment as to all remaining causes brought by the Amended Complaint.
Trial of the adversary proceeding was conducted on March 5 and 7, 2013. The parties subsequently submitted proposed findings and conclusions and a hearing for final argument was held on June 12, 2013, after which the court held the matter under advisement.
I. Factual Findings
Debtor was hired by Airpack in 20027 after an extensive career in the freight forwarding industry.8 As a part of his employment, Debtor executed a non-compete agreement. On a date sometime pri- or to March 2004, Debtor began his own business as a sole proprietorship using the name “MacPack.”9 Airpack discovered the Debtor’s competing business in March 2004 and terminated his employment.10 Debtor consulted his attorney, Defendant Joseph Edward Martin, Jr. (“Attorney Martin”) in March 2004 about the non-compete clause. Attorney Martin also drafted documents to charter a limited liability company for Debtor under the name of MacPack, L.L.C. (“MacPack, LLC”) that were filed with the Maryland State Department of Taxation on April 12, 2004.11
Airpack brought a suit in the Circuit Court for Wicomico County, Maryland, Case no. 02-C-04-098423 against Debtor and MacPack, LLC for damages from violation of the non-compete clause (hereinafter referred to as the “Judgment Case”). Attorney Martin represented the defendants in that case.12 Judgments were entered against Debtor on April 3, 2006 and August 25, 2006, in the total amount of $153,981.13 When MacPack, LLC was formed its principal member was listed as Linda McLean, the Debtor’s wife and a co-defendant in the action sub judice.14 A *53130% interest in MacPack, LLC was held by Paul Little who it appears invested funds.15 Linda McLean had little prior experience in the regulated business of freight packaging and forwarding.16 Although answers to discovery in subsequent litigation with Paul Little apparently stated that Linda McLean provided an equity injection for her ownership of the business in the form of a customer list and conversion of loans,17 this court finds no credible evidence of an actual investment. Her answers to questions at a deposition taken in that action demonstrate no real support for the assertion that Linda McLean provided any significant equity for her listed ownership.18
At the time MacPack, LLC was created, Debtor was the principal person involved in the business with the contacts, knowledge and experience to run the operation of MacPack, LLC. At times Debtor held himself out as the General Manager of MacPack, LLC.19 However on other occasions during the protracted litigation between Airpaek and Debtor, he was described as a consultant.20 The court finds that arrangement was purposely constructed so that it would appear Debtor was not the person participating in competition with Airpaek through MacPack, LLC. In addition, after some initial distributions to Debtor as a consultant, the arrangement ensured there would be no income paid in the Debtor’s name21 that Airpaek, as a judgment creditor, could attach.22
In lieu of salary paid to Debtor, Mac-Pack, LLC paid a salary to Linda McLean. Joanne Zenobia testified that compensation was paid to Linda McLean for the work performed by Debtor.23 This statement was also made by defendant Allison Davis, in an email dated April 23, 200824 and alluded to in an email from Paul Little dated August 31, 2007.25
The evidence as to the degree of involvement and work contribution provided by Linda McLean is in conflict and at different times inconsistent. For example, witness Zenobia testified at trial in this Adversary Proceeding that Debtor was her supervisor when she worked for MacPack, LLC26 and that Linda McLean was not substantially involved until a subsequent entity (MacPack of S.C., LLC) was formed, although Linda McLean was involved in doing accounts payable and some invoicing for MacPack, LLC.27
*532However, Ms. Zenobia was confronted on cross examination with prior inconsistent statements from a deposition in an earlier action, including statements as to who hired her and who started MacPack, LLC. These statements were made in a deposition of Ms. Zenobia as the corporate designee of MacPack, LLC during the Judgment Case.28 In that deposition, Ms. Zenobia testified that it was Linda McLean who started MacPack, LLC.29 At the time of that deposition testimony, Air-pack was asserting in the Judgment Case that the Debtor, acting through MacPack, LLC, was violating the non-compete clause. Ms. Zenobia as an employee, and at one time 1% member of MacPack, LLC, testified in a manner minimizing the Debt- or’s interest in MacPack, LLC.30 At trial in this adversary proceeding, after having severed relations with MacPack, LLC, Ms. Zenobia was willing to testify as to a far more expansive involvement by the Debtor in the business.31 Although the court must discount the weight to be given to Ms. Zenobia’s present testimony in light of her prior inconsistent statements, the court finds that a preponderance of the evidence supports a finding that MacPack, LLC was created with Linda McLean holding approximately 97% of the ownership but actually investing no measurable equity in exchange for that holding. The business of the prior sole proprietorship of Mac-Pack belonging to Debtor, along with the Debtor’s experience, knowledge, name recognition in the industry and associated goodwill, as well as most likely a customer list from Debtor, formed the actual contribution for the share of the business placed in the hands of Linda McLean. Debtor received nothing of value in his own name in exchange for that value transferred by him to MacPack, LLC and to Linda McLean when MacPack, LLC was formed (hereinafter the “Initial Transfers”).
The evidence also demonstrates that the business of MacPack, LLC was conducted with very significant work done by Debtor for which the company paid a salary and some profit distributions in the form of checks to Linda McLean.32 This misdirection of the income being received for services rendered by Debtor was a transfer of valuable rights from Debtor to Linda McLean without receipt by Debtor of fair consideration or reasonably equivalent value (hereinafter the “MacPack Income Transfers”).
The Initial Transfers from Debtor to MacPack, LLC and to Linda McLean could form the basis for a judgment against MacPack, LLC and Linda McLean to avoid fraudulent conveyances. In addition, the MacPack Income Transfers could form the basis for a judgment against Linda McLean for the value of the Debtor’s services for which payment was made to Linda McLean. Such judgments can only be found if other elements of recoverable fraudulent conveyances are proven and no defense, such as statute of limitations, is successfully presented by the defendants.
On January 7, 2008, a new entity named MacPack of S.C., LLC (“S.C., LLC”) was formed.33 At some point prior to October 2008,34 differences arose between the Mc-Leans and Paul Little. Mr. Little questioned the accounting for income and expenses.35 These differences blossomed *533into a suit by Mr. Little against Linda McLean, Debtor and S.C., LLC, filed on June 4, 200936 in the Circuit Court for Baltimore County, Maryland. According to the testimony of Linda McLean, the new entity had been formed so that Paul Little would have no interest in the packaging and crating portion of the freight forwarding.37 Instead, S.C., LLC absorbed a business owned and operated by Steve and Debbie Bohle that did packaging and crating. Mr. Bohle testified that he was put in contact with Linda McLean by Debtor and dealt with Linda McLean as the owner and managing officer of S.C., LLC.38 In the same time frame, Linda McLean ended her outside employment in the insurance industry. Ms. Zenobia when testifying as a witness for the Plaintiff in the instant adversary proceeding, stated that she saw Linda McLean in the office more often in early 2009.39 S.C., LLC shared common office space with MacPack, LLC.40 Steve Bohle testified extensively concerning Linda McLean’s activities as manager of S.C., LLC. These duties included approving financial expenditures and business management, including “cutting” checks approving new contracts, including credit decisions for new customers.41 Mr. Bohle and Mrs. Bohle operated independently as to the work performed.42 Mr. Bohle testified that his wife performed duties of an “inside operations manager,” managing the labor force, preparing invoices, handling accounts receivable and purchasing supplies for building crates43 and he handled sales.44 After its creation, Linda McLean received a salary from S.C., LLC but Debtor did not.45 MacPack, LLC continued to handle all packaging of hazardous material.46 After the creation of S.C., LLC, Linda McLean received regular distributions and/or salary from both MacPack, LLC and S.C., LLC.47
II. Analysis
A. Counts I, II and IV — Fraudulent Conveyance and Recovery
Plaintiffs Count I is brought under Section 548(a)(1) and requests the court to avoid transfers (1) of the South Carolina property from Debtor to MacPack, LLC; (2) of ownership of MacPack and MacPack of SC from Debtor to Linda McLean; (3) of profit distributions from MacPack, LLC and S.C., LLC to Linda McLean; and (4) of wages paid to Linda McLean (specified only as the Debtor’s wages, but no amount provided) by MacPack, LLC and S.C., LLC. Plaintiff asks for reconveyance of property to Debtor or a judgment against MacPack, LLC, S.C., LLC and Linda McLean in the amount of $500,000. In Count II, Plaintiff seeks avoidance of the same transfers pursuant to state fraudulent conveyance law set forth in Md.Code Ann. Com. Law §§ 15-204 and 15-207.
The court finds from the evidence that Plaintiff has proven by the preponderance standard48 that the initial creation of *534MacPack, LLC using the assets of Debtor but registering the ownership of that entity in the name of Linda McLean was an intentional act to defraud creditor Airpack by a transfer of the Debtor’s assets into MacPack, LLC. Plaintiff has also proven that the transfer of assets into MacPack, LLC in 2005 was a transfer for which no fair consideration was provided to Debtor and that Debtor was left insolvent. Similarly, the shifting of ownership in the business of MacPack, LLC from Debtor to Linda McLean would constitute an avoidable fraudulent conveyance of the value of the business (at the time of the creation of MacPack, LLC). Under both Section 548 and Md. Code Ann. Com. Law §§ 15-204 and 15-207, Plaintiff has therefore proven a prima facie case as to avoidance of the Initial Transfers. The court also finds that salaries and distributions of profit made to Linda McLean by MacPack, LLC for the work done by the Debtor (who at times described the salary as his)49 form the legal basis for avoiding the MacPack Income Transfers to Linda McLean.50
Despite this finding of evidence of avoidable fraudulent conveyances, in its Order granting partial summary judgment entered September 26, 2012, the court was compelled to find in favor of defendants as to all avoidances under Section 548(a)(1) that occurred more than two years prior to petition.51 This included the transfer of ownership of MacPack, LLC and S.C., LLC to Linda McLean and all pre-Sep-tember 9, 2008 salary and profit distributions by those entities to Linda McLean. The court now finds that the post-September 9, 2008 MacPack Income Transfers to Linda McLean are avoidable pursuant to Section 548(a) and recoverable from Linda McLean under Section 550.
The court, however, declined to make a finding on summary judgment as to Count II brought under Md.Code Ann. Com. Law §§ 15-204 and 15-207 for conveyances which occurred more than three years52 prior to the Petition Date53 because there was a material dispute of fact as to the Plaintiffs argument that the three year statute of limitations does not bar recovery. Airpack asserted that it did not learn of the fraudulent conveyance scheme until sometime in 2010 during the course of the Paul Little litigation and *535within the state law limitations periods. Plaintiff renewed this argument at trial. In essence, Plaintiff requests this court to invoke what is commonly known as the “discovery rule.” The discovery rule exists in both Maryland statutory and common law.
What is known as the “fraud discovery exception” is codified at Md.Code Ann. Cts. & Jim PROC. § 5-203. That Section provides: “If the knowledge of a cause of action is kept from a party by the fraud of an adverse party, the cause of action shall be deemed to accrue at the time when the party discovered, or by the exercise of ordinary diligence should have discovered the fraud.” Although Plaintiff alleges that the underlying conveyances were done with fraudulent intent and constituted fraud as against Airpack, the record does not support a finding that defendants took fraudulent measures to conceal the transfers from Airpack. The creation of MacPack, LLC as solely owned by Linda was never concealed or denied. Even if this court were to find that the defendants fraudulently concealed the transfers to Linda McLean, for the same reasons discussed supra, the court finds that Airpack (in whose “shoes” Trustee now appears as Plaintiff) by exercise of ordinary diligence should have discovered the fraudulent conveyances. Therefore, the cause of action accrued at the time of the transfers.
The common law “discovery rule” is recognized in Maryland law and is different than the statutory “fraud discovery exception.” The operation of the common law discovery rule is to effectively toll a limitations period where a plaintiff does not or can not discover that the wrong has occurred until sometime after the wrong is committed. Stated conversely “a cause of action accrues when a plaintiff in fact knows or reasonably should know of the wrong.” Hecht v. Resolution Trust Co., 333 Md. 324, 336, 635 A.2d 394, 399 (1994) (citing Poffenberger v. Risser, 290 Md. 631, 636, 431 A.2d 677 (1981)). In the instant adversary proceeding, Plaintiff argues that the limitations period should be found to have been tolled from the period of the conveyances to 2010.54 The evidence, however, does not support such a finding.55 Instead, the court finds that Airpack had sufficient information available as of April 3, 2006 to be aware of the ownership of MacPack, LLC and the use of that structure to try to place the assets of MacPack, LLC and income earned by Debtor through MacPack, LLC beyond the reach of Airpack as a creditor.56 Not only was the corporate structure of MacPack, LLC discoverable to Airpack in its litigation *536proceedings and post-judgment collection efforts,57 but Plaintiffs counsel in argument acknowledged that Airpack received information regarding Linda McLean’s ownership of MacPack, LLC and chose not to believe it.58
Accordingly, the court does not find that a statutory or common law “discovery rule” would operate to toll the statute of limitations thereby allowing the Plaintiff trustee to reach transfers beyond the applicable statutes of limitations. The court concludes that transfers occurring prior to August 2, 200759 (the “Limitations Date”) cannot be avoided in this adversary proceeding as a result of the application of the Maryland statute of limitations.
As to the MacPack Income Transfers paid to Linda McLean by MacPack, LLC, the Court finds that such income payments were an intentional misdirection of payment for the services and expertise of Debtor and as such are a transfer by Debtor to Linda McLean of the Debtor’s right to receive the income and distributions. The evidence supports a finding that these transfers, as each income and distribution payment was made, were made to “hinder, delay, or defraud present or future creditors” and are thus avoidable pursuant to Md.Code Ann. Com. Law § 15-207 to the extent they occurred after the Limitations Date.60 The court finds that the transferee, Linda McLean knew of the fraudulent nature of the transfer and participated with requisite intent. Such knowledge and intent are necessary elements for a finding under that Section. See Berger v. Hi-Gear Tire and Auto Supply, Inc. 257 Md. 470, 475, 263 A.2d 507, 510 (1970) (“Even if the grantor has a fraudulent intent, this will not vitiate or impair a conveyance unless the grantee participates in the fraudulent intent.”). Consequently the court concludes that the amount of such transfers is avoidable pursuant to Section 544(b) and the Maryland Uniform Fraudulent Conveyance Act and recoverable by judgment against the transferee, Linda McLean, pursuant to Section 550. In reaching this conclusion, the court finds without credibility the explanations of Linda McLean as to the amount, nature, and value of alleged work that defendants assert she performed for *537MacPack, LLC and the argument that the income she received was for her services. The evidence instead demonstrates by a preponderance that all income and distribution payments were recompense for the Debtor’s work.
In addition, the above-discussed MacPack Income Transfers are avoidable pursuant to Section 544(b) and Md.Code AnN. Com. Law § 15-204.61 The evidence is devoid of any fair consideration provided by Linda McLean to Debtor for the MacPack Income Transfers. Circumstantial evidence supports a finding that at the time of the transfers, Michael McLean was insolvent, particularly in light of the judgment liabilities against him entered in the Judgment Case. Furthermore where a transfer is demonstrated to have been made without fair consideration, and the transfer is sought to be avoided because the transferor was insolvent, the burden of proving the transferor was neither insolvent, nor rendered insolvent at the time of the transfer is upon the party seeking to uphold the transfer.62 No evidence supporting a finding of solvency was received, nor argument for such a finding made. In fact Debtor had intentionally rendered himself insolvent as a means of thwarting collection by Airpack of its judgment.
Plaintiff asserts that the same fraudulent transfers occurred as a result of the formation of S.C., LLC and income paid by S.C., LLC to Linda McLean. S.C., LLC was formed after the Limitations Date and therefore avoidance under the causes of action prayed by Count II of the Amended Complaint are not barred by the Maryland statute of limitations.63 Nevertheless, the court finds insufficient evidence to support a finding that fraudulent conveyances from Debtor to others were made as a result of the creation of S.C., LLC or by reason of the income payments made by S.C., LLC to Linda McLean. Here the evidence of Linda McLean’s efforts in managing aspects of the business of S.C., LLC and the facts surrounding this LLC’S formation and operation do not demonstrate by a preponderance of the evidence that Debtor made a transfer into S.C., LLC or to Linda McLean at its formation, nor that income paid by S.C., LLC to Linda McLean was not for her efforts but rather a misdirection of income due to Debtor.
S.C., LLC was formed to separate the hazardous materials packaging business retained by MacPack, LLC from other packing and freight forwarding to be done by S.C., LLC.64 There is no evidence that Debtor conveyed something to S.C., LLC at that time. Furthermore, S.C., LLC absorbed the business of Steve Bohle and was thereafter carried forward through the Bohles’ operational efforts with Linda McLean handling accounts payable and receivable functions as well as credit approval and contract approval.65 From this evi*538dence the court cannot find as a fact that the income paid to Linda McLean by S.C., LLC was misdirected funds actually earned by Debtor. For these reasons the Plaintiffs demand in Counts I and II that the court find a avoidable fraudulent transfers by Debtor from the activities of S.C., LLC will be denied.
The Amended Complaint also sought avoidance of a March 17, 2009 transfer of real property located in South Carolina (the “S.C. Property”) from Debtor and Linda McLean to MacPack, LLC. This transfer occurred within both the two year and three year statutes of limitations and is not subject to the statute of limitations defense raised by Defendants. However in argument before the court, Plaintiffs counsel effectively abandoned any request to find the transfer avoidable. Plaintiffs counsel explained that discovery had revealed that the S.C. Property was heavily mortgaged and so no evidence was presented during trial as to the net value of the property. The court, therefore, concludes that there is insufficient evidence upon which the court could determine the transfer of the S.C. Property to be avoidable.
B. Counts III and VII — Turnover and Declaratory Judgment
The court also must deny the Plaintiffs alternative argument in Count VII of the Amended Complaint that the businesses were and remain owned by the Debtor and that the court should enter a declaratory judgment so stating. Although in closing argument, counsel for Plaintiff stated that this is the Plaintiffs primary position with the assertion that the businesses were fraudulently transferred being an alternative, the court notes that the count for declaratory judgment was added by the Amended Complaint filed after defendants raised the statute of limitations defenses to the fraudulent conveyance counts. Simply put, the evidence does not support that either business was owned by Debtor at the time of the Petition Date.
Having denied the declaratory judgment requested by Count VII, the action for turnover in Count III must similarly be denied. The ownership of the business and income paid to Linda McLean by the businesses were not property of the estate on the date of petition.
C. Counts V and VI — Civil Conspiracy and Aiding and Abetting
In Count V, Plaintiff alleges a civil conspiracy of a fraudulent transfer of property. To support such a claim, Plaintiff is required to demonstrate an agreement between the involved parties. A cause of action for civil conspiracy was defined in Maryland as “a combination of two or more persons by an agreement or understanding to accomplish an unlawful act or to use unlawful means to accomplish an act not in itself illegal, with the further requirement that the act or the means employed must result in damages to the plaintiff.” Hoffman v. Stamper, 385 Md. 1, 24, 867 A.2d 276, 290 (2005). In In re Rood, 459 B.R. 581, 603-04 (Bankr.D.Md.2011), this court (P. Mannes), held that the tortious conduct of an underlying fraudulent transfer was sufficient to find a civil conspiracy where the court also found an agreement or meeting of the minds to accomplish such fraudulent conveyance. Id. Such a finding that civil conspiracy would lie was upheld by the District Court in 482 B.R. 132, 143 (D.Md.2012)(D. Cha-sanow).
The Rood case, like the instant case, also involved an allegation of aider and abettor liability. 459 B.R. at 604. The court held that such liability is established if “(1) there is a violation of the law by the principal, (2) defendant knew about the violation, and (3) the defendant gave substantial assistance or encouragement to *539the principal to engage in the tortious conduct.” Id. (citing Alleco, Inc. v. Harry & Jeanette Weinberg Found., Inc., 340 Md. 176, 665 A.2d 1038 (Md.1995) and Christian v. Minn. Mining & Mfg. Co., 126 F.Supp.2d 951, 960 (D.Md.2001).
In the Order Denying Motion of Defendants Melissa Greenwell, Attorney Martin and Allison Davis for Summary Judgment, entered on September 26, 2012, the court held that upon their motion for summary judgment, it was defendants who must prove by evidence the nonexistence of the claims brought against them and that the “Defendants’ evidence does not entirely refute their possible participation, knowledge and encouragement in one or all (depending on which Defendant of these alleged fraudulent transfers).”66 However, at trial it was Plaintiff who had the burden of proving defendants acted in a manner satisfying the elements of the causes of action brought against them. Plaintiff did not meet this burden with respect to defendants Greenwell, Attorney Martin and Davis. Plaintiffs evidence against Greenwell, Attorney Martin and Davis at trial consisted largely of documentary exhibits, in particular deposition transcripts. The court has spent considerable time reviewing the allegations and the exhibits after completion of the courtroom phase of the trial.
As to Greenwell and Davis, the exhibits could lead the court to find that they were aware that the Debtor’s role in MacPack, LLC was greater than that which he now claims and similarly that Linda McLean’s role was smaller. However, evidencing a degree of awareness by Greenwell and Davis’ of their co-defendants’ business efforts does not satisfy the Plaintiffs burden to prove both an awareness that such acts were being done for a tortious purpose and that Greenwell and Davis participated in the scheme.
Plaintiff argues that as the Debt- or’s attorney, Attorney Martin was in the position of collaborating with Debtor to create the scheme and effectuate the fraudulent conveyances. The evidence that Plaintiff asserts supports such a finding is Attorney Martin’s role in preparing business documents with respect to the creation of MacPack, LLC, the sanction entered against him for a discovery violation during the Fraudulent Conveyance Case and statements made by Attorney Martin which at most demonstrate that he was aware of the fraudulent conveyance scheme. The evidence is not in dispute that Attorney Martin prepared and filed the paperwork to form MacPack, LLC, which creation is found to be a fraudulent conveyance though unavoidable for reasons of statute of limitations. However, Plaintiff has not demonstrated that Attorney Martin advised or participated with Debtor to adopt the ultimate scheme of creating the corporation in Linda McLean’s name and paying his salary to her in order to avoid Airpack’s collection efforts.
As explained in the decision of Fraidin, et al. v. Weitzman, et al., 93 Md.App. 168, 611 A.2d 1046 (Md.App.1992), an attorney will not be found liable for a conspiracy where the conduct of the attorney was within the scope of employment. Id. at 234-35, 611 A.2d at 1079-80. Further, the Plaintiff has not demonstrated by any evidence that Attorney Martin’s services to Debtor were undertaken to either benefit himself or injure another. Id. at 235-236, 611 A.2d at 1079-80. As the Fraidin Court pointed out, there is a distinction between “committing] fraud or collusion, or a malicious or tortious act, even *540if doing so is for the benefit of the client ... [and] mere participation in acts which subsequently make possible the alleged fraud.” Id. at 236-37, 611 A.2d at 1080.
The court cannot conclude that Plaintiff has proven by a preponderance of the evidence that Greenwell, Attorney Martin or Davis conspired with each other or with Michael and Linda McLean to commit tor-tious acts, or that any of the defendants aided and abetted Michael and Linda McLean with those acts. The court finds that Plaintiff presented insufficient evidence to prove liability against Greenwell, Attorney Martin or Davis under Counts V and VI of the Amended Complaint.
III. Judgment
Having found that the MacPack, LLC Income Transfers occurring after the Limitations Date are fraudulent conveyances that are avoidable as against Linda McLean, the court must determine the amount of the consequent judgment to be entered. Plaintiffs Exhibit 69 is a voluminous copy of paystubs demonstrating amounts paid to Linda McLean by Mac-Pack, LLC. Plaintiff did not provide a summary or computation as to the aggregate amounts stated in this evidence. Therefore in its order determining certain MacPack Income Transfers to be avoided, the court will require that Plaintiff file a detailed summary and computation of the MacPack Income Transfers occurring after the Limitations Date as evidenced by Exhibit 69. The court will enter a money judgment in favor of Plaintiff and against Linda McLean after receipt and review of the required summary and computation.
These are the findings and conclusions of the court. An order and judgment will be entered in accordance with this Opinion.
. The remaining defendants in the Fraudulent Conveyance Case are the non-debtor defendants in the instant adversary proceeding.
. Hereafter, all code sections refer to the United States Bankruptcy Code found at Title 11 of the United States Code unless otherwise noted.
. In the bankruptcy case, Airpack also filed a Motion for Relief from Stay asking that it be permitted to prosecute the Fraudulent Conveyance Case in the state court. The court denied that motion because upon the filing of a chapter 7 bankruptcy case, the right to pursue a fraudulent conveyance action belongs to the chapter 7 trustee. 11 U.S.C. §§ 323, 544(a), 548(a). See also PW Enterprises, Inc. v. State of North Dakota, et al. (In re Racing Services), 363 B.R. 911, 916 (8th Cir. BAP 2007) (citing, inter alia, In re Baltimore Emergency Services II Corp., 432 F.3d 557 (4th Cir.2005) and finding that absent specific finding by bankruptcy court that creditor can proceed derivatively, the authority to pursue a fraudulent conveyance action rests with the trustee).
. The non-debtor defendants are MacPack, LLC, MacPack of SC, LLC, Linda McLean (the Debtor's wife), Melissa Greenwell (the Debtor’s daughter), Allison Davis (a former employee of MacPack, LLC), and J. Edward Martin (the Debtor's attorney).
. If upon any appellate review it shall be determined that the bankruptcy judge was not permitted to enter final orders and judgments, in the alternative the findings and conclusions stated in this opinion would be intended to constitute proposed findings and conclusions under Standing Order 2012-05 of the United States District Court for the District of Maryland.
. The Motion for Partial Summary Judgment was brought by all defendants. In addition to that motion, defendants Greenwell, Davis and Martin filed a Motion for Summary Judgment seeking to have the Amended Complaint dismissed in its entirety as against them. Although the court now finds that the Amended Complaint is properly denied as to those defendants, such finding was not appropriate prior to the trial on the merits and that motion was denied on September 26, 2012.
. Trial Transcript March 5, 2013, p. 28, line 5.
. Plaintiff's Exhibit 11.
. Plaintiff’s Exhibit 1.
. Plaintiff’s Exhibit 3 and Trial Transcript March 5, 2013, p. 29, line 8.
. Defendant’s Exhibit 21.
. Plaintiff's Exhibits 13 and 14.
. Plaintiff’s Exhibit 15.
. Defendant's Exhibit 25, Bates no. 3677
. Id.
. See Joint Exhibit A, Deposition of Linda McLean, November 9, 2011, at p. 49, lines 9-15 and p. 50, lines 1-9.
. See id. at Deposition of Linda McLean, August 23, 2010, at pp. 22-26, 38 and Deposition of Linda McLean, November 9, 2011, at pp. 57-59. See also Defendants' Exhibit 25, Bates no. 3677.
. See generally Joint Exhibit A, Excerpts of Deposition of Linda McLean August 23, 2010, including pp. 56-60.
. Plaintiff's Exhibit 7; Plaintiff’s Exhibit 13, at Bates no. 2334.
. See e.g., Joint Exhibit A, Deposition of Michael McLean, November 16, 2011, at p. 66, lines 8-14; Plaintiff's Exhibit 65, Defendants' Exhibit 32 and Defendants' Exhibit 24, Bates no. 1634, 1643.
. Plaintiff’s Exhibit 13, at Bates no. 2334.
. E.g., Plaintiff’s Exhibit 10, at Bates no. 6277.
. Trial Transcript March 5, 2013, p. 96, line 14.
. Plaintiff’s Exhibit 22 at Bates no. 1078.
. Id. at Bates no. 1164.
. Trial Transcript March 5, 2013, p. 74, line 13.
. Id. at p. 74, line 1 — p. 75, line 2.
. See id. at pp. 103-04.
. Id. at p. 112
. See id. at pp. 103-113.
. See id.
. See Plaintiff's Exhibit 22, Bates no. 1164.
. Defendant’s Exhibit 34.
. Plaintiff’s Exhibit 26.
. See e.g., Plaintiff's Exhibit 22, Bates no. 1078/1164.
. Plaintiff's Exhibit 28.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2010, atpp. 61-62.
. Trial Transcript March 5, 2013, at p. 121, lines 9-13.
. Id. atp. 83, line 15.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2010, at p. 63, line 12.
. Id. atpp. 178-81.
. Id. at p. 183, lines 2-13; p. 121, lines 9-10.
. Id. at p. 120, lines 2-12.
. Id. atp. 119, lines 18-23.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2010, at pp. 69-71; Plaintiff's Exhibit 70.
. Id. atp. 188, lines 3-6.
. Plaintiff’s Exhibits 69-71.
. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). See also In re Goldschein, 241 B.R. 370, 377-78 (Bankr.Md.1999).
. Plaintiff's Exh. 22, at 560, 1163.
. See generally Cardiello v. Arbogast (In re Arbogast), 466 B.R. 287, 300-01 (Bankr.W.D.Pa.2012) (court found fraudulent conveyance where debtor caused wages to be direct deposited into account maintained with wife as tenants by the entireties).
. Section 548 limits the avoidance of a fraudulent transfer to those transfers occurring within two years of the petition date.
. Where a trustee asserts claims under state law pursuant to Section 544(b), the state law statute of limitations will apply. E.g., In re Simpson, 334 B.R. 298, 304 (Bankr.D.Mass.2005). In Maryland, the statute of limitations for fraudulent conveyance is set forth in Md. Code Ann., Cts. & Jud. Proc. § 5-101 which provides: "A civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.”
.The Petition Date is ordinarily the proper date for application of the state law statute of limitations. The trustee is required to file an action for avoidance within two years of appointment pursuant to Section 546(a), however, even if the trustee does not initiate the adversary proceeding seeking avoidance of transfers until a date between the petition date and the two year deadline applicable by Section 546(a), transfers made within three years of the petition date are within the statute of limitations. E.g., In re Dry Wall Supply, Inc., 111 B.R. 933, 936 (D.Colo.1990).
However, see infra fn. 55, Airpack had initiated a fraudulent conveyance action against Debtor a month prior to the Petition Date and that earlier date is the starting point of the limitations period.
. As recognized in In re Bernard L. Madoff Investment Securities LLC, 445 B.R. 206 (Bankr.S.D.N.Y.2011), applying a similar New York discovery rule, a trustee proceeding under Section 544 can take advantage of the discovery rule if the fraud was "(1) not discovered, and could not have been discovered with reasonable diligence, by at least one unsecured creditor; or (2) was only discovered, and could have only been discovered with reasonable diligence, by at least one unsecured creditor within two years of the Filing Date.” Id. at 232.
. A trustee gains only what right an unsecured creditor would have on the date of petition. Because the court finds that the statute of limitations had run as to any transfer which occurred more than three years prior to the filing of the state court action (August 2, 2010), Plaintiff acquires no greater right to maintain an avoidance for transfers beyond the period of time. Cardiello v. Arbogast (In re Arbogast), 466 B.R. 287, 300-01 (Bankr.W.D.Pa.2012). See also Bergquist v. Vista Development, Inc. (In re Quality Pontiac Buick GMC Truck, Inc.), 222 B.R. 865, 869 (Bankr.D.Minn.1998); Bay State Milling Co. v. Martin (In re Martin), 142 B.R. 260 (Bankr.N.D.Ill.1992).
.The court infra has held that the transfer of property to S.C., LLC which occurred in 2008 and from S.C., LLC to Linda McLean did not constitute an avoidable transfer so it is not necessary to determine the applicable statute of limitations date.
.Plaintiff produced an exhibit which he has identified as MacPack LLC’s Supplemental Answers to Interrogatories from the Judgment Case. Plaintiffs Exhibit 14. That document provides that Linda McLean provided information relevant to the answers (Supplemental Answer No. 1), that Michael McLean became a consultant to MacPack, LLC at the request of Linda McLean (Supplemental Answer No. 7) and further, though unsigned for reasons unknown to the court, the prepared signature line identifies Linda McLean as the majority owner of MacPack, LLC.
On cross examination at trial, counsel for Debtor provided Ms. Zenobia with a copy of a deposition transcript from March 20, 2006 during which deposition she testified as the corporate designee for MacPack, LLC in the Judgment Case. Those excerpts revealed a pattern of questions and answers between Zenobia and Airpack's counsel wherein Zeno-bia referenced the ownership by Linda McLean and that Linda McLean had hired her. Trial Transcript March 5, 2013, at pp. 106-109.
. Trial Transcript March 7, 2013, at p. 142, line 23 — p. 143, line 4 ("[The allegation] was made during the Airpack case sometime in 2006, but it was not believed by Airpack at the time because obviously Michael McLean was running the company.”)
. The Fraudulent Conveyance Action was filed by Airpack in state court on August 2, 2010. Seefn. 55.
. Section 15-207 of the Commercial Law Article of the Maryland Annotated Code provides: “Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors, is fraudulent as to both present and future creditors.”
. This Section of the Maryland Code provides: "Every conveyance made and every obligation incurred by a person who is or will be rendered insolvent by it is fraudulent as to creditors without regard to his actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.” Md. Code Ann. Com. Law § 15-204.
. Lacey v. Van Royen, 259 Md. 80, 93-94, 267 A.2d 91, 98 (1970) (discussing Section 4 of Article 39B of the Annotated Code of Maryland, now codified in Md.Code Ann. Com. Law § 15-204).
. The court previously ruled in the Order granting partial summary judgment that as to Count I (Section 548), the statute of limitations would bar recovery of any avoidable transfers occurring prior to two years prior to the Petition Date. See supra fn. 51 and accompanying text.
. Joint Exhibit A, Deposition of Linda McLean, August 23, 2013, at pp. 61-62.
. See supra fn. 41-44 and accompanying text.
. Order entered September 26, 2012, at p. 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496339/ | MEMORANDUM OPINION GRANTING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS’ MOTION AND SUPPLEMENTAL MOTION FOR SUMMARY JUDGMENT
REBECCA B. CONNELLY, Bankruptcy Judge.
Before the Court are cross motions for summary judgment. The question the Court must answer is whether a Chapter 13 Trustee’s strong arm powers under section 544(a)(3) may defeat an unrecorded deed of trust or whether equitable remedies may block the trustee’s powers.
The Parties
Herbert L. Beskin, Chapter 13 Trustee (the “Trustee”), and Michael and Brandy Perrow (the “Debtors”) (collectively, the “Plaintiffs”) filed a complaint against BAC Home Loan Servicing LP (the “Defendant”) and CTC Real Estate Services, Inc. (the “Third-Party Defendant”) (collectively, the “Defendants”). The Plaintiffs seek avoidance under 11 U.S.C. § 544(a)(3) of Defendant’s alleged interest in Debtors’ real property and disallowance of Defendant’s proof of claim under 11 U.S.C. 502.1 The Defendants’ assert a counterclaim and a third party claim seeking six grounds of equitable relief, namely: declaratory judgment, equitable subrogation, specific performance, constructive trust, equitable lien, and relief under 11 U.S.C. § 105 (the “Counterclaim”).2
Procedural Posture and Background On April 22, 2009, the Debtors filed for Chapter 13 relief. The Debtors’ listed Defendant as an unsecured creditor on Schedule F.3 The Debtors explained on Schedule A4 why Defendant was listed as unsecured. On July 2, 2009, the Debtors filed an amended Chapter 13 plan. The Debtors’ amended plan listed Defendant as unsecured and proposed to pay Defendant a two percent dividend. Defendant never objected to the amended plan. The Debt*566ors’ amended plan was confirmed as proposed on September 17, 2009. On September 24, 2009, Defendant filed a proof of claim as a secured creditor. The deadline for filing claims was August 17, 2009.
On August 15, 2011, the Plaintiffs initiated this adversary proceeding to avoid Defendant’s unrecorded deed of trust. Defendants later added the Third-Party Defendant as a necessary party. On October 15, 2011, the Plaintiffs filed an amended complaint (the “Complaint”), which is the basis of the matter for decision before the Court. The Complaint seeks to avoid Defendant’s unrecorded deed of trust under 11 U.S.C. § 544(a)(3) and asks that the Court to disallow Defendant’s proof of claim as untimely.5 Defendants answered the Complaint and asserted as affirmative defenses6 six grounds of equitable relief to Plaintiffs Complaint — declaratory judgment, equitable subrogation, specific performance, constructive trust, equitable lien, and relief under 11 U.S.C. § 105.7
On January 27, 2013, Defendant filed a motion for summary judgment on Plaintiffs’ Complaint. Plaintiffs followed suit and filed a motion for summary judgment on their Complaint on February 25, 2013. On that same day, Defendant filed a supplemental motion for summary judgment on its Counterclaim. After hearings on March 14, 2013, and April 25, 2013, the matter was taken under advisement.
Facts
The facts of this case are minimal and undisputed. On September 20, 2004, the male debtor entered into a loan (the “2004 Loan”) with Charter Capital (the “Third-Party Defendant”) for $133,299. The 2004 Loan was secured by a deed of trust (the “2004 DoT”) on the male debtor’s real property. The 2004 DoT was properly recorded October 20, 2004.
On July 20, 2005, the male debtor deeded by gift his real property to himself and the female debtor as tenants by the entirety. The deed of gift was properly recorded on August 2, 2005.
Debtors entered into a refinance loan (the “2006 Loan”) with another bank on June 12, 2006, in the amount of $184,500, repayment of which was secured by a deed of trust (the “2006 DoT”) on Debtors’ real property. The 2006 DoT was properly recorded on July 24, 2006. The proceeds from the 2006 Loan were used to pay off the 2004 Loan, but the Third-Party Defendant never recorded a release of its 2004 DoT.
On May 15, 2007, the Debtors entered into a refinance loan (the “2007 Loan”) with BAC Home Loan Servicing LP, fka Countrywide Home Loans, Inc. (the “Defendant”) for $197,900, the repayment of which was secured by a deed of trust (the “2007 DoT”) on the Debtors’ real property. The 2007 DoT was never recorded and has since been lost, misplaced, or destroyed. The proceeds from the 2007 Loan were used to pay off the 2006 Loan and a release of the 2006 DoT was properly recorded on July 2, 2007.
On April 22, 2009, the Debtors filed for bankruptcy relief under Chapter 13 of Title 11. The Debtors’ Chapter 13 plan was confirmed on September 17, 2009. The Defendant never filed an objection to the plan. After confirmation of the plan, on *567September 24, 2009, Defendant filed a proof of claim as a secured creditor in Debtors bankruptcy case. Subsequently, the Trustee with Debtors jointly filed this adversary proceeding under 11 U.S.C. § 544(a) seeking to avoid Defendant’s unrecorded deed of trust.
JURISDICTION AND THE COURT’S AUTHORITY
This adversary proceeding is a civil proceeding arising in a case filed under Title 11 of the United States Code. Specifically, the plaintiffs in this adversary proceeding are the Chapter 13 Trustee and the Chapter 13 debtors, and the defendants are creditors of the Debtors. The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1334. This matter is a core proceeding under the Bankruptcy Code because it is a proceeding to determine the Chapter 13 Trustee’s ability to use his “strong-arm” powers under Section 544 of the Bankruptcy Code and to determine the extent, priority, and validity of an alleged lien under Section 506 of the Bankruptcy Code. 28 U.S.C. §§ 157(b)(2)(B) and (K). This Bankruptcy Court can hear this matter pursuant to 28 U.S.C. § 157(b)(1) and the Western District of Virginia District Court Order of Reference.8
Constitutional Authority and the Stern v. Marshall Opinion
In Stem v. Marshall, the Supreme Court found that a bankruptcy court may have statutory authority to hear a “core proceeding” under 28 U.S.C. § 157, yet not Constitutional authority to issue a final judgment in that proceeding. — U.S. -, 131 S.Ct. 2594, 2608,180 L.Ed.2d 475 (2011). In Stem, the Supreme Court determined that a bankruptcy court could not issue a final ruling on a state law counterclaim against a non-creditor third party even if the counterclaim was a core proceeding. Id. at 2615. The test for whether a bankruptcy court has constitutional authority to enter a final judgment is “whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Id. at 2618.
The Defendants have requested summary judgment on multiple state law counterclaims. Some of these counterclaims do not stem from the bankruptcy itself, but ultimately impact the claim allowance process. The Counterclaim lists several equitable remedies, all of which allegedly allow the Defendant to claim an interest or lien in the Debtors’ real property superior to that of the Trustee’s interest under section 544(a)(3). If, however, the Defendant does not have a valid interest or lien, or the Trustee is able to avoid Defendant’s interest, then the Defendant may not have an allowed secured claim. 11 U.S.C. § 506(a). As a consequence, Defendant may have an unsecured claim. Id. As an unsecured creditor, Defendant’s proof of claim would be susceptible to disallowance as untimely because Defendant’s proof of claim was filed thirty-eight days after the bar date. 11 U.S.C. §§ 501 and 502. Plaintiffs’ Complaint specifically requests such relief. The equitable remedies put forth by Defendants in the Counterclaim are, therefore, necessary to the claims allowance process because they will ultimately determine whether Defendants’ claim is secured and allowed or unsecured and, potentially, disallowed. Stem, 131 S.Ct. at 2618. Furthermore, to the extent the Counterclaim asserts affirmative defenses to the Trustee’s ability to exercise his strong-arm power, they stem from the bankruptcy itself. Id. The Court concludes that it has authority to issue a final ruling on all matters currently before it.
*568Conclusions op Law
Summary Judgment
This matter comes before the Court on cross motions for summary judgment on Plaintiffs’ Complaint and Defendants’ motion for summary judgment on counts II through VI of their Counterclaim. On motions for summary judgment, the Court must apply a different standard of review than it would on the merits of the case at trial. The Fourth Circuit has summarized the standard:
Summary judgment should be granted 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. Facts are material when they might affect the outcome of the case, and a genuine issue exists when the evidence would allow a reasonable jury to return a verdict for the nonmoving party. The moving party is entitled to judgment as a matter of law when the nonmoving party fails to make an adequate showing on an essential element for which it has the burden of proof at trial. In ruling on a motion for summary judgment, the nonmoving party’s evidence is to be believed, and all justifiable inferences are to be drawn in that party’s favor. To overcome a motion for summary judgment, however, the nonmoving party may not rely merely on allegations or denials in its own pleading but must set out specific facts showing a genuine issue for trial.
News and Observer Publishing Co. v. Raleigh-Durham Airport, 597 F.3d 570, 576 (4th Cir.2010) (internal citations and quotations omitted) (summarizing Supreme Court precedents). A party may move for full or partial summary judgment on any claim or defense. See Fed. R. Civ. P. 56(a) (made applicable by Fed. R. BankR. P. 9056). See also 11-56 Mooee’s Federal PRACTICE — Civil ¶ 56.02.
With this standard in mind, the Court will address the cross motions for summary judgment and Defendants’ motion for summary judgment on counts II through VI of their Counterclaim. The Court will address the matters out of turn. First, the Court will address Defendants’ motion for summary judgment on Plaintiffs’ Complaint. Next, the Court will address the Trustee’s status as a bona fide purchaser of real property under section 544(a)(3), which Plaintiffs have raised as grounds for granting their Complaint. After that, the Court will address the Defendants’ supplemental motion for summary judgment on their Counterclaim, which alleges equitable remedies and is incorporated in Defendants’ answer as affirmative defenses to the Plaintiffs’ Complaint. Last, the Court will address Plaintiffs’ motion for summary judgment on their Complaint.
“Strong Arm” Powers of the Trustee under Section 544(a)
Section 544(a) of the Bankruptcy Code grants the trustee “the rights and powers of, or [the ability to] avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by” certain creditors or a bona fide purchaser of real property. 11 U.S.C. § 544(a). Section 544(a) is most often invoked by Chapter 7 trustees in a Chapter 7 case. See 11 U.S.C. § 704 (charging the Chapter 7 trustee with the potential liquidation of the estate for the benefit of unsecured creditors). The trustee’s strong arm powers under section 544(a), however, are not exclusive to Chapter 7 trustees. Section 103(a) of the Code makes section 544(a) applicable in a Chapter 13 case. See 11 U.S.C. § 103(a). As such, a Chapter 13 trustee may appear and invoke the strong arm powers under section 544(a) to avoid a *569creditor’s interest just as a Chapter 7 trustee would, despite the fact that a Chapter 13 trustee’s interests in the case may differ from those of a Chapter 7 trustee’s. Compare 11 U.S.C. § 704 with 11 U.S.C. § 1302.
Standing to Bring Suit under Section 5ii(a)
The ability of the Chapter 13 trustee to bring an action under section 544(a) on behalf of or with a particular debtor is relevant in this case because the entirety of Defendants’ motion for summary judgment on Plaintiffs’ Complaint rests on the assertion that it is Debtors, not the Trustee, who are the party bringing this action. Defendants’ motion for summary judgment ignores the fact that the Trustee is a plaintiff in this action.9 Defendants have attempted to shoehorn the Debtors as the real party bringing this action in an attempt to make the Debtors’ knowledge of the 2007 DoT a factor disqualifying Plaintiffs’ claim under section 544(a)(3).
Defendants rely on Freeman v. Eli Lilly Fed. Credit Union (In re Freeman), 72 B.R. 850 (Bankr.E.D.Va.1987) for the proposition that it is the debtor, not the Chapter 13 trustee, who has standing to bring suit under section 544(a). In particular, the Defendants rely on the conclusion from Freeman, in which the court stated, “it is only logical that [the Chapter 13 debtor] should be extended the powers possessed by the trustee which work toward enhancing their own bankruptcy estate.” Freeman, 72 B.R. at 854. Such a statement, however, does not lead to the conclusion that a Chapter 13 debtor has exclusive standing to bring a section 544(a) action. Rather, analysis of the Code leads to the contrary conclusion: a Chapter 13 debtor may only bring a section 544(a) action after the Chapter 13 trustee fails to do so. See 11 U.S.C. § 522(h) (made applicable to a Chapter 13 debtor by 11 U.S.C. § 103(a)). Section 544(a) explicitly grants certain powers and rights to the trustee without mention of any other party in interest. See 11 U.S.C. § 544(a) (“The trustee shall have.... ”). A statutory provision that designates a particular party empowered to act in a particular way is the least appropriate in which to presume nonexclusivity as to who may act. Hartford Underwriters Insurance Comp. v. Union Planters Bank, 530 U.S. 1, 120 S.Ct. 1942, 1947-48, 147 L.Ed.2d 1 (2000) (disqualifying a party-in-interest from bringing a § 506(c) action because § 506(c) exclusively grants such power to the trustee) (citing 11 U.S.C. § 544(a) as example where exclusivity is presumed). In the case of section 544(a), Congress chose in section 522(h) to allow the debtor to step into the shoes of the trustee for certain avoidance actions under limited circumstances. Cf. Osting v. Blockberger (In re Osting), 337 B.R. 297, 306 (Bankr.N.D.Ohio 2005) (citing Hartford Underwriters) (finding that where Congress intends for a provision to be non-exclusive, it knows how to say so); Mitrano v. United States (In re Mitrano), 468 B.R. 795, 801-02 (Bankr.E.D.Va.2012) (calling into question the precedential value of Freeman in light of the holdings in Osting and Hartford Underwriters). As such, Defendants’ conclusion that the Debtors have exclusive standing to bring this action is inapposite to the provisions of the Code. The Trustee has standing to bring this action under section 544(a) and is the real party in interest in this action.
The Trustee’s Knowledge under Section 511(a)
As the real party in interest, it is the Trustee’s knowledge as a hypothetical *570bona fide purchaser of real property under subsection (a)(3) that is at issue in this matter. Whatever actual knowledge the Trustee may have regarding the interest he or she is attempting to avoid under section 544(a) is disregarded. See 11 U.S.C. § 544(a) (“The trustee shall have ... and without regard to any knowledge of the trustee or of any creditor, the rights and powers of....”). To impute to a trustee the actual knowledge a debtor may have regarding an interest the trustee is attempting to avoid under section 544(a) would strip section 544(a) of any meaningful impact. Under section 544(a), the trustee’s powers as a hypothetical lien creditor or bona fide purchaser are defined by applicable state law. Havee v. Belk, 775 F.2d 1209, 1218-19 (4th Cir.1985). Under Virginia law, a bona fide purchaser of real property is one who purchases real property for valuable consideration without notice of the objecting party’s adverse interest in the property. Va.Code Ann. § 55-96 (West 2013). By imputing a debtor’s actual knowledge to the trustee in actions under section 544(a)(3), the trustee would lose all ability to claim the status of a hypothetical bona fide purchaser of real property because the trustee would almost always have actual knowledge of the underlying transaction between the debtor and the creditor that creates the interest the trustee is attempting to avoid. The Court cannot read such an absurd result into the meaning of the Code, particularly when the Code explicitly provides that the trustee’s actual knowledge is to be disregarded. As such, under section 544(a), the knowledge the Court should concern itself with is the knowledge that the trustee would have as a hypothetical creditor or hypothetical bona fide purchaser. Imputation of the Debtors’ actual knowledge to the Trustee is inappropriate and contrary to the purpose of the Code. Because Defendants’ motion for summary judgment on Plaintiffs’ Complaint rests entirely on the Debtors as the party bringing this action and, therefore, the Debtors’ knowledge of the transaction at issue, Defendants are not entitled to judgment as a matter of law on Plaintiffs’ Complaint. Defendants’ motion for summary judgment on Plaintiffs’ Complaint is, therefore, denied.
Does a Lien or Interest Exist on Debtors’ Real Property that is Subject to the Trustee’s Strong Arm Powers under Section 544(a)?
A central issue before the Court is whether a lien or interest exists on Debtors’ real property that may be avoided by the Trustee under his section 544(a) strong arm powers. By bringing the section 544(a) action, Plaintiffs have conceded that some interest existed between Debtors and Defendant, but that such interest is voidable by a hypothetical bona fide purchaser. The extent of that interest is only relevant in so far as it relates to the Defendant’s rights as to hypothetical bona fide purchasers, not the Debtors. It is uncontested that Debtors and Defendant entered into the 2007 Loan to refinance the 2006 Loan. Furthermore, it is uncontested that Debtors granted Defendants the 2007 DoT as security for the 2007 Loan. As between the Debtors and the Defendant, a valid, enforceable interest in Debtors’ real property was created at the moment the Debtors granted Defendant the 2007 DoT. See Va.Code Ann. § 55-59 (West 2013); Hunton v. Wood, 101 Va. 54, 43 S.E. 186, 187 (1903) (finding that a deed is good as to the parties to the deed upon enactment). Although the 2007 DoT created a valid and enforceable interest between the Debtors and the Defendant, the issue in this case is whether Defendant’s interest is valid and enforceable as against a hypothetical bom fide purchaser of real estate under § 544(a)(3). To answer that question, we must look to Virginia law.
*571
Virginia’s Recordation Statute
Under section 55-96 of the Virginia Code, every deed of trust or mortgage is “void as to all purchasers for valuable consideration without notice not parties thereto and lien creditors, until and except from the time it is duly admitted to record....” Virginia is a race notice jurisdiction; meaning, generally, the first creditor to record its interest has priority over others who record or purchase thereafter. It is undisputed that Defendant has failed to record its interest in Debtors’ real property, as exhibited by the 2007 DoT.10
Under 11 U.S.C. § 544(a)(3), the Trustee is able to step into the shoes of a bona fide purchaser of real estate — a purchaser for valuable consideration without notice. The trustee’s rights as a bona fide purchaser under section 544(a) are limited to those rights he or she would have under applicable state law; no more and no less. Havee, 775 F.2d at 1218-19. As such, the question we must answer is whether the Trustee may step in front of, and avoid entirely, Defendant’s unrecorded interest in Debtors’ real estate under applicable Virginia law.
Bona Fide Purchaser of Real Estate under Section 54Ua)(3)
A bona fide purchaser of real estate is an individual who purchases real estate from another for value and without notice of an objecting creditor’s adverse claim to an interest in the property. See Va.Code Ann. § 55-96; Neff v. Edwards, 148 Va. 616, 139 S.E. 291, 294 (1927) (“A bona fide purchaser, — that is, one who, without such knowledge or notice, actual or constructive, and who has not been put on such inquiry as would lead to knowledge or notice, and has paid the consideration ... ”). As a hypothetical, bona fide purchaser under 544(a)(3), a trustee is statutorily deemed to have purchased the real estate from the debtor for valuable consideration. The trustee’s rights and powers under section 544(a)(3) are defined by applicable state law. Havee, 775 F.2d at 1218-19. The trustee, therefore, is deemed to have the same knowledge of the creditor’s interest as would a hypothetical purchaser under state law. Only a purchaser without knowledge of another’s failure to record an instrument may take advantage of the other’s failure. National Mut. Bldg. & Loan Ass’n v. Blair, 36 S.E. 513, 515 (Va. 1900). As such, the ability of the Trustee to avoid Defendant’s interest in Debtors’ real property rests on what knowledge a hypothetical purchaser would have under applicable Virginia law of Defendant’s interest as of the date of the filing of the bankruptcy petition.
As Neff illustrates, there are two forms of notice under Virginia law: actual and constructive. 139 S.E. at 294. In either form, notice focuses on whether the purchaser, at the time of the purchase, had knowledge of the objecting party’s interest in the seller’s real estate. See Grayson Lumber Co. v. Young, 118 Va. 122, 86 S.E. 826, 828 (1915) (holding that another’s adverse interest would not affect a purchaser’s interest without notice that the purchased land was encumbered by the other’s interest); Stith v. Thorne, 488 F.Supp.2d 534, 547 (E.D.Va.2007) (applying Virginia law) (“To attain the status of a bona fide purchaser for value, a mortgagee must establish that it paid value for its interest in the property without notice of the plaintiff’s rights.”) (citing Ransome v. Watson’s Adm’r, 145 Va. 669, 134 S.E. 707, 709 (1926) (emphasis in original and emphasis added, respectively)). Actual *572notice is “never to be presumed, but must be proved, and proved clearly. A mere suspicion of notice, even though it be a strong suspicion, will not suffice.” Gray-son Lumber, 86 S.E. at 828. The proof of actual notice “must be such as to affect the conscience of the purchaser” and “must be so strong as to fix upon [the purchaser] the imputation of [bad faith].” Id.
Under Virginia law, a purchaser is charged with constructive “notice of all the facts appearing [on the face of the title papers under which he buys], or to the knowledge of which anything there appearing will conduct him.” Shaheen v. County of Mathews, 265 Va. 462, 579 S.E.2d 162, 172 (2003) (quoting Burwell’s Adm’rs v. Fauber, 62 Va. (21 Gratt.) 446, 463 (1871)). A purchaser cannot actively avoid acquiring information in order to avoid acquiring notice of an adverse interest in the property he or she is purchasing. Id. (“[The purchaser] has no right to shut his eyes or ears to the inlet of information, and then say he is a bona fide purchaser without notice.”)
The purpose of the recordation requirement of Virginia Code section 55-96 is to give constructive notice to purchasers or creditors seeking to acquire some interest or right in another’s property. Shaheen, 579 S.E.2d at 171 (citing Chavis v. Gibbs, 198 Va. 379, 94 S.E.2d 195, 197 (1956)). In line with its purpose, deeds properly recorded under section 55-96 constitute “constructive notice to subsequent purchasers, and the titles they take are subject to whatever adverse conveyances or encumbrances they should have discovered in a proper search of the records.” Faison v. Union Camp Corp., 224 Va. 54, 294 S.E.2d 821, 825 (1982) (citing Chavis, 94 S.E.2d 195).
Based on the information before the Court, there is nothing to suggest that a bona fide purchaser of Debtors’ real property would have had actual notice of Defendant’s interest in Debtors’ property. Besides Defendants’ assertions that Debtors’ actual knowledge of the 2007 DoT controls, addressed supra, Defendants have provided the Court with no evidence that a hypothetical purchaser would have had knowledge of Defendant’s interest and most assuredly no evidence that would fix upon the purchaser an imputation of bad faith. See Grayson Lumber, 86 S.E. at 828. Therefore, we find that the Trustee, as a hypothetical purchaser of Debtors’ property, would not have had actual notice of Defendant’s interest in Debtors’ property-
The Trustee, however, is charged with constructive notice of the facts appearing on Debtors’ title papers. Under the facts of this case, the Trustee would have purchased Debtors’ property under the 2005 deed of gift, under which the male debtor deeded his interest in the subject property to himself and the female debtor as tenants by the entirety.11 Upon a proper search of the records, the Trustee would have discovered the recorded 2006 DoT and a subsequent, recorded release of the 2006 DoT.12 Furthermore, the 2005 deed of gift references a 2003 deed under which the male debtor acquired his interest in the property.13 An astute title searcher *573would have examined the records pertaining to the 2003 deed and have discovered the recorded, but unreleased,2004 DoT on Debtors’ real property.14
Defendant’s 2007 DoT, however, would not have been discovered by a proper search of the land records. Defendant failed to record the 2007 DoT. Although it is undisputed that the 2007 Loan was used to satisfy the 2006 Loan, which resulted in the recorded release of the 2006 DoT, the recorded release of the 2006 DoT makes no reference to any interest held by Defendant.15
Defendants have alleged16 that the existence of a release, without a new, accompanying, recorded deed of trust in favor of a new mortgage creditor “is a ‘red flag’ and [should] raise a strong suspicion that there is, in fact, an existing deed of trust that must not have been recorded.”17 Defendants argue that such is sufficient to give a purchaser constructive notice of its interest in Debtors’ real property.18 The Court does not find Defendants’ argument to be persuasive. The court in HSBC Bank v. Gold considered a similar, but more persuasive argument by plaintiff HSBC. In that case, HSBC’s properly recorded deed of trust had been improperly released by another without authority to do so and such release was recorded in the land records. HSBC Bank v. Gold, 427 B.R. 109 (Bankr.E.D.Va.2010). HSBC argued that a purchaser would have constructive notice of HSBC’s interest because a title search would have revealed that the property in question had changed hands six times over the course of six months and that twelve deeds of trust representing loans from the same lender had been properly recorded and released within the same period. Id. at 119. Despite the unusual sequence of events, the Court found that the nature of the recorded transactions was not suspicious and was certainly not suspicious enough to put a subsequent purchaser on notice of HSBC’s interest. Id. at 122. If the recordation and subsequent release of a deed of trust by the same lender twelve different times in a six month period is not sufficient to put a subsequent purchaser on notice of a potential interest in the same property, then there is nothing out of the ordinary with the recorded release of the 2006 DoT such that a purchaser would have been put on constructive notice of *574Defendant’s interest in Debtors’ real property.
Recordation of the 2007 DoT or reference by the recorded release of the 2006 DoT to Defendant’s interest would have been sufficient to give a purchaser constructive or, alternatively, inquiry notice of Defendant’s interest in Debtors’ property. Neither occurred. As such, the Trustee, as a hypothetical purchaser, would not have had constructive notice of Defendant’s interest in the property as of the filing of the bankruptcy petition.19
Defendant failed to record its 2007 DoT in Debtors’ real property. As explained above, a purchaser of Debtors’ real property would not have had actual or constructive notice of Defendant’s interest in the property. If paying valuable consideration for the property, such a purchaser would be a bona fide purchaser. As such, under Virginia Code section 55-96, a bona fide purchaser of Debtors’ property would be entitled to avoid Defendant’s unrecorded interest in the property. Shaheen, 579 S.E.2d at 172. As section 544(a)(3) grants the Trustee the power of a bona fide purchaser and the facts establish that the Trustee qualifies as a bona fide purchaser under Virginia law as to Defendant’s interest in Debtors’ real property, the Trustee is entitled to rely on Virginia Code section 55-96 and avoid Defendant’s interest in Debtors’ real property under section 544(a)(3), subject to any affirmative defenses that Defendants may invoke to defeat the interest of a bona fide purchaser.
Defendant’s Equitable Remedies
Having determined that the Trustee may qualify under Virginia Code section 55-96 as a bona fide purchaser, the Court must determine whether any of Defendant’s alleged equitable remedies, incorporated as affirmative defenses, are sufficient to prevent the Trustee, as a bona fide purchaser, from avoiding his interest in Debtors’ real property.
Constructive Trust
Defendants’ Counterclaim alleges that imposition of a constructive trust for the benefit of Defendants is “necessary, equitable, and appropriate” “in order to prevent a fraud or injustice that would otherwise ensue.”20 Before reaching the question of whether imposition of a constructive trust is appropriate under the circumstances, the Court must answer the following: Will imposition of a constructive trust have any effect on the Trustee’s ability as a hypothetical bona fide purchaser to avoid Defendant’s interest in Debtors’ property?
Under Virginia law, the imposition of a constructive trust in favor of a creditor is sufficient to protect that creditor’s interest from that of a lien creditor, but not a bona fide purchaser. See Enterprise Leasing Co. v. Mepco, Inc. (In re Mepco), 276 B.R. 94, 101 (Bankr.E.D.Va.*5752001). A constructive trust arises independently of the parties’ intentions by operation of law and establishes legal title in the possessor of the property, who possesses such property in trust for the equitable interest holder. Richardson v. Richardson, 242 Va. 242, 409 S.E.2d 148 (1991). A judgment creditor’s lien can only attach to the beneficial interest held by the debt- or on or subsequent to the entry of the judgment. Straley v. Esser, 117 Va. 135, 83 S.E. 1075, 1078 (1915). Because property held in trust for another vests the holder of the property with only legal title to the property, judgment liens against the holder cannot attach to the property held in trust. Id.; see also Mepco, 276 B.R. at 101. The equitable interest holder, therefore, will trump any interest of a subsequent judicial lien creditor.
In bankruptcy, section 544(a)(1) grants a trustee the rights and powers of a hypothetical judicial lien creditor with a perfected interest as of the filing of the petition. A trustee in bankruptcy relying on section 544(a)(1) cannot have any greater power or rights than a judicial lien creditor under state law. Havee, 775 F.2d at 1218-19. If a constructive trust was imposed or recognized in favor of Defendant, Virginia law would prevent the Trustee from avoiding Defendant’s interest in Debtors’ property because Debtors would not have had an equitable interest in the property as of the filing of the bankruptcy petition to which the Trustee’s interest could attach. Without an equitable interest in the property, the Trustee’s interest as a judicial lien creditor would be inferior to those of Defendant.
The situation, however, is different when a trustee claims an interest as a bona fide purchaser under section 544(a)(3). It is well settled under Virginia law that a bona fide purchaser of property takes such property free of any latent equity against it. HSBC Bank, 421 B.R. at 116 (citing cases). It is equally well settled that the existence of a constructive trust is such a latent equity against property. Id. at 122; see also Carter v. Allan, 62 Va. 241, 249 (1871) (holding “it has been the uniform course of decision in [Virginia], as well as in the other States of the Union, to hold that the bona fide purchaser of a legal title is not affected by a latent equity founded on a trust, fraud or incum-brance, or otherwise, of which he had not notice, actual or constructive.”). Thus, a trustee relying on his powers as a bona fide purchaser under section 544(a)(3) takes the property free of any latent equity, including property subject to a constructive trust.
A trustee is permitted to bring property subject to a constructive trust into the estate for the benefit of unsecured creditors under section 544(a)(3) despite the fact that such property is not property of the estate under section 541(d). Under section 541(d), when the debtor holds only legal title in property, it is property of the estate only to the extent of debtor’s legal title. 11 U.S.C. § 541(d). The equitable interest does not become property of the estate. Id. As discussed above, the imposition of a constructive trust on property held by a debtor would vest only legal, not equitable title in the debtor. See Richardson, 409 S.E.2d 148. Section 541(d), however, applies only to property coming into the estate through sections 541(a)(1) and (a)(2). Wells Fargo Funding v. Gold, 432 B.R. 216, 221 (E.D.Va.2009). Section 541(d) has no effect on a trustee’s ability to void a creditor’s equitable interest in property and bring such interest into the estate under section 544(a)(3) for the benefit of unsecured creditors. Id.
As a bona fide purchaser of real property under section 544(a)(3), the trustee’s ability to rely on his or her strong arm powers to bring property into the estate as *576a bona fide purchaser of such property is not defeated by the imposition of a constructive trust. HSBC Bank, 427 B.R. at 122; Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court’s determination that trustee’s avoidance power under section 544(a)(3) would trump creditor’s rights under the imposition of a constructive trust). Because we have already determined that the Trustee qualifies as a bona fide purchaser and that a constructive trust will not prevent a bona fide purchaser from voiding a creditor’s equitable interest in property held in trust, we do not need to reach the question of whether a constructive trust should be imposed on Debtors’ real property for the benefit of Defendant. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court’s refusal to reach the issue of imposing a constructive trust because the trustee could defeat such a claim under section 544(a)(3)). Regardless of the outcome of that inquiry, Plaintiffs still would be entitled to judgment as a matter of law as a bona fide purchaser of real property.
Imposition of an Equitable Lien
Defendants have requested that this Court impose and establish, as of May 15, 2007, an equitable lien on Debtors’ real property for Defendant’s benefit.21 As with the Court’s analysis of Defendant’s constructive trust affirmative defense, the Court need not determine whether Defendant is entitled to an equitable lien on Debtors’ property, unless such relief would defeat the Trustee’s rights and powers as a bona fide purchaser.
Under Virginia law, an equitable lien exists where an “express executor agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, ... a security for a debt or other obligation.... ” Hoffman v. First Nat. Bank of Boston, 205 Va. 232, 135 S.E.2d 818, 821-22 (1964). The lien created is enforceable against the property. Id. at 822. As the Court has already addressed, under Virginia law, a bona fide purchaser of property takes such property free of any latent equity against it. HSBC Bank, 427 B.R. at 116 (citing cases); see also Carter, 62 Va. at 249 (holding “it has been the uniform course of decision in [Virginia], as well as in the other States of the Union, to hold that the bona fide purchaser of a legal title is not affected by a latent equity founded on a trust, fraud or incumbrance, or otherwise, of which he had not notice, actual or constructive.”). The recognition of an equitable lien is an equitable remedy in which an encumbrance is imposed on certain real property in the name of equitable considerations. Thus, a trustee, as a bona fide purchaser under section 544(a)(3), takes the property free of any latent equity, including property subject to an equitable lien.
Based on the foregoing, there is no need to reach the question of whether an equitable lien should be imposed in favor of Defendant’s. The Court has already determined that the Trustee qualifies as a bona fide purchaser under Virginia law. Imposition or recognition of an equitable lien would create or recognize a latent equity on Debtors’ real property. The Trustee, as a bona fide purchaser, would be permitted to avoid the equitable interest created by an equitable lien on the property. As such, we do not need to reach the question of whether a constructive trust should be imposed on Debtors’ real property for the benefit of Defendant because regardless of the outcome, Plain*577tiffs would be entitled to judgment as a matter of law. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court’s refusal to reach the issue of imposing a constructive trust because the trustee could defeat such a claim under section 544(a)(3)).
Specific Performance to Reform Deed of Trust
Count III of Defendants’ Counterclaim asks this Court to grant specific performance of a provision contained in a “Document Correction Agreement,” for which the Debtors signed in conjunction with the 2007 Loan.22 That provision provides, in part:
... If any document is lost, misplaced, misstated, inaccurately reflects the true and correct conditions of the [2007 Loan], or otherwise missing upon request of the [Defendant], [Debtors] will comply with [Defendant’s] request to execute, acknowledge, initial and deliver to [Defendant] any documentation [Defendant] deems necessary to replace or correct the lost, misplaced, misstated, inaccurate or otherwise missing document(s) ... [Debtors] agrees to deliver the Documents within ten (10) days after receipt by [Debtors] of a written request for such replacement.23
In light of this provision, Defendant alleges that equity and justice dictate that the Court order Debtors to execute any and all “documents necessary to effectuate the legal transfer of the Property, in trust, for the benefit of the [Defendants] to secure the [2007 Loan].”24 To effectuate the legal transfer in trust, Defendants request this Court to require Debtors to execute a replacement deed of trust or, in the alternative, to appoint a Special Commissioner to execute a replacement deed of trust.25 Defendants have cited three Virginia cases in support of their request for specific performance of the “Document Correction Agreement.”26
The Court need not determine if Defendants are entitled to judgment as a matter of law on their request for specific performance of the “Document Correction Agreement.” Even if the Court ordered specific performance of the “Document Correction Agreement,” such relief would not defeat the Trustee’s rights as a bona fide purchaser of Debtors’ property. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court’s refusal to reach the issue of imposing a constructive trust because the trustee could defeat such a claim under section 544(a)(3)).
As we have stated previously, a bona fide purchaser of property takes such property free of any latent equity against it, so long as he purchases without notice of such equity. HSBC Bank, 427 B.R. at 116 (citing cases); Carter, 62 Va. at 249. Under the “Document Correction Agreement,” the re-execution of the 2007 DoT would grant Defendant a valid and enforceable interest in Debtors property as against the Debtors. However, under Vir*578ginia law, recordation of an interest in real property is required to perfect one’s interest in real property as against other creditors and purchasers of the debtor. Va. Code ANN. § 55-96
Re-execution of the 2007 DoT will not help Defendants succeed against a bona fide purchaser; only a prior recordation of its interest or a finding of notice would allow Defendant to succeed against a bona fide purchaser. In conjunction with their request for specific performance of the “Document Correction Agreement,” Defendants contend that “equity and the ends of justice further require that this Court enter an order authorizing [Defendants] to record the replacement version of the [2007 DoT].”27 Defendants, however, have cited no authority for such a remedy and have failed to brief the issue for the Court.28 Defendants have based this request entirely on equity and justice.29 Such considerations, however, do not support Defendants’ position; rather, they support a finding in favor of Plaintiffs.
In In re Ware, the Bankruptcy Court for the Eastern District of Virginia considered a creditor’s request to retroactively reform a defective deed of trust to place its interest in debtor’s property ahead of that of other creditors and the Chapter 7 trustee. The Court ultimately concluded that the trustee could avoid the creditor’s interest under sections 547 and 550, but not section 544(a)(3) because of a pending lis pendens action that was filed in state court prior to the filing of the bankruptcy petition. In re Ware, 2013 WL 1163953, *7 (Bankr.E.D.Va.2013). No lis pendens suit was filed in this case and, as that was the sole grounds for denying the trustee’s powers under section 544 and Virginia Code section 55-96, the Court finds the reasoning of Ware to be persuasive in this case. The court in Ware started with the principle that reformation of a deed of trust is an equitable remedy. Id. at *6. From that principle, the Court found that in any equitable ruling, the rights of intervening parties without notice are protected under Virginia’s recording statute. Id. In Ware, as is the case here, the intervening party was the trustee. Id. The court found that allowing the creditor to retroactively reform its recorded deed of trust to place it ahead of the trustee would be improper. Id. In coming to its conclusion, the court determined that placing a creditor who recorded a defective deed of trust ahead of intervening interests would not only violate the equitable nature of reformation of a deed, but also violate the Code’s distribution system and the powers explicitly granted the trustee in such actions. Id.
In this case, Defendants are not asking to reform a recorded, but defective, deed of trust, as was the case in Ware; rather, Defendants are requesting that we allow them to record an interest that they have slept on for approximately six years. Such a request is even greater than that requested by the creditor in Ware, and the Court finds that such a request is contrary to the purpose and structure of the Code, as well as Virginia’s recordation statute. To the extent necessary, Plaintiffs, not Defendants, are entitled to judgment as a matter of law on this issue. See Fed. R.Civ.P. 56(f)(1) (adopted by Fed. R. BaNKR.P. 7056). Furthermore, Defendants have not addressed the issue of the auto*579matic stay, which would prevent Defendants from recording a deed of trust on Debtors’ real property in the event that the Court even entertained such a request.
It is undisputed that Defendant did not record its 2007 DoT. Furthermore, the Court has determined that Defendants’ request to record its interest in Count III is without merit. Lastly, the Court previously determined that the Trustee, acting as a bona fide purchaser of real property under Virginia law, would not have had notice of Defendant’s interest in Debtors’ real property. Without a finding to the contrary on one of these three factors, re-execution of the 2007 DoT would not defeat the Trustee’s ability as a bona fide purchaser to avoid Defendant’s unrecorded interest in Debtors’ property, regardless of whether that interest was established by the actual 2007 DoT or a re-executed version. As such, we need not reach the question of whether specific performance of the “Document Correction Agreement” is appropriate in this case. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court’s refusal to reach the issue of an equitable remedy because the trustee could defeat such a claim under section 544(a)(3)).
Equitable Subrogation
In response to Plaintiffs’ Complaint, Defendants have asserted that their interest is entitled to be equitably subrogated to the position of the 2006 DoT and/or the 2004 DoT.30 While the doctrine of equitable subrogation has long been established under Virginia law, the Court has been unable to find any case law in which the doctrine has been juxtaposed with the rights of a bona fide purchaser of real property. As such, the issue appears to be an issue of first impression and this Court must determine whether Virginia law would allow a secret creditor to be equitably subrogated to the rights of a previous creditor to the detriment of a bona fide purchaser of property. If Virginia law would not allow such a situation to occur, then we need not reach the question of whether Defendants are entitled to be equitably subrogated to the rights of the 2006 DoT and/or the 2004 DoT because, regardless, such treatment would not defeat the Trustee’s rights as a bona fide purchaser of Debtors’ real property.
In determining this issue, the Court starts with the basic principle that under Virginia law a bona fide purchaser of property takes such property free of any latent equity against it. HSBC Bank, 427 B.R. at 116 (citing cases). This principle is broad enough to cover any “latent equity founded on a trust, fraud or incum-brance, or otherwise, of which he had not notice, actual or constructive.” Carter, 62 Va. at 249. Subrogation is a remedy which allows one creditor to step into the shoes of another creditor through the payment of the debt owed the other creditor. Federal Land Bank v. Joynes, 179 Va. 394, 401, 18 S.E.2d 917 (1942). It is a purely equitable remedy “founded upon principles of natural justice,” not contract or privity. Id.; see also Gatewood v. Gatewood, 75 Va. 407, 411 (1881); Morgan v. Gollehon, 153 Va. 246, 248-49, 149 S.E. 485 (1929). Under the doctrine, “although the debt is paid and satisfied, a court of equity will keep alive the lien for the benefit of the party who made the payment, provided he as security for the debt, ‘has such an interest in the land’ as entitled him to the benefit of the security given for its payment.” Gatewood, 75 Va. at 411 (quotations in original). Subrogation is, therefore, an equitable remedy that keeps alive an encumbrance on real property that would other*580wise not exist for the benefit of one who satisfies the debt underlying such an encumbrance. In the words of the Carter court, equitable subrogation is a “latent equity founded on a[n] ... incumbrance, or otherwise.” 62 Va. at 249. Because a bona fide purchaser takes property free of latent equities founded on encumbrances or otherwise and equitable subrogation creates a latent equitable encumbrance on real property, a bona fide purchaser of real property would take the property free of any interest created or revived by the doctrine of equitable subrogation. Regardless of whether Defendants are entitled to equitable subrogation as a matter of law, their interest in Debtors’ real property would still be voidable by the Trustee acting as a bona fide purchaser of real property under section 544(a)(3). As such, the Court need not reach that question. Wells Fargo Funding, 432 B.R. at 221 (upholding bankruptcy court’s refusal to reach the issue of an equitable remedy because the trustee could defeat such a claim under section 544(a)(3)).
If, in the alternative, the rights of a creditor established through the doctrine of equitable subrogation could defeat the rights of a bona fide purchaser, the Court would need to address the question of whether Defendants are entitled to equitable subrogation under the facts of this case. The question of whether to grant equitable subrogation is necessarily a fact intensive inquiry and, as such, is governed by general principles of law rather than bright line rules. Centreville Car Care, Inc. v. North American Mortg. Co., 263 Va. 339, 345, 559 S.E.2d 870 (2002). Virginia recognizes two general principles that guide our inquiry: “First, subrogation is not appropriate where intervening equities are prejudiced. Second, ordinary negligence of the subrogee does not bar the application of subrogation where an examination of the facts shows that the equities strongly favor the subrogee.” Id. (citing cases) (emphasis in original) (internal quotations omitted). In addition to these principles, Virginia recognizes that “subro-gation is generally allowed where the loan was made by one who took a security from the borrower which turned out to be invalid.” Morgan, 153 Va. at 250, 149 S.E. 485. At its heart, the doctrine of equitable sub-rogation is concerned with restoring the interests of the parties to their intended position relative to others. See Joynes, 179 Va. at 401-02, 18 S.E.2d 917. The doctrine, however, is not concerned with the creation of rights not created prior to trial. Such a remedy would undermine the intent of the legislature in enacting Virginia Code section 55-96.
There is a difference, in equity, if not also in law, between an invalid security interest in real property and a security interest in real property that a creditor failed to perfect. Equitable subrogation is concerned with the former, but not the latter. Compare Mayer v. U.S. (In re Reasonover), 236 B.R. 219 (Bankr.E.D.Va.1999) (finding that creditor taking under a broken chain of title was entitled to be equitably subrogated to the position of the entity paid with its funds); First Community Bank v. E.M. Williams & Sons, Inc. (In re E.M. Williams & Sons, Inc.), 2009 WL 2211727 (Bankr.E.D.Va.2009) (finding that creditor, who took a deed of trust from an individual without ownership rights in the property, was entitled to be equitably subrogated to the rights of the entity paid with its funds) with Centreville, 559 S.E.2d 870 (finding that creditor, who took under a valid deed of trust, but failed to discover an existing second deed of trust, was not entitled to be equitably sub-rogated to the position of the first deed of trust holder); Deutsche Bank National Trust Comp. v. IRS, 361 Fed.Appx. 527 (4th Cir.2010) (finding that creditor, who was the last in a chain of assignments of a *581valid deed of trust, but was unaware of existing liens on the deeded property, was not entitled to be equitably subrogated above the secret liens because creditor’s loan was greater than the amount of the loan paid). In the present action, Defendant had a valid and enforceable interest in Debtors’ real property. There is no question that Debtors were the owners of the property with the rights and powers capable of granting Defendant an interest in the property. Furthermore, there are no issues regarding the enforceability of the 2007 DoT as against the property, held by the Debtors as tenants by the entirety, because it is undisputed that both Mr. and Mrs. Perrow signed the 2007 Refinancing Loan and the 2007 DoT.31 As such, there is no question as to the validity of the interest held by Defendant.
What is at issue in this case is Defendant’s failure to record the 2007 DoT, which under Virginia Code section 55-96 is required to perfect the interest in Debtors’ real property against intervening interest holders. Equitable subrogation is not appropriate in such circumstances. To hold otherwise would prejudice intervening equities under a guise of equity when state law dictates that such intervening equities are entitled to take free. See Va.Code Ann. § 55-96 (West 2013). Such a conclusion would be directly contrary to the first guiding principle of equitable subrogation. Centreville Car Care, 263 Va. at 345, 559 S.E.2d 870.
Furthermore, to allow a creditor to perfect its already valid interest through equitable subrogation would reward a creditor’s negligence to the detriment of others. While negligence on the part of the party seeking subrogation is not an absolute bar, it is a factor to be considered and should only be overlooked when the balance of equities strongly favors the negligent party. Id. In cases where negligent creditors have been allowed equitable subrogation, the creditors took the steps necessary to properly perfect their interest, only to realize that such interest was invalid, generally because of a failure by the title search company to discover a break in the chain of title. Reasonover, 236 B.R. 219; E.M. Williams & Sons, 2009 WL 2211727. In those cases, unlike here, the creditors did not sleep on their rights; rather, they were surprised to learn that their rights were not what they believed them to be. Id. As such, those cases contained facts strongly favoring overlooking the negligent failure to discover a break in the chain of title. No such facts exist in this case. Defendant had everything it needed to perfect its interest in 2007. The fact that it failed to properly record its 2007 DoT; that the 2007 DoT is now lost, misplaced, or destroyed; and that Defendant now stands to lose a sum of money does not shift the balance of equity in its favor, let alone strongly in its favor. Every unsecured creditor in bankruptcy stands to lose a sum of money. Based on the foregoing, Defendant would not be entitled under the facts of this case to equitable subrogation to either the 2006 DoT or the 2004 DoT. If the Court were forced to address this question, Plaintiffs, not Defendants, would be entitled to judgment as a matter of law on count III of Defendants’ Counterclaim. Fed.R.CivP. 56(f)(1) (made applicable by Fed. R. BankR. P. 7056) (granting the Court authority to grant summary judgment for the nonmovant).
Equitable Relief under 11 U.S.C. § 105
Defendants have suggested that as a court of equity, this Court should follow the maxim that “equity regards as done that which ought to be done” and enter an order pursuant to section 105 of *582the Code establishing that Defendant’s 2007 DoT is “a valid /irsi-priority lien on the Property, superior to any other consensual and noneonsensual liens on the Property.”32 In support of this position, Defendants cite Stokes v. Firestone, 198 B.R. 168 (E.D.Va.1996), in which the District Court for the Eastern District of Virginia upheld the bankruptcy court’s reliance on section 105 in ordering specific performance of a settlement agreement between the debtor and another for the conveyance of real property. In Stokes, the debtor entered into the settlement agreement in resolution of an adversary proceeding before the bankruptcy court, and the agreement was the basis for the court’s approval of debtor’s plan of reorganization. Stokes, 198 B.R. at 175. Approval of the settlement agreement and the debtor’s plan of reorganization involve orders issued by the court. Under section 105(a), the bankruptcy court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” The difference between the court’s decision in Stokes to order specific performance under section 105 and Defendants’ request for relief in this case is that in Stokes, court orders would have been disregarded, but for an order directing the debtor to act in a particular way. The court in Stokes used section 105 to ensure that the order confirming debtor’s plan of reorganization was given effect. No such situation exists in this case.
Furthermore, granting Defendants relief under section 105(a) in this case is contrary to the purpose of that provision. Under section 105(a), the Court is granted authority to enter orders necessary or appropriate to carry out the provisions of the Code. As we have already said, allowing Defendant to perfect its interest against the rest of the world now would run counter to the Code’s distribution system and the strong arm powers explicitly granted a trustee for situations just like this. Ware at *6. As such, there is no court order to effectuate, and judgment in favor of the Defendant, in this case, would be contrary to the purpose of the Code. Relief under section 105 is not appropriate in this case. Count six of Defendant’s counterclaim is, therefore, denied summary judgment and cannot form the basis of an affirmative defense to Plaintiffs’ Complaint.
Plaintiffs’ Motion for Summary Judgment
Plaintiffs’ motion for summary judgment seeks determination as a matter of law that they are entitled to judgment on their Complaint.33 The Court will consider the Complaint’s counts in turn.
Counts I and II of Plaintiffs’ Complaint request this Court determine that the unrecorded 2007 DoT is void and that Defendants are without an interest in Debtors’ real property, respectively. Previously in this opinion, the Court has determined that the Trustee qualifies as a bona fide purchaser of real property under Virginia law. As a bona fide purchaser of real property, the Trustee is granted the power under section 544(a)(3) to void any interests that such a person would be entitled to avoid under applicable state law. Under applicable Virginia law, a bona fide purchaser takes the purchased property free and clear of any unnoticed adverse interest in the property. Va.Code Ann. § 55-96 (West 2013). Defendant’s unrecorded 2007 DoT is such an unnoticed adverse interest. Furthermore, the Court has determined that equitable defenses *583raised by Defendants’ supplemental motion for summary judgment are insufficient to defeat a bona fide purchaser’s interest or are not available to Defendants under the facts of this case as a matter of law. Lastly, the only remaining defense raised by Defendants’ Counterclaim is count I, which seeks declaration and determination that an interest and lien existed against Debtors’ property as of May 15, 2007. Defendants’ requested relief confuses the issue in this case. As stated previously, Defendant had a valid and enforceable interest against the Debtors and their property upon the execution of the 2007 DoT. The fact remains, however, that Virginia requires recordation to perfect one’s interest in real property as against the world. Defendant failed to record. Without re-cordation, the relief sought in Counterclaim count I would be insufficient to defeat the Trustee’s interests as a bona fide purchaser. Defendants’ count I is not a valid affirmative defense to Plaintiffs’ motion. Therefore, the Trustee, as a bona fide purchaser under section 544(a)(3), is entitled to void Defendant’s unrecorded 2007 DoT, which has the effect of removing Defendant’s interest and lien in Debtors’ real property as of the petition date. Plaintiffs’ request for summary judgment on counts I and II of their Complaint are hereby granted.
Based on the Court’s determination that Defendant is without an interest in Debtors’ real property as of the date of the bankruptcy filing, Defendant is an unsecured creditor. As an unsecured creditor, Defendant was required to file a proof of claim within ninety (90) days after the first date set for the meeting of creditors under section 341(a). Fed. R. BanKR.P. 3002(a). In Debtors’ bankruptcy case, the first 341(a) meeting was scheduled for May 19, 2009, and the deadline for filing unsecured claims was August 17, 2009. See In re Perrow, No. 09-61234 (Bankr.W.D.Va. Apr. 22, 2009). Defendant, however, filed its proof of claim on September 24, 2009, approximately thirty-eight days after the deadline for filing claims. As such, Defendant’s claim was not timely filed.
Under section 502(a), a claim filed is deemed allowed, unless a party in interest objects. Count III of Plaintiffs’ Complaint has objected to the timeliness of Defendant’s claim and seeks disallowance of that claim.34 Upon such an objection, section 502(b) dictates that the Court shall determine the amount of the claim as of the date of the filing of the petition. Section 502(b)(9) states, however, that the court is not permitted to allow a claim to the extent that “proof of such claim is not timely filed.” None of the exceptions provided by sections 726(a)(1), (2), or (3) apply in this case. See 11 U.S.C. § 502(b)(9). As such, Defendant’s claim cannot be allowed. In re Nwonwu, 362 B.R. 705, 707 (Bankr.E.D.Va.2007) (“The claims bar date, moreover, may not be extended under the court’s general power to extend deadlines but only as specifically provided in Rule 3002(c).”). Plaintiffs are entitled to summary judgment on count III of the Complaint.35
*584Conclusion
Based on the foregoing, the Court concludes that Defendants’ motions for summary judgment are denied and Plaintiffs’ motion for summary judgment is granted in its entirety. The Court will issue a corresponding order consistent with the findings in this opinion. Copies of this memorandum opinion are directed to be sent to the Chapter 13 Trustee; the Debtors; counsel for the Debtors; Defendants; and counsel for Defendants.
.There is some confusion as to whether the Plaintiffs’ Complaint seeks relief under section 544(a)(3) only or whether the Complaint incorporates section 544(a)(1) as well. Compare Plaintiffs’ Amended Complaint, Beskin v. Bank of New York Mellon, et. al. (In re Perrow), No. 11-06082 (Bankr.W.D.Va. Aug. 15, 2011) ECF No. 18 with Defendants’ Memorandum in Support of Motion for Summary Judgment at p. 7, Beskin v. Bank of New York Mellon, et al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 44. After reviewing the Complaint, the Court finds that Plaintiffs attempted to rely solely on section 544(a)(3). As such, the Court will not address the Trustee’s powers under section 544(a)(1).
. Defendants' Counterclaim asserts the equitable remedies alleged prevent the Plaintiffs from succeeding under 11 U.S.C. § 544(a). Defendants’ Counterclaim and Third-Party Claim at ¶ 19, Beskin v. Bank of New York Mellon, et al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 22.
. Schedule F reports creditors holding unsecured, non-priority claims. See Official Form B-6F (12/07) Fed. Rule 1007(b).
. Schedule A reports real property held by a debtor. See Official Form B-6A (12/07) Rule 1007(b).
. Plaintiffs’ Amended Complaint, In re Peirow, No. 11-06082, ECFNo. 18.
. Defendants’ Answer to Plaintiffs’ Complaint incorporates the counts of Defendants' Counterclaim as affirmative defenses to Plaintiffs' requested relief. Defendants’ Answer at p. 3, Beskin v. Bank of New York Mellon, et al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECFNo. 21.
.Defendants' Counterclaim and Third-Party Claim, In re Perrow, No. 11-06082, ECF No. 22.
. Western District of Virginia District Court Order of Reference December 6, 1994; Western District of Virginia District Court Local Rule 3.
. See generally Defendants’ Memorandum in Support of Motion for Summary Judgment, In re Perrow, No. 11-06082, ECF No. 44.
. Defendants’ Counterclaim and Third-Party Claim at ¶ 16, In re Perrow, No. 11-06082, ECF No. 22.
. Defendants' Exhibit A to Defendants' Counterclaim and Third-Party Claim, In re Perrow, No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 22-1.
. Defendants’ Exhibit 1 to Defendants’ Memorandum in Support of Motion for Summary Judgment, In re Perrow, No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 44-1.
.Defendants’ Exhibit B to Defendants’ Counterclaim and Third-Party Claim, In re Perrow, No. 11-06082, ECF No. 22-1.
.A proper title search would have involved following the chain of title associated with the 2003 deed back through the records to determine if any other adverse interests attached to the property. HSBC Bank v. Gold (In re Taneja), 427 B.R. 109, 120 (Bankr.E.D.Va.2010) (finding that a purchaser is charged with constructive notice of anything that might be revealed if title was traced back to a general warranty deed recorded at least 60 years pri- or to the current sale). The Court, however, has no information regarding any interests or encumbrances beyond the 2004 DoT. Since Defendant’s interest stems from the 2007 DoT, further examination beyond what the Court has already determined would be uncovered is unnecessary to successfully resolve the issue of constructive notice for purposes of this opinion.
. See Defendants’ Exhibit 1 to Defendants' Memorandum in Support of Motion for Summary Judgment, In re Perrow, No. 11-06082, ECF No. 44-1.
. Defendants’ allegation regarding constructive notice appears in its motion for summary judgment on Plaintiffs’ Complaint. The Court has already denied summary judgment on this motion. The argument, however, is relevant to this discussion, and, as the Plaintiffs' are the party moving for summary judgment on their Complaint, every inference should be granted in favor of the non-moving party. News and Observer, 597 F.3d at 576.
. Defendants’ Memorandum in Support of Motion for Summary Judgment at p. 17, In re Perrow, No. 11-06082, ECF No. 44.
. Id.
. As a proper search of the land records would have revealed the recorded 2004 DoT, the Trustee would have constructive notice of any interest held by the 2004 DoT holder and would take Debtors' property subject to any interest held by such party. Such a situation may not be ideal for a purchaser of real property, but such a situation is not unheard of under Virginia law. Purchasers of Virginia real property are permitted to assume or take property subject to a pre-existing mortgage.
Along these lines, Defendant has alleged that its interest in Debtors' property is enti-tied to be equitably subrogated to the holder of the 2004 DoT. To the extent that equitably subrogating Defendant’s interest to the 2004 DoT would affect the Trustee's constructive notice of Defendant’s interest, we do not reach that question. Defendant's equitable subrogation claim is addressed infra.
. Defendants' Counterclaim and Third-Party Claim at V 38, In re Perrow, No. 11-06082, ECF No. 22.
. Defendants’ Counterclaim and Third-Party Claim at V 42, In re Perrow, No. 11-06082, ECF No. 22.
. Defendants’ Counterclaim and Third-Party Claim at ¶ 32, In re Perrow, No. 11-06082, ECF No. 22.
. Defendants’ Memorandum in Support of Defendants and Counterclaim Plaintiffs’ Supplemental Motion for Summary Judgment as to Counts II through VI of Counterclaim and Third Party Claim at p. 12, Beskin v. Bank of New York Mellon, et al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 48.
. Defendants’ Counterclaim and Third-Party Claim at ¶ 32, In re Perrow, No. 11-06082, ECF No. 22.
. Id.
. See Defendants’ Memorandum in Support of Supplemental Motion for Summary Judgment at p. 13, In re Perrow, No. 11-06082, ECF No. 48.
. Defendants’ Counterclaim and Third-Party Claim at ¶ 34, In re Perrow, No. 11-06082, ECF No. 22.
. See Defendants’ Memorandum in Support of Supplemental Motion for Summary Judgment, In re Perrow, No. 11-06082, ECF No. 48.
.Id.
. Defendants' Counterclaim and Third-Party Claim at 11 29, In re Perrow, No. 11-06082, ECF No. 22.
. Plaintiffs’ Amended Complaint at ¶ 5, In re Perrow, No. 11-06082, ECF No. 18.
. Defendants’ Counterclaim and Third-Party Claim at ¶ 45, In re Perrow, No. 11-06082, ECF No. 22 (emphasis in original).
. Plaintiffs' Motion for Summary Judgment at ¶ 1, Beskin v. Bank of New York Mellon, et. al. (In re Perrow), No. 11-06082 (Bankr.W.D.Va. Aug. 15, 2011) ECF No. 45.
. Plaintiffs' Amended Complaint, In re Per-row, No. 11-06082, ECF No. 18.
. A footnote in Defendants’ Memorandum asks this Court to withhold ruling on count III of Plaintiffs’ Complaint. Defendants’ Memorandum in Support of Defendants and Counterclaim Plaintiffs’ Supplemental Motion for Summary Judgment as to Counts II through VI of Counterclaim and Third Party Claim at p. 5 n.l, Beskin v. Bank of New York Mellon, et al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 48. Defendants represented that this request was on behalf of the parties. Id. While we have no reason to doubt Defendants’ representations, Plaintiffs filed a motion for summary judgment on all counts of their Complaint. See Plaintiffs' Motion for Summary Judgment at ¶ 1, Beskin v. Bank of New York Mellon, et *584al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 45 ("Plaintiffs move for summary judgment on their complaint ... ”); See Plaintiffs’ Memorandum in Support of Trustee and Debtors’ Motion for Summary Judgment at p. 4, Beskin v. Bank of New York Mellon, et al. (In re Perrow), No. 11-06082 (Bankr. W.D. Va. Aug. 15, 2011) ECF No. 46 ("[The parties] respectfully request that the Court grant them summary judgment on their complaint ...”). Plaintiffs have filed no motions amending their motion for summary judgment; nor have Plaintiffs filed anything else with the Court requesting deferral of a ruling as to count III. This matter is currently and properly before the Court on a motion for summary judgment. There are no issues of material fact in dispute, and it is appropriate to rule on this matter at this time. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496340/ | MEMORANDUM OPINION DENYING PLAINTIFF’S COMPLAINT SEEKING A DENIAL OF DISCHARGE
REBECCA B. CONNELLY, Bankruptcy Judge.
This matter comes before the Court on Tiffany D. Smith’s (the “Plaintiff’) complaint seeking to deny the Chapter 7 discharge of Melissa M. Bowen (the “Debtor” or “Defendant”) under 11 U.S.C. § 727(a)(2)(A). The trial was conducted on May 20, 2013. During the trial, the parties presented argument, submitted numerous exhibits, and elicited testimony from the Debtor. At the conclusion of the trial, the Court took the matter under advisement. While the matter was under advisement, the Honorable William E. Anderson, presiding trial judge, passed away, and the case was reassigned to the undersigned judge. Based on the record as established at trial, the Court makes the following findings of fact and conclusions of law.1
Facts
The relevant facts of this case are largely uncontested. This dischargeability proceeding stems from a boating accident in August of 2009 involving the Plaintiff, the Debtor, and the Debtor’s then-husband (the “Husband”). Trial Transcript (hereinafter “Transcript”) at 4, Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept. 12, 2012) ECF No. 49. The Plaintiff suffered serious injuries in the accident. Id. at 5. Following the accident, the Plaintiff filed a personal injury lawsuit on March 3, 2010, against the Debtor’s Husband for one million dollars. Id. at 7; and Complaint at ¶ 5, Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept. 12, 2012) ECF No. 1.
On September 9, 2009, after a physical altercation, the Debtor separated from her Husband. Transcript at 16, 66, In re Bowen, No. 12-06099, ECF No. 49. The couple officially divorced in February of 2012 without any formal property settlement or support agreement. Id. at 13, 47-48.
In March of 2011, Plaintiff amended her personal injury claim to add the Debtor as a defendant. Shortly thereafter, in April, the Debtor surrendered certain interests in business and personal property to her Husband, including her share of the family business, an interest in a work vehicle for the business, as well as an interest in a personal vehicle. Id. at 21, 52-53. The Debtor testified that she transferred her interest in this property without demand*587ing anything in return because it “was the easiest way [to] just cut all ties, end it, and start over.” Id. at 22.
In late June 2011, as the state court trial was approaching, Plaintiff made a settlement demand of $750,000.00. Id. at 5. Debtor and her Husband apparently turned down the settlement offer because the state court later entered judgment for $700,000.00 in Plaintiffs favor in September of 2011. Id. at 4.
Following Plaintiffs settlement offer, but before judgment was entered, Debtor and her Husband sold two-parcels of real property (the “Property”) to Debtor’s then-sister-in-law. Debtor claims she did not learn the identity of the purchaser until the date of the closing, July 22, 2011. Id. at 31, 33. The total purchase price for the Property was $41,750.00 of which the Debtor received $0. Id. at 33, 35. Debtor signed the sale contract on July 1, 2011. Id. at 31-33, 41. According to the Debtor, however, she was unaware she was signing a sales contract because she was presented with only the signature page and was told by her Husband that it was a dual-agent agreement. Id. at 31.
On March 15, 2012, the Debtor filed a petition in this Court for relief under Chapter 7 of the Code. Approximately six months later, Plaintiff filed a complaint and this adversary proceeding seeking to bar the Debtor’s discharge under 11 U.S.C. § 727(a)(2)(A).
Jurisdiction
The Court has jurisdiction to hear this matter under 28 U.S.C. §§ 157 and 1334. The issue of whether a debtor is entitled to a discharge is a core proceeding under 28 U.S.C. § 157(b)(2)(J).
Conclusions op Law
Plaintiffs complaint alleges that Debtor transferred the Property within one year of her bankruptcy with the intent to hinder, delay, or defraud Plaintiff and, therefore, should be denied a discharge in her underlying bankruptcy case pursuant to 11 U.S.C. § 727(a)(2)(A). See Complaint, In re Bowen, No. 12-06099, ECF No. 1. Section 727(a)(2)(A) provides that a court shall grant a debtor a discharge, unless a debtor has transferred property within the year immediately preceding the filing of a bankruptcy petition and with the intent to hinder, delay, or defraud a creditor. Plaintiff alleges that Debtor’s selling of the Property approximately seven months prior to her filing for bankruptcy relief was with the intent to hinder, delay, or defraud the Plaintiff, a judgment creditor. As such, Plaintiff alleges that the elements of section 727(a)(2)(A) are satisfied, and Debtor, therefore, is not entitled to a discharge in her bankruptcy case. Debtor does not dispute she sold the Property seven months prior to filing for bankruptcy. Therefore, the only question before the Court is whether the Debtor sold the Property with the “intent to hinder, delay, or defraud” the Plaintiff.
Burden of Proof under 11 U.S.C. § 727(a)
The primary purpose of bankruptcy law is to give honest debtors a fresh start. Farouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 249 (4th Cir.1994). In keeping with this purpose, section 727 provides honest debtors with a general discharge of their indebtedness, so as to relieve the “pressure and discouragement of preexisting debt.” Id. (quoting Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970)) (internal quotations omitted). When debtors “play fast and loose with their assets or with the reality of their affairs,” however, section 727(a) provides the court with authority to deny debtors their fresh start by prohibiting discharge. Id. (quoting In re Tully, 818 F.2d 106, 110 (1st Cir.1987)). The denial of a discharge is an extreme penalty, and, as such, section 727(a) is generally con*588strued liberally in the debtor’s favor. In re Golob, 252 B.R. 69, 75 (Bankr.E.D.Va.2000) (quoting 6 Collier on Bankruptcy ¶ 727.01[4] (Lawrence P. King ed., 15th rev. 1999)).
Rule 4005 of the Federal Rules of Bankruptcy Procedure assigns the burden of persuasion to the party objecting to discharge. Fed. R. BANKR.P. 4005. See Farouki, 14 F.3d at 249; Golob, 252 B.R. at 75 (citing Farouki). The burden may shift to the debtor to provide a satisfactory explanation of certain actions or deeds once the objecting party has established a prima facie case, but the burden ultimately rests with the objecting party to prove its objection by a preponderance of the evidence. Id.
Intent to Hinder, Delay, or Defraud under 11 U.S.C. § 727(a)(2)(A)
In order for the court to deny discharge under section 727(a)(2), the objecting party must prove that the debtor had the actual intent to “hinder, delay, or defraud;” constructive intent is not sufficient. In re Smoot, 265 B.R. 128, 142 (Bankr.E.D.Va.1999); Zanderman, Inc. v. Sandoval (In re Sandoval), 153 F.3d 722, 1998 WL 497475, *2 (4th Cir.1998) (unpublished). As direct evidence of a fraudulent intent is rarely available, actual intent may be inferred through the presence of “badges of fraud.” Id. Such badges include:
(1) A relationship between the debtor and the transferee; (2) Lack of consideration for the conveyance; (3) Debtor’s insolvency or indebtedness; (4) Transfers of debtor’s entire estate; (5) Reservation of benefits, control, or dominion by the debtor; (6) Secrecy or concealment of the transaction; and (7) Pen-dency or threat of litigation at the time of transfer.
Smoot, 265 B.R. at 142. No single badge is necessary to prove actual intent; the presence of only one badge may be sufficient; and certainly, the presence of several badges can inescapably lead to the conclusion that the debtor possessed an actual intent to hinder, delay, or defraud. See Smoot, 265 B.R. at 142; Sandoval, 155 F.3d at *2.
Plaintiffs complaint alleges, and Plaintiff appears to have established, the existence of badges (1), (2), and (7). These factors taken together are sufficient to establish Plaintiffs prima facie case, but do not necessarily establish actual intent by a preponderance of the evidence. As such, the Court must consider whether Debtor has provided a satisfactory explanation for her actions, sufficient to satisfy the Court that no actual intent to hinder, delay, or defraud exists. Smoot, 265 B.R. at 143.
Relationship between Debtor and Transferee
Plaintiff has shown and it is uncontested that a familial relationship existed between the Debtor and the transferee because the Plaintiff has shown that Debtor and her Husband transferred the Property to the Debtor’s then-sister-in-law. The Court, however, does not believe that the existence of a relationship between the Debtor and the transferee establishes by a preponderance of the evidence that Debtor had the actual intent to hinder, delay, or defraud the Plaintiff in this case. The Court finds that three facts establish that no actual intent existed.
First, the relationship between the Debtor and the transferee was a strained relationship. Generally, inter-family transfers provide sufficient grounds for establishing fraud. See Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 307 (11th Cir.1994). The transfer in this case, however, was to the Debtor’s estranged, then-sister-in-law. The Debtor’s relationship with the transferee was de*589pendent upon the Debtor’s continued relationship with her Husband. Debtor had been separated from her Husband for almost two years at the time the transfer took place and had the intention of divorcing him. Transcript at 16, 47, In re Bowen, No. 12-06099, ECF No. 49. Because the Debtor separated from her husband prior to the transfer, there is sufficient reason to believe that the relationship between the Debtor and her then-sister-in-law was not on the best of terms. Although a relationship existed between the Debtor and the transferee, the familial status was ending. Furthermore, the Plaintiff provided no evidence of an on-going relationship or regular communication between the Debtor and the then-sister-in-law.
Second, the Debtor testified that she had no knowledge of the purchaser’s identity until the sale closed on July 22, 2011. The Debtor, however, signed the sales agreement on July 1, 2011, which listed the then-sister-in-law as a purchaser. See Plaintiffs Exhibit 4, Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept. 12, 2012) ECF No. 47. The Debtor testified that her Husband presented her with the signature page of the contract and told her she was signing a dual-agent agreement. Transcript at 31, In re Bowen, No. 12-06099, ECF No. 49. Plaintiff has provided no evidence that Debtor participated in negotiations with her then-sister-in-law, but has provided some information to suggest that Debtor may have known the identity of the purchaser prior to closing.2 While a lack of knowledge would be sufficient to establish a lack of actual intent, the presence of knowledge is not sufficient to establish actual intent. Had Plaintiff provided the Court with evidence of the Debtor’s active participation in negotiations with the then-sister-in-law, or something more than mere knowledge of who was purchasing the property, the Court might be able to find that actual intent existed. See Bane v. U.S. Trustee, 2013 WL 942415, *2 (W.D.Va.2013). Plaintiff, however, has failed to provide such evidence, and the fact that Debtor may have known she was selling to a family member when she signed the sales contract is not sufficient to show an actual intent to hinder, delay, or defraud.
Third, the purchase price paid is consistent with the amount one might have received from an arm’s length transaction at that time, despite the fact that the amount received was significantly less than the original purchase price and the tax assessed value. The Property sold for $41,750. Plaintiffs Exhibit 4 at ¶ 3, In re Bowen, No. 12-06099, ECF No. 47. The Debtor and her Husband purchased the Property in 2001 for approximately $82,000. Transcript at 50-51, In re Bowen, No. 12-06099, ECF No. 49. In 2011, the tax assessed value of the Property was approximately $196,000. Plaintiffs Exhibit 1 at ¶ 6, Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept.12, 2012) ECF No. 44. The parties, however, agree that the appraised value of the Property in July 2011 was $70,000. Defen*590dant’s Exhibit Cl, Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept.12, 2012) ECF No. 31; Defendant’s Exhibit Dl, Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept.12, 2012) ECF No. 32; Transcript at 27, 60, In re Bowen, No. 12-06099, ECF No. 49. It is also uncontested that part of the Property had been on the market for over a year without any offers. Transcript at 33, In re Bowen, No. 12-06099, ECF No. 49. The Property consisted of vacant, unimproved lots. Given these facts and the general state of the real estate market in July 2011, a purchase price of approximately sixty percent of the appraised value of unimproved land is not surprising to this Court. When the Court considers that the parties had been attempting to sell part of the property for over a year without any interest and needed to liquidate the Property in order to pay their debts as they became due, this sale appears to be fairly consistent with what would be expected from an arm’s length transaction under similar circumstances. Miller, 39 F.3d at 307 (finding that a transfer of property for less than the appraised value was reasonable given the debtors’ need to turn illiquid assets into liquid assets). As the price paid by the then-sister-in-law is comparable to what might have been received by a stranger in an arm’s length transaction under similar circumstances, the fact that the transferee was related to the Debtor does not establish by a preponderance of the evidence an actual intent to hinder, delay, or defraud the Plaintiff.
Taken individually, and as a whole, these three facts suggest the Debtor, more likely than not, did not actually intend to hinder, delay, or defraud the Plaintiff when she transferred the Property to her then-sister-in-law. Plaintiffs establishment of a mere relationship between the Debtor and the transferee, therefore, is not sufficient to meet her burden of establishing actual intent by a preponderance of the evidence.
Lack of Consideration
Plaintiff has established, and Debtor does not dispute, that Debtor received $0 from the sale of the Property. Transcript at 35, In re Bowen, No. 12-06099, ECF No. 49. The Debtor’s Husband kept the proceeds and did not share them with the Debtor. Id. Plaintiff appears to argue that Debtor did not receive any consideration for the sale of the Property because she did not physically receive any of the cash proceeds said sale. The Court, however, does not believe the Debtor’s failure to share in the proceeds of the sale establishes that the Debtor failed to receive any consideration for the sale of the Property.
Consideration may include any benefit, interest, profit, promise, or right received by a party as an inducement to enter a contract. See Restatement, Second, Contracts, §§ 17(1), 71; Good v. Dyer, 137 Va. 114, 119 S.E. 277, 282 (1923). While it is true that the Debtor did not physically receive any cash proceeds from the transfer, there was consideration for the transfer. As Plaintiffs Exhibit 4 shows, Debtor and her Husband sold their interest in the Property to Debtor’s then-sister-in-law in exchange for the then-sister-in-law’s payment of $41,750. Transcript at 33, In re Bowen, No. 12-06099, ECF No. 49. The payment of the $41,750 was the consideration paid for the Debtor and her Husband’s joint interest in the Property.
Plaintiff appears more accurately to be arguing that Debtor did not share in the benefit of the consideration because her Husband never shared the proceeds with her. Plaintiffs argument fails to the extent she is arguing Debtor did not receive any benefit from the transfer, and, therefore, received no consideration for the transfer. Of the sale proceeds, approximately $33,000 of the $41,750 was used to satisfy mortgages on the property for *591which the Debtor was personally liable; another $1,582 was used to pay taxes on the property for which she was personally hable; another $1,400 was used to pay home owner association dues on the marital residence; and another $1,600 was used to pay for legal services to defend the Debtor from liability in a one million dollar personally injury suit. Id. Based on these figures, the Debtor received some benefit from approximately $87,582 of the $41,750 or approximately ninety percent of the funds received from the transfer. Debtor was told such benefits would be forthcoming in the event she agreed to the sale. Id. at 30. The evidence suggests Debtor received consideration for the transfer of the Property and received a substantial benefit from the consideration. As such, Plaintiff cannot rely on this badge of fraud as grounds to prove Debtor’s actual intent.
Pendency of Litigation at Time of Transfer
Through cross examination of the Debt- or, Plaintiff has established the following timeline: Plaintiff filed a personal injury suit against the Debtor’s Husband in March of 2010; Debtor was added as a defendant to the personal injury suit in March of 2011; a settlement demand of $750,000.00 was made on the Debtor and her Husband in June of 2011; Debtor and her Husband transferred the Property in July of 2011; and trial on the personal injury claim was held in September of 2011. The question the Court must answer is whether the timing of the transfer on the eve of trial is sufficient to find that Debtor actually intended to hinder, delay, or defraud the Plaintiff.
According to the Debtor, she transferred the Property when she did and in the manner she did to generate cash flow to fund her and her Husband’s legal defense and to disentangle herself financially from her Husband. Transcript at 12, In re Bowen, No. 12-06099, ECF No. 49. The Debtor claims to have had no intent to hinder, delay, or defraud the Plaintiff in transferring the Property when she did. Id. While the timing of the transfer on the eve of trial appears inherently suspicious, the facts of the case corroborate the Debt- or’s testimony and lead the Court to believe that Debtor did not actually intend to hinder, delay, or defraud the Plaintiff.
In particular, after satisfying the outstanding obligations associated with the property, the remaining proceeds from the sale were used to pay for legal fees incurred in relation to the personal injury suit brought by Plaintiff. Id. at 36. As a defendant in that suit, Debtor was the beneficiary of the legal representation paid for by those proceeds. Had none of the sale proceeds been used to pay for legal services or other debts, the Court would have a much harder time finding that Debtor’s intentions were honest. See Belmont Wine Exchange v. Nascarella (In re Nascarella), 492 B.R. 914, 917 (Bankr.M.D.Fla.2013) (citing In re Miller, 39 F.3d 301) (finding that the transfer of property to pay for existing debts helped to establish that debtors did not have an actual intent to hinder, delay, or defraud their creditors). In addition to the proceeds, the transfer of the property eliminated two mortgage payments and allowed the Debt- or’s Husband, who had assumed the responsibility of paying the mortgages, to use those funds to pay for the couple’s joint defense instead. Transcript at 15-16, In re Bowen, No. 12-06099, ECF No. 49.
Also of importance is the fact that one of the parcels of property had been on the market for approximately a year before it was finally sold to the Debtor’s then-sister-in-law in July of 2011. Id. at 33. The fact that part of the property was being openly and honestly sold for such a long period of time leads the Court to believe that the intent was to liquidate, rather than hinder, *592delay, or defraud. There was no secret sale in this case, and the Debtor and her Husband were not attempting to hide the fact that their property was for sale.
Conclusion
Based on the facts of the case, the Court determines that the Debtor did not have the actual intent to hinder, delay, or defraud the Plaintiff. Without proof of actual intent by a preponderance of the evidence, the Plaintiff has not carried her burden, and her request to deny the Debt- or’s discharge cannot be granted. The Court will enter a contemporaneous order consistent with this opinion. Copies of this memorandum opinion should be sent to the Plaintiff, Plaintiffs counsel, the Debtor, Debtor’s counsel, and the Chapter 7 Trustee.
. After the case was reassigned to the undersigned judge, neither party moved the Court to rehear the matter. Out of an abundance of caution, the undersigned judge held a conference call on September 17, 2013, to discuss the issue of whether the parties wished for the matter to be reheard or whether reliance on the record was satisfactory. See Smith v. Bowen (In re Bowen), No. 12-06099 (Bankr.W.D.Va. Sept. 12, 2012) ECF No. 51. Although the date and time was confirmed with both parties a week prior, only Plaintiffs counsel appeared telephonically. Id. Plaintiff's counsel had no objection to the Court relying on the record as established at trial. Id.
. The signature page of the sales contract lists the Debtor as the seller and the then-sister-in-law as a purchaser. This suggests that the Debtor knew on July 1, 2011, that the then-sister-in-law was purchasing the property, rather than on July 22, 2011, as she claimed. Transcript at 40-42, In re Bowen, No. 12-06099, ECF No. 49. While the document establishes that both parties signed the document on the same day, that fact is not necessarily inconsistent with the Debtor’s testimony. The then-sister-in-law's name is hand written on the signature page and may have been added and signed after the Debtor signed the document; in which case, the Debtor would not have known that her then-sister-in-law was the purchaser. Plaintiff's counsel did not explore this question in his cross examination of the Debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496341/ | MEMORANDUM OPINION
PATRICK M. FLATLEY, Bankruptcy Judge.
The Huntington National Bank (“HNB”), West Union Bank, and Freedom Bank (collectively “Plaintiffs”) seek summary judgment on their complaint to except $300,000 from John P. Aman and Veronica J. Aman’s (“Debtors”) discharge under 11 U.S.C. § 523(a)(2), (4), and (6). The Plaintiffs contend that grounds exist to render this debt nondischargeable because Mr. Aman engaged in fraud, defalcation, and embezzlement over a seven-year period. The Debtors oppose summary judgment on the basis that genuine issues of material fact exist. For the reasons stated herein, the court will deny the Plaintiffs’ motion for summary judgment.
I. STANDARD OF REVIEW
Federal Rule of Civil Procedure 56, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment is only appropriate if the movant demonstrates “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). A party seeking summary judgment must make a prima facie case by showing: first, the apparent absence of any genuine dispute of material fact; and second, the movant’s entitlement to judgment as a matter of law on the basis of undisputed facts. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The movant bears the burden of proof to establish that there is no genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Demonstrating an absence of any genuine dispute as to any material fact satisfies this burden. Id. at 323, 106 S.Ct. 2548. Material facts are those necessary to establish the elements of the cause of action. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. Thus, the existence of a factual dispute is material — thereby precluding summary judgment — only if the disputed fact is determinative of the outcome under applicable law. Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir.1994). A movant is entitled to judgment as a matter of law if “the record as a whole could not lead a rational trier of fact to find for the non-movant.” Williams v. Griffin, 952 F.2d 820, 823 (4th Cir.1991) (citation omitted); see also Anderson, 477 U.S. at 248, 106 S.Ct. 2505.
If the moving party shows that there is no genuine dispute of material fact, the *598nonmoving party must set forth specific facts that demonstrate the existence of a genuine dispute of fact for trial. Celotex Corp., 477 U.S. at 322-23, 106 S.Ct. 2548. The court is required to view the facts and draw reasonable inferences in the light most favorable to the nonmoving party. Shaw, 13 F.3d at 798. However, the court’s role is not “to weigh the evidence and determine the truth of the matter [but to] determine whether there is a need for a trial.” Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505. Nor should the court make credibility determinations. Sosebee v. Murphy, 797 F.2d 179, 182 (4th Cir.1986). If no genuine issue of material fact exists, the court has a duty to prevent claims and defenses not supported in fact from proceeding to trial. Celotex Corp., 477 U.S. at 317, 323-24, 106 S.Ct. 2548.
II. BACKGROUND
Ms. Aman had a close relationship with her great uncle, Peter L. Olean. For a number of years, Mr. Olean visited the Amans three to six nights per week. In 2000, Mr. Olean designated Mr. Aman as one of his attorneys-in-fact because of his relationship with Ms. Aman. Under the durable power of attorney, Mr. Aman had numerous powers: He had the right to, among other things, draw checks on, and withdraw all or part of Mr. Olean’s savings accounts; to demand, sue for and recover for, any and all sums of money, debts, rents, royalties, accounts, insurance, interest and dividends that became due; to sell, lease, pledge, encumber, convey, transfer, assign, and dispose of property, and to make, execute, acknowledge, and deliver any instruments required to consummate such transaction; to sell, assign, cash, convert or transfer any stocks, notes, or securities; and “generally to do and perform all things necessary to carry out the powers” provided for under the durable power of attorney. Soon after Mr. Olean executed the durable power of attorney, he began noticing withdrawals from his bank accounts. Upon review of his monthly bank statements, Mr. Olean discovered that Mr. Aman was writing checks on his accounts. Mr. Olean told Mr. Aman to stop withdrawing funds from his accounts, but Mr. Aman continued writing checks in Mr. Olean’s name. Although these unauthorized withdraws continued for many years, Mr. Olean did not revoke his power of attorney because of his beloved niece.
In 2001, Mr. Aman joined HNB as its senior treasury management officer. Sometime during Mr. Aman’s employment with HNB, Mr. Olean loaned Mr. Aman stock certificates for 5,335 shares of Merck and 17,206 shares of Mylan Laboratories. Mr. Olean loaned him the stock certificates as collateral to borrow from HNB. During Mr. Aman’s employment with HNB, twelve HNB loans were taken out in Mr. Olean’s name; Mr. Olean signed three of the loans,1 and Mr. Aman signed nine in his capacity as Mr. Olean’s power of attorney. At least eight of the HNB’s loans were collateralized with Mr. Olean’s Merck and Mylan stock. All of HNB’s loans were paid in full.
In 2005, Mr. Aman left HNB to join West Union Bank as its senior vice president of its Clarksburg, West Virginia branch office. During the first two years there, Mr. Aman took out twenty-nine loans in the name of Mr. Olean and signed each one as “John Aman P.O.A.” The loan documents indicate that the purpose of the loans were to “pay off Huntington Bank,” “to pay contractor,” and for the “renewal *599of loan.” The vast majority of the West Union Bank loans were unsecured; the few loans that were secured were collater-alized by a “Pete Dye Membership Certificate.” Mr. Olean was not aware of these loans until 2009. All of the West Union Bank loans were paid in full.
On or about May 15 and May 17, 2007, Mr. Aman took out two loans in the name of Mr. Olean from Freedom Bank in the amounts of $245,054.89 and $114,313.36 — a total of $359,368.25. The loan documents reflect that Mr. Olean was the borrower and Mr. Aman signed as “John Aman P.O.A.” The stated purpose of the loans was “debt consolidation.” Both loans were collateralized by Mr. Olean’s stock: 17,208 shares of Mylan Laboratories stock and 6,335 shares of Merck stock. A few days after Mr. Aman took out these loans, Mr. Olean revoked Mr. Aman’s power of attorney. By 2009, both of the Freedom Bank loans were in default. Freedom Bank sold the collateral and applied the proceeds to the outstanding debt obligation; the proceeds, however, did not satisfy the outstanding obligation. Freedom Bank notified Mr. Olean by letter that he should contact the bank to make arrangements to pay the $55,444 deficiency.
In 2010, Mr. Olean filed a lawsuit against the Plaintiffs in the Circuit Court of Monongalia County, West Virginia. He brought four causes of action against the banks: fraud, negligence, conversion, and vicarious liability. The Plaintiffs each filed a third-party complaint against Mr. Aman. HNB and West Union Bank’s third-party complaint asserted the same two-counts: first, for contribution from Mr. Aman if the banks were held liable to Mr. Olean; and second, they alleged that Mr. Aman fraudulently misrepresented his authority under his durable power of attorney, they relied upon his misrepresentations by approving the loans, they were damaged by having to defend Mr. Olean’s lawsuit, and any potential judgment against them was sustained as a proximate consequence of Mr. Aman’s fraudulent misrepresentations. Freedom Bank’s third-party complaint, without the same specificity as HNB and West Union Bank, also asserted causes of action for fraud and contribution if Freedom Bank was held liable to Mr. Olean.
During the state court proceeding, the Plaintiffs deposed the Debtors. Mr. Aman asserted his Fifth Amendment privilege in response to questions relating to the money he borrowed from the Plaintiffs in his capacity as Mr. Olean’s power of attorney. Ms. Aman similarly asserted her spousal privilege in response relating to her husband’s loans from the Plaintiffs. On July 27, 2011, while the state court proceeding was pending, the Debtors filed for bankruptcy relief under Chapter 13 of the Bankruptcy Code. On October 7, 2011, the Plaintiffs filed this adversary proceeding and also individually filed proofs of claim in the Debtors’ bankruptcy case. This adversary proceeding was stayed to permit the resolution of the state court proceeding above. The Plaintiffs ultimately settled with Mr. Olean for $300,000 and each obtained a default judgment against Mr. Aman: HNB was awarded $108,333.33; West Union Bank was awarded $108,333.34; and Freedom Bank was awarded $83,333.33.2
On February 26, 2013, this court held a pretrial conference and subsequently entered a scheduling order whereby the parties were provided with sixty days for discovery. The court held another pretrial hearing on June 10, 2013, where the parties indicated that discovery was complete *600and they were ready to file dispositive motions. The motion for summary judgment before the court relies on four depositions that were developed in the state court action, the Plaintiffs’ loan documents, the durable power of attorney, and Freedom Bank’s letter to Mr. Olean. The Debtors only offered two affidavits as evidence. The affidavits are both approximately one page and provide, other than identification information, that the Debtors were each advised by an attorney to assert the Fifth Amendment and spousal privilege in the state court case. The Debtors presented no other evidence in opposition to the pending motion.
III. DISCUSSION
The Plaintiffs argue that their motion for summary judgment is ripe for disposition because there are no genuine issues of material fact. They claim that all the material facts necessary to adjudicate their motion were of record in the state court case. The Plaintiffs contend that the Debtors cannot introduce “new evidence”3 in this proceeding because they elected to invoke the Fifth Amendment and spousal privilege in the state court case. Relying on SEC v. Benson, 657 F.Supp. 1122 (S.D.N.Y.1987) and Leonard v. Coolidge (In re Nat’l Audit Def. Network), 367 B.R. 207 (Bankr.D.Nev.2007), the Plaintiffs urge the court to bar the Debtors from introducing any evidence in this proceeding because a non-moving party cannot introduce evidence in response to a motion for summary judgment where that party previously asserted the Fifth Amendment. In response, the Debtors highlight that Benson and In re Nat’l Audit Def. Network dealt with circumstances where the non-moving party raised the Fifth Amendment in the same case, whereas here the Debtors have yet to assert any privileges. Moreover, the Debtors argue that since there was not a judicial ruling made in the state court case regarding the validity of the invoked privileges, this court should not penalize the Debtors for merely asserting a privilege in a previous case.
At this stage of the proceeding, the court declines from deciding whether the Debtors may introduce new evidence in this case because the Debtors have not attempted to offer any evidence. The Debtors’ response to the Plaintiffs motion for summary judgment does not attach any depositions, substantive affidavits,4 or answers to interrogatories challenging the Plaintiffs factual allegations. In fact, the Debtors’ response to the Plaintiffs’ motion for summary judgment does not contest any of the Plaintiffs factual allegations; rather, the Debtors seemingly rely on the record as developed by the Plaintiffs to show that genuine disputes of material fact exist.
Turning to the merits of the Plaintiffs nondischargeability action, they argue that each of their default judgments against Mr. Aman is nondischargeable because neither Mr. Olean nor the durable power of attorney authorized Mr. Aman to obtain loans from the Plaintiffs. The Plaintiffs contend that these default judgments are nondischargeable under any one of the three following grounds: first, Mr. Aman violated § 523(a)(2)(A) because he obtained the subject loans by fraudulently representing to the Plaintiffs that he had the authority to do so; second, Mr. Aman *601violated § 523(a)(4) because he embezzled money from the Plaintiffs, and also obtained money from them by acts of fraud or defalcation while acting in a fiduciary capacity; and third, Mr. Aman violated § 523(a)(6) because he intentionally and maliciously injured the Plaintiffs by obtaining loans he knew Mr. Olean had not authorized. The Plaintiffs bear the burden to demonstrate by a preponderance of the evidence that the Debtors debt is nondis-chargeable under one of these sections. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (holding that the standard of proof for the dis-chargeability exceptions in § 523(a) is the preponderance-of-the-evidence standard). Exceptions to discharge under § 523 are construed narrowly in favor of providing debtors a fresh start. See Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir.1999).
A. Section 523(a)(2)(A)
The Plaintiffs argue that Mr. Aman fraudulently misrepresented his authority to obtain loans on behalf of Mr. Olean; they relied on his professed authority in approving the subject loans; they were harmed by having to pay Mr. Olean $300,000 in the state court action; and they justifiably relied on Mr. Aman’s representations because his power of attorney was “facially valid.” The Plaintiffs also contend that they are entitled to judgment against Ms. Aman because she obtained a benefit from the loans and she knew of her husband’s conduct. The Debtors counter that the record shows that Mr. Olean was aware of Mr. Aman’s conduct and voluntarily provided him with the collateral to secure the loans. Regarding Ms. Aman, the Debtors allege that § 523(a)(2)(A) is inapplicable because she made no representation to the Plaintiffs.
Section 523(a)(2)(A) excepts from discharge any debt “for money ... to the extent obtained, by — (A) false pretenses, a false representation, or actual fraud .... ” Congress enacted § 523(a)(2)(A) “to protect creditors who were tricked by debtors into loaning them money or giving them property, services, or credit through fraudulent. means.” Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 219-20 (4th Cir.2007). Section 523(a)(2)(A) does not except any debt incurred as a result of fraud; for a debt to fall within this exception, the debtor must use “fraudulent means to obtain money, property, services, or credit.” Id. at 219 (emphasis added).
The terms “false pretenses,” “false representation,” and “actual fraud” are interpreted according to the common understanding of those terms at the time of § 523(a)(2)(A)’s enactment. E.g., Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (“The operative terms in § 523(a)(2)(A) ... carry the acquired meaning of terms of art. They are common-law terms, and ... they imply elements that the common law has defined them to include.”). At the time of their promulgation, the prevailing common-law definition of these terms was set forth in the Restatement (Second) of Torts (1976), which was published shortly before Congress passed the 1978 Bankruptcy Act. Field, 516 U.S. at 70-72, 116 S.Ct. 437; Biondo, 180 F.3d at 134 (“[W]e will follow the Supreme Court’s lead and look to the Restatement to determine the elements required to prove that claim.”). Relying on the Restatement of Torts and the Supreme Court’s survey of the dominant consensus of common-law jurisdictions in 1978, the Court of Appeals for the Fourth Circuit found that a plaintiff must prove four elements to satisfy § 523(a)(2)(A): “(1) a fraudulent misrepresentation; (2) that induces another to act or refrain from acting; (3) causing harm to the plaintiff; and (4) the plaintiffs justifiable reliance on *602the misrepresentation.” In re Biondo, 180 F.3d at 134.
In this case, the Plaintiffs have failed to establish that there is no genuine issue of material fact as to whether Mr. Aman fraudulently misrepresented his authority to take out loans on Mr. Olean’s behalf. Whether Mr. Aman had such authority is material because it is determinative of the Plaintiffs’ cause of action under § 523(a)(2)(A). Relying on Mr. Olean’s deposition from the state court case and the durable power of attorney, the Plaintiffs argue that Mr. Aman did not have the authority to take out the subject loans and therefore he fraudulently misrepresented to them that he had the authority to obtain the loans. The Plaintiffs cite to portions of Mr. Olean’s deposition where he testified that he was unaware of Mr. Aman’s borrowing and that he did not authorize Mr. Aman to borrow money on his behalf unless he was incapacitated. But Mr. Ole-an’s recollection of the subject loans is inconsistent. Mr. Olean testified that he voluntarily loaned his Mylan and Merck stock to Mr. Aman for the purpose of using it as collateral to take out the HNB loans. Notably, in response to whether Mr. Olean knew Mr. Aman was going to use the stock as collateral for the HNB loans, Mr. Olean testified that “he [Mr. Aman] said he was going to use it for that” and that “he told me he was going to use it for collateral at Huntington Bank.” If Mr. Olean did not authorize Mr. Aman to take out loans, it is quite peculiar for Mr. Olean to then loan him approximately $371,0005 in stock to use as collateral for the HNB loans.
The terms of Mr. Olean’s durable power of attorney also do not resolve Mr. Aman’s authority to obtain loans on Mr. Olean’s behalf. The Plaintiffs argue that the durable power of attorney does not provide Mr. Aman with the authority to borrow in Mr. Olean’s name. But paragraph six of the power of attorney provides that Mr. Aman:
may act as my [Mr. Olean] attorney, for me in my name and in my behalf: To sell, lease, pledge, encumber, convey, transfer, assign or otherwise deal in and dispose of my property, real and personal, and to make, execute, seal, acknowledge, and deliver any deeds, contracts, leases, assignments, releases or other instruments required to consummate any of said transaction.
By its terms, this paragraph authorizes Mr. Aman to encumber Mr. Olean’s personal property and to execute any such instrument required to consummate the transaction. An encumbrance is a “claim or liability that is attached to property ... such as a lien or mortgage.” Black’s Law Dictionary 568 (8th ed. 2004). And an “instrument” is a “written legal document that defines rights, duties, entitlements, or liabilities, such as a contract, will, promissory note, or share certificate.” Id. at 813 (emphasis added). Without determining definitively, the court observes that paragraph six may empower Mr. Aman to encumber Mr. Olean’s personal property and to execute promissory notes on his behalf. Based upon Mr. Olean’s contradictory testimony and paragraph six, the court finds that a material factual dispute exists as to whether Mr. Aman had the authority to borrow on Mr. Olean’s behalf. Thus, the Plaintiffs have not satisfied their burden in showing the absence of a genuine dispute of material fact. See Anderson, 477 U.S. at 248, 106 S.Ct. 2505.
The court also finds that the Plaintiffs have not alleged or established suffi*603cient facts showing that § 523(a)(2)(A) applies to Ms. Aman. Section 523(a)(2)(A) requires “the debtor to have obtained money, property, services, or credit through her fraud or use false pretenses.” In re Rountree, 478 F.3d at 219 (emphasis added). The debts the Plaintiffs seek this court to find nondischargeable are default judgments entered against Mr. Aman. The pleadings before the court do not indicate that a judgment was entered against Ms. Aman, or that she individually obtained money from the Plaintiffs prepetition. The court therefore is unsure what “debt” under § 523(a)(2)(A) the Plaintiffs seek this court to find nondischargeable against Ms. Aman. Moreover, the record is devoid of any representations — let alone fraudulent misrepresentations — that Ms. Aman made to either the Plaintiffs or Mr. Olean. Without providing a scintilla of evidence that she ever even made representations to the Plaintiffs, the Plaintiffs have not demonstrated that § 523(a)(2)(A) is applicable to Ms. Aman.
B. Section 523(a)(4)
Section 523(a)(4) excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” § 523(a)(4). Importantly, “while acting in a fiduciary capacity” only qualifies “fraud or defalcation”; acts of embezzlement or larceny do not require the concomitant condition of the act while the individual is a fiduciary. Therefore, an examination of defalcation or fraud is only necessary if the Plaintiffs first demonstrate that the debt arose while Mr. Aman was acting in a fiduciary capacity. See In re Parker, 264 B.R. 685, 700 (10th Cir. BAP 2001) (“The existence of a fiduciary relationship is a threshold issue under § 523(a)(4).”).
1. Fiduciary Capacity
The Plaintiffs argue that Mr. Aman owed a fiduciary duty to Mr. Olean and to two of the three Plaintiff banks. The Plaintiffs contend that Mr. Aman was placed in a position of ascendancy over Mr. Olean because he was designated as Mr. Olean’s attorney-in-fact and had substantial experience in financial matters. The Plaintiffs allege that Mr. Olean placed special trust in Mr. Aman because of his financial knowledge and the relationship Mr. Olean had with Ms. Aman. The Plaintiffs also assert that Mr. Aman acted in a fiduciary capacity to HNB and West Union Bank because he was employed as an officer at both banks. In response, the Debtors argue that Mr. Aman did not retain a position of ascendancy over Mr. Olean because Mr. Olean was competent to handle his financial affairs, reviewed his bank statements, and was aware of Mr. Aman’s financial transactions.
The definition of “fiduciary” for purposes of § 523(a)(4) is controlled by federal common law. Harrell v. Merchant’s Express Money Order Co. (In re Harrell), No. 98-1728, 1999 WL 150278, at *2-3 (4th Cir. Mar. 19, 1999). Under the federal common law, the term “fiduciary” is limited to instances involving express or technical trusts. Id. In an express or technical trust, “[t]he trustee’s obligations must have been imposed prior to, rather than by virtue of, any claimed misappropriation of funds.... ” Id. at *3. In general, the concept of a “fiduciary duty” under § 523(a)(4) applies only to technical or express trusts; it does not generally apply to fiduciary duties implied by law from the contract. In re Bennett, 989 F.2d 779, 784 (5th Cir.1993). For instance, there is no cause of action under § 523(a)(4) based on the existence of a constructive or resulting trust because those types of trusts serve as remedies for another’s breach of duty. E.g., Guerra v. Fernandez-Rocha (In re Fernandez-Rocha), 451 F.3d 813, 816 *604(11th Cir.2006) (“ ‘[Constructive’ or ‘resulting’ trusts, which generally serve as a remedy for some dereliction of duty in a confidential relationship, do not fall within the § 523(a)(4) exception ‘because the act which created the debt simultaneously created the trust relationship.’ ”) (citation omitted). A technical or express trust requires there be a “fiduciary duty” with trust-type obligations that are imposed under statute or common law. Bennett, 989 F.2d at 785. As explained by the Court of Appeals for the Seventh Circuit, a fiduciary relationship may be created when there is a “ ‘difference in knowledge or power between the fiduciary and principal ... which gives the former a position of ascendancy over the latter.’ ” In re Frain, 230 F.3d 1014, 1017 (7th Cir.2000) (citation omitted). Under this test, a fiduciary relationship includes any relationship that calls for the imposition of the same high standard as a trust, such as “a lawyer-client relation, a director-shareholder relation, or a managing partner-limited partner relation” because all these relationships call for the principal to “ ‘repose a special confidence in the fiduciary.’ ” Id. (citation omitted).
Although the determination of whether a fiduciary duty exists to support a § 523(a)(4) cause of action is a question of federal law, “state law is relevant in determining whether a trust obligation exists.” Martinez v. Goodrich (In re Goodrich), No. 03-8172, 2004 WL 2758671, at *2 (Bankr.C.D.Ill. Oct. 20, 2004). “[T]he existence of a state statute or common law doctrine imposing trust-like obligations on a party may, at least in some circumstances, be sufficient to create a technical trust relationship for purposes of section 523(a)(4).” 4 Collier on Bankruptcy ¶ 523.10[l][d] (Alan N. Resnick & Henry J. Sommer, eds. 15th ed. rev. 2009). If such an obligation exists under state law, then “the court must look behind the provision to ascertain whether the relationship possesses the attributes required for the purposes of Section 523(a)(4).” In re Goodrich, 2004 WL 2758671, at *2; see Texas Lottery Comm’n v. Tran (In re Tran), 151 F.3d 339, 342 (5th Cir.1998) (“A state cannot magically transform ordinary agents, contractors, or sellers into fiduciaries by the simple incantation of the terms ‘trust’ or ‘fiduciary.’ ”). Relationships demonstrating the requisite attributes have included an ambassador and the property of the ambassador’s represented country, Republic of Rwanda v. Uwimana (In re Uwimana), 274 F.3d 806 (4th Cir.2001), a financial advisor committing fraud and found to be a fiduciary by default in a state court judgment, Pahlavi v. Ansari (In re Pahlavi), 113 F.3d 17 (4th Cir.1997), real estate agents handling closing funds, Hamby v. St. Paul Mercury Indemnity Co., 217 F.2d 78 (4th Cir.1954), attorneys handling client funds, Andy Warhol Found, for Visual Arts, Inc. v. Hayes (In re Hayes), 183 F.3d 162 (2d Cir.1999), a corporate officer and director mishandling corporate funds, In re Burton, 416 B.R. 539, 546 (Bankr.N.D.W.Va.2009) and those acting under a power of attorney to an incompetent person, Ostrum v. Porter (In re Porter), No. 03-118, 2008 WL 114914 (Bankr.N.D.W.Va. Jan. 10, 2008).
In In re Porter, this court considered whether an appointee of a durable power of attorney6 acted in a “fiduciary *605capacity” to the grantor under § 523(a)(4). Following the Seventh Circuit, this court held that a fiduciary relationship exists under § 523(a)(4) when there is a “ ‘difference in knowledge or power between the fiduciary and principal ... which gives the former a position of ascendancy over the latter.’ ” In re Porter, 2008 WL 114914, at *3 (quoting In re Frain, 230 F.3d at 1017). Employing this standard to the facts of that case, the court bifurcated when the attorney-in-fact was acting in a fiduciary capacity. When the grantor of the attorney-in-fact was competent and aware of the financial decisions being made on her behalf, the-attorney-in-fact was not acting in a fiduciary capacity. Id. at *4. But when the grantor became incompetent, the attomey-in-fact enjoyed a position of ascendancy; consequently, the relationship metamorphosed such that the attorney-in-fact acted in a fiduciary capacity from the time of the incompetency.
Here, the Plaintiffs failed to demonstrate by a preponderance of the evidence that a fiduciary relationship existed between the Plaintiffs and Mr. Aman. The Plaintiffs mistakenly focus almost their entire argument on the relationship between Mr. Aman and Mr. Olean. The default judgments the Plaintiffs obtained against Mr. Aman — the debts they seek the court to find nondischargeable — are debts owed by Mr. Aman to the Plaintiffs. If Mr. Olean’s estate was seeking a nondis-chargeability finding with respect to a judgment he obtained against Mr. Aman, an examination of their relationship would be necessary. But the court, for purposes of determining whether the Plaintiffs default judgments against Mr. Aman stemmed from “fraud or defalcation,” is only concerned with whether he was acting in a fiduciary capacity with respect to the Plaintiffs.7 See In re Bratt, 489 B.R. 414, 425 (Bankr.D.Kan.2013) (“Proving this exception [§ 523(a)(4) ] requires demonstrating that a fiduciary relationship existed between the debtor and the objecting party and that the debtor committed the defalcation in the course of that fiduciary relationship.”).
Regarding the relationship between the Plaintiffs and Mr. Aman, the Plaintiffs summarily conclude that Mr. Aman acted in a fiduciary capacity at HNB and West Union Bank because he was employed by them. The Plaintiffs offered no other details of Mr. Aman’s corporate responsibilities other than his title: At HNB, Mr. Aman was the senior treasury management officer; at West Union Bank, he was the senior vice president of the Clarksburg branch. At this stage of the *606proceeding, the record does not reflect the existence of a technical or express trust, and the Plaintiffs provided no evidence suggesting that a state statute or common law doctrine imposed trust-like obligations on Mr. Aman.8 Accordingly, the court cannot determine with Mr. Aman’s working titles alone whether he was acting in a fiduciary capacity. Because the Plaintiffs failed to demonstrate that Mr. Aman was acting in a fiduciary capacity, the court does not need to consider whether the debt arose from fraud or defalcation.
2. Embezzlement
The Plaintiffs also assert that Debtors debts to them are nondischargeable on the ground of embezzlement under § 523(a)(4). The Plaintiffs argument that Mr. Aman embezzled funds from them is one sentence: “[T]he evidence here is that although Aman lawfully (albeit fraudulently) obtained the 43 loans from Plaintiff Banks, he thereafter fraudulently misappropriated the funds for his own use and without his principal’s authority.” The Plaintiffs also argue that Ms. Aman satisfies § 523(a)(4) because she was a “beneficiary of the misappropriated monies.” The Debtors contend that the Plaintiffs have failed to show that the Debtors embezzled funds because Mr. Olean was aware of Mr. Aman’s loan transactions, and Ms. Aman could not have embezzled funds from the Plaintiffs because she was never entrusted with monies.
“Embezzlement” under § 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.’ ” Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598, 602 (5th Cir.1998) (citation omitted). To establish embezzlement, the movant must demonstrate that “(1) the person was lawfully entrusted with property or property lawfully came into the hands of that person, and (2) the property was fraudulently appropriated.” In re Davis, 262 B.R. 663, 671 (Bankr.E.D.Va.2001). Fraudulent intent may be inferred from the surrounding facts and circumstances. E.g., In re Chwat, 203 B.R. 242, 249 (Bankr.E.D.Va.1996); In re Allman, 147 B.R. 122,125 (Bankr.E.D.Va.1992). In contrast, “larceny” occurs under § 523(a)(4) if “the debtor has wrongfully and with fraudulent intent taken property from its owner.” In re Rose, 934 F.2d 901, 903 (7th Cir.1991). “Embezzlement” differs from “larceny” in that when money is embezzled, “the original taking of the property was lawful, or with the consent of the owner, while in larceny the felonious intent must have existed at the time of the *607taking.” 4 Collier on Bankruptcy ¶ 523.10[2],
The Plaintiffs iterate throughout their motion for summary judgment that Mr. Aman unlawfully obtained the subject loans because he did not have the authority to obtain the loans on Mr. dean’s behalf. This line of argument fails to show that the original taking of the Plaintiffs property was lawful. Furthermore, the Plaintiffs argue that Mr. Aman “lawfully (albeit fraudulently) obtained the 43 loans from the Plaintiff Banks.” This statement is oxymoronic: Mr. Aman legally perpetrated fraud against the Plaintiffs. Thus the Plaintiffs have failed to show that Mr. Aman legally received the loans and subsequently misappropriated those loans for his benefit with a fraudulent intent. Regarding Ms. Aman, the Plaintiffs have provided no evidence that Ms. Aman was ever entrusted with property of the Plaintiffs. She was not a party to any of the subject loan transactions between the Plaintiffs and Mr. Aman, and she did not take out loans from the Plaintiffs on her behalf. Accordingly, the court finds that the Plaintiffs have failed to demonstrate how the embezzlement exception to discharge under § 523(a)(2)(A) applies to the Debtors.
C. Section 523(a)(6)
The Plaintiffs assert that grounds exist under § 523(a)(6) to except their debts from discharge because Mr. Aman acts and resulting injury to them were deliberate and intentional. The Plaintiffs allege that Mr. Aman intentionally entered the loan transactions with full knowledge that Mr. Olean had not authorized the loans; they conclude that Mr. Aman therefore misled the Plaintiffs into thinking that the loans were for the benefit of Mr. Olean. The Plaintiffs contend that Mr. Aman, with thirty years of experience in the financial industry, knew that borrowing funds based on misrepresentations created a substantial certainty that harm would result. The Plaintiffs assert that Mr. Aman also acted with malice because he abused his power under the durable power of attorney and his employment position with HNB and West Union Bank. In response, the Debtors argue that the Plaintiffs have failed to show how any acts by Mr. Aman were malicious.
Section 523(a)(6) provides that a discharge in bankruptcy does not apply to any debt that arises from the “willful and malicious injury by the debtor to another entity or to the property of another entity.” § 523(a)(6). The test is conjunctive — the debtor’s conduct must be both willful and malicious. E.g., In re Miera, 926 F.2d 741, 743 (8th Cir.1991) (noting that willful and malicious are distinct elements of § 523(a)(6) exception to discharge). For a debt to be excepted from a debtor’s discharge under 523(a)(6), “the plaintiff must prove three elements by a preponderance of the evidence: (1) that the defendant’s actions caused an injury to the plaintiffs person or property, (2) that the defendant’s actions were willful, and (3) that the defendant’s actions were malicious.” In re Raeder, 409 B.R. 373, 383 (Bankr.N.D.W.Va.2009).
Section 523(a)(6)’s exception from discharge is associated with the law of intentional torts, and conduct that is negligent or reckless remains dischargea-ble. Kawaauhau v. Geiger, 523 U.S. 57, 60, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). The acts done must be with the actual intent to cause injury. Geiger, 523 U.S. at 61, 118 S.Ct. 974 (“[N]ondisehargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.”) (emphasis in original). An intentional act alone “does not necessarily mean that he acted willfully and maliciously for purposes of § 523(a)(6).” Duncan v. Duncan (In re *608Duncan), 448 F.3d 725, 728 (4th Cir.2006). For an injury to be “willful,” the debtor must actually intend to cause injury. This sort of intentional conduct includes those actions where the debtor knows the consequences flowing from the complaint acts are certain, or are substantially certain to occur. See Barclays American/Business Credit., Inc. v. Long (In re Long), 774 F.2d 875, 881 (8th Cir.1985).
“Malicious” under § 523(a)(6) means that the debtor’s act was committed “deliberately and intentionally in knowing disregard of the rights of another.” First Nat’l Bank v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir.1995); In re Walker, 48 F.3d 1161, 1163-64 (11th Cir.1995) (“As used in section 523(a)(6), malicious means wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will.”) (internal quotation marks and citation omitted). Debtors may act with malice even if they do not have “subjective ill will toward” and do not intend to injure their creditor. In re Stanley, 66 F.3d at 667. Because a debtor will rarely, if ever, admit to acting in a willful and malicious manner, those requirements may be inferred from the circumstances surrounding the injury at issue. E.g., St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1010 (4th Cir.1985) (“Implied malice, which may be shown by the acts and conduct of the debtor in the context of their surrounding circumstances, is sufficient under 11 U.S.C. § 523(a)(6).”).
The Plaintiffs have not demonstrated that there is no genuine dispute as to whether Mr. Aman intentionally meant to harm the Plaintiffs when he obtained the subject loans. The Plaintiffs allege that Mr. Aman executed promissory notes he knew Mr. Olean did not authorize. But as the court noted above, a genuine issue of material fact exists as to whether Mr. Aman had the authority to take out the loans. Consequently, the court cannot determine if Mr. Amen knowingly misrepresented his authority to the Plaintiffs with the intent to cause them financial harm.9
IV. CONCLUSION
For the above-stated reasons, the court will deny, without prejudice, the Plaintiffs’ motion for summary judgment. A separate order will be entered pursuant to Fed. R. Bankr.P. 9021.
. The Plaintiffs suggest that Mr. Aman may have had Mr. Olean sign a blank page and then somehow transcribed his signature onto the three loan documents. Mr. Olean acknowledged his signature on three of the loan documents, but could not recall ever signing the loan documents.
. The court is relying on the Plaintiffs representations of the amounts of the respective default judgment awards. Upon review of the docket in this proceeding, the court could not find the default judgment awards that were entered in state court.
. The court assumes that the Plaintiffs consider new evidence to be any evidence not proffered by the Debtors in the state court case.
. The two affidavits submitted by the Debtors do not contest any of the facts alleged by the Plaintiffs. Other than identification information, the affidavits only provide that an attorney told the Debtors to assert the Fifth Amendment and spousal privilege in the state court case.
. The record does not reflect the fair market value of Mr. Olean’s stock when he loaned it to Mr. Aman. The court crudely estimates the value at $371,000 based upon the sale of the stock on April 27, 2009. Of course, the value of the stock may have been vastly different at the time Mr. Olean loaned it to Mr. Aman.
. In West Virginia, a power of attorney is " 'an instrument granting someone authority to act as agent or attorney-in-fact for the grantor.’ ” In re Richard P., 227 W.Va. 285, 708 S.E.2d 479 (2010) (quoting Black’s Law Dictionary 1290 (9th ed. 2009)); Napier v. Compton, 210 W.Va. 594, 558 S.E.2d 593 (W.Va.2001) (" 'A power of attorney creates an agency and this establishes the fiduciary relationship which exists between a principal and agent.’ ”) (citation omitted); Frazier v. Steel & Tube Co., 101 W.Va. 327, 132 S.E. *605723, 724 (1926) (" 'It is conceded that, as a general rule, a principal has the right to revoke a power of attorney at any time...."’) (citation omitted).
. Although Mr. Aman and Mr. Olean’s relationship is irrelevant in this § 523(a)(4) action, the court nonetheless finds that Mr. Aman did not act in a fiduciary capacity to Mr. Olean. See Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.1996) (“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.”). Similar to the facts of In re Porter, Mr. Olean monitored his financial affairs, reviewed bank statements, and confronted Mr. Aman about his withdrawals. The Plaintiffs provided no evidence suggesting that Mr. Olean was incompetent during the time Mr. Aman acted as his attorney-in-fact. In fact, Mr. Olean was aware that Mr. Aman was using his powers for his personal benefit. Mr. Olean had the right to object and revoke Mr. Aman’s authority at any time. Frazier v. Steel & Tube Co., 101 W.Va. 327, 132 S.E. 723, 724 (1926) (" 'It is conceded that, as a general rule, a principal has the right to revoke a power of attorney at any time ... ’ "). Notably, Mr. Olean eventually did exercise this right in 2007 and revoked his durable power of attorney.
. "The term 'officer' is not defined by the West Virginia Business Corporation Act, but, with regard to corporate law, 'the term refers esp. to a person elected or appointed by the board of directors to manage the daily operations of a corporation....' " In re Cross, No. 9-1823, 2010 WL 3447850, at *2-3 (Bankr.N.D.W.Va. Aug. 27, 2010). The current record does not indicate whether Mr. Aman was appointed or elected by a board of directors, or whether he was named in the respective bank's by-laws as an officer. The distinction between Mr. Aman being an officer or employee is significant because an employer-employee "relationship does not generally entail the type of fiduciary duty contemplated by 11 U.S.C. § 523(a)(4).” Id. at *3. Compare Grow Up Japan, Inc. v. Yoshida (In re Yoshida), 435 B.R. 102, 109 (Bankr.E.D.N.Y.2010) ("[A]n employment relationship alone does not give rise to a fiduciary relationship for purposes of § 523(a)(4). Nor does the elevation of an employee to a managerial position bring into being a fiduciary relationship within the purview of § 523(a)(4).”), with In re Burton, 416 B.R. at 546 (holding that the “fiduciary relationship between a corporate officer and/or director to the corporation and its shareholders is a trust-type obligation that satisfies the fiduciary requirement of § 523(a)(4)”).
. Even assuming Mr. Aman misrepresented his authority, the Plaintiffs have not presented any evidence that such conduct was directed towards harming the Plaintiffs rather than Mr. Olean. See, e.g., In re Grasso, 497 B.R. 434, 447 (Bankr.E.D.Pa.2013) (“The Movant must prove that the Debtor acted with a substantial certainty that his conduct would harm the Movant. The Movant must also present evidence that establishes that the Debtor's intent was focused upon harming the Movant....”); In re Brown, 442 B.R. 585, 620 (Bankr.E.D.Mich.2011) (“[A]ctions that are calculated to benefit a debtor, with any harm to a plaintiff being a result of the debt- or’s ‘reckless disregard for the plaintiff's economic interests,' are not malicious for purposes of § 523(a)(6)”) (citation omitted); In Re Nofziger, 361 B.R. 236, 244 (Bankr.M.D.Fla.2006) ("Therefore, in order to establish that a particular debt is nondischargeable, [under 523(a)(6) ], at a minimum, the creditor must establish that the [debtor's] ... act was directed at the creditor, not someone else.”). Indeed, if Mr. Aman misrepresented his authority to the Plaintiffs, Mr. Olean stood to take the brunt of the consequences: Mr. Olean was the stated borrower on all the loans, $371,888 of his stock was sold when the Freedom Bank loans defaulted, and Freedom Bank threatened legal recourse against him if he did not pay the $55,444 deficiency. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496342/ | OPINION
ELIZABETH W. MAGNER, Bankruptcy Judge.
I. Procedural History
A. Highsteppin Productions, L.L.C. v. George Porter, Jr., et al.1
Highsteppin Productions, L.L.C. (“HSP”) filed suit against Porter, Batiste, Stoltz, L.L.C. (“PBS”) and its individual members on December 29, 2009, in the United States District Court for the Eastern District of Massachusetts. In its Complaint, HSP demanded reimbursement in the amount of $527,000.00.2 The Massachusetts court entered a prejudgment writ of attachment requiring each defendant to escrow portions of their income.3 George Porter, Jr. (“Porter”) and Brian Stoltz (“Stoltz”) escrowed money in connection with the Massachusetts proceeding prior to seeking Chapter 7 relief.4
B. Bankruptcy Filings, HSP’s Proof of Claim and Adversary Proceedings
Porter, Stoltz and their wives filed Chapter 7 bankruptcy petitions on September 27, 2010.5 They scheduled HSP as an unsecured creditor with a disputed debt of $504,040.06.6 On December 17, 2010, HSP filed a proof of claim for $608,878.28 *620in both cases.7 On December 29, 2010, HSP filed a Complaint to Determine Dis-chargeability of Debt against Porter and Stoltz.8
David R. Batiste, Jr. (“Batiste”) filed a Chapter 7 petition on September 28, 2011 also scheduling HSP as an unsecured creditor holding a disputed claim of $504,040.06.9 HSP did not file a proof of claim in Batiste’s bankruptcy but did file a Complaint to Determine Dischargeability of Debt on December 30, 2011.10 The two (2) Complaints filed by HSP were substantively consolidated by this Court on February 23, 2011.11
Porter, Stoltz and Batiste filed Counterclaims against HSP. They asserted claims for breach of contract and fiduciary duties, unfair and deceptive trade practices in violation of M.G.L. c. 93A §§ 2 and 11, copyright infringement and alter ego.12
HSP’s Complaint seeks $527,000 for personal advances made to Porter, Stoltz or Batiste, deferred commissions earned on the Artists’ Gross Earnings (as defined below) and PBS expenses paid by HSP during the term of their Personal Management Agreement (“PMA”).13 It also alleges the debt is nondischargeable.14
Trial on the merits of this matter began on June 13, 2012 and ended on September 27, 2012. Post-trial briefs were filed on January 31, 2013.15 After submission of post-trial briefs, the Court took the matter under advisement.
II. Findings of Fact
A. The PMA
On June 2, 2003, Porter, Stoltz and Batiste formed PBS (collectively Porter, Stoltz, Batiste and PBS are referred to as “Artists”). For three (3) years, PBS handled its financial and business arrangements, paying expenses from performance revenue, then splitting the net profit in equal one-third shares.16 PBS had no outstanding debt prior to May of 2006.17
In 2005, Phillip Stepanian (“Stepanian”) owned a direct marketing company, Resort Discovery, which marketed travel packages.18 Although not involved in the entertainment business, in January 2005, Stepanian emailed Porter to discuss a merchandising and marketing proposal for Porter’s music and image.19
The Artists met with Stepanian on or about April 20, 2005, at Porter’s house in New Orleans.20 Stepanian presented a ba*621sic concept for producing and selling merchandise, including a rough outline of different products he wanted to sell.21 Throughout 2005, Stepanian continued to discuss a merchandising and marketing deal with the Artists, circulating merchandising agreements in June and July 2005.22 Although the Artists never executed a merchandising agreement, Stepanian followed PBS through its tour schedule, attending performances and selling mainly Porter-related T-shirts and merchandise Stepanian had purchased.23
Occasionally, music CDs owned, produced and paid for by Porter, Stoltz or Batiste were also placed on Stepanian’s merchandise table and sold.24 Stepanian gave the artist any amounts he collected from sales of their individual merchandise but kept any revenues from the sale of the merchandise Stepanian personally purchased.25 The Artists were neither paid a share of Stepanian’s sales, nor were they given any costs to satisfy.26
As Stepanian became comfortable with the Artists, he suggested becoming PBS’ personal manager.27 Stepanian believed his company, HSP, would free the Artists from having to exercise day to day management duties, thereby allowing PBS to focus on its music.28 HSP offered to create an “artist-controlled environment,” allowing the musicians to decide when and where they played, as well as the content of their music.29 Although PBS was operating at a profit, Stepanian argued that with professional management, PBS could increase its exposure, play more venues for higher fees and make significantly more money.30
The Artists signed the PMA with HSP on May 8, 2006.31 The PMA had an initial 2-year term with an automatic 18-month renewal, after which PBS or its members could terminate the PMA without cause.32 The PMA was governed by Massachusetts law.33
Under the PMA, HSP is entitled to a commission on all “Gross Earnings” received by the Artists during its term with some exceptions. Paragraph 4 of the PMA defines “Gross Earnings” and sets forth the formula for calculating commissions:
(a) Except as otherwise provided herein, as compensation for Highsteppin’s covenants and services, ... [HSP will receive] fifteen (15%) percent (hereinafter “Commission”) of Artists’s Gross Earnings (as hereinafter defined) .... in the event Artist’s Gross Earnings during any consecutive twelve (12) month period during the Term increase by at least fifty percent (50%) above the Gross Earnings Baseline (i.e., increasing to a total amount of money equal to $108,000.00 (one hundred eight thousand dollars) during such twelve month period), the Commission shall increase to seventeen and one half *622percent (17.5%) of Artist’s Gross Earnings ... in the event Artist’s Gross Earnings during any consecutive twelve (12) month period during the Term increase by at least sixty five percent (65%) above the Gross Earnings Baseline (i.e., increasing to a total amount of money equal to $118,800.00 (one hundred eighteen thousand eight hundred dollars) during such twelve month period), the Commission shall increase to twenty percent (20%) of Artist’s Gross Earnings.
(b) The term “Gross Earnings,” as used herein, shall mean and include the total of all earnings ... provided however all monies derived from the preexisting compositions ... shall only be deemed Gross Earnings to the extent that such monies are derived from exploitation of the preexisting compositions pursuant to agreements entered into and/or licenses granted during the Term.
(c) Notwithstanding anything to the contrary contained herein, Artist and Highsteppin hereby agree that Gross Earnings shall specifically exclude monies ... advanced by third parties and actually expended on audio and video recordings ..., reasonable “tour expenses” actually paid to third parties in connection with Artist’s concerts and other five engagements, namely booking agency fees, the costs of self-produced merchandise, reasonable so-called “sounds and lights” reimbursement and/or the costs of opening acts.34
With regard to expenses, HSP was allowed to incur expenses for performances and to promote or further the career of an individual artist or PBS. Specifically, the PMA states in relevant part:
(a) Artist shall be solely responsible for payment of all booking, theatrical or employment agency fees, union dues, publicity costs, promotion or exploitation costs, traveling expenses and/or wardrobe expenses and all other expenses, fees and costs incurred by Artist. Highsteppin is not required to make any loans or advances hereunder to Artists or for Artist’s account nor to incur any expenses on Artist’s behalf ... (including, without limitation, all long distance telephone charges, cellular phone charges, charges for couriers, messengers, facsimile and telex transmissions, accountants fees, attorney’s fees and costs incurred on the Artist’s behalf (excluding the fees and costs associated with the preparation and negotiation of this Agreement), photocopying and postage expenses, air and ground transportation, lodging, meals and other living expenses for Highsteppin while traveling), ... 35
HSP’s authority to incur expenses without the Artists’ approval was limited by the amount of any individual charge or aggregate monthly expenses. The PMA provides in relevant part:
(b) Artist (or Business Manager) will reimburse Highsteppin for any and all expenses incurred by Highstep-pin on Artist’s behalf in connection with Highsteppin’s services performed hereunder, provided that: (i) Artist will not be responsible for any portion of Highsteppin’s overhead expenses; (ii) subject to paragraph 6(b)(iii) of this Agreement, if High-steppin incurs travel expenses on behalf of both Artist and other of Highsteppin’s clients, Artist shall be responsible only for Artist’s pro rata *623share of such expenses; and (iii) Highsteppin shall not incur without Artist’s prior consent (A) any single expense in excess of Seven Hundred Fifty ($750) Dollars or (B) aggregate monthly expenses in excess of Two Thousand ($2,000) Dollars.36
The PMA contemplates that Artists’ revenue would be collected by a business manager.37 PBS did not hire a business manager as anticipated in the PMA.38 and HSP began filling the void in August of 2006.39
On August 1, 2006, Stepanian requested that PBS’ booking agent, Blue Mountain Artists (“Blue Mountain”), forward all executed contracts, checks, paperwork, reports, monthly statements or other mailings to HSP.40 HSP began receiving amounts payable to PBS from Blue Mountain and all related accountings in August 2006.41 HSP also collected the amounts due after completed performances through HSP personnel traveling with the band.42 All sales of merchandise and music were funneled into HSP accounts.43
B. Commingling of Funds
Throughout 2006 and 2007, revenues and expenses of the Artists, Bonerama (HSP’s other client) and HSP were commingled in a single checking account.44 It was not until October 2006 that HSP electronically sorted the deposits and withdrawals made on behalf of the Artists, HSP, or Bonera-ma into separate accounting records.45
On December 7, 2007, HSP established separate checking accounts for PBS and Bonerama in an effort to segregate the deposits and withdrawals of HSP, Bonera-ma, and PBS electronically and physically.46 Stepanian was the sole signatory on both the HSP account and PBS checking account.47 In January 2008, the income and expenses of HSP, PBS and Bonerama were split into their respective bank accounts, and HSP started paying some PBS related invoices out of PBS’ checking account.48 However, HSP continued to pay most of PBS’ expenses from and deposited PBS’ revenue into HSP’s checking account.49
C. Payments to the Artists
During 2006, the Artists collected performance fees on the road, paid tour expenses and divided the remaining cash in equal shares. In 2007, HSP began collecting revenues and remitting payments to the Artists. Before December 2007, the *624Artists paid for tour expenses and crew directly when on tour, then sent reconciliations to HSP for entry into HSP’s accounting system.50 In November 2007, HSP began sending the Artists bi-weekly payments in set amounts.51 HSP also paid the majority of expenses,52 including crew members’ payroll while on tour, out of its checking account.53 This practice continued through November 2008.
1. 1099 and K-l Tax Forms for 2007
HSP issued 1099 tax forms to the Artists for payments made to them in 2007 through HSP’s payroll system.54 HSP voided the 1099s in September or October 2008 and substituted PBS K-ls to the Artist members.55 The 2007 tax return of PBS, which Porter signed on October 20, 2008, reflected K-l income to Stoltz of $32,500.00, Porter for $40,570.00, and Batiste for $27,570.00.56
2. 1099 and K-l Tax Forms for 2008
After the end of 2008, HSP again issued 1099s to the Artists for payments made by HSP through its payroll or checking account during 2008.57 This time the 1099s were not voided, and PBS’ 2008 tax return does not reflect any amounts paid to the Artists.58 Instead, HSP took a deduction for the payments it made to the Artists on its tax return as an expense of HSP and transmitted the 1099s to the IRS on September 10, 2009.59 Nevertheless, after suit was instituted, HSP “corrected” the 1099s by reducing the amounts paid to zero ($0) and issuing Kls in PBS’ name.60 HSP then booked the amounts paid as loans due from PBS.61
3.1099 and K-l Tax Forms for 2009
In 2009, many of PBS’ revenues and expenses were itemized on its QuickBooks account, rather than transferred from HSP’s accounts through batch entry.62 However, HSP also continued to book revenues and expenses, particularly those associated with merchandise and music sales, on its books.63 HSP made no payments to the Artists, and therefore did not issue 1099s, for 2009. Neither PBS nor HSP *625have filed a tax return for 2009, and K-ls have not been issued.
D. HSP’s Accounting of Expenses and Revenues for the Artists
1. Calendar Year 2005
HSP did not have a relationship with PBS in 2005, and Stepanian did not account to the Artists for the merchandise he purchased and sold during 2005.64
2. Calendar Year 2006
HSP’s only method of accounting was through hand notes.65 In the summer of 2006, Bonnie Stockdale was hired to load a QuickBooks program onto HSP’s computers and enter revenue and expense data, from Malangone’s notes, for PBS.66 It took Stockdale until October 2006 to complete the data entry.67
During 2006, Blue Mountain began sending the deposits it collected on behalf of PBS to HSP. Porter collected any residual revenues after completed performances.68 Porter acted as tour manager, paid tour expenses from the cash collected and provided HSP with reconciliation reports during this period.69
After the payment of direct expenses, any remaining cash was distributed evenly between Porter, Stoltz and Batiste. HSP began incurring expenses on behalf of PBS during 2006,70 and most of its costs were directly related to touring.71 During 2006, HSP failed to provide copies of any expenses it paid or revenues it received on behalf of PBS.72 It also failed to provide copies of Blue Mountain performance fee reports, merchandise or music sales.73
PBS utilized Shannon Chabaud as its CPA, who was also Porter’s personal accountant.74 HSP failed to provide an accounting of PBS’ 2006 revenues or expenditures.75 Because HSP did not provide expense and revenue information, Chabaud filed the 2006 tax return without input from HSP.76 Based on Porter’s accountings of performance fees collected and tour expenses paid, Chabaud calculated PBS’ profit for 2006 at $54,457.00.77 HSP ultimately calculated a loss of $26,698.78 for 2006.78
3.Calendar Year 2007
No one at HSP prepared budgets for nontour expenses nor were tour budgets prepared prior to commencing a tour or its booking.79 Throughout most of 2007, Porter or HSP collected performance revenues and paid performance related expenses.80 *626Porter accounted for his collections and expenses noting on reports the amounts charged on the PBS American Express card.81 He also noted amounts sent directly to HSP by Blue Mountain as deposits and deducted for booking agent and HSP commissions.82 Due to expenditures paid for by HSP and unaccounted for to PBS, HSP deferred its commissions without PBS’ knowledge.83 As a result, although Porter attempted to split the true net profit out of remaining cash between PBS’ members, unaccounted for expenditures incurred and paid by HSP meant his calculations were inaccurate.84
In 2007, HSP began booking hotels and flights for PBS through a travel agent and paid the expenses directly.85 HSP also incurred significant nontour expenses on PBS’ behalf but did not forward contracts or invoices for these services or goods to the Artists.86 Stepanian handled the expenses for promotion, sales of music and merchandise, and was only the person to authorize a nontour expense on behalf of PBS.87
As detailed below, HSP did not send the Artists a copy of PBS’ 2007 profit and loss statement (“P/L”) until October 2008.88 During 2007 it also failed to give the Artists any accounting of what expenses it was incurring or satisfying,89 provide copies of Blue Mountain performance fee reports, or account for merchandise and music sales.90
Stepanian testified that he offered his resources to help Artists pay for items needed to “grow the band,” including additional crew which he believed necessary to project the image of a “well respected larger paid band.”91 The crew for PBS from November 2007 to November 2008 was hired and paid by HSP.92
4. Calendar Year 2008
In 2008, HSP convinced PBS to terminate Chabaud’s services in favor of a tax preparer HSP hired, Alan Friedman.93 *627Although Friedman was located in Boston near HSP, he did not verify or audit the financial information delivered to him by HSP.94 HSP acted as the direct liaison to Friedman and provided him with documents and work papers to prepare PBS’ 2007 tax return.95
In July of 2008, HSP produced a 2007 P/L for PBS. The P/L reflected a loss of $62,741.57.96 It was withdrawn shortly thereafter by Stepanian due to inaccuracies.97 In October 2008, HSP delivered a 2007 P/L to Freidman also reflecting a loss of $62,074.57 for 2007. In addition, it prepared and forwarded a 2007 balance sheet (“B/S”) on which it booked directly to equity a 2006 loss of $62,244 and cash disbursements in 2007 to Porter ($40,569), Batiste ($27,569) and Stoltz ($32,519).98 This created a negative retained earnings balance of $225,646 which was offset by a loan from HSP in the amount of $227,660.99
The tax return for 2007 was adjusted by Freidman because the 2007 P/L did not contain several large expenditures incurred by HSP. For example, a photography bill for $37,673.00 was omitted and instead booked directly to retained earnings on PBS’ B/S.100 In addition, losses for 2006 were booked into retained earnings in 2007 without any accounting being given to PBS.101 Music and merchandise sales were not included on PBS’ P/L nor were costs associated with music or merchandise production.102 Freidman adjusted the losses on PBS’ return and forwarded it to Porter for signature and fifing on or about October 2, 2008.103 The 2007 tax return reflected a loss of $225,933.00.104
Once Porter received the draft return, he met with Chabaud in an effort to understand its content. On October 2, 2008, Porter wrote Friedman with several questions, including the existence of the $227,660 loan.105 Freidman and Dyer explained that PBS had incurred losses of $227,661.00 in 2007, which were funded by HSP, creating a loan due to HSP by PBS. 106 Porter signed the return on October 20, 2008.
With regard to revenues collected and expenses paid in 2008, HSP again failed to provide any accounting, invoices or reports to PBS throughout 2008. Despite the existence of a separate checking account for PBS, HSP continued to put PBS’ revenues into its checking account and book expenses on HSP’s records.107 HSP transferred the individual revenue and expense entries by batch or lump sum to PBS’ QuickBooks account sometime after this suit was instituted.108
In November of 2008, Stepanian wrote an extensive email to the Artists admitting that he had never actually accounted to PBS on its financial status. Stepanian also *628admitted that because of the recession, he could no longer fund PBS’ costs.109 Following this email, the discovery of the 2007 losses and the previously unknown $227,000 “loan” to PBS by HSP, the Artists returned to managing their expenses and performance revenues.110 Expenditures for promotion and merchandise or music sales virtually ceased.111 HSP’s claim includes only $9,103.65 for expenses incurred between November 2008 and November 2009.112
5. Calendar Year 2009
HSP called a meeting with the Artists in August 2009 to examine “where they were and where they could go.113 The Artists believed the meeting would produce the accounting for expenses and revenues missing over the last three (3) years.114 HSP used the day to reintroduce each of its employees to PBS. It also presented its future vision for promotion centered on music sales and an increase in PBS’ average performance rate.115 No explanation of the outstanding losses was given116 Frustrated by the perceived lack of financial information, Porter stormed out of the meeting.117 Pursuant to Paragraph 1(a) of the PMA, Porter sent notice of his intention to terminate the PMA.118
The PMA terminated on November 7, 2009.119 The revised financial documents for the previous years were not delivered to PBS until May 2011.120 The 2009 B/S dated May 6, 2011 reflects a loan payable to HSP of $534,222.54, including draws given to Batiste ($76,278.80); Porter ($170,078.78); and Stoltz ($92,728.78).121 Retained earnings had a negative balance of $263,053.61, and net income was $72,648.63.122 Neither HSP nor PBS has filed a tax return for 2009.123
E. HSP’s Claim
1. Touring Revenues and Expenses
HSP claims that it is owed reimbursement for $321,303.81 in tour expenses HSP paid on behalf of PBS.124 HSP’s tour expense claim is composed of costs for travel, crew wages, hotels and other costs. The Court finds the following sums were incurred and are associated with touring:
TOUR EXPENSES_2006_2007 2008_2009
Crew_2,896 29,284 56,490 4,230
Airfare_3,991 26,959 16,482 11,918
Gas_1,563 4,576 8,377 1,136
*629Van Rental_7,638 12,093 8,581 4,662
Tolls/Parking_911_207_1682 555
Hotel_10,244 11,772 29,536 6057
Per Diem Payments_4,346_12,225_6,750 5,430
Equipment Rental/Musical Supplies_534_977_1581_2554
Venue Fees_==_132_540_—
TOTAL_32,123 98,227 130,019 36,543125
Tour revenue earned through performance fees for years 2006 and 2009 is:
2006: $92,605126
2007: $150,647127
2008:- $152,379128
2009: $159,512129
2. Merchandise Costs
(a) April 2005 through May 2006
Prior to the execution of the PMA in 2006, Stepanian incurred costs to produce merchandise promoting Porter.130 Stepa-nian also traveled with PBS and/or Porter when on tour in 2005 and 2006 selling merchandise at each venue.131 Although the Artists saw the merchandise, Stepani-an never provided the Artists with an invoice or statement for any costs incurred, never discussed the costs or quantities associated with acquiring any merchandise Stepanian was selling, nor did PBS or the Artists individually pay any of these costs. Stepanian ordered all the merchandise and paid for the items through his checking account or personal credit card. Sales revenue was collected by Stepanian and kept by him. The Artists did not receive any share of sales.132
Paragraph 6(c) of the PMA provides the following with regard to expenses incurred in 2005 and early 2006, prior to execution of the PMA:
(c) Reference is made to that certain merchandising agreement entered into by and between Artist and Highsteppin before the effective date of this Agreement (“Previous Merchandising Agreement”) which granted Highsteppin the exclusive right to develop, produce, manufacture, package, ship, distribute, market, promote and sell merchandise embodying the name and likeness of each member of Artist and the professional names, group names, logos, trademarks and servicemarks of the Artist. Upon full execution of this Agreement, the Previous Merchandising Agreement shall be terminated, any and all expenses incurred by Highsteppin pursuant to the Previ*630ous Merchandising Agreement shall be deemed Expenses hereunder, and all income derived from the sale of merchandise shall be deemed Gross Earnings hereunder.”133
Prior to the PMA, drafts of a merchandising agreement were exchanged between the Artists and Stepanian however, no contract was executed. Prior to the execution of the PMA, Stepanian did not disclose the extent of amounts expended for Artist related merchandise during 2005 or 2006.134
(b) May 2006 through November 2009
After the execution of the PMA, Marie Kirschberger, a HSP employee, set up a “cost recovery” formula to allow HSP to track the sales of Stepanian’s merchandise and its cost basis on HSP’s books. A similar system was not added to track PBS or the individual Artists’ previously owned merchandise, including music.135 New merchandise for the Artists was ordered and sold by HSP.136 Except for a general comment by Stepanian to the Artists indicating that merchandise purchased for sale and promotion would cost roughly $1.00 to $1.50 per piece, HSP never discussed the cost of any particular item, the quantities being ordered or the total cost of a merchandise order.137 HSP neither gave the Artists an invoice nor statement for any costs incurred nor did the Artists pay any charges.138 The Court finds that the following amounts were incurred by HSP for PBS or Porter related merchandise:
VENDOR ITEM DATE QUANTITY CHARGE EXH. NO.
Nimbit CDs 7/6/06 1000 1,499 159(R)
Armydogtags Dog tags 6/29/06 1000 1,640 159(C)
TOTAL 2006 $3,139
All American Advertising Lighters Specialities Bio 4/23/07 500 657.33 159(B), p.5045/5039
All American Advertising Specialities Black Koozies 4/23/07 2500 1,709.93 159(B), p. 5047, 5041
All American Advertising Specialities Black Koozies 4/26/07 1500 1,031.83 159(B), p. 5049, 5043.
Extreme Glow Circle Pendant 11/18/07 1000 1,641 159(1), p. 5101, 5103
Fred Cox Merchandising GPJ tshirts 12/29/07 186 1,519 159(K)
Foster’s Promotional Goods, Inc. Apparel 11/15/07 various 11,866.85 159(J)
TOTAL 2007 $18,425.94
Nugs.net CDs 12/28/08 366 2,196 159(S)
NKC Custom Apparel Apparel 6/17/08 0 2,576 159(D)
QRST T-shirts 9/3/08 300 2,017.80 159(V), p. 5253.
TOTAL 2008 $6,789.80
TOTAL ALL PURCHASES $28,354.74
All merchandise costs were paid through *631HSP’s checking account and deducted on its tax returns.139 All income was also deposited into HSP’s account and declared as revenue on its books.140 Only revenue derived from sales of music owned or merchandise paid for by the Artists prior to the PMA was credited into PBS’ account and reflected on P/Ls.141 On occasion, the Artists were asked their thoughts on the selection of items HSP offered for sale.142 The Artists were also aware that HSP was running merchandise tables offering their music and merchandise at each venue.143 The Artists and HSP have stipulated that $76,387.15 in sales revenue was received for PBS merchandise, CDs and downloads of music.144
HSP also funded the production of several albums both for the Artists individually and as a group. Production costs associated with PBS’ MooDoo release in 2008 were $14,161.24.145 Production costs for Stoltz’s Up All Night were $8,309.20146 and $18,871.26147 for Porter’s It’s Life.148 Revenue from the sale of Porter’s personal CDs and digital downloads was $22,455.67 through June 30, 2009.149 Revenue from the sale of Stoltz’s personal CDs and digital downloads was $10,042.36 through June 30, 2009.150 Revenue from sale of Batiste’s merchandise was $1,387.38 for the same period.151
3. Nontour or Promotional Expenses
HSP’s claim seeks reimbursement for several expenditures related to promotion or outside services incurred on behalf of PBS. Specifically:
Danny Clinch Photography 2/26/07 $37,673.00152 H
Freidman 10/4/08 & 9/10/09 $1,800.00153 w
Leeway’s HGMN 1/9/08 $1,520.00154 CO
Madison House Publicity 7/6/07-3/4/09 SK3 0 10 155
Nimbit, Inc. 1/31/08-5/29/08 $855.00 156
*632OffBeat 4/7/08 157
Powderfinger Promotions 9/07 & 9/08 $5,625.00158
Richard Quindry 7/07 $652.53159
Relix Magazine 2/07, 7/07,10/07,12/07 $12,166.00160 •
David Stocker 2/21/08 $2,000.00 161 r-5
Domeniek Tucci 1/07-11/08 $12,000.00 162 I — I
Zenbu Magazines, LLC 8/08-9/08 $1,850.00163 hs!)
For every month of the PMA, expenses in excess of $2,000.00 per month were incurred.164 All of the amounts in question also exceed $750.00 and require the consent of PBS.165
III. Law and analysis
A. Background
In the music industry, booking agents serve as a broker or liaison between musicians and venues. Booking agents regularly field calls for a musician’s services and will verify availability of the artist. They then contact the artist or his personal manager if one exists, regarding the inquiry. If approval is given, the booking agent sends a standard form contract to the venue and collects a deposit. The musician signs the contract, but the deposit is retained by the booking agent until the performance is given. If all goes as planned, the balance of the contract is paid to the booking agent, musician or business manager at the conclusion of the performance. The booking agent’s fee is typically ten percent (10%) of the gross revenues received under the contract.
*633PBS’ booking agent both before, during and after the PMA was Blue Mountain, and its relationship with PBS never varied. Blue Mountain collected deposits in advance of performances it booked, deducted its commission out of the deposit after the performance occurred and sent the residual, if any, to PBS or HSP as directed.166 On a monthly basis, it itemized the amounts received on behalf of PBS and commissions deducted in a report originally delivered to PBS. After July 2006, the reports were delivered to HSP.
B. HSP’s Claim for Reimbursement and PBS’ Claim for Breach of Contract and Duty
HSP claims it is owed approximately $600,000.00 for funds advanced to pay tour, promotional, merchandise, music production and living expenses of the Artists. The Artists challenge the claim on the basis that HSP faked to provide account detail on revenues received and expenses paid during the PMA. As such, the Artists assert that HSP breached its contract and fiduciary duties in addition to engaging in negligent and unfair trade practices. Because the Court finds that HSP did not properly account to the Artists during the PMA, calculation of HSP’s claim requires an analysis of all revenues received and expenses paid during its term.
1. Conduct of the Parties
From May 2006 to August 2006, Blue Mountain collected deposits and transmitted any residual amounts directly to PBS after its commission was deducted.167 All reporting by Blue Mountain went to PBS. The remaining sums due under performance contracts were collected by PBS after the completion of the performance. From these sums, PBS paid its travel expenses, including hotel rooms, side musician fees, rental car, gas expenses, etc. The difference or “profit” was divided between Porter, Stoltz and Batiste equally.
Because PBS could not afford personal and business managers, HSP began filling the void.168 HSP admits that it had no experience as a business manager, a fact known by the Artists. HSP alleges it had no choice but to assume responsibility for “bookkeeping” because the Artists refused to hire or to pay for a business manager. Nevertheless, the Court finds that HSP purposefully and willingly assumed the role of business manager and began taking control of the Artists’ revenue streams in August 2006.169
In August 2006, HSP requested Blue Mountain send all, paperwork, reports and monthly statements to HSP. HSP also instructed Blue Mountain to forward amounts payable to PBS by check made payable to HSP.170 Whenever possible, HSP collected the amounts due after completed performances through HSP personnel traveling with the band.171 Merchandise and music sales revenue belonging to the Artists was deposited into HSP’s checking and QuickBooks accounts.172 Performance fees were reported to the Artists in gross terms, at best annually, if done at all, and typically shortly prior to the extended deadline for filing tax returns.173 Reve-*634núes from music or merchandise sales were placed in reports delivered to the Artists only twice during the entire relationship.174
In February of 2007, HSP began promoting PBS and its members. As a result, it began incurring substantial nontour or promotional expenses. By November of 2007, HSP insisted on controlling all tour expenses as well. This included contracting for and paying band crew.175 Airfare, hotel rooms, meals, side musician fees, gas, etc. were incurred and paid by HSP.176 If the expense was invoiced, HSP paid the charge from its accounts.177 If it was paid on the road, generally it was paid out of cash given to the Artists prior to the start of a tour or through the use of PBS’ credit card,178 which HSP paid.179 At the end of each tour, the Artists gave an accounting to HSP of all tour expenses they paid and cash on hand.180 The remaining cash was either split between the Artists as a share of their profits or held as starting cash for the next tour.181
Conversely, HSP accounted for its expenditures in at most a general, haphazard fashion, and dilatory manner. Nevertheless, HSP avers that it performed its duties under the PMA and is owed reimbursement for all amounts it incurred on the Artists’ behalf. The Artists disagree citing breach of contract, MUTPA, and fiduciary duty claims.
2. Claims for Breach of Contract And Duty By HSP
Breach of contract is a failure to perform a material term for which no legal excuse exists.182 Under Massachusetts law, a plaintiff must demonstrate (1) a valid contract exists, (2) the defendant breached the contract, and (3) the plaintiff was damaged as a result.183 Damages in a breach of contract action attempt to place the plaintiff in the position it would have been in had the contract been performed.184 It is undisputed that the PMA is a valid contract. Questions remain as to whether or not HSP breached its obligations under the PMA and the extent of the Artists’ damages.
As discussed in greater detail below, the PMA required HSP to perform its obligations with a standard of care it failed to achieve. As a business manager, HSP was required to exercise a fiduciary duty of loyalty and care in the exercise of its profession.185
*635a. Failure of HSP to Obtain Prior Consent for Expenses Paid on Artists’ Behalf (PMA, Paragraph 6)
HSP’s expenditures can be divided into three (3) groups, those directly related to touring, those related to promotion and those related to production of music and product. The Artists do not dispute that HSP spent its funds to satisfy tour related expenses incurred on behalf of PBS. However, they argue that the tour expenses were not reasonable and HSP failed to obtain their consent to any of the charges. The Artists also allege that HSP was grossly negligent and breached its fiduciary duties to them when it incurred the charges.
The Artists object to reimbursement of HSP’s nontour expenses because 1) they were not proven at trial, and 2) they were not approved by the Artists in advance as required by the PMA.
Paragraph 6(b) of the PMA sets forth the parameters under which HSP is entitled to reimbursement for “Expenses, Loans, Advances and Statement” incurred by HSP on PBS’ behalf. According to Paragraph 6(b):
(a) Artist shall be solely responsible for payment of all booking, theatrical or employment agency fees, union dues, publicity costs, promotion or exploitation costs, traveling expenses and/or wardrobe expenses and all other expenses, fees and costs incurred by Artist. Highsteppin is not required to make any loans or advances hereunder to Artists or for Artist’s account not to incur any expenses on Artist’s behalf, but, in the event Highsteppin does so, Artist shall reimburse Highsteppin therefore promptly ... Artist hereby irrevocably authorizes Highsteppin to recoup and retain the amount of any such loans, advances, and/or expenses incurred (including, without limitation, all long distance telephone charges, cellular phone charges, charges for couriers, messengers, facsimile and telex transmissions, accountants fees, attorney’s fees and costs incurred on the Artist’s behalf ..., photocopying and postage expenses, air and ground transportation, lodging, meals and other living expenses for Highsteppin while traveling), and all other expenses relating to Highsteppin’s services in accordance with this Agreement from any sums Highsteppin may receive for Artist’s account.
(b) Artist ... will reimburse Highstep-pin for any and all expenses incurred by Highsteppin on Artist’s behalf in connection with Highstep-pin’s services performed hereunder, provided that: (i) Artist will not be responsible for any portion of High-steppin’s overhead expenses; (ii) subject to paragraph 6(b)(iii) of this Agreement, if Highsteppin incurs travel expenses on behalf of both Artist and other of Highsteppin’s clients, Artist shall be responsible only for Artist’s pro rata share of such expenses; and (iii) Highstep-pin shall not incur without Artist’s prior consent (A) any single expense in excess of Seven Hundred Fifty ($750) Dollars or (B) aggregate monthly expenses in excess of Two Thousand ($2,000) Dollars. (Emphasis added).
HSP argues that every tour expense was reasonable, incurred within the scope of its authority and in the proper discharge of its duty. HSP also argues that it received oral approval for each of the nontour expenses and that HSP engaged in discussions with the Artists prior to incurring any expense.
*636(1) Tour Related Expenses
Before HSP took control over tour related expenses, the Artists were their own tour manager. Although far from wealthy, the Artists had managed to be profitable and support themselves.186 Costs were paid primarily in cash, and although not sophisticated, this method of bookkeeping had the distinct advantage of being immediate and largely accurate.
During 2007, HSP gradually assumed payment and contracted for more and more of the tour related expenses. HSP also took control over the collection of performance fees on the road. By October 2007, HSP’s control over all revenue and expenditures was almost complete. This divorced the Artists from the day-to-day cash accounting they were accustomed to practicing.187 The Artists complain that HSP incurred unreasonable costs and expenses in connection with touring. They also assert that they were unaware of these costs and did not give HSP permission to incur them. Finally, they claim the costs are excessive in relation to their income.
HSP avers that the Artists were clearly aware that additional crew and associated costs were being incurred and never asked HSP to “stop spending.”188 For example, HSP points to Porter’s email dated March 4, 2008 asking HSP “to pay one of the road workers” as a preapproval of tour expenses.189 The email notes that the van driver for a seven-day tour called Porter because the driver had not received payment. In the email Porter noted “... I don’t know what kind of deal You (sic) have made with these guys or should I say Patrick Bell, as no other crew member has called me looking for his money ...” Ma-langone’s explanation on March 4, 2008 only lends credibility to the Artists’ assertions that they were not consulted with regard to the tour expenses during 2007 and 2008. She explained:
Phil has made financial arrangements with each and every guy who went out this tour and they will without doubt all be paid by Highsteppin’ Productions in a timely manner. Patrick is the only guy who is repeatedly a problem. I asked both him and Stretch to ensure Patrick was paid in cash at the conclusion of this run because we knew it would be a problem if he wasn’t. This unfortunately did not happen. We have a payroll system in place now as you know. Like everyone else, I’d prefer to see him being paid under the same guidelines. Patrick was only able to supply me today with his new bank account information even though on Sunday when we spoke he was going to have it to me for Monday. I left a message for him just a few minutes ago and suggested he would have money in his account tomorrow afternoon.190
Further, even Stepanian claimed he (HSP) was paying crew, not PBS.191
HSP also alleges that tour expenses were relatively large in relation to touring income because the Artists were unavailable for performances due to outside projects and participation in other musical groups. HSP avers that PBS’ lack of revenue in relation to its touring expenses is directly attributable to the unavailability of the Artists.192 In support of its position, *637HSP points to the stipend program it was forced to implement in favor of the Artists.
In November 2007, Stepanian wanted PBS to play more venues on the road.193 Despite his efforts, PBS had played only ninety-six (96) shows in each of the years 2006 and 2007, roughly the same number of shows it had performed before hiring HSP.194 The revenue generated from these performances was wholly inadequate to support the expenses HSP was incurring, much less the commissions HSP was owed.195 HSP blamed the lack of revenue on its inability to book PBS into venues. It also believed that this problem was caused by the Artists’ commitments to other bands or projects. In HSP’s view, conflicts in scheduling were the root cause of PBS’s lack of success.196 The Artists’ claim that HSP failed to generate new performance opportunities and was slow to remit any profits being generated.197 As a result, the Artists were forced to seek out other avenues for revenue in order to support themselves.198
At trial, Coran Capshaw (“Capshaw”), an expert professional manager of musi-dans, explained that a personal manager’s principal duty is to acquire performance opportunities through his contacts with venues or festivals.199 Ralph Jacodine (“Jacodine”), HSP’s expert, also explained that the personal manager is responsible for scheduling tours that will generate profits. While Jacodine acknowledged that some tours or venues might be played for a loss, he opined that this should be a rare occurrence and undertaken only if the exposure for the artist outweighed the monetary loss. Even if advisable, the artist should be made aware of the trade-off long before any commitment to the tour or venue was given. The evidence offered at trial established that the Artists were available to HSP in all material respects.200 Because it is the personal manager’s responsibility to secure performance opportunities and the Artists were willing and able to perform, the Court concludes that HSP’s lack of experience and connections in the industry were the reasons more venues were not booked.
Until 2009, HSP never prepared much less presented the Artists with a preview or forecast of the revenues and expenses *638anticipated with any tour or performance. It also failed to keep them informed as to whether or not any particular tour was profitable.201 Although HSP admitted that only by playing 120 venues per year could PBS obtain profitability, it never acquired 120 opportunities for them to perform, nor were many of the opportunities secured profitable.
PBS’ gross performance income did not vary substantially between May 2006 and November 2009.202 Yet PBS’s touring expenses climbed exponentially under HSP’s watch. During the PMA’s term, annual touring costs were $32,123 (2006); $98,227 (2007); $130,019 (2008); and $36,547 (2009).
In 2006 and 2009, PBS largely controlled its touring costs. For this reason, the Court finds that the touring expenses in the amounts of $32,123 for 2006 and $36,547 for 2009 were authorized by PBS. In each of these years, costs were within $5,000 of each other on gross revenues of approximately $92,000 and $159,000 respectively. Thus, the Court concludes that increased touring costs were not necessary to generate increased income. For this reason, HSP has failed to show that its expenditures were reasonable in light of the band’s performance revenue. As Jaco-dine, HSP’s own expert, opined, it is the duty of personal managers to secure profitable venues and manage tour costs based on the anticipated revenue available. Because HSP failed to consider tour expenses in light of revenues, it breached its contract and duty to the Artists. HSP also failed to produce any evidence that the exponential increase in touring costs was approved by PBS. The record contains unsupported assertions by HSP that PBS “knew” of HSP’s increased tour spending. However, it failed to produce any evidence that PBS was aware of the amount or extent of its spending and particularly the losses HSP was generating.203 For this reason, tour expenses for 2007 and 2008 will be reduced to $36,000 per year to correct for HSP’s failure to exercise reasonable care in the performance of its duties.
(2) Nontour or Promotional Expenses
The music industry is filled with professionals paid to handle parts of a musician’s image, music production, touring, personal life or business affairs. Public relations professionals secure interviews on radio and television, in print and internet to promote the release of new music, tour dates or the artist generally. Photographers, graphic artists, mixing engineers and other professionals design, package or produce the music of an artist for sale. Stylists dress, coif and otherwise refine the physical appearance of an artist for performances, interviews, public appearances or any occasion of note.
Stepanian’s vision included surrounding the Artists with top professionals in their fields in an effort to elevate PBS’ profile and profits. In 2007 and 2008, Stepanian secured the services of publicists, web designers, photographers, travel agents, internet tracking services, graphic artists, music production experts and other musi*639cians. In many cases, the services of these parties were not discussed with PBS. In some cases PBS did not know, until discovery was conducted in this litigation, these individuals or companies existed much less the expenses associated with their services. In other cases, PBS was aware of the services being provided but was not told of the cost. In still other circumstances, HSP gave PBS the impression that it was covering the expense as an investment in its own business.
Nontour or promotional expenses were typically incurred by HSP and paid through its account. The Artists never saw the invoices or statements reflecting the amounts incurred although PBS was aware that some of the expenditures had been incurred on its behalf.204 The Artists uniformly and consistently testified that they believed HSP was either taking personal responsibility for promotional expenses or that the expenses were being paid through revenues. It was clear that Porter, Stoltz and Batiste had no indication until October 2008 that HSP was advancing money on PBS’ behalf.205 Stepani-an aided in this apparent misconception by giving the Artists vague assurances or representing the costs as investments in HSP. 206
PBS’ success was directly linked with HSP, and in order to elevate HSP’s profile, Stepanian led the Artists to believe that HSP was absorbing some promotional expenses.207 Because HSP kept its spending hidden, failed to account to the Artists for revenues or expenditures, and made its expectations for repayment purposefully vague, the Artists reasonably assumed this position.
For instance, Stepanian sent an email to Porter’s daughter on June 11, 2007 discussing plans for Porter’s 60th birthday party. In the email, Stepanian represented that he had:
... [Personally invested over a million dollars into Highsteppin’ Productions, with the sole purpose of helping your father’s career and that of a few others. This event, in fact all events, that include your dad, Russell Batiste, Brian Stoltz and Bonerama are what this million dollars has gone toward representing. ... I’m sorry, but I just feel it’s an insult to me to have to even ask that I be involved in all of this. And I can give you a million reasons why. Really hoping we can get on the same page now and forever. Because I too, am doing all of this out of the goodness of my heart.208
Similarly, in a letter dated November 14, 2008 to the Artists Stepanian stated, “... [Ojver the past few years I have made enormous investments in everything that is HSP.”209
Although Stepanian claimed to have discussed expenditures with the band, if done at all, it was only in the most general of ways. For example, on March 3, 2007, *640Porter sent an email to his fellow Artists and to Stepanian stating that his wife was asking him questions about expenses that he could not answer.210 Specially, Porter questioned whether PBS and the Artists would b.e financially responsible for a van Stepanian had recently purchased and whether the Artists would be paying for the Danny Clinch photography session.211 Stoltz responded to Porter’s email, “[My] understanding of it all is that Phil [Stepa-nian] is absorbing much of the cost and is looking at it as an investment into High-steppin’ Productions.”212 Stoltz’s understanding was based on his prior conversation with Stepanian. Stoltz testified that upon arriving at the photography session, he realized the scale of the production and was immediately concerned about costs. When he raised the issue with Stepanian, he was told not to worry about it, that HSP “had it.”213 HSP offered no credible proof that it provided any other explanation to Stoltz or responded to Porter’s inquiry.
The testimony of Stepanian, Porter and Stoltz supports a finding that Stepanian linked the success of his new company, HSP, to the fortunes of PBS. Throughout the relationship, Stepanian acknowledged that the success of PBS would establish HSP in the industry of personal management. As a result, Stepanian characterized much of what he did with or for PBS as an “investment” in HSP. Rightly or wrongly, when coupled with the lack of routine accounting, requests for payment and disclosure of nontour costs, PBS was given the justifiable belief that it was not responsible for most, if not all, of these charges.
Although Stepanian testified that the Artists “knew” of several large expenditures, there is no evidence that Stepanian informed PBS of specific nontour costs. The first attempt to provide PBS with an accounting did not occur until July 2008 when a 2007 P/L was forwarded to PBS. However, it was quickly withdrawn due to inaccuracies. It was not until October 2008 when the P/L for 2007 and draft tax return arrived that the Artists first learned of HSP’s deficit spending. By this time, HSP had incurred large deficits for both 2007 and 2008 funded by HSP through loans PBS was expected to repay.214
This Court is also unconvinced that HSP was aware of its own runaway spending. Stepanian himself testified that he did not know how fiscal year 2007’s $227,661.00 deficit was calculated.215 The Court finds Stepanian’s testimony regarding his lack of knowledge about the particulars of HSP’s loans credible because of HSP’s atrocious bookkeeping methods. For example, at the start of the PMA, HSP commingled all transactions for the Artists, itself and Bon-erama in an single checking account. While HSP attempted to keep track of the individual transactions by client, it was not until October 2006, some seven (7) months after the PMA was executed, that the transactions were electronically mapped between the parties.
HSP’s acquisition of a QuickBooks program to segregate, at least on paper, the revenues and expenses attributable to it*641self, the Artists and its other clients was a good first start even if tardily taken. However, this too proved problematic for HSP. While QuickBooks will maintain an internal separation of accounts, it is dependent on the correct input of data. HSP employed Dyer for this purpose. She was assisted by Malangone and Stepanian. Unfortunately, these individuals had a minimal understanding of accounting or the legal relationship between the parties. As a result, revenues owed to PBS were included in HSP’s account, expenses HSP claims are owed by PBS were not booked into PBS’ account and many costs were improperly booked after the close of a fiscal year through adjusting entries in some cases entered years later. HSP employed batch or lump sum adjustments to “move” expenses entered on its books to PBS’ books. While this placed the expense with PBS, it failed to give the Court or PBS the detail necessary to verify the amounts being charged.
In addition, even after establishing separate checking accounts for HSP, PBS and Bonerama, HSP continued to commingle funds and pay PBS expenses from HSP’s account. HSP also paid Bonerama and HSP expenses out of the account into which it deposited PBS revenue. Not only did this practice allow HSP to use client funds at will, it clouded HSP’s ability to determine what it was advancing on behalf of the Artists versus what they were paying.
Based on the condition of its accounting, HSP cannot support a claim that the Artists knew HSP was advancing funds on their behalf and that negative balances were mounting in their account. This finding is supported by the minimal ac-countings actually delivered. For example, in 2006, the Artists were still handling their own tour expenses and collecting performance fees on the road. Based on then-records, a profit of $54,457.00 had been earned, which they split evenly.216 However, because they lacked an accounting of revenues and expenses for 2006 incurred or collected by HSP, they were unaware that HSP’s books reflected losses in excess of $26,000.00 a difference of $75,000.00.217 As late as October of 2008, HSP delivered a 2007 P/L for PBS showing a $62,000'loss. In fact, the loss was $227,000.218
After receiving this information, Porter responded with an email to Dyer, Cha-baud, Stepanian and Stoltz that owing money to HSP was “NOT THE DEAL.”219 Porter’s reaction was vehement. He testified that he believed HSP was spending HSP’s money to build HSP’s professional brand as a personal management group. It is clear to the Court that the amounts claimed by HSP were both a surprise and did not comport with Porter’s understanding of the PMA or the current state of affairs.
Following the revelations made in October 2008, HSP began its own period of reflection. On November 14, 2008, Stepa-nian sent an email to the Artists indicating that he needed to “make some very hard decisions in order to stay in the game.”220 He stated that “over the past few years I have made enormous investment in everything that is Highsteppin’ Productions .... my current financial situation requires that I make some immediate changes.” Most damning for Stepanian’s position is his recognition that “[i]t has *642been quite awhile (if ever) since we have sat down and discussed all of the band’s financial details, but it is clearly time that we do so. We have compiled many detailed reports that will provide a complete insight into where we have been and where we need to go.” In closing, Stepa-nian stated that “going forward, we will need to take each gig and tour based on a realistic budget. While I will continue to ‘financially help’ the situation where necessary, we will need to decide the travel arrangements, hotel stays and crew based on our guaranteed income.”221
As a result of Stepanian’s email and the huge amounts claimed by HSP, PBS reasserted control over revenues and expenses. Beginning in November 2008 and continuing through 2009, PBS did not take an engagement without a budget reflecting anticipated tour revenue and expenses.222
The PMA contained very specific limitations on HSP’s ability to incur debt on PBS’ behalf. In part this was because the Artists feared exactly the situation HSP created, runaway costs, failure to disclose expenses and lack of accountability for revenues.223
The Artists’ expert, Capshaw, testified that many expenses incurred by HSP on behalf of PBS were inappropriate for this particular group. For instance, Capshaw stated that incurring approximately $40,000 on photographs was a mistake based on the bands’ baseline income. Spending on Madison House Publicity (“Madison House”) for publicity also was out of line with the band’s income. Finally, he believed that an intern could have handled the band’s internet presence. In Capshaw’s opinion, the nontour expenses were unreasonable and imprudent given the level of the Artists’ careers. Jacodine, HSP’s expert, testified that while HSP’s performance as a personal manager was consistent with custom, practice and the standard of care, a reasonable business manager should provide a plan tailored to an Artists’ individual needs. He also opined that no expense should ever be incurred by a manager without it first being discussed in detail with the artist, including details as to the amount of the expenditure and the benefit it might provide. Further, once a charge was incurred, the artist should receive, at least monthly, a detailed and itemized listing of each expense along with the individual revenue deposits. HSP did none of these things.
(a) Individual Expenses
(i) Danny Clinch Photography
Stepanian began the process of promoting PBS with the retention of a professional photographer, Danny Clinch, in February 2007.224 Clinch is a photographer of some renown. Evidently, the mere mention of his name signals a level of seriousness for his subject. Stepanian determined that Danny Clinch was just what PBS needed to establish itself on a national level.225
Although Stepanian explained to the Artists who Danny Clinch was and why he thought photographs by him could help their careers, he neglected to mention what a photography session with Clinch would cost. The record reflects that an estimate of Clinch’s fees ($41,700.00) was sent to HSP on February 2, 2007.226 HSP booked flights on February 3, 2007.227 *643HSP was billed for a deposit on February 21, 2007.228 The photography session occurred on February 26, 2007. The final bill of $37,673.02 was delivered on March 3, 2007.229 HSP produced no evidence of PBS’ approval to incur almost $40,000.00 in fees. In fact, HSP lacked proof that it even discussed the fee with the Artists.230 In contrast, Stoltz testified that upon arriving at the session he became concerned over its costs. He asked Stepanian what the photography session was costing and who was paying for it. Stepanian reassured Stoltz that he (HSP) had this one.231 Following the photography session, Porter also sent an email to Stoltz and Stepanian asking about the costs associated with the photography session and who was paying for it and other expenses.232 Stoltz replied that it was his understanding that HSP was covering the costs as an investment in HSP.233 Stepanian was copied on Stotlz’s response but made no effort to correct or respond to the email chain between Stoltz and Porter.234 Further, the Clinch expense was never presented to PBS. It was booked as an expense of HSP, and it was not included in the 2007 P/L produced to PBS in 2008. Based on these facts, the Court concludes that HSP failed to obtain consent to incur the expense associated with the Clinch photographs and instead assumed responsibility for this expenditure as a cost of promoting itself.
(ii) Madison House
Stepanian also introduced the Artists to Madison House, a public relations firm located in Colorado. Porter, Stoltz and Stepanian met with Madison House representatives for about two (2) hours in July 2006 and went over promotional ideas. The Madison House representatives were enthusiastic about working with the Artists 235 but did not discuss the cost of their services or even their scope.236 Madison House worked for the Artists on a month-to-month basis for a flat fee.237 Stepanian did not forward the Artists the monthly invoices HSP received and paid.238
Porter and Stoltz acknowledged talking to Madison House employees and participating in interviews set up by Madison House. They denied knowing how much the services cost, however. At trial, Stoltz testified that in his experience, a personal manager handled publicity in house. Although he was at the meeting with Madison House, Stoltz believed that HSP was looking for a publicist for itself or for Madison House to handle this function as part of HSP’s overhead. Because PBS never received a statement for Madison House’s services, nor were the costs of Madison House discussed, Porter and Stoltz were not aware that Madison House was charging them for its services.239 Madison House billed $1,800.00 per month from June 2007 to February 2009. Additional charges were added each month for *644clipping services, graphic design, postage, web design, fan mail, press releases, etc. The total charges paid to Madison House were $53,910.10, averaging $2,343.92 a month.240
While Madison House’s services in 2007 were included in the P/L for that year, they were lumped in with other charges.241 In addition, since the 2007 P/L was not delivered to PBS until October of 2008, charges for Madison House for 2007 and 2008 had been incurred before PBS realized the enormity of the losses HSP was mounting. Madison House’s services terminated in February 2009 some four (4) months after Porter made it clear that losses were not acceptable.
Based on the facts of this case, HSP has failed to provide proof that it obtained the consent of PBS to incur expenses of $53,910.10 with Madison House.
(iii)Freidman Kannenberg
The professional fees of Freidman Kan-nenberg are not disputed by PBS and are allowed in the amounts of $1,000.00 for services performed in 2008 and $800.00 for services performed in 2009.242
(iv)Nimbit, Inc., David Stocker, Do-menick Tucci, Richard Quindry, JamBands, and Fan Marketing
Stepanian advised the Artists on multiple occasions that he intended to increase profits through internet sales, website access and email contact with their fans. To accomplish this result, HSP hired Nimbit, Inc. (“Nimbit”) and David Stocker (“Stock-er”) to assist with website design and maintenance at a cost in excess of $5,000.00.243 In addition, Domenick Tucci (“Tucci”) was paid $500 per month from February 2007 through November 2008 to maintain the Artists’ Myspace pages. None of the invoices for these services were forwarded to the Artists nor were any bills, statements or detailed account-ings reflecting charges given to it. As a result, the Artists had no idea these individuals or companies were working on their internet presence as outside consultants. The testimony of Stoltz was to the effect that Tucci worked in HSP’s offices and he believed he was an employee of HSP rather than an independent contractor billing the Artists for his services.244 The Artists had no contact with Nimbit and had no idea it was charging them for web maintenance until discovery revealed Nimbit charges included in HSP’s claim.245 PBS was aware that Stocker was working for HSP but thought his services were limited to album design, not their website.246 Richard Quindry, JamBands and Fan Marketing were also complete unknowns. Based on these facts, HSP failed to establish that it obtained approval to incur these charges from the Artists and they are disallowed.
(v)Powderfinger Promotion
Powderfinger Promotions (“Powderfinger”) was retained by Stepanian to track and promote play of PBS’ MooDoo release. It charged $5,625.00 for its services.247 The Artists had no idea who Powderfinger was or what it did, and HSP failed to *645provide bills, statements or a detailed accounting of Powderfinger’s costs to the Artists after the fact.248 Under these facts, the Court finds that HSP failed to obtain the consent of the Artists to incur expenses related to Powderfinger and they are disallowed.
(vi) Advertising
Ads for PBS, their upcoming performance dates and new releases also began appearing in publications with and without the Artists’ advance knowledge. However, the cost of the ads was not discussed with the Artists. Exhibit D-159 includes advertising costs:
a. Graphic Therapy $ 940.00
b. Off Beat $ 1,600.00
c. Relix Magazine $20,500.00
d. Zenbu Magazine $ 1,850.00249
Stoltz admitted to seeing a 2007 ad placed in OffBeat promoting PBS’ upcoming performance at Jazz Fest and Porter also saw an ad promoting him individually.250 However, the cost of either ad was not discussed prior to its placement.251 None of the Artists saw any of the other ads or discussed them with HSP. Stoltz and Porter testified that they often suggested advertising or promotional opportunities for PBS but expected HSP to discuss with them the costs in advance.252 For example, Stoltz did request that an ad be considered for Leeway’s Home Grown Music Network (“LHGMN”), which HSP immediately placed without talking to the Artists about its cost.253 The Court finds the testimony of Stoltz and Porter credible. The mere suggestion of an opportunity for PBS promotion is not a blank check authorizing HSP to proceed regardless of cost. Under these facts, the Court finds that HSP failed to carry its burden of proof regarding the Artists’ consent. Therefore, the costs are disallowed.
(vii) Merchandising and Music Production
According to the invoices HSP produced at trial, HSP incurred various expenses associated with the purchase of merchandise and music production. The costs were incurred from differing vendors and at various dates. Some of the charges were only attributable to an individual artist rather than the group.
In 2005, Stepanian acquired $10,363.78 in merchandise to promote Porter.254 Ste-panian also claims $18,404.87 in travel expenses associated with selling this merchandise. The acquisitions were prior to the execution of the PMA and done at a time when Stepanian had no formal permission to either produce or sell anything associated with Porter or PBS. Nevertheless, Porter knew Stepanian had purchased the items because Stepanian was following Porter along his tour and selling them ad hoc at concerts. Stepanian pocketed all proceeds and never discussed the costs, revenues or any reimbursement with Porter.
*646In May of 2006, Stepanian inserted a clause in the PMA to capture the costs or expenses of this merchandise as an expense of PBS. The clause was never discussed with the Artists nor did Stepanian disclose the expenses or revenues he had incurred prior to the PMA’s execution.255
Nothing in the relationship between Porter and Stepanian supports Stepanian’s demand for reimbursement of these costs. In 2005 and early 2006, Porter knew that Stepanian was selling merchandise at his concerts. It is clear that Porter did not object to Stepanian’s activities. However, it is equally clear that Porter never expected to be responsible for Stepanian’s costs nor did he ever make a claim for the sales revenue Stepanian was receiving.256 At best Porter allowed Stepanian to use his image and reputation to sell items, presumably to make a profit. This was an arrangement similar to one Porter had with Tripp Billings.257 There is no evidence to support an agreement between Porter and Stepanian or HSP 258 regarding the reimbursement of merchandise costs or travel expenses. There is no evidence to support any allegation that Stepanian requested or received permission to obligate Porter for these costs.
Prior to the PMA, the Court finds that there was no agreement between the Artists and HSP granting Stepanian “[T]he exclusive right to develop, produce, manufacture, package, ship, distribute, market, promote and sell merchandise embodying the name and likeness of each member of Artist and the professional names, group names, logos, trademarks and servicemarks of the Artist.” 259 Because no agreement existed, the sums cannot be absorbed into the PMA.
In 2006, 2007, 2008 and 2009 HSP ordered various small items to promote PBS or Porter along with t-shirts, hoodies and other items of apparel.260 Although the Artists were aware of HSP’s activities and were consulted on some of the items to purchase, they were never advised as to the cost or quantities ordered.261 The only testimony adduced was that Stepanian told Porter that merchandise would cost $1.00 to $1.50 to produce.262 HSP kept all costs and revenues for these items off PBS’ books, posting expenses and receipts to its own account.263 It was not until trial that HSP attempted to account for the amounts it spent and also the amounts it received. HSP’s failure to properly account or submit purchase orders for merchandise to PBS establishes that it never received approval to expend more than the contract limitations for merchandise. However, because the revenues HSP derived from these items exceed their cost, HSP may claim reimbursement under a theory of quantum meriut. The total cost of merchandise purchased from May 2006 through November 2009 is $28,354.74. Of this amount, $1,519.00 is an expense of Porter alone because it represents t-shirts produced for his 60th birthday.
*647(viii) Costs of CD Production
Stepanian also funded the production of several albums or CDs, both for the Artists individually and as a group. HSP’s claim includes $14,161.24 for production costs associated with MooDoo, a joint PBS work.264 HSP claims expenditures of $8,309.20 for the production of Up All Night for Stoltz, individually,265 and $18,871.26 for the production of It’s Life, an individual work of Porter.266
Each of the Artists participated in the production of the joint work, and they are responsible for its costs.267 Stoltz and Porter are individually liable for the costs associated with the production of their albums as well.268 For the reasons specifically detailed below, none of the Artists are responsible for the costs associated with another artist’s individual recording because none were consulted regarding the solo expenditures.269
(3) Payments to the Artists
Another sizeable portion of HSP’s claim seeks reimbursement for amounts it paid directly to the Artists. HSP claims $309,470.31, but the evidence admitted at trial established that $204,000.00 was advanced to the Artists individually rather than as a share of PBS profits.270 The Artists assert that these sums were never intended to be a loan from HSP and that they were unaware that HSP was funding these payments through loans. They also aver that they did not authorize HSP to advance sums to them over and above what they were earning and certainly did not expect to pay living expenses through HSP loans.
HSP first delivered a money stipend to each Artist in November 2007. As previously explained, HSP believed that the Artists needed to play more venues in order to be profitable. HSP was convinced that the Artists’ other business endeavors conflicted with this goal by reducing their availability to HSP. In addition, since HSP had taken over collecting performance revenue, the Artists were complaining that HSP was not sending them PBS’ profits timely and they were having trouble paying living expenses.
In order to secure more of the Artists’ time and provide a steady predictable income stream, HSP proposed to send regular bi-weekly amounts to the Artists. HSP separately negotiated the amount it would sent to each Artist based on their living *648expenses rather than the anticipated profits of PBS. Specifically, Porter was paid $10,000 per month, Stoltz $4,000 per month and Batiste $3,000 per month. At trial, HSP argued that the payments were always intended to be advances on future PBS income.
In 2008, HSP provided 1099s to the Artists for payments received in 2007.271 A 1099 is used to account for independent contract employment by the issuer to the recipient. An employer does not pay payroll tax or withhold income taxes on 1099 employees. Instead, the employee pays all associated taxes on his individual return. Generally, a limited liability company’s profits are taxed to its members as reflected on K-ls.272 Porter, Stoltz and Batiste are equal members of PBS and are entitled to an equal share of PBS profits.
The separate payments to each of the PBS members were based on their living expenses rather than PBS’ anticipated profits.273 Porter and Stoltz testified it was based on what they néeded to live or “get by.” The payments not only deviated from equal distribution to Porter, Batiste and Stoltz, they were made from HSP’s payroll account and deducted on its books as a HSP expense.
The issuance of 1099s is consistent with the intention to treat the payments as an HSP expense. However, in October of 2008 when the tax returns were being prepared, PBS’ own accountant, Friedman, noticed the 1099s for each of the musicians reflecting the amounts paid in 2007. Without consulting his clients, Friedman assumed this was a mistake and directed HSP to void the 1099s and issue K-ls from PBS to the Artists in the same amounts. The amounts were classified as “guaranteed payments” to each Artist. Unfortunately, Freidman failed to note that the limited liability company’s operating agreement treated each member equally and did not authorize unequal distributions. Nevertheless, at Freidman’s suggestion, Dyer voided the 1099s and issued K-ls.274 These accounting adjustments support the intention to treat the payments as distributions from PBS and not expenditures of HSP. Further, since PBS was not profitable, they increased its losses and by correlation, increased the amounts HSP had to advance to cover the losses.
In 2009, HSP again provided 1099s to the Artists reflecting the amounts paid in 2008. Consistent with this accounting method, the PBS P/L for 2008 did not include the amounts as advances to PBS or distributions to its members, nor did the B/S include these amounts as debt to HSP.275 HSP also paid the advances from its account and deducted the payments on its tax return. This conduct is consistent with the Artists’ position that HSP was responsible for the payments.
Then in May 2011, after the 2008 returns were filed and this lawsuit was instituted by HSP, HSP reversed course, “correcting” the 1099s.276 The new amended 1099s cancelled any income to the Artists allowing HSP to claim the advances as loans. It also booked adjusting entries to both its books and those of PBS increasing the due to affiliate account for the amounts previously paid as 1099 income.
*649For the following reasons, the Court finds that the amounts paid to the Artists by HSP from November 2007 to November 2008 are not properly loans to PBS or its members. The disbursement of funds to the Artists was an effort to provide a steady stream of income to each artist. However, HSP ignored the fact that each Artist was an equal member of PBS and entitled to an equal share of its profits. Instead, HSP paid a different amount to Porter, Stoltz and Batiste without informing the others of this arrangement. The payments varied widely, particularly between Porter and the others.277 Stepanian not only failed to get the approval to vary the payments to the members, he instructed Porter not to discuss what he was being paid out of fear that the others would become dissatisfied.278
Under these facts, it is clear that HSP was not making the distributions to the Artists based on the PBS Operating Agreement. Instead, HSP was making individual payments to each Artist directly. While the PMA contemplates advancing funds on behalf of an individual artist to further that artist’s career, it also requires the approval of the artists for any expenditure over $750.00. Given the inherent conflict of interest between the PBS members in this situation, the Court does not read the agreement to allow one (1) member to self deal at the expense of another. Further, since HSP admitted that it was a fiduciary of the Artists, it cannot rely on the singular approval of one (1) member to bind the others when the approving member was the only beneficiary of the transaction.
Because the Court finds that the Artists would not have accepted funds in excess of their profits and particularly, if from loans, HSP’s claim for these advances will be limited up to the level of PBS’ profits. Thus, to the extent each artist received a benefit, HSP may offset the amounts it may owe to that Artist against the stipends advanced to that Artist.
b. No Waiver
HSP alternatively asks this Court to find that the Artists’ waived the PMA’s prior consent provision. A waiver excuses a party from fully performing some term of a contract.279 Whether a defendant has waived performance of a contractual obligation is a question of fact. “Waiver may be manifested by words ... It would be unconscionable to permit the defendants, in view of their conduct, without notice or warning to insist upon strict performance of the contract and to forfeit all rights of the plaintiff.”280
HSP alleges that the “Artists’ knowledge of HSP’s spending coupled with their silence” constitutes a waiver of HSP’s contractual obligations. The trial testimony is replete with questions from the Artists’ regarding spending281 and HSP’s failure to comply. The testimony also includes attestations by Stepanian that HSP would pay for expenses because doing so would establish HSP. The Court has found the Artists’ recollection of Ste-panian’s “I got this” responses to their questions regarding expenses to be credi*650ble. The record also supports a pattern of expenditure beyond the Artists’ awareness. This Court finds no waiver on the part of the Artists.
c. Additional Claims by The Artists for Breach Of The PMA
(1) Breach of Paragraph 2
The Artists assert that HSP breached the contract by failing to “adequately and effectively ‘advise, counsel and assist’” Artists. The Artists claim that HSP’s breach of the contract lies in its
1) wanton deficit spending; 2) without prior approval or disclosure; 3) that outstripped revenues on a 2-to-l basis; 3) overstaffing tour support to create the illusion of a “big-time” act; 4) the lack of income/expense projections; 5) the lack of tour budgets until 2009 (the first year the band turned a profit under Stepani-an’s ‘tutelage’); 6) the abject failure of HSP as a business manager; 7) the lack of non-tour budgets; 8) the failure of disclosure on just about every front; 9) the failure to increase the number of PBS’ gigs or gross revenue to any appreciable degree; 10) the failure to protect and/or advise Defendants to protect, their intellectual properties; 11) the failure to disclose 3rd-party distribution and vendor agreements and the revenues derived from those deals; 12) the failure to advise Defendants of actual and/or potential conflicts of interest; 13) the failure to instruct Defendants to get independent legal advice; and 14) the breaches of fiduciary duty, good faith and fair dealing.282
The Court has already found that HSP breached the contract as to the expenditures and will not allow reimbursement except for the amounts listed above. The Court has also found that HSP breached its duties of loyalty and the standard of care owed the Artists. Damages for these infractions will be discussed in connection with the Artists’ claim for unfair trade practice.283
(2) Breach of Paragraph 3
Artists argue that HSP breached Paragraph 3 of the PMA in because HSP did not properly engage and direct a business manager.
(a) Paragraph 3(a)(iv)
Paragraph 3(a)(iv) required that HSP:
[E]ngage, discharge and/or direct for Artist and in Artist’s name, accountants, business managers, auditors, talent agents, attorneys, publicists and others (“Artist’s Agents”) in connection with Artist’s career; provided, however, that Artist and Highsteppin shall mutually agree upon the selection of a business manager (“Business Manager”), which Business Manager shall be engaged at Artist’s sole expense, and provided further that Highsteppin may not discharge the Business Manager or Artist’s attorney without Artist’s approval ... 284
The Court finds that HSP did not breach its obligation to secure a business manager for the Artists. The record reflects that Stepanian suggested managers to Porter and Stoltz, but they were uninterested or opposed retaining a business manager due to the additional cost.285 The employment of a business manager was at the Artists’ discretion. Therefore, HSP did not breach any obligation on this point.
(b) Paragraph 3(c)
Paragraph 3(c) provides:
*651Artist and Highsteppin hereby acknowledge and agree that before the effective date of this Agreement, Artist had granted Highsteppin and Highsteppin had accepted from Artist, the sole and exclusive right and license ... to supervise, manage, develop and maintain all of Artist’s fan email addresses and fan data ... (“Email List”) ... provided, however, that Highsteppin mil not use the Email List in connection with Artist after the expiration or termination of the Term of this Agreement without Artist’s consent. Upon the expiration or termination of this Agreement, High-steppin shall provide Artist with a true and complete electronic copy of the then-current Email List for Artist’s use, at no cost to Artist.... 286
The Artists allege that HSP breached Paragraph 3(c) by the unauthorized and undisclosed use of the Artists’ Email List after termination of the PMA and the admitted failure to deliver a copy of the Email List to Artists at the conclusion of the PMA.
The Court finds that HSP breached the PMA by utilizing the Email List after the termination of the PMA without authorization.287 HSP also failed to deliver a copy of the Email List to the Artists. The damages recoverable for breach of Paragraph 3(c) will be discussed in connection with the Artists’ unfair practices claim.288
(3) Breach of Paragraph 8
Paragraph 8 of the PMA pertains to the requisite accounting. It provides:
Artist shall cause Business Manager to prepare and maintain books and records relating to monies received by Business Manager on Artist’s behalf, to remit on a monthly basis to Artist or Artist’s designee any sums due Artist hereunder, and to remit on a monthly basis to Highsteppin any sums due to Highstep-pin hereunder. Artist and Highsteppin shall each have the right hereunder to inspect Business Manager’s books and records with regards to monies received on Artist’s behalf upon thirty (30) days notice during reasonable business hours, twice per calendar year. If Artist receives monies commissionable hereunder directly, Artist shall remit such monies to Business Manager within five (5) days of receipt. During and after the Term hereof, Highsteppin shall have the right to inspect Artist’s books and records with respect to Artist’s Gross Earnings. Notwithstanding the foregoing, if and during such times as no Business Manager is engaged on Artist’s behalf, then Highsteppin shall hereby be authorized to assume the rights of Business Manager hereunder.289
Although the PMA specifically provides that HSP is not the Artists’ business manager, HSP voluntarily assumed the role. The Artists assert that HSP breached paragraph 8 of the PMA because it failed to 1) set up bank accounts for HSP, Stepa-nian, PBS, the Artists and Bonerama upon commencement of the PMA; 2) set up separate QuickBooks files for HSP, Stepa-nian, PBS, the Artists and Bonerama upon commencement of the PMA; 3) avoid commingling the funds of HSP, Stepanian, PBS, the Artists and Bonerama; 4) avoid conversion of the funds of HSP, Stepanian, PBS, the Artists and Bonerama; and 5) provide monthly and/or quarterly account-ings.
While every accounting witness opined at trial that the complained of deficiencies were a material deviation from good accounting practices and/or Generally Ac*652cepted Accounting Principles.290 The PMA does not require a business manager to deliver records except on reasonable demand. Additionally, the PMA does not require a business managers to follow Generally Accepted Accounting Principles or a proscribed accounting method. Therefore, this Court cannot find that HSP breached the PMA in either of these regards.
Instead, HSP’s assumption of the role of business manager is outside the terms of the PMA and its duties are determined by the standard of care required by its fiduciary position. For the reasons set forth below, the Court does find that HSP’s conduct fell so far below the standard of care required by a business manager that its conduct is actionable. The damages associated with this claim will be discussed in connection with the Artists unfair trade practices action.291
(4) Breach of Paragraph 16(b)
The Artists assert that HSP breached Paragraph 16(b) by failing to make any effort to comply with the Leaving Member/Key Person clause. Paragraph 16(b) provides:
(b) In the event any one or more of the individuals who comprise Artist intend to depart from Artist, such individual or individuals shall notify Highsteppin of such a departure; Highsteppin shall then make an election within thirty (30) days of notification as to whether High-steppin shall continue to act hereunder for the Term as Highsteppin for (i) Artist (without the departing individual or individuals), (ii) the departing individual or individuals (but not the Artist); or (in) both Artist and the departing individual or individuals. If Highsteppin chooses to act as personal manager for Artist (without the departing individual or individuals), or for the departing individual or individuals (but not Artist), the term “Artist”, as used in this Agreement, shall be deemed to refer to the persons as to whom Highsteppin chooses to act as personal manager. In the event that Highsteppin chooses to act hereunder for both Artist and the departing individual or individuals, this Agreement shall apply separately to the Artist and the departing individual or individuals.
The Artists complain that failed to replace Porter once his termination notice was delivered. HSP admittedly made no effort to replace Porter but the PMA does not require that it do so. Further, Batiste acquiesced in the termination of the PMA and offered nothing at trial to this claim. Without evidence of a desire to continue the relationship, Batiste waived any demand under this provision of the PMA. As for Stoltz, while he continued to work individually with HSP and its employees, he made no demand to continue the PMA and terminated further business dealings on or about December 29, 2009 when he was sued by HSP. Thus, he too waived any claim based on HSP’s failure to substitute another musician for Porter.
C. Violation of Massachusetts Unfair Trade Practices Act
Both HSP and the Artists brought actions against each other under the Massachusetts Unfair Trade Practices Act (“MUTPA”), specifically M.G.L. c. 93A, §§ 2 and 11. The parties agree that they are “engaged in trade and commerce in Massachusetts” pursuant to the PMA. Therefore, the Court will not discuss eligibility under the statute.
MUTPA creates a private cause of action to remedy damages sustained as a *653result of unfair or deceptive acts or practices. The law originally was enacted to improve the commercial relationship between consumers and businessmen. “By requiring proper disclosure of relevant information and proscribing unfair and deceptive acts or practices, the Legislature strove to encourage more equitable behavior in the marketplace.” 292 Section 11 of MUTPA extended the statute’s coverage to individuals engaged in trade or commerce in business transactions with others engaged in trade or commerce.293
Section 2 of MUTPA prohibits unfair or deceptive acts or practices in the conduct of any trade or commerce. The statute does not define “unfair” or “deceptive acts or practices.” The existence of an unfair practice is determined on a case-by-case basis depending on the circumstances.294 “The circumstances of each case must be analyzed, and unfairness is to be measured not simply by determining whether particular conduct is lawful apart from c. 93A but also by analyzing the effect of the conduct on the public.”295
1. Unfairness
Whether a practice is permitted by law may be considered when determining unfairness, but the legality of the *654act is not determinative. Likewise, the fact that an act is authorized by contract does not exempt it from scrutiny.296 “Just as every lawful act is not thereby automatically free from scrutiny as to its unfairness under c. 98A, so not every unlawful act is automatically an unfair (or deceptive) one under G.L. c. 93A.” 297 A court may, however, look at both statutory and common law for established notions of fairness.
An action is “unfair” if it is “(1) within the penumbra of a common law, statutory or other established concept of unfairness; (2) immoral, unethical, oppressive, or unscrupulous; or (3) causes substantial injury to competitors or other business people.” 298 Massachusetts courts have looked at MUTPA as an expression of public notions of fairness.
In determining whether a practice is unfair, one must evaluate the equities between the parties and their relative position and sophistication. What a defendant knew or should have known may be relevant in determining unfairness. Similarly, a plaintiffs conduct, his knowledge and what he reasonably should have known may be factors in determining whether an act or practice is unfair.299
In an arms-length transaction between two (2) business entities, the plaintiff must show a greater degree of “rascality” to establish an act is unfair within the meaning of G.L. c. 93A.300 The fairness of an act in a commercial transaction is judged by the standards of a businessman rather than those of an average individual.301 The heightened standard remains fairly liberal:
[P]ractices involving even worldly-wise business people do not have to attain the antiherioc proportions of immoral, unethical, oppressive, or unscrupulous conduct, but need only be within any recognized or established proportions of immoral, unethical, oppressive or unscrupulous conduct, but need only be within any recognized or established common law or statutory concept of unfairness.” 302
An unfair commercial practice must also result in “substantial injury ... to competitors or other businessmen.”303
2. Deception
The question of whether a practice is deceptive is separate from that of fairness.304 Deceptive acts are defined as those which “could reasonably be found *655to have caused a person to act differently from the way he otherwise would have acted.” 305 The standard is an objective test of whether the general public would be deceived.306 But the plaintiff must allege that he would have behaved differently but for the deceptive act.307 It should be noted that reliance is not a prerequisite for recovery under the statute,308 but may be necessary to prove the required causal link between the deception and the injury.309 To prevail, there is no need to prove intention to deceive or that the unfair or deceptive act is intentional or wilful.310
Even if a plaintiff has not suffered an injury, it may bring a suit to obtain an injunction upon showing that the unfair.business practice may cause a loss. In addition to equitable relief, an injured plaintiff may seek actual damages and is entitled to attorneys fees and costs if a violation is found, whether or not other relief is awarded.311 Damages must be casually linked to and a foreseeable result of the unlawful practice.312 The court may award up to treble damages, but no less than double damages, if it finds the violation was “knowing and wilful.”
A mere breach of contract without more, is not a violation of Chapter 93A.313 A party that has not breached a contract, may nevertheless be held liable under MUTPA.314 To rise to the level of a MUTPA violation, a breach must be both knowing and intended to secure “unbar-gained-for benefits” to the detriment of the other party.315
3. No Violation by Artists
In addition to a claim in contract and fraud, HSP asserts the Artists violated MUTPA. The facts upon which HSP relies are the same ones as those giving rise to HSP’s claims for breach of contract and fraud. The Court incorporates those facts as set forth above. Generally, HSP argues that the Artists never intended to repay the expenses incurred and induced HSP to incur losses through this deception. It also argues that the Artists’ refusal to pay outstanding loans constitutes a MUTPA violation.
A party’s breach of contract violates MUTPA when the party withholds payment without a good faith basis in an attempt to gain an unfair advantage.316 *656Conversely, a refusal to pay for goods or services because of a dispute over the amount of the bill does not give rise to a MUTPA action.317 HSP argues that Artists deceived HSP into believing they would repay the mounting debts. Under the PMA, the Artists promised to pay HSP commissions and reimburse HSP for loans to the Artists and for expenditures made on the Artists’ behalf. HSP argues that the Artists knew of their obligation to reimburse HSP. For purposes of its MUT-PA claim, HSP asserts that despite this knowledge, the Artists continued to incur debt that they had no intention to repay. In support of its claims, HSP cites the acceptance of various sums paid by HSP directly to the Artists whether as stipends for living expenses or personal bills. For the reasons set forth below, this Court finds the Artists did not engage in unfair or deceptive trade practices. Furthermore, the Court finds no merit in HSP’s assertion that receipt of a stipend or cash to pay small personal expenses evidences a pattern of deceit.
The record is absolutely devoid of “numerous ongoing representations that [the Artists] would repay HSP.”318 Although HSP claims that by accepting direct payments the Artists committed to repay the amounts, this is not the case. While HSP attempts to equate the receipt of funds with a promise of repayment, it omits any proof that the recipient knew the funds were a loan rather than a distribution of profits. In order for the Artists to have deceived HSP, HSP must prove that they knew that PBS was unprofitable and the payments were loans. The record is totally lacking on this point. Given HSP’s 1) failure to account or provide status reports on profitability; 2) assurances that expenses were “investments in HSP;” 3) characterization of direct payments as “salaries;” 4) failure to include significant costs on PBS’ books; and 5) failure to obtain consent from the Artists prior to incurring an expense, the evidence is sufficient to establish that the Artists had insufficient facts to understand that HSP was lending them funds or that it would demand repayment for the amounts it now claims.
HSP’s claims against Artists are, at their core, a simple contract dispute. The Artists’ refusal to repay the debt claimed by HSP is not a violation of MUTPA because they possess legitimate defenses to payment.
4. Violations by HSP
The Artists also seek damages against HSP for violations of MUTPA and request a finding of wilfulness. The Artists argue that HSP and Stepanian committed multiple breaches of fiduciary duty during the term of the PMA, and those breaches were sufficiently severe and pervasive enough to constitute MUTPA violations as a matter of law.
(a) Breach of Fiduciary Duty
A fiduciary relationship is established whether the relationship is one of pure agency, attorney in fact, trustee, escrow agent, partner, attorney at law or corporate director of a closely held corporation. A fiduciary holds a time-honored, selfless and hallowed position of trust. According to the Supreme Judicial Court of Massachusetts: -
A fiduciary duty exists “when one reposes faith, confidence, and trust in another’s judgment and advice.” Van Brode Group, Inc. v. Bowditch & Dewey, 36 Mass.App.Ct. 509, 516 [633 N.E.2d 424] (1994); quoting Fassihi v. Sommers, Schwartz, Silver & Tyler, P.C., 107 Mich.App. 509, 515 [309 N.W.2d 645] *657(1981). Its central tenet is the “duty on the party of the fiduciary to act for the benefit of the other party to the relation as to matters within the scope of the relation.” 1 A.W. Scott & W.F. Fratcher, Trusts Sect. 2.4 (4th ed. 19871). See Restatement (Second of Trusts Sect. 2 comment b (1959)). Although some fiduciary relationships, such as that between guardian and ward, are created by law, others arise from the nature of the parties’ interactions. The “circumstances which may create a fiduciary relationship are so varied that it would be unwise to attempt the formulation of any comprehensive definition that could be uniformly applied in every case.” Warsofsky v. Sherman, 326 Mass. 290, 292 [93 N.E.2d 612] (1950) (and listing examples of fiduciary relationships). See Patsos v. First Albany Corp., 433 Mass. 323, 335-336 [741 N.E.2d 841] (2001).319
A fiduciary duty may arise when one party reposes trust and confidence in the integrity of another and the other party knows of this reliance and voluntarily assumes and accepts the confidence.320 Whether there is a relation of trust and confidence under particular circumstances is a question of fact.321 A fiduciary is a person to whom property or power is entrusted for the benefit of another.322 WTien HSP undertook the collection and disbursement of all revenues obtained by PBS, it became a fiduciary of those funds. At trial, Stepanian, HSP’s experts and those offered by PBS all agreed that HSP held a fiduciary position with the Artists.323 The actions of the parties and the testimony of the witnesses leads to the inescapable conclusion that the Artists put their complete “faith, confidence and trust” in HSP’s judgment, advice, counsel and guidance with regard to the collection and expenditure of funds. This Court finds a fiduciary relationship existed between HSP and the Artists.
HSP argues that the provision allowing HSP to advance money on the Artists’ behalf modifies any fiduciary duty to the Artists. It argues that HSP’s failure to acquire the Artists’ approval constitutes a breach of contract, not fiduciary duty.324 The two (2) claims presented by the Artists are not mutually exclusive. A breach of duty may or may not be a breach of contract. Similarly, a breach of contract may or may not be a breach of duty. In this case, HSP breached the terms of its personal management contract by incurring charges without their approval and by failing to exercise proper judgment as to the expenses it incurred. It also breached an independent fiduciary duty to the Artists as their business manager by failing to account for revenues it collected and expenditures it paid on their behalf. *658HSP had two basic fiduciary duties as business manager, honesty and loyalty. Those duties have been judicially construed to include the expansive duty of full disclosure, including full disclosure of all facts related to the subject-matter of the fiduciary relationship, full accountings, disclosure of conflicts of interest, disclosure of opportunities available to the principal, disclosure of the fiduciary’s desire to take advantage of such opportunities, mistakes and errors in performance by the fiduciary and the avoidance of self-dealing, commingling and conversion.325
By not keeping the Artists apprised of their financial situation including the receipt of income from merchandise and digital sales, HSP breached a fiduciary duty to the Artists. HSP’s failure to properly segregate the Artists’ funds was a breach of duty. Commingling the Artists’ funds with its own and that of other HSP clients is also a classic breach of duty. HSP’s failure to account in a timely and accurate manner for all revenues and expenditures constitutes another breach of duty. Its abject failure to provide detailed accountings of revenues and expenses has led to this very suit. Even as the trial progressed, this Court was shocked and dismayed by HSP’s lack of transparency and the inaccuracy in its accounting. Its experts were poorly pre*659pared and unable to address basic questions regarding expenses or revenues. Its principal and employees were wholly deficient in their understanding of proper bookkeeping methods or the legal relationship between the parties under the PMA. Its records were inconsistent, inaccurate and ever shifting. In short, HSP failed to address the core issue of this dispute: what was earned and what was spent.
It is beyond explanation why this was necessary. Stepanian admitted his own problems to the Artists in his email of November 2008.326 The Complaint and Counterclaims clearly required HSP to prove its claims and to do so, an accounting of the revenues and expenses during the PMA’s term was required. For reasons unknown, HSP failed to provide that accounting. As a result, the Court was required to reconstitute from source documents, where available, the revenues earned and expenses incurred during the PMA. Ultimately, HSP is responsible to the Artists because a client should not have to sue his fiduciary in order to obtain a full and complete accounting.
In addition, the Court finds that HSP’s performance as the Artists’ personal manager falls so far below the standard of care required as to be actionable under the MUTPA. Stepanian was an ardent fan, particularly of Porter, and idolized PBS’ talents. Stepanian possessed infinite enthusiasm for PBS’ potential but sorely lacked experience and training. Stepanian took on a task well above his abilities at a severe cost to himself and the Artists. HSP argues that all of its expenditures were for the Artists’ benefit, but neglects to acknowledge that its actions also bankrupted PBS’ principals. It fails to accept responsibility for its lack of transparency or reporting to the Artists either during the relationship or after suit was filed. HSP may not hide behind the best of intentions when its conduct falls so far below the standard of care as to be actionable. HSP fails to concede that its advice and counsel were so poor as to be grossly negligent.
HSP’s conduct also breached its duty to the Artists individually. According to the PMA, the Artists are liable in solido for the aggregate amount of salaries and solo-project related expenses paid regardless of the specific amount received by each individual. In solido liability for the Artists may be sanctioned by the PMA, but HSP’s practice of advancing funds for the benefit of a single artist without the consent of the others, crosses a fiduciary line. For example, HSP is claiming reimbursement from all three (3) Artists for Porter related merchandise and travel expenses incurred by Stepanian prior to the execution of the PMA. Those costs were incurred by Stepanian without any agreement for reimbursement by either Porter or the Artists.
The testimony reflects that Stepanian incurred the costs while he followed Porter throughout his tours. While Porter did not object to Stepanian’s presence or sale of merchandise, there was absolutely no evidence to support a finding that he agreed to be responsible for Stepanian’s costs. It is also critical that Stepanian never mentioned the existence or amount of this “debt” before, during or after the execution of the PMA. To obligate Porter, much less Stoltz and Batiste, to undisclosed pre-PMA expenditures that none were obligated to pay before the PMA is a breach of loyalty to all concerned.
*660HSP also claims reimbursement from all three (3) Artists for expenses related to solo projects incurred by Stoltz and Porter. HSP failed to disclose any of the costs incurred with the other Artists, a clear breach of loyalty to those who did not benefit. But these charges pale in comparison to HSP’s actions in connection with its “salary” program.
From late 2007 to late 2008, HSP advanced $204,000.00 to the Artists through stipends. Significantly, Stepanian separately negotiated with each Artist and agreed to pay each substantially differing amounts. HSP also instructed Porter not to discuss the amount he was being paid with the others.
HSP deliberately did not inform the Artists of its inequitable distributions because doing so would have caused a rift between the Artists.327 As a fiduciary of each artist, HSP owed Porter, Stoltz and Batiste an independent duty of loyalty. As such, to obligate each artist for differing amounts without disclosure and their express consent constituted a breach of loyalty. Causation is established if the deception could reasonably be found to have caused a person to act differently.328 The causal connection between HSP’s actions and the Artists’ loss is glaring. Without HSP’s nondisclosure, the court finds that the Artists would have reasserted control over their finances and limited the damage much sooner.
While success can never be guaranteed, HSP created a financial disaster for these Artists without their knowledge or consent. The losses sustained were a result of HSP’s folly. The magnitude of HSP’s incompetence and its failure to supplement its critical weakness with competent help constitutes a breach of duty for which it must answer. Regardless of good intentions, as a fiduciary, HSP cannot expect its mistakes to be covered by its clients. As such, this Court will enjoin HSP from claiming joint and several or in solido liability for any amounts paid that only benefitted a single artist.
Because HSP’s discharge of its duties was substantially below the standard of care owed and it failed to disclose conflicts of interest between itself or the Artists in the management of their affairs, the Court finds that its conduct constitutes a wilful violation of MUTPA and awards the injunctive relief set froth below; and attorney’s fees and costs associated with the litigation over the relative claims between the parties.
In addition and for the reasons set forth above, the Court awards the following relief:
1. HSP must account for any and all proceeds received from the sale, license, or use of merchandise or music of the Artists after June 2012 and remit the gross proceeds to the Artists’ Trustee within fourteen (14) days.
2. HSP must immediately notify all parties with whom it contracted or authorized any distribution, sale, license or use of the Artists’ works of the termination of its nonexclusive license in same and the corresponding termination of the third party’s rights. It must also instruct the addressees to contact Trustee should they possess any property or revenue belonging to Porter, Batiste Stoltz, or PBS. Copies of confirming correspondence should be provided to the Artists within fourteen (14) days of this ruling.
*6613. HSP must deliver all merchandise, CDs or other product purchased or produced during the term of the PMA to the Trustee. To the extent a the merchandise or music is in the hands of a third party, HSP must recover said property and deliver it to the Trustee.
4. This ruling may require the amendment of the Artists’ tax returns for tax years 2006, 2007, 2008 or 2009. To the extent amendments are possible, the Artists will be reimbursed for all fees and costs associated with the preparation of amended tax returns, as well as any penalties or interest payable on any taxes owed due to late filing or change in the amounts originally due. To the extent an amendment generates a refund, HSP is responsible for the payment of interest on the refund generated by the amended return at the federal rate from the date of the original tax return’s filing through the date of receipt of the refund. To the extent an amendment cannot be filed due to the intervention of time, HSP will be responsible for the additional refund amount which might otherwise be claimed with interest at the federal rate until paid.
D. HSP’s Commission Claim
1. Performance Fees
In its post-trial brief, HSP alleges commissions of $70,640.40 based on a rate of twenty-three percent (23%). The Artists assert that HSP breached Paragraph 4 of the PMA by improperly calculating its commissions. The Artists also request a forfeiture of commissions as damages for HSP’s breach of fiduciary duties. The Court has already denied reimbursement of substantial costs incurred as a result of HSP’s failure to obtain consent and properly discharge its responsibilities as a per-. sonal manager. Compensatory damages, attorneys fees and costs, as well as injunc-tive relief have been separately awarded for violations of MUTPA and HSP’s breach of fiduciary duty. In light of these substantial awards and because HSP did not self deal or personally profit from its transgressions, forfeiture of its commissions is not warranted.
2. Definition of Gross Earnings and Calculation of Commissions
Paragraph 4 defines “Gross Earnings” and sets forth how commissions are to be calculated. It provides:
(a) Except as otherwise provided herein, as compensation for Highsteppin’s covenants and services, Highsteppin is and shall be entitled to receive from Artist or directly from third parties pursuant to paragraph 3 hereof, throughout the Term and thereafter as set forth in this Agreement, fifteen (15 %) percent (hereinafter “Commission”) of Artists’s Gross Earnings (as hereinafter defined). Notwithstanding the immediately preceding sentence, in the event Artist’s Gross Earnings during any consecutive twelve (12) month period during the Term increase by at least fifty percent (50%) above the Gross Earnings Baseline (i.e., increasing to a total amount of money equal to $108,000.00 (one hundred eight thousand dollars) during such twelve month period), the Commission shall increase to seventeen and one half percent (17.5%) of Artist’s Gross Earnings on a prospective basis. Notwithstanding the first sentence of this paragraph 3(a), in the event Artist’s Gross Earnings during any consecutive twelve (12) month period during the Term increase by at least sixty five percent (65%) above the Gross Earnings Baseline (i.e., increasing to a total amount of money equal to $118,800.00 (one hundred eighteen thousand eight hundred dollars) during such twelve *662month period), the Commission shall increase to twenty percent (20%) of Artist’s Gross Earnings on a prospective basis.
(d) Notwithstanding anything to the contrary contained herein, Artist and Highsteppin hereby agree that Gross Earnings shall specifically exclude monies advanced by third parties and actually expended on audio and video recordings (except to the extent that Artist receives such monies in the form of a personal advance pursuant to any recording agreement and such personal advance is not paid to third parties), reasonable “tour expenses” actually paid to third parties in connection with Artist’s concerts and other live engagements, namely booking agency fees, the costs of self-produced merchandise, reasonable so-called “sounds and lights” reimbursement and/or the costs of opening acts. (Emphasis added.)
3. Deduction of Reasonable Tour Expenses
The Artists’ allege that HSP failed to back out “reasonable tour expenses” when calculating its commission. HSP maintains that the “reasonable tour expenses” definition is limited to the laundry list of examples. The Artists assert that the laundry list is not exclusive. The Court finds that a plain reading of the contract results in the deduction of normal and reasonable costs of touring from the gross revenues before calculating the commission.329
4. Commission Schedule
Artists also argue that paragraph 4(a) requires PBS’ revenues to reach base levels each calendar year before the commission rate is increased. HSP argues that a plain reading of paragraph 4(a) provides that once the historical aggregate earnings reach a higher commission level, that level is charged on all future earnings until earnings increase to the next plateau. The Court disagrees with both interpretations.
Under Paragraph 4(a), commissions are owed monthly in arrears and the commission rate is based on the aggregate earnings for the preceding twelve (12) month period. Thus, the commission rate rolls up or down each month based on the total earnings of the preceding twelve (12) month period. For example, if from May 2006 to April 2007 PBS’ Gross Earnings were $108,000, HSP’s commission rate for May 2007 would be seventeen point five percent (17.5%). In June 2007, the calculation would be based on Gross Earnings from June 2006 to May 2007. If that calculation produced Gross Earnings equal to $118,800, the commission rate on June 2007’s earnings would be twenty percent (20%). If instead the earnings dropped to $100,000, the commission rate for June 2007 would drop to fifteen percent (15%). Based on the evidence presented at trial, the Court has calculated Gross Earnings for each month by averaging revenues and expenses incurred for each year over the twelve (12) months. Exhibits A and B to this Opinion reflect the revenue and expense calculations, commission rate and commission earned by month.330 The total commissions due to HSP are $54,496.331
*663E. Dischargeability of Debts Owed by Debtors to HSP
HSP argues that all debts owed to it by PBS and its members are nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. The facts of this case do not support nondischargeability.
1. Elements of Nondischargeability Finding
Section 523 of the United States Bankruptcy Code provides:
(a) A discharge ... does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition ...
A creditor must prove nondis-chargeability by a preponderance of the evidence.332 All exceptions to discharge under Section 523 “must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start.”333 As set forth in In re Acosta, 406 F.3d 367, 372 (5th Cir.2005):
Debts that satisfy the third element, the scienter requirement, are debts obtained by frauds involving “moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.” In re Martin, 963 F.2d 809, 813 (5th Cir.1992). An intent to deceive may be inferred from “reckless disregard for the truth or falsity of a statement combined with the sheer magnitude of the resultant misrepresentation.” In re Norris, 70 F.3d 27, 30 n. 12 (5th Cir.1995), citing In re Miller, 39 F.3d 301, 305 (11th Cir.1994).
Courts may not render debts non-dischargeable unless they are presented with proof that the debtor had an “intent” to deceive when the actual fraud, fraudulent representations or false pretenses occurred.334 However, “an honest belief, *664even if unreasonable, that a representation is true and that the speaker has information to justify it does not amount to an intent to deceiye.”335
a. False Pretenses, False Representations and Actual Fraud
The Fifth Circuit has distinguished the elements of false pretenses, false representations and actual fraud.336 The distinction hinges on whether a debtor’s representation is made with reference to a future event, a past or existing fact.337
In order for a debtor’s representation to constitute a false pretense or a false representation, it “must have been: (1)[a] knowing and fraudulent falsehood, (2) describing past or current facts, (3) that [was] relied upon by the other party.” 338 While “false pretenses” and “false representations” both involve intentional conduct intended to create and foster a false impression, a false representation involves an express statement, while a claim of false pretenses may be premised on misleading conduct without an explicit statement.339
To have a debt excepted from discharge based on actual fraud, an objecting creditor must prove that the debtor (1) made representations; (2) which he knew at the time were false; (3) with the intent and purpose to deceive the creditor; (4) who actually and justifiably relied on the representation; and (5) sustained losses as a proximate result.340 Actual fraud also focuses on future events, thus it is designed to entice or commit another to an act based on false representations of future events.
Fraud under Section 523(a)(2)(A) is the “positive” type of fraud as opposed to constructive fraud.341 The Fifth Circuit in Mercer reasoned that “[t]he appropriate focus with respect to a debtor’s intent is whether she acted in bad faith by knowingly making a false representation.”342 Actual fraud by definition consists of “any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another, something said, done or *665omitted with the design of perpetrating what is known to be a cheat or deception.” 343
HSP alleges that the debts owed by Porter, Stoltz, Batiste and PBS are nondischargeable under 11 U.S.C. § 523(a)(2)(A). Specifically, HSP avers that the Artists never intended to repay HSP for the advances it incurred under the PMA even though they were contractually required to do so. Based on the Artists’ allegedly false promise to repay, HSP argues that it advanced funds and incurred substantial losses.
^ The Artists’ initial promise to repay HSP for its advances is contained in the PMA. Thus, in order for this to constitute a fraud, HSP must show that at the time the PMA was executed, the Artists had no intention of ever repaying any amount owed to HSP regardless of the circumstance. In support of its position, HSP argues that in October of 2008, after first learning of the debt to HSP, the Artists, specifically Porter, evidenced their intention not to repay. HSP points to the October 2008 email exchange between Porter, Dyer and Friedman during which Porter screams in text that the amounts advanced to the Artists for the year were not supposed to be loans. HSP alleges this supports nondischargeability.
HSP also argues that the Artists were aware of the mounting debts and made no effort to stop expenditures or repay HSP. HSP relies heavily on In re Melancon344 to support its claim. The Melancon Court held that a misrepresentation is fraudulent if the maker (a) knows or believes that the matter is not as he represents it to be; (b) does not have the confidence in the accuracy of his representation; or (c) knows that he does not have a basis for the representation.345 More particularly HSP relies on the following:
It is insufficient for a debtor to simply state that he always planned to pay the money back ‘somehow (we have a mental image of cash suddenly falling from the skies, like manna from heaven.) If the debtor has no idea how the money will get paid back, or if it will get paid back, then he may hope to repay — he may even want to repay — but he certainly does not intend to repay. Melan-con at 320.
The Melancon case is wholly distinguishable from the case at hand for many reasons. In Melancon, the debtor, who was a loan officer for a bank, took cash advances from her credit card to support her gambling habit. The Melancon Court denied discharge of the cash advances after finding that Mrs. Melancon had an accurate understanding of her financial position, was fully capable of properly analyzing her circumstances to determine whether she could pay additional debts, and presented no evidence concerning any prospect of repayment. As a result, when Mrs. Melancon requested cash advances, she knew she would not be able to repay them and made no attempt to cut her losses.
HSP alleges the Artists both anticipated and actually expected HSP to advance large sums of HSP’s money to satisfy expenses incurred on behalf of the Artists. The Artists’ state of mind is crucial to HSP’s case. Due to the incredible lack of information and dearth of disclosure by HSP regarding PBS’ financial status, the Court concludes that the Artists were un*666able to form an intent to deceive. The Artists were unaware that HSP was advancing monies to pay for the Artists’ tour and professional expenditures. Based on what they knew and when they knew it, they simply did not have enough information to form an accurate understanding of their financial position or to properly analyze their ability to repay HSP’s alleged claims.
For example, Porter’s March 3, 2007, email to his fellow Artists and Stepanian posed several questions regarding responsibility for certain expenses.346 Specifically, Porter questioned whether PBS and the Artists would be financially responsible for a van Stepanian had recently purchased and whether the Artists would be paying for the recent photography session. Stepanian responded that the van was owned by HSP and the Artists would not be responsible for its purchase or modifications. Stepanian did not address the photography session and let Stoltz’s explanation that it was an investment in HSP go uncorrected.
In July 2008 the first P/L, as well as a B/S was provided to PBS by HSP. Although the documents reflected 2007 transactions, they also reflected a loss for 2006 of $26,698.78 through a negative equity entry.347 Because PBS had handled and paid most tour expenses during 2006, the losses were principally due to nontour promotional costs incurred by HSP. These statements also reflected substantial losses incurred in 2007 ($62,747.57348) and a loan outstanding of 227,660.75.349 The outstanding loan did not balance to the P/L because HSP had booked entries directly to retained earnings rather than through expense accounts for 2006 or 2007. It is doubtful the Artists understood the significance of these documents. In any event, they were quickly withdrawn by Stepanian due to “inaccuracies” without detailed explanation.
It was not until October 2008 that the full extent of HSP’s deficient spending became apparent to PBS. In October 2008, the Artists received their draft 2007 tax return, which showed a loss of $225,655 and a loan payable of $227,661.350 Prior to October 2008, PBS could not have known that HSP was spending them into bankruptcy. Further, because they did not know, they could not have made any representations to the contrary to HSP. Following October 2008, PBS reasserted control over its finances and losses incurred by HSP stopped.
This Court concludes that prior to October 2008, the Artists clearly believed, albeit erroneously, that certain nontour promotional expenses (e.g. Danny Clinch) were being subsidized by HSP as an investment in HSP’s future. This assumption was not created out of thin air. Ste-panian’s own vague assurances and failure to account allowed this impression to take hold. His emails of July 2007 and November 2008 also provide support for the Artists’ position.351 Finally, HSP’s own bookkeeping indicates that it accepted revenues and took certain expenses on its own books rather than charge PBS, even after PBS’ separate checking account had been established. Only after suit was filed did HSP “correct” its accounting. The Court finds that the facts lead to the inescapable conclusion that Stepanian was acting in great hope that the expenses incurred would *667propel the Artists into superstardom, thus benefitting both PBS and HSP.
While the PMA clearly contemplates that the Artists will be personally responsible for reimbursement of losses incurred by HSP, it also places significant restraints on HSP’s ability to incur losses. As explained earlier, under the PMA, HSP was prohibited from incurring a single expense in excess of $750.00 or aggregate monthly expenses of over $2,000.00 without the express consent of the Artists. The limitations on spending in the PMA were designed to protect the Artists from runaway costs incurred by HSP without their knowledge and consent. The PMA also contemplated that all expenses incurred would be submitted monthly for payment to the Artists’ business manager. Again, this provision was designed to protect the Artists against unknown and unaccounted for bills incurred by HSP on their behalf. Timely accountings were designed to avoid exactly what HSP did, incur substantial costs which it presented for payment years later.
Jacodine confirmed that industry practice required personal managers to submit invoices for services rendered and costs incurred on a monthly basis. He also confirmed that monthly accountings for all revenues received by date, amount and source were also standard practice.352 None of this was done by HSP.
HSP was unable to provide evidence that a single expenditure was presented to the Artists either before it was incurred or when it was paid. Instead, it argued the Artists’ general knowledge that the service providers existed constituted both knowledge of the charge and consent to incur expenses on their behalf. HSP’s position fails because most of the nontour expenditures and services were performed by companies or individuals that the Artists had never heard of or did not know had been retained (e.g., Nimbit, Inc.; Leeway’s HGMN,353 Stocker, Powderfinger). Finally, Stepanian’s constant assurances that he was investing in HSP through promotion of PBS supports the Artists’ belief that the services of which they were aware were being subsidized by HSP.
HSP’s proof of claim also itemizes payments to the Artists from November 2007 to November 2008. Referred to as “salaries” or “draws,” Stepanian admitted proposing to pay the Artists biweekly, instead of after each performance. HSP claims these advances are nondischargeable because, like its other claims, PBS lured HSP into advancing funds with no intention of repayment.
HSP alleges that after learning about the deficit spending in October 2008, Porter claimed in an email that repayment to HSP was “NOT THE DEAL.” 354 HSP alleges that this is evidence of the Atists’ bad faith. The Court finds that Porter’s obvious disagreement with HSP’s demands does not rise to the level of deceit nor does it indicate a pattern of luring HSP into deficit spending. PBS did not know that any deficits existed prior to October of 2008. HSP had failed to deliver an accounting for 2006, and the tax return prepared by the Artists showed a profit for that year. The results of 2007 were not delivered until October 2008, and there is no proof that HSP warned the Artists that deficits were mounting. It is exactly at this time that the bi-weekly payments ceased. Thus, HSP could not have been lured into making the bi-weekly payments on a false promise of repayment because *668the Artists did not understand the amounts were being made through HSP loans. When it became clear, the payments stopped and the Artists reasserted control to avoid additional losses or HSP advances.355
HSP has failed to prove that the debts allegedly owed to it are the result of false pretenses, false representations or actual fraud.
b. No Reliance by HSP on Representations by Artists
HSP must also prove justifiable or actual reliance upon a statement by PBS in order to carry its burden of proof. HSP argues that it relied on the Artists’ “fraudulent misrepresentations” because “HSP advanced the monies to build PBS’ brand, and HSP relied on the Artists putting their efforts into making PBS successful.” HSP argues that it justifiably believed the Artists were working to “maximize PBS’ success.”
There is no evidence that the Artists did not work to maximize PBS’ success. The Artists continued to play live shows as directed by HSP and PBS’ booking agent. The situation continued until Porter’s notice of intent to terminate was effective.356 Although HSP claims the Artists asked “for cash advances from the HSP ATM,” HSP had total control of PBS’ funds and total control regarding whether or not any request could or should be granted.
The PMA sets forth strict limitations on HSP’s authority to incur expenses for PBS. It also requires regular, monthly submission of bills and statements of account. HSP also had fiduciary duties to PBS.357 The Court finds that if the Artists had known of the deficit spending and HSP’s intention to seek reimbursement, they would have stopped the spending and taken back the reigns of their business sooner than November 2008. Both the PMA and the Artists’ testimony establish that making money was a goal, but not losing money was paramount. Therefore, HSP has failed to establish a justifiable reliance on any representation by the Artists. For this and the additional reasons set forth above the amounts owed by Artists are dischargeable.
F. Claims of Violation of Copyrights
The Artists allege that HSP and Stepa-nian infringed upon their copyrights and should be cast in judgment for damages stemming from infringement. Specifically, the Artists’ claim HSP violated 17 U.S.C. § 1101, more commonly known as the “Anti-Bootlegging Statute.” The statute broadly prohibits unauthorized creation and trafficking in sound recordings and music videos.358 The Artists also allege *669violations of 17 U.S.C. §§ 106 and 115.359 This Court finds that the Artists granted a nonexclusive license to HSP and Stepanian to commercially exploit recordings of PBS’ live performances. Therefore, no violation occurred.360
1.Background
Under the Copyright Act, copyright ownership automatically vests in the author or authors of an original work.361 “The author is the party who actually creates the work, that is, or the person who translates an idea into a fixed, tangible expression entitled to copyright protection.” 362 Copyright laws protect the authors of literary, dramatic, musical, artistic and certain other intellectual works. The protection is available to both published and unpublished works. Under section 106 of the 1976 Copyright Act, the owner of a copyright has the exclusive right:
1. To reproduce the copyrighted work in copies or phonorecords;
2. To prepare derivative works based upon the copyrighted work;
3. To distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease or lending;
4. To publicly perform literary, musical, dramatic, and choreographic works, pantomines, and motion pictures and other audiovisual works;
5. To publicly display literary, musical, dramatic, and choreographic works, pantomines, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work; and
6. To publicly perform by means of a digital audio transmission, a sound recording.363
Copyright law grants authors the right to control the work, including the decision to make the work available or withhold it from the public.364 Ownership of a copyright may be transferred in whole or in part by any means of conveyance or by operation of law. An owner may also grant a license for its use, production or distribution. An exclusive license must be in writing. Nonexclusive licenses can be granted by operation of law under a totality of the circumstances test.365
a. Authors
Under copyright law, reproduction and distribution of copyrighted musical works is allowed by mechanical license. Once a copyrighted work has been performed publically, a third party is not required to obtain a mechanical license to simply perform the work. A mechanical license is *670only required if a person wishes to reproduce and distribute copyrighted musical compositions (songs) on phonorecords (ie. CDs, records, tapes and certain digital configurations). Thus, if a musician wants to record and distribute a song that was written by someone else, a mechanical license is necessary.366 Authors of original works may always perform their works without necessity of mechanical licenses,
b.Performers
A sound recording is owned by the person whose performance is reflected on the recording. The sound recording itself constitutes a property right in favor of the musicians and is in addition to the author’s right in the musical composition. The right to exploit a sound recording is owned by the recording artist (voice) and musicians performing the work unless a written agreement transfers those rights to a third party. Session musicians generally relinquish and assign their performance rights to the label or band owner for a flat fee or royalty. It is also common for the main artist to have an agreement with the label regarding their relative rights in the recording.
c.Producer or Publisher
Generally, a producer or publisher of a work is the person who pays for its production. This may be the artist, composer or a third party. If the producer or publisher is someone other than the artist or if the work is one “for hire,” the right of a producer or publisher in the work or performance is acquired by contract.367 Merely paying the costs of production does not entitle the producer to rights in the music. However, as explained below, it may grant the paying party a nonexclusive license under the totality of the circumstances.368 The owner of the recording (initially the performer unless a transfer or license of the right has occurred) usually has the right to and is responsible for the exclusive rights set forth in Section 106.
d.Compensation
Songwriters are compensated when their work is included on a recording. When someone produces a CD, he owes the songwriter a royalty for every CD printed regardless of the number sold.369 If a prerecorded performance is repressed, mechanical royalties are also due *671to the original publisher or artist, if self-published.
Songwriters and publishers are also paid when their works are used in a commercial, television show, movie, digitally simulcast, webcasted, streamed, downloaded, provided by an on line demand service, performed live or broadcasted. Airplay or public performance royalties are derived from money collected by Performance Rights Organizations (“PROs”). PROs collect flat or negotiated royalties from restaurants, bars, television stations and performance venues and allocate the amounts collected among musical works based on the frequency and nature of use.370 Use of PROs allows a commercial establishment to play various original works without having to separately negotiate with every artist or songwriter.
Performers receive revenue from the sale of their music and concert appearances. A recording artist currently does not receive any revenue for play of his or her hit song on the radio unless he or she was also the songwriter or publisher.
2. The Artist’s Claim Against HSP for Unauthorized Distribution
The Artists’ allege that HSP distributed their works through various internet companies and PBS’ own website without the Artists’ permission. As the PMA did not give HSP a right to distribute the Artists’ works, HSP claims an irrevocable, nonexclusive license to distribute based on the Artists’ knowledge and consent.
Copyright owners are free to grant multiple nonexclusive licenses for different uses of the same material.371 Under federal law, a nonexclusive license may be granted orally or may be implied from conduct.372 In Lulirama Ltd., Inc. v. Axcess Broad. Servs. Inc., supra, the Fifth Circuit held, “[w]hen the totality of the parties’ conduct indicates an .intent to grant such permission, the result is a legal nonexclusive license ...” 373 Other circuits have limited the granting of an implied nonexclusive license to situations when: (1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes the particular work and delivers it to the person who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work.374 However, the Fifth Circuit has dismissed this limitation.
In Baisden v. I’m Ready Prods., Inc., the Fifth Circuit held that an implied license could arise when the totality of the parties’ conduct supported such an outcome.375 The Baisden Court reasoned *672that consent for an implied license may take the form of permission or lack of objection.376 HSP argues that the Artists’ conduct and documentary evidence demonstrate the existence of a nonexclusive mechanical license allowing HSP the right to release and distribute the Artists’ music.
After several weeks of testimony, the parties entered into a Joint Stipulation of Facts Regarding the Defendants’ Copyright Infringement Claims (“Stipulation”).377 The parties stipulated that all of the live recordings were made with the Artists’ consent for commercial distribution.378 Further, HSP and the Artists stipulated that the Artists had consented in the distribution of the studio recordings at issue.379 Based on the Stipulation, this Court finds that a nonexclusive license to distribute the works in question was granted to HSP. As such, HSP was authorized to distribute the Artists’ live performance and studio recordings for their benefit. Nevertheless, the Artists continue to complain that HSP has violated even a nonexclusive license by granting third parties exclusive distribution rights.
During litigation, the Artists learned that HSP entered into, a Letter of Agreement (“Agreement”) with Nugs.Net Enterprises, LLC (“nugs.net”).380 Under the Agreement, HSP provided audio recordings of PBS songs, concerts and other performances, as well as recordings from the Artists’ other group, solo and side projects as content (“Content”). Nugs.net then released the Content through its on demand service.381 The Artists complain that the Agreement creates an exclusive license in the live performances and studio recordings and impairs the Artists’ ability to license their own works to other parties.
The Agreement provides:
During the Term of this Agreement, nugs.net shall be the exclusive distributor, without limitation, of Artists’ digital music content via Internet Protocol (IP) networks for the following Content items:
a. Select recordings from Artist’s live concert archive to be mutually determined by the Parties and distributed through the COD service during the Term of this Agreement.
b. Select studio recordings and albums from Artist’s archive and catalog to be mutually determined by the Parties and distributed through the COD service during the Term of this Agreement. It is agreed by the Parties that select mutually determined studio recordings and albums from Artist’s archive and catalog shall also be released through the COD service on a non-exclusive basis.382
*673The Agreement also provided that catalog works released through the COD service would be on a nonexclusive basis.383
HSP provided Content to nugs.net for distribution. Having already concluded that HSP held a nonexclusive license over the works in question, mere distribution is not a violation. However, the Artists assert that by contracting for an exclusive right of distribution, HSP has impaired their rights. Licensees are allowed to enter into exclusive or nonexclusive agreements for distribution of the works they license. The right to exclusive distribution from a nonexclusive licensee does not bind the owner of the work nor does it prohibit the owner from granting additional nonexclusive licenses to others.384 HSP’s ability to grant a distribution contract is limited by the terms of its own license. As the holder of a nonexclusive right to distribute, HSP can limit its own right to distribute through others, but it cannot limit the owner from granting additional licenses. The Court reads the Agreement to limit HSP’s right to grant additional distribution licenses in favor of Nugs’ exclusive right. It does not limit the Artists from granting additional rights to distribution; it can only convey the right to nonexclusive distribution.
3. Revocation of the Nonexclusive License
A nonexclusive license may be revocable or irrevocable, depending on whether the license is supported by consideration.385 HSP argues that its nonexclusive license is irrevocable because it was acquired for consideration.
HSP avers that it advanced marketing and production expenses in connection with the Content; therefore, consideration was given to the Artists. In its proof of claim and as part of this suit, HSP has demanded repayment of all advances for production costs and marketing given in connection with the Artists’ works. If the payments are loans repayable by the Artists, HSP did not give consideration for the production costs and the Artists did not receive any consideration. The repayment of the production expenses makes the works self-published.
HSP also argues that accounting to the Artists for revenues received and expenses paid in connection with the production and sale of music constitutes additional consideration. Pretermitting the fact HSP failed to account to the Artists for the costs and revenues derived from music sales until trial, the Court finds simply accounting for revenue or a loan is not consideration because both are part of HSP’s obligation under its status as a business manager.
As previously held, HSP assumed the responsibility of business manager. As such, it insisted on collecting all revenues for digital and CD sales. Under this authority, it also controlled and paid the expenses of production. Accounting to the Artists for expenses and revenues was part and parcel of its duties as a business manager. Thus performance of accounting services in this context does not constitute additional consideration for the license because HSP already owed the Artists a duty to account. The discharge of a duty one is already bound to perform is not consideration.386
For the above stated reasons, the Court finds that the license is revocable at will because it was granted without consider*674ation. When the Artists terminated the PMA, they evidenced a desire to end their relationship with HSP. HSP’s license to distribute was terminated effective November 7, 2009.
4. Copyright Infringement for Non-PBS Works
During the course of their relationship, HSP frequently sold, online and through merchandise tables, works of the Artists generated before the PMA was signed. The Artists complain that HSP had no right to sell their works. As previously held, the Artists were aware of HSP’s sale of merchandise on tables during performances. The Artists admitted at trial they both knew and accepted HSP’s activities without objection. They also testified to providing music CDs for HSP to sell along side its merchandise. Therefore, the Court concludes the Artists granted HSP an implied license to sell both merchandise and music prior to the execution of the PMA.
After the execution of the PMA, HSP also sold non PBS works. Because the Stipulation does not address this issue, the Artists complain that HSP violated their copyrights on these works. HSP argues it sold merchandise and music it received from the Artists on their behalf and with the Artists’ authority and knowledge. The evidence supports a finding that the Artists delivered music and merchandise to HSP to market and sell through the internet and at performance venues.387 As a result, this Court finds the Artists were fully aware of HSP’s actions and authorized HSP to sell their individual works.
5. The Artists’ Claim for Royalties
Royalties were paid to all third party songwriters for works used by the Artists. This includes the Artists if the work predated the PMA. In addition, royalties were also paid to third party publishers for repressed works. What is at issue are unpaid royalties claimed by the Artists as songwriters on works written after the PMA was signed, as well as publishing royalties for works produced by the Artists and digital royalties owed to the Artists as performers.
Because the Court has found the Artists incurred the costs of production for all works created during the PMA, the Artists are entitled to the revenues derived from their sale. While royalties to the Artists as songwriters might be owed if the works were performed by another, because they were performed by the Artists, no royalties are due. The Court also finds the Artists, as both self-publishers and performers, are entitled to revenues obtained through digital downloads of their music.
Because the Court finds that all revenues for works written or performed by the Artists during the PMA belonged to the Artists, claims for royalties are dupli-cative and denied.
G. Interest on Award
HSP raised two (2) independent grounds for its interest claim, 28 U.S.C. § 1961 388; and M.G.L. c. 231 §§ 6B and 6C.389 The Artists also requested interest in their Counterclaim against HSP.
1. Interest Claims under 28 U.S.C. § 1961 (Post-Judgment Interest)
HSP’s claim includes $81,482.63 in interest for the period of January 1, 2010 to November 26, 2010. Federal law authorizes bankruptcy courts to award post-judgment interest on any money judgment *675in a civil case recovered in a district court.390 The statute provides that interest is calculated from the date of the entry of the judgment. Once a judgment is obtained, it bears interest without regard to the elements for relief composing the judgment.391 Federal courts have routinely held that a bankruptcy proceeding is a “civil case” under 28 U.S.C. § 1961(a) and judgments in bankruptcy proceedings accrue post-judgment interest.392
Under the plain language of 28 U.S.C. § 1961, interest on the amount awarded accrues from the entry of this judgment, not before.393 The prevailing party is only entitled to post-petition interest from the date of judgment. The $81,482.63 claimed by HSP in its proof of claim is not post-judgment interest and cannot be allowed.
HSP and the Artists may be entitled to post-judgment interest on their awards upon entry this Court’s ruling.
2. Prejudgment, Prepetition Interest Claims under M.G.L. c. 231, § 6B and 6C
(a) HSP Prepetition, Prejudgment Interest
Although the PMA does not contain an interest provision, HSP argues that Massachusetts law mandates the imposition of prejudgment interest.394 M.G.L. c. 231, § 6B reads:
In any action in which a verdict is rendered or a finding made or an order for *676judgment made for 'pecuniary damages for personal injuries to the plaintiff or for consequential damages, or for damage to property, there shall be added by the clerk of court to the amount of damages interest thereon at the rate of twelve per cent per annum from the date of commencement of the action even though such interest brings the amount of the verdict or finding beyond the maximum liability imposed by law. M.G.L. c. 231, § 6B. (emphasis added).
M.G.L. c. 231, § 6C, which deals with contract actions, similarly provides:
In all actions based on contractual obligations, upon a verdict, finding or order for judgment for pecuniary damages, interest shall be added by the clerk of the court to the amount of damages, at the contract rate, if established, or at the rate of twelve per cent per annum from the date of the breach or demand. If the date of the breach or demand is not established, interest shall be added by the clerk of the court, at such contractual rate, or at the rate of twelve per cent per annum from the date of the commencement of the action ... M.G.L. c. 231, § 6C (emphasis added).
M.G.L. c. 231, § 6B is inapplicable in this case because Porter, Batiste and Stoltz did not commit a tort against HSP. M.G.L. c. 231, § 6C also is inapplicable with regard to prepetition interest owed to HSP because neither PBS nor Porter, Batiste or Stoltz individually breached the PMA.
As explained below, even if this Court’s ruling can be construed as a finding that the Artists’ non-payment of HSP’s reimbursement demand 395 constitutes a breach of the PMA for purposes of M.G.L. c. 231, § 6C, HSP’s claim for prejudgment interest can only extend until the dates Porter, Batiste and Stoltz filed their bankruptcy petitions. Specifically, the claim from Porter can only be allowed for the ten (10) month period between HSP’s November 20, 2009 demand and the date Porter filed his bankruptcy petition. Prejudgment interest can only accrue against Stoltz for the nine (9) month period between the filing of HSP’s Complaint against Stoltz and the date Stoltz filed his bankruptcy petition. Prejudgment interest can only accrue against Batiste for the twenty-one (21) month period between the filing of HSP’s Complaint and Batiste’s bankruptcy filing.396
*677Section 502(a) of the Bankruptcy Code provides that “a claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects.” However, Section 502(b)(2) provides that “except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that — (2) such claim is for unmatured interest.” (Emphasis added).
Pursuant to section 502(b)(2), the accrual of interest on prepetition claims are suspended when a bankruptcy petition is filed.397 Section 502(b)(2) provides that the claim is disallowed to the extent that “such claim is for unmatured interest.” Thus, section 502(b)(2) prohibits payment of postpetition interest on prepetition unsecured claims.398
The Fifth Circuit Court of Appeals has found that “allowing the accrual of postpe-tition interest in favor of one (1) creditor would be “inequitable” to other creditors.399 Ultimately, 502(b)(2) “protects the debtor and its other creditors from the assertion of claims for amounts in excess of the benefit actually conveyed to the debtor.”400
Similarly, a Massachusetts bankruptcy court ruled that prepetition, prejudgment interest might be contingent, disputed or unliquidated, but not unmatured.401 The court noted that while section 502(b)(2) prohibits the allowance of unmatured interest claims, the amounts accruing pre-petition are allowed. It opined that “if Congress intended that contingent claims for interest be disallowed, the language of section 502(b)(2) would have included both the words “contingent” and “unliquidat-ed.” 402
In the Lamarre decision, the claim for breach of contract was, as of the petition date, disputed and unliquidated. During the bankruptcy it became fixed and liquidated. At that time, the amount of interest accruing under state law also became a fixed and liquidated amount.
*678Section 502(b)(2) does not require the exclusion of so much of the interest as accrued up to the petition date simply because the amount was unliquidated and disputed on the petition date. It requires that, once the amount of interest that accrued became fixed and liquidated, only that portion that accrued on or before the petition date can be allowed. This result is in keeping with the one case that expressly considered and discussed the issue.403
Under Massachusetts law, HSP is entitled to prejudgment interest.404 However, since the Court has allowed HSP’s quantum meruit claim only as an offset against any amount due the Artists, HSP is not entitled to a judgment and its entire claim is disallowed.
3. Interest on PBS’ Claims Against HSP
Section 502(b)(2) does not prohibit the imposition of prejudgment interest for claims by debtors against third parties. The purpose of awarding prejudgment interest is to compensate a party for the loss of the use of his money in order to make the party whole.405 Prejudgment interest in contract actions is to be calculated from the date of “breach or demand.” In Sargeant v. Commissioner of Public Welfare, 383 Mass. 808, 423 N.E.2d 755 (1981), the Supreme Judicial Court held that where the record establishes the date of demand in a contract action, prejudgment interest should be awarded from that date.406 However, since the Artists are not entitled to a compensatory award other than attorney’s fees, costs, and those associated with the injunc-tive relief, no interest is due at this time.
IV. Conclusion
For the reasons set forth above:
1. HSP’s proofs of claim in the bankruptcy cases of Porter and Stoltz are disallowed in their entirely;
2. HSP’s claims for breach of contract, violation of MUTPA and nondischargeability are Denied;
3. The Artists’ claims for breach of contract, breach of fiduciary duty, and MUTPA violations are GRANTED in part and denied in part;
4. The Artists’ claims for copyright infringement are DENIED.
Based on the findings of this Court:
1. Neither HSP nor the Artists are owed sums under the PMA due to offsetting claims;
2. HSP must account for any and all proceeds received from the sale, license, or use of merchandise or music of the Artists after June 2012 and remit the gross proceeds to the Artists’ Trustee within fourteen (14) days.
3. HSP must immediately notify all parties with whom it contracted or authorized any distribution, sale, license or use of the Artists’ works of the termination of its nonexclusive license in same and the corresponding termination of the third party’s rights. It must also instruct the address*679ees to contact Trustee should they possess any property or revenue belonging to Porter, Batiste Stoltz, or PBS. Copies of confirming correspondence should be provided to the Artists within fourteen (14) days of this ruling.
4. HSP must deliver all merchandise, CDs or other product purchased or produced during the term of the PMA to the Trustee. To the extent the merchandise or music is in the hands of a third party, HSP must recover said property and deliver it to the Trustee.
5. This ruling may require the amendment of the Artists’ tax returns for tax years 2006, 2007, 2008 or 2009. To the extent amendments are possible, the Artists will be reimbursed for all fees and costs associated with the preparation of amended tax returns, as well as any penalties or interest payable on any taxes owed due to late filing or change in the amounts originally due. To the extent an amendment generates a refund, HSP is responsible for the payment of interest on the refund generated by the amended return at the federal rate from the date of the original tax return’s filing through the date of receipt of the refund. To the extent an amendment cannot be filed due to the intervention of time, HSP will be responsible for the additional refund amount which might otherwise be claimed with interest at the federal rate until paid. All amended returns or calculations in the event an amended return cannot be filed, are to be submitted to the Court and delivered to HSP no later than October 1, 2013.
6. This is a partial ruling and specifically reserves for later determination and after evidentiary hearing on award for the Artists’ attorneys’ fees and costs, as well as any amounts due under paragraph 4 above. The Court will notice a status conference between the parties to set the necessary pretrial deadlines and hearing date. This ruling will not be final until after these amounts have been determined and a judgment in accord with this Opinion and any later ruling is entered.
A judgment in accord with this Opinion will be separately rendered.
. HSP filed suit against George Porter, Jr., d/b/a Ora’s Publishing, Inc.; David Russell Batiste, Jr., d/b/a Not So Serious Music; Brian Stoltz, d/b/a Long Overdue Music; Porter, Batiste, Stoltz, L.L.C., a Louisiana Limited Liability Company; Bugaloo Music, a California Corporation; Screen Gems-EMI Music, Inc, a New York Corporation; Bug Music, a California Corporation; and Cabbage Alley Music, a California Corporation.
. Docket No. 10-1130, P-1.
. Id.
. As of each Debtors’ petition date, amounts collected totaled $25,279.12 for Porter; $1,004.88 for Stoltz and $0 for Batiste.
. Case No. 10-13553 (Porter) and Case No. 10-13554 (Stoltz).
. P-8 (Porter) and P-6 (Stoltz).
. POC No. 11 (Porter) and POC No. 2 (Stoltz).
. P-56, Adv. 10-1130 and 10-1139 (Porter) and P-34, Adv. 10-1131 and 10-1139 (Stoltz).
. Case No. 11-13158, P-1.
. P-1, Adv. 11-00163.
. P-11, Adv. 10-1130.
. Id.
. The Court notes that HSP's Massachusetts Complaint demanded $527,000, its post-trial brief requests $632,017.59, and its proof of claim $608,878.28. Variances in HSP’s demand are partially due to variations in its claim for non-tour expenses. E.g. Exh. 159 reflects $245,919.17 in non-tour expenses. At trial, counsel for HSP represented that many of the itemized charges were neither part of HSP’s claim nor were actually owed by the Artists. However, even in post-trial briefing, HSP utilizes the full amount claimed on Exh. 159 in the calculation of the amounts owed.
. P-1, Adv. 10-1130.
. P-268 and 269, Adv. 10-1130.
. T.T. Porter, Stoltz; Exh. 151 A-C.
. T.T. Porter, Stoltz, Chabaud.
. T.T. Stepanian.
. T.T. Stepanian; Exh. 62 at 1809.
. Porter included Stoltz and Batiste rather than meet with Stepanian alone because he *621was interested in Stepanian's ideas to promote PBS.
. T.T. Stepanian.
. Id.
. Id.
. T.T. Stepanian, Porter, Stoltz.
. T.T. Stepanian.
. T.T. Stepanian, Malangone.
. T.T. Stepanian.
. Id.
. T.T. Stepanian, Porter, Stoltz, Malangone.
. T.T. Stepanian, Porter, Stoltz.
. Exh. 1.
. Id. at ¶ 1.
. Id. a^21.
. Id. at ¶ 4.
. Id. at II 6(b).
. Id. at ¶ 6(a).
. Id. at ¶¶ 3(a)(iv), 7, 8.
. T.T. Porter, Stepanian, Stoltz.
. T.T. Stepanian, Malangone.
. Exh. 66 at 2007; T.T. Porter.
. T.T. Malangone.
. T.T. Stepanian.
. T.T. Stepanian, Dyer.
. T.T. Stepanian, Malangone, Dyer; Exh. 61 at 1798.
. T.T. Malangone, Dyer. Although electronically separated, the various deposits and withdrawals of HSP, the Artists and Bonerama were still physically combined.
. Id. (PBS’ account contained deposits and withdrawals for PBS as well as expenses of the individual artists. Porter, Stoltz and Batiste’s individual earnings were still deposited into HSP’s checking account as were some earnings and withdrawals of PBS). Exh. 61 at 1798.
. T.T. Malangone.
. Exh. 61; T.T. Dyer 89:13-25, 90, 92:11-23.
. E.g. Exh. 20. Most entries reflected on PBS’s Journal for 2008 are by batch transfer from HSP’s accounts.
. T.T. Porter, Malangone.
. T.T. Porter, Stepanian, Stoltz, Batiste.
. T.T. Dyer.
. T.T. Stoltz, Porter, Stepanian, Malangone.
. E.g. Exh. 163.
. Exh. 25 at 382-384, 200(H).
. Exhs. 17, 19 at 230, 234, 236, 238. HSP’s proof of claim reflects payments to Stoltz of $32,520.00; to Porter of $40,589.99 and to Batiste for $25,570.00.
. Exh. 25 at 387-388. HSP took expense deductions for the salary payments on its books.
. Exh. 24 at 370. (HSP asserts that Porter resigned before HSP was able to correct the 2008 1099’s. HSP avers that it would have corrected the 1099’s before October 15, 2009 if Porter had not resigned on September 29, 2009. (P-263, HSP's Proposed Findings of Fact at 23). The Court finds this odd because Porter signed the 2008 tax return on September 14, 2009 (two weeks before he sent his official termination letter, which was not effective until November 7, 2009). HSP should have provided PBS’ tax preparer with the corrected information. Instead, HSP did not reissue the 1099’s to reflect zero income until advised to do so by its tax accountant in 2011. (P-263, HSP's Proposed Findings of Fact at 23).
. Exh. 25 at 387-388; Tax year 1099 forms for 2008 were issued to Porter for $115,700.00; Stoltz for $46,400.00 and Batiste for $34,900.00. Exh. 200M; T.T. Debiasi at 164.
. Exh. 25 at 382-384; Exh. 163; T.T. Ma-langone.
. T.T. Debiasi.
. Exh. 26.
. Exh. 146.
. T.T. Stepanian, Porter, Stoltz; Exh. 209.
. T.T. Malangone.
. Id.
. Id.
. T.T. Porter.
. Exh. 65 at 1957, 1961; T.T. Porter.
. Exh. 8.
. Id. (PBS' Profit and Loss indicates $9,010.00 in non-tour related costs).
. T.T. Stepanian, Dyer, Malangone, Porter, Stoltz.
. Id.
. T.T. Porter, Chabaud; Exh. 12.
. Id.
. Id.
. Exh. 12.
. Exh. 8. PBS profit and loss statement for 2006 was not prepared until at least May of 2011. All other financial statements were accompanied by an email transmittal and in accord with the trial testimony, the Court finds that this statement was not sent to PBS prior to the institution of this suit.
. T.T. Stepanian and Malangone.
. T.T. Malangone.
. E.g. Exh. 37, 65 at 1924-1925, 140.
. E.g. Exh. 65 at 1924-1925, 1928, 1930.
. T.T. Stepanian. Blue Mountain commissions were deducted from deposits Blue Mountain collected for the Artists before any amounts were sent to HSP.
. T.T. Malangone (The Artists were on the road and settled expenses after each show. In 2006, the Artists disbursed money to crew and themselves. HSP then received the net money in house. In 2007, HSP received PBS’ gross performance fees, which went into HSP's checking account. In some instances, HSP made disbursements through HSP's checking account to the Artists and crew. In other instances, the Artists paid the crew in cash.)
. T.T. Stepanian.
. T.T. Stepanian, Dyer, Malangone, Porter, Stoltz.
. T.T. Dyer at 161-162; Malangone, Stepa-nian.
.Exh. 19.
. T.T. Porter, Stoltz, Stepanian, and Malan-gone.
. Exh. 19 at 301, 320, 326. Dyer did send all three members a four-page report including PBS merchandise and music sales, as well as a partial P/L reflecting January through August 2007 figures in March 2008. The partial P/L is illegible and there was no evidence that a legible copy was forwarded to the Artists. In any event, assuming the Artists could read the document, it reflected a year to date loss of only $13,000. Exh. 19 at 186-190, paginated with email transmitted as pgs. 1-5, versus Exh. 19 at 195 not marked with email transmittal pages on following documents (at 196-198).
. T.T. Stepanian at 218.
. T.T. Stepanian, Porter.
. T.T. Stepanian.
. T.T. Freidman.
. T.T. Dyer at 191.
. Exh. 14.
. Exh. 19 at 206-208.
. Exh. 14.
. Id.
. Exh. 200.
. Id.
. T.T. Dyer, Friedman.
. Exh. 200; T.T. Friedman.
. T.T. Exh. 200(b) and Exh. 17.
. Exh. 18.
. Id. at 181.
. Exh. 20 at 344-346 (HSP used batch journal entries to move expenses taken on its books to PBS’ QuickBooks Journal); T.T. Dyer at 227:10-25, 228-230: 1-13; T.T. Ma-langone.
. T.T. Dyer.
. Exh. 182.
. T.T. Porter.
. T.T. Stepanian, Porter, Stoltz.
. Exh. 159.
. Exh. 35.
. T.T. Porter, Stoltz.
. T.T. Stepanian.
. T.T. Porter.
. T.T. Porter, Stepanian, Stoltz, Malan-gone.
. Exh. 62 at 1831-1833.
. Id. and Exh. 1.
. T.T. Debiasi at 168, Dyer. As of May 2011, Stepanian had not filed tax returns for 2008, 2009 or 2010. HSP filed its 2008 tax return on October 15, 2011. T.T. Weinstein at 12; Debiasi at 167.
. Exh. 26.
. Id.
. T.T. Porter, Stepanian.
.P-262 at 12.
. In order to ascertain the debts due to and from each of the parties, a review of the source documents and contemporaneous booking entries has been made. The Court has calculated tour expenses from source documentation or individual book entries when verifiable. Batch or lump sum entries from HSP’s books without any detail as to the dates, amounts or sources of the expenses comprising the total have been eliminated.
. Exh. 8; Exh. 34.
. Exh. 13 ($150,647.00); Exh. 34 ($150,-109.89).
. Exh. 20; Exh. 34.
. Exh. 29; Exh. 24.
. Exh. 5.
. HSP claims $22,637.65 for Stepanian’s travel costs in 2005 and through April 2006. Cf: Exh. 2 which reduces HSP's claim for Stepanian’s personal travel to $18,404.87. It also alleges $10,363.78 in merchandise purchases during the same period are reimbursable under the PMA. Exh. 159; Exh. 5, T.T. Stepanian.
. T.T. Stepanian, Porter.
. Exh. 1 ¶ 6(c).
. T.T. Stepanian, Porter.
. T.T. Malangone; Exh. 172 at 6216.
. Exh. 159.
. T.T. Stepanian, Porter, Stoltz.
. Id.
. Exh. 197, 198, and 212; T.T. Stepanian.
. Id.
. Id.
. Exh. 87; T.T. Stoltz.
. T.T. Porter, Stoltz.
. Exh. 237; Stipulation is for sales data through July 2012.
. Exh. 36 at 810. This amount does not include fees of $14,000.00 paid to Page McConnell, which have been added to the costs of MooDoo’s production. See Exh. B.
. Id. at 828.
. Exh. 26 at 827.
. Exh. 36 at 144.
. Id. at 824.
. Id. at 828.
. Id. at 836.
. Originally claimed for $41,400 but adjusted during trial. The total expenditures for the photography session, airfare, hotels, etc. are $39,891.24. Exh. 164 at 5624.
. Exh. 46, 159(L)
. Exh. 50, 159(P). Stoltz forwarded, without comment, a solicitation email from Lee-ways to Stepanian on August 28, 2006. Stoltz forwarded another solicitation email from Leeways to Stepanian on September 10, 2007. Stoltz added that he was “just passing this along in case you don’t have it.”
. Exh. 51, 159(Q). Madison House Publicity charges are reflected on twenty (20) invoices beginning in June 2007 and charged in August-December 2007, January-December 2008, January and February 2009. The charges were paid from HSP’s checking account and booked into promotional, advertising or publicity expenses.
. Exh. 52, 53, 159(R). Nimbit charges are for website maintenance and production of CDs.
. Exh. 55, 159(T). Although an invoice for only $1,600 in advertising charges is included, HSP's records reflect seven (7) ads placed in 2007 in Offbeat for a total of $7,575.00 and five (5) more in 2008 for $2,650.00.
. Exh. 56, 159(U). Two (2) charges of $1,350.00 were paid through HSP’s checking account in 2007 and booked into promotions. Exh. 56 at 1681, 1683.
. Exh. 159(W). Richard Quindry was used by HSP as a photographer for advertising on internet websites. Actual charges booked to PBS for 2007 are $3,702.90 and $369.00 in 2008.
. Exh. 57, 159(X). HSP’s books reflect six (6) ads were placed in Relix for a total cost of $12,316.00.
. Exh. 159(Y). Stocker was used by HSP for the Artists’ web page design. Although HSP produced only one (1) invoice for $2,000.00 dated October 2006, according to HSP's books, Stocker charged $2,352 in 2007 and $2,218.00 in 2008. All expenses were paid by HSP through its checking account and booked to PBS website design.
. Exh. 159(Z). Domeniek Tucci was employed by HSP to maintain the Artists’ MySpace pages. (Bills from January 21, 2008 through November 24, 2008.)
. Exh. 57, 159(AA). Zenbu Magazines charged $550.00 to place a skyscraper banner ad on www.jambands.com from 9/23 to 10/23/08. Exh. 57 at 1734. Documents produced at trial also include a check from HSP to Zenbu for $1,300 on a bill dated 8/15/08. Exh. 57, at 1736.
. Exh. 8, 13, 20, 26.
. Expenses claimed for the services of Karen Stella Consultants are omitted by admission at trial. T.T. Malangone. Regardless, Karen Stella represented to the Artists that she worked at HSP, not that she was a consultant independently charging the Artists for travel arrangements. Exh. 116 at 2695-2696. The Court finds that the Artists were not aware of any charges by Stella and did not approve them in advance. Therefore, under the terms of the PMA they are disallowed. HSP’s post-trial proposed findings of fact (P-263) states that "Karen Stella does not appear on the PBS or HSP Profit and Loss Details. In fact, Stepanian sent an email to Batiste on August 7, 2007, stating Karen Stella was not the Artists’ agent and she was being paid directly by HSP. Exh. 117 at 3696.”
. T.T. Stepanian, Porter.
. T.T. Malangone.
. T.T. Stepanian, Malangone.
. HSP exerted increasing control over expenses beginning in Februaiy of 2007. T.T. Malangone, Porter.
. T.T. Dyer; Exh. 66 at 2007.
. T.T. Stepanian.
. T.T. Stepanian, Malangone, Dyer.
. An accounting of 2007 gross performance fees was not delivered until October 2008. An accounting of gross performance fees for 2008 and 2009 was not delivered until May 2011.
. Merchandise and music sales reports were delivered in March of 2008 and August of 2009. Exh. 19 at 301, 320, 326 and Exh. 36. Porter also received an individual merchandise report in July 2008. Exh. 19. Each was materially incomplete as it failed to reflect substantial sales deposited into HSP’s checking account.
. T.T. Stepanian, Porter.
. E.g. Exh. 37.
. T.T. Stepanian, Malangone.
. Exh. 37 at 917 et. seq.
. T.T. Malangone.
. Exh. 65 at 1926, 1927, 1933, 1935, 1939, 1961, 1968-71, 1976, 1977-1978.
. Exh. 65, 140.
. Guckenberger v. Boston University, 957 F.Supp. 306, 316 (D.Mass.1997); Sterilite Corp. v. Continential Casualty Co., 20 Mass.App.Ct. 215, 479 N.E.2d 205, 208 (1985), superseded on other grounds, 397 Mass. 837, 494 N.E.2d 1008 (1986).
. Michelson v. Digital Financial Services, 167 F.3d 715, 720 (1st Cir.1999).
. Situation Management Systems, Inc. v. Malouf, Inc., 430 Mass. 875, 724 N.E.2d 699, 704 (2000).
. Opinion at 656-61; T.T. Stepanian, Jaco-dine, Resnick at 102-103, Templeman.
. Exh. 151 (A — C).
. T.T. Malangone, Porter.
. T.T. Stepanian.
. Exh. 116 at 3680.
. Exh. 116 at 3680.
. Exh. 116 at 3707 (Stepanian corrects Porter when Porter indicates PBS is paying crew.)
. T.T. Stepanian; Exh. 106.
. T.T. Stepanian.
. Exh. 36 at 805; Exh. 34, flowcharts for performances.
. In response to insufficient income from PBS, the Artists began taking side performances and split performance revenue they received on the road to pay living expenses. Exh. 7 at 68-78. Although accounted for by PBS, Stepanian objected to this practice and insisted on the deposit of all revenues into HSP’s account. The Artists were unaware that all of the monies received by HSP were being consumed by HSP’s expenditures leaving nothing for them to share. The Artists assumed that HSP was holding profits because from May 2006 to July 2008, it never explained or attempted to account to the Artists for revenues earned and expenses incurred. T.T. Porter, Batiste, Stepanian.
. T.T. Stepanian.
. T.T. Porter, Stoltz.
. T.T. Porter, Stoltz.
. Bernard Resnick also testified that a business manager should prepare tour budgets and analyze particular offers to make sure the performance is financially sound, viable and something the artist should undertake. Res-nick at 97.
. The only evidence of a conflict between PBS and its members regarding venue dates was in relation to a festival performance. The conflict involved the Funky Meters, a band comprised of Porter, Batiste and Stoltz, along with others. Exh. 81 at 2205-2206. The Court notes that the PMA recognized the Artists' right to perform with the Funky Meters. No other evidence of conflicts was presented. Exh. 1.
. Exh. 132.
. The gross performance fees were: (2006) $92,605 (8 months/annualized $138,906); (2007) $150,647; (2008) $152,379; and (2009) $159,512.50.
. Given that the Artists had always been profitable in touring and they continued to play the same number of venues for the same or better terms, they had little reason to expect that touring was also losing money. In addition, HSP was also promoting music and merchandise sales in an effort to generate additional income for the Artists. PBS was also in the dark as to the size of HSP's spending on nontour related items.
. T.T. Stepanian, Malangone, Porter, Batiste, Stoltz.
. T.T. Porter, Stoltz.
. T.T. Porter, Stoltz, Stepanian. Stepanian testified that he never used the words "personally liable” with the Artists. His statements indicated that he would personally provide the Artists with the resources to advance their careers. Stepanian used similarly vague words during trial. For instance, he stated that he would help the band survive while building an infrastructure. He admitted to telling Porter than the cost of the Clinch photos were not coming out of “gig money.” Stepanian also testified that Porter and Stoltz were seriously concerned about not creating losses.
. T.T. Stepanian, Porter, Stoltz; Exh. 60.
. Exh. 184.
. Exh. 132.
. Exh. 60.
. Capshaw testified that common sense was lacking in this case.
. Exh. 60.
. T.T. Porter, Stoltz.
. Exh. 19 at 334-335; T.T. Dyer, Porter, Stoltz. It is worth noting that the 2007 P/L produced in October 2008 incorrectly reflected approximately $62,000 in losses, while actual losses were closer to $200,000 as of 2007 year end.
. T.T. Stepanian.
. Exh. 12.
. Exh. 151(D) (2006 PBS Tax Return); Exh. 8 (2006 P/L prepared May 2011).
. Exh. 13 (2007 P/L); Exh. 17 (2007 PBS Tax Return).
. Exh. 18 at 183.
. Exh. 132.
. Id.; T.T. Stepanian.
. T.T. Malangone; E.g. Exh. 35 at 773.
. T.T. Porter, Stoltz.
. T.T. Stepanian.
. Id.
. Exh. 96 at 1670.
.Exh. 47.
. Exh. 159(G).
. Exh. 159(G).
. T.T. Porter, Stoltz.
. T.T. Stepanian, Stoltz.
. Exh. 60.
. T.T. Stepanian, Stoltz.
. T.T. Stepanian, Porter, Stoltz. Exh. 60. HSP offered no credible proof that it provided any other explanation to Stoltz or responded to Porter's inquiry.
. T.T. Stepanian.
. Id.
. Id.
. Id.
. T.T. Porter and Stoltz.
. Exh. 159. Madison House fees were included in publicity, promotion and advertising.
. T.T. Dyer.
. Exh. 159(L).
. From 2006 through 2009 HSP utilized Fort Point, David Stocker, Nimbit, Richard Quindry, Domenick Tucci, JamBase and Fan Marketing to promote PBS through its website.
. T.T. Stoltz.
. T.T. Porter, Stoltz, Batiste.
. T.T. Stoltz.
. Exh. 159(U).
. T.T. Porter.
. Exh. 159(M), (T), (X), (AA). The Court notes that HSP actually spent $31,172 in advertising costs none of which were approved by the Artists. Only these invoices were produced.
. T.T. Stoltz; Exh. 55.
. T.T. Stoltz. See also Exh. 128 at 3796 (email from Porter regarding an inquiry from Zumbu Media regarding Relix). Again, the email is a general solicitation without specific pricing. It is also worth noting that the email dated October 1, 2007 cannot support ads placed previously in Relix on February 2007 and April/May 2007.
. T.T. Porter and Stoltz.
. Exh. 50 at 1565. The Leeway's ad cost $1,520.00.
. T.T. Stepanian.
. T.T. Stepanian, Porter, Stoltz.
. T.T. Porter.
. T.T. Porter, Stepanian.
. T.T. Stepanian, Porter.
. Exh. 1 ¶ 6(c).
. Exh. 159 (B, C, D, I, J, K, R, S, V) summarized at 23-24, supra.
. E.g., Exh. 87. (Stoltz email suggesting HSP inquire as to PBS hooded sweatshirts dated March 2006). The Court notes that while sweatshirts were ordered, HSP did not do so until October of 2007 or nineteen (19) months later.
. T.T. Stepanian.
. T.T. Dyer, Malangone, Stepanian.
. Exh. 36 at 132. Costs incurred in connection with the production of PBS Universe, Live from Providence, RI, Live from Burlington, VT, CD and MP3 for Burlington, VT, Live from Troy, N.Y., Live from New York, N.Y., Live from Savannah, GA, Live Boulder, Co., Live Charlotte, N.C. are included in merchandise costs. As previously indicated, costs for performance fees paid to Page McConnell have also been added. Infra at fn 147.
. Stoltz's Up All Night recording cost $8,309.20 to duplicate, produce, mix and master. Exh. 36 at 155.
. Production costs for the It’s Life recording by Porter individually are $18,871.26 Exh. 36 at 144, 147.
. Exh. 94 (MooDoo invoices for mixing, studio, editing, cover charges).
. Exh. 40, 88, 94, 117 at 3746. (Porter advising of musician, studio, mastering, cover expenses.) Exh. 85 at 2949, 2951, 2952, 2962, 2972, 2978 (Stoltz reporting musician, mixing, studio charges).
. Opinion at 656-61.
. HSP seeks reimbursement of the $323,719.97 it "advanced” to the band members between November 2007 and November 2008. The actual amounts distributed to the Artists are reconciled after the calculation of revenue and expenses. However, a portion of the amounts delivered to the Artists, collectively $204,000.00 received between November 2007 and November 2008 are separately discussed because the Court finds they were delivered under distinguishing circumstances.
. Exh. 17, 19 at 230, 234, 236, 238; HSP POC No. 11.
. The Court acknowledges that some exceptions to this rule exist, but are inapplicable to the facts of this case.
. T.T. Stepanian, Stoltz, Porter and Batiste.
. Exh. 17, 19 at 230, 234, 236, 238; HSP POC No. 11.
. Exh. 20 at 342, 347.
. Exh. 163.
. Exh. 25 at 388.
. T.T. Porter.
. Porter v. Harrington, 262 Mass. 203, 159 N.E. 530 (1928).
. Porter v. Harrington, 262 Mass. 203, 159 N.E. 530 (1928).
.E.g., Exh. 41 at 1418 (February 2008 email from Stoltz regarding accounting); Exh. 109 (September 2008 email from Porter requesting accounting); Exh. 116 at 3706 (March 2008 Porter complaining that HSP must be spending more than PBS is earning and demanding to know details.)
. AP Defendants’ Post-Trial Memorandum. P-259 at 3, 4.
. Opinion at 652-53.
. Exh. 1 ¶ 3(a)(iv).
. T.T. Stepanian, Porter and Stoltz.
. (Emphasis added). Exh. 1.
. E.g., Exh. 208.
. Opinion at 652-53.
. (Emphasis added) Exh. 1.
. E.g., T.T. Schimmel at 255-294; Debiasi at 600-640. See also generally T.T. Dyer, Friedman and Weinstein.
. Opinion at 652-53.
. Planned Parenthood Federation of America, Inc. v. Problem Pregnancy of Worcester, Inc., 398 Mass. 480, 498 N.E.2d 1044, 1051 (1986) (quoting Manning v. Zuckerman, 388 Mass. 8, 444 N.E.2d 1262 (1983)).
. Id. at 1051. Section 11 of MUTPA provides:
Any person who engages in the conduct of any trade or commerce and who suffers any loss of money or property, real or personal, as a result of the use or employment by another person who engages in any trade or commerce of an unfair method of competition or an unfair or deceptive act or practice declared unlawful by section two or by any rule or regulation issued under paragraph (c) of section two may, as hereinafter provided, bring an action ... .for damages and such equitable relief, including an injunction, as the court deems to be necessary and proper.
If the court finds for the petitioner, recovery shall be in the amount of actual damages; or up to three, but not less than two, times such amount if the court finds that the use or employment of the method of competition or the act or practice was a willful or knowing violation of said section two. For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence regardless of the existence or nonexistence of insurance coverage available in payment of the claim. In addition, the court shall award such other equitable relief, including an injunction, as it deems to be necessary and proper. The respondent may tender with his answer in any such action a written offer of settlement for single damages. If such tender or settlement is rejected by the petitioner, and if the court finds that the relief tendered was reasonable in relation to the injury actually suffered by the petitioner, then the court shall not award more than single damages.
If the court finds in any action commenced hereunder, that there has been a violation of section two, the petitioner shall, in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorneys' fees and costs incurred in said action. In any action brought under this section, in addition to the provisions of paragraph (b) of section two, the court shall also be guided in its interpretation of unfair methods of competition by those provisions of chapter ninety-three known as the Massachusetts Antitrust Act....
(Emphasis added)
. Peter J. Wied, Patently Unfair: State Unfair Competition Laws and Patent Enforcement, 12 Harv. J.L. & Tech. 469, 1999), (citing Fraser Eng’g Co. v. Desmond, 26 Mass. App.Ct. 99, 524 N.E.2d 110, 112 (1988)).
. Mechanics Nat’l Bank of Worcester v. Killeen, 377 Mass. 100, 384 N.E.2d 1231, 1237 (1979).
. Peter J. Wied, Patently Unfair: State Unfair Competition Laws and Patent Enforcement, 12 Harv. J.L. & Tech. 469, 1999) (citing Penney v. First Nat'l Bank, 385 Mass. 715, 433 N.E.2d 901, 905 (1982)).
. Mechanics Nat'l, supra, at 1237.
. Heller Fin. v. Ins. Co. of North Am., 410 Mass. 400, 573 N.E.2d 8, 12 (1991). See also Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 887 N.E.2d 244 (2008), (quoting Morrison v. Toys "R” Us, Inc., 441 Mass. 451, 806 N.E.2d 388 (1993)).
. Swanson v. Bankers Life Co., 389 Mass. 345, 450 N.E.2d 577, 580 (1983).
. Anthony’s Pier Four, Inc. v. HBC Assoc., 411 Mass. 451, 583 N.E.2d 806, 822 (1991).
. Den Norske Bank AS v. First Nat'l Bank of Boston, N.A., 838 F.Supp. 19, 28 (D.Mass. 1993) ("[A] section 11 claimant must show that the objectionable conduct attained 'a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce' ”).
. VMark Software, Inc. v. EMC Corp., 37 Mass.App.Ct. 610, 642 N.E.2d 587, 595 (1994).
. Quaker State Oil Refining Corp. v. Garrity Oil Co., Inc., 884 F.2d 1510, 1513 (1st Cir.1989).
. Massachusetts Farm Bureau Fed’n, Inc. v. Blue Cross of Mass., Inc., 403 Mass. 722, 532 N.E.2d 660, 664 (1989).
. Tagliente v. Himmer, 949 F.2d 1, 7 (1st Cir.1991).
. Aspinall v. Philip Morris Co., 442 Mass. 381, 813 N.E.2d 476 (2004).
. Herring v. Vadala, 670 F.Supp. 1082, 1087 (D.Mass.1987).
. Zayre Corp. v. Computer Sys. Of Am., Inc., 24 Mass.App.Ct. 559, 511 N.E.2d 23, 30 (1987).
. Trifiro v. New York Life Ins. Co., 845 F.2d 30, 33 n. 1 (1st Cir.1988).
. Giannasca v. Everett Aluminum, Inc., 13 Mass.App.Ct. 208, 431 N.E.2d 596, 599 (1982).
. Canal Elec. Co. v. Westinghouse Elec. Corp., 756 F.Supp. 620 (D.Mass.1990).
. Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486, 961 N.E.2d 1067 (2012).
. Madan v. Royal Indemnity Co., 26 Mass. App.Ct. 756, 532 N.E.2d 1214 (1989).
. NASCO, Inc. v. Pub. Storage, Inc., 29 F.3d 28, 34 (1st Cir.1994).
. Id. at 34.
. Pepsi-Cola Metropolitan Bottling Co. v. Checkers, Inc., 754 F.2d 10 (1st Cir.1985) (a debtor who willfully withholds payments on a properly owed debt to attempt to obtain an advantage in negotiations regarding future sales commits an unfair practice violative of chapter 93A).
. Levings v. Forbes & Wallace, Inc., 8 Mass.App.Ct. 498, 396 N.E.2d 149 (1979).
. HSP’s Post-Trial Brief, P-262 at 16.
. Doe v. Harbor Schools, Inc., 446 Mass. 245, 843 N.E.2d 1058, 1064 (2006).
. Karal v. Marken, 333 Mass. 743, 133 N.E.2d 476 (1956); Rood v. Newberg, 48 Mass.App.Ct. 185, 718 N.E.2d 886 (1999), rev. denied, 431 Mass. 1106, 733 N.E.2d 126 (2000).
. Collins v. Huculak, 57 Mass.App.Ct. 387, 783 N.E.2d 834 (2003).
. Peerless Ins. v. Swanson (In re Swanson), 231 B.R. 145, 149 (Bankr.D.N.H.1999); S.E.C. v. Sargent, 229 F.3d 68 (1st Cir.2000) (citing U.S. v. Chestman, 947 F.2d 551, 569 (2d Cir.1991) (en banc) ("in relying on a fiduciary to act for his benefit, the beneficiary of the relation may entrust the fiduciary with ... property ... Because the fiduciary obtains access to this property to serve the ends of the fiduciary relationship, he becomes duty-bound not to appropriate the property for his own use”); Baker v. Friedman (In re Friedman), 298 B.R. 487 (Bkrtcy.D.Mass.2003)).
. T.T. Stepanian, Porter, Stoltz, experts.
. HSP’s post-trial brief (P-262) at 6.
. Restatement (Third) of Agency Sect. 8.11 (2006) ("an agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know when (1) subject to any manifestation by the principal, the agent knows or has reason to know that the principal would wish to have the facts or the facts are material to the agent’s duties to the principal; and (2) the facts can be provided to the principal without violating a superior duty owed by the agent to another person.”); Restatement (Third) of Agency Sect. 8.01 (an agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship); 3 Am.Jr.2d Agency Sect. 205 (An agent is a fiduciary with respect to the matters within the scope of the agency. The agent or employee is bound to exercise the utmost good faith, loyalty, and honesty toward the principal or employer, regardless of whether the agency is one coupled with an interest, or the compensation given the agent is small or nominal, or that it is a gratuitous agency. An agent is not in a fiduciary relationship to the principal in matters in which the agent is not employed unless the nature of the agency is such as to create a confidential relationship in all matters.”; Ball v. Hopkins, 268 Mass. 260, 167 N.E. 338 (1929) (duty of utmost good faith); Jerlyn Yacht Sales, Inc. v. Wayne R. Roman Yacht Brokerage, 950 F.2d 60 (1st Cir.1991) ("As for even more basic affirmative duty of a fiduciary to disclose to his principal all material facts concerning the transaction with which he is entrusted ... Absent an agreement to the contrary, a broker must put his principal's interest first and refrain from competing with the principal as to the subject matter of the agency. Restatement (Second) of Agency, Sect. 393. He must be ‘up front’ with his principal at all times.”); Neuro-Rehab Associates, Inc. v. Amresco Commercial Finance, LLC, 2009 WL 649584 (D.Mass.) ("A duty to disclose may arise when (a) a party to a business transaction in a fiduciary relationship [or other similar relationship of trust and confidence] with the other party; or (b) disclosure would be necessary to prevent a partial or ambiguous statement of act from becoming misleading; or (c) subsequent information has been acquired which a party knows will make a previously representation untrue or misleading; or (d) a party knows a false representation is about to be relied upon; or (e) a party knows the opposing party is about to enter into the transaction under a mistake of fact and because of the relationship between them or the customs of trade or other objective circumstances would reasonably expect a disclosure of the facts.”) (citing Watts v. Krebs, 131 Idaho 616, 962 P.2d 387 (Idaho 1998); and Ho Myung Moolsan Co., Ltd. v. Manitou Mineral Water, Inc., 665 F.Supp.2d 239 (S.D.N.Y.2009)) ("it is settled law that an agent owes his principal a duty of loyalty, and must account for any profits realized in connection with his representation of the principal” (citing United States v. Miller, 997 F.2d 1010, 1018 (2d Cir.1993)).
. Exh. 132 at 3907. Stepanian wrote, "... "It’s been quite awhile (if ever) since we have sat down and discussed all of the band’s financial details, but it is clearly time that we do so. We have complied many detailed reports that will provide a complete insight into where we have been and where we need to go.”
. T.T. Porter.
. Bellerman v. Fitchburg Gas and Elec. Light Co., 31 Mass.L.Rptr. 123, 2013 WL 518526 (Mass.Super.2013) (citing Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486, 961 N.E.2d 1067 (2012)).
. Opinion at 633-39.
. The PMA provides for commission to continue after expiration or termination under certain circumstances. Exh. 1, ¶ 17 provides that (a) Subject to the provisions of section 17(b) hereof, upon the expiration or other termination of the Term of this Agreement for any reason, Artist shall continue to be responsible for obligations under Paragraph 6 above and Highsteppin shall continue to receive its full Commission hereunder in perpetuity with respect to gross monies and other considerations earned or received by Artist after the Term hereof pursuant to or in connection with any and all engagements, agreements, *663and contracts which Artist enters into during the Term, or substantially negotiates during the Term and enters into within six (6) months after the Term, and including any renewals, substitutions, extensions and any resumptions of such engagements, agreements, or contracts and any repeat of engagements that occurred during the Term, which occur within six (6) months after the Term hereof.” Paragraph (b) provides that "[w]ith respect to all musical and/or lyrical compositions written, published and/or exploited during the Term, for a period of five years after the expiration or other termination of the Term of this Agreement for any reason (“Post Termination Period”), Artist shall pay in cash to Manager the Commission hereunder from Gross Earnings generated in such reduced amount as equals the applicable percentage of all monies paid, earned, accrued, received or applied for Artist’s benefit during such yearly period, as follows: For the fist full year of the Post Termination Period, One Hundred Percent (100%) of the Commission rate in effect at the end of the Term ...”). HSP failed to prove or provide this Court with any information relative to commissions due for the period between termination of the PMA and trial or of revenues received. The Court denies any claim for post-termination commissions.
. Commissions on merchandise an music sales have been awarded based on stipulated revenues through June 2012. However, the Court declines to award commissions on any other revenues earned beyond those stipulated because they were not proven at trial. The Court also notes that commissions are only due, post-termination, on sales of musical compositions authored and produced during the PMA. This would only include revenues generated by MooDoo, Up All Night, and It's Life. Exh. 1, ¶ 17(b).
. In re Mercer, 246 F.3d 391, 403 (5th Cir.2001).
. In re Hudson, 107 F.3d 355, 356 (5th Cir.1997).
. Sect. 523(a)(2)(A). Turbo Aleae Investments, Inc. v. Borschow (In re Borschow), 454 B.R. 374 (Bankr.W.D.Tex.2011).
. Acosta, 406 F.3d at 373.
. RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1291 (5th Cir.1995).
. Bank of La. v. Bercier (In re Bercier), 934 F.2d 689, 692 (5th Cir.1991) (A debtor's promise ... related to a future action which does not purport to depict current or past facts ... cannot be defined as a false representation or a false pretense).
. Emphasis added. Allison v. Roberts (In re Allison), 960 F.2d 481, 483 (5th Cir.1992); see also In re Bercier, 934 F.2d at 692 ("to be a false representation or false pretense under § 523(a)(2), the false representations and false pretenses must encompass statements that falsely purport to depict current or past facts").
. See Wallace v. Davis (In re Davis), 377 B.R. 827, 834 (Bankr.E.D.Tex.2007); and Haney v. Copeland (In re Copeland), 291 B.R. 740, 760 (Bankr.E.D.Tenn.2003).
. See, RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1293 (5th Cir.1995) (citing Keeling v. Roeder (In re Roeder), 61 B.R. 179, 181 (Bankr.W.D.Ky.1986), quoted in In re Bercier, 934 F.2d at 692). See also In re Acosta, 406 F.3d 367, 372 (5th Cir.2005); In re Mercer, 246 F.3d 391, 403 (5th Cir.2001); Pentecost, 44 F.3d at 1293, as modified by the United States Supreme Court decision of Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) [regarding the proper standard of reliance]; Gateway One Lending and Finance v. Fuller (In re Fuller), 2012 WL 5989241 (Bankr.E.D.La.2012).
. See In re Mercer, 246 F.3d 391, 407 (5th Cir.2001) (citing Ames v. Moir, 138 U.S. 306, 311, 11 S.Ct. 311, 34 L.Ed. 951 (1891)).
. Id.
. 3 Collier on Bankruptcy II 523.08[l][e] at 52345 (15th Ed.).
. In re Melancon, 223 B.R. 300 (Bankr.M.D.La.1998).
.Id. at 319.
. Exh. 60.
. Exh. 9. The loss was reflected in retained earnings on the 2007 B/S rather than through a separate 2006 P/L.
. Exh. 13.
. Exh. 19 at 208.
. Id. at 210.
. Exh. 132, 184.
.T.T. Jacodine. Jacodine testified that he informs his clients whenever a check is received on the artist's behalf and reports monthly for all expenditures.
. See Exh. 50 at 1565 in 8/28/06, (Lee-ways). Exh. 52 at 1643 (Nimbit).
. Exh. 18.
. Exh. 17. (The 2007 tax return reflected a $227,000 loss which Porter assumed was attributable to HSP’s demand for repayment of the payments during 2007/2008. In fact, the losses were principally due to non-tour expenses paid in 2007 and increased touring overhead. The payments in 2008 and the expenses for 2008 were yet to be revealed.).
. Exh. 162 at 5374-5376; T.T. Stoltz and Porter.
. Stepanian testified that he accepted the duty to hold in trust the business of PBS and that he knew that he owed a fiduciary responsibility to the Artists.
.17 U.S.C. § 1101 provides;
(a) Unauthorized acts. Anyone who, without the consent of the performer [and performers] involved—
(1) fixes the sounds or sounds and images of a live musical performance in a copy or phonorecord ... [or]
(2) transmits or otherwise communicates to the public the sounds or sounds and images of a live musical performance ... shall be subject to the remedies in sections 502 through 505, to the same extent as an infringer of copyright.
. 17 U.S.C. § 115 provides: “[I]n the case of nondramatic musical works, the exclusive rights provided by clauses (1) and (3) of section 106, to make and to distribute phonorec-ords of such works, are subject to compulsory licensing under the conditions specified in this section.”
. Because this Court finds that the Artists granted an oral nonexclusive license to HSP to record and release performances, an analysis of whether HSP copied constituent elements of the Artists’ work or whether the Artists properly and timely filed the copyrights with the Copyright Office with respect to this litigation is unnecessary.
. 17 U.S.C. § 201(a).
. Community for Creative Non-Violence v. Reid, 490 U.S. 730, 737, 109 S.Ct. 2166, 2171, 104 L.Ed.2d 811 (1989).
. 17 U.S.C.A. § 106; See also, Bridgeport Music, Inc. v. Rhyme Syndicate Music, 376 F.3d 615, 621 (6th Cir.2004).
. Laws v. Sony Music Entertainment, Inc., 448 F.3d 1134 (9th Cir.2006).
. Section 101 of the Copyright Act expressly excludes nonexclusive licenses from Sect. 204(a)'s writing requirement. Lulirama Ltd., Inc. v. Axcess Broad. Servs. Inc., 128 F.3d 872, 879 (5th Cir.1997).
. Section 115 of the 1976 U.S. Copyright Act grants a compulsory mechanical license once a composition has been commercially recorded and released to the general public.
. 17 U.S.C. Sect. 101, et seq.
. Baisden v. I’m Ready Productions, Inc., 693 F.3d 491 (5th Cir.2012) {cert. denied, - U.S. -, 133 S.Ct. 1585, 185 L.Ed.2d 578 (2013)); Davis v. Tampa Bay Arena, Ltd., 2013 WL 3285278 (M.D.Fla.2013) (An implied license was created. Licensee's failure to abide by the terms of the implied license constituted a breach of contract, not copyright infringement.); Jacob Maxwell, Inc. v. Veeck, 110 F.3d 749, 753-54 (11th Cir.1997) ("[Artist] agreed to write the song free of charge, to provide the Miracle with the Digital Audio Tape master, and to grant the Miracle an exclusive license ... In return, Miracle had to pay his out-of-pocket production costs and give him credit as the author any time the song was played at games or distributed on cassette tape.... [Artist] delivered the song to the Miracle, and the team proceeded to play it at many games during the course of a summer. [Artist], however, was never given the promised authorship credit, and he sued the team, alleging copyright infringement and breach of contract." The court held that breach of a covenant in a copyright license does no more than provide licensor an opportunity to seek rescission of the license, but does not constitute an ab initio rescission of the licensee’s permission to use a copyrighted work.”)
.In the United States, mechanical royalties are paid on a negotiated rate, usually a reduced percentage of the rate established by the Copyright Royalty Board. If no agreement is reached, songs of 5 minutes or less require payment of 9.1 cents per item produced. If a work is greater than 5 minutes, a royalty of 14 cents is owed. (http://www. copyright/gov/carp/m2002.html).
. Typically, flat rates are paid to one of three (3) major organizations, BMI, ASCAP or SESAC. If an artist registers with one (1) of these firms, he will receive a portion of the flat rate fees.
. Buffalo Broad. Co., Inc. v. American Soc'y of Composers, Authors and Publishers, 744 F.2d 917, 920 (2d Cir.1984). See also, Daggs v. Bass, 2012 WL 5878670 (D.Mass.2012) ("An implied license is a valid defense to copyright infringement; a copyright owner can make an oral grant of a nonexclusive license, or such a grant can be implied from conduct which indicates the owner's intent to allow a license to use the work.”)
.3 NIMMER, supra. Sect. 10.03(A), at 10-40. See also, I.A.E., Inc. v. Shaver, 74 F.3d 768, 775 (7th Cir.1996); and Effects Assocs. v. Cohen, 908 F.2d 555, 558 (9th Cir.1990).
. Lulirama, 128 F.3d at 879 (quoting 3 MELVILLE B. NIMMER & DAVID NIM-MER, NIMMER ON COPYRIGHT § 10.03[A], at 10-41 (1997)).
. I.A.E., 74 F.3d at 776 (citing Effects, 908 F.2d at 558-59).
. 693 F.3d 491 (5th Cir.2012), cert denied, - U.S. -, 133 S.Ct. 1585, 185 L.Ed.2d 578 (2013).
. Foad Consulting Grp., Inc. v. Azzalino, 270 F.3d 821, 826 n. 9 (9th Cir.2001) (correctly stating test in Fifth Circuit). Other decisions support this conclusion. See Carson v. Dynegy, Inc., 344 F.3d 446, 451-53 (considering whether nonexclusive license was created despite defendant not having asked plaintiff to create a product) and John G. Danielson, Inc. v. Winchester-Conant Props., Inc., 322 F.3d 26, 41 (1st Cir.2003) (considering nonexclusive license defense where third party, not defendant, requested production of copyrighted work).
. Exh. 237.
. Id. at ¶ 8.
. Id. at ¶ 9, 11.
. Exh. 169. The Nugs.net Agreement was executed by HSP and Nugs. Importantly, HSP signed the Agreement in its own name and not as agent for the Artists.
. The Agreement was for a one (1) year term followed by successive ninety (90) day extensions. Either party could terminate the Agreement after thirty (30) days written notice. Exh. 169 at 6128.
. Exh. 169 at 6128.
. Id.
. Saregama India Ltd. v. Mosley, 635 F.3d 1284 (11th Cir.2011).
. See, 3 NIMMER, supra; Sect. 10.02(B)(5)(Nonexclusive licenses are revocable absent consideration). Avtec Sys. Inc. v. Peiffer, 21 F.3d 568, 574 n. 12 (4th Cir.1994); Keane Dealer Servs., Inc. v. Harts, 968 F.Supp. 944, 947 (S.D.N.Y.1997); and Johnson v. Jones, 885 F.Supp. 1008, 1013 n. 6 (E.D.Mich.1995).
. Mims v. Fidelity Funding, Inc., 275 B.R. 789 (Bkrtcy.N.D.Tex.2002); (aff’d in part and rev’d in part, 307 B.R. 849 (N.D.Tex.2002)).
. T.T. Porter, Stepanian, Stoltz.
. See HSP’s Proof of Claim, which calculates interest under 28 U.S.C. § 1961 from January 1, 2010 to November 26, 201 in the amount of $81,482.63.
.HSP’s Post-Trial Brief at 53, 54. P-262.
.28 U.S.C. § 1961(a) reads as follows:
(a) Interest shall be allowed on any money judgment in a civil case recovered in a district court. Execution therefor may be levied by the marshal, in any case where, by the law of the State in which such court is held, execution may be levied for interest on judgments recovered in the courts of the State. Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment. The Director of the Administrative Office of the United States Courts shall distribute notice of that rate and any changes in it to all Federal judges.
(b)Interest shall be computed daily to the date of payment except as provided in section 2516(b) of this title and section 1304(b) of title 31, and shall be compounded annually.
(c)(1) This section shall not apply in any judgment of any court with respect to any internal revenue tax case. Interest shall be allowed in such cases at the underpayment rate or overpayment rate (whichever is appropriate) established under section 6621 of the Internal Revenue Code of 1986.
(2)Except as otherwise provided in paragraph (1) of this subsection, interest shall be allowed on all final judgments against the United States in the United States Court of Appeals for the Federal circuit,[2] at the rate provided in subsection (a) and as provided in subsection (b).
(3) Interest shall be allowed, computed, and paid on judgments of the United States Court of Federal Claims only as provided in paragraph (1) of this subsection or in any other provision of law.
(4) This section shall not be construed to affect the interest on any judgment of any court not specified in this section.
. La. & Ark. Ry. v. Pratt, 142 F.2d 847, 849 (5th Cir.1944) and Endeavour GP, L.L.C. v. Endeavour Highrise, L.P. (In re Endeavour Highrise, L.P.), 432 B.R. 583 (Bankr.S.D.Tex.2010), (quoting Laffey v. Northwest Airlines, Inc., 740 F.2d 1071, 1103 (D.C.Cir.1984)).
. Pester Refining Co. v. Ethyl Corp (In Re Pester Refining Co.), 964 F.2d 842 (8th Cir.1992) (because a bankruptcy court is part of the district court, the statute applies to bankruptcy proceedings).
. In re Gulfport Pilots Ass’n, Inc., 434 B.R. 380 (Bkrtcy.S.D.Miss.2010); Wise v. Peterson (In re Peterson), 452 B.R. 203 (Bkrtcy.S.D.Tex.2011); Amegy Bank National Association v. Brazos M & E, Ltd. (In re Bigler LP), 458 B.R. 345 (Bkrptcy.S.D.Tex.2011).
. Federal court cases that are based on state law, such as the one before this Court, *676are controlled by state rights to judicial interest. Travelers Ins. Co. v. Liljeberg Enterprises, Inc., 7 F.3d 1203 (5th Cir.1993).
. Exh. 62 (Herlihy email to Eveline. — ■ "please find a summary of George Porter’s account with Highsteppin Productions”.) HSP demanded paid from Porter on November 20, 2009 of $256,280.97. (Exh. 62 at 1821-1829). No evidence was presented that a similar demand was made of Stoltz or Batiste before December 29, 2009, when HSP filed the lawsuit. The November 2009 demand only was sent to Porter. For purposes of the interest calculation, this Court finds that the November 2009 was a demand under the Massachusetts statute. McGarrigle v. Bachand, 1999 Mass.App. Div. 57, 1999 WL 788693. ("Massachusetts case law is clear that a 'demand' for purposes of G.L.c. 231, Sect. 6C is established if the party has been informed of the extent of the obligation and that payment is due. A bill is sufficient to establish a demand.”) The applicable date from which to calculate interest for Stoltz and Batiste is the day HSP filed its Complaint. Fratus v. Republic Western Ins. Co., 147 F.3d 25 (1st Cir.1998) (prejudgment interest began to accrue on the date plaintiffs filed their complaint and demand for payment in the district court); Siegel v. Kepa Homes Corp., 2000 Mass.App.Div. 170, 2000 WL 798639 (in the absence of a specific finding as to the date of breach, interest in calculated from the date the complaint was filed).
. HSP filed suit on December 29, 2009. Porter and Stoltz filed for bankruptcy on September 27, 2010 (nine (9) months after HSP filed suit in Massachusetts.) Batiste filed on September 28, 2011.
. In applying 502(b)(2), the Fifth Circuit Court of Appeals has stated that "interest stops accruing at the date of the filing of the petition.” Matter of West Texas Marketing Corp., 54 F.3d 1194, 1197 (5th Cir.1995) (“post-petition accumulation of interest on claims against a bankruptcy’s estate are suspended.”) In re Brints Cotton Marketing, Inc., 737 F.2d 1338, 1341 (5th Cir.1984).
. "Although different methods of considering and computing interest in bankruptcy cases are conceivable, fixing the cutoff point for the accrual of interest of the date of the filing of the petition is a rule of convenience providing for equity in distribution.” 4 Collier on Bankruptcy, Sect. 502.03 (Allan N. Resnick & Henry J. Sommers eds., 16th ed.). This rule combines the advantage of practicability with equality of distribution. To take into account contractual interest would not only entail considerable administrative inconvenience but also violate the equitable princi-pie that delay in liquidation and subsequent distribution necessitated by the bankruptcy process should result in neither gain nor loss for similarly situated creditors. Interest on debts is to be computed as of the date of the filing of the petition.” 4 Collier on Bankruptcy, Sect. 502.03 (Allan N. Resnick & Henry J. Sommers eds., 16th ed.).
. Louisiana Public Serv. Comm’n v. Mabey (In re Cajun Electric Power Co-op., Inc.), 185 F.3d 446, 457 (5th Cir.1999).
. Brown v. Sayyah (In re ICH Corp.), 230 B.R. 88, 94 (N.D.Tex.1999) (quoting Nicholas P. Saggese, et al., A Practitioner's Guide to Exchange Offers and Consent Solicitations, 24 Loy. La. L.Rev. 527, 550 (1991)).
. In re Lamarre, 269 B.R. 266 (Bankr.D.Mass.2001).
. See also 11 U.S.C. § 303(b)(1).
. Lamarre, supra at 269, (citing In re United States Lines, Inc., 199 B.R. 476 (Bankr.S.D.N.Y.1996)).
. On the bankruptcy petition date, interest ceases to accrue on an unsecured claim. In re United States Lines, Inc., 199 B.R. 476, 481 (Bankr.S.D.N.Y.1996). Interest accruing pre-petition is not "unmatured” just because it is "unliquidated.” Id. at 482; 11 U.S.C. Sect. 502(b)(2). See Diggs v. Guarantee Service Team of Prof. (In re Diggs), 2008 WL 5096008 (Bkrtcy.E.D.La.2008).
. Perkins School for the Blind v. Rate Setting Commission, 383 Mass. 825, 423 N.E.2d 765 (1981).
. Id. at 822, 423 N.E.2d 765. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496343/ | MEMORANDUM OPINION AND ORDER: (1) DENYING PARADIGM’S MOTION FOR SUMMARY JUDGMENT AND GRANTING TRBP’S MOTION FOR SUMMARY JUDGMENT AS TO COUNT 1 OF THE AMENDED COMPLAINT; (2) GRANTING PARADIGM’S MOTION FOR SUMMARY JUDGMENT AND DENYING TRBP’S MOTION FOR SUMMARY JUDGMENT AS TO COUNT 2 OF THE AMENDED COMPLAINT; AND (3) DENYING PARADIGM’S AND HSG’S MOTION TO DISMISS TRBP’S THIRD PARTY COMPLAINT AGAINST HSG AND COUNTERCLAIM AGAINST PARADIGM
STACEY G. JERNIGAN, Bankruptcy Judge.
I. INTRODUCTION
The above-referenced adversary proceeding (the “Adversary Proceeding”) has arisen in the much-followed Chapter 11 bankruptcy case, filed May 24, 2010, by the Texas Rangers Baseball Partners (“TRBP” or the “Former Debtor” or the “Defendant”).1 The Adversary Proceeding involves a Boeing 757 aircraft that the Texas Rangers Baseball Club (the “Rangers”) and the Dallas Stars Hockey Club *685(the “Stars”) — both formerly under common ownership — previously used to fly their professional sports teams to out-of-town games. In short, the new owners of the Rangers, an entity known as Rangers Baseball Express LLC (“Baseball Express”), decided near the time of the bankruptcy court’s approval of its acquisition of the team out of bankruptcy, that it did not wish to utilize the 757 aircraft going forward (ie., after the 2010 baseball season). This decision apparently caught the lessor of the aircraft, Paradigm Air Carriers and SportsJet Operators (collectively, “Paradigm” or the “Plaintiffs”), by complete surprise. Paradigm thought, based on earlier communications and agreements, that the new owners of the Rangers would use the aircraft through the year 2017 baseball season. Specifically, Paradigm thought that certain agreements involving the aircraft would be assumed and assigned (in their pre-bankruptcy versions) to the new owners as part of the bankruptcy case.2 After the dust settled, so to speak, Paradigm filed a $29.385 million proof of claim in the TRBP bankruptcy case, for its alleged damages, and also filed this Adversary Proceeding — both of which require this court to interpret certain pre-and post-petition agreements involving (a) Paradigm, (b) TRBP, and (c) HSG Sports Group, LLC (“HSG”), the latter of which is the former indirect (ultimate) owner of TRBP.3
Now before this court are cross motions for summary judgment filed by Paradigm and TRBP as to counts 1 and 2 of Paradigm’s First Amended Complaint [DE #11] (the “First Amended Complaint”), along with a related motion to dismiss filed by Paradigm and HSG as to TRBP’s Original Third Party Complaint Against HSG and Counterclaim Against Paradigm [DE # 151] in the Adversary Proceeding.
The Cross Motions for Summary Judgment. Specifically, the cross motions for summary judgment concern two breach of contract claims that are asserted in the First Amended Complaint by Paradigm against TRBP. Specifically, Paradigm contends that the Defendant, TRBP, has breached contractual obligations under two separate agreements that allegedly, collectively required TRBP to pay certain aircraft charter payments to Paradigm through the year 2017:
(1) Agreement # 1: a 2007 Aircraft Charter Agreement (the “2007 Charter Agreement” or “Agreement # 1”) between Paradigm and HSG; and
(2) Agreement # 2: a Shared Charter Services Agreement (“SCSA” or “Agreement # 2”) executed by HSG and TRBP on May 23, 2010 (the night before TRBP filed for bankruptcy).
Whether or not TRBP has breached contractual obligations it may have to Paradigm through year 2017 turns not only upon this court’s interpretation of these two agreements, but also on the validity of yet a third document: a First Amendment to the SCSA, dated August 12, 2010 (the “Amendment to the SCSA” or the “Amendment” or “Agreement # 3”)— which third document purported to terminate, at the close of the 2010 baseball season, any obligation that TRBP might have had to pay aircraft charter payments to Paradigm through year 2017. Notably, the date of this third document (August 12, 2010) was one week after the bankruptcy court confirmed a plan of reorganization and sale of TRBP to the new owners, and was also the “Effective Date” of the confirmed plan.
Specifically, with regard to the cross motions for summary judgment the court refers to:
*686(1) Paradigm’s Motion for Partial Summary Judgment and Brief in Support [DE ## 17 & 18] (collectively, “Paradigm’s MSJ”);
(2) TRBPs’ Response in Opposition to Paradigm Air Carriers and Sports Jet Air Operators’ Motion for Partial Summary Judgment and Brief in Support [DE ## 34 & 35];
(3) Reply Brief in Support of Plaintiffs’ Motion for Partial Summary Judgment and the Notice of Supplemental Authority [DE ## 41 & 43];
(4) TRBP’s Motion to Dismiss4 First Amended Complaint or, Alternatively, for Summary Judgment and Brief in Support [DE # # 14 & 15] (collectively, “TRBP’s MSJ”);
(5) Paradigm’s Response to Defendant’s Motion to Dismiss First Amended Complaint or, Alternatively, for Summary Judgment and Brief in Support [DE ## 37 & 38]; and
(6) Reply in Support of Motion to Dismiss First Amended Complaint or, Alternatively, for Summary Judgment [DE # 40].5
The court also refers to the following Appendices (all filed under seal) submitted by Paradigm and TRBP relating to the cross motions for summary judgment:
(1) Plaintiffs Appendix in Support of Their Motion for Partial Summary Judgment [DE # 30] (“Plaintiffs’ Appendix”);
(2) Plaintiffs’ Supplemental Appendix in Support of Their Cross Motions for Summary Judgment and Response to Rangers Baseball Express LLC’s Motion to Dismiss [DE # 144] (Plaintiffs’ “Supplemental Appendix”);
(3) Defendant’s Appendix in Support of Its Motion to Dismiss First Amended Complaint or, Alternatively, for Summary Judgment [DE # 32] (“Defendant’s Appendix”); and
(4) Defendant’s Supplemental Appendix in Support of Its Motion to Dismiss First Amended Complaint or, Alternatively, for Summary Judgment and Response in Opposition to Plaintiffs’ Motion for Partial Summary Judgment [DE # 36] (“Defendant’s Supplemental Appendix”).
The Motion to Dismiss the Avoidance Complaint. TRBP (as a form of alternative relief) has separately filed a third-*687party complaint against HSG and a counterclaim against Paradigm (the “Avoidance Complaint”) in order to potentially avoid as a fraudulent transfer Agreement # 2 (again, Agreement # 2 was the agreement that may have obligated TRBP to pay aircraft charter payments to Paradigm through year 2017, and was executed the day before TRBP filed bankruptcy). Specifically, should this court determine that Agreement # 3 was invalid, unenforceable, or otherwise nonbinding on Paradigm, TRBP filed the Avoidance Complaint to avoid Agreement #2 as a fraudulent transfer.6 Paradigm and HSG have each sought to dismiss the Avoidance Complaint, pursuant to Fed. R.Civ.P. 12(b)(6), as incorporated by Fed. R. BaniírP. 7012, on the grounds that: (a) TRBP lacks constitutional standing to pursue any type of avoidance action, since TRBP paid unsecured creditors in full under its confirmed chapter 11 plan, and there would be no benefit to the estate to permit avoidance of Agreement # 2; and (b) TRBP’s Counterclaim fails to adequately allege all of the elements required for a claim of “actual fraud” under 11 U.S.C. § 548(a)(1)(A) or to plead fraud with particularity as required under Fed. R. Civ. P. 9(b) as incorporated by Fed. R. BaNKR.P. 7009.
With regard to the motion to dismiss, the court refers to:
(1) Plaintiffs’ Motion to Dismiss and Brief in Support [DE ## 160 & 161] along with HSG’s Motion to Dismiss and Joinder [DE # 173] (collectively, the “Motion to Dismiss”);
(2) TRBP’s Response to Paradigm’s Motion to Dismiss [DE # 175];
(3) Paradigm’s Reply in Support of Motion to Dismiss [DE # 184]; and
(4)TRBP’s Response to HSG’s Motion to Dismiss and Joinder [DE 183].
For the reasons articulated below, the court is: (1) denying Paradigm’s MSJ and granting TRBP’s MSJ as to Count 1; (2) granting Paradigm’s MSJ and denying TRBP’s MSJ as to Count 2; and (3) Denying the Motion to Dismiss as to the Avoidance Complaint.
II. JURISDICTION
Bankruptcy subject matter jurisdiction exists in this Adversary Proceeding, pursuant to 28 U.S.C. § 1334(b). This bankruptcy court has authority to exercise bankruptcy subject matter jurisdiction, pursuant to 28 U.S.C. § 157(a) & (c) and the Standing Order of Reference of Bankruptcy Cases and Proceedings (Misc. Rule No. 33), for the Northern District of Texas, dated August 3, 1984. This is a core proceeding in which this court has statutory authority to issue final judgments, pursuant to at least 28 U.S.C. § 157(b)(2)(B), (C) and (H). However, in the event this bankruptcy court is found to lack Constitutional authority to issue this Memorandum Opinion and Order, this court submits this as a proposed ruling to the District Court.
Venue is proper in this district, pursuant to 28 U.S.C. § 1409(a), as TRBP’s chapter 11 case was filed in this district.
III. THE CROSS MOTIONS FOR SUMMARY JUDGMENT
A. Undisputed Facts7
1. Paradigm, TRBP, and the Dallas Stars Execute the Aircraft Charter Agreements in 2003.
In 2003, Paradigm first began providing air charter services to the Rangers and the *688Stars, originally under separate written contracts with each team (the “2003 Agreements”).8 TRBP executed an agreement for the Rangers’ charter services and Dallas Stars, LP executed an agreement for the Stars’ charter services.9 Paradigm communicated with, invoiced, and was paid directly by TRBP and Dallas Stars, LP under those two separate agreements.10
2. The 2007 Aircraft Charter Agreement: Agreement #1
In year 2007, a new arrangement was made. Specifically, in order to resolve scheduling conflicts and avoid potential double payment for the two teams’ usage of charter services during the same months, TRBP and Dallas Stars, LP asked that Paradigm essentially consolidate things and enter into one contract with their common ultimate parent company, HSG.11 Consequently, IISG and Paradigm entered into the 2007 Charter Agreement on June 21, 2007 (the “2007 Charter Agreement” or “Agreement # l”).12 In the 2007 Charter Agreement, Paradigm agreed to fly both the Rangers and Stars to away games in a Boeing 757 (the “Aircraft”).13 The term of the 2007 Charter Agreement was through year 2017.
The undisputed summary judgment evidence is that the execution of the 2007 Charter Agreement did not materially change Paradigm’s relationship with TRBP and Dallas Stars, LP.14 TRBP and Dallas Stars, LP at all times dealt and coordinated directly with Paradigm, and Paradigm continued to send invoices directly to TRBP and Dallas Stars, LP for payment.15 Moreover, TRBP has acknowledged:
... since the commencement of the term of the [2007 Charter Agreement], the Rangers and Stars have had an oral agreement with HSG whereby each of the Rangers and Stars reimburse HSG for its proportionate share of the rent, operational expenses and all other costs and expenses of HSG under the [2007 Charter Agreement] based on such party’s use of the Charter Services.16
3. The Execution of the SCSA: Agreement # 2
Three years later, circumstances were different. TRBP was facing bankruptcy and separation from its ultimate par-enf/owner, HSG, was inevitable. And, as noted above, HSG was the entity that had contractual rights to the Aircraft. On May 23, 2010, TRBP, as part of its proposed *689pre-packaged bankruptcy reorganization plan, entered into an Asset Purchase Agreement (as amended from time to time, the “APA”) with Baseball Express for TRBP’s sale of the Rangers and related assets to Baseball Express.17 In order to provide for the continuity of transportation for the Rangers in connection with this contemplated sale, HSG and TRBP entered into a Shared Charter Services Agreement, dated as of May 23, 2010 (the “Shared Charter Services Agreement” or the “SCSA” or “Agreement #2”), pursuant to which HSG contractually agreed to make available to TRBP (and to Baseball Express or such other purchaser of the Rangers following TRBP’s sale of the Rangers) certain of its Aircraft charter services rights under the 2007 Charter Agreement.18
Prior to the SCSA’s execution, however, HSG and TRBP sought Paradigm’s written consent to the execution of the SCSA, as required under Section 20 of the 2007 Charter Agreement. Specifically, Section 20 of the 2007 Charter Agreement provided:
20. Successors and Assigns. This Lease shall be binding upon the parties thereto, and their respective successors and assigns and shall inure to the benefit of the parties hereto and except as otherwise provided herein, to their respective successors and assigns. The parties agree that they shall not lease, assign, transfer, pledge or hypothecate this Lease, without the prior written consent of the other party. It is further expressly understood by both Paradigm and Hicks that Hicks shall be fully obligated to continue its performance under the terms of this Lease should either or both the Texas Rangers MLB team (“Rangers”) or Dallas Stars NHL team (“Stars”) are [sic] sold to an outside third party.19
To memorialize the required consent in writing, TRBP’s counsel prepared a “Consent to Shared Charter Services Agreement” dated May 23, 2010 (the “Consent”) to evidence the consent of Paradigm to HSG’s entry into the SCSA with TRBP.20 Prior to its execution, counsel for TRBP emailed Paradigm’s president, Craig Ireland (“Mr. Ireland”), on May 20, 2010, drafts of the SCSA and the Consent.21 On that same day, Mr. Ireland emailed TRBP’s counsel with several comments:
We have the following comments:
Consent to the Shared Charter Services Agreement
Page 1: Aircraft is Boeing 757-236 (not-346 as written)
Page 2: Truth in Leasing Compliance. Only the first sentence is applicable. Reference 91.23(b)(1)(h) as we are “operating under part ... of this chapter.” Shared Charter Services Agreement
Page 5: Term. We do not see how HSG would ever be fully released from all obligations and liabilities under the Aircraft Agreement, as the Aircraft Agreement is a full-year agreement, but an assignment to Baseball Express/New Owner would only effect )£ of the overall obligations and liabilities under the Aircraft Agreement.
Page 7: Truth in Leasing Compliance. See comments above regarding FAR 125 operations. We would suggest adding “if required only” language.
It is our overall understanding that HSG remains fully liable for all existing obli*690gations under the existing Aircraft Agreement through its respective termination unless otherwise released by Paradigm.22
Counsel for TRBP ultimately revised both the drafts of the SCSA and the drafts of the Consent to incorporate Ireland’s comments.23 Specifically, in its final form, Section 5.1 of the SCSA provided that
5.1The term of this Agreement (the “Term”) shall commence on the date listed hereof and shall terminate upon (a) if completed contemporaneously with or following the Rangers Baseball Express Sale (i) the assignment by HSG and assumption by Baseball Express (by its express written consent) of the Aircraft Agreement, provided that Paradigm has consented to such assignment and assumption, (ii) the execution of a new agreement between Baseball Express (or an affiliate thereof) and Paradigm to replace the Aircraft Agreement, provided that Paradigm has fully released HSG from all obligations and liabilities under the Aircraft Agreement, (b) by the termination of the Aircraft Agreement, or (c) termination of this Agreement by TRBP, at its sole option, by notice to HSG upon occurrence of an Event of Default (as defined in the Aircraft Agreement) by Paradigm under Section 8(a) (ii), (Hi), (iv) or (v) of the Aircraft Agreement24
Notably, Section 5.1 contemplated that the SCSA might terminate in various different ways (such as by an actual assignment to Baseball Express of the underlying HSG/Paradigm 2007 Aircraft Charter Agreement, or through a new agreement that might be reached between Baseball Express and Paradigm, or by virtue of a default by Paradigm under the 2007 Aircraft Charter Agreement), but in the absence of one of these circumstances, it was contemplated that the SCSA would be coextensive with the term of the 2007 Aircraft Charter Agreement (through year 2017).
There were several other key provisions of the SCSA which outlined the parties’ respective rights and obligations. First, the SCSA contained some specific covenants with respect to HSG’s obligations under the 2007 Charter Agreement, including Section 1.1, which provided that “HSG shall continue to perform its obligations and enforce its rights under the Aircraft Agreement to continue to obtain Charter Services from Paradigm for the benefit of the Rangers in accordance with the terms of the Aircraft Agreement” and “HSG shall use commercially reasonable efforts to cause Paradigm to take the following actions with respect to the insurance required to be provided by Paradigm pursuant to the Aircraft Agreement.”25 Second, section 3 of the SCSA provided that:
3.1 TRBP shall be responsible for all costs and expenses (including, but not limited to, rent) for which HSG is responsible under the Aircraft Agreement to the extent related to the Rangers’ use of the Aircraft; provided that, TRBP will not be responsible for any of the costs and expenses that are attributable to the Stars’ use of the Aircraft.
3.2 TRBP shall be responsible for paying directly to Paradigm rent in accordance with the schedule set forth in Exhibit D hereto (“Rent”). All payments of Rent shall be made at Para*691digm’s address as set forth on Exhibit C or at such place in the United States as Paradigm may designate through HSG in writing to the Rangers from time to time, or by wire transfer to Paradigm’s designated account set forth in Exhibit C.26
Third, section 6.3 provided that:
6.3 Entire Agreement. This Agreement (including the Exhibits attached hereto) constitutes the entire agreement of the parties hereto in respect of the subject matter hereof, and supersedes all prior agreements or understandings between the parties hereto in respect of the subject matter hereof and can be amended, supplemented or changed, and any provisions hereof can be waived, only by written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought.27
Additionally, the Consent, in its final form, provided the following:
(a) Paradigm’s Consent shall in no way release HSG from any of HSG’s covenants, agreements, liabilities or duties under the Aircraft Charter Agreement and any amendments thereto, including the obligation to pay all Rent as and when the same becomes due and payable under the Aircraft Charter Agreement and for the performance of all obligations of HSG thereunder. HSG shall continue to be liable for the payment of all Rent due and payable under the Aircraft Charter Agreement and for the performance of all obligations of HSG thereunder. This Consent does not (i) create any privity between Paradigm and TRBP or (ii) constitute an agreement or approval by Paradigm to any modification or amendment of the terms of the Aircraft Charter Agreement.
(b) The Shared Charter Services Agreement is and shall be, in all respects, subject and subordinate to the Aircraft Charter Agreement.28
Once satisfied with the SCSA and the Consent, Paradigm executed the Consent on May 23, 2010, with HSG as the only other signatory.29 After TRBP and HSG executed the SCSA, TRBP began paying Paradigm directly for charter services rendered to the Rangers (specifically for June, July, August, September, and October 2010).30
4. TRBP’s Bankruptcy Case and the Confirmed Chapter 11 Plan
The day after the SCSA’s and the Consent’s execution (May 24, 2010), TRBP filed for Chapter 11 bankruptcy protection and proposed the aforementioned prepackaged bankruptcy plan for the bankruptcy court’s approval.31 As reflected in TRBP’s Amended Disclosure Statement (the “Amended Disclosure Statement”) filed in the Bankruptcy Case, the SCSA was an agreement to be assumed and assigned to Baseball Express (or such other purchaser of the Rangers) under the APA.32 However, circumstances changed. *692Subsequent to the court’s approval of the Amended Disclosure Statement, and due to various parties challenging certain terms of the pre-petition sale negotiated between TRBP and Baseball Express, the court ultimately required an auction of TRBP’s assets and entered an order approving bidding procedures for the auction (the “Bidding Procedures Order”).33 Among other things, the Bidding Procedures Order provided for bids to be submitted consistent with the terms of the APA attached thereto, which now included a First Amendment to the APA, dated as of July 12, 2010, which conditioned the closing of the sale on, among other things, an amendment to the SCSA to provide for its automatic termination upon conclusion of the Rangers’ 2010 MLB baseball season.34 Apparently, at some point in the first six weeks of TRBP’s bankruptcy, Baseball Express had decided it was not interested in having access to the Aircraft long term.
The auction for the Rangers commenced on August 4, 2010, and concluded with Baseball Express emerging as the winning bidder. Consistent with the results of the auction, the APA was further amended by a Second Amendment to the APA, dated as of August 12, 2010, which maintained the requirement that the SCSA be amended to provide for its automatic termination upon conclusion of the Rangers’2010 MLB season.35
Following the auction, TRBP filed its Fourth Amended Plan of Reorganization of Texas Rangers Baseball Partners Under Chapter 11 of the Bankruptcy Code (the “Plan”).36 On August 5, 2010, the court entered its Order Confirming the Plan of Reorganization of Texas Rangers Baseball Partners Under Chapter 11 of the Bankruptcy Code (the “Confirmation Order”).37 On August 12, 2010 (the “Effective Date”), the Plan became effective and fully enforceable. The Plan, among other things, provided that “[o]n the Effective Date, the Asset Purchase Agreement 38 shall be consummated.”39 In connection therewith, the Plan also provided for TRBP’s assumption and assignment of executory contracts and unexpired leases associated with the sale:
[A]s of the Effective Date, the Debtor [TRBP] shall be deemed to have assumed and assigned to the Purchaser [Baseball Express]40 each executory contract and unexpired lease to which it is a party, unless such contract or lease ... is an Excluded Contract.41 The Confirmation Order shall constitute an *693order of the Bankruptcy Court under sections 365 and 1123(b) of the Bankruptcy Code approving the contract and lease ... assumptions and assignments ... described above, as of the Effective Date.
Unless otherwise specified, each execu-tory contract and unexpired lease shall include any and all modifications, amendments, supplements, restatements or other agreements made directly or indirectly by any agreement, instrument or other document that in any manner affects such executory contract or unexpired lease, without regard to whether such agreement, instrument or other document is listed on such schedule.
Any counterparty that does not object to the ... assumption and assignment of its executory contract or unexpired lease by the Debtor under the Plan, shall be deemed to have consented to such ... assumption and assignment.42
The SCSA was one of the executory contracts subject to the foregoing provisions, and was not one of the “Excluded Contracts” excluded from assumption and assignment to Baseball Express.43
5. The Post-Confirmation Execution of the Amendment to SCSA: “Agreement # 3”
As required by the APA, the Plan and the Confirmation Order, HSG and TRBP entered into a First Amendment to Shared Charter Services Agreement, post-confirmation, on August 12, 2010 (ie., Agreement # 3).44 Pursuant to the Amendment to the SCSA, HSG limited its obligation to make Charter Services available to TRBP (and following the closing, to Baseball Express under the APA) to the Rangers’ 2010 MLB baseball season, and similarly TRBP’s payment obligations were also limited. Specifically, and in pertinent part, section 1 of the Amendment to the SCSA provided for the following:
1. Amendments. The Agreement [i.e., the SCSA] is hereby amended as follows. Notwithstanding anything in the Agreement [ie., the SCSA] to the contrary, and in particular Sections 3.2 and 5.1 thereof, (1) the Agreement [ie., the SCSA] shall terminate following the last game (and any return flight following such last game) of the Texas Rangers’ 2010 MLB baseball season (including, if applicable, the final MLB post-season game in which the Texas Rangers participate in 2010), without premium or penalty payable by TRBP (or any successor or assign) and (2) only if each such payment becomes due prior to the termination of the Agreement [ie., the SCSA], TRBP (and not any successor or assign) shall make the following monthly lease payments required to be made by HSG pursuant to the [Aircraft Charter Agreement] directly to Paradigm Air Operators, Inc. (d/b/a SportsJet Air Operators, LLC) (without prorating any such payments) on the dates and in the amounts as follows: (x) the payment due September 1, 2010, in the amount of $635,000 for use of the aircraft in October 2010 (the “September Payment”), (y) the payment due October 1, 2010, in the amount of $615,000 for use of the aircraft in November 2010 (the “October Payment”), and (z) the payment due November 1, 2010, in the amount of $615,000 for use of the aircraft in December 2010 (the “December Payment” *6946). For the avoidance of doubt, TRBP, and not any successor or assignee of TRBP, shall continue to be responsible for the September Payment, October Payment and December Payment, notwithstanding any assignment by TRBP of the Agreement, as amended by this Amendment.45
Thereafter, on the Effective Date of the Plan, the closing under the APA took place and pursuant to the Plan, the SCSA, as amended, was deemed assumed and assigned to Baseball Express.46
After close of business on August 12, 2010, TRBP’s counsel emailed Paradigm’s President, Craig Ireland, an executed copy of the Amendment to the SCSA.47 The email (which was sent in response to an email from Ireland requesting a digital copy of the SCSA) told him, “please note that there was a subsequent amendment to the [SCSA], which I have also attached.”48 Within minutes of receiving and reviewing the Amendment to the SCSA, Ireland informed TRBP’s counsel that “Paradigm made no consent to any amendments to the existing agreement.”49 In response, TRBP’s counsel told Ireland that the Amendment to the SCSA was “consistent with the bankruptcy court rulings,” but would not identify which rulings he was referring to and would not explain why the Amendment to the SCSA had been drafted and executed earlier that day without Paradigm’s knowledge or consent.50
Subsequent to these communications, TRBP made payments under the SCSA in September and October 2010.51 The Rangers played their final game of the 2010 MLB baseball season on November 1, 2010 in Arlington, Texas.52 Pursuant to the terms of the SCSA, as amended, the SCSA would have automatically terminated upon the conclusion of such game.53
6. Paradigm’s Proof of Claim and the Adversary Proceeding
After Paradigm received notice of the Amendment to the SCSA, Paradigm retained litigation counsel, then searched for and retained bankruptcy counsel, and on August 28, 2010, timely filed Claim No. 57 (the “Proof of Claim”) for TRBP’s alleged contractual breaches under both the 2007 Charter Agreement and the SCSA.54 After conducting initial discovery on the Proof of Claim, Paradigm filed its Original Complaint against TRBP on February 2, 2011, initiating the Adversary Proceeding. The Original Complaint incorporated the then-pending Proof of Claim and asserted state *695law causes of action for breach of contract and for a declaratory judgment. The adjudication of the Proof of Claim was later consolidated into this Adversary Proceeding.55 On March 11, 2011, Paradigm filed its First Amended Complaint.56 On March 18, 2011, Paradigm and TRBP filed the competing summary judgment motions addressed herein.57
Within TRBP’s summary judgment briefing, TRBP argued that it could have no contractual liability to Paradigm because “the SCSA, whether or not amended, had been assumed and assigned to [Baseball] Express.”58 At an April 11, 2011 summary judgment hearing, Judge Lynn, who originally presided over this Adversary Proceeding and the Bankruptcy Case, referenced this argument and asked TRBP’s counsel whether TRBP intended to join Baseball Express as a necessary party. TRBP’s counsel said TRBP had no intention to do so until after the dispositive motions were decided.59 At the hearing, Judge Lynn dismissed Paradigm’s Count Three (which was an alter ego claim) and took the remaining counts under advisement.
With the dispositive motions still pending, Judge Lynn sent the parties a letter on May 16, 2011, stating his belief that Baseball Express and HSG were “necessary parties that must be joined pursuant to Fed.R.Civ.P. 19(b)(1)(B) and (2).”60 Judge Lynn then requested that Paradigm, not TRBP, “act pursuant to Rule 19 to add as parties [Baseball] Express and [HSG].”61 The letter was also sent to counsel for Baseball Express and HSG.62
On May 27, 2011, Paradigm sent a letter to Judge Lynn expressing its belief that neither Baseball Express nor HSG was a “Required Party” as defined in Rule 19, respectfully declining Judge Lynn’s invitation that Paradigm sue those parties, and requested an opportunity to brief the issue.63 On June 9, 2011, Judge Lynn, acting sua sponte, issued an Order Respecting Joinder, holding that “neither Plaintiff nor Defendant shall be required to implead [Baseball] Express or [HSG]” under Rule 19, but permitting Baseball Express and HSG to intervene under Fed. R. Civ. P. 24 prior to July 1, 2011, “if either wishe[d] to protect its rights.”64 Judge Lynn’s sua sponte order stated that the court had authority to permit Baseball Express and HSG, as non-debtors, to intervene and assert claims against non-debtor Paradigm “pursuant to 11 U.S.C. § 105(a).”65
*696On June 30, 2011, Baseball Express filed a Notice of Intervention and Brief Regarding the Aircraft Charter and Related Agreements.66 Baseball Express’ intervention resulted in a deluge of counterclaims, procedural motions, and multiple rounds of dispositive motions and delayed this proceeding for about a year. On May 12, 2012, following Judge Lynn’s self-initiated recusal and a transfer of the Adversary Proceeding to this court, Baseball Express, TRBP and Paradigm were finally able to negotiate and submit a Stipulated Judgment Regarding Claims By and Against Rangers Baseball Express.67 That stipulated judgment dismissed Baseball Express from this Adversary Proceeding and adjudicated that Baseball Express would not have assumed TRBP’s payment obligations under an unamended SCSA, which are at issue here.68
On May 24, 2012, TRBP filed an Original Third-Party Complaint (the “Avoidance Complaint”) against HSG Sports Group LLC and Counterclaim against Paradigm.69 This third-party complaint asserts that if the Amendment to the SCSA is found to be invalid and unenforceable (arguably as part of this court resolving the cross motions for summary judgment), 11 U.S.C. § 548(a)(1)(A) would allow TRBP to avoid its obligations created on the eve of bankruptcy, under the unamended SCSA dated May 23, 2010.
B. Summary Judgment Standard
Summary judgment is appropriate whenever a movant establishes that the pleadings, affidavits, and other evidence available to the court demonstrate that no genuine issue of material fact exists, and the movant is, thus, entitled to judgment as a matter of law.70 A genuine issue of material fact is present when the evidence is such that a reasonable fact finder could return a verdict for the non-movant.71 Material issues are those that could affect the outcome of the action.72 The court must view all evidence in a light most favorable to the non-moving party.73 Factual controversies must be resolved in favor of the non-movant, “but only when there is an actual controversy, that is, when both parties have submitted evidence of contradictory facts.”74 If the movant satisfies its burden, the non-movant must then come forward with specific evidence to show that there is a genuine issue of fact.75 The non-movant may not merely rely on conclusory allegations or the pleadings.76 Rather, it must demonstrate specific facts identifying a genuine issue to be tried in order to avoid summary judgment.77 Thus, summary judgment is proper if the non-movant “fails to make a show*697ing sufficient to establish the existence of an element essential to that party’s case.”78
C. Analysis on Count 1 and Count 2 of the Amended Complaint
As currently plead, Paradigm’s MSJ seeks partial summary judgment (ie., judgment on liability, not damages) on Counts One (Breach of the 2007 Charter Agreement), Two (Breach of the SCSA), and Four (Declaratory Judgment). Specifically, Count Four seeks a declaration that the Amendment to the SCSA is invalid. Because Paradigm and TRBP have agreed that the Amendment’s validity is the central issue of the case and will determine how Counts One and Two are resolved, Paradigm has agreed that the court’s separate consideration of Count Four (Declaratory Judgment) is simply unnecessary at this time. As such, Paradigm has withdrawn its summary judgment motion as to Count Four and will dismiss it without prejudice. Thus, the court must only determine whether summary judgment (either in favor of Paradigm or TRBP) is appropriate on Paradigm’s claims for breach of the 2007 Charter Agreement and breach of the SCSA (Counts One and Two of the Amended Complaint). Moreover, as stated above, should the court grant summary judgment in favor of TRBP as to Counts One and Two, any decision as to the Motion to Dismiss TRBP’s Avoidance Complaint would be mooted.
1. The Legal Nature of the SCSA
Before determining whether there was a breach by TRBP of the 2007 Charter Agreement or the SCSA, the court must first determine the legal nature of the SCSA, specifically whether: (1) the SCSA was an assignment of HSG’s rights under the 2007 Charter Agreement; (2) the SCSA was a sublease of the 2007 Charter Agreement; or (3) the SCSA was something else entirely. Paradigm has argued that the SCSA (particularly §§ 3.1 and 3.2) made TRBP an assignee of the 2007 Charter Agreement by assigning to TRBP, HSG’s payment obligations under the 2007 Charter Agreement. TRBP, on the other hand, has argued that the SCSA was a sublease, not an assignment.
In order to determine the legal nature of the SCSA, the court’s primary duty is to ascertain and give effect to the intent of the parties, as that intent is expressed in the contract.79 An unambiguous contract is construed according to the plain meaning of its express wording.80 The court must look “at the contract as a whole in light of the circumstances present when the contract was entered” into.81 Terms used in the contract have their “plain, ordinary, and generally accepted meaning unless the [contract] shows that the parties used them in a technical or different sense.”82 Unambiguous contracts are enforced as written.83
In Amco Trust, Inc. v. Naylor,84 the Texas Supreme Court held that, when *698a lessee voluntarily transfers part or all of its interest under the lease to another, the transaction is accordingly treated as either an assignment or a sublease for purposes of determining the rights and liabilities of the parties involved. In order to constitute an assignment, the lessee must part with his entire interest in all or part of the demised premises without retaining any reversionary interest.85 One who, thus, acquires the entire leasehold estate becomes the tenant in place of the lessee and is in privity of estate with the lessor.86 If, on the other hand, the lessee retains any reversionary interest, no matter how small it may be, his transferee is not in privity of estate with the lessor and is regarded as a sublessee.87 There is no privity of contract between the lessor and a sublessee, and the latter is not liable to the lessor on the covenants of the lease, unless he assumes or otherwise binds himself to perform the same.88 Thus, the critical issue in determining whether the SCSA was an assignment or a sublease is whether HSG had a reversionary interest in the 2007 Charter Agreement after executing the SCSA with TRBP.
Paradigm has argued that all of the Texas case law cited by TRBP,89 including Amco Trust, is irrelevant because these cases apply the sublease/assignment principles discussed above to leases of real property, not personal property, and has further implied that subleases of personal property are not possible. Specifically, Paradigm has cited to the definition of “sublease” in Black’s Law Dictionary as support for this assertion, arguing that the definition of “sublease” only contemplates a sublease involving real property. However, Black’s Law Dictionary (in its current form) defines a sublease as “a lease by a lessee to a third party, conveying some or all of the leased property for a term shorter than or equal to that of the lessee, who retains a reversion in the lease.”90 Furthermore, Black’s Law Dictionary defines the term “lease” as “... a contract by which the rightful possessor of personal property conveys the right to use that property in exchange for consideration.” 91 Thus, the current definition of “sublease” in Black’s Law Dictionary clearly contemplates subleases involving personal property. But interestingly, in the Fifth Edition of Black’s Law Dictionary (which was cited and relied upon by Paradigm in its briefing), “sublease” was defined as a “transaction whereby tenant grants interest in leased premises less than his own, or reserves to himself rever-sionary interest in term.”92 Moreover, the Fifth Edition of Black’s Law Dictionary defines “Premises” as “lands and tenements; an estate, including land and buildings thereon; the subject-matter of a conveyance.” 93 Citing these older versions of the definitions for “sublease” and “premises,” it makes sense why Paradigm has *699argued that the SCSA could not qualify as a sublease. Nonetheless, the court finds that because the definition of “sublease,” as defined in the latest edition of Black’s Law Dictionary now encompasses both leases of real property as well as leases of personal property, the case law cited by TRBP in its briefing is relevant to this court’s analysis of whether the SCSA was an assignment or a sublease.94
Taking into account the distinctions between an “assignment” and a “sublease,” as set forth by the Texas Supreme Court in Atoco Trust, the court must determine whether HSG was left with a re-versionary interest in the 2007 Charter Agreement as a result of signing the SCSA. If HSG had a reversionary interest, the SCSA should be construed as a sublease. However, if HSG transferred its entire interest in the 2007 Charter Agreement, the court must construe the SCSA to be an assignment. Here, the court finds that the undisputed facts show that the SCSA was a sublease. Specifically, the SCSA recognizes HSG’s retention of rights under the 2007 Charter Agreement by expressly requiring HSG to continue to enforce such rights as part of its contractual obligations to TRBP under the SCSA:
HSG shall continue to perform its obligations and enforce its rights under the Aircraft [Charter] Agreement to continue to obtain Charter Services from Paradigm for the benefit of the Rangers in accordance with the terms of the Aircraft [Charter] Agreement.
HSG shall use commercially reasonable efforts to cause Paradigm to take the following actions with respect to the insurance required to be provided by Paradigm pursuant to the Aircraft [Charter] Agreement [followed by specifics] ... 95
Similarly, the termination clause of the SCSA acknowledged HSG’s retention of rights by making it abundantly clear that HSG’s (not TRBP’s) potential assignment of the 2007 Charter Agreement would automatically terminate the SCSA:
The term of this Agreement (the “Term”) shall commence on the date hereof and shall terminate upon ... the assignment by HSG and assumption by Baseball Express (by its express written consent) of the [2007 Charter Agreement] ... 96
Had the SCSA resulted in an assignment by HSG to TRBP of its entire interest under the 2007 Charter Agreement, this provision would have been completely unnecessary because HSG would have had no continuing ability to assign any interest in the 2007 Charter Agreement to Baseball Express. Hence, this language alone demonstrates that HSG and TRBP did not intend for the SCSA to result in an. assignment of HSG’s interest in the 2007 Charter Agreement to TRBP.
Finally, and perhaps most important, the unequivocal language of Paradigm’s own Consent to the SCSA simply cannot be ignored: “This Consent does not create any privity between Paradigm and TRBP.”97 The hallmark of an assignment is privity between the assignee and the original lessor, and yet Paradigm executed a consent that expressly negates any such privity. Specifically, the language of Paradigm’s own Consent to the SCSA provided that:
2. Paradigm’s Consent. Paradigm hereby consents to the Shared Charter *700Services Agreement and transfers or assignments contained therein (“Paradigm’s Consent”), subject to the following terms and conditions:
(a) Paradigm’s Consent shall in no way release HSG from any of HSG’s covenants, agreements, liabilities or duties under the Aircraft Charter Agreement and any amendments thereto, including the obligation to pay all Rent as and when the same becomes due and payable under the Aircraft Charter Agreement and for the performance of all obligations of HSG thereunder. HSG shall continue to be liable for the payment of all Rent due and payable under the Aircraft Charter Agreement and for the performance of all obligations of HSG thereunder. This Consent does not (i) create any privity between Paradigm and TRBP or (ii) constitute an agreement or approval by Paradigm to any modification or amendment of the terms of the Aircraft Charter Agreement.
(b) The Shared Charter Services Agreement is and shall be, in all respects, subject and subordinate to the Aircraft Charter Agreement.98
While Paradigm has argued that the above language was only referring to the Consent, alone, and not the SCSA, the court cannot agree based upon the introductory phrase to section 2 which provides that “Paradigm hereby consents to the Shared Charter Services Agreement and transfers or assignments contained therein.” Thus, by substituting the meaning of the defined term from the introductory phrase of section 2 of the Consent into the applicable no-privity subparagraph, Paradigm expressly negated the creation of any privity with TRBP on account of the execution of the SCSA.
For all these reasons, the court finds that the SCSA should be treated as a sublease, not an assignment.99
2. Count 1: Breach of the 2007 Charter Agreement
In count 1 of the Amended Complaint, Paradigm alleges that TRBP breached the 2007 Charter Agreement. Here, it is undisputed that TRBP was not a signatory to the 2007 Charter Agreement. In order for Paradigm to prevail on Count 1, Paradigm must prove: (a) the existence of a valid, enforceable contract; (b) the plaintiff is a proper party to sue for breach; (c) the non-breaching party performed; (d) the defendant breached the contract; and (e) the defendant’s breach caused the damages sought.100 With regard to the first element, Texas law is clear that in general “privity of contract is an essential element of recovery.”101 In order to maintain an action to recover damages flowing from the breach of a written agreement, there must ordinarily be a privity existing between the party damaged (here, allegedly Paradigm) and the party sought to be held liable for the repudiation of the agreement (here, TRBP).102
*701As stated above, TRBP was not a party to the 2007 Charter Services Agreement; the agreement was between Paradigm and HSG only. Thus, the only way Paradigm could have a viable claim against TRBP for breach of the 2007 Charter Services Agreement is if the SCSA had the legal effect of creating an assignment of the 2007 Charter Services Agreement to TRBP (thus, creating privity between Paradigm and TRBP). Based on the court’s analysis above, the court has determined that the SCSA was in the nature of a sublease — not an assignment — and, thus, there was no privity of contract created between Paradigm and TRBP. As earlier mentioned, the plain unambiguous language of the Consent, which was signed by Paradigm, makes clear that the parties never intended for the SCSA to create any type of privity between Paradigm and TRBP. Because no privity existed between TRBP and Paradigm, no relief is available to Paradigm against TRBP for breach of the 2007 Charter Agreement, and the court must grant TRBP’s MSJ as to Count 1 of the Amended Complaint and deny Paradigm’s MSJ as to Count 1 of the Amended Complaint. Moreover, because Paradigm cannot assert breaches of the 2007 Charter Agreement against TRBP, the court need not determine, at least as to Count 1 of the Amended Complaint, whether the Amendment to the SCSA was valid and/or whether its execution was a breach of the 2007 Charter Agreement.
3. Count 2: Breach of the SCSA
As noted earlier, the SCSA was an agreement between HSG and TRBP. Paradigm was not a party to it (although Paradigm signed a Consent as to it). Nevertheless, in Count 2 of the Amended Complaint, Paradigm has asserted that TRBP and HSG intended to secure a benefit for Paradigm when they entered into the SCSA, and that, accordingly, Paradigm is a third-party beneñciary of SCSA, fully vested with rights to enforce the terms of the SCSA against TRBP under Texas law. With such standing, Paradigm has asserted a claim against TRBP for TRBP’s breaches or anticipatory breaches of the SCSA, including but not limited to TRBP’s refusal to pay Paradigm for rent, costs, and expenses owed during the Major League Baseball season in each year through 2017,103 and its attempt to modify, assign (or reassign), and/or terminate its obligations to make those payments without Paradigm’s written consent via TRBP’s execution of the Amendment to the SCSA, which is invalid and unenforceable under Texas law.
a) Was Paradigm a Third-Party Beneñciary of the SCSA?
The court must first determine whether Paradigm was a third-party beneficiary of the SCSA. In order for Paradigm to qualify as a third-party beneficiary of the SCSA under Texas law, the terms of the SCSA must show that TRBP and HSG: (1) intended to secure a benefit for Paradigm, and (2) entered into the agreement directly for Paradigm’s benefit.104 *702When determining whether Paradigm is a third-party beneficiary, it is appropriate to examine the entire contract and give effect to all its provisions so that none are rendered meaningless.105 A third-party beneficiary does not have to show that the signatories executed the contract solely to benefit the non-contracting party, but rather, the focus is on whether the contracting parties intended, at least in part, to discharge an obligation owed to a third party.106 There is a legal presumption that parties contract only for themselves and not for the benefit of third parties.107 Moreover, according to the Texas Supreme Court, a party proves itself to be a third-party beneficiary if the performance of the contract will satisfy “a legal duty owed to [it],” which “may be an ‘indebtedness, contractual obligation or other legally enforceable commitment’ owed to the third party.”108 Thus, Paradigm need not show that TRBP and HSG executed the SCSA solely to benefit Paradigm; rather, the focus is on whether they intended, at least in part, to discharge an obligation owed to Paradigm.109 Finally, any references to Paradigm in the SCSA, though not disposi-tive, provide further evidence that it was an intended third-party beneficiary.110
Here, the court finds that the undisputed facts show that Paradigm was a third-party beneficiary of the SCSA. While HSG and TRBP, in executing the SCSA, may have primarily been focused on the fact that HSG would no longer be the ultimate, indirect owner of the Rangers, and the new owner of the Rangers should have some written contractual arrangements governing its rights and obligations with regard to the Aircraft, the fact is that the SCSA spelled out that TRBP and its successor would have both a right to use the Aircraft and an obligation to pay Paradigm in specified amounts. The facts here resemble those considered by the Texas Supreme Court in Stine v. Stewart, which the Texas Supreme Court reaffirmed in Tawes v. Barnes.111 In Stine, the Texas Supreme Court determined that an agreement settling a divorce by, among other things, requiring the husband to pay a specific amount of money under a detailed plan to a person named in the agreement, his mother-in-law, Ms. Stine, conferred a direct benefit on Ms. Stine, made her the agreement’s third-party beneficiary, and allowed her to sue her former son-in-law for defaulting on his payment obligations.112 When discussing Stine in the Tawes decision, the Texas Supreme Court noted that an agreement “contain[s] the requisite clear and unequivocal language of intent to directly benefit a third party” *703when, for example, it provides for the payment “of a specific amount of money” to an identified recipient.113 In light of the criteria promulgated by the Texas Supreme Court in Tawes and Stine, the court finds that the SCSA clearly and fully expressed TRBP’s and HSG’s intent to secure a benefit for Paradigm and to discharge their obligations to pay Paradigm for the charter services Paradigm would render through 2017. To clarify and discharge those payment obligations, the SCSA, which references Paradigm repeatedly in the SCSA, made TRBP responsible for paying Paradigm directly for all costs and expenses for which HSG was responsible under the 2007 Charter Agreement and even attached a schedule for such payments as an exhibit to the SCSA (showing the exact payments to be made).114 The SCSA conferred a direct benefit on Paradigm because it promised TRBP’s performance in satisfaction of contractual obligations HSG owed to Paradigm under the 2007 Charter Agreement, particularly the payment of monthly rent and other expenses as set forth in Exhibit D to the SCSA.
b) Did TRBP Breach the SCSA?
Having found that Paradigm is a third-party beneficiary of the SCSA, the court must next determine whether TRBP breached, or anticipatorily breached, the SCSA by its attempt to modify, assign (or reassign), and/or terminate its obligations to make payments under the SCSA to Paradigm for rent, costs, and expenses owed during the Major League Baseball season in each year through 2017, via execution of the Amendment to the SCSA without Paradigm’s written consent. If not, the Amendment to the SCSA would be deemed valid and TRBP’s obligation to pay Paradigm for charter services beyond the end of the 2010 season would have been extinguished. In other words, HSG would be “on the hook” for breaches of the SCSA after 2010, but not TRBP.
“It is settled in Texas that after a contract for the benefit of a third-party has been accepted or acted on by an entity (ie., Paradigm), it cannot be rescinded or modified by the original parties (ie., HSG and TRBP) without the third-party’s consent.”115 Here, there is no dispute that Paradigm accepted the SCSA as *704a matter of law. It participated in the revision of the agreement and then signed the Consent to the SCSA on May 23, 2010, signifying its acceptance of the SCSA. Paradigm subsequently relied on the SCSA and accepted its benefits by dealing directly with TRBP on payment issues and accepting TRBP’s rental payments in June, July, and August, 2010, before the Amendment to the SCSA was signed without Paradigm’s knowledge or consent on August 12, 2010.116
The court concludes that the Amendment to the SCSA was, without a doubt, a modification of TRBP’s obligations under the SCSA that required Paradigm’s consent to be effective. Specifically, section 1 of the Amendment to the SCSA provides that
Notwithstanding anything in the Agreement [ie., SCSA] to the contrary, and in particular Section 3.2 and 5.1 thereof, (1) the Agreement [le., SCSA] shall terminate following the last game ... of the Texas Rangers’ 2010 MLB baseball season ... 117
TRBP has argued that the Amendment to the SCSA merely reduced the time at which the SCSA would expire by its own terms.118 In other words, TRBP argues that a termination was not accomplished but a mere amendment. This is really of no moment. The case law is clear that a mere modification of a contract requires the consent of a third-party beneficiary. At a minimum, the Amendment to the SCSA was intended to create a modification. The modification of the SCSA without Paradigm’s (ie., the third party beneficiary’s) knowledge or consent was a breach of the SCSA, and the Amendment to the SCSA is not valid as a matter of law. And because the Amendment to the SCSA is not valid, TRBP has further breached its obligations under the SCSA by not making the required payments to Paradigm since the fall of 2010.
TRBP attempts to escape any liability under the SCSA (or side-step the “consent” problem it has with regal’d to the Amendment to the SCSA) by relying on Section 365 of the Bankruptcy Code and the procedures TRBP undertook to purportedly assume and assign the SCSA to Baseball Express, on the Effective Date of the Chapter 11 Plan. Specifically, Section 365 permits a debtor-in-possession, subject to court approval, to either reject or assume (or assume and assign) an exec-utory contract.119 And Section 365 of the Bankruptcy Code provides that “assignment by the debtor in possession to an entity of a contract or lease assumed under this section relieves the [debtor in possession] and the estate from any liability for any breach of such contract or lease occurring after such assignment.”120
The SCSA was, without a doubt, an executory contract between TRBP and HSG (of which Paradigm was a third-party beneficiary). Here, Paradigm was entitled to notice of the debtor-in-possession’s intentions with regard to the SCSA since it was a third-party beneficiary of the SCSA. Under the Bankruptcy Rules, notice must be given in a bankruptcy case to counter-parties to the contract and to other parties in interest of a debtor-in-possession’s contemplated decision to either reject or assume an executory contract.121 Here, TRBP gave notice to parties-in-interest *705(including Paradigm) that the SCSA was on the list of executory contracts to be assumed and assigned to the purchaser.122 And while there was language given in such notice that all executory contracts would be subject to any amendments thereto (and while there was a July 2010 amendment to the APA stating that Baseball Express would not close on its acquisition of the Rangers unless the SCSA was amended to terminate after the 2010 season), the fact is that the Amendment to the SCSA was not executed until: (a) after the notice went out to parties in interest containing the list of executory contracts to be assumed and assigned by TRBP (which list included the SCSA); and (b) after the court’s approval of the assumption and assignment of executory contracts (via the Confirmation Order). There is no credible argument, based on the undisputed summary judgment evidence, that Paradigm received meaningful notice of the Amendment to the SCSA prior to the document’s preparation and execution (and, in time to object, if Paradigm wanted to, prior to the bankruptcy court’s approval of all assumptions and rejections as part of the Confirmation Order). So there cannot be any implied “consent” by Paradigm to the Amendment to the SCSA through notice and failure by Paradigm to object (if that is what TRBP is suggesting). Section 365 provides no safety net to TRBP here. Not only did Paradigm not receive notice reasonably calculated to apprise Paradigm of what was happening, but any notice would have been disingenuous. The notices regarding executory contracts suggested that the SCSA was being assumed and assigned. But the Amendment to the SCSA essentially sought to accomplish a Section 365 rejection — since it contemplated modifying the SCSA agreement to expire in three months rather than seven years. This is tantamount to a rejection. Thus, TRBP cannot fall back on Section 365 to save it from liability to Paradigm.
In summary, not only has the court found the Amendment to the SCSA to be invalid and unenforceable (since done without the consent of the third-party beneficiary), but TRBP essentially circumvented proper procedures under section 365 of the Bankruptcy Code. TRBP’s liability under the SCSA either: (a) rode through the bankruptcy proceeding unaffected and is binding on TRBP because the SCSA (without the Amendment) was never assumed and assigned to any party under the confirmed chapter 11 plan (nor rejected);123 or (b) survived as a rejection damages claim, since TRBP effectively rejected the SCSA by its execution of the Amendment to the SCSA (which, under section 365(g)(1) of the Bankruptcy Code, would give Paradigm a prepetition claim for breach of the SCSA). Either way, Paradigm’s claim for breach of the SCSA against TRBP survives and Paradigm is entitled to summary judgment on its claim for breach of the SCSA.
In conclusion, the court finds that the summary judgment evidence demonstrates that Paradigm was a third-party beneficiary of the SCSA and that TRBP has breached its obligations owing to Paradigm under the SCSA. Accordingly, as to Count 2 of the Amended Complaint, the court finds that Paradigm’s MSJ should be granted and TRBP’s MSJ should be denied.
*706IV. THE MOTION TO DISMISS THE AVOIDANCE COMPLAINT
TRBP has separately filed a third-party complaint against HSG and counterclaim against Paradigm in order to avoid the SCSA as a fraudulent transfer pursuant to section 548(a)(1)(A) of the Bankruptcy Code (the “Avoidance Complaint”). Specifically, TRBP has requested, if this court does not hold the Amendment to SCSA to be valid and binding, that the court, in the alternative, avoid the SCSA as an “obligation ... incurred by the debtor ... within 2 years before the date of the filing of the petition” that was incurred “with actual intent to hinder, delay, or defraud” TRBP’s lenders.124 Because the court has denied TRBP’s MSJ as to Count 2 of the Amended Complaint, finding that TRBP breached the SCSA and that the Amendment to SCSA is not binding on Paradigm, the court must now consider the Avoidance Complaint as well as Paradigm’s and HSG’s Motion to Dismiss the Avoidance Complaint.
Specifically, Paradigm and HSG have sought dismissal of the Avoidance Complaint under two separate grounds: (1) that TRBP lacks standing to bring the Avoidance Complaint because, as a matter of law, an avoidance action must be for the benefit of creditors and not the debtor (and here, Paradigm argues, there can be no benefit to creditors since TRBP’s creditors were paid in full under TRBP’s Plan); and (2) that TRBP has failed to allege the required elements of a fraudulent transfer claim under section 548(a)(1)(A) of the Bankruptcy Code, by failing to specifically allege how TRBP (as opposed to HSG) intended to hinder, delay, or defraud its creditors.
A. Does TRBP Have Standing to Bring the Avoidance Complaint?
Constitutional standing requires three elements: (1) the plaintiff must have suffered an “injury in fact” — an invasion of a legally protected interest which is (a) concrete and particularized; and (b) “actual or imminent, not ‘conjectural’ or ‘hypothetical;’ ” (2) there must be a causal connection between the injury and the conduct complained of — -the injury has to be “fairly ... trace[able] to the challenged action of the defendant, and not ... th[e] result [of] the independent action of some third party not before the court;” and (3) it must be “likely,” as opposed to merely “speculative,” that the injury will be “redressed by a favorable decision.”125 As mentioned above, Paradigm’s and HSG’s lack-of-standing argument is all premised on the argument that avoidance actions must be for the benefit of creditors, not the debtor or its equity holders, and, here, it is a matter of public record that all creditors of TRBP, including all unsecured creditors, were paid in full with interest on their claims in the underlying Bankruptcy Case. As such, Paradigm argues that no creditors stand to benefit from successful prosecution of the Avoidance Complaint and TRBP is not permitted to use the strong-arm equitable power of a bankruptcy avoidance action for the exclusive benefit of itself and its equity holders. Simply stated, Paradigm argues that, in the absence of any injured creditors, TRBP lacks standing to bring the Avoidance Complaint.
Here, it first should be reiterated that the only claim asserted by TRBP in the Avoidance Complaint is for avoidance of a fraudulent transfer under section 548(a)(1)(A) of the Bankruptcy Code and: (a) not a cause of action under section 544 *707of the Bankruptcy Code to avoid a 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 that is holding an unsecured claim”; and (b) not a claim under section 550(a) of the Bankruptcy Code “to recover, for the benefit of the estate property transferred” to the Paradigm Parties.126 To be clear, TRBP has brought a “standalone” Section 548 action. TRBP is simply seeking to avoid the obligation it incurred on the eve-of-bankruptcy by virtue of the SCSA. Notably, it is Section 550 (not Section 548 or other Chapter 5 statutes) that mentions the requirement of a “benefit” to the “estate” if a trustee/debtor-in-possession seeks to recover property transferred (as opposed to seeking to avoid transfers or obligations). And notably, while Section 544(b) requires a preexisting holder of an unsecured claim as a condition to bringing an avoidance action under state law, there is no such requirement in Section 548(a). Thus, this court must probe deeper into whether standing is defeated here if the creditors of TRBP (including unsecured creditors) have at this point been paid in full.
While the Fifth Circuit has specifically recognized the differences between bringing fraudulent transfer actions under section 544 of the Bankruptcy Code (which allows for a longer reach back period) and those pursued under section 548 of the Bankruptcy Code,127 the Fifth Circuit has never expressly addressed the requisite standing to bring an avoidance action under section 548(a)(1) of the Bankruptcy Code. In fact, the Fifth Circuit authority that comes closest to the standing question presented here is In re Mirant Corp.128 In that case, the issue was whether a debtor had standing to assert an avoidance action that had been brought under Section 544 and the debtor was also seeking recovery of funds, pursuant to Section 550 of the Bankruptcy Code. In Mirant Corp., the debtor had guaranteed certain obligations of its affiliate, and after its affiliate defaulted, the debtor was forced to make payments on the guaranty.129 The debtor later filed for bankruptcy and initiated an adversary proceeding against the lenders, again, pursuant to both sections 544 and 550 of the Bankruptcy Code.130 After the debtor confirmed a plan that paid general unsecured creditors in full (albeit with primarily the receipt of shares in the reorganized debtor), the lenders filed a motion to dismiss for lack of standing.131 On appeal, the Fifth Circuit first noted that other federal courts were divided on the issue of whether parties in the position of this debtor had standing to pursue avoidance actions where the debtor’s creditors had been paid in full.132 Specifically, the Second Circuit has held that the debtor did not have standing under section 544 to assert an avoidance action where creditors had been paid in full and would receive no benefit from avoiding the transfer, whereas the Eighth and Ninth Circuits have held that a debtor’s standing to pursue an avoidance action was not defeated simply because creditors had been paid in full.133 *708The Fifth Circuit ultimately sided with the Eighth and Ninth Circuits, first, noting that under the law of the Fifth Circuit, the right to avoid a transfer or obligation under § 544 is assessed as of the petition date.134 As a result, the Fifth Circuit held that “[o]nce a trustee’s avoidance rights are triggered at the time of filing, they persist until avoidance will no longer benefit the estate under § 550.”135 Specifically, the Fifth Circuit held that the debtor may have standing to pursue avoidance actions, even though creditors have subsequently been paid in full, although this standing will hinge on whether the avoidance and recovery would actually benefit the estate, noting that:
A bankruptcy trustee may still have standing to avoid a fraudulent transfer after the unsecured creditors are satisfied in full. The fraudulent transfer injures the estate and § 550 ensures that the injury is redressed because a trustee may only avoid a transfer to the extent it benefits the estate. Therefore, to the extent that MCAR’s [the debtor] successful avoidance of fraudulent transfers will benefit the bankruptcy estate, MCAR [the debtor] has Article III standing to avoid transfers that injure the estate.136
Without a doubt, the Fifth Circuit appeared to recognize a distinction between a “benefit to the estate” and the concept of a pool of assets to be gathered for the sole benefit of unsecured creditors.137 However, it cannot be ignored that Section 550 was implicated in Mirant — which is the statute that refers to the notion of “benefit” to the “estate.” As noted above, this case is distinguishable from the facts of Mirant because the Avoidance Complaint is being brought under section 548(a)(1)(A) of the Bankruptcy Code alone, not sections 544 or 550 of the Bankruptcy Code. The court believes this to be an important distinction.
Specifically, the court finds that the inquiries relevant to a fraudulent transfer action under section 548(a)(1) (i.e., whether a particular obligation incurred by the debtor is subject to avoidance) are materially different than the inquiries related to recovery under section 550(a) (i.e. whether the recovery of specific fraudulently transferred property will result in a benefit to the bankruptcy estate). A number of federal courts that have addressed the specific issue of whether avoidance of a transfer/obligation (as opposed to affirmative recovery on a transfer/obligation) requires a showing that avoidance must demonstrably benefit the estate have found that it does not.138 In any event, even if benefit to the estate is on some level required in a Section 548 standalone action *709(for example, required on some equitable level)—in spite of there being no requirement in the wording of Section 548(a)—the court is not convinced there is no plausible benefit to the estate here. As described above, Mirant makes clear that “benefit to the estate” does not hinge on whether a Chapter 5 action will result in a pool of assets being garnered for the benefit of unsecured creditors. Here, it is a matter of public record that the equity holders of TRBP have obligations to certain lenders that TRBP was also liable to (and while those lenders may have been paid in full on the “capped liability” on which TRBP was obligated, such lenders were not paid in full on their entire indebtedness owed by the direct and indirect equity owners of TRBP). Thus, to the extent the equities matter here, it would seem that such equities weigh in favor of finding there to be a plausible “benefit to the estate” argument articulated by TRBP.139 Accordingly, the court finds that here, TRBP does have Constitutional standing to assert a fraudulent transfer claim under section 548(a)(1)(A) of the Bankruptcy Code, even
though unsecured creditors were paid in full under the Plan, and that the Avoidance Complaint should not be dismissed.
B. Has TRBP Alleged AH the Required Elements for a Fraudulent Transfer Claim?
Section 548(a)(1) of the Bankruptcy Code provides for the avoidance of “any transfer ... of any interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred ... within two years before the date of the filing” of the bankruptcy petition, if the transfer was made with “actual intent to hinder, delay, or defraud.”140 Thus, section 548(a)(1)(A) requires TRBP to plead and prove: (1) a transfer, (2) of an interest of the debtor in property or any obligation incurred by the debtor, (3) made or incurred within two years of the filing of the petition, that was (4) either voluntary or involuntary, and (5) the transfer was made with the actual intent to hinder delay or defraud a creditor.141 Here, TRBP’s Counterclaim alleges, in relevant part:
*710On the date of the execution of the Shared Charter Services Agreement, TRBP, as a guarantor of Obligations under the Credit Agreements, was indebted to the Lenders in the amount of at least $75 million.
TRBP entered into the Shared Charter Services Agreement with HSG for the purpose of, among other things, hindering and delaying the Lenders. In particular, because the Lenders had refused to approve the sale to Baseball Express as originally structured, TRBP and HSG sought to frustrate the Lenders’ approval rights under the Credit Agreements by orchestrating the “eve of bankruptcy” transactions, including the Shared Charter Services Agreement, and by then seeking to consummate the sale through TRBP’s Bankruptcy Case without the approval of the Lenders based upon the payment limitation benefits of TRBP’s Guaranty Cap. Moreover, TRBP’s execution of the Shared Charter Services Agreement was wholly unnecessary to the Baseball Express sale. HSG could have just as easily, and more appropriately, directly entered into the Shared Charter Services Agreement with Baseball Express without any involvement by TRBP. By entering into the Shared Charter Services Agreement instead, TRBP and HSG sought to effectively elevate the payment priority of HSG’s obligations under the Paradigm-HSG Charter Agreement over the payment priority that the Lenders have in the absence of such agreement by virtue of their hens under the Security Agreements. Finally, as a result of TRBP’s entry into the Shared Charter Services Agreement, TRBP has been embroiled in litigation that would have been wholly-unnecessary in the absence of such agreement, and such litigation has further hindered and delayed the Lenders’ collection efforts.
Additionally, by entering into the Shared Charter Services Agreement, at a time when both TRBP and HSG were under the control of Hicks, TRBP and HSG intended to defraud the Lenders. Such indicia of fraud includes, without limitation:
• The fact that the obligations incurred by TRBP were for the benefit of HSG and Hicks, both insiders of TRBP at the time of the transaction;
• The fact that TRBP and HSG shared the same officers at the time of the execution of the Shared Charter Services Agreement, and no arms-length negotiations (if any negotiations at all) took place between TRBP and HSG with respect to the terms of the Shared Charter Services Agreement;
• The fact that the terms of Paradigm-HSG Charter Agreement were above market and, notwithstanding same and the fact that Baseball Express was agreeable to the assumption of a short-term sublease between HSG and TRBP, the above-market terms for the full term of the Paradigm-HSG Charter Agreement were effectively passed along to TRBP under the terms of the Shared Charter Services Agreement;
• The fact that the prior agreement between HSG and TRBP for TRBP’s access to air charter services, to the extent contemplated as a multi-year agreement, was unenforceable as a matter of law, and it was unnecessary for TRBP to enter into a direct agreement with HSG in connection with the Baseball Express sale (inasmuch as HSG could have contracted directly with Baseball Express);
• The fact that HSG was insolvent at the time of the transaction and, having control of TRBP as its indirect parent and by virtue of overlapping officers, including Hicks, had the incentive to limit its liabilities by effectively imposing its *711long-term above-market obligations on TRBP so that such obligations would be satisfied through the Baseball Express sale or, alternatively, from proceeds of the sale;
• The fact that the transaction took place on the eve of TRBP’s bankruptcy filing, after the Lenders had accelerated the indebtedness owed under the Credit Agreements, and after HSG had failed to obtain the requisite level of Lender approval to enable consummation of the previously-structured sale (which did not include the Shared Charter Services Agreement); and
• The fact that Hicks stood to indirectly benefit from the transaction as a direct or indirect owner of SW SportsJet, the owner of the Aircraft and counterparty to the Paradigm-SW SportsJet Lease with Paradigm.142
In the Motion to Dismiss, Paradigm and HSG have alleged that TRBP’s Avoidance Complaint fails to adequately allege the fifth requirement of a fraudulent transfer under section 548(a)(1)(A) of the Bankruptcy Code that “the transfer was made with the actual intent to hinder, delay, or defraud a creditor.” Specifically, Paradigm and HSG have argued that TRBP fails to plead that TRBP — as distinct from HSG — acted with “actual intent to “hinder, delay or defraud” TRBP’s creditors. The court disagrees and determines that enough facts have been pleaded (including but not limited to shared officers between TRBP and HSG, control by Mr. Hicks of TRBP, failure of TRBP to have lender support of its contemplated sale to Baseball Express as of the date of the SCSA) to make a plausible claim of the requisite intent on the part of TRBP.
In evaluating a Motion to Dismiss under Rule 12(b)(6), which is made applicable in this proceeding pursuant to Bankruptcy Rule 7012, a complaint is to be charitably construed, with all well pleaded factual allegations being accepted as true and with any reasonable inferences from those facts being drawn in favor of the non-moving party, TRBP.143 Moreover, “factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).”144 In 2009, the Supreme Court clarified the Twombly pleading standard and elaborated that, to survive a motion to dismiss, a civil complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.”145 In ruling on a Rule 12(b)(6) Motion, the material to which the Court may refer is limited, and the Court should not look beyond the pleadings.146 The pleadings include the complaint and any documents attached to it.147
In addition to moving for dismissal under Rule 12(b)(6), Paradigm and HSG have argued that because fraud is alleged, the heightened pleading standard of Rule 9(b) applies to the Avoidance Complaint. Specifically, Rule 9(b), made applicable by Bankruptcy Rule 7009, states that “[i]n *712alleging fraud ..., a party must state with particularity the circumstances constituting fraud_” Fed.R.Civ.P. 9(b). Thus, a party alleging fraud must specify “the who, what, when, where, and how” of the alleged fraud.148 While, the Fifth Circuit has yet to address whether the heightened pleading standard of Rule 9(b) applies to claims for fraudulent transfers,149 the court need not decide such issue, as TRBP (as explained in detail below) has plead its claim with sufficient particularity even to satisfy Rule 9(b)’s more stringent standard.
Here, the court finds that the acts alleged by TRBP in the Avoidance Complaint unquestionably provide notice to both Paradigm and HSG of the specific facts and circumstances surrounding this eve of bankruptcy transaction, including the who, what, when, and where of the alleged fraud. However, even if the Avoidance Claim did not properly allege such facts, TRBP has, nonetheless, pleaded the fraudulent intent required under section 548(a)(1)(A) of the Bankruptcy Code by pleading certain indicia of fraud. Specifically, a plaintiff may establish the fraudulent intent required under section 548(a)(1)(A) by pleading so-called “badges of fraud” as circumstantial evidence of fraudulent intent which include: (1) the lack or inadequacy of consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of possession, benefit or use of the property in question; (4) the financial condition of the party sought to be charged both before and after the transaction in question; (5) the existence or cumulative effect of a pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pen-dency or threat of suits by creditors; and (6) the general chronology of the events and transactions under inquiry.150 While no particular “badge” is dispositive, courts typically require the confluence of multiple badges to establish fraudulent intent.151 Here, the court finds that TRBP has adequately pleaded at least three of the contemplated “badges of fraud” including that: (1) the obligations incurred by TRBP were for the benefit of an insider (here, HSG); (2) the value of the consideration received was not reasonably equivalent to the value of the amount of the obligation incurred as the terms of the 2007 Charter Agreement were above-market; and (3) the obligation was incurred on the eve of TRBP’s bankruptcy after several of HSG’s lenders had accelerated the indebtedness owing under certain of HSG’s credit agreements (of which TRBP was a guarantor). The court finds that the presence of these badges of fraud is enough to establish the requisite “fraudulent intent” to meet the pleading requirements of both Rule 9(b) and Rule 12(b)(6). Accordingly, TRBP has properly plead all the required elements of section 548(a)(1)(A) of the Bankruptcy Code, and the court finds that the Motion to Dismiss should be denied.
V. CONCLUSION
For the reasons articulated above, the court is: (1) denying Paradigm’s MSJ and *713granting TRBP’s MSJ as to Count 1; (2) granting Paradigm’s MSJ and denying TRBP’s MSJ as to Count 2; and (3) Denying the Motion to Dismiss as to the Avoidance Complaint. Further proceedings will be necessary to determine at least: (a) the potential amount of the allowable claim of Paradigm for TRBP’s breach of the SCSA; (b) whether the SCSA should in fact be avoided as a fraudulent transfer so that perhaps Paradigm will have no claim in the TRBP bankruptcy case; and (c) other potential relief.
Counsel shall upload Summary Judgments consistent with the ruling above.
IT IS SO ORDERED.
. TRBP should probably more properly be referred to as the "Post-Effective Date Debt- or" under the Fourth Amended Confirmed Plan (the "Plan") in the above-referenced bankruptcy case. Pursuant to the Plan, all remaining officers of TRBP were terminated as of the Effective Date of the Plan, and Alan M. Jacobs, an independent third party, was appointed to serve as TRBP's Plan Administrator and Disbursing Agent.
. 11 U.S.C. § 365.
. HSG is an entity affiliated with Mr. Tom Hicks.
. The court will not address TRBP's dismissal arguments under Rule 12(b)(6), as opposed to its summary judgment arguments under Bankruptcy Rule 7056, mostly because the parties have made Counts 1 (Breach of the 2007 Charter Agreement) and 2 (Breach of the SCSA) the subject of their respective summary judgment motions; moreover, the court concludes that Counts 1 and 2 are not subject to any legitimate dismissal arguments under Rule 12(b)(6).
. With regard to the cross motions for summary judgment, the court has also considered the following correspondences with the court and supplemental briefing: (1) Letter from Judge Michael Lynn and Response from Paradigm [DE # # 46 & 49]; (2) Plaintiffs’ Supplemental Brief in Support of Their Motion for Partial Summary Judgment [DE # 62]; (3) Defendant's Response to Plaintiffs’ Supplemental Brief in Support of Their Motion for Partial Summary Judgment [DE # 75]; (4) Defendant’s Supplemental Brief in Response to Court’s Request of May 16, 2011 for Supplemental Briefing [DE # 63]; (5) Plaintiffs’ Response in Opposition to Defendant’s Supplemental Brief in Response to Court’s Request of May 16, 2011 for Supplemental Briefing [DE # 73]; (6) TRBP’s Written Submission Clarifying Issues Pursuant to the Court’s April 19, 2012 Order [DE # 156]; (7) Plaintiffs’ Supplemental Brief Supporting Their Motion for Partial Summary Judgment and Opposing Defendant’s Motion for Partial Summary Judgment [DE # 157]; and (8) TRBP’s Reply to Pages 28-34 of the Plaintiffs' Supplemental Brief Supporting Their Motion for Partial Summary Judgment and Opposing Defendant's Motion for Partial Summary Judgment [DE # 182],
. Thus, the court need only consider TRBP’s Avoidance Complaint to the extent it denies TRBP's MSJ as to Count 1 or Count 2 of the Amended Complaint.
. The court will refer to: (1) Plaintiffs' Appendix as "Plaintiffs’ App. at_(2) Plaintiffs Supplemental Appendix as "Plaintiffs’ Supp. App. at __(3) Defendant’s Appendix as *688“Defendant’s App. at _and (4) Defendant's Supplemental Appendix as "Defendant’s Supp. App. at_”
. Plaintiffs’ App. at 97 (Ireland Dec., ¶ 5).
. Plaintiffs’ App. at 102-133 (Ireland Dec., Exs. 1 and 2, 2003 Agreements).
. Plaintiffs’ App. at 97 (Ireland Dec. ¶ 5).
. Plaintiffs’ App. at 98 (Ireland Dec. ¶ 6).
. Id..; Plaintiffs’ App at 134-148 (Ireland Dec., Ex. 3, 2007 Charter Agreement).
. Plaintiffs App. at 98 (Ireland Dec. ¶ 6). Interestingly, Paradigm is not the actual owner of the Aircraft. Paradigm leased the Aircraft from Southwest SportsJet, LLC, the Aircraft’s actual owner. Southwest SportsJet, LLC was, in turn, jointly owned by Jim Wi-kert and Hicks SportsJet, LLC, the latter of which is an entity owned by Tom Hicks. Plaintiffs’ App. at 97 (Ireland Dec. ¶ 4). Thus, while Paradigm itself is not a Tom Hicks-owned entity, there is clearly some coziness between Paradigm and HSG that does not escape the court’s attention and may become more relevant at later stages of this litigation.
. Plaintiffs’ App. at 98 (Ireland Dec. ¶ 7).
. Id.
. Plaintiffs' App. at 149 (Ireland Dec., Ex. 4, SCSA p. 1).
. Defendant's App. at 16-133.
. Defendant’s App. at 133-144; see also Plaintiffs App. at 98-99 (Ireland Dec. ¶ 8).
. Plaintiffs' App. at 140.
. Defendant’s App. at 166-184.
. Plaintiffs’ App. at 99, 201-23 (Ireland Dec. ¶ 9, Ex. 6, May 20, 2010 email from Christensen with attached drafts).
. Plaintiffs’ App. at 224.
. Plaintiffs' App. at 149-200, 224 (SCSA, Consent, & Ex. 7, May 20, 2010 Cheng email attaching revisions to SCSA and Consent).
. Plaintiffs' App. at 153 (SCSA, § 5.1).
. Plaintiffs’ App. at 150 (SCSA, §§ 1.1, 1.4).
. Plaintiffs’ App. at 152 & 176-77 (SCSA, §§ 3.1, 3.2, Exhibit D).
. Plaintiffs' App. at 154 (SCSA, § 6.3) (emphasis added).
. Defendant's App. at 167 (Consent to SCSA) (emphasis added).
. Plaintiffs' App. at 99, 182-185 (Ireland Dec. ¶ 11, Ex. 5, Consent to SCSA).
. Plaintiffs’ App. at 99 (Ireland Dec. ¶ 11).
. See generally In re Texas Rangers Baseball Partners, Case No. 10-43400-DML-ll (Chapter 11) (the "Bankruptcy Case”).
. See DE # 226 in the Bankruptcy Case; see also Defendant’s App. at 133 (APA Exh. 1.1(a)(0).
. Defendant's App. at. 185-307 (Bidding Procedures Order).
. See Defendant’s App. at. 302-307 (Bidding Procedures Order, Exh. C — First Amendment to APA).
. Defendant's App. at 123-133 (Second Amendment to APA, § 18).
. Defendant’s App. at 308-351 (Fourth Amended Plan).
. Defendant's App. at 352-356 (Confirmation Order).
. The "Asset Purchase Agreement” is defined in the Plan as "that certain Asset Purchase Agreement, dated as of May 23, 2010 and amended as of July 12, 2010, by and between TRBP and Baseball Express, as amended, restated, amended and restated or otherwise modified from time to time.” See Defendant’s App. at. 312-313 (Plan, § § 1.3 and 1.11).
. Defendant's App. at. 328 (Plan, § 6.1(a)).
. "Purchaser” is defined in the Plan as Baseball Express. See Defendant’s App. at. 313, 318 (Plan, §§ 1.10 and 1.72).
. "Excluded Contract” is defined in the Plan as "those contracts defined as Excluded Contracts pursuant to Section 1.1 of the Asset Purchase Agreement.” See Defendant's App. at 315 (Plan, § 1.42).
. Defendant’s App. at 334-35 (Plan, § 9.1(a),(d)).
. Defendant’s App. at 27; 131 (APA, § 1.1 and Exh. 1.1(a)(0).
. Defendant’s App. at 162-165 (the Amendment).
. Defendant’s App. at 162 (the Amendment, § 1).
. Defendant's App. at. 334 (Plan, § 9.1(a)); see also Defendant's App. at. 42 (APA, § 2.1(a)).
. Ireland has asserted that he did not receive and had no knowledge of the provisions in the amendments to the APA, particularly those that were eventually incorporated into the Amendment to the SCSA. In fact, he did not receive a draft of the First Amendment to the APA until August 13, 2010. Plaintiffs’ App. at 99-101, 275-284 (Ireland Dec. ¶¶ 12-14, Ex. 10, August 13, 2010 email from D. Artz [Redacted for Attorney-Client Privilege]).
. App. at 99-100, 268-274 (Ireland Dec. ¶ 12, Ex. 9, August 12, 2010 email from Ireland and responses).
. Id.
. Id.
. TRBP’s October 2010 payment was for access to Charter Services through the end of November 2010. See Defendant's App. at 162 (Amendment, § 1).
. Defendant's App. at 357-368 (Report on World Series).
. Defendant’s App. at 162 (the Amendment, § 1).
. Plaintiffs’ App. at 101 (Ireland Dec. ¶ 15).
. See Agreed Order Granting Motion to Consolidate [DE #58].
. See DE #11.
. Specifically, TRBP filed a “Motion to Dismiss First Amended Complaint or, Alternatively, for Summary Judgment and Brief in Support” [DE ## 14 & 15], and Paradigm filed a Motion for Partial Summary Judgment and Brief in Support [DE ## 17 & 18],
. TRBP’s Brief in Support of Motion to Dismiss First Amended Complaint or, Alternatively, For Summary Judgment [DE # 15],
. See April 11, 2011 Hearing Transcript, at 29-32 [DE # 52] ("COURT: Do you think that it was your place to bring in Express if you think Express has whatever liability TRBP might have? MR. APPENZELLER: I do think that’s something that, depending on the outcome of these motions, we’re going to have to make a decision on.”)
. See May 16, 2011, Letter from Court [DE # 46]. This appears to be a typographical error since there is no Rule 19(b)(1)(B).
. Id.
. Id.
. See May 27, 2011, Letter from W. Snyder to Court [DE # 49].
. See June 9, 2011, Order Respecting Join-der [DE # 55].
. Id.
. See DE # 70.
. See DE # 149.
. Id.
. See DE# 151.
. Fed.R.Civ.P. 56(a); Piazza's Seafood World, LLC v. Odom, 448 F.3d 744, 752 (5th Cir.2006); Lockett v. Walart Stores, Inc., 337 F.Supp.2d 887, 891 (E.D.Tex.2004).
. Piazza’s Seafood World, LLC, 448 F.3d at 752 (citing Anderson v. Liberty Lobby, Inc., All U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
. Wyatt v. Hunt Plywood Co., Inc., 297 F.3d 405, 409 (5th Cir.2002), cert. denied, 537 U.S. 1188, 123 S.Ct. 1254, 154 L.Ed.2d 1020 (2003).
. Piazza’s Seafood World, LLC, 448 F.3d at 752; Lockett, 337 F.Supp.2d at 891.
. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994).
. Lockett, 337 F.Supp.2d at 891; see also Ashe v. Corley, 992 F.2d 540, 543 (5th Cir.1993).
. Lockett, 337 F.Supp.2d at 891.
. Fed.R.Civ.P. 56(c)(1); Piazza's Seafood World, LLC, 448 F.3d at 752; Lockett, 337 F.Supp.2d at 891.
. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
. Gulf Ins. Co. v. Burns Motors, Inc. 22 S.W.3d 417, 423 (Tex.2000); Ideal Lease Serv., Inc. v. Amoco Prod. Co., 662 S.W.2d 951, 953 (Tex.1983).
. Lyons v. Montgomery, 701 S.W.2d 641, 643 (Tex.1985); Kahn v. Seely, 980 S.W.2d 794, 797 (Tex.App.-San Antonio 1998, pet. denied).
. Nat'l Union Fire Ins. Co. of Pittsburgh v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.1995).
. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex.1996).
. Id.
. 317 S.W.2d 47, 50 (Tex.1958).
. Id.
. Id.
. Id.
. Id.
. See, e.g., id.; Interstate Fire Ins. Co. v. First Tape, Inc., 817 S.W.2d 142, 145 (Tex.App.Houston [1st Dist.] 1991, writ denied); Dameron Oil Co., Inc. v. Majeed, No. 10-01-00401-CV, 2004 WL 1211620, at *2-3 (Tex.App.-Waco Jun. 2, 2004, pet. denied).
. Black’s Law Dictionary, 1562 (9th Ed. 2009).
. Black’s Law Dictionary, 970 (9th Ed. 2009) (emphasis added).
. Black's Law Dictionary, 1278 (5th Ed. 1979).
. Black’s Law Dictionary, 1063 (5th Ed. 1979).
.The court acknowledges that there is sparse case law referencing subleases of personal property and, thus, this has made the parties and court resort to discussing sources like Black's Law Dictionary.
. Plaintiffs’ App. at 150 (SCSA, §§ 1.1, 1.4).
. Plaintiffs' App. at 153 (SCSA, § 5.1).
. Plaintiffs’ App. at 183 (Consent, ¶ 2(a)).
. Id. (emphasis added).
. For the avoidance of doubt, the court finds that the 2007 Charter Agreement is also a sublease (so, technically, the SCSA is a sub-sublease). Although the 2007 Charter Agreement is titled “Aircraft Charter Agreement" and Paradigm has argued that 2007 Charter Agreement is more in the nature of a services agreement, paragraph 1 of the 2007 Charter Agreement (Plaintiff's App. at 134) clearly demonstrates that the 2007 Charter Agreement is for a “lease” of the Aircraft, and the court finds this to be the substance of the agreement.
. City of The Colony v. N. Tex. Mun. Water Dist., 272 S.W.3d 699, 739 (Tex.App.-Fort Worth 2008, pet. dism’d).
. Boy Scouts of Am. v. Responsive Terminal Sys., Inc., 790 S.W.2d 738, 747 (Tex.App.Dallas 1990, writ denied) (emphasis added).
. Id. However, “a well-defined exception to the general rule thus stated is that one who is not privy to the written agreement may dem*701onstrate satisfactorily that the contract was actually made for his benefit and that the contracting parties intended that he benefit by it so that he becomes a third-party beneñciary and eligible to bring an action on such agreement.” Id. Paradigm has argued that it was a third-party beneficiary of the SCSA, so this third-party beneficiary doctrine will be discussed further below. However, the third-party beneficiary doctrine has no relevance with regard to the 2007 Charter Agreement, since Paradigm — the party claiming breach— was itself a party to the 2007 Charter Agreement and need not prove itself to be a third-parly beneficiary.
. There is no dispute that TRBP has not paid Paradigm under the SCSA since October 2010. Plaintiffs’ App. at 99, 482 (Ireland Dec. ¶ 11, Nicholson Dec., Ex. E., January 14, 2011, TRBP Response to Paradigm Request for Admission No. 23).
. Stine v. Stewart, 80 S.W.3d 586, 589 (Tex.2002); MCI Telecomms. Corp. v. Texas Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex.1999); *702Doe v. Tex. Ass'n of Sch. Bds., Inc., 283 S.W.3d 451, 460 (Tex.App.-Fort Worth 2009, pet. denied).
. Stine, 80 S.W.3d at 589; MCI, 995 S.W.2d at 652.
. Id. at 651.
. Id.
. Id. Such beneficiaries are referred to as "creditor beneficiaries." See S. Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex.2007); Stine v. Stewart, 80 S.W.3d 586, 589 (Tex.2002); Doe, 283 S.W.3d at 460; In re Bayer Materialscience, LLC, 265 S.W.3d 452, 456-57 (Tex.App.-Houston [1st Dist.] 2007, no pet.).
. Stine, 80 S.W.3d at 591-92.
. Union Pacific R.R. Co. v. Novus Int’l, Inc., 113 S.W.3d 418, 423 (Tex.App.-Houston [1st Dist.] 2003, pet. denied).
. 340 S.W.3d 419, 426-28 (Tex.2011) (comparing Stine and finding no third-party beneficiary status because relevant agreement did not "identify a specific sum which the parties ... must pay to a certain [third] person or entity.”).
. Stine, 80 S.W.3d at 590-591.
. Tawes, 340 S.W.3d at 428; see also Int'l Real Estate Holding Co., LLC v. For 1013 Regents, LLC, No. 3.T1-CV-02317, 2013 WL 1091243, at *5-6 (N.D.Tex. March 13, 2013) (citing to Stine and finding that lender was third-party beneficiary of contract that defendant executed with certain other third parties (the "TICs”) where the defendant agreed to ensure that the TICs pay all taxes due under loan agreement [between the lender and the TICs] or to do so itself).
. Plaintiffs’ App. at 152, 176-177 (SCSA, ¶ 3. 1, Exhibit D).
. Houston Lighting & Power Co. v. Wheelabrator Coal Servs. Co., 788 S.W.2d 933, 937 (Tex.App.Houston [14th Dist.] 1990, no writ); San Pedro State Bank v. Engle, 643 S.W.2d 450, 456 (Tex.App.-San Antonio 1982, no writ) ("[ajfter a third-party beneficiary contract has been accepted by the third-party beneficiary, it cannot be rescinded or modified without the subsequent consent of the third party beneficiary”); Mercantile Nat’l Bank at Dallas v. McCullough Tool Co., 250 S.W.2d 870, 875 (Tex.Civ.App.-Austin 1952, no writ), rev'd on other grounds, 152 Tex. 471, 259 S.W.2d 724 (1953) ("It is a well-established rule of law that a contract entered into by parties for the benefit of a third party is binding and may be enforced by the third party ... [a]nd where the contract has been accepted by the third party beneficiary it may not be modified or rescinded without his consent”); Pac. Am. Gasoline Co. of Texas v. Miller, 76 S.W.2d 833, 845 (Tex.Civ.App.-Amarillo 1934, writ ref’d) (after a contract for the benefit of a third person has been accepted or acted on by him, it cannot be rescinded without his assent).
. Plaintiffs' App. at 99 (Ireland Dec. ¶ 11).
. Plaintiffs' App. at 264 (Amendment, § 1).
. With all due respect, this is ''doublespeak.” This is like saying someone did not die but, rather, merely ceased to exist.
. 11 U.S.C. § 365(a) & (fi.
. 11 U.S.C. § 365(k).
. Fed. R. Bankr.Pro. 6006(c).
. Actually, there was a list of "Excluded Contracts” that would not be assumed and the SCSA was not on such list.
. Century Indem. Co. v. Nat'l Gypsum Co. Settlement Trust, 208 F.3d 498, 504 n. 4 (5th Cir.2000), cert. denied, 531 U.S. 871, 121 S.Ct. 172, 148 L.Ed.2d 117 (2000).
. See 11 U.S.C. § 548(a)(1)(A).
. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) (internal citations omitted).
. 11 U.S.C. §§ 544(b)(1), 550(a).
. In re Moore, 608 F.3d 253, 260 (5th Cir.2010).
. 675 F.3d 530 (5th Cir.2012).
. Id. at 532.
. Id.
. Id.
. Id. at 533.
. Id. at 533-34 (comparing Adelphia Recovery Trust v. Bank of America, N.A., 390 B.R. 80 (S.D.N.Y.2008), aff'd, 379 Fed.Appx. 10 (2d Cir.2010) (adopting reasoning of Southern District of New York), with Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 295 B.R. 593 (8th Cir. BAP 2003), aff'd, 376 F.3d 819 (8th Cir.2004)), and Acequia, Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800 (9th Cir.1994).
. Mirant, 675 F.3d at 534 (citing In re Moore, 608 F.3d 253, 260 (5th Cir.2010)).
. Mirant, 675 F.3d at 534.
. Id. (emphasis added).
. Id.; see also Stalnaker, 376 F.3d at 823.
. See, e.g., In re Coleman, 426 F.3d 719, 725-27 (4th Cir.2005) (rejecting defendant’s contention that "like property recovery, transfer avoidance could be limited to the extent necessary to benefit the creditors and pay the administrative expenses of the estate”); Dunes Hotel Assocs. v. Hyatt Corp., 245 B.R. 492, 503-511 (D.S.C.2000) (declining to adopt a per se rule that every avoidance action must demonstrably benefit the estate or must lead to the recovery of property transferred, but ultimately finding that in specific circumstances of the case, avoidance would not be permitted); Brennan v. Slone (In re Fisher), Nos. 07-3319, 07-3320, 2008 WL 4569946, at *8 (6th Cir. Oct. 10, 2008) ("[a]voidance and recovery are distinct [remedies], with the former a necessary precondition for the latter”); Brown v. Phillips (In re Phillips), 379 B.R. 765, 780 (Bankr.N.D.Ill.2007); Savage & Assocs., P.C. v. BLR Servs. SAS (In re Teligent, Inc.), 307 B.R. 744, 747-49 (Bankr.S.D.N.Y.2004).
. Without a doubt, Paradigm has eloquently argued that it would be disingenuous and against the underlying purposes of the Bankruptcy Code to allow TRBP to prosecute the Avoidance Complaint where recovery would be solely for the benefit of the reorganized debtor. However, in addition to the points made above (concerning the lenders of TRBP who still hold outstanding obligations owed by direct or indirect equity owners of TRBP), the court cannot help but point out the unique and somewhat troubling circumstances of this case—specifically, that it is a Hicks’-owned entity that actually owned the Aircraft (i.e., specifically, Tom Hicks is an indirect owner of SW SportsJet, LLC the owner of the Aircraft and counter-party to the Paradigm-SW SportsJet Lease with Paradigm)—and it was also a Hicks'-owned entity that was a subles-see on the Aircraft and that ultimately entered into the SCSA, making TRBP liable on the Paradigm lease, on the eve of bankruptcy. While the facts remain to be developed at a trial, it certainly does not seem disingenuous or contrary to the underlying purposes of the Bankruptcy Code to allow the Plaintiff his day in court regarding the bona fides of this eve-of-bankruptcy transaction between TRBP and the Hicks-entity/insider, when the transaction had the consequence of making TRBP liable for several millions of indebtedness of a Hicks-entity/insider. After all, avoidance actions have historically been aimed at (among other things) deterring overreaching by insiders of a debtor.
. 11 U.S.C. § 548(a)(1)(A).
. 11 U.S.C. § 548(a)(1)(A) (emphasis added); U.S. Bank, NA v. Verizon Commons, Inc., 817 F.Supp.2d. 934, 940 (N.D.Tex.2011) (noting that “[t]o state a claim for actual fraudulent transfer under the [Texas Business & Commerce Code] and the Bankruptcy Code, a creditor must allege that a debtor made a transfer 'with actual intent to hinder, delay, or defraud' any creditor of the debtor.”).
. Avoidance Complaint at 14-16, ¶¶ 41-42.
. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554-556 & 569, n. 14, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
. Id. at 555-556, 127 S.Ct. 1955.
. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949-1951, 173 L.Ed.2d 868 (2009) (the Court also affirmed the Twombly two-pronged approach to deciding motions to dismiss: first, determine what is a factual allegation versus a legal conclusion, as only factual allegations will be accepted as true; and second, determine whether the factual allegations state a plausible claim for relief).
. Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir.1999).
. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir.2000).
. Benchmark Electronics, Inc. v. J.M. Huber Corporation, 343 F.3d 719, 724 (5th Cir.2003).
. Janvey v. Alguire, 647 F.3d 585, 599 (5th Cir.2011) ("We need not and do not address the issue of whether heightened pleading is required.").
. Soza v. Hitt (In re Soza), 542 F.3d 1060, 1067 (5th Cir.2008).
. In re Equipment Acq. Resources, Inc., 481 B.R. 422, 431 (Bankr.N.D.Ill.2012) ("A single badge of fraud is insufficient to establish intent, but the presence of several may create a presumption that the debts acted with the requisite intent to defraud.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496345/ | Opinion and Order Denying Motion to Stay Proceedings Pending Determination of Motion to Withdraw the Reference
STEVEN RHODES, Bankruptcy Judge.
On September 11, 2013, the Official Committee of Retirees filed a motion to withdraw the reference on its objection to eligibility. (Dkt. # 806) On September 13, 2013, the Committee filed a motion to stay this Court’s deadlines and hearings concerning the determination of eligibility, pending the district court’s decision on the motion to withdraw the reference. (Dkt. # 837) Several parties, including Detroit Retired City Employees and Retired Detroit Police and Fire Fighters Association, filed a joint concurrence. (Dkt. # 922)
On September 18, 2013, the City filed an objection to the motion for stay. (Dkt. #925)
*780The Court heard argument on the motion on September 19, 2013, and took the matter under advisement.
I.Summary of Decision
The Court finds that none of the four factors to be considered on the Committee’s motion for stay weigh in favor of granting the motion. Specifically, the Court finds that:
1. The Committee is not likely to succeed on the merits of its motion to withdraw the reference.
2. The Committee will not suffer any harm, let alone irreparable harm, if the stay is denied.
3. The City will suffer substantial harm if the stay is granted.
4. The public interest would not be served by granting the stay.
For these reasons, the motion for stay is denied.
II. The Law Applicable to the Committee’s Motion for Stay
Bankruptcy Rule 5011(c) governs a motion for a stay of proceedings pending the determination of a motion to withdraw the reference.
The filing of a motion for withdrawal of a case or proceeding or for abstention pursuant to 28 U.S.C. § 1334(c) shall not stay the administration of the case or any proceeding therein before the bankruptcy judge except that the bankruptcy judge may stay, on such terms and conditions as are proper, proceedings pending disposition of the motion.
Fed. R. Bankr.P. 5011(c).
“Although BR 5011(c) provides little guidance as to the circumstances under which a bankruptcy court should stay a proceeding, it is clear from the plain language of the Rule that the granting of a stay should be the exception — not the general rule.” In re The Antioch Co., 435 B.R. 493, 496 (Bankr.S.D.Ohio 2010). The Antioch court further observed:
While the term “may” in the Rule appears to grant the bankruptcy court broad discretion in determining such a motion, the case law applying the Rule has limited the circumstances under which a stay may be granted to essentially the circumstances under which a preliminary injunction would be appropriate under Federal Rule of Civil Procedure 65.
Id. at 497.
Accordingly, when considering the Committee’s motion for a stay, the Court considers whether “(1) [the Committee] is likely to prevail on the merits of the withdrawal motion; (2) [the Committee] is likely to suffer irreparable harm if the motion is denied; (3) the debtor [or other parties] will not be harmed by a stay; and (4) the public interest will be served by granting a stay.” F.D.I.C. v. Imperial Capital Bancorp, Inc., 2011 WL 5600542, at *1 (S.D.Cal. Nov. 17, 2011).1 The parties agree that these are the factors to be considered.
This statement of the factors to consider on the Committee’s motion for stay is con*781sistent with the factors that the Sixth Circuit has approved when considering a motion for a preliminary injunction. See, e.g., Moltan Co. v. Eagle-Picher Indus., Inc., 55 F.3d 1171, 1175 (6th Cir.1995). “These factors are to be balanced against one another and should not be considered prerequisites to the grant of a preliminary injunction.” Leary v. Daeschner, 228 F.3d 729, 736 (6th Cir.2000).
The Committee bears the burden of establishing that a stay is appropriate. See, e.g., In re New Energy Corp., 2013 WL 1192774, at *10 (Bankr.N.D.Ind. Mar. 14, 2013).2
Ultimately, the issue of whether to grant a stay is left to the court’s discretion. See, e.g., In re Chrysler LLC, 2009 WL 7386569, at *1 (Bankr.S.D.N.Y. May 20, 2009).3
III. Whether the Committee Is Likely to Succeed on Its Motion to Withdraw the Reference
The parties agree, and the Court concurs, that the issue here is the Committee’s likelihood of success on the motion to withdraw the reference, not the likelihood of success on the Committee’s eligibility objections.
The Committee’s motion to withdraw the reference asserts three grounds:4
A. Stern v. Marshall requires withdrawal of the reference of the eligibility objection independently of 28 U.S.C. § 157(d).
B. Withdrawal of the reference is mandatory under 28 U.S.C. § 157(d).
C. Withdrawal for “cause” is warranted under 28 U.S.C. § 157(d).
The Court will review the likelihood of success of each of these three grounds.5
A. Stern v. Marshall
The Committee’s eligibility objection challenges the constitutionality of both chapter 9 of the bankruptcy code under the Federal Constitution and Michigan PA 436 (2012) under the Michigan Constitution. It asserts that therefore the Supreme Court’s decision in Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), requires the district court to withdraw the reference.6
*782In Stern v. Marshall, the Supreme Court held that the “judicial power of the United States” can only be exercised by an Article III court and “that in general, Congress may not withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” 131 S.Ct. at 2608-12. The Court held that a bankruptcy court therefore lacks the constitutional authority to enter a final judgment on a debtor’s counterclaim that is based on a private right when resolution of the counterclaim is not necessary to fix the creditor’s claim. 131 S.Ct. at 2611-19. The Court described the issue before it as “narrow.”7 131 S.Ct. at 2620.
The Sixth Circuit has adhered to a narrow reading of Stem in the two cases that have addressed the issue: Onkyo Europe Elect. GMBH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d 705 (6th Cir.2012), and Waldman v. Stone, 698 F.3d 910 (6th Cir.2012).
In Global Technovations, the Sixth Circuit summarized Stem as follows:
Stem’s limited holding stated the following: When a claim is “a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy,” the bankruptcy court cannot enter final judgment. Id. at 2611. In those cases, the bankruptcy court may only enter proposed findings of fact and conclusions of law. Ibid.
694 F.3d at 722. Based on this view of Stem, the Global Technovations court held that the bankruptcy court did have the authority to rule on the debtor’s fraudulent transfer counterclaim against a creditor that had filed a proof of claim. Id.
In Waldman, the Sixth Circuit summarized the holding of Stem as follows:
When a debtor pleads an action under federal bankruptcy law and seeks disal-lowance of a creditor’s proof of claim against the estate — as in Katchen [v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) ] — the bankruptcy court’s authority is at its constitutional maximum. 131 S.Ct. at 2617-18. But when a debtor pleads an action arising *783only under state-law, as in Northern Pipeline [v. Marathon Pipe Line Co. 458 U.S. 50, 102 S.Ct. 2858, 78 L.Ed.2d 598 (1982) ]; or when the debtor pleads an action that would augment the bankrupt estate, but not “necessarily be resolved in the claims allowance process[,]” 131 S.Ct. at 2618; then the bankruptcy court is constitutionally prohibited from entering final judgment. Id. at 2614.
698 F.3d at 919. Based on this view of Stem, the Waldman court held that the bankruptcy court lacked authority to enter a final judgment on the debtor’s prepetition fraud claim against a creditor that was not necessary to resolve in adjudicating the creditor’s claim.
These cases recognize the crucial difference to which Stem adhered. A bankruptcy court may determine matters that arise directly under the bankruptcy code, such as fixing a creditor’s claim in the claims allowance process. However, a bankruptcy court may not determine more tangential matters, such as a state law claim for relief asserted by a debtor or the estate that arises outside of the bankruptcy process, unless it is necessary to resolve that claim as part of the claims allowance process. See City of Cent. Falls, R.I. v. Central Falls Teachers’ Union (In re City of Cent. Falls, R.I.), 468 B.R. 36, 52 (Bankr.D.R.I.2012) (“[Ajlthough the counterclaim at issue in Stem arose under state law, the determinative feature of that counterclaim was that it did not arise under the Bankruptcy Code.”).
The matter on which the Committee has moved for withdrawal of the reference is the debtor’s eligibility to file this chapter 9 case. A debtor’s eligibility to file bankruptcy stems directly from rights established by the bankruptcy code. As quoted above, Waldman expressly held, “When a debtor pleads an action under federal bankruptcy law,” the bankruptcy court’s authority is constitutional. 698 F.3d at 919. In this case, the debtor has done precisely that. In seeking relief under chapter 9, it has pled “an action under federal bankruptcy law.”
The Committee’s federal and state constitutional challenges are simply legal arguments in support of its objection to the debtor’s request for bankruptcy relief. Nothing in Stem, Waldman, or Global Technovations suggests any limitation on the authority of a bankruptcy court to consider and decide any and all of the legal arguments that the parties present concerning an issue that is otherwise properly before it. More specifically, those cases explicitly state that a bankruptcy court can constitutionally determine all of the issues that are raised in the context of resolving an objection to a proof of claim, even those involving state law.8 For the same rea*784sons, a bankruptcy court can also constitutionally determine all issues that are raised in the context of resolving an objection to eligibility.
No cases address Stem in the context of eligibility for bankruptcy. Nevertheless, several cases do address Stem in the context of similar matters — conversion and dismissal of a case. Each readily concludes that Stem’s limitation on the authority of a bankruptcy court is inapplicable. For example, in In re USA Baby, Inc., 674 F.3d 882, 884 (7th Cir.2012), the Seventh Circuit held that nothing in Stem precludes a bankruptcy court from converting a chapter 11 case to chapter 7, stating, “we cannot fathom what bearing that principle might have on the present case.”9 In Mahanna v. Bynum, 465 B.R. 436 (W.D.Tex.2011), the court held that Stem does not prohibit the bankruptcy court from dismissing the debtors’ chapter 11 case. The court concluded, “[T]his appeal is entirely frivolous, and constitutes an unjustifiable waste of judicial resources!.]” Id. at 442. In In re Thal-mann, 469 B.R. 677, 680 (Bankr.S.D.Tex. 2012), the court held that Stem does not prohibit a bankruptcy court from determining a motion to dismiss a case on the grounds of bad faith.10 This line of cases strongly suggests that Stem likewise does not preclude a bankruptcy court from determining eligibility.
*785Implicitly recognizing how far its motion to withdraw the reference stretches Stem, the Committee argues that two aspects of its objection alter the analysis of Stem and its application here. The first is that its objection raises important issues under both the Federal and Michigan Constitutions. The second is that strong federalism considerations warrant resolution of its objection by an Article III court. Neither consideration, however, is sufficient to justify the expansion of Stem that the Committee argues.
First, since Stem was decided, non-Article III courts have considered constitutional issues, always without objection.
Both bankruptcy courts and bankruptcy appellate panels have done so.11 More specifically, and perhaps more on point, in two recent chapter 9 cases, bankruptcy courts addressed constitutional issues without objection. Association of Retired Employees v. City of Stockton, Cal. (In re City of Stockton, Cal.), 478 B.R. 8 (Bankr.E.D.Cal.2012) (holding that retirees’ contracts could be impaired in the chapter 9 ease without offending the constitution); In re City of Harrisburg, PA, 465 B.R. 744 (Bankr.M.D.Pa.2011) (upholding the constitutionality of a Pennsylvania statute barring financially distressed third class cities from filing bankruptcy).
In addition, the Tax Court, a non-Article III court, has also examined constitutional issues, without objection.12 Likewise, the Court of Federal Claims, also a non-Article III court, has considered constitutional claims, without objection. This was done perhaps most famously in Beer v. United States, 111 Fed.CL 592 (Fed.Cl.2013), which is a suit by Article III judges under the Compensation Clause of the Constitution.
*786Stem does not change this status quo, and nothing about the constitutional dimension of the Committee’s eligibility objection warrants the expansion of Stem that the Committee asserts. As Stem itself reaffirmed, “We do not think the removal of counterclaims such as [the debt- or’s] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute[.]” 131 S.Ct. at 2620. Expanding Stem to the point where it would prohibit bankruptcy courts from considering issues of state or federal constitutional law would certainly significantly change the division of labor between the bankruptcy courts and the district courts.13
The Committee’s federalism argument is even more perplexing and troubling. Certainly the Committee is correct that a ruling on whether the City was properly authorized to file this bankruptcy case, as required for eligibility under 11 U.S.C. § 109(c)(2), will require the interpretation of state law, including the Michigan Constitution.
However, ruling on state law issues is required in addressing many issues in bankruptcy cases. As the Supreme Court has observed, “[BJankruptcy courts [ ] consult state law in determining the validity of most claims.” Travelers Cas. & Sur. Co. of Am. v. Pacific Gas & Elec. Co., 549 U.S. 443, 444, 127 S.Ct. 1199, 1201, 167 L.Ed.2d 178 (2007). Concisely summarizing the reality of the bankruptcy process and the impact of Stem on it, the court in In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 698 (Bankr.N.D.Ill.2011), concluded:
[Stem] certainly did not hold that a Bankruptcy Judge cannot ever decide a state law issue. Indeed, a large portion of the work of a Bankruptcy Judge involves actions in which non-bankruptcy issues must be decided and that ‘stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process,’ [131 S.Ct.] at 2618, for example, claims disputes, actions to bar dischargeability, motions for stay relief, and others. Those issues are likely *787within the ‘public rights’ exception as defined in Stem.
Other cases also illustrate the point.14
The distinction is clear. While in some narrow circumstances Stem prohibits a non-Article III court from adjudicating a state law claim for relief, a non-Article III court may consider and apply state law as necessary to resolve claims over which it does have authority under Stem. The mere fact that state law must be applied does not by itself mean that Stem prohibits a non-Article III court from determining the matter.
Moreover, nothing about a chapter 9 case suggests a different result. In City of Cent. Falls, R.I., 468 B.R. at 52, the court stated, “Nor did {Stem'] address concerns of federalism; although the counterclaim at issue in Stem arose under state law, the determinative feature of that counterclaim was that it did not arise under the Bankruptcy Code. The operative dichotomy was not federal versus state, but bankruptcy versus nonbankruptcy.”
The troubling aspect of the Committee’s federalism argument is that it does not attempt to define, even vaguely, what interest of federalism is at stake here or how that interest requires withdrawal of the reference to the district court. Its motion does little more than just drop the word in here and there, and argue that federalism requires this or that.
In Arizona v. United States, — U.S. -, 132 S.Ct. 2492, 2500, 183 L.Ed.2d 351 (2012), the Supreme Court stated, “Federalism, central to the constitutional design, adopts the principle that both the National and State Governments have elements of sovereignty the other is bound to respect.” Accordingly, federalism is about the federal and state governments respecting each other’s sovereignty. It has nothing to do with the requirements of Article III or, to use the phraseology of Stem with the “division of labor” between the district courts and the bankruptcy courts.15 131 S.Ct. at 2620. See also City of Cent. Falls, R.I., 468 B.R. at 52, quoted above.
Beyond that, the Committee’s motion does not address why principles of federalism suggest that the district court rather than the bankruptcy court should first review the constitutional issues, especially since any decision by this Court is subject to de novo review by the district court on appeal.
For these reasons, the Court concludes that the Committee is not likely to prevail on the merits of its withdrawal motion as it pertains to its Stem argument.
B. Mandatory Withdrawal Under 28 U.S.C. § 157(d)
The Committee also asserts that it is likely to succeed on the merits of its withdrawal motion because withdrawal of the reference is mandatory under 28 U.S.C. § 157(d). Under this statute, withdrawal of the reference is mandatory if the “reso*788lution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.” 28 U.S.C. § 157(d).
Most courts agree that “[mandatory] withdrawal should be granted only if the current proceeding could not be resolved without ‘substantial and material consideration’ ” of the federal law regulating interstate commerce.16 In re Vicars Ins. Agency, Inc., 96 F.3d 949, 952 (7th Cir.1996) (citations omitted).
Mandatory withdrawal of the reference is granted only when “resolution of the proceeding must require consideration of non-bankruptcy federal statutes regulating interstate commerce.”17 In re Texaco Inc., 84 B.R. 911, 919 (S.D.N.Y.1988). These laws are “rooted in the commerce clause.”18 In re Ziviello-Howell, 2011 WL 2144417, at *2 (E.D.Cal. May 31, 2011) (collecting cases).
“[Section 157(d)] has been construed narrowly.” Shugrue v. Air Line Pilots Ass’n Int’l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 995 (2d Cir.1990). “By misinterpreting the mandatory withdrawal provision, courts risk encouraging delay tactics, forum shopping, and ultimately, *789dissipation of the bankrupt’s estate through costly litigation by the parties.” Erich D. Andersen, Closing the Escape Hatch in the Mandatory Withdrawal Provision of 28 U.S.C. § 157(d), 36 UCLA L. Rev. 417, 418 (December 1988) (footnotes omitted).
This basis for withdrawal of the reference that the Committee asserts is likely to fail for one simple reason. Resolution of the Committee’s eligibility objection does not require consideration of any “laws of the United States regulating organizations or activities affecting interstate commerce.” The Committee has not cited any such laws to be considered in connection with its eligibility objection and the Court sees none.
Instead, the Committee argues that restructuring the fiscal activities among a state and its employees affects interstate commerce. It cites United States v. Darby, 312 U.S. 100, 61 S.Ct. 451, 85 L.Ed. 609 (1941), for the proposition that the regulation of employees affects interstate commerce. This is weak. The question here is not whether the bankruptcy filing of the City of Detroit will affect interstate commerce. It probably will, but the Committee cites no cases holding that 28 U.S.C. § 157(d) requires withdrawal of the reference whenever a debtor’s bankruptcy affects interstate commerce. It would stretch § 157(d) beyond recognition to reach that result.
It would also stretch 28 U.S.C. § 157(d) beyond recognition to conclude that it covers all federal laws, including the Constitution, as the Committee apparently contends. Although the Commerce Clause of the Constitution, Art. 1, § 8, cl. 3, gives Congress the power to enact laws “to regulate Commerce ... among the several States,” the Constitution itself is simply not a law “regulating organizations or activities affecting interstate commerce,” as required for mandatory withdrawal of the reference under 28 U.S.C. § 157(d). Beyond that, if Congress had intended for mandatory withdrawal of the reference to apply to matters that involve constitutional issues, it could easily have so provided. It did not.
Simply stated, the Committee’s objections to eligibility do not require any consideration of a federal law “regulating organizations or activities affecting interstate commerce,” let alone any “substantial and material” consideration of such a law. For that reason, the Court concludes that the Committee has not established that it is likely to prevail on the merits of the withdrawal .motion as it pertains to its mandatory withdrawal argument.
C. Permissive Withdrawal Under 28 U.S.C. § 157(d)
In its motion to withdraw the reference, the Committee also argues for permissive withdrawal under § 157(d). This ground allows the district court to withdraw the reference whenever it concludes that there is “cause shown.” 28 U.S.C. § 157(d).
Curiously however, the Committee did not assert in its motion for stay that it is likely to succeed on its claim for permissive withdrawal of the reference. As noted in Part II above, the Committee has the burden to establish that it is likely to succeed on its motion. In these circumstances, it is hard to find that the Committee has met its burden.
Nevertheless, in the interest of justice, the Court will review the specific grounds for permissive withdrawal that the Committee argued in its motion to withdraw the reference. In summary, the Committee asserts cause for withdrawal of the reference based on the following factors:
1. “Post-SieTO, the most relevant factor is whether a bankruptcy court can enter final judgment on the matter.” Committee’s Motion to Withdraw *790the Reference at ¶ 45, p. 26. (Dkt. #806)
2. “Withdrawal will promote judicial and party efficiency.” Committee’s Motion to Withdraw the Reference at ¶ 46, p. 27. (Dkt. # 806)
3. “The federalism concerns implicated by the Committee’s constitutional challenges to Chapter 9 also counsel in favor of resolution in an Article III court.” Committee’s Motion to Withdraw the Reference at ¶ 47, p. 27-8. (Dkt. #806)
4. “Finally, the Bankruptcy Court has no special legal expertise to determine the Eligibility Objection based on novel issues of state and federal constitutional law and related to a newly-enacted state statute.” Committee’s Motion to Withdraw the Reference at ¶ 48, p. 28. (Dkt. #806)
“[I]n determining whether cause exist[s] a district court should consider such goals as advancing uniformity in bankruptcy administration, decreasing forum shopping and confusion, promoting the economical use of the parties’ resources, and facilitating the bankruptcy process.” Dionne v. Simmons (In re Simmons ), 200 F.3d 738, 742 (11th Cir.2000) (citing Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 998 (5th Cir.1985)).19
The factors argued in the Committee’s motion to withdraw the reference that are summarized in paragraphs 1, 3 and 4 above are not among the factors suggested in Simmons or in other cases on point. Still, the district court has wide discretion and may consider them.
The Committee argues that the most relevant factor is its Stem argument. The Court has already explained why that argument is not likely to succeed.
The Committee also asserts that withdrawal of the reference on its eligibility objection will promote efficiency. This too is unlikely to succeed. If the motion to withdraw the reference is granted, then one of the eligibility objections that have been filed in the ease will be in the district court (the Committee’s objections) and all of the others will be in the bankruptcy court, including the other parties’ constitutional objections. This leaves the City litigating eligibility, and to some extent the same issues on eligibility, in two different courts, simultaneously. This does not promote judicial or party efficiency; it is its antithesis. The most efficient way to litigate eligibility in this case is in one court — the bankruptcy court — and then on appeal in the next.
The Committee also argues that considerations of federalism suggest that constitutional issues should be resolved in the district court. However, as demonstrated above in connection with the Committee’s Stem argument, there is nothing about principles of federalism that suggest that the Committee’s constitutional challenge to chapter 9 of the bankruptcy code or to PA 436 should be determined in the district court.
Finally, the Committee argues that this Court has no special legal expertise to determine novel issues of state and federal constitutional law. The self-contradiction of this argument makes it the most puzzling of all. Almost by definition, no court *791will have “special legal expertise” to review an issue of law that is “novel.” Still, both this Court and the district court do have the necessary legal expertise to deal with all of the legal arguments raised in the eligibility objections, even if that expertise is not “special.”
The Court concludes that each of the factors in the appellate decisions cited above—-advancing uniformity in bankruptcy administration, decreasing forum shopping and confusion, promoting the economical use of the parties’ resources, and facilitating the bankruptcy process—-weigh against withdrawing the reference. Accordingly, the Court finds that the Committee is not likely to succeed on its motion to withdraw the reference.
IV. Whether the Committee Will Suffer Irreparable Injury If the Stay Is Not Granted
The second consideration in the determination of whether to grant the request for a stay is whether the moving party will suffer irreparable injury if the stay is not granted. The Committee argues that even a threat to a constitutional right mandates a finding of irreparable injury. The Committee cites Hillside Prods., Inc. v. Duchane, 249 F.Supp.2d 880, 900 (E.D.Mich.2003), for the proposition, “[W]hen reviewing a motion for a preliminary injunction, if it is found that a constitutional right is being threatened or impaired, a finding of irreparable injury is mandated.” Id. (quoting Bonnell v. Lorenzo, 241 F.3d 800, 809 (6th Cir.2001) (citing Elrod v. Burns, 427 U.S. 347, 373, 96 S.Ct. 2673, 49 L.Ed.2d 547 (1976))).
The difficulty with the Committee’s argument here is that in Hillside Productions, the court had already found a substantial likelihood of success on the merits of the plaintiffs’ constitutional claims. Specifically, the court found, “Based on the evidence presented, this Court finds that Plaintiffs are likely to succeed on the merits of the selective enforcement and First Amendment retaliation claims. Rarely does one hear such compelling and unre-butted evidence of the vindictive retaliatory action such as that taken[.]” 249 F.Supp.2d at 898.
However, the mere argument that a constitutional right might be impaired is not sufficient for a finding of irreparable injury in the absence of a substantial showing of likelihood of success on the merits of the underlying claim. As determined in Part III above, the Committee has not established a likelihood of success on the merits of its argument that Stem requires withdrawal of the reference.
As the court stated in In re The Antioch Co., 435 B.R. 493, 502 (Bankr.S.D.Ohio 2010):
Finally, a decision to stay this litigation cannot be premised on the mere possibility this court might interpret its jurisdiction in too broad a fashion. If Congress intended for the bankruptcy courts to stay proceedings upon the filing of a motion to withdraw the reference or to abstain, it would have so provided. Movants’ argument regarding the risk of the Bankruptcy Court overstepping its jurisdictional and constitutional authority would not only remove the discretion accorded the bankruptcy courts under BR 5011(c), but also would flip the apparent presumption in favor of not staying such proceedings that arises out of the plain language of the Rule.
The Committee also asserts that its constituency will suffer a loss of constitutional rights if the stay is not granted because their pensions will be diminished. Its brief states, “Ultimately, the risk is the loss of life-preserving or even life-enhancing retirement compensation!.]” Committee’s Motion to Stay at ¶ 23, p. 12. (Dkt. #837)
*792At this point, however, the retirees have not suffered a loss of any retirement benefits, and more importantly, nothing suggests that denying the motion for stay would create any risk to their retirement benefits pending the district court’s determination of whether to withdraw the reference.
The City argues, with merit, that even in the Committee’s worst-case scenario, its right to have the district court determine its constitutional challenges will still not be lost. Even if the stay is denied, and the motion to withdraw the reference is denied, and this Court determines that Stem does not preclude this Court from entering a final judgment on the Committee’s constitutional objections to eligibility, the Committee can still have both its Stem objection and its constitutional challenges to eligibility heard by the district court, de novo, on appeal.
Accordingly, the Court concludes that the Committee has not established any harm, let alone irreparable harm, if the stay is denied.
V. Whether the City Will Be Harmed If a Stay Is Granted
In this motion, the Committee requests a stay of this Court’s consideration of all of the one hundred ten objections to eligibility, pending the district court’s determination of its motion to withdraw the reference on its one eligibility objection.
The Committee argues that the City will only suffer “minimal inconvenience” if the stay is granted. Committee’s Motion to Stay at p. 13. (Dkt. # 837) It argues that the only injury to the City would be the loss of its choice of forum to decide issues. Committee’s Motion to Stay at ¶ 27, p. 13. (Dkt. # 837)
In response, the City states, “The sooner the City can demonstrate its eligibility for chapter 9, the sooner it can complete other restructuring steps and ultimately confirm and implement a plan of adjustment. A prompt exit from chapter 9 will facilitate the long process of rebuilding the City.” City’s Brief in Opposition to Motion to Stay at ¶ 1, p. 1. (Dkt. # 925)
It further states, “[Ejvery day of delay in the administration of this case inflicts injury on the City and its residents through continuation of intolerably low levels of municipal services and public health and safety and the deferral of any opportunity that the City may have to revitalize itself.” City’s Brief in Opposition to Motion to Stay at ¶ 35, p. 20. (Dkt. # 925)
Finally, the City relies on the Declaration of Kevyn D. Orr in Support of City of Detroit, Michigan’s Statement of Qualifications Pursuant to Section 109(c) of the Bankruptcy Code, filed on July 18, 2013, which states that the City is (a) currently unable to make investments critical to the health and safety of its residents, (b) plagued by shockingly high crime rates and low police response times, (c) struggling to keep the lights on (with 40% of the City’s street lights inoperative as of April 2013), (d) ravaged by extensive and intractable urban blight and (e) saddled with obsolete and decaying infrastructure and equipment. Orr Declaration at ¶¶ 3N44, pp. 21-5. (Dkt. #11)
The Court agrees with the City that the real injury to it if a stay is granted will be the consequences resulting from the inevitable delay in resolving the case. The record in this case firmly establishes the necessity that this case move promptly through the process of determining the City’s eligibility for chapter 9 relief. If the City is found to be eligible, it will then need to move promptly through the process of plan negotiation and confirmation. If the City is found not to be eligible, it will then need to promptly evaluate its post-bankruptcy options. In the meantime, however, the creditors’ many eligibil*793ity objections create substantial uncertainty regarding the City’s ability to achieve its goal of adjusting its debt through chapter 9. Until that uncertainty is removed, the City’s progress in recovering its financial, civic, commercial, and cultural life and in revitalizing itself will likely be slowed, if not stalled entirely.
Orr’s declaration further establishes that also at stake in this motion is the City’s ability to provide basic services to its residents and to remediate a host of unsafe living conditions. At the hearing on the individual objecting parties’ objections to eligibility on September 19, 2013, the Court heard truly disturbing accounts of the consequences of the City’s inability to provide basic services. These accounts were undoubtedly just a microscopic sample of the full truth regarding the inadequacy of basic services in the City of Detroit.
In these circumstances, the consequences of extending the eligibility process by granting the requested stay are not a “minimal inconvenience.” They are much more than that. They are truly beyond irreparable and bordering on the incomprehensible.
VI. Whether the Public Interest Will be Served by Granting the Stay
The Committee asserts that “the public interest is best served by preventing [a] prohibited act.” Committee’s Motion to Stay at ¶ 27, p. 13. (Dkt. # 837) It further asserts that the prohibited act is the impairment of pensions. However, whatever the merits of that claim, granting a stay pending the determination of the motion to withdraw the reference does not preserve pension rights any more than denying the stay impairs them.
The Committee also asserts that the public interest is served by granting the stay because it would avoid the constitutional violation that would occur under Stem if this Court were to rule on the Committee’s constitutional challenges to the City’s eligibility. However, as the Court concluded in Part III above, the Committee is unlikely to succeed on its argument that Stem prohibits this Court from ruling on the City’s eligibility.
The Committee has not stated any other public interest in support of granting the stay.
There is, however, a strong public interest in denying it, because to a great extent, the public’s interest and the City’s interest in the prompt resolution of this case coalesce. Accordingly, for the same reasons and to the same extent that granting the stay would harm the City, it would also harm the public interest.
VII. Conclusion
The Court concludes that the Committee has failed to establish any of the factors to be considered in connection with its request for a stay. Accordingly, it is hereby ordered that the Committee’s motion for a stay pending the district court’s determination of the motion to withdraw the reference is denied.
. See also Beach First Nat’l Bancshares, Inc. v. Anderson {In re Beach First Nat’l Bancshares, Inc.), 2011 WL 2441501, at *1 (Bankr.D.S.C. Jan. 21, 2011); Hecny Transp. Ltd. v. Summit Global Logistics, Inc. {In re Summit Global Logistics, Inc.), 2008 WL 5953690, at *2 (Bankr.D.N.J. Dec. 1, 2008); Env’t Litig. Grp., P.C. v. Crawford {In re Price), 2007 WL 1125639, at *7 (Bankr.N.D.Ala. Apr. 16, 2007); Miller v. Vigilant Ins. Co. {In re Eagle Enters. Inc.), 259 B.R. 83, 86 (Bankr.E.D.Pa. 2001); Northwestern Inst, of Psychiatry, Inc. v. Travelers Indem. Co. {In re Northwestern Inst, of Psychiatry, Inc.), 268 B.R. 79, 83 (Bankr.E.D.Pa.2001).
. See also In re Dana Corp., 2007 WL 2908221, at *1 (Bankr.S.D.N.Y. Oct. 3, 2007); In re Eagle Enters. Inc., 259 B.R. at 86; In re Matterhorn Grp., Inc., 2010 WL 4628119, at *2 (E.D.Cal. Nov. 5, 2010); TIN, Inc. v. Superior Container Corp. (In re TIN, Inc.), 207 B.R. 499, 500 (Bankr.D.S.C.1996).
. In re Ionosphere Clubs, Inc., 1996 WL 361531, at *1 (S.D.N.Y. June 28, 1996); Antioch, 435 B.R. at 497, 502; Finger v. County of Sullivan Indus. Dev. Agency (In re Paramount Hotel Corp.), 319 B.R. 350, 357 (Bankr.S.D.N.Y.2005).
. For convenience, this statement of the Committee’s grounds for withdrawal of the reference is quoted and adapted from the table of contents in its memorandum in support of its motion to withdraw the reference filed September 11, 2013. (Dkt. # 806)
. In its opposition to the motion for stay and at the oral argument on the motion for stay, the City made clear its opposition to the motion to withdraw the reference and the grounds for it.
.Specifically, the Committee’s objection to eligibility under 11 U.S.C. § 109(c) asserts:
I. Acceptance of the city's authorization to file its petition would render chapter 9 unconstitutional.
A. If chapter 9 permits the city to ignore the pension clause, chapter 9 grants authorization not available under the Michigan Constitution.
B. If chapter 9 permits Michigan's executive branch to consent to a limitation on its sovereignty not authorized by its people, the federal statute is unconstitutional.
II. It is not necessary for the court to review the constitutionality of chapter 9 because the emergency manager’s petition for the City of Detroit does not meet the bankruptcy code requirements for eligibility-
*782A. The burden is on the debtors to show compliance with sections 109(c) and 921(c).
B. The authorizations relied upon by the emergency manager were flawed under the Michigan Constitution.
1. PA 436 is squarely at odds with the pension clause of Michigan's constitution and therefore unconstitutional.
2. The conflict between PA 436 and the pension clause of the Michigan Constitution cannot be reconciled.
a. The Attorney General’s position should not be adopted.
b. The City of Detroit cannot rescue the unconditional authorizations.
c. The governor’s authorization pursuant to PA 436 is not valid and void ab initio under Michigan's Constitution, and so is that of the emergency manager.
d. The City cannot satisfy bankruptcy code 109(c)(5) and is subject to dismissal under bankruptcy code 921(c).
For convenience, this expanded statement of the Committee’s arguments in support of its objection to eligibility is quoted and adapted from its table of contents in its objection to eligibility filed September 10, 2013. (Dkt. #805)
. Outside of the Sixth Circuit, the scope of Stern has been somewhat controversial. See generally Joshua D. Talicska, Jurisdictional Game Changer or Narrow Holding? Discussing the Potential Effects of Stem v. Marshall and Offering a Roadmap Through the Milieu, 9 Seton Hall Circuit Rev. 31 (Spring 2013); Michael Fillingame, Through a Glass, Darkly: Predicting Bankruptcy Jurisdiction Post-Stern, 50 Hous. L. Rev. 1189 (Symposium 2013); Tyson A. Crist, Stem v. Marshall: Application of the Supreme Court's Landmark Decision in the Lower Courts, 86 Am. Bankr. L.J. 627 (Fall 2012); Hon. Joan N. Feeney, Statement to the House of Representatives Judiciaiy Committee on the Impact of Stern v. Marshall, 86 Am. Bankr. L.J. 357 (Summer 2012).
. The Supreme Court has never squarely held that claims allowance, which is at the heart of the bankruptcy process, falls within the permissible scope of authority for a non-Article III court as a “public right” or any other long-standing historical exception to the requirement of Article III adjudication. Stern, 131 S.Ct. at 2614 n. 7; Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56, n. 11, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). However, in Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 2871, 73 L.Ed.2d 598 (1982) (plurality opinion), the Court came tantalizingly close when it stated, "the restructuring of debtor-creditor relations ... is at the core of the federal bankruptcy power ... [and] may well be a 'public right’[.]”
No court has ever held otherwise. On the contrary, the cases have uniformly concluded that the public rights doctrine is the basis of a bankruptcy court’s authority to adjudicate issues that arise under the bankruptcy code. For example, in Carpenters Pension Trust Fund for Northern California v. Moxley, - B.R. -, -, 2013 WL 4417594, at *4 (9th Cir.2013), the Ninth Circuit held:
[T]he dischargeability determination is central to federal bankruptcy proceedings. Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, *784363-64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006). The dischargeability determination is necessarily resolved during the process of allowing or disallowing claims against the estate, and therefore constitutes a public rights dispute that the bankruptcy court may decide.
Similarly, in CoreStates Bank, N.A. v. Huis Am., Inc., 176 F.3d 187, 196 n. 11 (3d Cir.1999), the Third Circuit held, “The protections afforded a debtor under the Bankruptcy Code are congressionally created public rights.”
In Kirschner v. Agoglia, 476 B.R. 75, 79 (S.D.N.Y.2012), the court stated, “[After Stem,] bankruptcy courts still have the ability to finally decide so-called 'public rights’ claims that assert rights derived from a federal regulatory scheme and are therefore not the 'stuff of traditional actions,’ as well as claims that are necessarily resolved in ruling on a creditor’s proof of claim (e.g., a voidable preference claim) [.]”
Other cases also conclude that various matters arising within a bankruptcy case are within the public rights doctrine. See., e.g., In re Bataa/Kierland LLC, 496 B.R. 183, 188 (D.Ariz.2013) (scope of Chapter 11 debtor’s rights under easement); Hamilton v. Try Us, LLC, 491 B.R. 561 (W.D.Mo.2013) (validity and amount of common law claim against Chapter 7 debtor); In re Prosser, 2013 WL 996367 (D.Vi.2013) (trustee's claim for turnover of property); White v. Kubotek Corp., 487 B.R. 1 (D.Mass.2012) (creditor’s successor liability claim against purchaser of assets from bankruptcy estate); United States v. Bond, 486 B.R. 9 (E.D.N.Y.2012) (trustee's claims for tax refund); Turner v. First Cmty. Credit Union (In re Turner), 462 B.R. 214 (Bankr.S.D.Tex.2011) (violation of the automatic stay); In re Whitley, 2011 WL 5855242 (Bankr.S.D.Tex. Nov. 21, 2011) (reasonableness of fees of debtor's attorney); In re Carlew, 469 B.R. 666 (Bankr.S.D.Tex.2012) (homestead exemption objection); West v. Freedom Med., Inc. (In re Apex Long Term Acute Care-Katy, L.P.), 465 B.R. 452, 458 (Bankr.S.D.Tex.2011) (addressing preference actions, stating, "This Court concludes that the resolution of certain fundamental bankruptcy issues falls within the public rights doctrine.”); Sigillito v. Hollander (In re Hollander), 2011 WL 6819022 (Bankr.E.D.La. Dec. 28, 2011) (nondischargeability for fraud).
In light of the unanimous holdings of these cases, the Court must conclude that its determination regarding the City’s eligibility will likely be found to be within the public rights doctrine and therefore that the Court does have the authority to decide the issue, including all of the arguments that the Committee makes in its objection.
. See also In re Gow Ming Chao, 2011 WL 5855276 (Bankr.S.D.Tex. Nov. 21, 2011).
. See also In re McMahan, 481 B.R. 901 (Bankr.S.D.Tex.2012); In re Watts, 2012 WL 3400820 (Bankr.S.D.Tex. Aug. 9, 2012).
. See, e.g., Williamson v. Westby (In re Westby), 486 B.R. 509 (10th Cir. BAP 2013) (upholding the constitutionality of the Kansas bankruptcy-only state law exemptions); Res. Funding, Inc. v. Pacific Continental Bank (In re Washington Coast I, L.L.C.), 485 B.R. 393 (9th Cir. BAP 2012) (upholding the constitutionality of the final order entered by the bankruptcy court); Richardson v. Schafer (In re Schafer), 455 B.R. 590 (6th Cir. BAP 2011), rev’d on other grounds, 689 F.3d 601 (6th Cir.2012) (addressing the constitutionality of the Michigan bankruptcy-only state law exemptions); Old Cutters, Inc. v. City of Hailey (In re Old Cutters, Inc.), 488 B.R. 130 (Bankr.D.Idaho 2012) (invalidating a city's annexation fee and community housing requirements); In re Washington Mut., Inc., 485 B.R. 510 (Bankr.D.Del.2012) (holding Oregon’s corporate excise tax unconstitutional under the Commerce Clause); In re McFarland, 481 B.R. 242 (Bankr.S.D.Ga.2012) (upholding Georgia's bankruptcy-specific exemption scheme); In re Fowler, 493 B.R. 148 (Bankr.E.D.Cal.2012) (upholding the constitutionality of California’s statute fixing the interest rate on tax claims); In re Meyer, 467 B.R. 451 (Bankr.E.D.Wis.2012) (upholding the constitutionality of 11 U.S.C. § 707(b)); Zazzali v. Swenson (In re DBSI, Inc.), 463 B.R. 709, 717 (Bankr.D.Del.2012) (upholding the constitutionality of 11 U.S.C. § 106(a)); Proudfoot Consulting Co. v. Gordon (In re Gordon), 465 B.R. 683 (Bankr.N.D.Ga.2012) (upholding the constitutionality of 11 U.S.C. § 706(a)); South Bay Expressway, L.P. v. County of San Diego (In re South Bay Expressway, L.P.), 455 B.R. 732 (Bankr.S.D.Cal.2011) (holding unconstitutional California's public property tax exemption for privately-owned leases of public transportation demonstration facilities).
. See, e.g., Field v. C.I.R., 2013 WL 1688028 (U.S.Tax Ct.2013) (holding that the tax classification on the basis of marital status that was imposed by requirement that taxpayer file joint income-tax return in order to be eligible for tax credit for adoption expenses did not violate Equal Protection clause); Begay v. C.I.R., 2013 WL 173362 (U.S.Tax Ct.2013) (holding that the relationship classification for child tax credit did not violate Free Exercise Clause); Byers v. C.I.R., 2012 WL 265883 (U.S.Tax Ct.2012) (rejecting the taxpayer’s challenge to the authority of an IRS office under the Appointments Clause).
. Only one case, cited extensively by the Committee, suggests otherwise. Picard v. Flinn Invs., LLC, 463 B.R. 280 (S.D.N.Y.2011). (Committee's Motion to Stay, ¶ 12, p. 6) That case did state in dicta in a footnote, "If mandatory withdrawal protects litigants’ constitutional interest in having Article III courts interpret federal statutes that implicate the regulation of interstate commerce, then it should also protect, a fortiori, litigants' interest in having the Article III courts interpret the Constitution.” Id. at 288 n. 3.
This single sentence cannot be given much weight. First, it is only dicta. Second, it is against the manifest weight of the case authorities. Third, the quote assumes, without analysis, that the litigants do have an interest in having Article III courts interpret the Constitution, and thus bootstraps its own conclusion. Fourth, nothing in the Flinn Investments case states or even suggests that Stem itself prohibits a bankruptcy court from ruling on a constitutional issue where it otherwise has the authority to rule on the claim before it. Finally, the district court that issued Flinn Investments has now entered an amended standing order of reference in bankruptcy cases to provide that its bankruptcy court should first consider objections to its authority that parties raise under Stem v. Marshall. Apparently, that district court’s position now is that Stem does not preclude the bankruptcy court from determining constitutional issues, including the constitutional issue of its own authority. The order is available at http:// www.nysd.uscourts.gov/rules/StandingOrder_ OrderReference_ 12mc3 2.pdf.
The Committee cited two other cases in support of its position that only an Article III court can determine a constitutional issue: TTOD Liquidation, Inc. v. Lim {In re Dott Acquisition, LLC), 2012 WL 3257882 (E.D.Mich. July 25, 2012), and Picard v. Schneiderman {In re Madoff Secs.), 492 B.R. 133 (S.D.N.Y.2013). Both are irrelevant to the issue. Dott Acquisition did discuss Stem but only in the unremarkable context of withdrawing the reference on a fraudulent transfer action. Schneiderman did not address a Stem issue at all, or even cite the case.
. See, e.g., Picard v. Estate of Madoff, 464 B.R. 578, 586 (S.D.N.Y.2011) (quoting In re Salander O’Reilly Galleries, 453 B.R. 106, 118 (Bankr.S.D.N.Y.2011)) (“It is clear” from Stem v. Marshall and other Supreme Court precedent that "the Bankruptcy Court is empowered to apply state law when doing so would finally resolve a claim.”); Apperson v. Bleckner (In re Batt), 2012 WL 4324930, at *2 (W.D.Ky. Sept. 20, 2012) (“Stem does not bar the exercise of the Bankruptcy Court's jurisdiction in any and all circumstances where a party to an adversary proceeding has not filed a proof of claim, or where the issue in an adversary proceeding is a matter of state law.”).
. Genuine federalism concerns are fully respected in bankruptcy through the process of permissive abstention under 28 U.S.C. § 1334(c)(1).
.“This 'substantial and material’ gloss has been accepted as an appropriate reading of the statute and effectuation of Congress’ intent by most courts[.]” Vicars Ins. Agency, Inc., 96 F.3d at 952 (citations omitted). See also Security Farms v. Int’l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir.1997) (holding that 28 U.S.C. § 157(d) “mandates withdrawal in cases requiring material consideration of non-bankruptcy federal law.”); City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir.1991) ("This mandatory withdrawal provision has been interpreted to require withdrawal to the district court of cases or issues that would otherwise require a bankruptcy court judge to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes.”); Sweet v. Chambers (In re Chambers), 2012 WL 933199, at *1 (E.D.Mich. Mar. 20, 2012) (Hood, J.) (“Two prongs must be met for requiring mandatory withdrawal of the reference: 1) consideration of the Bankruptcy Code; and 2) substantial and material consideration of a nonbankruptcy federal law affecting interstate commerce.”); Stevenson v. Polymerica, Ltd., djb/a Global Enters. Inc. & Fabribond, LLC (In re Snooks), 2009 WL 230598, at *2-3 (E.D.Mich. Jan. 29, 2009) (Fiekens, J.) ("The 'substantial and material consideration’ standard is the one adopted by the latest court in this district to consider the question. This standard is also the one gaining most acceptance by courts of late. Therefore, this Court will follow this standard.”).
A small minority of courts reject the "substantial and material consideration” test in favor of applying the literal language of 28 U.S.C. § 157(d). See, e.g., Laborers’ Pension Trust Fund-Det. & Vicinity v. Kiefer (In re Kiefer), 276 B.R. 196, 200 (E.D.Mich.2002) (Gadola, J.) (“Instead, literal interpretation of § 157(d) would preclude bankruptcy court jurisdiction only when (1) consideration of a federal law that regulates commerce and is outside of the Bankruptcy Code were required to resolve the case and (2) a party moved for withdrawal of the proceeding.”).
It does not matter which approach is applied here. As noted in the text, the Committee's objections to eligibility do not require consideration of any federal statute other than the bankruptcy code, let alone "substantial and material” consideration.
. It must be noted that some cases loosely state that this section applies when consideration of a “non-bankruptcy federal law” is required. See, e.g., Vicars Ins. Agency, Inc., 96 F.3d at 952. Given the specificity of the statute, this shorthand language should be understood to refer to “other laws of the United States regulating organizations or activities affecting interstate commerce.” 28 U.S.C. § 157(d).
. The reference in Texaco to "federal statutes regulating interstate commerce” includes, for example, the federal antitrust laws, securities laws, environmental laws, labor laws, RICO, truth in lending laws, the Federal Aviation Act, and the Occupational Safety and Health Act. See generally, Hatzel & Buehler, Inc. v. Orange & Rockland Utilities, Inc., 107 B.R. 34, 38 (D.Del.1989).
. See also Sec. Farms v. Int’l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir.1997) ("In determining whether cause exists, a district court should consider the efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors.”); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir.1993). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496346/ | MEMORANDUM OPINION REGARDING MOTION TO DISMISS COMPLAINT
KAY WOODS, Bankruptcy Judge.
This cause is before the Court on Motion to Dismiss Complaint (Doc. # 9) filed by Defendant JP Morgan Chase Bank, National Association, successor by merger to Chase Home Finance, LLC (“Chase”), on August 15, 2013. Debtor/Plaintiff Doreen Bodrick (“Debtor”) filed Memorandum in Opposition to Defendant’s Motion to Dismiss Summary of Argument [sic] (“Memo in Opposition”) (Doc. # 16) on September 23, 2013. On October 3, 2013, Chase belatedly filed Reply in Support of Motion to Dismiss Complaint (“Reply”) (Doc. # 17).1
The Motion to Dismiss seeks dismissal of Complaint for Violation of the Automatic Stay (“Complaint”) (Doc. # 1) on the basis that the Complaint fails to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).
This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and the general orders of reference (Gen. Order Nos. 84 and 2012-7) entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The following constitutes the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
J. STANDARD OF REVIEW FOR MOTION TO DISMISS
Federal Rule of Civil Procedure 12(b)(6), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b), allows a defendant to move for dismissal of a complaint that fails “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6) (West 2013). The motion to dismiss will be denied if the complaint contains “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility *796when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted). Thus, “to survive a motion to dismiss, the complaint must contain either direct or inferential allegations respecting all material elements to sustain a recovery under some viable legal theory.” Eidson v. Tenn. Dep’t of Children’s Servs., 510 F.3d 631, 634 (6th Cir.2007) (citation omitted).
When evaluating a motion to dismiss, the court must “construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff.” Tam Travel, Inc. v. Delta Airlines, Inc. (In re Travel Agent Comm’n Antitrust Litig.), 583 F.3d 896, 903 (6th Cir.2009) (quotation marks and citation omitted). However, “conclusory allegations or legal conclusions masquerading as factual allegations will not suffice.” Watson Carpet & Floor Covering, Inc. v. Mohawk Indus., Inc., 648 F.3d 452, 457 (6th Cir.2011) (quotations marks and citation omitted).
Accordingly, for purposes of determining this Motion to Dismiss, the Court accepts all facts pled in the Complaint as true.
II. FACTUAL AND PROCEDURAL BACKGROUND
The Debtor filed a voluntary petition pursuant to chapter 13 of Title 11 of the United States Code on September 25, 2007, which was denominated Case No. 07-42377 (“Main Case”). That same day, she filed her chapter 13 plan (“Plan”) (Main Case Doc. #2), which was confirmed on December 3, 2007 when the Court entered Order Confirming Plan (“Confirmation Order”) (Main Case Doc. # 19). With respect to the Debtor’s note and mortgage on her residence (collectively “Mortgage”), the Plan provided for (i) the chapter 13 trustee (“Trustee”) to pay the default claim to “Washington Mutual”; and (ii) the Debtor to pay the ongoing Mortgage payments directly to “Washington Mutual.” (Plan ¶¶ 5-6.)
On October 17, 2007, Washington Mutual Bank, as Servicer for Deutsche Bank National Trust Company, as Trustee for Long Beach Mortgage Loan Trust 2006 WL-1 (“Washington Mutual”), filed a proof of claim, denominated Claim No. 4-1, in the secured amount of $131,937.25, with an arrearage amount of $6,560.34. Washington Mutual filed amended Claim No. 4-2 on March 10, 2008, asserting a secured claim in the total amount of $131,781.24, with an arrearage claim of $6,404.33. Claim No. 4 was amended yet again on March 25, 2008 (Claim No. 4-3) to assert a total secured claim of $132,506.24, with an arrearage claim of $7,129.33.2 Transfer of Claim Other Than for Security (Main Case Doc. # 44) was filed on May 6, 2011, which stated that Claim No. 4 was transferred from Washington Mutual to Chase.
On April 29, 2008, Deutsche Bank National Trust Company, as Trustee for Long Beach Mortgage Loan Trust 2006-WL 1 (“Deutsche Bank”) filed a proof of claim, denominated Claim No. 15-1 (“Claim No. 15”), in the secured amount of $3,376.01 for “supplemental arrears.” Washington Mutual Mortgage3 is listed as the party and address where payment should be *797sent. Nothing on the docket indicates that Claim No. 15 was ever transferred.
On September 17, 2012, the Trustee filed Notice of Final Cure Payment on Residential Mortgage (“Final Cure Notice”) regarding Claim No. 15-1 (Main Case Doc. # 64), which stated that Claim No. 15-1 filed by Washington Mutual Mortgage in the amount of $3,376.01 had been paid in full. That same day, the Trustee filed Final Cure Notice (Main Case Doc. # 65) stating that Claim No. 4-3 filed by Chase in the amount of $7,129.33 had been paid in full. Both Final Cure Notices were filed pursuant to Federal Rule of Bankruptcy Procedure 3002.1(f).
On October 3, 2012, Deutsche Bank filed Response to Notices of Final Cure Payment on Residential Mortgage (Claim Nos. 4, 15) (“Cure Response”) (Main Case Doc. Oct. 3, 2012), which stated that Deutsche Bank (i) agrees Claim No. 4-3 has been paid in full; (ii) agrees Claim No. 15-1 had been paid in full; but (iii) “disagrees that the Debtor is current in ongoing post-petition mortgage payments. Debtor is post-petition delinquent for the February 1, 2012 through October 1, 2012 payments in the amount of $1,274.87 each, less suspense in the amount of $758.35, for a post-petition arrearage totaling $10,715.48.”4 (Cure Resp. at 1.)
Neither the Trustee nor the Debtor filed a motion regarding the Cure Response.
On November 21, 2012, the Trustee filed Final Report and Account (Main Case Doc. # 69). The Court issued Discharge of Debtor After Completion of Chapter 13 Plan (Main Case Doc. # 71) on November 26, 2012.
The Debtor moved to reopen her case on March 18, 2013 (Main Case Doc. # 74), in order to file an adversary proceeding against Chase for violation of the automatic stay and Rule 3002.1. The Court entered Order Granting Debtor’s Motion to Reopen Case (Doc. #75) on March 18, 2013.
On June 17, 2013, the Debtor filed the Complaint, which alleges that Chase (i) failed to credit $6,255.00 to the Mortgage,' although it acknowledged payment of this amount in the Provisional Order Resolving Motion for Relief from Stay (Docket Number 22) as to Real Property Located at 5027 Simon Road, Youngstown, OH 44512 (“Agreed Order”) (Main Case Doc. #26) *798entered by the Court on April 3, 2008 (ComplJ 14); (ii) overcharged the Debtor for the escrow on the Mortgage, which led to an affidavit of default being filed by Chase in September 2008 (later withdrawn), indicating that the Debtor had not made the requisite payments (id. ¶ 15); (iii) sent letters to the Debtor indicating that she was in default of the Agreed Order, including a letter in February 2012 sent by counsel for Chase that the post-petition escrow account was delinquent due to the failure of Chase to include $2,496.00 of pre-petition escrow payments in its proof of claim (id. ¶ 16); (iv) filed duplicative claims for escrow payments as the Agreed Order included $800.00 in pre-petition escrow payments that were accounted for in Claim No. 4 (id.); (v) never adjusted the escrow account and continued to charge the Debtor $319.00 per month for escrow, which was an overcharge of more than $100.00 per month for more than two years (id. ¶ 17); (vi) overcharged and misapplied the Debtor’s Mortgage payments, which caused her to be behind on her payments upon completion of the bankruptcy and resulted in Chase threatening foreclosure (id.); and (vii) recklessly and willfully caused the Debtor “tremendous damages” (Id. ¶ 18).5
III. MOTION TO DISMISS
Chase asserts that the Complaint must be dismissed for failure to state a claim on the grounds of (i) waiver; and (ii) res judicata. As set forth below, Chase’s arguments fail because they are based on a faulty reading of Federal Rule of Bankruptcy Procedure 3002.1. The Court begins its analysis with Rule 3002.1, as it applies to the instant case.
There is no question that Rule 3002.1 applies to Claim Nos. 4 and 15, which are based on the Mortgage relating to the Debtor’s principal residence. Rule 3002.1, which became effective December 2, 2011, provides, as follows:
(a) In General
This rule applies in a chapter 13 case to claims that are (1) secured by a security interest in the debtor’s principal residence, and (2) provided for under § 1322(b)(5) of the Code in the debtor’s plan.
(b) Notice of payment changes
The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice of any change in the payment amount, including any change that results from an interest rate or escrow account adjustment, no later than 21 days before a payment in the new amount is due.
(c) Notice of fees, expenses, and charges
The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice itemizing all fees, expenses, or charges (1) that were incurred in connection with the claim after the bankruptcy case was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence. The notice shall be served within 180 days after the date on which the fees, expenses, or charges are incurred.
(d) Form and content
A notice filed and served under subdivision (b) or (c) of this rule shall be prepared as prescribed by the appropriate Official Form, and filed as a supplement to the holder’s proof of claim. The notice is not subject to Rule 3001(f).
*799(e) Determination of fees, expenses, or charges
On motion of the debtor or trustee filed within one year after service of a notice under subdivision (c) of this rule, the court shall, after notice and hearing, determine whether payment of any claimed fee, expense, or charge is required by the underlying agreement and applicable nonbankruptcy law to cure a default or maintain payments in accordance with § 1322(b)(5) of the Code.
(f) Notice of final cure payment
Within 30 days after the debtor completes all payments under the plan, the trustee shall file and serve on the holder of the claim, the debtor, and debtor’s counsel a notice stating that the debtor has paid in full the amount required to cure any default on the claim. The notice shall also inform the holder of its obligation to file and serve a response under subdivision (g). If the debtor contends that final cure payment has been made and all plan payments have been completed, and the trustee does not timely file and serve the notice required by this subdivision, the debtor may file and serve the notice.
(g) Response to notice of final cure payment
Within 21 days after service of the notice under subdivision (f) of this rule, the holder shall file and serve on the debtor, debtor’s counsel, and the trustee a statement indicating (1) whether it agrees that the debtor has paid in full the amount required to cure the default on the claim, and (2) whether the debtor is otherwise current on all payments consistent with § 1322(b)(5) of the Code. The statement shall itemize the required cure or postpetition amounts, if any, that the holder contends remain unpaid as of the date of the statement. The statement shall be filed as a supplement to the holder’s proof of claim and is not subject to Rule 8001(f).
(h) Determination of final cure and payment
On motion of the debtor or trustee filed within 21 days after service of the statement under subdivision (g) of this rule, the court shall, after notice and hearing, determine whether the debtor has cured the default and paid all required postpetition amounts.
(i) Failure to notify
If the holder of a claim fails to provide any information as required by subdivision (b), (c), or (g) of this rule, the court may, after notice and hearing, take either or both of the following actions:
(1) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(2) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
Fed. R. BankrP. 3002.1 (West 2013) (emphasis added).
The Advisory Committee Note to Rule 3002.1 states:
This rule is new. It is added to aid in the implementation of § 1322(b)(5), which permits a chapter 13 debtor to cure a default and maintain payments of a home mortgage over the course of the debtor’s plan.
In order to be able to fulfill the obligation of § 1322(b)(5), a debtor and the trustee must be informed of the exact amount needed to cure any prepetition arrearage, see Rule 3001(c)(2), and the *800amount of the postpetition payment obligations. If the latter amount changes over time, due to the adjustment of the interest rate, escrow account adjustments, or the assessment of fees, expenses, or other changes, notice of any change in payment amount needs to be conveyed to the debtor and trustee. Timely notice of these changes will permit the debtor or trustee to challenge the validity of any such charges, if necessary, and to adjust postpetition mortgage payments to cover any properly claimed adjustment. Compliance with the notice provision of the rule should also eliminate any concern on the part of the holder of the claim that informing a debtor of a change in postpetition payment obligations might violate the automatic stay.
Subdivision (f) [now (h)] provides the procedure for the judicial resolution of any disputes that may arise about payment of a claim secured by the debtor’s principal residence. The trustee or debt- or may move no later than 21 days after the service of the statement under subdivision (e) [now (g) ] for a determination by the court of whether the prepetition default has been cured and whether all postpetition obligations have been fully paid.
Fed. R. BanKR.P. 3002.1, Advisory Committee Note (West 2013) (emphasis added).
The Motion to Dismiss is premised upon Chase’s argument that Rule 3002.1(h) required the Debtor to file a motion within 21 days after Chase filed the Cure Response if she ever wanted to dispute that there was a post-petition arrearage. However, Chase misreads Rule 3002.1(h). The Rule does not require the Trustee or the Debtor to file a motion in response to the Cure Response. Rule 3002.1(h) merely provides for what is to happen if a motion is filed.
Although the Advisory Committee Note states that subdivision (h) of Rule 3002.1 provides the procedure for the judicial resolution of any disputes that may arise about payment of a claim secured by the debtor’s principal residence, it does not say that it is the only or the exclusive procedure that may be used to resolve such disputes. Moreover, the Rule says nothing about the consequences if a debtor fails to file a motion under Rule 3002.1(h).6
Chase argues that the negative pregnant rule does not apply here and that the canons of statutory construction require the Court to look at the plain meaning of the rule. (Reply at 2-3.) However, a plain reading of Rule 3002.1(h) demonstrates that it does not (i) contain compulsory language requiring the debtor or the trustee to file a motion in response to a creditor’s statement that it disagrees with the trustee’s notice of final cure payment; or (ii) purport to be the exclusive procedure for determining if the debtor has paid all required post-petition amounts due on his/her residential mortgage. The word “shall” is included in subsections (b), (c), (d) and (g) regarding obligations of the holder of a claim secured by a debtor’s principal residence to file certain notices and statements. “Shall” also applies to the trustee’s obligation in subsection (f) to file a notice of final cure payment. However, “shall” is noticeably missing from subsection (h), which simply says what is to happen if a motion is filed by either the debtor or the trustee. Consistent with the language of Rule 3002.1(h), the Advisory Committee Note states that the debtor or *801trustee “may” file a motion to seek a determination from the court.
Chase argues that there “would have been no point in setting forth a 21 day time frame and a right to hearing if a debtor could simply ignore the Cure Notice Response and sue a creditor at his or her leisure at a later time.” (Id. at 3.) The 21-day time frame, however, serves a different purpose. If a creditor disputes that a claim for which the trustee is responsible for payment has been made (i.e., a pre-petition default or a post-petition payment made through a conduit plan) the trustee will, of necessity, have to file a motion for determination that the debtor has cured the pre-petition default and paid all required post-petition amounts before the trustee can file the final accounting. However, if a creditor disputes that the debtor is current on post-petition payments that the plan calls for the debtor to have made directly to the creditor and no motion is filed, the trustee can file a final accounting, the debtor can receive a discharge and the court can close the case. Without the 21-day period in Rule 3002.1(h), the controversy created by a creditor disputing the trustee’s notice of final cure payment could necessitate that a case remain open indefinitely — even if the dispute has nothing to do with administration of the chapter 13 case.7
Although it is not explicit, the Court understands that the 21-day period in Rule 3002.1(h) provides the time period for the bankruptcy court to make a determination whether the debtor has paid all required post-petition amounts on the mortgage. Rule 3002.1(h) was intended to provide a debtor with a procedure to seek a determination of the status of his/her mortgage prior to closure of the bankruptcy case. The 21-day period, however, in no way limits any other court from making a determination of the post-petition status of a mortgage at a later date and in a different forum.
Chase cites In re Poff, No. 11-15869, 2012 WL 7991472, 2012 Bankr.LEXIS 1189 (Bankr.S.D.Ohio March 16, 2012) for the proposition that “[R]ule 3002.1(h) provides [sic] mechanism to bring any dispute regarding charges to court’s attention ‘before the case is closed.’”8 (Reply at 5.) The Poff case dealt with Rule 3002.1 in an entirely different context; the statement was made in response to a debtor’s attempt to add provisions in a proposed chapter 13 plan concerning the mortgage creditor’s obligations. The bankruptcy court found that the proposed provisions either restated the law or were unnecessary because of Rule 3002.1. Furthermore, the Poff court did not find that Rule 3002.1(h) required a debtor to file a motion; the court found no such requirement and instead found that filing a motion was discretionary. Chase conveniently ignores the sentence immediately before the one it quotes, which states, “If the secured creditor files a timely dispute, the debtor or the Chapter 13 trustee may file a motion to have the court determine whether the debtor has cured the default and paid all required post-petition amounts.” Poff 2012 WL 7991472, at *8, 2012 Bankr.LEX-IS 1189, at *21 (emphasis added). Consistent with Rule 3002.1(h), the Poff court did not find any requirement in the Rule that a debtor or the trustee is required to file a motion.
*802Despite the absence of any requirement in Rule 3002.1 for the Debtor to file a motion in response to Chase’s Cure Response, Chase attempts to manufacture such requirement. Chase argues, “Upon the filing by Chase of its Cure Notice Response, a duty was triggered-pursuant to Bankruptcy Rule 3002.1(h)-on the part of Plaintiff to file a motion for determination of final cure payment if she wished to challenge the postpetition account included in the Cure Notice Response. See Cure Payment Notices at 1; and Fed. R. Bankr.P. 3002.1(h).” (Mot. to Dismiss at 8.) The language in the Cure Response upon which Chase relies states:
Pursuant to Federal Bankruptcy Rule 3002.1(h), within 21 days of the service of this Response, the Trustee and/or the Debtor shall request a hearing to determine whether the Debtor has cured the default and paid all required post-petition amounts. If no request for hearing is made, Creditor’s Response shall be accepted as an accurate statement of the loan’s status.
(Cure Resp. at 1-2) (bold in original). However, Chase’s misstatement of Rule 3002.1(h) in its Cure Response does not and cannot create an obligation on the part of the Debtor to file a motion when the Rule does not “trigger a duty” on the part of the Debtor to request a hearing to determine whether the Cure Response is accurate. Chase saying it doesn’t make it so.
A. Chase’s Waiver Argument
Chase argues, “Plaintiff was aware that her failure to file a motion for determination would preclude her ability to dispute the application and amount of the mortgage payments that resulted in the deficiency identified in the Cure Notice Response.” (Mot. to Dismiss at 9.) Chase bases this proposition on the Trustee’s Cure Notice, which states, “A hearing on your response to this Notice shall not be scheduled unless a motion pursuant to Rule 3002.1(h) of the Federal Rules of Bankruptcy Procedures [sic] is requested by a party in interest.” (Id. (quoting the Final Cure Notice at 1.)) Chase goes on to assert that, by not filing a motion, the Debtor has “voluntarily relinquished and abandoned her right to challenge the amount and application of the pre-dis-charge mortgage payments; accordingly, Plaintiffs Complaint is barred by the doctrine of waiver.” (Id. at 9-10.)
The Trustee’s statement in the Final Cure Notice, however, in no way would have made the Debtor aware that she had to file a motion in response to the Cure Response or be forever precluded from challenging the content of the Cure Response. The Trustee’s statement makes no mention of preclusion and simply informs that if no motion is filed, there will be no hearing. There is nothing in the Trustee’s statement regarding the effect, result or ramification of not having a hearing on the Cure Response.
As set forth above, there is no basis for Chase’s misstatement of Rule 3002.1(h) that the Debtor “shall” request a hearing within 21 days after service of the Cure Response. Moreover, there is nothing in Rule 3002.1, any other Bankruptcy Rule or the Bankruptcy Code to support Chase’s statement that, if a request for hearing is not made, then its Cure Response “shall be accepted as an accurate statement of the loan’s status.” (Id. at 5.) Indeed, to the contrary, Rule 3002.1(g) specifies that the statement filed as a supplement to the proof of claim (i.e., the Cure Response) “is not subject to Rule 3001(f).” Rule 3001(f) states, “A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R. BaNkr.P. 3001(f) (West 2013).
*803Chase acknowledges that the Debtor accurately states the proposition that the Cure Response is not entitled to a presumption of prima facie validity under the Bankruptcy Rules at the time it was filed. (Reply at 8 n. 6.) However, Chase maintains that this proposition only would have affected Chase’s burden of proof at a hearing if the Debtor had filed a motion seeking a determination whether she had paid all post-petition amounts. (Id.) While Chase acknowledges that the Cure Response is not presumptively valid, Chase nonetheless makes the extraordinary leap that the Cure Response has a preclusive effect as to the accuracy of the status of the Mortgage. Chase’s statement to that effect does not make it so. Chase cites to no case law to support its claim that the Debtor waived her ability to contest the post-petition default amount in the Cure Notice when she did not file a motion for determination in response to the Cure Response. Likewise, the Court could find no case law to that effect.9
Although the bankruptcy court in In re Rodriguez, No. 08-80025-G3-13, 2013 WL 3430872, 2013 Bankr.LEXIS 2738 (Bankr.S.D.Tex. July 8, 2013) dealt with Rule 3002.1(h) in a different context, its opinion is instructive. In Rodriguez, during the course of the chapter 13 case, the creditor filed two notices of post-petition mortgage fees under Rule 3002.1(c), to which there was no objection. Like the statement in Rule 3002.1(h), notices under Rule 3002.1(c) are not subject to Rule 3001(f). The trustee filed a notice that the debtor had completed all plan payments, followed by a motion seeking an order deeming, pursuant to Rule 3002.1(f), that the debt- or’s debt to the creditor was current. The creditor opposed the trustee’s motion and asserted that the debtor had paid the amount necessary to cure the pre-petition default on the note, but had not paid post-petition arrearages in the amount of $25,798.02. The court held a hearing, at which the debtor testified that he believed the cost of insurance was being paid out of the monthly mortgage payments he made directly to the creditor. The creditor presented no evidence of any disbursements it may have made for taxes or insurance. The bankruptcy court found that, under Rule 3002.1(h), the burden of proof was on the creditor. Even though the debtor had never objected to the two supplements to the proof of claim for fees, the court held that the debtor had cured the default and paid all required post-petition amounts. The court stated, “[The creditor] filed two notices of post-petition fees, expenses, and charges, totaling $908.28. Debtor did not object to those notices. The notices were timely filed. However, those notices do not enjoy the presumption of validity.” Id. at *4, 2013 Bankr.LEXIS 2738, at *11. The Rodriguez court found that notices under Rule 3002.1(c) have no presumptive validity even if the debtor fails to object to them.
This Court likewise finds that statements filed pursuant to Rule 3002.1(g) have no presumptive validity even if there is no objection thereto. As a consequence, the Cure Response has no prima facie evidentiary effect and no presumptive validity. The Debtor was not required by Rule 3002.1(h) to file a motion in opposition to the Cure Response. Accordingly, Chase’s attempt to construct a waiver by the Debtor’s failure to file a motion and to compel the Debtor’s acceptance of the Cure Response as an accurate statement *804of the status of the Mortgage is unavailing. Including such statement in the Cure Response has no legal effect. The Debtor’s failure to file a motion when she had no duty to do so does not constitute waiver.
There is no basis for Chase’s arguments that (i) the Debtor was required to file a motion pursuant to Rule 3002.1(h); and (ii) the Cure Response constitutes an accurate statement of the status of the Mortgage. The Debtor did not knowingly and intentionally relinquish and abandon her ability to challenge whether she has paid all post-petition amounts relating to the Mortgage. Because the Debtor was not required by Rule 3002.1(h) to file a motion for a determination of the post-petition claim in the Cure Response, her failure to do so cannot and does not constitute a waiver of her ability to challenge such amount later. Accordingly, Chase’s argument for dismissal on the basis of waiver is without merit.
B. Chase’s Res Judicata Argument
Similarly, Chase’s argument for dismissal based on res judicata or issue preclusion must fail because of its misreading of Rule 3002.1. As Chase correctly notes, in order for res judicata or issue preclusion to be applicable there must be “a final decision on the merits by a court of competent jurisdiction.” (Mot. to Dismiss at 11.) Chase’s argument for “a final decision on the merits” rests entirely on the Debtor and all creditors being bound by the terms of the Debtor’s confirmed Plan. Chase postulates that, because the Debt- or’s confirmed Plan called for payment of Chase’s claim and “the final amount of which was subsequently determined pursuant to Bankruptcy Rule 3002.1,” the Debt- or cannot relitigate the amount of the alleged post-petition arrearage set forth in the Cure Response. (Id.) Because the Debtor did not file a motion under Rule 3002.1(h), Chase states:
As of October 29, 2012, issues regarding the application and amount of Plaintiffs post-petition pre-discharge mortgage payments were determined as between these same parties pursuant to Bankruptcy Rule 3002.1....
Under res judicata, Plaintiff is barred from asserting her claim in the Complaint, as she was required to raise these issues in the context of a motion for determination within her bankruptcy.
(Id. at 11-12.)
There is no legal foundation for this proposition because the final amount of Chase’s claim, as supplemented by the Cure Response, was never determined pursuant to Rule 3002.1. Such a determination would have occurred only if a motion had been filed by the Trustee or the Debtor and the Court, after notice and hearing, had “determine[d] whether the debtor has cured the default and paid all required postpetition amounts.” Fed. R. BankR.P. 3002.1(h). Both parties agree that the Debtor did not file a motion and the Court did not make a determination.10 As set forth above, the Debtor was not required by Rule 3002.1(h) to file a motion in response to the Cure Response, although she was permitted to do so. The Debtor’s failure to file a motion at that time did not result in any determination by the Court regarding the amount, if any, of the Debtor’s post-petition, pre-discharge default on the Mortgage.
Most troubling to the Court is Chase’s attempt to use the Confirmation Order as a final order determining the amount of its post-petition claim, as set forth in the Cure Response. There is simply no basis for this assertion. In a post-petition foreclo*805sure action, a state or federal court would have to give full faith and credit to a final order of another court of competent jurisdiction. It would be impossible for any court to find that the Confirmation Order, coupled with the Cure Response, finally adjudicated the amount of debt that the Debtor owes to Chase for post-petition, pre-discharge defaults. There is no language in the Confirmation Order or any other order of this Court to that effect. In fact, there is nothing to support Chase’s argument of finality except for the self-serving misstatement of Rule 3002.1(h) in the Cure Response. As set forth above, the fact that Chase says the Cure Response represents an “accurate statement of the loan’s status” does not make it so.11 More importantly, the Cure Response cannot be and certainly is not a final order of this Court. In short, there has been no final determination of the amount, if any, that the Debtor owes to Chase relating to post-petition defaults on the Mortgage on her principal residence.
Accordingly, there has been no final decision on the merits by a court of competent jurisdiction. Without such a final decision, all of the remaining components of res judicata cannot exist. As a consequence, Chase’s argument for dismissal on the basis of res judicata is without merit.
TV. CONCLUSION
As set forth above, Chase has failed to establish a legal basis for either of its arguments for dismissal. Neither the doctrine of waiver nor res judicata requires this Court to dismiss the Debtor’s Complaint. The Motion to Dismiss Complaint will be denied. An appropriate order will follow.
ORDER DENYING MOTION TO DISMISS COMPLAINT
This cause is before the Court on Motion to Dismiss Complaint (Doc. # 9) filed by Defendant JP Morgan Chase Bank, National Association, successor by merger to Chase Home Finance, LLC (“Chase”), on August 15, 2013. Debtor/Plaintiff Doreen Bodrick (“Debtor”) filed Memorandum in Opposition to Defendant’s Motion to Dismiss Summary of Argument [sic] (“Memo in Opposition”) (Doe. # 16) on September 23, 2013. On October 3, 2013, Chase belatedly filed Reply in Support of Motion to Dismiss Complaint (“Reply”) (Doc. # 17).
The Motion to Dismiss seeks dismissal of Complaint for Violation of the Automatic Stay (“Complaint”) (Doc. # 1) on the grounds of waiver and res judicata.
For the reasons set forth in the Court’s Memorandum Opinion Regarding Motion to Dismiss Complaint1 entered on this date, the Court FINDS and ORDERS:
1. Federal Rule of Bankruptcy Procedure 3002.1(h) did not require the Debtor to file a motion for the Court to determine whether the Debtor had paid all required post-petition amounts relating to the Debt- or’s residential mortgage, although the Debtor was permitted to file such motion.
2. The failure of the Debtor to file a motion pursuant to Federal Rule of Bankruptcy Procedure 3002.1(h) did not and does not constitute a waiver of the Debt- or’s ability to later dispute any post-petition amounts included in the Cure Re*806sponse filed pursuant to Federal Rule of Bankruptcy Procedure 3002.1(g).
3. The failure of the Debtor to file a motion pursuant to Federal Rule of Bankruptcy Procedure 3002.1(h), did not and does not result in the application of res judicata because there is no final decision of the Court concerning the merits of the post-petition amounts asserted to be due in the Cure Response.
4. The Motion to Dismiss is denied in its entirety.
. Local Rule 9013-l(c) states, "Subject to Fed. R. Bankr.P. 9006(f), a reply may be filed within 7 days after the date of service shown on the certificate of service of the response.” LBR 9013-l(c) (2011). The certificate of service on the Memo in Opposition states that it was served electronically on September 23, 2013. Accordingly, any reply was due no later than September 30, 2013. Federal Rule of Bankruptcy Procedure 9006(f) does not enlarge the time for Chase to file the Reply because service of the Memo in Opposition was not accomplished by mail.
. Unless otherwise stated, the Court will refer to Claim Nos. 4-1, 4-2 and 4-3 as Claim No. 4.
. In Claim No. 4 and Claim No. 15, respectively, Washington Mutual Bank and Washington Mutual Mortgage have the same address in Jacksonville, Florida, but it is not clear if they are the same or different entities.
. Deutsche Bank defined itself as Creditor in the Cure Response. Nowhere in the Motion to Dismiss does Chase explain the relationship, if any, between itself and Deutsche Bank. Indeed, Chase retreats to use of the passive voice in reference to the filing of the Cure Response. "On October 3, 2012, within 21 days provided for under Bankruptcy Rule 3002.1 and the Cure Payment Notices for filing a response, a ... Cure Notice Response was filed with respect to Chase's claim arising out of the Note and Mortgage.” (Mot. to Dismiss at 4 (emphasis added).) Claim No. 4, which was transferred to Chase from Washington Mutual (Main Case Doc. # 44), was filed by Washington Mutual as servicer for Deutsche Bank. Claim No. 15 lists the Creditor as Deutsche Bank with payment to be made to Washington Mutual Mortgage. Rule 3002.1(b) requires "the holder of the claim” to file and serve a notice of any change in the payment amount on the residential mortgage. Prior to transfer of Claim No. 4, Chase (not Washington Mutual), "as servicer for Deutsche Bank,” filed two Notices of Mortgage Payment Change (Main Case Docs. ## 42 and 43, dated December 12, 2010 and April 15, 2011, respectively). After transfer of Claim No. 4, Chase "as servicer for Deutsche Bank” filed a third Notice of Mortgage Payment Change (Main Case Doc. # 47) on July 18, 2011. Chase, in its own name, not as servicer, filed a fourth Notice of Mortgage Payment Change (Main Case Doc. Nov. 15, 2012). The Cure Response was filed by Deutsche Bank, which is the holder of Claim No. 15, whereas Chase is the holder of Claim No. 4. As a consequence, it is difficult to determine how and by whom the delinquency for February through October 2012, as set forth in the Cure Response, was calculated.
. Although the Debtor's Motion to Reopen indicated that she intended to allege that Chase had violated the automatic stay and Rule 3002.1, the Complaint contains no allegations concerning Rule 3002.1. (See Main Case Doc. # 74.)
. The only ramifications in Rule 3002.1 are for the creditor's failure to comply. It would be fundamentally unfair to penalize a debtor for noncompliance without notice and a hearing, when such are required before penalizing the creditor. See Rule 3002.1 (i).
. Indeed, where, as here, the Debtor's Mortgage payment was paid directly to the creditor and not through the Trustee, any dispute regarding post-petition payments could never be remedied by further administration of the case.
. This Court does not disagree with this statement.
. Chase cites this Court's decision in In re Adkins, 477 B.R. 71 (Bankr.N.D.Ohio 2012) for the proposition that compliance with Rule 3002.1 is mandatory. (Mot. to Dismiss at 9.) While this is an accurate statement of that case, it has no applicability here because the Debtor was not required to take any action by Rule 3002.1(h).
. In the present case, there is no dispute that the pre-petition default claim was paid by the Trustee. (See Final Cure Notice and Cure Response.)
. In the present case, the Court is particularly disturbed by Chase's attempt to put a gloss of finality on the alleged amount of the Debt- or's post-petition Mortgage default since Deutsche Bank, which filed the Cure Response, was not the "holder” of Claim 4 at the time the Cure Response was filed. (See supra at page 797 n. 4.) Rule 3002.1(g) requires the holder of the claim to file a response.
. All capitalized terms have the same meaning as in the Memorandum Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496348/ | *816MEMORANDUM
SHELLEY D. RUCKER, Bankruptcy Judge.
The trustees seek substantive consolidation of the two cases in order to sell a condominium owned by the debtors as tenants by the entirety for the benefit of the debtors’ joint creditors. Before the court determines whether substantive consolidation is warranted, it must determine whether the trustees can overcome the exemption that each debtor has claimed in their respective entirety interests in the condominium. Mr. Jahn, Mr. James’ trustee, has objected to Mr. James’ claim of exemption in an interest in the condominium and seeks a finding by this court that his objection is timely because either the exemption was fraudulently asserted or, in the alternative, allowance of the exemption would be a legal fraud or an abuse of process which the court may prohibit under 11 U.S.C. § 105(a). [In re Alvin James, Bankr.Case No. 11-16354, Doc. No. 47]. Mr. Farinash, Mrs. James’ trustee, has filed an objection to her claim of exemption in her entirety interest in the condominium on the basis that she is not entitled to the exemption under applicable nonbankruptcy law because joint creditors exist, or alternatively, that she should not be allowed an exemption on equitable grounds. [In re Delorese James, Bankr. Case No. 12-13300, Doc. No. 16].1
Mr. James opposes the relief requested on the basis that he has committed no fraud and his trustee missed the deadline to object to his exemptions. [In re Alvin James, Bankr.Case No. 11-16354, Doc. No. 48]. His wife opposes the relief requested on the basis that she committed no fraud and that her husband’s discharge left her with no joint creditors. [In re Delorese James, Bankr.Case No. 12-13300, Doc. No. 28]. If no joint creditors existed at the time her case was filed, her entirety interest is wholly exempt under Florida law.
Based upon a review of the evidence provided at the hearing, the arguments of counsel and the entire record in these contested matters, the court finds that no actual fraud was committed by Mr. James. As such, the court does not find that the exemption was fraudulently asserted by Mr. James. Having missed the deadline to object, Mr. James’ trustee has waived his objection to the exemption of $260,000 claimed for the entirety interest. Mr. James has received his discharge, but joint creditors continue to exist to the extent that a joint debt secured by the condominium was reaffirmed and there is any value above $260,000 in the condominium. For these reasons, the objection of Mr. James’ trustee will be sustained only as to any value in excess of the amount claimed as exempt.
The legal and equitable reasons for allowing an exemption for Mr. James do not apply to Mrs. James. Her trustee timely filed an objection. Her case was filed within months of her husband’s case. Her financial problems arise from joint debt or debt related to Mr. James’ business. Her valuation of her interest in the condominium failed to take into account information she received after her husband filed. For Mrs. James to be entitled to an exemption other than that which her husband has already claimed would be an abuse of the bankruptcy process. For these reasons, the objection of Mrs. James’ trustee to her exemption will be sustained.
*817In order to prevent a double exemption on the same property and to preserve the value in excess of the claimed exemption for the benefit of joint creditors, the court finds that limited substantive consolidation is appropriate. The trustees’ joint motion to consolidate will be granted in accordance with this memorandum. [Bankr. Case No. 11-16354, Doc. No. 64; Bankr. Case No. 12-13300, Doc. Nos. 62].
These are the court’s finding of facts and conclusions of law made pursuant to Fed. R. Bankr.P. 7052 as made applicable to contested matters by Fed. R. Bankr.P. 9014(c). This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and § 167(b)(2)(0).
I. Facts
Alvin Lebrón James filed his individual petition for relief under Chapter 7 of the United States Bankruptcy Code on November 15, 2011. [Bankr.Case No. 11-16354, Doc. No. 1]. Mr. Jahn was appointed as his trustee. Delorese Juanette James, his wife, filed an individual petition for relief under Chapter 7 on June 28, 2012, seven and a half months after Mr. James’ filing. [Bankr.Case No. 12-13300, Doc. No. 1], Mr. Farinash was appointed as trustee for Mrs. James. Both debtors are represented by Thomas E. Ray.
A. Mr. James’ Schedules
Mr. James filed bankruptcy because his construction company, A.L. James Construction & Development, had failed. The same day he personally filed, he also filed a chapter 7 case for the company. Mr. Jahn was also appointed as the company’s trustee. In re A.L. James Construction and Development, LLC, Case No. 11-16353 (Bankr.E.D.Tenn.) (J. Cook). In his individual case, the four pieces of real property listed by Mr. James in Schedule A are shown as jointly owned. Schedule A reflects that the values of the four properties total $1,962,000.
Two of the four are significant in the court’s analysis. The first is a property in Georgetown Bay Subdivision, Ooltewah, Tennessee (the “Georgetown Property”). He listed the value as $1,200,000 securing a claim of $1,113,714.22 held by Northwest Georgia Bank (“NWGB”). The second piece is a condominium located at 4621 South Atlantic Avenue, Unit 8102, Ponce Inlet, Florida (the “Condominium”). Mr. James listed the Condominium with a value of $260,000 securing a claim of $160,000 also held by NWGB. Hearing Ex. B, Statement of Financial Affairs and Schedules (“Schedules”) at 16. The Georgetown Property is significant because when NWGB foreclosed, a deficiency of approximately $600,000 resulted, not equity of $87,000 as Schedule A indicated. The Condominium is significant because the debtor’s exemption in this property is the subject of both trustees’ objections. The schedule reflects an anticipated deficiency for all the properties of $3,378.37. Schedule D at 22.
On Schedule D-Secured Debt, only three of the four properties were shown as collateral for joint debts with Mrs. James. Id. at 22. One debt of $199,433.18, secured by 455 Winding Ridge Road, Lafayette, Georgia, (‘Winding Ridge Property”) owed to First Horizon/First Tennessee, is shown as only Mr. James’ debt. Id. The secured debts total $1,778,525.77.
On Schedule F-Creditors Holding Unsecured Nonpriority Claims, Mr. James lists $3,787,914.70 of unsecured debts held by 64 different creditors. Hearing Ex. B, Schedule F. Of these unsecured debts, nine creditors hold debts designated as joint. These nine total $85,501.15 and appear to be credit card debts and have the designation “Business” in the column headed “Date Claim Was Incurred and Consideration for Claim.” Id.
*818On February 27, 2012, Mr. James reaffirmed his debt to NWGB on the Condominium for $164,036.17. [Bankr.Case. No. 11-16354, In re Alvin James, Doc. No. 40 at 2]. On February 29, 2012, Mr. James received his discharge.
B.Mrs. James’ Schedules
Mrs. James filed bankruptcy approximately four months after Mr. James’ discharge was granted. Her schedules reflected jointly held assets except for jewelry and an IRA. Her liabilities are a subset of those listed in Mr. James’ schedules. On Schedule A she listed only the Condominium and the Winding Ridge Property in her Schedule of Real Property. She valued the Condominium at $260,000 with a debt of $160,000. The Georgetown Property is not listed since it had been foreclosed by NWGB prior to her filing. On Schedule D-Secured Debts, she listed two debts — the NWGB Condominium debt and the First Horizon/First Tennessee debt secured by the Winding Ridge Property. The latter debt is described as a nonrecourse joint debt, contrary to her husband’s schedule which reflected it as his individual debt. Hearing Ex. C, Schedule D. On Schedule F-Unsecured Non Priority Creditors, she lists 27 unsecured creditors, 26 of which were listed in Mr. James’ schedules, totaling $1,753,159.53. The 27th is a servicing address for Bank of America and appears to have been added only for notice related to two other Bank of America accounts. The total of her unsecured debts is significantly larger than Mr. James’ because it includes a $600,000 deficiency claim resulting from the foreclosure of the Georgetown Property by NWGB. Most of the descriptions of the debts contain the word “Business.” Compare Hearing Ex. C at pp. 23-28 with Hearing Ex. B at pp. 25-37. At trial Mrs. James testified that the creditors she listed for $1.00 were added for notice purposes and she was not really sure whether she was jointly liable for the debts. The court finds that all of these debts arose from Mr. James’ business since Mrs. James testified that her only employment had been as a bookkeeper for her husband’s business for the last twelve years with no other employment until two weeks prior to the hearing in this court. Testimony of De-lorese James, May 17, 2013 Hearing at 9:38-9:39 a.m.
C. Condominium Exemption
In their respective schedules C — Property Claimed as Exempt, both debtors list the Condominium under the heading “Description of Property.” Both claimed 11 U.S.C. § 522(b)(3)(B) as the law providing the exemption. Both listed the “Value of the Claimed Exemption” to be $260,000. Both listed the “Current Value of the Property Without Deducting Exemption” to be $260,000. Mrs. James also reaffirmed the debt to NWGB secured by the Condominium. Neither party claimed a homestead exemption under either Tennessee or Florida law.
At the hearing, Mrs. James testified that she and her husband had listed the Condominium for sale prior to her bankruptcy filing. They listed the property for $449,500. She explained that she listed the property for that amount in consultation with her realtor “as a negotiating point.” Hearing Ex. 25, Deposition of De-lorese James (“D. James Dep.”), p. 22, 1. 17. The property was on the market for approximately six weeks. Id. at 23, 1. 3.
D. Mrs. James’ Filing and the NWGB Deficiency
One debt that is central to the issue of whether equitable remedies are appropriate is the $600,000 deficiency claim owed to NWGB. It was the uncertainty surrounding that debt which Mrs. James tes*819tified delayed her decision to file bankruptcy with her husband. Mrs. James testified that she hoped she would never owe a deficiency because she hoped the Georgetown Property would sell for enough at foreclosure to satisfy the debt. Alternatively, she hoped that something could be worked out with NWGB so that the bank would not pursue her for a deficiency if there were one. Only when it became apparent that she would be facing a substantial deficiency did she decide to file. She testified that her attorney Mr. Ray had explained to her the risk of nondis-chargeable tax debt if the Bank forgave the deficiency and reported that forgiveness of debt as her income. She testified that the risk of tax liability was the reason she ultimately chose to file. Testimony of Delorese James, May 17, 2013 Hearing at 10:08-10:09 a.m.
The trustees in this case contend that Mrs. James never realistically believed that she could avoid filing bankruptcy; knowing that, she and her husband deliberately filed separately in the hope that they could save the equity in the Condominium for a fresh start. The trustees also contend that her explanation of why she delayed filing is not credible based on her knowledge of an appraisal showing that a deficiency was likely on the Georgetown Property. The debtors had had an appraisal prepared by Henry Glascock which reflected that the value of the Georgetown Property “as is” was $950,000. That appraisal was completed on June 27, 2011, a date prior to both bankruptcy filings. It indicated that it would cost $50,000 to complete the house in order to achieve the completed value of $1,200,000. Hearing Ex. E, Appraisal of Henry Glas-cock. Nevertheless, it was the completed value that Mr. James used on his Schedules.
The trustees also offer a Submission of Intent to Purchase the bank’s note that was made to NWGB on December 2, 2011, for $767,255. Hearing Ex. H. There was another offer to purchase the bank’s note secured by the Georgetown Property for $801,610. Hearing Ex. J. The trustees argue that there were no offers or appraisals that support the debtors’ theory that the Georgetown Property was ever worth $1,200,000.
Finally, the trustees point to the explanation given by Mrs. James for changing her mind and filing when she did. She testified that she did not want to file because she thought that NWGB would not have a deficiency against her. When it did, she testified that her attorney told her that she should file to avoid tax liabilities if NWGB changed its mind and forgave her debt. The tax liability that would be created as a result of the forgiveness of indebtedness outside of bankruptcy “freaked her out.” Testimony of Delorese James, May 17, 2013 Hearing at 10:08-10:09 a.m.
The court has doubts about this explanation. According to her testimony, NWGB repeatedly refused to negotiate to release her. All of the parties were aware of the Glascock appraisal and the lower offers for the note before the foreclosure sale occurred. The risk of tax exposure existed well before the foreclosure sale occurred. Mrs. James’ credibility is further in question when her optimism about the Georgetown Property is compared to her apparent pessimism about the value of the Condominium. Mrs. James and her husband listed the Condominium for sale at $449,500, almost $200,000 more than she reflected as the value on her schedules. At her deposition, she testified that she had just gotten an appraisal from NWGB for $275,000 when she was preparing her schedules. Hearing Ex. 25, D. James Dep., p. 22. The trustees provided emails between Mrs. James and her counsel that indicate the Condominium was of *820great concern to the debtors. Hearing Ex. F, Email String between John Beard, counsel for Construction Company, and Tom Ray regarding Condominium dated Sept. 12, 2011; Hearing Ex. L, Email from Delorese. James to Tom Ray dated June 12, 2012 containing inquiry about NWGB mortgage. Her reasons for the delay in filing, her valuation of the Condominium, and the similarity of her obligations to those of her husband are all factors the court has considered in finding that her additional claim of a $260,000 exemption is an abuse of the bankruptcy process and limited substantive consolidation is appropriate.
II. Issues
Prior to addressing substantive consolidation, the court will consider the objection to the parties’ claim of exemption under Section 522(b)(3)(B). As to Mr. James, the court will address whether Mr. James’ trustee has waived any objection to the exemption in the entirety property by failing to object in a timely manner. If the court finds that Mr. James’ trustee may pursue even a part of the Condominium or its value, then the court must determine whether Mrs. James may exempt any interest in the Condominium. If after determining that there remains an interest to be administered, the court will determine whether the cases should be consolidated and to what extent.
III. Analysis
A. Objection to the Exemption of Mr. James
1. Exemption of Tenancy by the Entirety Property
When a debtor files bankruptcy, a bankruptcy estate is established which includes all property in which the debtor has a legal or equitable interest as of the petition date. 11 U.S.C. § 541(a)(1) (2012). The debtor may remove certain property from that bankruptcy estate pursuant to the exemptions allowed by 11 U.S.C. § 522. There are two choices for exemptions contained in Section 522. 11 U.S.C. § 522(b)(1). The first is a list of specific federal exemptions found in subparagraph (d). 11 U.S.C. § 522(b)(2). The other list, found in subparagraph (b)(3), incorporates a state’s exemptions2 and includes property that qualifies for exemption under Section 522(b)(3)(B) and (C). A prerequisite to a debtor’s right to use a state’s exemption list is that the debtor must have been domiciled in that state for the 730 days prior to his or her filing. If the debtor has not been located in one place for that period, the court looks to his or her domicile during the 180 days prior to the 730 day period. If the effect of this domiciliary requirement under subparagraph (b)(3)(A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property under section 522(d). The states may also limit their citizens’ alternatives for exemptions to only the second one by “opting out” of the federal list found in subparagraph (d).
In order to claim those exemptions, the debtor is required to “file a list of property that the debtor claims as exempt under subsection (b)” of section 522. 11 U.S.C. § 522(l). Unless a party in interest objects, the property claimed as exempt on such list is exempt. Id. “Unless the case is dismissed, property exempted under this section [11 U.S.C. § 522] is not liable during or after the case for any debt of the debtor that arose, or that is determined *821under section 502 of this title as if such debt had arisen, before the commencement of the case....” 11 U.S.C. § 522(c).
At issue in this case is the exemption allowed by subsection 522(b)(3)(B). It authorizes a debtor to remove from his/her bankruptcy estate, “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety ... to the extent that such interest as a tenant by the entirety ... is exempt from process under applicable nonbankruptcy law.” 11 U.S.C. § 522(b)(3)(B).
Mr. and Mrs. James chose Section 522(b)(3)(B) as their basis to exempt the Condominium. They hold an interest in the Condominium as tenants by the entirety. There is no issue about the type of interest they hold. They acquired the property while they were married, and titled it in their names prior to the filing of his bankruptcy case. Beal Bank SSB v. Almand & Assocs., 780 So.2d 45, 52 (Fla. 2001) (listing requirements for tenancy by the entirety property). If Florida law treats this property interest as exempt from process, they would be entitled to exempt “any interest in property in which [he] had, immediately before the commencement of the case, an interest as a tenant by the entirety ... to the extent that such interest as a tenant by the entirety ... is exempt from process under applicable nonbankruptcy law.” 11 U.S.C. § 522(b)(3)(B).
a. Applicable Nonbankruptcy Law for Entirety Property Exemption
To determine whether the Condominium is exempt from process, the court will look to the law of the situs of the real property. In this case that is Florida. “Under Florida law, entireties property is exempt from process to satisfy debts owed to individual creditors of either spouse. Entireties property is not exempt from process to satisfy the joint debts of both spouses.” See In re Monzon, 214 B.R. 38, 40-41 (Bankr.S.D.Fla.1997) (citing Neu v. Andrews, 528 So.2d 1278, 1279 (Fla.Dist.Ct.App.1988) and Stanley v. Powers, 123 Fla. 359, 166 So. 843, 846 (1936) (holding that a judgment debt against both spouses can be satisfied by selling the entireties property)). “Courts have generally recognized that § 522(b)[ (3) ](B),3 read in conjunction with applicable Florida law, precludes the debt- or from exempting a portion of his entire-ties property where joint creditors of both spouses exist at the time of filing.” In re Monzon, 214 B.R. at 41. The debtor may have some exemption to the extent that there is equity in the property over and above the claims of joint creditors. “The debtor does not lose all benefit of exemption under 11 U.S.C. § 522(b)[ (3) ](B) when joint creditors are present; he loses the exemption as to the extent of the joint creditors and their claims.” Pepenella v. Life Ins. Co. of Georgia (In re Pepenella), 103 B.R. 299, 302 (M.D.Fla.1988); see also, In re McRae, 308 B.R. 572 (N.D.Fla.2003); In re Helm, No. 11-18801-EPK, 2012 WL 1616791 (Bankr.S.D.Fla. May 9, 2012). But see In re Anderson, 132 B.R. 657, 659-60 (Bankr.M.D.Fla.1991) (existence of joint judgment defeats “exemption”, trustee may distribute proceeds to all creditors). While the Florida federal courts may disagree about which creditors may *822be paid from the proceeds, there is little disagreement in their holdings that the existence of joint creditors will defeat the exemption of the entirety interest to the extent of the joint debt. In re McRae, 308 B.R. 572; In re Planas, No. 98-0506-CIV-NESBITT, 1998 WL 757988, at *3-4 (S.D.Fla. Aug. 21, 1998); In re Ciccarello, 76 B.R. 848, 850 (Bankr.M.D.Fla.1987); In re Koehler, 6 B.R. 203, 206 (Bankr.M.D.Fla.1980).
b. Procedure for Preventing Exemption of Entirety Property Where Joint Creditors Exist
The disallowance of an exemption requires the trustee or a creditor to object to the exemption. With respect to this exemption specifically, the Sixth Circuit has held that the appropriate procedure for preventing entirety property from escaping the claims of joint creditors is an objection to the exemption. Liberty State Bank and Trust v. Grosslight (In re Grosslight), 757 F.2d 773, 777 (6th Cir.1985). “Rule 4003(b) gives the trustee and creditors 30 days from the initial creditors’ meeting to object. By negative implication, the Rule indicates that creditors may not object after 30 days, ‘unless, within such period, further time is granted by the court.’ ” Taylor v. Freeland & Kronz, 503 U.S. 638, 643, 112 S.Ct. 1644, 1648, 118 L.Ed.2d 280 (1992); Fed. R. Bankr.P. 4003(b).
Mr. Jahn did not object to the exemption within the thirty day time limit of Fed. R. Bankr.P. 4003(b)(1). He did, however file an Objection to Homestead Exemption 4 on September 17, 2012. [Bankr. Case No. 11-16354, Doc. No. 47]. In order to prevent the property claimed as exempt from leaving the estate free of the claims of Mr. James’ joint creditors, Mr. Jahn must find an exception to the thirty day time limit. He raises several theories which he argues provide grounds for sustaining his objection.
c. Exceptions to Thirty Day Time Limit
i. Fraudulent Assertion of Exemption
Rule 4003 does have an additional window within which a trustee may file an objection if the debtor fraudulently asserted the claim of exemption. The rule provides that he “may file an objection to a claim of exemption at any time prior to one year after the closing of the case.” Fed.R. Bankr. 4003(b)(2). Mr. James’ case has not closed, so the objection is timely if the court finds that exemption was asserted fraudulently. It is the trustee’s burden of proof to show that the exemption is not properly claimed. Fed. R. Bankr.P. 4003(c).
Mr. James denies that he fraudulently asserted his entirety exemption. He disclosed his entirety interest. He made no effort to mislead the trustee about his intention to exempt his entirety interest in a valuable condominium. He claimed the exemption in his initial filings and properly described the basis of the exemption. He designated numerous creditors as joint creditors and listed his wife as a co-obligor on Schedule H. There was no evidence that Mr. James had independent knowledge that the Condominium was worth more than the number he placed on his Schedules or that he directed his wife to wait to *823file. The court cannot find that he withheld any information or knowingly provided any inaccurate information to the trustee.
Mr. Jahn testified that he was aware of the existence of the Condominium and that the Schedule D showed that there was approximately $100,000 of equity in the Condominium. He admitted that he believed $100,000 was a significant number, but that he made a conscious decision not to object to the exemption. He “downgraded” the value stated in Mr. James’ Schedules based on the depressed real estate market and his own experience with the “poor” Florida real estate market. He made no effort to verify the value from an independent source. He further felt that the federal exemption created some “legal issues to deal with.” It was a combination of these factors that led to his “judgment call” that it was impractical to pursue the Condominium. Testimony of Richard P. Jahn, May 17, 2013 Hearing at 9:17-9:18 a.m. He has not attempted to sell the Condominium to satisfy the claims of unsecured joint creditors. His objection appears to have been filed when he learned that Mrs. James had followed her husband into bankruptcy and that the parties had listed the Condominium for sale for $449,500.00 immediately prior to her filing.
The act by Mr. James that gives the court pause is Mr. James’ statement in Schedule C that the value of his exemption is $260,000. Under Florida law, he was only entitled to claim the value of the equity after the deduction of the claims of joint creditors. See Stanley, 166 So. at 846. That is the only amount that would have been immune from process under applicable nonbankruptcy law pursuant to 11 U.S.C. § 522(b)(3)(B). He listed the value of the Condominium at $260,000. He clearly was aware of the existence of joint creditors. He listed nine creditors as joint. In fact, he had listed $88,000 of joint unsecured debts on Schedule D and F. There was also a lien on the Condominium for $160,000 owed by both him and his wife. Hearing Ex. B, Alvin James’ Schedules; Hearing Ex. 26, Deposition of Alvin James, p. 22,1. 1-11 (negotiations between NWGB and Mr. James regarding the release of his wife’s guaranty on the Georgetown Property). Using those amounts from his sworn schedules, he should have arrived at a dollar value for the exemption of $12,000, derived by using his value of $260,000 less joint debt mortgage of $160,000 and less $88,000 of scheduled unsecured joint debt. There was no testimony about how the value of the exemption was determined, and no objection was filed to the amount. When the court weighs an aggressive claim to an exemption against the current bankruptcy law on requirements for claiming exemptions discussed below, the trustee’s awareness of the equity in the Condominium and the full disclosure of joint debt, the court does not find that the single overstatement of the value of the claimed exemption rises to the level of a fraudulent assertion of an exemption.
ii. Equitable Theories to Extend Deadline to Object
Since the court has not found actual fraud, the trustees contend that the court should employ an equitable doctrine to allow Mr. James’ trustee additional time to object to the exemption. A review of the statutory history and case law dealing with this issue causes the court to question the extent to which equitable theories may be used to extend a trustee’s deadline.
One theory utilized to bring jointly held property into an estate for the benefit of joint creditors is legal fraud. Black’s Law Dictionary defines legal fraud, also known as constructive fraud or equitable fraud, as the “Unintentional deception or misrepre*824sentation that causes injury to another.” The definition recites that “[i]n equity law the term fraud has a wider sense, and includes all acts, omissions, or conceal-ments by which one person obtains an advantage against conscience over another, or which equity or public policy forbids as being to another’s prejudice; as acting in violation of trust and confidence.” BlaCK’s Law DICTIONARY (9th ed. 2009) (citing Encyclopedia of Criminology 175 (Vernon C. Branham & Samuel B. Kutash eds., 1949)). Courts have applied this concept to situations in which a husband and wife have equity in a property held by them as tenants by the entireties which they prevent joint creditors from reaching by filing their bankruptcy petitions separately. One of the leading cases applying the doctrine of legal fraud to bring back the joint property into the bankruptcy estates for the benefit of joint creditors is the case of Reid v. Richardson, 304 F.2d 351, 355 (4th Cir.1962). In that case, the Circuit Court affirmed a bankruptcy court which had used its equitable powers to re-open a husband’s case and consolidate it with his wife’s case “for the sole purpose of permitting the enforcement in the Bankruptcy Court of the joint claims against the en-tireties property.” Id. at 353.
The ruling in Reid must be considered in the context of bankruptcy law as it existed at that time. Prior to the enactment of the Bankruptcy Code in 1978, entireties property did not come into the bankruptcy estate unless the property was subject to the claims of the debtor’s individual creditors under applicable nonbank-ruptcy law. Therefore, even if joint creditors existed, the entireties property was not part of the estate. When the debtor’s discharge was entered, the joint creditors’ claims were extinguished; and they were prohibited from pursuing the entireties property of the nondebtor spouse because they were no longer joint creditors. “The effect of the coincidental interrelation of these rules of law is to allow the tenants by the entireties to keep the entireties property secure from the claims of their creditors even though that property was never available in bankruptcy for the satisfaction of those claims.” Reid, 304 F.2d at 354-55. Reid relied on an earlier case which had framed the problem as follows:
The question presented is whether, without giving these creditors an opportunity to proceed, the court should grant the discharge knowing that it will result in a legal fraud, i.e. the effectual withdrawing of the property from the reach of those entitled to subject it to their claims, for the beneficial ownership and possession of those who created the claims against it. We cannot conceive that any court would lend its aid to the accomplishment of a result so shocking to the conscience.
Reid, 304 F.2d at 354 (quoting Phillips v. Krakower, 46 F.2d 764, 765 (4th Cir.1931)). Approximately thirty years later a Circuit Court described the legal fraud doctrine discussed in Reid as follows:
Under this pre-Code scheme, there was a potential for legal fraud against joint creditors of a husband and wife. The couple could shelter their assets as unencumbered entirety property, then one spouse could file bankruptcy and obtain a release from his share of all joint debts without exposing the entirety property to any claims because it would not enter the bankruptcy estate. After bankruptcy, all joint creditors could sue only the remaining spouse, a judgment against whom would be ineffective as against the entirety property. This was the situation recognized by the Fourth Circuit in Reid.
In re Hunter, 970 F.2d 299, 302 (7th Cir.1992).
In 1978, the Bankruptcy Code changed the treatment of entireties property. If *825the debtor had any legal or equitable interest in property, it became part of the estate upon filing. 11 U.S.C. § 541(a); In re Grosslight, 757 F.2d at 775. If the property was not subject to process by the debtor’s creditors, then the debtor could remove it from the estate by claiming an exemption in the interest. The trustee could object and prevent the removal. Additional changes to the treatment of entire-ties property in the Bankruptcy Code allowed the trustee to sell both the estate’s interest and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant by the entirety. 11 U.S.C. § 363(h); In re Gross-light, 757 F.2d at 776. He could then distribute the proceeds to the estate’s joint creditors.5
The statutory changes did not clarify how joint creditors should procedurally protect their interests in order to prevent the “legal fraud” that might arise from spouses filing separately. Courts disagreed on how a joint creditor could preserve its claim when only one of the joint debtors was in bankruptcy. The Fourth Circuit continued the pre-Code practice of requiring a creditor to lift the automatic stay and seek a deferral of the discharge while joint creditors proceeded to seek a remedy in state court. See, In re Gross-light, 757 F.2d at 776 (citing Sovran Bank, N.A. v. Anderson, 743 F.2d 223, 224 (4th Cir.1984) and Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057, 1059 (4th Cir.1983)). The Third Circuit approached the problem differently. It held that “a creditor with a judgment on a joint debt may levy upon the property itself and thus on the interests of both spouses. The debtor’s interest in that portion of entire-ties property reachable by joint creditors therefore is not exempt.” In re Gross-light, 757 F.2d at 776 (citing Napotnik v. Equibank & Parkvale Savings Ass’n, 679 F.2d 316, 320-22 (3d Cir.1982)). The Sixth Circuit followed the Third Circuit and found that the entireties property was included in the estate. To the extent that all or a portion of the debtor’s interest was not subject to process by all or a group of his creditors, the debtor was required to claim an exemption in that portion. If a creditor or trustee did not want the property interest to be removed from the reach of one or more of the creditors, the trustee or creditor would be required to object to the exemption. In re Grosslight, 757 F.2d at 777.
Even though a joint creditor may lose the ability to reach jointly held property, the doctrine of legal fraud has not been applied in cases in which only one spouse files, and a joint creditor is seeking to avoid the effect of the filing debtor’s discharge on the creditor’s ability to reach jointly held property. In In re Paeplow, 972 F.2d 730, 735 (7th Cir.1992), the court upheld an injunction prohibiting the discharged joint creditor from proceeding in rem against entirety property finding that “the rationale underlying the pre-Code Indiana decisions” was no longer “viable.” Id. at 735. In In re Hunter, 970 F.2d 299 (7th Cir.1992), the court held that bank could not pursue post-discharge suit against entireties property based on Indiana exemption of entireties property. See also, Munoz v. Dembs (In re Dembs), 757 F.2d 777, 780 (6th Cir.1985), abrogated by Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) (noting that “[t]he clear import of the new rule and of section 522(l) is that objections to claimed exemptions must be made with*826in thirty days after the creditors’ meeting or any amendment, or they are waived.” Efforts of a joint creditor to reach exempted entireties property were not allowed after discharge had been granted).
Courts have been more willing to step in when the other spouse files later. Courts have not been comfortable with a result that allows debtors to keep property which joint creditors should have been able to reach when a trustee or creditors fail to object. To prevent the “shocking” result described in Reid v. Richardson, they have looked to 11 U.S.C. § 105(a), § 350(b) or equity in general to prevent a harsh result in cases where one spouse has successfully exempted his entirety interest from his joint creditors and received a discharge and then the other spouse files. Ragsdale v. Genesco, Inc., 674 F.2d 277 (4th Cir.1982) (bankruptcy court had authority under Section 105(a) to allow a late-filed objection to the exemption); Dickenson v. Penland (In re Penland), 34 B.R. 536, 542 (Bankr.E.D.Tenn.1983) (late-filed objection to exemption allowed in husband’s case after wife filed with court noting that “[ejquity disfavors allowing exemptions to a debtor to which he is not entitled”); In re Monzon, 27 B.R. 50 (Bankr.S.D.Fla.1983); In re Vigil, 23 B.R. 172 (Bankr.D.Colo.1982); In re Shelton, 201 B.R. 147 (Bankr.E.D.Va.1996) (court reopened husband’s closed case in which entirety property had been claimed as exempt, no objection to exemption filed, discharge granted and case closed to allow consolidation with wife’s case filed nineteen months after husband’s case had been filed finding an attempt to commit legal fraud; schedules showed contradictions regarding identity of joint creditors).
The Sixth Circuit has also struggled with the equity of a debtor receiving an exemption to which he was not entitled. In a 1985 case in which the debtor claimed an exemption in his entirety interest and there was no objection, the Sixth Circuit Court of Appeals refused to allow a joint creditor to proceed against the entireties property after the discharge had been granted. The court found that the objection to the exemption had been waived. In re Dembs, 757 F.2d 777. The court was aware of the potential for abuse that an absolute bar to late-filed objections to exemptions might have. It tempered its waiver ruling by stating that:
We do not mean by this to endorse ‘exemption by declaration’; there must be a good faith statutory basis for exemption, and in that respect we fully approve In re Bennett, 36 B.R. 893, 895 (Bankr.W.D.Ky.1984). But where the validity of an exemption is uncertain under existing law, or where, as in Gross-light, it is the special character of the creditor that prevents the exemption, the creditor cannot rest on his rights in the face of Rule 4003(b).
In re Dembs, 757 F.2d at 780 (emphasis added).
In 1992, the “good faith” prerequisite recognized in In re Dembs was challenged in a Supreme Court case addressing a trustee’s ability to file a late-filed objection. Taylor, 503 U.S. 638, 112 S.Ct. 1644. As part of its analysis, the Supreme Court specifically addressed the good faith requirement noted by the Sixth Circuit in In re Dembs, 757 F.2d at 780. Taylor, 503 U.S. at 643, 112 S.Ct. 1644. The majority rejected an interpretation of Section 522(i) that required the debtor to claim an exemption in good faith. The majority concluded that the failure to object within thirty days or to obtain an extension within that time period resulted in the property being exempt “whether or not [the debt- or] had a colorable statutory basis for claiming [the exemption.]” Id. at 644, 112 S.Ct. 1644. In fact, in Taylor, the parties had agreed that the debtor did not have a right to exempt more than a small portion *827of the proceeds from the lawsuit she had claimed as wholly exempt under state law or under the federal exemptions. Id. at 642, 112 S.Ct. 1644. The dissent argued that equitable doctrines such as tolling could have been used to extend the deadline. Id. at 646-48, 112 S.Ct. 1644 (Stevens, J., dissenting). This court’s reading of the majority’s ruling and its rejection of the equitable theories raised by the dissent is that equitable remedies to extend the deadline to object to exemptions are severely limited, if not abrogated, if the deadline is missed.
The Supreme Court did leave one option open. The Court specifically declined to address whether Section 105(a) provided an independent basis for allowing the late-filed objection because the trustee had failed to raise it in the lower courts. Since Taylor, Section 105(a) has been used by another bankruptcy court in this Circuit when faced with an unusual claim of exemption and a late-filed objection. In that case the debtor both claimed an exemption and also denied owning residential property. In re Montanez, 238 B.R. 791 (Bankr.E.D.Mich.1999). The case before the court is factually different. Although Mr. James did not have a right to claim his whole entirety interest in light of the existence of joint creditors, he never claimed that (a) he did not own the property, (b) his exemption had no value or (c) joint creditors did not exist. Based on the holding in Taylor, the lack of a timely objection by any creditor or the trustee, and insufficient evidence that Mr. James’ filing was an abuse of the bankruptcy process, the court declines to use any equitable remedy or its power under 11 U.S.C. § 105 to allow the trustee to extend the deadline to object to Mr. James’ exemption.
2. Exemption of the Asset or an Interest in the Asset
There is still a question of whether there is any interest in the Condominium that has not been exempted. This question arises from the Supreme Court’s ruling clarifying the extent of the Taylor holding. Schwab v. Reilly, 560 U.S. 770, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). In Schwab, the Supreme Court differentiated between an exemption of a specific asset, i.e., an “in kind” exemption, and an exemption of an interest in that asset that was subject to a monetary cap. The Supreme Court reversed the lower court’s denial of a trustee’s request to sell personal property claimed by the debtor as exempt, even though the trustee had failed to object within the time limit prescribed by Rule 4003. The court held that “an interested party need not object to an exemption claimed” by the debtor’s listing the value of the asset as the maximum value allowed by a statutory exemption “in order to preserve the estate’s ability to recover value in the asset beyond the dollar value the debtor expressly declared exempt.” Id. at 2657. The Supreme Court analyzed what the debtor had exempted on Schedule C and noted that there is a difference in exempting an asset and exempting an interest in the asset. Id. at 2660. The Court relied on the statute’s specific use of the term “an interest in” in the description of the exemption and the existence of a monetary cap, to conclude that the exemptions as filed did not create an obligation on the part of the trustee to object. Since there was no exemption claimed in excess of the exemption limit, the court found there was nothing objectionable in the exemptions as filed and the objection deadline discussed in Taylor was “inapplicable.” Id. at 2667.
In Schwab, the value of the personal property turned out to exceed by several thousand dollars the exempted value. The exempted value equaled the maximum allowed by the statutory exemption.
The trustees in this case allege that the value of the entirety interest exceeds the *828valued claimed as exempt. The listing agreement for $449,500 raises the question of whether the value of the Condominium is substantially more than the amount of the exemption claimed. If there is value above the exemption, Mr. James’ trustee may administer that property interest. To the extent that there is additional value, the objection deadline is inapplicable to that portion that has not been exempted.
Section 522(b)(3)(B), the statutory exemption in question, uses the term “interest in”; and, while it does not have a monetary cap, it does contain the limiting language that the exemption is limited “to the extent” that the interest is not subject to process under applicable nonbankruptcy law. 11 U.S.C. § 522(b)(3)(B). If the court applies the same analysis as the Schwab court did to the exemption claim, there is an interest remaining in his estate if the Condominium value exceeds $260,000. Mr. James claimed his entirety interest in the Condominium based on the exemption of Section 522(b)(3)(B). That provision entitled him to exempt “an interest in property” which he held prepetition as a tenant by the entirety “to the extent” that it was exempt from process. The court does not view the language of Section 522(b)(3)(B) as substantially different from those exemptions of “an interest in property, not to exceed” a specific value. To the extent that Mr. James has limited his exemption to the value of $260,000, his trustee may still seek to recover the value of the entirety interest, which remains property of the estate, in excess of his claimed exemption for the benefit of his joint creditors. If the Condominium sells for $449,500, the joint lien creditor, whose debt was reaffirmed and was in existence when Mrs. James filed, will receive approximately $160,000. Mr. James will receive the difference between the lien payoff and $260,000, receiving the value of the exemption he claimed. The remaining balance will go to pay the claims of joint creditors. Whether the trustee pursues the sale will be a matter for his consideration after further investigation regarding the value. In conclusion, therefore, the court will sustain the objection of Mr. James’ trustee to the exemption to the extent that there is value in the Condominium in excess of $260,000.
B. Objection to Exemption of De-lorese James
The situation in Mrs. James’ case is different. There is no issue about the timeliness of the objection to her exemption. Mr. Farinash has objected that she is not entitled to exempt her tenancy by the entirety property when she designated twenty-one creditors holding joint debt in her schedules, one of which she listed for an amount in excess of the total amount she claimed as exempt. At the hearing she contended that no joint debts with her husband existed because he had received a discharge. The court does not find that to be accurate. He reaffirmed his debt to NWGB and that joint debt was in existence when she filed. At a minimum, her exemption would have been subject to that debt. Furthermore, to the extent that there is an interest in the Condominium remaining in Mr. James’ estate, joint creditors may be paid from proceeds of that interest without a need to violate the discharge injunction. Meyer v. Hammes, 187 B.R. 281, 286 (S.D.Ind.1996). The court also has questions about the good faith of the amount of her claim of exemption since she had the benefit of an appraisal, the advice of a realtor regarding the listing value, and her husband’s reaffirmation of the mortgage securing the Condominium. For these reasons, the court will sustain the objection to her exemption.
C. Motion to Consolidate
The court has found that there may be an interest in the Condominium for the *829trustees to pursue. The court will therefore consider a motion for substantive consolidation of the two eases. In a case involving a request by a creditor to consolidate a husband’s chapter 7 case with that of his spouse in a jointly filed case, the Eleventh Circuit discussed the various theories of substantive consolidation. Reider v. Federal Deposit Ins. Co. (In re Reider), 31 F.3d 1102 (11th Cir.1994). There, the Eleventh Circuit noted that while few courts have analyzed substantive consolidation with respect to debtor spouses, “[tjhree cases have formulated the following rule: ‘[c]ases should be consolidated where the affairs of the husband and wife are so intermingled that their respective assets and liabilities cannot be separated.’ ” Id. at 1108 (quoting Chan v. Austin Bank of Chicago (In re Chan), 113 B.R. 427, 428 (N.D.Ill.1990) and citing In re Birch, 72 B.R. 103, 106 (Bankr.D.N.H. 1987); In re Barnes, 14 B.R. 788, 790 (Bankr.N.D.Tex.1981)). The Court then concluded that such analysis, while necessary, should not be the “sole test.” In re Reider, 31 F.3d at 1108. Instead, the Court noted, “the ultimate answer to the question of substantive consolidation requires the court to weigh ‘the economic prejudice of continued debtor separateness versus the economic prejudice of consolidation.’ ” Id. (relying on In re Steury, 94 B.R. 553, 554 (Bankr.N.D.Ind.1988) and Eastgroup Properties v. Southern Motel Assoc., Ltd., 935 F.2d 245, 249 (11th Cir.1991)). The Court determined that prior ease law was of limited utility and that it needed to determine “what equity requires.” In re Reider, 31 F.3d at 1108.
The Eleventh Circuit then adopted a two part-test for determining whether substantive consolidation is appropriate:
In assessing the propriety of substantive consolidation, a court must determine:
(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation. In assessing the extent of substantial identity, relevant factors will include the extent of jointly held property and the amount of joint-owed debts. Upon a determination of substantial identity, the court must then analyze the harm attendant to a failure to consolidate. Where administrative difficulties in disentangling the spouses’ estates makes it prohibitively expensive or where disentanglement is otherwise impracticable, consolidation should ordinarily be permitted. A creditor may also demonstrate that it will be unfairly prejudiced by a failure to consolidate and may interpose the fraud or bad faith of the debtors as a defense. To prevent consolidation, a creditor may demonstrate that it has relied on the separate credit and assets of one of the spouses and would be harmed by a consolidation of assets. The burden is upon the proponent of a motion for consolidation and is exacting. Ultimately, the court must be persuaded that “ ‘the creditors will suffer greater prejudice in the absence of consolidation than the debtors (and any objecting creditors) will suffer from its imposition.’ ” Substantive consolidation should be invoked “sparingly” where any creditor or debtor objects to its use.
In re Reider, 31 F.3d at 1108-9 (citations and footnotes omitted).
In absence of any controlling law in the Sixth Circuit, the court finds the Reider court’s discussion of considerations helpful. Applying the first consideration noted above, the court finds that there is substantial identity between the assets, liabilities and handling of financial affairs between the debtor spouses. Mrs. James’ *830creditors are all listed in Mr. James’ schedules. All of Mrs. James’ creditors are related to Mr. James or his business. The court also finds that Mrs. James’ filing was necessitated by Mr. James’ filing and his failed business. There is very little personal property which is owned individually, and it has already been exempted or the objection to its exemption has been overruled. See [Bankr.Case No. 12-13300, Doc. Nos. 58, 59 (memorandum and order overruling trustee’s objection to Mrs. James’ exemption of her Individual Retirement Account) ].
With respect to the second consideration, the court must weigh the relative harm resulting from failure to consolidate with the harm resulting from consolidation. The only benefit that the trustees are seeking to obtain through consolidation is the ability to extract the value of the Condominium in excess of the first mortgage for the benefit of joint creditors. That result would prevent the debtors from achieving a result through separate bankruptcy filings that they would not have been able to achieve outside of bankruptcy or through a joint filing. However, Mr. James opposes the consolidation on the basis that it would effectively revoke Mr. James’ discharge and make property which he exempted without objection subject to the claims of creditors whose debts have been discharged. Further, this revocation would occur without a court finding that he had committed any of the acts that may be the grounds for revocation of discharge found in 11 U.S.C. § 727(d). The court finds these to be significant facts which weigh against consolidation.
As for Mrs. James, her opposition that she should benefit from the discharge of Mr. James’ joint creditors does not merit the same level of deference. Her reason for filing separately is questionable in light of the interrelationship of her financial situation with that of Mr. James, and the court may consider whether allowing separate administration of her estate would be an abuse of the bankruptcy process. Her disclosures about the Condominium are more suspect. She had more information regarding the value of the Condominium, but failed to disclose it in her schedules. Her trustee timely objected to the exemption to which she would not be entitled but for her husband’s discharge. Failing to consolidate the cases also leaves open the issue of whether she would be entitled to an additional $260,000 exemption in the Condominium resulting in nothing for her joint creditors. In a case in which the trustee did not miss his deadline, such a result would be shocking to the court, and the court finds that allowing her case to proceed separately would be an abuse of the bankruptcy process.
The court can prevent such a result without disregarding the holding in Taylor. Consolidation is not “an all or nothing proposition.” In re Steury, 94 B.R. at 556. In Steury, the court found that there was no need for total consolidation of the two estates. There was a need to consolidate the estates to the extent that joint creditors could share in the proceeds of entireties real estate. Id. at 557. The court finds that limited consolidation of the cases is appropriate here. The cases will be consolidated for the administration of the value of the Condominium in excess of the $260,000 and consolidation of the exemption allowed under Section 522(b)(3)(B). The cases will also be consolidated for the purpose of distributing proceeds from the Condominium to the lien creditor, to Mr. James for his exemption, and to their creditors who were owed by both Mr. and Mrs. James at the time of either debtors’ filings. Therefore, the court will grant the joint motion of the trustees to consolidate the two debtors’ separate bankruptcy cases in the case of Alvin Lebrón James, Bankruptcy Case No. 11-16354, for these limited purposes.
*831A limited consolidation does not alter Mr. James’ exemption or discharge. It allows both debtors to share a consolidated exemption of $100,000 of their entirety interest in the Condominium. It prevents Mrs. James from receiving a windfall at the expense of joint creditors to the extent there is value in excess of the exemption to which they would be entitled under applicable nonbankruptcy law. It does not provide a windfall to creditors of only one debtor. Finally, it does not reward creditors or trustees who fail to object within the time limits set for Rule 4003.
IV. Conclusion
In conclusion the court will sustain Mr. James’ trustee’s objection to Mr. James’ exemption but only to the extent that there is value in the Condominium in excess of $260,000. The objection of Mrs. James’ trustee to her additional exemption in the Condominium will be sustained. The motion to consolidate will be granted in part to provide for the limited consolidation of the two cases. The court will order the limited consolidation of the two cases in the case of Alvin Lebrón James, Bankruptcy Case No. 11-16354, to provide for: (a) the consolidation of the debtors’ exemption in the Condominium equal to the value of the Condominium in excess of the lien of NWGB up to $260,000; (b) the administration of the estates’ remaining interest in the Condominium; (c) the determination of allowed claims of creditors owed by both debtors on the commencement of their cases; and (d) the distribution to those joint creditors of the proceeds of the administration of the estates’ remaining interest in the Condominium.
A separate order will enter.
. The trustee also objected to Mrs. James’ exemption of her Individual Retirement Account, Bankr.Case No. 12-13300, Doc. Nos. 22 and 24. The court overruled that objection on February 22, 2013. [In re Delores James, Bankr.Case No., Doc. No. 58], The IRA is not at issue in these proceedings.
. Subparagraph 522(b)(3)(A) also allows the exemption of property that is exempt under other federal laws. For a listing of other federal exemptions, see 16 William H. Brown, Nancy Fraas MacLean. and Lawrence A. Ahern, III, Tennessee Practice Series, Debtor-Creditor Law § 15.34 (2d ed. 2012). Those exemptions are not at issue in this matter.
. The Monzon case refers to Subsection 522(b)(2)(B). See In re Monzon, 214 B.R. at 41. The section number was changed to 522(b)(3)(B) without amendment to the text in 2005 by the Bankruptcy Abuse Prevention and Consumer Protections Act of 2005. 4 Collier on Bankruptcy ¶ 522.LH[5] (16th ed. 2013). In order to avoid confusion, the court will use the current designation of the subsection and indicate the change from the quotation from the case by brackets.
. The court would note that Mr. James did not claim a homestead exemption under Tennessee or Florida law for this property. He relied on the bankruptcy exemption for tenants by the entirety property. Although the trustee did not cite Section 522(b)(3)(B) in his objection, he did correctly identify the property and the value claimed as exempt from the estate. All of the parties at the hearing treated his objection as referring to the Section 522(b)(3)(B) exemption.
. For a thorough analysis of the impact the bankruptcy changes made on the treatment of entireties property, see In re Hunter, 122 B.R. 349, 353-358 (Bankr.N.D.Ind.1990), aff'd, In re Hunter, 970 F.2d 299 (7th Cir.1992). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496349/ | *833MEMORANDUM AND ORDER REGARDING THE DEBTOR’S “MOTION TO SURCHARGE SALES PROCEEDS PURSUANT TO BANKRUPTCY CODE SECTION 506(c)” COMBINED WITH NOTICE OF THE ENTRY THEREOF
DAVID S. KENNEDY, Chief Judge.
The instant core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B) arises out of a contested matter governed by Rule 9014 of the Federal Rules of Bankruptcy Procedure regarding a “Motion to Surcharge Sales Proceeds Pursuant to Bankruptcy Code Section 506(c)” filed by the above-named Debtor in possession, TIC Memphis RI 13, LLC, (“Debtor”), on December 8, 2012. This motion is brought on behalf of Business Debt Solutions (“Business Capital”), Fox Rothschild, LLP, and Adams and Reese, LLP, (collectively, the three entities are referred to as the “Debt- or’s professionals”)1. 110 Monroe Avenue Holdings, LLC, (“Holder”) filed a timely objection to the § 506(c) motion on December 26, 2012.
The narrow and ultimate issue before the court is whether the Debtor’s bankruptcy court authorized professionals should be allowed to surcharge sales proceeds resulting from a § 363 sale where the Holder is not fully secured by those sales proceeds but has a valid security interest in the entire sale proceeds. After considering the entire case record as a whole, the following shall constitute the court’s findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The relevant background facts may be briefly stated as follows. Debtor held an undivided 24.10866% tenant in common interest in a ground lease with the Memphis Center City Revenue Finance Corporation. The ground lease includes a 12 story, 90 room hotel located in downtown Memphis, Tennessee. The hotel is operated by a third party as a Residence Inn pursuant to a relicensing franchise agreement by and between the Master Tenant and the Marriott International, Inc. Essentially, the Debtor is a single asset entity having the 24.108665% tenant in common interest referred to above. This project was leased by the Debtor and 15 other non-debtor holders of tenant in common interests. The ground lease contractually matures on December 31, 2024, with an option to renew for an additional 11 years.
Due to financial distress and to stop a scheduled and imminent non-judicial foreclosure sale, on June 14, 2012, the Debtor filed an original chapter 11 petition in the Bankruptcy Court for the District of Delaware. On June 25, 2012, Fox Rothschild, LLP filed an application to be employed as the Debtor’s attorney, which was later authorized in an order entered on July 10, 2012. Also on June 25, 2012, Holder filed a motion to dismiss this case in the Delaware bankruptcy court under § 1112(b) of the Bankruptcy Code and, also, filed a motion to transfer the venue of this chapter 11 case from the District of Delaware to the Western District of Tennessee bankruptcy court under 28 U.S.C. § 1412 and Fed. R. Bankr.P. 1014(a)(1). Holder asserted approximately a $10 million plus secured claim against the hotel.
On July 9, 2012, the Debtor filed an “Application to Employ/Retain Business Debt Solutions, Inc. as Investment Bank*834er.” Prior to bankruptcy on May, 30, 2012, Business Debt Solutions, Inc. (“Business Capital”), entered into a financing agreement with the Debtor to engage Business Capital to obtain financing. The financing agreement provided Business Capital an “Underwriting Fee” of $15,000 payable upon execution of the agreement and a “Financing Fee” also known as a “Success Fee” equal to 3% of the total amount of the obtained financing.
Later, the Debtor and Holder entered into a “Stipulation Term Sheet” that was approved by the Delaware bankruptcy court on July 20, 2012. This Stipulation Term Sheet required the Debtor to file a motion to sell the project by September, 10, 2012 and also required the Debtor to provide a letter of intent by August 31, 2012 (timing was later modified/extended by consent). On July 23, 2012, the parties consented to the transfer of this chapter 11 case under 28 U.S.C. § 1412 and Fed. R. Bankr.P. 1014 from the District of Delaware to the Western District of Tennessee to be effective on August 31, 2012. In addition, the Delaware bankruptcy court entered an order authorizing the employment and retention of Business Debt Solution, Inc., more specifically Mr. Robert Burrick, as an investment banker for the Debtor.
On September 4, 2012, the case was transferred to the Western District of Tennessee, and, shortly thereafter on September 10, 2012, the Debtor made application to employ Adams and Reese, LLP as Counsel for Special Purpose to represent the Debtor in seeking a § 363 sale of the hotel in the Western District of Tennessee. An order was entered authorizing the employment of Adams and Reese, LLP on September 13, 2012.
On September 10, 2012, the Debtor also filed a Motion for Sale of Property under § 363(b). Subject to various objections, amendments, and bid procedures, the Debtor’s “Amended Motion for Order Authorizing and Approving the Sale of Property by Action” was approved by the court on November 28, 2012. This order approved Wright Investments, LLC, as the highest bidder at the auction, to purchase the hotel with a $7.2 million cash offer. The sale was free and clear of all encumbrances. This sales price was substantially less than the Holder’s asserted secured claim of over $10 million. Holder’s encumbrances against the property sold additionally transferred to the cash proceeds resulting from the sale.
Holder’s valid secured claim covers all assets of the Debtor. As the cash proceeds are the only remaining property of the chapter 11 estate, Holder is underse-cured and, as a result thereof, the estate is administratively insolvent. After becoming aware of this insolvency, the Debtor filed the instant “Motion to Surcharge Sales Proceeds Pursuant to Bankruptcy Code Section 506(c)” (“Surcharge Motion”) on December 8, 2012. In essence, this motion seeks to pay the Debtor’s professionals from the cash proceeds of the sale. Unsurprisingly, the Holder objected to this Surcharge Motion on December 26, 2012. A final hearing was held on January 4, 2013, and Mr. Burrick provided oral testimony as the only witness.
§ 506(c) Analysis
Section 506(c) allows the trustee or debtor in possession to 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. The trustee or debtor in possession must prove, among other things, that the secured creditor directly benefited from the expenditure; “a debtor [in possession] does not meet this burden of proof by suggesting possible or hypothetical benefits.” In re Flagstaff *835Foodservice Corp., 762 F.2d 10 (2nd Cir.1985). Absent consent by the secured creditor, fees and costs against the secured creditor’s collateral ordinarily cannot be paid unless the trustee or the debtor in possession proves they are reasonable, necessary, and directly benefit the secured creditor. See, for example, In re Ferncrest Court Partners, Ltd., 66 F.3d 778 (6th Cir.1995); In re Flagstaff Foodservice Corp., 739 F.2d 73 (2nd Cir.1984). To demonstrate such a benefit, the debtor in possession must show that its actions caused the secured creditor to realize over and above what it would have realized without the debtor in possession’s intervention. In re Crutcher Concrete Const., 218 B.R. 376, 380-381 (Bankr.W.D.Ky.1998) (citing in re Lambert Implement Co. 44 B.R. 860, 861 n. 3 (Bankr.W.D.Ky.1984)).
This court now will analyze the facts and circumstances of this case to determine if the actions by the Debtor and Debtor’s professionals can be characterized as 1) necessary, 2) reasonable, and 3) having provided a benefit to the secured creditor, as contemplated under § 506(c).
First, the Debtor must demonstrate that its professionals’ actions were necessary. Debtor alleges that the entire bankruptcy process was necessary because it provided an opportunity to achieve the highest and best sales price for the Holder’s collateral. Specifically, it further alleges the bankruptcy processes allowed the various TIC interests to be bundled and sold free and clear of all encumbrances, which Holder could not have done on its own outside of bankruptcy. Holder does not agree and indicates that from the beginning it has sought to dismiss the case and has raised numerous objections to practically every motion or application that the Debtor has made. Holder alleges that absent bankruptcy it could have foreclosed on the property in June, 2012, at its scheduled foreclosure sale instead of waiting for the § 363 sale to take place in December, 2012. It alleges a similar sale of the Debt- or’s single asset could have been successfully accomplished absent the costs and process of a bankruptcy filing, § 363 sale, and various objections, etc.
The court finds under the particular facts and totality of the circumstances and applicable law that the actions of the Debt- or were not sufficiently necessary as contemplated under § 506(c) because, in reality, the bankruptcy case served no purpose other than to provide an opportunity to obtain the highest bid possible and to dispose of the Holder’s collateral, which could have been done absent a chapter 11 bankruptcy case in a chapter 7 case or through a non-judicial foreclosure sale under applicable state law. Remedies exist outside of a chapter 11 case for disposition of single assets like the hotel in this case. In this situation, the Holder pursued those remedies by beginning a non-judicial foreclosure; however, the Holder’s efforts to foreclose were automatically stayed upon the filing of the chapter 11 petition and the imposition of the statutory stay under § 362(a). Eleven days after the filing of the chapter 11 petition, the Holder moved to dismiss the chapter 11 case and transfer the case venue from the District of Delaware to the Western District of Tennessee. After hearings and negotiations before the Delaware bankruptcy court, the Debtor and Holder entered into a Stipulation Term Sheet that, among other things, allowed (and required) the Debtor to file a § 363 sale motion that would “pay the Holder the Payoff Amount in full ” (emphasis added). At the time of the Stipulation Term Sheet, the payoff amount was $10,146,652.91. After establishing bid procedures and holding an auction after this court resolved the Holder’s objection, a final sales price of $7.2 million was obtained. The Holder opted not to credit bid *836under § 363(k) at the auction. The sales price left the estate insolvent, as the Holder could not be paid off in full in accordance with the Stipulation Term Sheet. Notwithstanding the bid procedures and auction, the Debtor was unsuccessful in obtaining a bid that was sufficient to payoff the secured creditor and make the estate administratively solvent.
Here, the Debtor voluntarily elected to file a chapter 11 case and ultimately sought to sell the single asset at an auction in order to obtain what it hoped to be the highest and best price for the hotel. Chapter 11 allows the debtor in possession an exclusive period to formulate and file a plan and essentially control how the property of the estate is preserved or disposed. An independent, stand alone sale motion under § 363 also is statutorily permissible. This is a substantial privilege given to chapter 11 trustees and debtors in possession in chapter 11 cases that does not exist in a chapter 7 context or in a non-judicial foreclosure context. Here, the Debtor and its professionals exercised their business judgment that utilizing the chapter 11 privileges would best protect the § 541 estate and would also protect the interests of Holder, if successful. Under the circumstances, this was a risky proposition by the Debtor because at no time did the Holder consent to the actions of the Debt- or and the Debtor knew that the collateral, the hotel, was undersecured. Debtors may use the bankruptcy system to attempt to sell a single asset; however, such use should not come at the expense of an objecting secured creditor, who is the highest priority lienholder on the single asset and is undersecured by that single asset. Had the Debtor filed for chapter 11 relief and sold the asset for more than the payoff amount, the Debtor and its professionals would have reaped the benefit. However, the Debtor cannot avoid the dire consequences of its gamble when that gamble loses. Here, the Debtor and the Debtor’s professionals, no doubt, incurred significant fees and expenses seeking to sell the Debtor’s single business asset at an auction. The auction resulted in a bid significantly below the payoff amount and the amount set forth in the Stipulation Term Sheet. No funds were generated to pay administrative expenses (e.g., professional fees and expenses) or allow the debtor to reap the benefit of its gamble.
In hindsight, the better business judgment might have been to allow the Holder to foreclose on the single business asset or pursue another course of action, but the Debtor was not privy to hindsight at the time it filed the chapter 11 petition. Debt- or made a last ditch effort via the use of highly competent and highly experienced professionals to obtain a sales price that would cover its obligations to the Holder so to avoid the consequences that would result from a deficiency. If foreclosure had occurred, the Holder not the Debtor would have incurred the costs to sell the asset, if it chose to sell the asset at all. These costs plus the payoff amount would become a deficiency balance that could be enforced against the Debtor or potentially against any guarantors associated with the Debtor. If a chapter 11 case indeed had been necessary to dispose of this single asset, the Holder and other creditors of the Debtor could have filed an involuntary chapter 11 case or simply consented to the instant chapter 11 case. It did neither, and, in its own business judgment, the Holder sought first a non-judicial foreclosure and then aggressively contested the instant chapter 11 case, only acquiescing to the final auction result under § 363.
The court finds, for an action to be necessary under § 506(c), the action must be required to preserve or dispose of the property securing the debt. Where actions are elective and forgo other viable actions and options, such actions are not, *837ipso facto, by nature necessary. Under the particular facts and circumstances of this case, seeking to sell a single asset by means of a § 363 sale in a chapter 11 case was not a necessary action to preserve or dispose of the property securing Holder’s debts because other remedies existed. Debtor sought chapter 11 protections for voluntary and elective reasons of disposing of the single asset in a self-beneficial manner rather than out of necessity. For these reasons alone, the Holder’s collateral cannot be surcharged for the Debtor’s professional fees and expenses that are sought here; however, the court also will address the other two elements of § 506(c) to provide a complete record of the court’s findings of fact and conclusions of law.
Under the second § 506(c) element, the Debtor must demonstrate that its professionals’ actions were reasonable under the circumstances. As discussed above, the Debtor sought bankruptcy protections in a gamble to try and obtain a sales price for its single asset that would cover the payoff amount to the Holder. It utilized the Chapter 11 privileges given to debtors that do not exist in a chapter 7 context or in a non-judicial foreclosure context. At the time of the filing of the chapter 11 petition, the actions of the Debtor appear to be a reasonable last-ditch effort to stop a scheduled and imminent foreclosure and protect its own interests in the single asset, which in turn would concomitantly protect the interests of Holder.
Reasonableness is not judged in hindsight, but rather at the time the business judgment is exercised. At the time the Debtor and Debtor’s professionals acted, their actions were reasonable attempts to preserve the property securing the Holder’s debt and to obtain the highest purchase price possible. Had they been successful at obtaining a sales price that exceeded the payoff amount, there would have been no need to surcharge the Holder’s collateral and no deficiency on the Holder’s debts would exist. The court finds under the circumstances that this was a reasonable objective exercised by highly qualified professionals and, therefore, a reasonable action for the debtor in possession to take in an attempt to dispose of the single asset securing Holder’s debts and achieve a maximization of the value of the hotel. However, reasonableness in and of itself does not infer necessity, as one can have reasonable elective actions just as one can have reasonable necessary actions. Here, the Debtor acted reasonably in electing to use the privileges afforded by a chapter 11 case, but the Debt- or did not act out of necessity as other means of disposing of the single asset were readily available.
Where the reasonableness element looks forward, the best interest of secured creditor element looks in hindsight. Section 506(c) limits recovery against property securing an allowed claim “to the extent of any benefit to the holder of such claim.” Accordingly, if reasonable and necessary actions do not provide a benefit at the end of the action, the trustee or debtor in possession cannot recover under § 506(c). These benefits must be direct and not speculative, hypothetical, or unascertainable. Here, the secured creditor did receive a benefit from the actions of the Debtor’s professionals because the property securing its debts was liquidated for $7.2 million. However, there is much speculation as to whether this benefit was the best result under the particular facts and circumstances and whether the costs of the chapter 11 ease to the Holder outweighed any benefit it received. Would the secured creditor have benefited more in a chapter 7 case or under a non-judicial foreclosure? The court is not called to speculate under these other circumstances as to whether Holder would have benefited more or less and what costs the Holder or *838the Debtor would have occurred, as those would be merely hypothetical and unascer-tainable costs. What is clear from the facts is that the Holder incurred significant costs and delays litigating throughout this chapter 11 case that would not have been incurred absent the bankruptcy filing. What is further clear is that other options existed beyond a § 363 sale in a chapter 11 case. Surcharging the Holder’s cash collateral for and with the Debtor’s professional fees and expenses at this point and under these circumstances would only be a hypothetical balancing act between the § 363 sale price, a hypothetical foreclosure sales price, the fees and expenses incurred by Holder in this bankruptcy case, the hypothetical fees and expenses that would have been incurred in a hypothetical foreclosure, and the fees and expenses incurred by the Debtor’s professionals. The court believes such a tenuous and speculative balancing act was not the intended purpose of a § 506(c) analysis. Rather § 506(c) has typically been used to surcharge the secured creditors’ collateral in situations where imminent loss was certain to result and actions were necessary to preserve or dispose of the asset to maintain the value for the secured creditor. In theory, the actions here should be the same actions or substantially similar actions that the secured creditor would take if it had possession of the property rather than the estate having possession. Where the secured creditor in hindsight would not seek the same or substantially similar benefit if placed in the same position of the trustee or debtor in possession, the court is hard pressed to find that a benefit for the secured creditor resulted. In the instant case, Holder has constantly emphasized through oral statement, written objection, and its own motion to dismiss that it saw the bankruptcy process as a detriment and not a benefit. The court finds that the Debtor and the Debtor’s professionals have not carried the high burden of proving that a direct, quantifiable benefit has been bestowed upon the Holder that would warrant Holder’s collateral being surcharged under § 506(c).
In conclusion, the court finds, under the totality of the circumstances and given the particular facts of this case, the actions of the Debtor and Debtor’s professionals were somewhat reasonable but neither necessary nor provided a direct and quantifiable benefit to the Holder. As the Debtor has not carried its burden of proof regarding all three elements of a § 506(e) surcharge, the court has no choice but to deny the Debtor’s Surcharge Motion. The court is not unmindful and understands this ruling results in a harsh outcome for the Debtor’s professionals, as they dutifully performed their jobs; however, surcharging the Holder’s collateral under the existing circumstances when the law and circumstances clearly do not allow it under § 506(c) perhaps would have been harsher.
Based on the foregoing and considering the case record as a whole, IT IS ORDERED AND NOTICE IS HEREBY GIVEN THAT:
1) Debtor’s § 506(c) Surcharge Motion on behalf of Business Capital, Fox Rothschild, LLP, and Adams and Reese, LLP, is denied;
2) The § 363 sale proceeds that are Holder’s cash collateral shall NOT be used to pay the compensation, fees, and expenses of Business Capital, Fox Rothschild, LLP, and Adams and Reese, LLP; and
3) The Bankruptcy Court Clerk shall cause a copy of this Order, Memorandum, and Notice to be sent to the following:
L. John N. Bird, Esquire TIC Memphis RI13, LLC
*839Fox Rothschild, LLP e/o Randy R. Hanson
919 North Market St., 16th Floor 5566 N. Riley St.
Wilmington, DE 19801 Las Vegas, NV 89149
Eric Michael Sutty, Esquire Timothy M. Lupinacci, Esquire
Fox Rothschild, LLP Attorney for Holder
Citizens Bank Center, Suite 1300 420 North 20th Street
919 North Market Street 1600 Wells Fargo Tower
P.O. Box 2328 Birmingham, AL 35203
Wilmington, DE 19899
R. Spencer Clift, III, Esquire, and
Jeffrey M. Schlerf, Esquire Erno Lindner, Esquire
Fox Rothschild, LLP Attorneys for Holder
919 N. Market St., Suite 1600 165 Madison Avenue, Suite 2000
Wilmington, DE 19899 Memphis, TN 38103
Henry C. Shelton, III, Esquire Bruce Esquire,
Adams and Reese, LLP Marshall W. Criss, Esquire, and
80 Monroe Avenue, Suite 700 John Dunlap,
Brinkley Plaza Attorneys for Borrowers
Memphis, TN 38103
6070 Poplar Avenue, Suite 600
Memphis, TN 38119
Carrie Ann Rohrscheib, Esquire
Office of United States Trustee for Region 8
200 Jefferson Ave., Ste. 400
Memphis, TN 38103
. Each of the Debtor's professionals made application/'petition” for fees and reimbursement of expenses in this chapter 11 case and each application/'petition” had related objections filed thereto. The contested application/"petitions” and related objections are concurrently (Jealt with in a separate order being issued in association with this instant Memorandum, Order, and Notice. This instant Memorandum, Order, and Notice addresses only docket entry numbers 118 and 137. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496350/ | *858
OPINION
THOMAS L. PERKINS, Bankruptcy Judge.
Before the Court is the confirmation of the amended Chapter 13 plan filed by the Debtor, Stephanie Brooks (DEBTOR), and the objection by Michael D. Clark, Chapter 13 Trustee (TRUSTEE). At issue is how child support payments should be treated on Form 22C for purposes of calculating disposable income.
The DEBTOR, who is divorced with two young children, filed a Chapter 13 petition on October 4, 2012. Because the DEBTOR’S annualized current monthly income exceeds the applicable median family income for a household of three persons residing in the state of Illinois, she is an “above median” debtor, her applicable commitment period is 60 months and the Bankruptcy Code requires her to use the “means test” to calculate the “amounts reasonably necessary to be expended” for her family’s maintenance or support.
Official Form 22C, the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, as subsequently amended by the DEBTOR, discloses current monthly income of $6,614.50, of which $6,214.50 is attributable to her employment as a nurse manager. In addition to her wages, the DEBTOR receives child support of $400 per month for her two children. The DEBTOR takes a deduction on Line 54 of Form 22C, for the full amount of child support which she receives, as reasonably necessary to be expended for her children’s care. According to Line 59, the DEBTOR’S monthly disposable income is $111.46. However, the DEBTOR separately deducts an expense of $141 for day care, as an additional expense claim on Line 60, which directs the debtor to list and describe other expenses required for the health and welfare of the debtor and the debtor’s family. Taking that final deduction into account, the DEBTOR is left with a negative disposable income.
On Schedule I, the DEBTOR reported her average monthly income as $4,340, including child support. Her monthly expenses, including $150 for day care, were reported on Schedule J as $4,252. According to those schedules, her monthly net income was $88. The amended Chapter 13 plan filed by the DEBTOR proposes to pay $100 per month for 60 months, for a total of $6,000. From that amount, the amended plan would pay off a mortgage arrearage to Busey Bank of $2,000.1 The amended plan provides for the assumption of the lease on her vehicle. Unsecured creditors will receive no distribution.
The TRUSTEE objected to confirmation of the amended plan, contending that the amended plan failed to apply all of the DEBTOR’S projected disposable income to the payment of unsecured creditors, as required by section 1325(b)(1)(B). The primary basis of the TRUSTEE’S objection is that by excluding the full amount of the child support that she receives, the DEBTOR is availing herself of double deductions, as most of those expenses are factored into the standard deductions for living expenses allowed elsewhere on Form 22 C. At the DEBTOR’S request, an evidentiary hearing was held on July 23, *8592013. The DEBTOR was the only witness to testify. According to her testimony, the annual expenditures for her children total $10,055, or $838 per month.2 Following the hearing, the parties filed briefs in support of their positions. In addition to the child support deduction, the TRUSTEE noted that he opposed the following additional deductions taken on amended Form 22C: Line 30 — the necessary tax expense should be limited to $1,316.94; Line 47(c) — the $90 insurance expense is dupli-cative as Line 47(b) already includes homeowners insurance; and Line 60 — the daycare expense, properly claimed on Line 35, should be limited to $110.17.
ANALYSIS
Section 1325(b)(1)(B) provides that if a trustee or unsecured creditor objects to confirmation of a chapter 13 plan, the court may not approve the plan unless, as of its effective date, the plan “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). Section 1325(b)(2) defines “disposable income” in two parts. The first step focuses upon the income side of the equation and applies to all chapter 13 debtors.3 Disposable income is preliminarily defined by reference to “current monthly income.” “Current monthly income,” as defined in section 101(10A), in addition to a debtor’s earnings, includes amounts paid by third parties “on a regular basis for the household expenses of the debtor or the debtor’s dependents.” 11 U.S.C. § 101(10A)(B). Based on this broad definition, it has been held that child support payments are encompassed within “current monthly income.” In re Taborski 2013 WL 211116 (Bankr.W.D.Pa.2013); In re Wise, 2011 WL 2133843 (Bankr.S.D.Ill.2011). The inquiry does not end there, however. For purposes of chapter 13 only, disposable income is defined as “current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child).” 11 U.S.C. § 1325(b)(2).
The second part of the “disposable income” determination, addressing the expense component of the equation, provides for the deduction of amounts “reasonably necessary to be expended ... for the maintenance or support of the debtor or a dependent of the debtor....” 11 U.S.C. § 1325(b)(2)(A). While the expenses of a below median debtor are determined by the same standard which was employed prior to BAPCPA, the deduction of expenses for an above median debtor is to be determined by application of the chapter 7 formulaic “means test.”
The issue before the Court is the interpretation and application of the parenthetical exclusion from disposable income of “child support payments ... for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child” in section 1325(b)(2). The in*860terpretation of a statute begins with the language of the statute. Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir.2003). If the language is plain, the only function of the court is “to enforce it according to its terms.” U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). The plain meaning of a statute is conclusive unless “literal application will produce a result demonstrably at odds with the intentions of its drafters.” Id. The interpretation of a statute is guided not just by a single sentence or sentence fragment, but by the language of the whole law, and its object and policy. Brack v. Amoco Oil Co., 677 F.2d 1213 (7th Cir.1982).
Section 1325(b)(2)’s parenthetical excludes three types of payments: child support, foster care payments and disability payments for a dependent child. The exclusion is subject to two conditions: (1) the payments are made in accordance with applicable nonbankruptcy law; and (2) the payments are excludable only to the extent reasonably necessary to be expended for such child. Keeping in mind that the exclusion is made in the context of the “income side” of the calculation, the Court will briefly examine the nature and character of child support, the category of payments at issue here, before addressing the contentions of the parties.
Under section 505(a) of the Illinois Marriage and Dissolution of Marriage Act, the trial court may order either or both of the parents to pay child support in an amount that is “reasonable and necessary.” 750 ILCS 5/505(a). The Act provides guidelines for determining the minimum amount of child support. 750 ILCS 5/505(a)(l). A deviation from the guidelines may be made upon a determination that it would be appropriate after considering the best interest of the child in light of the evidence, including, but not limited to, the financial resources and needs of the child and both parents, the standard of living the child would have enjoyed had the marriage not been dissolved, and the physical, mental, emotional, and educational needs of the child. 750 ILCS 5/505(a)(2). The trial court is justified in making a downward departure from the guideline amount where the incomes of the parents are more than sufficient to provide for the reasonable needs of the children of the marriage. In re Marriage of Hubbs, 363 Ill.App.3d 696, 707, 300 Ill.Dec. 220, 843 N.E.2d 478 (Ill.App. 5 Dist.2006). An award of child support is not meant to be a windfall to the custodial parent. In re Keon C., 344 Ill.App.3d 1137, 1142, 279 Ill.Dec. 674, 800 N.E.2d 1257 (Ill.App. 4 Dist.2003). It is equally true that a child is not required to subsist at a minimal level of comfort while the noncustodial parent is living a life of luxury. In re Marriage of Bussey, 108 Ill.2d 286, 297, 91 Ill.Dec. 594, 483 N.E.2d 1229 (1985). Support is for the benefit of the child, not the parent or stepparent of the child, nor the step-siblings of the child. In re Marriage of Edwards, 369 Ill.App.3d 1035, 1039, 308 Ill.Dec. 455, 861 N.E.2d 1020 (Ill.App. 5 Dist.2006).
Although it is only the exclusion for child support at issue here, the other exclusions provided by the statute, for foster care payments and disability payments, are similar in their purpose and are regarded as subject to the same restriction that the payments be expended for the child. In Bryant v. Bryant, 218 S.W.3d 565 (Mo.App. E.D.2007), the court summarized the nature of foster care payments, stating:
Foster care payments triggered by foster children’s presence in a foster home are intended to provide economic benefits only for the foster children, but not the foster parent. Wilkerson v. State, Dept. of Health and Social Services, Div. of Family and Youth Services, 993 *861P.2d 1018, 1023 (Alaska 1999). Foster care payments received by a foster care parent per day, per child are received by the foster parent acting in a fiduciary capacity. Paternity of 633 N.E.2d 1028, 1029 (Ind.Ct.App.1994). These payments assist the foster parent in fulfilling his or her obligation to provide food, clothing, and shelter for foster children placed under his or her care. Id. Accordingly, a foster parent has a duty to spend money received per day, per child on behalf of the foster children, the money is plainly unavailable for the foster parent’s own needs, and the money is not considered income available to the foster parent. See Rios v. South Dakota Dept. of Social Services, 420 N.W.2d 757, 762 (S.D.1988).4
218 S.W.3d at 569. Similarly, social security disability payments to children replace wages that a parent would have earned but for the disability, substituting for support. Graby v. Graby, 87 N.Y.2d 605, 641 N.Y.S.2d 577, 664 N.E.2d 488 (1996). Like the first two exclusions, those disability payments belong to the child.5 Labrosciano v. Labrosciano, 426 N.J.Super. 252, 43 A.3d 1260 (N.J.Super.Ch.2011). Although a split of authority exists, many courts have held that child support payments are not property of the custodial parent’s bankruptcy estate. See In re Mehlhaff, 491 B.R. 898, 904 n. 32 (8th Cir. BAP 2013); In re Pojfenbarger, 281 B.R. 379, 390 (Bankr.S.D.Ala.2002)(collecting cases). With that backdrop, the Court turns to the arguments made by the parties in the present case.
The TRUSTEE contends that the DEBTOR, as an above median debtor, is not entitled to exclude any portion of the child support she receives, as being “reasonably necessary to be expended” for expenses incurred on behalf of the children which are otherwise included in the standardized expense component of the means test computation. The TRUSTEE believes that the parenthetical exclusion calls for an independent calculation to be made, on a case-by-case basis, with the Line 54 exclusion limited to additional, extraordinary expenses of the children which are reasonably necessary and have not otherwise been deducted on Form 22C. The TRUSTEE believes a case-by-case analysis is necessitated by the statute’s “reasonably necessary” standard set forth in the parenthetical. According to the TRUSTEE, because the DEBTOR has included her two children in her claim of a household size of three, most, if not all, of the cost of the children’s care and support cannot be separately considered in determining how much of the child support she receives is reasonably necessary for their care, because those amounts are separately accounted for under the National Standard for allowable living expenses, which includes food, apparel and services, personal care products and services and miscellaneous expenses.6 In other words, in computing the income component of “disposable income,” the TRUSTEE would *862jump ahead to the expense side of the equation, backing out from the amount of child support the DEBTOR receives, the deductions which are allowed by Form 22C.
The DEBTOR contends that the child support she receives of $200 for each child falls well below any threshold amount which might be questioned as reasonably necessary to meet the needs of a child. The DEBTOR maintains that it is appropriate for the Court to make this determination as a matter of law. According to the DEBTOR, that determination ends the inquiry. If the child support is reasonably necessary to be expended for the child’s care, it is not included in disposable income. Alternatively, the DEBTOR suggests that the Court should revert to Schedules I and J, with their detailed itemization of actual expenses, engaging in a painstaking analysis on a case-by-case basis.7
The TRUSTEE also argues that if Congress had intended to exclude the entire amount of child support income, it could have done so explicitly in section 101(10A)(B). Because the exclusion is set forth in chapter 13 of the Code, not in chapter 1, it is clear that the exclusion was intended to operate only in chapter 13 cases. It is also clear by its placement in section 1325(b)(2), not (b)(2)(A), that the parenthetical exclusion is intended to be applied as an exclusion from income rather than an expense adjustment as the TRUSTEE would apply it. In this Court’s view, the flaw in the TRUSTEE’S interpretation results from regarding the parenthetical exclusion as creating an additional, separate computation, prematurely calling into play the expense side of the disposable income equation. Nothing in the language of the statute calls for such a calculation. Construing the parenthetical exclusion in conjunction with section 1325(b)(2) in its entirety, it becomes apparent that the TRUSTEE’S interpretation disrupts the formulaic approach prescribed by the statute. The means test was intended to establish a uniform, easily administrable, mechanical formula. Disposable income was intended to be determined as a “simple and straightforward matter of arithmetic.” In re Farrar-Johnson, 353 B.R. 224, 232 (Bankr.N.D.Ill.2006). This is especially true on the income side of the equation. As a practical matter, the TRUSTEE makes no suggestion as to how a child’s fractional share of the standard deduction for allowable living expenses would be determined. The allocation would be no less problematic for below median debtors who are recipients of child support, because the exclusionary paragraph applies equally to them. The TRUSTEE’S interpretation would present difficult evidentiary issues.
The plain meaning of the parenthetical exclusion is better reflected by the DEBTOR’S interpretation, and is adopted by the Court. Under Illinois law, as set forth above, the benchmark for determination of child support is the reasonable and necessary needs of the child.8 750 ILCS *863§ 5/505(a).9 The reasonable necessity inquiry in section 1325(b)(2)’s parenthetical is, in effect, answered affirmatively by the Illinois divorce court’s child support award, issued in accordance with Illinois law. Although the parties do not frame it as an issue of preclusion, when an Illinois divorce court issues a child support award, for the exclusive payment of the child’s reasonable and necessary expenses, the court has necessarily determined that the full amount awarded is “reasonably necessary to be expended for such child.”
Moreover, if the custodial parent’s finances improve such that the entire amount of the child support award is no longer reasonably needed by the child, the ex-spouse payor has the right to seek reduction of the award. The custodial parent’s creditors have no valid claim to the excess funds. This result is in harmony with the long-standing principle that domestic relations matters should properly be reserved to the state courts. Simms v. Simms, 175 U.S. 162, 20 S.Ct. 58, 44 L.Ed. 115 (1899). Federal courts, in deference to the states’ traditional authority over and particular expertise in domestic relations, are loath to intrude in matters of family law. In re Taub, 438 B.R. 39 (Bankr.E.D.N.Y.2010).
Noting that a primary objective of the means test was to make “can-pay” debtors pay more, the TRUSTEE maintains that allowing debtors to fully exclude child support would result in a windfall to them, a result clearly not intended by the drafters of BAPCPA. That general policy, however, must defer to the specific exclusions from disposable income for child support, foster care and disability payments for a dependent child. Congress carved out an exclusion for payments received by debtors which must be dedicated for the support of the child for whom those payments are received. In crafting these narrowly targeted exclusions from a debtor’s income, Congress intended to protect those funds for their dedicated purpose by removing them from the disposable income equation. To the extent that the income exclusions might enable some debtors to live a better lifestyle in chapter 13 than creditors might prefer, Congress likely weighed this as a lesser evil than depriving dependent children of the benefit of funds intended solely for their care, which is the risk that would be entailed by including the funds in the debtor’s income or requiring the debtor to prove exactly how the child support funds are spent each month.
In this Court’s view, the condition that the income exclusions are subject to a standard of reasonable necessity, is best interpreted as a hedge against the risk of abuse. There may be some few cases where the custodial parent is so well off that child support payments amount to unneeded surplus funds. In that event, the reasonable necessity standard provides a basis for including the payments in the debtor’s income. That occurrence is likely to be rare. This case, where each child is receiving $200 per month from their father, is a far cry from being an abusive situation where a debtor is unfairly taking advantage of the income exclusion for child support payments to the detriment of creditors.
*864In summary, allowing the debtor to exclude the full amount of child support in most cases is consistent with the intent of Congress as reflected in the statute. If the trustee or an objecting creditor can establish that all or part of such payments are truly excessive under the circumstances, the reasonable necessity standard provides a basis to deny all or part of the claimed exclusion. In light of the DEBTOR’S circumstances, a monthly child support payment of $400 for two children is not excessive. The DEBTOR’S deduction of the $400 in monthly child support taken on line 54 of Form 22C is allowable. The Court will address the TRUSTEE’S other objections at a subsequent hearing. 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.
ORDER
For the reasons stated in an Opinion entered this day, IT IS HEREBY ORDERED that the Trustee’s objection to the exclusion from income of $400 per month for child support payments received by the Debtor is DENIED.
. At prior hearings in this case, the DEBTOR referred to delinquent real estate taxes, which would need to be provided for by the plan. According to Schedule J, real estate taxes are not included in her mortgage payments, but are shown as a separate payment in the amount of $280. Although the DEBTOR had indicated that an amended Schedule D would be filed, that has not been done. The amended Form 22C, filed thereafter, did not include a secured claim for delinquent real estate taxes. Busey Bank, the mortgagee, has not filed a proof of claim. Presumably, if delinquent real estate taxes remain to be paid through the plan, the DEBTOR will provide for the claim in a second amended plan.
. That total consists of clothing expense of $2,500; toys for Christmas and birthdays of $1,600; school registration, supplies and pictures of $370; school activities of $110; latchkey (day care) expense of $2,460; lunches of $960; sports activities of $375; and additional transportation expense of $1,680.
. For purposes of this case, "projected disposable income” will be the same as "disposable income,” given the absence of anticipation of any change in the DEBTOR’S financial circumstances.
.Section 675(4)(A) of the Adoption Assistance and Child Welfare Act of 1980, as amended, a federal funding statute establishing a program of payments to states for foster care and adoption assistance, which is a part of the Social Security Act, provides that "foster care maintenance payments” mean "payments to cover the cost of (and the cost of providing) food, clothes, shelter, daily supervision, school supplies, a child's personal incidentals, liability insurance with respect to a child and reasonable travel to the child’s home for visitation.” 42 U.S.C. § 670 et seq.
. The exclusion is not limited to social security disability payments, but is for "disability payments for a dependent child.” This opinion does not speak to the parameters of that exclusion.
. The deduction taken by the DEBTOR on Form 22C for allowable living expenses is $1,227.
. The DEBTOR makes the suggestion that the Court could determine whether all of the child support is being used for the purposes of supporting the children by examining Schedules I and J. According to the DEBTOR, because she has very little money left over, the Court can conclude that all of the child support is being used for the care of the children. This Court rejects that approach. A '‘pooling” of the child support together with the income of the custodial parent and deducting the reasonable and necessary expenses of the family unit as a whole, may have the unintended consequence of committing some portion of the child support to pay off creditors of the custodial spouse, to the detriment of the child for whose benefit the support was paid.
. The Illinois Marriage and Dissolution of Marriage Act is modeled after the Uniform Marriage and Divorce Act. See Kujawinski v. *863Kujawinski, 71 Ill.2d 563, 17 Ill.Dec. 801, 376 N.E.2d 1382 (1978).
. The DEBTOR testified that the amount of the child support was determined by agreement with the children's father. The DEBTOR'S earnings are twice those of her former spouse, and the DEBTOR believed that $400 per month was all that he could afford. In all cases, the state court is not bound by agreements between the parents, but is required to approve the amount of the child support provided for. In re Marriage of Ealy, 269 Ill.App.3d 971, 207 Ill.Dec. 345, 647 N.E.2d 307 (Ill.App. 4 Dist.1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496352/ | ORDER DENYING MOTION FOR THE HONORABLE JAMES K. COACH-YS TO RECUSE FROM THIS CAUSE PURSUANT TO 28 U.S.C. § 455(a) and (b)(1)
JAMES K. COACHYS, Bankruptcy Judge.
This matter comes before the Court on Debtors Thomas B. O’Farrell and Heather E. O’Farrell’s (together, “Debtors”) Motion for the Honorable James K. Coachys to Recuse From This Cause Pursuant to 28 U.S.C. § 455(a) and (b)(1) (the “Recusal Motion”). Following a hearing on July 31, 2013, the Court took the matter under advisement and now issues the following Order.
Procedural History
The Court begins by setting out the rather long and involved procedural history that precedes Debtors’ Recusal Motion. On September 13, 2007, Mary and Scott Knighton (the “Knightons”) filed a voluntary Chapter 11 petition (the “Knighton 11”) under Case No. 07-08826-JKC-ll. The Knightons were represented by Mr. O’Farrell and Alfred B. McClure, both of McClure & O’Farrell, P.C. (the “Firm”). On Schedule A of the petition, the Knigh-tons listed their residence at 23998 Twilight Hills, Cicero, Indiana 46034 (the “Property”) as an asset of the estate and valued the property, per an appraisal, at $290,000.00. On December 12, 2007, Citi-Mortgage, Inc. (“Citi”) filed a secured claim with respect to the Property in the amount of $118,797.29. No objection to that claim was ever posed.
On November 7, 2008, the Knightons filed an Amended Application to Sell Property Free and Clear of Liens pursuant to 11 U.S.C. § 363(f)(3) (the “Amended Sale Motion”),1 wherein they sought to sell the Property free and clear of liens and encumbrances for $150,000.00 to Phillip D. Roudebush and Sara S. Roudebush (the “Roudebushes”). The Amended Sale Motion also stated that the sale proceeds “shall be deposited in a segregated account, to which any and all valid liens will attach, subject to distribution upon further order of the Court.” Counsel for Citi was served with the Amended Sale Motion and did not object.
Following a hearing on November 20, 2008, at which counsel for the Knightons, Citi and the United States Trustee appeared, the Court issued an order granting the Amended Sale Motion (the “Sale Order”). Admittedly, the Sale Order,2 was not particularly well crafted in that it did not explicitly restate all of the terms of the Amended Sale Motion. Instead, it stated that the Amended Sale Motion was “granted” and further provided that the sale proceeds were to be placed in a “segregated account for distribution only pursuant to further order of the Court.”3 While the Knightons never filed a formal report of sale, the Property was apparently sold to the Roudebushes for the sum of $147,831.68, with a check made payable to the Knightons and the Firm (the “Sale Proceeds”).
*877Following issuance of the Sale Order, very little additional activity transpired in the case-at least according to the Court’s docket — until Citi filed a Motion for Relief from Stay and to Abandon Real Estate or in the Alternative Adequate Protection (the “Chapter 11 Stay Motion”) on February 27, 2009. In the Chapter 11 Stay Motion, Citi asserted that the Knightons had defaulted on their post-petition payments to Citi for the period October 1, 2007 through February 1, 2009. No mention was made in the Chapter 11 Stay Motion that the Property had been sold free and clear of Citi’s mortgage. The Knightons objected, asserting that the Property had been sold and was no longer property of the estate. No mention was made in the objection that Citi had a lien on the Sale Proceeds or that there was any dispute between the parties as to Citi’s entitlement to them.
The Court set the Chapter 11 Stay Motion and the objection thereto for hearing, but the hearing was continued multiple times at the Firm’s request. Meanwhile, the United States Trustee moved for dismissal of the case on April 7, 2009, based on the Knightons’ nonpayment of fees to be paid to the United States Trustee (the “Dismissal Motion”). The Court noticed the Dismissal Motion to all creditors and parties in interest and set the matter for hearing on April 30, 2009. The Chapter 11 Stay Motion was also reset to be heard that same day.
In advance of the hearing, and with no objection to the Dismissal Motion having been filed by the Knightons or any other party, Mr. McClure informed the Court by telephone that the case could be dismissed. Consistent with that, the Court vacated the April 30th hearing and immediately dismissed the case. Following dismissal, the Court was unaware of any further litigation between the Knightons, the Firm, Citi and/or the Roudebushes until December of 2012 — as detailed below.
On June 18, 2012, the Knightons filed a voluntary Chapter 7 bankruptcy petition with the assistance of counsel, Tom Scott & Associates, under Case No. 12-07266-JKC-7 (the “Knighton Chapter 7”). On December 6, 2012, the Roudebushes filed a Motion to Clarify Court’s Order (the “Clarification Motion”) that brought to this Court’s attention some troubling developments that allegedly transpired after dismissal of the Knighton Chapter 11 case. The Court set a hearing on the Clarification Motion for December 13, 2012.4
In reviewing the Clarification and Stay Motions, the Court recognized that the Firm might have some information to share that could potentially help clarify what happened after dismissal of the Knighton Chapter 11. The Court, through staff counsel, contacted the Firm by tele*878phone and eventually talked to both Ms. O’Farrell and Mr. McClure in an effort to inform them of the hearing. Staff counsel also sent an email to Mr. O’Farrell on December 10, 2012, stating:5
Thanks for calling me back. Unfortunately, no one is picking up your cell phone number, and it won’t let me leave a voicemail. So, I thought I’d leave an email message on the matter for which I’m calling.
You and your firm handled the above-referenced Chapter 11 case back in 2007. In the course of that case, your clients sold their residence by way of Section 363(f), free and clear of Citi-Mortgage’s and LaSalle Bank’s mortgages on the property. The mortgages instead attached to the sale proceeds, which were sufficient to pay off both mortgages and which you agreed to hold in escrow pending their distribution.
The case was then involuntarily dismissed, with a motion for relief from stay from Citi pending at the time. Citi has since proceeded with a foreclosure action in state court, with the buyers of the property ultimately interpleading. Your debtors, the Knightons, have now filed a Chapter 7 case under Case No. 12-07266 to stop the foreclosure proceeding. Various questions have been raised in the new case as to what happened to the sale proceeds. Debtor indicated in their schedules that they did not receive any of them, and it would appear that neither did Cit[i] or LaSalle. We have a hearing set this Thursday at 1:30 on a motion by the buyers of the real estate to clarify that the sale to them was, in fact, free and clear. The Court is not ordering you to appear at that hearing, but it would seem — based on what is before the Court already— that we will likely need to formally hear from you at some point as to the proceeds. So, if you can make the hearing, that might expedite resolution of the matter. We may have to reopen the 2007 case if [there] are funds that need to be administered or any other relief requested or ordered.
Please let me know how you with to proceed and/or if you have any questions.
Thank you.
Consistent with the email, the Court conducted a hearing on the Clarification Motion and Chapter 7 Stay Motions on December 13, 2012, at which counsel Tammy Lynn Ortman for the Roudebushes, David H. Yunghans for Citi, and Jeannette E. Hinshaw for the United States Trustee appeared, as did Deborah J. Caruso, the Chapter 7 Trustee in the Knighton Chapter 7. No one from the Firm was present. At the hearing, the Court first learned that Debtors had filed a Chapter 7 bankruptcy petition in this district on October 16, 2012, and that such petition was pending before the Honorable Robyn L. Moberly.
What further transpired at that hearing and immediately thereafter is largely the basis for the Recusal Motion. In the interest of providing an accurate and complete depiction of that hearing, nearly the entire transcript follows:6
*879THE COURT: Well, can somebody enlighten me as to what the heck is going on?
MS. CARUSO: I would be happy to. Just for a little bit of background, Your Honor, and I’m sure you’ve read the pleadings that we filed here, but this case emanates from a case that was filed by the Knigh-tons in 2007. It was a Chapter 11 case that was filed in this court. The court issued an order pursuant to motion to authorize the sale of the Knightons’ house to the Roudebushes. The sale was for $150,000 and the motion requests that the sale be under 363, free and clear of all liens and encumbrances. That’s the last the court knew of the case because it was dismissed for the debtors’ failure to do a lot of things. Anyhow, fast forward to this year and the Knightons filed a Chapter 7 bankruptcy proceeding. I am the trustee. In connection with the administration of that estate, I learned that the $150,000, it was about 147 net, proceeds, was deposited into Mr. O’Farrell’s account, trust account in 2007. It was never disbursed. So what happened after that was, CitiMortgage filed a foreclosure proceeding against the house that was sold to the Roudebushes who, by the way, paid cash at closing. And there was actually a judgment of foreclosure issued. The Roudebushes are now represented. That has been stayed in the Hamilton County Court and with much persistence, Mr. O’Farrell finally deposited 95,000 thereabouts — $93,000, with the Clerk of the Hamilton County Court. He’s never made an accounting, he’s never explained where the other $56,000 has gone.
THE COURT: Did he do that pursuant to an order out of that court?
MS. ORTMAN: There’s an order sitting that he has not answered. He has continued twice but there’s been no material response.
MS. CARUSO: So did he voluntarily—
MS. ORTMAN: Yes.
THE COURT: No, how did the money get from him to the clerk?
ORTMAN: He voluntarily deposited at a summary judgment hearing that was postponed, upon order that he deposit the proceeds and ninety-two of which were deposited.
MS. CARUSO: Mr. O’Farrell has filed bankruptcy. It’s pending in Judge Moberly’s court. He has not filed any 7 schedules. He has — the 341 has been continued until January.
THE COURT: He’s filed personally?
MS. CARUSO: Mr. O’Farrell, personally, with his wife. And by the way, his wife is also a lawyer who, which Jeannette just informed me today, if you recall our flat fee discussion—
THE COURT: Yes, I recall that.
MS. CARUSO: —the O’Farrell case, that is his wife.
THE COURT: Yes, I know.
MS. CARUSO: Okay. So, anyway, where we are today, the issues are, Your Honor, Number 1, should there be a foreclosure when there was a 363 sale ordering the house sold free and clear of liens and is the mortgage company’s remedy against the proceeds. I think we all agree to that. There should not be a foreclosure. The Roudebushes are a good faith purchaser and they own the house. [The ojther issue is the $94,000 sitting in the Hamilton County Clerk’s office, who is entitled to that money. When the case was — the Chapter 11 case was going on, if the mort*880gage company would have been paid their claim was $118,000, the debtors had an exemption of $30,000. If Mr. O’Farrell would have distributed this money, the mortgage company would have been paid in full, debtors would have received 30,000. As their trustee, I stand in their shoes for that claim and they have waived any right to an exemption. So we have agreed to file the appropriate pleadings in the Hamilton County Court to transfer the $94,000 to the trustee’s account. And we will discuss how that money should be distributed and, obviously, we would have to do that pursuant to an order that would be entered by this court. I think the issues with that are, we need to talk to Mr. O’Farrell. Number 1, are those the proceeds from the sale; Number 2, where is the rest of the money. Are there any malpractice claims against Mr. O’Farrell that we can recover and is there dis-chargeability of funds.
THE COURT: Okay. Schedules have not been filed in his bankruptcy.
MS. CARUSO: No.
THE COURT: You don’t know who he listed as creditors.
MS. CARUSO: Don’t know. I don’t know what assets he has either.
MS. HINSHAW: Correct, Your Honor. The schedules are due on January 4th and then that’s when the continued 341 is.
THE COURT: Is that a 7?
MS. HINSHAW: Yes.
THE COURT: Who’s the trustee?
MS. HINSHAW: The trustee is Jenice Golson-Dunlap. I’ve spoken with her and she’s aware that it’s going to be a — not a routine case. And I, as well as Ms. Caruso, am planning to attend the 341 to get direct responses regarding exactly these questions and then if — the questions will either be answered or Mr. O’Farrell will plead the fifth in which case we’ll take things from there.
THE COURT: Okay. Does the — okay. So you’ve agreed that the foreclosure is not going to continue? I mean right now, there’s apparently — apparently, there’s a motion to set aside the summary judgment order on foreclosure there, right? That’s pending.
MR. YUNGHANS: Your Honor, our firm, actually is not handling the foreclosure. I just received a referral to do the motion for relief. But certainly my advice to Citi-Mortgage is, they should not be continuing with the foreclosure at this time. Ms. Ortman, who is the counsel working? It’s Feiwell & Hannoy, I believe, is continuing with the foreclosure.
MS. ORTMAN: Feiwell.
THE COURT: Yes, I guess — I mean they were — you were represented, in fact, in the old case, the '07 case. They were represented at the hearing when I approved the sale. So then, why wouldn’t CitiMortgage go after the proceeds, rather than file a foreclosure a few months later? Does anybody know?
MS. ORTMAN: Your Honor, I have no idea, the answer to your question. But the foreclosure action was pending and then stayed when the Knightons filed their original petition.
THE COURT: So it was [on] file[ ] before the '07 case was 7 filed?
MS. ORTMAN: It was, yes. It was filed in '06. When the stay was lifted and the case was dismissed, then Citi filed its summary judgment motion to foreclose. But Citi at that time had actual knowledge one, of the order it agreed to sell free and clear of liens and two, of my clients’ VFP’s. So the foreclosure decree was entered with no notice to my clients and their first news that any of this had transpired was the notice of sheriffs sale on their door. And we’ve been litigating a motion to set aside and for an accounting of proceeds since *881March of this year, with no forward motion.
THE COURT: So does the '07 case need to be reopened?
MS. ORTMAN: I don’t know that reopening, if you would put the order in a recordable form that I could deliver to the Hamilton County and the recorder that would actually release the liens so that we could terminate—
THE COURT: Which order, the original order?
MS. ORTMAN: Yes, Your Honor.
THE COURT: So you would just need to get a certified copy?
MS. HINSHAW: There is a mechanism for doing exactly that.
MS. ORTMAN: It’s not in recordable form as I have read it. I would be happy to do an amendment or—
MS. HINSHAW: You go through a certification process with the clerk’s office. I had to do that when I was in private practice.
THE COURT: Yes, but you’re saying the form of the order.
MS. ORTMAN: —just need another order—
THE COURT: The form of the order isn’t correct, is that it?
MS. ORTMAN: Sufficient for the recorder to take it. It doesn’t identify the instrument number of the mortgage being released, of CitiMortgage. And a number of assignments that were between the original grant.
MS. CARUSO: But CitiMortgage, the other counsel, they’re not here today so, obviously, they’re not disputing that the foreclosure shouldn’t go forward, right? I don’t see that this is—
MR. YUNGHANS: I mean to me it seems like they — that’s what he has been doing. He’s still disputing that.
MS. CARUSO: I filed a motion—
MS. YUNGHANS: Is whole issue — are they waiting for an order from bankruptcy court, then, that releases — orders them to release the lien?
MS. ORTMAN: That already exists, so I can’t answer. I’m not—
MS. CARUSO: Do you guys talk? Because you’re representing the same client.
MR. YUNGHANS: I have not talked to foreclosure counsel, no. I have not.
MS. CARUSO: Okay, okay. So that’s why — I mean, I was assuming we’d have an agreement but that’s why you believe you need this order to go forward in the event that foreclosure counsel doesn’t agree that the foreclosure should be dismissed.
MS. ORTMAN: Correct.
MR. YUNGHANS: Yes.
MS. CARUSO: All right. But if you can speak for CitiMortgage that the funds should be transferred?
MR. YUNGHANS: Yes.
MS. CARUSO: Okay.
MR. YUNGHANS: Yes.
MS. CARUSO: I mean, I think we can do that—
THE COURT: But if you need that order amended, basically, or corrected, it seems to me we need to reopen that case. You need to file something there, and assuming nobody is going to object to it and you get an order, the type of order that’s needed to at least get them — get their title clear, right?
MS. ORTMAN: I wouldn’t pretend to know the procedure here, but either a ministerial amendment to that previous order, which would just do nothing more than include the instrument numbers and the dates of execution and recording, would suffice the recorder.
*882THE COURT: No, I understand, but I can’t just — it’s a closed case. I can’t just issue an order out of it. I mean, we’[ve] got to reopen it.
MS. ORTMAN: Which is why I filed the motion to clarify the order in this particular case if that—
THE COURT: Right. But that doesn’t reopen the '07 case. I think something needs to be filed and to reopen — I think. I mean, you guys tell me if you think something different, but I think we need to reopen — the motion to reopen, that needs to get reopened, then a motion to amend that order, whatever. I don’t think it’s really a clarification of the order, it’s probably an amendment to the order.
MS. CARUSO: Well, you know, Your Honor, I believe that that order is not a judicial estoppel argument with the state court.
MS. ORTMAN: I believe you’re correct.
MS. CARUSO: Have you tried to assert that in the state court?
MS. ORTMAN: I have. Our motion is pending and was continuing in the state court action, was stayed because of the Knightons and the O’Farrell bankruptcy cases.
MS. CARUSO: I really believe if you look at the motion and that order, it says it’s sold free and clear of all liens and encumbrances.
THE COURT: Yes. The order is not—
MS. CARUSO: It’s not—
THE COURT: —a work of art but it does refer to the motion. You really need to look at the motion to see what the order is.
MS. CARUSO: Is it possible you could approach that with the state court and if they feel they need a more comprehensive order, then move to reopen that '07 case? MS. ORTMAN: Yes, if we were allowed to continue in the state court proceeding.
MS. CARUSO: And I don’t have a problem, the only issue I raised with objections to the relief from the stay was with respect to abandonment of the funds. So if the funds aren’t going.to be abandoned and we’re going to—
THE COURT: Now, you’re talking about the Roudebushes’ relief from stay motion.
MS. CARUSO: Yeah. If the Roudebushes want to go to the state court and—
THE COURT: No, I understand that.
MS. CARUSO: —yeah, I’m all right that.
THE COURT: So what I suppose I need is, I’ll grant that motion but apparently it should have some language in it about where the money is going and then you can then continue to pursue your motion to set aside the judgment there.
MS. CARUSO: All right.
THE COURT: If you need something else, other than what you already have out of that prior case, I think we need to reopen it.
MS. CARUSO: And I think what I will do, if we — I would like to have an agreement that we can present to the state court for transfer of the funds and that would probably entail a global agreement that the case has been dismissed and the funds are going to be transferred. If we can’t have — what I said, Your Honor, I would like — it would be nice if we could have a global agreement, talk to foreclosure counsel where we would dismiss that state court case.
THE COURT: Is that Feiwell & Hannoy?
MS. CARUSO: Yes.
MS. HINSHAW: Your Honor, if I — I’m sorry to interrupt.
MS. CARUSO: No, that’s okay.
MS. HINSHAW: I didn’t know if there were any openings for something like a telephonic status conference on Citi’s mo*883tion for relief from stay where, for instance, Randy Eyster, who I believe is the head person in the bankruptcy department at Feiwell, if he were directed by the Court to be on the phone, that might help communication. Just an idea.
THE COURT: I mean, we could try. I mean, he may not have a clue what’s going on, though, other than them pursuing the foreclosure, I don’t know. I mean, maybe they do know.
MS. ORTMAN: Feiwell represented the bankruptcy of Citi — I’m sorry, represented the Knightons’ bankruptcy interest in Citi’s benefit out of that mortgage in the underlying bankruptcy.
THE COURT: Right.
MS. ORTMAN: So they would have participated.
THE COURT: I know. Yes, I know. It was John Joseph, though, and he’s—
MS. CARUSO: I know you don’t represent foreclosure — you’re not foreclosure counsel but to me it seems like the longer this goes on, there’s already a counterclaim and a cross-claim against CitiMort-gage. They’re just treading on very thin ice here.
MR. YUNGHANS: Well, just generally, I think they just probably have two different areas that their — you know, their bank, working the file. So they have, on one hand filing a foreclosure—
THE COURT: Yes. Of course, then hiring two different lawyers, that’s their problem. I mean, they’re the ones that participate— not only got notice, they were here.
MR. YUNGHANS: But ideally, what I’m going to do when I get back is, I’m going to change this over to a litigated file and basically when that — they send that to Citi, it goes to a different department. And that department usually can — they’ll combine everything together and then they will — I—
MS. CARUSO: What does that do for us?
MR. YUNGHANS: I think it would — it would stop having two firms working the file. That would be the first thing it would stop. And it would probably even be transferred to us or transferred to them. THE COURT: Well, what do you want me to do with CitiMortgage’s motion for relief from stay?
MS. CARUSO: Deny it. I think their motion for relief from stay should be denied because I see that that is just really directed to the only asset that we have in this case, which is the funds. The house has been sold.
THE COURT: Yes, it is. What’s your position on that?
MR. YUNGHANS: Your Honor, at this time we don’t want relief, we want to resolve this in the bankruptcy court. So we want to — we don’t want the asset, the proceeds, to be abandoned by Citi, we still want, you know, our proceeds to attach to that. Proceeds of the sale to — •
THE COURT: Okay, so how do we — what vehicle are we going to get the funds into the trust account?
MS. CARUSO: I’m going to file a motion to turnover with this Court. I think this would be two vehicles. One would be an agreed order that we would present to the state court, that their case is going to be dismissed and the funds should be transferred.
THE COURT: This is an agreed order out of what?
MS. CARUSO: In the state court.
THE COURT: Right, but—
MS. CARUSO: I think if the state court’s case is going to be dismissed, then they need to know what they should do with these funds. Perhaps what I need to do is file a motion to turnover the funds with this court.
*884THE COURT: I suppose. To the clerk you mean, to the Hamilton County clerk, I suppose.
MS. CARUSO: We did this in the Gibson Eastern case, but it was actually an agreed order that was presented to the clerk.
THE COURT: Who’s going to agree to that?
MS. CARUSO: CitiMortgage, the Roude-bushes, the trustee and I believe those are all the parties in the state court case.
THE COURT: But I mean soon. You can do that, you can make that agreement?
MS. CARUSO: With Citi’s cooperation—
THE COURT: No, Mr. Yunghans.
MR. YUNGHANS: I believe I can. I mean, certainly that’s what I’m going to recommend to my client to accept. I just — that’s the problem is, there’s nobody else working on the foreclosure case and it seems like they haven’t you know — they’re still thinking there’s some sort of lien on the property.
THE COURT: Yes. That’s too bad we don’t have Feiwell & Hannoy here and, it’s too bad we don’t have Mr. O’Farrell here. I don’t know if Kate told you, but I mean, in looking at this I had Kate call them to invite them, to see if they wanted to be here to try to — because it looked like there were a lot of questions and, perhaps, they could clear things up. And apparently, obviously, they’re not here. So they chose not to be.
MS. CARUSO: We weren’t aware at that time that he had filed.
THE COURT: Yes, I had no idea about Mr. O’Farrell’s bankruptcy.
UNIDENTIFIED FEMALE SPEAKER: I would indicate I talked to Mr. O’Farrell, or I traded voicemails with Tom and talked with Heather (indiscernible) Mr. McClure and none of them had suggested they were in bankruptcy.
MS. CARUSO: Oh. Well, now that was filed October. Yeah, it’s been pending for about — so, okay. I guess—
MS. ORTMAN: I suppose what I would ask the Court—
THE COURT: On the Roudebushes’ relief from stay, you can agree on an order granting that with the provision that at least between the Roudebushes and you, that that money be placed in escrow.
MS. CARUSO: Yes.
THE COURT: Right?
MS. ORTMAN: Yes.
THE COURT: So they can proceed, then, with whatever they want. They’ll have relief from stay from here.
MS. CARUSO: And they could proceed with relief for the purposes of getting the foreclosure case dismissed.
THE COURT: Okay.
MS. CARUSO: And not proceeding against the funds.
THE COURT: Then you want to present another agreed — I shouldn’t be calling it an agreed order, I guess, agreed entry with CitiMortgage?
MS. CARUSO: I would like to do that and, perhaps, we would need to do that by — yeah, I guess we could just do an agreed entry, where we would agree that the funds would be — and I can look at what we did in the Gibson case and I suppose we could have a conversation with the clerk as to what they’re going to require in the order to transfer the funds. Yes, I would like to—
THE COURT: Yes. I mean if you can get an agreed entry with CitiMortgage, I wouldn’t see why you can’t agree for the clerk to transfer and if I—
MS. ORTMAN: They may need something from this court directing—
*885THE COURT: Well, if I order that — well, if I approve it and it becomes the order, I assume the clerk will turn it over.
MS. CARUSO: I would assume so.
MS. ORTMAN: We would tender this court’s order along with the motion and the funds would be released.
THE COURT: Okay. So that takes care of those two things. And then we have a motion to clarify. I’m not sure—
MS. CARUSO: That’s Ms. Ortman.
THE COURT: Yes. That’s — I can’t clarify — I can’t issue an order in this case.
MS. ORTMAN: All right. If you would reset, then, 18 for 30 days and to the extent we can get an agreed entry that would resolve that and if not, we’ll address it in status in 30 20 days?
THE COURT: That’s fíne. I think — and then — in some ways it’s too bad that the other bankruptcy is in another court.
UNIDENTIFIED ATTORNEY: And I think it could transfer
THE COURT: I suppose if somebody makes that request I doubt very much if Judge Moberly would care. So I’ll do whatever you want in that regard. It might be — administratively it might be simpler if it was, you know, because we could set things at the same time, if need be. And it sounds like, to me, it will be there.
MS. ORTMAN: I assume so.
THE COURT: Okay.
MS. CARUSO: You know, Your Honor, I think I probably will file a motion to turnover, just in the event this doesn’t progress.
THE COURT: That’s fine.
MS. CARUSO: Okay.
THE COURT: Okay. So how much time on the agreed entries and the two relief from stays?
^ ^ #
THE COURT: Okay. So the agreed entries on the two motions for relief from stay is within 21 days and then—
UNIDENTIFIED ATTORNEY: That’s January 23rd—
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THE COURT: The 23rd at 1:30? I’ll reset the motion, right now, just the one motion, motion to clarify and then if somebody — you’re probably going to be filing a motion for turnover.
MS. CARUSO: Yes, Your Honor.
THE COURT: And somebody may be filing a motion to transfer the O’Farrell case.
MS. HINSHAW: Your Honor, for the U.S. Trustee, I’ve never been involved in that kind of motion before and more than happy to take a stab at doing it. I mean, usually, it kind of happens in the context of substantive consolidation or administrative consolidation. We don’t really — I don’t think you can consolidate a 7 and an 11. It’s just transferred from one court to another.
THE COURT: No, I’m not talking about — I’m talking about — right. So that we could set things at the same time because I think we’re going to have common issues. I think if you just — somebody just files it and said for ease of administration of the cases.
MS. CARUSO: Okay, because they’re related cases.
THE COURT: You know, there are related issue and, perhaps, related parties. And so, for ease of administration — it won’t take much.
MS. HINSHAW: I am hearing you, Your Honor. Thank you.
UNIDENTIFIED ATTORNEY: Does Judge Moberly care about that?
THE COURT: I don’t think she’ll be too broken up.
*886MS. HINSHAW: Kidding. Okay. So January 23rd at 1:30, motion to clarify.
THE COURT: Okay. So what’s the date again?
COURT CLERK: January 23rd, at 1:30 p.m.
THE COURT: Okay. And no further notice, okay. No further notice on that and then we may be getting two more motions fairly soon.
MS. CARUSO: Right. Yes, but we’ll do the motion for turnover quickly.
THE COURT: Okay. Well, before you go, let me make I sure I don’t have any other questions. I don’t — what—and maybe nobody can answer that, when the Knightons’ case got dismissed and there was money sitting in the account, they didn’t try to get that money?
MS. ORTMAN: I don’t think anyone did. Yes, I have the same question. I was kind of surprised that CitiMortgage wouldn’t try to go after the proceeds.
THE COURT: Well, not only CitiMort-gage but weren’t the Knightons owed some money, 30,000?
MS. CARUSO: The Knightons called Mr. O’Farrell — this is at least their testimony at the 341 and I have not questioned them other than the 341. They have indicated they have contacted him on numerous occasions for the past four years and he kept deflecting, giving them the runaround and finally they went and saw Mr. Hauber (phonetic). But I think their bankruptcy situation didn’t improve because none of their debts were discharged. The 11 was dismissed, it just got worse. They tried to get the money for about three or four years.
THE COURT: Well, how did the actual closing of this take place? Anybody know?
MS. ORTMAN: Yes, Your Honor. The order was presented to the title insurance company, the purchasers delivered their proceeds, the check from the title insurance company was issued jointly to the Knightons and the O’Farrell trust account and the deed was executed and recorded. And my folks moved in. Didn’t know anything—
THE COURT: When did they first learn of the problem?
MS. ORTMAN: After CitiMortgage—
THE COURT: Sued them?
MS. ORTMAN: —received the summary judgment — no, they didn’t sue them. They never named them in the foreclosure. THE COURT: Oh, that’s right, they only sued the Knightons.
MS. ORTMAN: They knew only when the sheriff delivered the notice of sale plastered to their front door.
THE COURT: That seems pretty odd, too, doesn’t it?
MS. CARUSO: Yep.
THE COURT: Well, okay. I guess that’s all for now.
The January 23, 2013 Hearing
Consistent with the preceding, the Court reset the Clarification Motion for January 23, 2013. On December 27, 2012, Citi withdrew its Chapter 7 Stay Motion. On January 2, 2013, Citi moved to reopen the Knighton Chapter 11. On January 8th, it also moved for relief from the April 30, 2009 order dismissing the Knighton Chapter 11. On January 9th, Citi asked for an emergency hearing to determine the status of the Sale Proceeds. On January 9th, the Court issued separate orders granting all three motions, along with a notice setting the last of the motions for a hearing to be held on January 23, 2013.
Also on January 9th, the Firm — purportedly on behalf of the Knightons — objected to Citi’s request that the case be reopened and the dismissal order be set *887aside. In the Objection, the Firm argued that it was improper for the Knightons to maintain two bankruptcy estates at one time. The Firm also argued that Citi was attempting to amend the Sale Order so as to improperly improve its position vis-a-vis the Knighton Chapter 7. The Firm — again, purportedly on behalf of the Knightons— also moved for relief from the Court’s orders reopening the Knighton Chapter 11 case and setting aside the dismissal order (the “Motion to Reconsider”).
On January 23, 2013, the Court conducted a hearing, at which Mr. McClure, Ms. Caruso, Ms. Ortman, Ms. Hinshaw, and Randall K. Eyster for Citi appeared. The transcript for the hearing is too lengthy to set forth in full. However, the initial dialogue between and among counsel and the Court provides some sense of the parties’ respective positions
THE COURT: Now would you state your appearances for the record, please?
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MR. McCLURE: Alfred E. McClure on behalf of the Knightons.
THE COURT: I’m sorry, for?
MR. McCLURE: Knightons.
THE COURT: I’m sorry?
MR. McCLURE: Knightons.
THE COURT: For the Knightons. Okay.
MS. CARUSO: For the Knightons?
THE COURT: Let me take [Case No.] 12-7266 first. Clean up—
MS. CARUSO: Your Honor, I have a — I don’t want to interrupt you, but I don’t understand how counsel can represent the Knightons. They’re in a bankruptcy—
THE COURT: Well—
MS. CARUSO: —proceeding.
MR. McCLURE: That’s—
THE COURT: I’ll get into that.
MS. CARUSO: Okay.
THE COURT: Let me take up 7266 first. We have the — there was a relief from stay in that filed by CitiMortgage and that has since been withdrawn. And then we had a relief from stay filed by the debtors, I believe. And on that it — my understanding, there was going to be an agreed entry filed within a certain time period, but I haven’t seen anything.
MS. T. ORTMAN: There hasn’t been one filed, Your Honor. We attended the 341 hearing and we’re awaiting some results of that. The State Court action was delayed. The hearing reset until the 25th of February hoping that we could get a ruling to resolve the problem on the recent motion and on the opening of the election. We have not communicated further.
THE COURT: Okay. I think there was one other matter set — it was the motion we reset today. It was that motion asking for a clarification of the order in the '07 case. Okay. So, before we — I think we talked about that. I’m not sure that — I’m not sure there is much I can do to clarify the order was made in the '07 case and I guess there was some representations made at that time that the CitiMortgage was going to be filing a motion in that case to reopen, which is what happened. So we probably should move onto that case. And I guess before we take up the emergency motion, I guess I need to do — to address the motion to reconsider. Mr. McClure, your motion.
MR. McCLURE: Well, Your Honor, I was hoping it came pretty quickly after the motions were — it’s generally understood and the Seventh Circuit — simply cannot have two of these at the same time. Now, they make an exception for a Chapter 20, but that’s not what’s happened here. What’s happening here is we have an open, existing Chapter 7 that was filed after this '07 case. The '07 case was asked to be open ostensibly to modify the dismissal *888and the 2007 order that was entered approving the sale of the property. Both— all of that was noticed properly and not appealable a long time ago. There is nothing that has happened here that cannot be handled in either the State Court action or in the existing Chapter 7. In fact, we — the trustee in the existing Chapter 7 has apparently at least filed a notice of possible assets relating to a portion of the fund that was held in the [segregated] account for the debtor pursuant to the order that was entered in 2007.
THE COURT: Okay. I—
MR. McCLURE: In—
THE COURT: I’ve got a couple of questions. You do represent that debtors in this case?
MR. McCLURE: Well, here’s the problem. We represent the debtors in the 2007 case.
THE COURT: You represent—
MR. McCLURE: We do not represent in them in the 2012 case.
THE COURT: No. I didn’t ask you that. Do you represent the debtors in this case now?
MR. McCLURE: I don’t think so.
THE COURT: Then why did you file this motion—
MR. McCLURE: Because there’s—
THE COURT: —on behalf of the debtors?
MR. McCLURE: Because there’s nobody in the notice. The debtors’ address was incorrect. And there was nobody in the notice that could answer for the debtors. We had an obligation to the debtors—
THE COURT: Do the debtors know you filed this motion?
MR. McCLURE: We have had no contact with the debtors.
THE COURT: So you filed a motion on behalf of the debtors anyway?
MR. McCLURE: We had a responsibility, in my judgment, to the debtors to take some action, notwithstanding that because we’re the only ones who knew about it.
THE COURT: Yes, but you’re representing to the Court that you represent the debtors.
MR. McCLURE: I — I’m representing to the Court that I have filed the motion because I have not been excused from—
THE COURT: No, you’re—
MR. McCLURE: —representing the—
THE COURT: No, you’re not.
MR. McCLURE: —debtor in this ease.
THE COURT: No, you’re not. You have said in the motion, the debtors, Mary Elizabeth Knighton and Scott Keith Knighton by counsel.
MR. McCLURE: I am still counsel in that case.
THE COURT: So you do represent them and they’re aware of it?
MR. McCLURE: They have not discharged us from the 2007 case. But we haven’t had contact with them.
THE COURT: Okay. That — that’s my first—
MR. McCLURE: I mean, it’s a problem.
THE COURT: That’s my first question. The second question is, what has happened to the funds that were escrowed?
MR. McCLURE: The funds that—
THE COURT: Pursuant to the Court’s order of December of 2008.
MR. McCLURE: The funds had been— part of the funds were sent to the Court— the State Court.
THE COURT: Which court?
MR. McCLURE: The Hamilton County Superior Court 1. That’s where $95,000 was sent.
*889THE COURT: And the rest?
MR. McCLURE: The remainder of the funds — not all the remainder of the funds — a small part of the funds were used to pay the United States Trustee’s fee that was left over when the case was closed.
THE COURT: How much was that?
MR. McCLURE: I don’t know offhand but we certainly are glad to make an accounting of it. The — it was like 2,000. The remainder, we used to pay an attorneys lien which we applied to those funds.
THE COURT: Under what authority?
MR. McCLURE: Under the authority of our — the authority of the attorney liens statutes and the attorney lien common law of the State of Indiana.
THE COURT: So you paid your — you paid those funds out of your trust account into your operating account?
MR. McCLURE: That is correct.
THE COURT: And that was how much?
MR. McCLURE: Whatever the difference is between the — about 50,000,1 think.
THE COURT: About $50,000?
MR. McCLURE: Yeah. Again, we’re—
THE COURT: And those are the—
MR. McCLURE: —perfectly willing to—
THE COURT: —it was attorney fees for what?
MR. McCLURE: For the representation in the original bankruptcy, 20,000 of which had already been approved by the Court and during the — and the representation in the State Court action. The State Court action went on for two years after the— after this case was — after the Bankruptcy Court lost jurisdiction of this case.
THE COURT: So these were fees earned in the — not in the bankruptcy but in the State Court action—
MR. McCLURE: In both.
THE COURT: —post&wkey;
MR. McCLURE: In both.
THE COURT: Well, how — but you — you applied for and got paid—
MR. McCLURE: No. We didn’t get paid.
THE COURT: No, you get — you applied for $20,000 and you wound up—
MR. McCLURE: And was approved. But not—
THE COURT: —getting paid—
MR. McCLURE: —paid.
THE COURT: So the rest — how much was it — how much of the 50,000 was for the bankruptcy proceedings?
MR. McCLURE: Probably 30 to 35,000 of it in total.
THE COURT: And when did you get approval from the Bankruptcy Court to have those fees paid?
MR. McCLURE: There was no way to get approval. The Bankruptcy Court had lost jurisdiction.
THE COURT: So you thought you had the authority to take it on your own then?
MR. McCLURE: We had — we believe—
THE COURT: You didn’t think you should try to reopen the bankruptcy to get that authority to take it out of your trust fund?
MR. McCLURE: We had — the bankruptcy dismissal order was final. Not appeal-able. It is our judgment and it remains our judgment that we were not — we could not reopen the bankruptcy case. I don’t think — and I think it remains the same, that nobody can reopen this bankruptcy case and nobody can alter this case.
THE COURT: Okay. Well, it’s been reopened.
MR. McCLURE: I understand that.
THE COURT: So obviously somebody can. The question is whether I reconsider the reopening of that. So your position is *890that the debtors, who you have not had any contact with, are attempting to pursue some kind of relief in both the Chapter 7 case and this previous Chapter 11 case, is that it?
MR. McCLURE: That is correct. But the debtors aren’t — the debtor—
THE COURT: And the debtors—
MR. McCLURE: The debtors did not reopen the case so they’re not pursuing relief in the Chapter 11 case. They’ve already received relief and a discharge in the Chapter 7 case.
THE COURT: Okay. Let’s see — anybody want to address the motion for — motion to reconsider?
MR. EYSTER: I would like to, Your Hon- or. The motion cites In Re: Sidebottom. An analysis of Sidebottom is just not applicable in this case. That — the analysis in Sidebottom references that the debtor actively opening two cases and it talks — it’s about the Chapter 20 situation. Whether they be simultaneous, one is not yet closed and debtor files a second one, which is what the debtor in Sidebottom did or whether they are one after the other. It has nothing to do with whether or not, for purposes of defining the rights that were delineated during the case and upon which parties relied, being further adjudicated. Additionally, the debtor relies on Espinosa and that had — that was all about the student loan discharge and in that case it was a confirmed plan that provided the student loan with discharge. U.S.A. Funds appealed. It related to whether or not that final confirmation order could be disturbed. The — again, not on point but the final order in this — in the '07 case, begs further action. It specifically says, funds are not to be distributed except by further order of this Court. So there’s a held, proceeds are tendered, there was never a — 6004 report of sale, there’s cash collateral out there with a valid lien on it that the Court has never given an order on how it was to be administered. We think it’s perfectly valid to deny the debtor — the debtors’ motion to reconsider opening this.
THE COURT: Ms. Hinshaw.
MS. HINSHAW: Your Honor, quickly if I may, three things. Jeannette Hinshaw on behalf of the United States Trustee. First, I’m totally in agreement with Mr. Eyster on the question of whether the Chapter 11 case can be reopened or if it was correctly reopened. Obviously, it can be reopened. I think the Sidebottom case is entirely inapplicable on the facts. Perhaps more importantly, the policy behind the Sidebottom case where you don’t want debtors running around in two different forums some — somehow trying to bootstrap them into — bootstrap themselves into some remedy they don’t deserve. That’s a policy way over here. That policy has nothing to do with reopening the 2007 Chapter 11 case. And from my position— or in my mind, that — the Sidebottom could just not be more inapplicable. Secondly, Mr. McClure said that at the time the 30 or some thousand attorney fees were taken from the trust account to the McClure O’Farrell operating account. The Chapter 11 case could not be reopened. And I see no reason why it could not have been reopened. Chapter 11 cases get dismissed or closed. It’s not that unusual for whatever reason because two parties over here agreed on something and then all of a sudden somebody figures out that Party’s 3 and 4 have something unresolved, so it gets reopened and then reclosed. I know of no reason in law, statute or case law why the case could not have been reopened and the debtors back then could not have gotten an order authorizing the payment of fees and in fact because Your Honor specifically had ordered that money shall be held in a segregated account until further order of the Court, I think there was an absolute duty back in the 2007 Chapter *89111 case for there to be a reopening before any fees got paid to the law firm. Thirdly, and parenthetically, I believe current counsel for the Knightons is here in court. Mr. McClure stated at the beginning of this that he represents the Knightons at least within the parameters of the Chapter 11 case that has currently been reopened but if Your Honor had any questions for current counsel for the Knightons in the Chapter 7 case, I believe he’s available. Thank you, sir.
MR. EYSTER: And Your Honor, I would add something else. I — so we kind of discussed the legal reasons for why the debtors’ motion should be denied. There’s also a very practical reason. I’m not sure why the debtors would oppose the motion for accounting. The debtors actually filed a letter in the State Court action in April of last year, specifically supporting that an accounting being held. And Mr. Hauber (phonetic) represents the Knightons in their pending Chapter 7 and he has indicated he’d be willing to elaborate to the Court pursuant to a conversation he and I have had that the Knightons do not oppose an accounting. So I — I’m—from a practical perspective, it also 25 makes no sense that the debtor would want to ask the Court to reconsider its order reopening the case.
THE COURT: Wouldn’t he have got—
MR. EYSTER: Your Honor, they didn’t— THE COURT: Wait. Before you — when they got this — there’s a motion to dismiss by the U.S. Trustee. And of course, this— we’re now talking, what — three, four years ago. I think I — I think it was fees weren’t being paid and there was something about insurance.
MS. HINSHAW: Yes.
THE COURT: What happened then either with the 11 trustee — the U.S. — well, the U.S. Trustee or even CitiMortgage when we had this order that was still up in the air, so-to-speak? You know, in other words, the funds were to be paid into the attorney’s — the debtors’ attorneys trust account and not to be distributed without further order of the Court?
MS. HINSHAW: Your Honor, are you directing—
THE COURT: Well, either one. Trustee or CitiMortgage, I guess.
MS. HINSHAW: All right. The Office of the U.S. Trustee did not know that any attorneys fees were being put anywhere. I have to admit that one of the wrinkles here is, I believe the order said the funds are to be put in a segregated account but it didn’t say a segregated account for the debtors’ attorney’s office. I think that’s the understanding of everybody in the courtroom at the time. I think the underlying motion would certainly support that but it’s possible—
THE COURT: Yes. I think the — let me look real quick.
MS. HINSHAW: I certainly could be wrong, Your Honor.
THE COURT: Well, I think the transcript — because there was a transcript that was prepared at — I think it was Citi-Mortgage’s counsel requested it—
MR. EYSTER: That’s correct, Your Hon- or.
THE COURT: —at some point and that was filed and I thought there was some wording in there — Mr. O’Farrell was actually counsel for the debtor at the time. Now, it — it does say what we’d like permission to do is — this is Mr. O’Farrell talking — is to go ahead and close, Your Honor, and put that money in a separate account — a segregated account so we can then distribute later. At any rate, Mr.—
MS. HINSHAW: It strikes me as very odd that Mr. O’Farrell’s counsel is now arguing against Mr. O’Farrell’s own words *892and it strikes me as very odd that Mr. McClure — again, Mr. McClure needs to be a zealous advocate and needs to be careful of respecting the rights of whomever his client is, but underlying all of this is a tug and pull. The Knightons may, may arguably now be adverse to Mr. O’Farrell and the firm McClure and O’Farrell. So it’s tenuous at best for Mr. McClure to state that he represents the debtors although he may just be doing that for the sake of formalities but for him to advance a substantive argument that the case should not be reopened and to purport that that argument is coming from — of the Knightons is, I think, tenuous at best. But to the extent I didn’t answer your direct question, I apologize and that may be for somebody else to answer.
THE COURT: Yes.
MR. McCLURE: I’d like to answer it.
THE COURT: Okay, sir.
MR. McCLURE: Everybody knew when they filed a motion — CitiMortgage filed a motion to lift the stay and abandon the property after the sale, Mr. O’Farrell filed a response that said, that the property had been sold. They nonetheless continued with their — continued with the motion which was at the same time that the trustee had moved to dismiss the case. Both parties were aware that this sale had taken place. It nonetheless got to a hearing and if my memory is right, we walked into the hearing — because I believe I came, and boom, the case was dismissed. Neither CitiMortgage nor the trustee was paying sufficient attention to what had happened. And had they, all they needed to say to the Court was, Your Honor, this should be converted to a Chapter 7 because there’s undistributed funds up there. And we would not have objected. Okay. We had a responsibility to our client and frankly the Knightons were probably better off dismissed then converted to a 7. So our lips are somewhat closed in an issue like that. Nonetheless, Mr. O’Farrell spent two— two, almost three years, trying to negotiate with CitiMortgage. Holding that money, trying to come to an arrangement to pay them, at the same time — and I presume the Knightons are releasing me from my confidentiality?
MS. CARUSO: Um, that would be held by me.
MR. McCLURE: Okay. Are my — am I released?
MS. CARUSO: I’m not going to give you a blanket release but I will definitely waive any privilege for you to explain to the Court what happened to the money, okay. MR. McCLURE: Well, then I can’t explain to the Court why what happened to the money, but I’m perfectly happy — and we — if you noticed, this motion to account has always been that somebody give us a court order — give us some cover so we can account this without having to worry about whether or not we’re violating attorney/client confidentiality. Okay. And that is the basis. We’ve never objected to telling what happened. I feel very comfortable about how this position developed, what the status of that — funds were and once this Court lost jurisdiction in this case and certainly CitiMortgage thought the Court lost jurisdiction, because they went back to State Court. They obtained a judgment. They obtained a judgment against the poor Roudebushes which then had to be set aside. And here, at the same time they knew the property had been sold because they got the notice in this court. Okay. We stepped in and spent time holding that money, trying to solve this problem. We have correspondence with Citi-Mortgage discussing the fact that it doesn’t appear the case can be reopened. We can’t do anything about the dismissal. It’s res judicata. Nobody appealed it. We’re stuck with it. We have a dismissed case, what do we do? Okay. On the one *893hand, we have CitiMortgage being in intransigent about their numbers on the other hand we had the — we had our client insisting that we not provide them with certain kinds of information and save time trying do this. We tried to take it to — Mr. O’Farrell tried to take it mediation. He scheduled the mediation but CitiMortgage decided they weren’t going to send a representative with any authority. This is what happened through the whole case. And this is with moving — still trying for us to get some authority to provide all the information. At the same time — then the — Mr. O’Farrell even talked to — at some point, talked to an attorney in Florida because the Knightons had moved to Florida — at least Scott Knighton had been there for years. Trying to — that they’re going to file bankruptcy in Florida, discuss what the status was, discussed the fact that there was probably no lien on the funds in our hand at this point at all. And at least if he filed bankruptcy in Florida, the trustee could claim — make a claim on that money and sort it out. Okay. That didn’t happen. Finally, when we couldn’t get anywhere with the Knightons, we took the action of applying our attorney’s lien to the funds that would have been owed to us—
THE COURT: What do—
MR. McCLURE: —and sent—
THE COURT: —you mean when you say you couldn’t get anywhere with the Knigh-tons?
MR. McCLURE: I — we could not get the Knightons to agree to anything. That’s the same reason the case was dismissed in the first place. Scott Knighton would not agree to a payment to his ex-wife for his domestic support obligation, which is required. He wouldn’t sign the plan that was supposed to be prepared the day before that hearing to be filed. And this is what we went through with the clients. At the same time, we’re trying to get solved with CitiMortgage and CitiMortgage keeps raising the ante. CitiMortgage in fact offered at one point the entire amount of their at one point the entire amount of their claim and they rejected it. At some point, we threw our hands in the air and we sent the remainder of the money to the court. And if somebody wants to sue McClure and O’Farrell over whether or not our lien is superior in — over CitiMort-gage’s lien, bring it on. Because I don’t think CitiMortgage has a lien on this money even now. I think the money that’s in that account actually belongs to the trustee in bankruptcy, but that trustee has made no attempt to get it because the lien died, and then the case was dismissed. And we’ve done an awful lot of work trying to figure out what happened here, and that’s what happened. And we believe firmly in our position and I’m prepared to fight it as far as it goes because I believe that what we’ve done is proper in the case. And what we have is a lot of people sleeping at the wheel. This case was brought to this court on motions to dismiss without anybody looking at the file. In my judgment — practice on the part of the attorneys for CitiMortgage, sloppiness on the part of the Office of the U.S. Trustee and boom, that’s where we were. And believe me, bet your money that we had wished we hadn’t had it in the first place, but it wasn’t our money. It was always theirs. That money was not given to the attorneys, that money was given to the debtor. And under 349, once this case was dismissed, that money reverted to the debtor. And when that money was sold, it was sold free and clear of all liens. We had a — we had money in that account with no liens on it and we worked our butt off to make some protection for everybody on it and ultimately it didn’t work.
THE COURT: Anybody else on the motion to reconsider?
*894MR. EYSTER: Judge, I’d like to just clarify some of the time lines and the altruism that McClure and O’Farrell engaged in, in inheriting this money that they felt so burdened by it that they took $55,000 of it and applied it to their own fees. The hearing on the motion to sell was held on — did occur — that hearing was held on November 20th. And it’s unfortunate that the transcript is not very clear. I’ve actually listened to the audio and you just — you just can’t hear very well what’s going on. But, at any rate, the hearing was held on November the 20th. An agreement was struck in principle. There was to be an order tendered after circulation to counsel for Citi and counsel for the U.S. Trustee. We followed up with Mr. O’Farrell on December 5 of 2008. Got no response. That order had actually been entered on December 3rd without being circulated to our office and potentially without being circulated to the Office of the U.S. Trustee. We contacted Mr. O’Farrell again in February regarding no payments and to find out what was going on and we — no response. Keep in mind no report of sale was ever filed regarding this money that they wanted so badly to make sure it got where it needed to go. We then filed a motion for relief because we’re not getting any payments, there’s no report of sale, we’re at — we’re receiving no communication. The debtor objected on March 2 the 25th of 2009 and in that objection states the property has been sold. That’s the first time that we know that that property has now been sold. Then, if .you look at the docket, the motion was filed on February 27th. There’s an— on March 3 an official court notice setting the hearing, the objection filed on March 25, then the debtor files a motion to continue the hearing on the motion for relief, order granting. Debtor files a motion to continue. The continued hearing on the motion for relief. Then the motion to dissent — dismiss the case was filed. So what the debtor then — what Mr. McClure and O’Farrell did while they were diligently trying to get this money where it was supposed to go, was continue to continue the hearing out, then no object to the U.S. Trustee’s motion to dismiss the case despite the obligation to zealously advocate for the Rnightons’ position. They don’t object when the case gets dismissed. Then — that’s what happened between the time of the hearing on the motion to sell and the dismissal of the case. We tried to get back in front of Court. The hearing got continued three times on debtors’ motion.
THE COURT: And that — when it got dismissed, did that not surprise CitiMort-gage?
MR. EYSTER: I believe it did and I believe at that point we just — I think the decision was made to pursue it in State Court and force the funds to be presented there.
THE COURT: And what was — was there a new action filed in State Court?
MR. EYSTER: No. There was one pending at the time of the bankruptcy.
THE COURT: Okay.
MS. T. ORTMAN: Your Honor, if I may?
THE COURT: Was there a — did it end up — did there end up being a State Court order ordering the funds to be paid or is it just paid in voluntarily?
MS. T. ORTMAN: There is an order.
THE COURT: What was ordered to be paid into it?
MS. T. ORTMAN: The remaining proceeds that McClure and O’Farrell held from the prior sale.
THE COURT: Didn’t have an amount?
MS. T. ORTMAN: It does not.
THE COURT: Okay. Anybody else on the motion to reconsider?
*895MS. T. ORTMAN: Yes, Your Honor. In addition to counsel’s recitation of the chronology here, there are couple more, in fact there are three pleadings in the Chapter 11 which identify specifically the sale of the real estate. The application to sell that was filed November the 7th includes the purchase agreement to the Roudebush-es and a sum certain amount and date for the sale to be completed. And the order granting was filed and entered on December the 3rd. The application for compensation and reimbursement to McClure and O’Farrell identifies the real estate as being sold. And on 2/27 Citi files motion for relief of the stay and to abandon the real estate but it knows from three prior entries that that real estate has been sold. And again, Knightons’ objection identifies — it was filed 3/25, that the property has already been sold. There’s no reason for someone to say they didn’t know. And four years later, Citi didn’t ask for the money. I certainly am not in a position to say that Citi isn’t entitled 13 to the money, but why didn’t they ask for it back then? And why now are we trying to find that money and the missing $55,000, which we’d all like to know where it is. We had plenty of time and plenty of opportunity to defend — to define that, identify the money, collect the money and pay over the lien that attached to the proceeds. The—
THE COURT: What was the two, three, four — year fight over the money? Was there — was it not — was it over the amount that was owed? Was — whether it was owed? Whether CitiMortgage even had a lien on the property? What was it?
MR. McCLURE: It was our position that Citi did not have a lien on the property but we also felt that Citi — CitiMortgage had— CitiMortgage was clearly going to get a judgment against the Knightons. You had — the money was clearly owed. Okay. We did not believe at that time that Citi-Mortgage either had mortgage on the property, because that property had been sold pursuant to the Court (indiscernible), nor do we believe that they had a lien on the cash. Okay. The discussions were— and—
THE COURT: You say — you saying they’d been sold free and clear?
MR. McCLURE: Yes. The property was sold free and clear of all liens. And that’s your order.
MS. HINSHAW: And—
MR. McCLURE: And—
MS. HINSHAW: —did the debtor think that it was with liens to attach to proceeds or—
MR. McCLURE: No.
MS. HINSHAW: —it was totally free and clear?
MR. McCLURE: They did — the lien — in my judgment the lien clearly did not attach to proceeds. Now I think that may—
MR. EYSTER: Despite the motion saying liens to attach—
MR. McCLURE: No-
MS. HINSHAW: It was debtors’ counsel who provided the order to the Court.
MR. McCLURE: And the—
MS. HINSHAW: Failed to say free and clear. They don’t just say free and clear with liens to attach to proceeds and now same debtors’ counsel is — they’re trying to argue itself into an advantageous position based on prior failures.
MR. McCLURE: No. What we’re — what it comes out to is the order says what the order says and the order, based on what I looked at, matches the prayer in the motion. Now, what really happened, with all due respect, you didn’t pay attention. The trustee’s office didn’t pay attention—
MS. HINSHAW: Does the U.S. Trustee’s—
*896MR. McCLURE: —and—
MS. HINSHAW: —office—
MR. McCLURE: —they didn’t pay attention.
MS. HINSHAW: —have a duty to represent the debtor in the Chapter—
MR. McCLURE: I think if you—
MS. HINSHAW: —11 case?
MR. McCLURE: I think that the U.S. Trustee’s office — if they’re going to file a motion to dismiss, has a duty to figure out what’s going on in the case.
MS. HINSHAW: I thought that was the job of debtors’ attorney.
The hearing continued from there in much the same vein. The Court ultimately denied the Motion to Reconsider. The Court also indicated that it intended to order an accounting of the Sale Proceeds and turnover of the Sale Proceeds from both the Firm and the state court. There was further discussion about whether Citi was willing to voluntarily release its foreclosure judgment (it was not so willing) and what actions, if any, the Roudebushes anticipated taking in the state court action in an effort to establish their clear title to the Property. From the discussion had on January 23rd, it was abundantly clear that there were numerous unresolved and contentious issues left to be litigated and adjudicated.
Following the January 23rd hearing, the Court issued two orders, both on January 28, 2013: First, the Court issued an order directing the Hamilton Superior Court and the Firm to turnover the Sale Proceeds to the Clerk of the United States Bankruptcy Court (the “Turnover Order”). More specifically, the Hamilton County Clerk was directed to turnover the $95,294.62 that had been previously deposited by the Firm as part of Citi’s foreclosure action against the Knightons. The Firm, in turn, was directed to turnover to the Clerk the balance of the Sale Proceeds, in the amount of $52,537.06. The Court also ordered the Firm to provide an “accounting” of the Sale Proceeds from the date they were paid to the firm to the date(s) they were distributed. Such accounting was to include “bank statements, deposit and/or withdrawal slips, and copies of any and all cancelled checks that were written against the segregated account in which the Proceeds were placed.” See Order (1) Directing Turnover of Certain Funds to the Clerk of the United States Bankruptcy Court; (2) Directing McClure & O’Farrell, P.C. to Provide and Accounting of Such Funds; and (3) Directing Clerk to Accept Deposit of Funds at *2. The Court indicated that failure to comply with Turnover Order by February 15, 2013, could “result in a finding of contempt and/or sanctions.” Id.
Second, the Court issued an Order Clarifying Court’s Order of December 3, 2008 (the “Clarification Order”). That Order stated in part:
At the January 23rd hearing, the Court learned even more disturbing information, including representations from Mr. McClure that the Firm had applied approximately $51,000.00 of the Proceeds to Debtors’ outstanding legal fees by virtue of an “attorney’s lien.” It also became clear at the hearing that both Citi and the Firm have long been confused as to the import of the Sale Order and have operated on several arguably incorrect assumptions, e.g., that the Property was sold subject to Citi’s mortgage and that Citi’s lien did not attach to the Proceeds.
With that in mind, the Court finds it absolutely imperative to clarify the Sale Order posthaste. While the terms of the sale could have been made more explicit in the Sale Order, the Sale Order is nevertheless unambiguous. The Order clearly granted the Sale Motion *897and the Sale Motion, in turn, dearly sought permission to sell the Property to the Buyers free and clear of Citi’s mortgage, with Citi’s lien to attach to the Proceeds. The Order also dearly provided that the Proceeds were not to be distributed until further order of the Court. The Court, at least at this stage in the proceeding, is unwilling to interpret the Sale Order in any other way. The Court is dumbfounded as to why Citi and the Firm failed to understand the import and meaning of the Sale Order. But even assuming such confusion was warranted, the Court is also dumbfounded as to why neither of them timely sought to resolve that confusion with this Court, either before the Chapter 11 case was dismissed or thereafter. Citi made no effort to forestall dismissal of the case and sought no relief when the case was dismissed. Mr. McClure’s insistence that the dismissal order was “res judicata” and not susceptible to being set aside is simply absurd. This Court routinely sets aside dismissal orders, and every order and judgment of this Court is implicitly subject to the relief provided by Federal Rule of Bankruptcy Procedure 9024....
Obviously, many factual and legal issues remain to be adjudicated, and the Court fully intends to provide the parties with a full and fair opportunity to address those issues. Certainly, the Court will take into consideration the parties’ respective legal claims to the Proceeds and to any other claim they might make, but the parties are hereby put on notice that the Court will also consider the equities of this situation in making its determinations. With that in mind, the Court emphasizes that based on the representations already made regarding the Citi’s and the Firm’s course of conduct, it is appalled by the manner in which both have proceeded in this case and in the state court foreclosure action. No compelling reason has yet been offered that explains why what should have been a straightforward asset sale turned into a mess of this magnitude.
Order Clarifying Court’s Order of December 3, 2008 at *5-7 (internal footnotes omitted) (italics in the original).7
The Hamilton Superior Court turned over the funds it had on deposit, and the Clerk continues to maintain custody of those funds. While the Firm filed an accounting by the prescribed deadline, it did not remit any funds to the Clerk. The Court then issued an Order to Appear and Show Cause (the “Show Cause Order”) that directed an “authorized representative” of the Firm to appear and show cause as to why the Firm should not be held in contempt.
The March 14, 2013 Hearing
The hearing on the Show Cause Order was conducted on March 14, 2013. At the hearing, Mr. McClure testified under oath about the accounting the Firm had provid*898ed. From the testimony, it became clear that the accounting was woefully deficient and that Mr. McClure either did not have personal knowledge of certain critical aspects of the accounting. He suggested that Mr. O’Farrell was likely more familiar with the matters at issue. It was also clear that he had not, prior to the hearing, fully reviewed the Knightons’ file or the bank records relating to the Sale Proceeds in that he was unable to offer any or much information on a variety of critical questions, ranging from the terms of the Knightons’ engagement of the Firm; details regarding the Knightons’ written authorization to apply the Sale Proceeds to their fees; the specific authority relied upon by the Firm to assert an attorney’s lien on the Sale Proceeds; the dates on which the Firm withdrew $27,165 from the Sale Proceeds as payment of the Knigh-tons’ legal fees; and whether the funds, when withdrawn from the Firm’s trust account, were moved to the Firm’s operating account. The testimony also indicated that at least one critical page of the accounting was inaccurate.8
The Amended Accounting
Admittedly frustrated that the Firm had provided a deficient accounting and had not sent an authorized representative to the March 14th hearing who was fully knowledgeable with the issues at hand, the Court ordered the Firm to produce the following:
[WJithin 14 days of this Order, the Firm shall file an amended accounting that fully and accurately reflects the deposit and disbursement of the sale proceeds at issue in this case. The amended accounting shall be filed under oath and signed by each and every shareholder, officer and board member of the Firm. The amended accounting shall include all bank statements of the Firm’s trust account at Community Bank from December, 2008 to the present time. Client names and any other privileged information shall be redacted from the statements. The amended accounting shall also include the Firm’s tax returns for the fiscal years 2011 and 2012. The amended accounting shall also include any and all authorizations given by the [the Knightons] to the Firm regarding the payment of the Firm’s fees and expenses from December 3, 2008 to the present time. Failure to timely file an amended accounting that fully complies with the above order will result in a finding of contempt and/or sanctions.
Order Directing McClure and O’Farrell, P.C. to File an Amended Accounting and Setting Continued Hearing On Order to Appear and Show Cause at *2. The Order set an additional hearing for Wednesday, April 10, 2013, at 9 a.m., at which Mr. McClure and Debtors were ordered to appear. The Court specified that failure to appear would result in the issuance of a body attachment. The Court notes that it did not reiterate its previous order that the Firm turn over the balance of the Sale Proceeds.
The Firm filed an amended accounting on March 29, 2013. However, the hearing originally scheduled for April 10, 2013, has been continued several times and has, to date, not been held. Ms. Caruso had a conflict with the original setting, and Mr. McClure suffered some health problems that necessitated several continuances. Then, on July 17, 2013, Debtors filed the Recusal Motion in this case, to which Ms. Caruso, the Roudebushes and the National Bank of Indianapolis filed responses. The Firm filed a nearly identical motion in the *899Knighton Chapter 11. Debtors have also filed a complaint in their case, under Adversary Proceeding No. 13-50164, against Ms. Caruso, Mr. Yunghans, Ms. Ortman and the Roudebushes under 11 U.S.C. § 362(k)(l) for allegedly willfully violating the automatic stay (the “Stay Violation Adversary”).
The Recusal Motion
In the Recusal Motion, Debtors argue that the Court should recuse from their case pursuant to 28 U.S.C. 455(a) and (b)(1). More specifically, Debtors complain of the fact that while the Court attempted to secure the Firm’s attendance at the hearing — recognizing that it might have information to share concerning the conduct of the sale in the Knighton Chapter 11 and with the status of the Sale Proceeds — it nevertheless conducted the hearing without them and did not provide a meaningful opportunity for them to participate. Debtors also complain that the Court heard unsworn, “hearsay” testimony from certain of the counsel in attendance at the December 13, 2012 hearing that was designed to be, and was, prejudicial to them.
Debtors further contend that the Court then improperly instructed counsel in attendance at the December 13, 2012 hearing on “how to reopen the Knighton [Chapter 11], how to transfer the O’Farrell Bankruptcy into his Court (even though there was no previous precedent for this type of transfer as stated by Jeannette Hinshaw ...) and how to practice in the State Court Roudebush foreclosure case.” Debtors also take issue with the fact that the Court asked that their case be transferred from the Honorable Robyn L. Mob-erly.
The Recusal Motion also alleges the following:
Judge Coachys then Ordered McClure & O’Farrell, P.C. ... without Hearing, Notice, or the ability to be heard, to transfer funds to the United States Bankruptcy Court based solely on hearsay arguments or the ability for the non-parties to respond. Judge Coachys ordered the payment of such funds without determining whether such funds were property of the 2007 bankruptcy estate.
Judge Coachys has Ordered O’Farrell, McClure O’Farrell and McClure to appear for Hearing or a Writ of Body Attachment without the parties [sic] ability to respond to a formal Motion or the non-parties being found in contempt. Judge Coachys has issued Orders without any of the parties requesting same based solely on the hearsay statement made by the “Attorneys.”
Motion for the Honorable James K. Coachys to Recuse From This Cause Pursuant to 28 U.S.C. § 4.55(a) and (b)(1) at *2.
Finally, while Debtors do not specifically cite to or quote 28 U.S.C. § 455(b)(5)(iv), they argue in the Recusal Motion that the Court must disqualify itself because “Judge Coachys will be a witness” in the Stay Violation Adversary based on his participation in the allegedly “ex parte conversations” that took place at the December 13th hearing. Motion for the Honorable James K Coachys to Recuse From This Cause Pursuant to 28 U.S.C. § 455(a) and (b)(1) at *3. And while not alleged at all their Recusal Motion, Debtors also argued at the hearing on the Motion that staff counsel could also be called as a witness in the Stay Violation Adversary based on the allegation that staff counsel must have had ex parte communications prior to the December 13, 2013 hearing.
Discussion and Decision
The Court notes that Debtors provided no citation to case law or any other legal authority in support of their Recusal Motion. While they have set forth numerous *900allegations based on the proceedings described above, they have not specifically framed those allegations with reference to applicable case law or the standards that govern recusal under 28 U.S.C. § 455. The Court further notes that Debtors made no attempt to indicate which of its allegations support recusal under 28 U.S.C. § 455(a) and those that support recusal under § 455(b)(1), notwithstanding the Court’s request that they do so at the hearing on the Recusal Motion. Thus, it is up to the Court to divine their specific arguments as best it can.
28 U.S.C. § 455(a)
Section 455(a) provides that “[a]ny justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” In evaluating whether a judge’s impartiality might reasonably be questioned, our inquiry is “from the perspective of a reasonable observer who is informed of all the surrounding facts and circumstances.” Cheney v. United States Dist. Court, 541 U.S. 913, 924, 124 S.Ct. 1391, 158 L.Ed.2d 225 (2004) (Scalia, J., in chambers) (citation omitted); See also Sao Paulo State of the Federative Republic of Brazil v. Am. Tobacco Co., 535 U.S. 229, 232-33, 122 S.Ct. 1290,152 L.Ed.2d 346 (2002); United States v. Holland, 519 F.3d 909, 913 (9th Cir.2008); In re Basciano, 542 F.3d 950, 956 (2d Cir.2008), cert. denied, 555 U.S. 1177, 129 S.Ct. 1401, 173 L.Ed.2d 596 (2009); In re McCarthey, 368 F.3d 1266, 1269 (10th Cir.2004); United States v. Cherry, 330 F.3d 658, 665 (4th Cir.2003). That an unreasonable person, focusing on only one aspect of the story, might perceive a risk of bias is irrelevant. United States v. Bonds, 18 F.3d 1327, 1331 (6th Cir.1994). Consequently, where a judge’s comments, writings, or rulings are the basis for a recusal request, our analysis assumes that a reasonable person is familiar with the documents at issue, as well as the context in which they came into being. See White v. NFL, 585 F.3d 1129, 1139-40 (8th Cir.2009).
In addition to being well-informed about the surrounding facts and circumstances, for purposes of our analysis, a reasonable person is a “thoughtful observer rather than ... a hypersensitive or unduly suspicious person.” In re Mason, 916 F.2d 384, 386 (7th Cir.1990), quoted in O’Regan v. Arbitration Forums, Inc., 246 F.3d 975, 988 (7th Cir.2001), and Hook v. McDade, 89 F.3d 350, 354 (7th Cir.1996); accord U.S. v. Holland, 519 F.3d 909, 913 (9th Cir.2008). Finally, a reasonable person is able to appreciate the significance of the facts in light of relevant legal standards and judicial practice and can discern whether any appearance of impropriety is merely an illusion. See Cheney, 541 U.S. at 924, 124 S.Ct. 1391; see also In re Mason, 916 F.2d 384, 387 (7th Cir.1990). Trivial risks are endemic, and if they were enough to require disqualification we would have a system of peremptory strikes and judge-shopping, which itself would imperil the perceived ability of the judicial system to decide cases without regard to persons. A thoughtful observer understands that putting disqualification in the hands of a party, whose real fear may be that the judge will apply rather than disregard the law, could introduce a bias into adjudication. Thus the search is for a risk substantially out of the ordinary. Mason, 916 F.2d at 385-86.
Based on the above standard, the Court cannot conclude that a “thoughtful observer” would reasonably question its impartiality toward Debtors. Admittedly, it is difficult to discern what a “thoughtful observer rather than ... a hypersensitive or unduly suspicious person” might make of the matters before this Court that relate to the Knightons’ and Debtors’ respective cases, as the procedural and factual history *901is, in a word, complicated. It is, quite frankly, a most unusual and unfortunate situation, and the Court holds itself partially to blame for the fact that the Knigh-ton Chapter 11 case was closed without first resolving the parties’ respective rights to the Sale Proceeds. Much of what has happened since dismissal of that case might have been forestalled if it had.
That said, the Court cannot conclude that recusal is warranted under 28 U.S.C. § 455(a). The December 13th discussion regarding Debtors’ bankruptcy case must be viewed within its larger context. The December 13th hearing related, fundamentally, to addressing (1) the Roudebushes desire for clarity that their purchase of the Property in the Knighton Chapter 11 was free and clear of any liens and encumbrances; and (2) securing those Sale Proceeds that were being held by the Hamilton Superior Court so that they could be administered in some fashion by Ms. Caruso, as the trustee in the Knighton Chapter 7.
The fact that Debtors — principals of the Firm — had filed for bankruptcy — a fact not known to the Court until the hearing— was relevant to this second issue, as the Firm had previously been ordered to hold the Sale Proceeds in a segregated account until further order of the Court. For that reason, the Court questions Debtors’ assumption that Ms. Caruso shared information regarding Debtors’ bankruptcy case merely in an attempt to prejudice them or that such information somehow created a risk of bias. This is a bankruptcy court after all. If the mere filing of a bankruptcy case compromised the Court’s impartiality toward a debtor, the Court would be hard pressed to hear any matter that came before it.
The additional comments from the United States Trustee regarding Debtors’ upcoming 341 meeting of creditors are, in the Court’s view, insufficient to compromise the Court’s impartiality. Ms. Hinshaw was merely assuring the Court that the United States Trustee intended to inquire about the Sale Proceeds when it conducted the 341 meeting and offered that it was at least possible — as it presumably is at any meeting of creditors — that Debtors might plead the Fifth. The Court did not acknowledge Ms. Hinshaw’s comment in any way or offer any commentary on it.
Debtors also question Ms. Caruso’s motives in sharing that Ms. O’Farrell had been the subject of a state disciplinary action and the effect such information may have had on the Court’s impartiality. Again, full context is important. The disciplinary action against Ms. O’Farrell involved a flat fee arrangement. The resulting decision by the Indiana Supreme Court in February of 2011 was already known to the Court. The Court reviews any disciplinary decision that concerns an attorney or law firm that appears, or has appeared, in this Court. Beyond that, the decision bears on matters this Court has had reason to examine in the not-so-distance past. See In re ThreeStrands by Grace, Case No. 12-00756-JKC-ll, Order Granting Application to Employ Taft, Stettinius & Hollister LLP as Debtor’s Counsel Effective Nunc Pro Tunc to January SI, 2012, In re ThreeStrands by Grace, LLC, at *3 (June 1, 2012)(citing In re O’Farrell, 942 N.E.2d 799, 803 (Ind.2011) for Indiana law regarding flat fees). While the Court cannot conclusively say why Ms. Caruso mentioned Ms. O’Farrell’s disciplinary action, the fact remains that she did not tell the Court anything it did not already know and had a legitimate judicial reason to know. As such, the Court cannot conclude that the information would lead a thoughtful observer to reasonably question the Court’s impartiality toward Debtors.
Next are Debtors’ concerns over the direction given by the Court during the *902December 13th hearing as to how the parties should proceed. A full and careful review of the Court’s discussion with the parties does not support Debtors’ characterization that the Court essentially told counsel how to practice law. The December 13th hearing dealt, in large part, with the practical aspects of (1) the Trustee securing the funds then on deposit with the Hamilton Superior Court and (2) how the Roudebushes might best obtain clarification from the Court that the sale of the Property to them was free and clear of liens and encumbrances. With respect to this second issue, it is important to emphasize that the Amended Sale Motion and Sale Order seemingly clearly provide that the Roudebushes purchased the property free of any liens; it appeared to be just a matter of proving that to the state court. Thus, there was much discussion on December 13th as to how the Roudebushes should proceed, both in this Court and in state court, in their effort to clarify the Sale Order so that it more clearly reflected that the Property had, in fact, been sold free and clear of Citi’s mortgage. The remaining issue related to the funds then on deposit with the state court and the Trustee’s desire to secure them for her administration as an asset of the Knigh-tons’ Chapter 7 estate.9
It is not unusual for the Court to engage in such discussions with counsel in the context of estate administration. It is important to keep in mind that the bankruptcy process is dissimilar in many regards from regular adversarial litigation. There is often a mutuality of interests and equitable considerations that make the process of discovering, marshaling and distributing estate assets a far less adversarial process than a two-party dispute. Bankruptcy also often poses far more logistical and procedural issues than regular litigation. For these reasons, the Court is much more apt to discuss procedural issues with counsel and with litigants and to provide a certain amount of guidance than it would in a two-party dispute. Such guidance is often a matter of sheer practicality.
Here, the Court merely indicated that it believed the Knighton Chapter 11 was the more appropriate case to address the issues raised by the Clarification Motion and that in order to address those issues in the context of the Knighton Chapter 11, the case would need to be reopened. It otherwise offered no substantive ruling on the relief requested in the Clarification Motion. Similarly, in its dialogue with the parties regarding the Trustee’s desire to obtain control over the funds on deposit with the state court, it offered no substantive opinion as to how those funds should be distributed or who, if anyone, had a superior claim to them. It merely discussed the various in ways the Trustee could go about securing the funds.
Debtors take issue with the fact that the Court accepted counsels’ “unsworn,” statements as fact. This Court frequently hears argument from counsel in the place of live testimony or evidence. Certainly, it is not uncommon for attorneys to explain the factual background of an issue or matter before the Court. It is also not uncommon for the Court to base a ruling on such explanations or to enter into a dialogue with counsel as to how the matter should proceed. While the Court did not dismiss what was discussed at the December 13th hearing or take counsels’ allegations and *903representations lightly, it again must be emphasized that it issued no substantive ruling, let alone an adverse one to Debtors, on December 13th. Rather, it directed the parties to cue up the matters at issue in the Knighton Chapter 11, the case in which the Firm was counsel of record such that it would receive formal notice of any further activity and would be given an opportunity to be heard as to matters concerning the Sale Order and the Sale Proceeds.
Ideally, a representative from the Firm or its counsel would have been present at the December 13th hearing, and the Court as much as acknowledged that by inviting their attendance. However, the primary thrust of the Clarification Motion and the Chapter 7 Stay Motions concerned Citi’s actions in pursuing its foreclosure action against the Knightons, and not the Firm’s or Debtors’ handling of the Sale Proceeds. Thus, the Court was not under the impression that formal notice of the hearing to the Firm or its attendance at the hearing was critical. That said, the Court rejects Debtors’ contention in the Recusal Motion that neither they nor their Firm lacked standing to seek a continuance of the December 13th hearing.10 Presumptively, any party can appear and be heard in a bankruptcy case unless and until someone challenges their standing to do so. There is no reason to believe that the Court would have summarily denied a motion to continue based on a lack of standing had the Firm or Debtors filed one. Beyond that, the mere fact that the Firm and Debtors were discussed at the hearing does not necessitate disqualification. Yet again, it must be emphasized that the Court took no substantive action against either the Firm or Debtors at the hearing, and there is nothing to suggest that its impression of them was prejudiced by what was said at the December 13th hearing.
Finally, the Court addresses Debtors’ argument that the Court improperly directed the parties to seek transfer of Debtors’ case from the Honorable Robyn L. Moberly. As discussed at the December 13th hearing, the Court believed that there might be some intersection of issues between the Knighton cases and Debtors’ Chapter 7. The Court also believed that there could be some administrative benefit to having the same judge handle all of the cases. While Ms. Hinshaw indicated that she had never moved for an intradistrict transfer, it is not unprecedented for the judges in this district to transfer, sua sponte, related or connected cases to one another. There was nothing said at the December 13th hearing to suggest that the Court had an improper motive for wanting the case transferred. The Court does not believe that a “thoughtful observer” would read any risk of bias into the transfer of Debtors’ case to this Court. As explained below, this is especially true since there is nothing in the Court’s handling of the Debtors’ case after the transfer that has unfairly prejudiced Debtors or otherwise suggests a risk of bias.
Based on the foregoing, the Court denies Debtors’ request that it disqualify itself pursuant to 28 U.S.C. § 455(a).
28 U.S.C. § 455(b)(1)
Under 28 U.S.C. § 455(b)(1), a judge must recuse himself when he “has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding.” “In determining whether a judge must disqualify himself under 28 U.S'.C. § 455(b)(1), the question is whether a reasonable person would be convinced the judge was biased.” Hook, 89 F.3d at 355 *904(internal quotation omitted). Recusal under § 455(b)(1) “is required only if actual bias or prejudice is proved by compelling evidence.” Id.
The Supreme Court has explained that neither judicial rulings nor opinions formed by the judge as a result of current or prior proceedings constitute a basis for recusal “unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible.” Liteky v. United States, 510 U.S. 540, 555, 114 S.Ct. 1147, 127 L.Ed.2d 474 (1994); see also Hook, 89 F.3d at 355 (“[JJudicial rulings are grounds for appeal, not disqualification”). Furthermore, “expressions of impatience, dissatisfaction, annoyance, and even anger” do not justify requiring recu-sal. Liteky at 555-56, 114 S.Ct. 1147. In claims arising under § 455(b)(1), the mere fact that a judge forms a negative opinion of a litigant during the course of a proceeding does not, by itself, constitute bias. In re Huntington Commons Assocs., 21 F.3d 157, 158 (7th Cir.1994) (quoting Liteky v. United States, 510 U.S. 540, 555-56, 114 S.Ct. 1147, 127 L.Ed.2d 474 (1994)).
In reviewing Debtors’ Recusal Motion, it is not clear what evidence they rely upon, compelling or otherwise, of actual bias. As already set forth above, their basis for claiming that the Court, through staff counsel, engaged in ex parte conversations is not supported by the only evidence they point to for such claim. They point to no personal knowledge of a disputed material fact or to any antagonistic, malicious or hostile comment from the bench or within a ruling. True, they point to two allegedly prejudicial comments made to the Court by Ms. Caruso and Ms. Hinshaw, but there is nothing in the Court’s response to those comments or its subsequent actions that suggest that they served to color the Court’s opinion or actions. The balance of their allegations relate to judicial rulings that, as the standard above indicates, generally cannot provide a basis for recusal under 28 U.S.C. § 455(b)(1).
Even assuming that the Court’s rulings could form a legitimate basis for disqualification, Debtors point to no adverse ruling within their own case that supports the conclusion that the Court is biased. Again, the Court disagrees that the mere transfer of their case from Judge Moberly suggests a risk of, or actual, bias, and the activity in the case since it was transferred provides no support for Debtors’ Recusal Motion either. To date, the Court has issued only one ruling adverse to Debtors in their case. Specifically, the Court overruled Debtors’ objection to a motion filed by the National Bank of Indianapolis on January 4, 2013, to extend the time to file a complaint under 11 U.S.C. § 523 and § 727. Such motion was filed prior to Debtors’ scheduled § 341 meeting of creditors and prior to the filing of Debtors’ schedules. In the Court’s view, Debtor’s objection to it — that the bank had already had more than adequate time to file a complaint — was simply without merit.11 Nearly everything else that has transpired in their case — including repeated requests by any number of parties to extend the deadline to file an action under 11 U.S.C. §§ 523 and/or 727 — have been granted in favor of those parties, not because of any bias but because they were unopposed.
At the close of the hearing on the Recu-sal Motion, there was a comment made that but for this Court’s handling of their case, Debtors would have already received *905a discharge by now. There is no evidence in the record to suggest that is true. The Court has held nothing up that the Debtors are otherwise entitled to. The discharge has been delayed because, as indicated above, multiple parties — including some that are otherwise not involved in the Knighton cases — have sought multiple extensions under Federal Rule of Bankruptcy Procedure 4004 and 4007. Contrary to what Debtors may think, the Court did not instigate or escalate the dispute between Citi, the Roudebushes, the Rnightons, Ms. Caruso and the Firm; that dispute arose well before the December 13th hearing. And even if the Court were otherwise uninvolved in adjudicating that dispute, it presumes that the parties would have taken the very same steps to preserve their claims against Debtors were this case still in front of Judge Moberly.
The rulings the Court has issued in the Knighton Chapter 11 and its comments from the bench, while occasionally critical of the Firm, are insufficient to require disqualification. The statements made by the Court regarding the Firm’s actions in this case and their failure, to date, to provide a full and accurate accounting are not disproportionate to what the Court has learned in the course of this proceeding and do not reveal a “deep-seated antagonism.” The Court notes that, to date, it has done little more than clarify its own Sale Order — something well within its purview — and to instruct the Firm and Debtors, as principals of the Firm, to account for and turnover the Sale Proceeds. The Court has specifically reserved other substantive decisions pending further fact-finding regarding the parties’ respective rights to the Sale Proceeds. The Court has issued no ruling as to whether the Firm and/or Debtors misappropriated any of the Sale Proceeds or otherwise engaged in improper conduct. It has simply taken steps to secure the Sale Proceeds and to understand what happened to them after dismissal of the Knighton Chapter 11. The Court has made it clear that while it is “appalled” with how the Firm or Citi proceeded following dismissal of the Knighton Chapter 11, it “fully intends to provide the parties with a full and fair opportunity to address those issues.” Order Clarifying Court’s Order of December 3, 2008 at *6-7. There is nothing in the record to suggest that the Court has limited the parties’ ability to be heard on these issues or has otherwise failed to honor its promise for a full and fair adjudication. Rather, the record reflects that resolution of these matters has stalled for reasons out of the Court’s control.
Certainly, Debtors and/or the Firm have been free to challenge any of the decisions rendered by this Court that they consider substantively or procedurally incorrect or premature. To date, no appeal has been filed and, save for the Motion to Reconsider, neither Debtors nor the Firm have sought relief from any ruling in either this case or the Knighton Chapter 11 under Federal Rule of Bankruptcy Procedure 59 or 60. While Mr. McClure, on behalf of either the Firm or Debtors, has made various comments that the Court has wrongly pursued its inquiry in light of the automatic stay in this case and within the context of the Knighton Chapter 11, to date, no formal motion has been filed to extend the automatic stay to the Firm or to determine whether the stay protects Debtors in their representative capacity as shareholders, officers and/or directors of the Firm.
28 U.S.C. § 455(b)(5)(iv)
Debtors do not specifically cite to or quote § 455(b)(5)(iv) in their Recusal Motion. However, they do argue that the Court must recuse because “Judge Coach-ys participated in the ex parte conversations that occurred” at the December 13, *9062012 hearing and, therefore, “will be a witness” in the Stay Violation Adversary.
Recusal under § 455(b)(5)(iv) is mandatory. See United States v. Tucker, 78 F.3d 1313, 1326 (8th Cir.1996). The purpose of this mandatory disqualification provision is “to prevent a judge from having to pass on the competence and veracity of his own testimony given with respect to a matter presently [sic] in controversy before him.” In re A.H. Robins Co., Inc., 602 F.Supp. 243, 250 (D.Kan.1985) (quoting In re Continental Vending Mach. Corp., 543 F.2d 986, 995 (2d Cir.1976)). Nevertheless, an assertion that a judge will be a material witness does not lead automatically to disqualification. See U.S. v. Rivera, 802 F.2d 593, 601 (2d Cir.1986). Neither is a judge “compelled automatically to accept as true the allegations made by the party seeking recusal.” In re Martinez—Catala, 129 F.3d 213, 220 (1st Cir.1997). In fact, a judge is presumed impartial unless the movant can demonstrate through the facts of the case that the criteria for an automatic recusal are met. See Matter of Horton, 621 F.2d 968, 970 (9th Cir.1980). “To the extent that facts are in dispute, factual determinations are made by the judge whose recusal is in question, and the same judge also decides whether the facts trigger disqualification, subject always to review on appeal, normally for abuse of discretion.” In re Martinez — Catala, 129 F.3d at 220 (citing Town of Norfolk v. United States Army Corps of Engineers, 968 F.2d 1438, 1460 (1st Cir.1992)). Therefore, the Court shall examine the factual basis for Debtors’ assertion that Judge Coachys and/or his staff counsel are likely to be called as material witnesses.
The Court questions Debtors claim that it will be called to testify as to the December 13th hearing. The transcript of that hearing speaks for itself; there is nothing more the Court can add to it. There were also several others present at the hearing, all of whom can presumably testify as to what occurred at the hearing. Debtors have otherwise stated no compelling reason to believe that the Court will be a material witness in the Adversary Proceeding and, for that reason, it rejects their argument that recusal is required pursuant to § 455(b)(5)(iv). See Adrian v. Mesirow Financial Structured Settlements, LLC, 588 F.Supp.2d 216, 222 (D.Puerto Rico 2008) (court rejects argument that disqualification was required under § 455(b)(5)(iv) where settlement meetings at issue had been duly recorded and attended by numerous other individuals; any testimony that could be given by judge “would not be crucial or non-cumulative.”).
Debtors’ argument that the staff counsel must have had ex parte conversations with other parties prior to the December 13th hearing is also without merit. As the only proof of that allegation, they point to the email sent to Mr. O’Farrell in advance of that hearing, arguing that there was information contained in the email that must have come from sources other than the pleadings and documents already on file with the Court. Contrary to Debtors’ argument, every bit of information contained in staff counsel’s email to Mr. O’Farrell was easily gathered from the schedules and pleadings already on file in the Knigh-ton Chapter 11 and/or Knighton Chapter 7.12 The public record in these cases was the only source of staff counsel’s email to Mr. O’Farrell. And the statement that the *907Court “may have to reopen the 2007 case.... ” was merely a reflection of the Court’s initial impression that the issues raised by the Clarification Motion were likely better addressed within the Knigh-ton Chapter 11, i.e., the case in which the Sale Order was issued and the Sale Proceeds obtained. Beyond that, the Court categorically denies the suggestion that staff counsel, or the Court, discussed the matters set for December 13th with anyone other than the Firm.
Even assuming that the Court or staff counsel are eventually and legitimately13 called as witnesses, the Court would be inclined to recuse only with respect to the Stay Violation Adversary, and not the underlying case, absent some other compelling reason to do so. Based on the foregoing, the Court denies Debtors’ request that it disqualify itself pursuant to 28 U.S.C. § 455(b)(5)(iv).
Conclusion
In conclusion, the Court holds recusal is not warranted or required under 28 U.S.C. § 455(a), (b)(1) or (b)(5)(iv). Accordingly, the Court denies the Recusal Motion.
SO ORDERED.
. In an Order dated January 28, the Court mistakenly indicated that the Amended Sale Motion was filed on September 9, 2008. That was the date that the Knightons filed their original sale motion (although it, too, is titled "Amended Application” for some reason).
. The Sale Order was an order proposed by the Firm.
.There was no discussion at the November 20th hearing as to what form "further order of the Court” would take, but given that the Knightons had already stated an intention to file a Chapter 11 plan, the Court presumed that the sale proceeds would be distributed according to the terms of a confirmed plan.
. Prior to the filing of the Clarification Motion, Citi filed a Motion for Relief from Stay and Abandonment in the Knighton Chapter 7 on September 12, 2012. The Chapter 7 Trustee objected to the stay motion and alleged many of the same things that the Clarification Motion later did. On September 26, 2012, the Roudebushes also moved for stay relief, to which the Chapter 7 Trustee also objected (together, Citi’s and the Roudebushes’ stay motions in the Knighton Chapter 7 shall be referred to as the "Chapter 7 Stay Motions”). The Court set the Chapter 7 Stay Motions and the objections thereto for a hearing on November 5, 2012. Such hearing was then continued to December 13, 2012, at the Trustee's request.
While the Court scheduled a hearing on the Chapter 7 Stay Motions, as it routinely does when an objection to such relief is posed, because the matters were continued in advance of the hearing, it did not formally review them until it prepared for the December 13, 2012 hearing. By that time, the Clarification Motion was on also file, and it was that motion that first alerted the Court to the controversy over the Sale Proceeds and Sale Order.
. The Court notes that the Firm was listed as a creditor in the Knighton Chapter 7 and, as such, received notice of some of the activity within the case, e.g., the 341 meeting notice and Citi's request for relief from the stay and for abandonment. Consistent with standard procedure, the Firm did not get notice of the hearings on the Stay Motion or Clarification Motion, nor were they served with a copy of the Trustee's objections or the Roudebushes’ request for stay relief (because it did not also seek abandonment).
. The only part of the transcript from the December 13th hearing deleted, above, pertains to counsels’ appearances at the commencement of the hearing and to the Court's attempt near the conclusion of the hearing to *879find a viable dale to reschedule the Clarification Motion. The full transcript of the hearing is available on the docket for the case.
. The Clarification Order also stated the following:
The Court wants to make clear that certain of the “facts” set forth in this order, especially those concerning the state court foreclosure action, have not yet been determined by way of an evidentiary hearing. Rather, they are based on representations made either in pleadings or in open court by the various parties’ counsel. By this Order, the Court is not formally making "findings of fact.” The Court reserves adjudication of the facts essential to this case for a later date. Many of the details provided herein for what transpired after dismissal of the Chapter 11 case are given simply to provide some background as to the current posture of this case. That said, none of the parties have yet disputed any of the factual representations made concerning what happened since dismissal of the Chapter 11 case.
Order Clarifying Court’s Order of December 3, 2008 at *4, n.8.
. At the March 14, 2013 hearing, the Court heard testimony from Mr. McClure that the Firm was no longer operating and that he and Debtors were now operating as McClure & O'Farrell, LP.
. It should be noted that the Firm has consistently supported the Roudebushes’ insistence that they purchased the Property free and clear of Citi’s mortgage. The Firm has also seemingly agreed that the balance of the Sale Proceeds that were on deposit with the state court as of December 13th are property of the Knighton Chapter 7. Thus, it is difficult to understand what objection Debtors or the Firm has to the procedural matters discussed on December 13th as to those issues.
. The Court notes that the Firm is scheduled as a creditor in the Knighton Chapter 7.
. The Court, following a hearing on March 6, 2013, overruled Debtors’ objection to a stay motion filed by the Roudebushes. As is reflected by the record of that hearing, Debtors and the Roudebushes ultimately agreed to such relief per the terms of the order that was jointly reviewed by them before being submitted to, and approved by, the Court.
. Specifically, the information was gathered from Schedule D, Citi's Response to the original Motion to Sell, the Amended Motion to Sell, and Sale Order in the Knighton Chapter 11, and from the Stay Motions, the Objections thereto, and the Clarification Motion in the Knighton Chapter 7.
. If a party needed to merely threaten naming the Court or its personnel as a witness, it would be all too easy for a party to manufacture grounds for recusal under 28 U.S.C. § 455(b)(5)(iv). The Seventh Circuit has rejected similar efforts. See In re Specht, 622 F.3d 697, 700 (7th Cir.2010) (the mere filing of a motion to add a party that could create grounds for disqualifying was insufficient; motion would have to be granted for disqualification to be required). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496353/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the Motion for Relief from Automatic Stay (the “Motion”) filed by U.S. Bank National Association as Indenture Trustee of Castle Peak 2011-Loan Trust Mortgage Backed Note, Series 2011-1 (“US Bank”), seeking relief from the automatic stay to proceed to exercise its rights pursuant to applicable federal and state law, including a summary process proceeding, as to real property located at 3 Whiting Lane, Unit 3, Building F, Hingham, Massachusetts (the “Property”). In its Motion, U.S. Bank avers that it is the owner of the Property by virtue of a foreclosure deed dated March 27, 2013 and recorded on April 2, *102013 and seeks relief from stay “for cause” pursuant to 11 U.S.C. § 362(d)(1).
The Debtor filed an Objection to the Motion in which she states, inter alia, that the foreclosure sale conducted by U.S. Bank was wrongful within the meaning of US Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 650-51, 941 N.E.2d 40 (2011), because the foreclosing entity was not the actual mortgagee or the holder of the promissory note at the time of the sale, adding that the decision in Bank of New York v. Bailey, 460 Mass. 327, 951 N.E.2d 331 (2011),1 “makes it clear that under Massachusetts law, merely presenting a foreclosure deed is insufficient when, as here, the moving party’s title (i.e., it’s ‘colorable’ right to possession, within the meaning of Grella v. Salem Five Cent Savings, 42 F.3d 26 (1st Cir.1994)), is challenged.”
On August 7, 2013, the Debtor filed an Emergency Motion for Leave to Supplement Objection to Motion for Relief from Stay together with exhibits. The Debtor in her Emergency Motion stated:
[Djebtor’s counsel realized that the moving party had failed to provide the court with evidence that it was either the original mortgagee or its assignee (or the lawful agent of either). Since that relates to the primary issue presented, the documents provided herewith will tend to show that the moving party was not the original mortgage [sic], its assignee, or the lawful agent of either. With regard to ownership of the Promissory Note, see Eaton v. FNMA, 462 Mass. 569 [969 N.E.2d 1118] (2012), the debtor has no information, but notes that the purported foreclosure took place after the Eaton decision, and thus Eaton controls.
The Court conducted a hearing on U.S. Bank’s Motion on August 8, 2013 and took the Motion under advisement. On August 12, 2013, the Court entered the following order, observing:
... At the August 8th hearing, a threshold issue arose regarding U.S. Bank’s standing to seek relief from the stay to evict the Debtor from the Property due to the provisions of the Mortgage in which the Lender thereunder, WMC Mortgage Corp., is referred to in Section D thereof as the “mortgagee under this Security Instrument” and MERS is referred to in Section C as the nominee for the Lender and “the beneficiary under this Security Instrument” but the Debtor mortgaged, granted and conveyed the Property, with the power of sale, to MERS pursuant to the Section of the Mortgage entitled “Transfer of Rights in the Property.” The Debtor alleges that MERS was not the Mortgagee under the Mortgage and therefore it did not have the capacity to assign the Mortgage and that, as a result, U.S. Bank conducted a wrongful foreclosure on the Property.
The Court ordered the parties to file briefs in support of their respective positions “[i]n light of the threshold legal issue of standing raised by the Debtor,” adding that it would determine the Motion or schedule an evidentiary hearing, if necessary.
*11The parties complied with the Court’s order and filed briefs. US Bank attached to its Memorandum numerous exhibits, including the Condominium Unit Deed pursuant to which the Debtor acquired the Property; the mortgage; four assignments; a Certificate of Authorization, dated March 27, 2013, pursuant to which U.S. Bank ratified that Orlans Moran PLLC was authorized to make entry on the Property, bid on its behalf at the foreclosure auction, and execute necessary affidavits in conjunction with the foreclosure; a Certificate of Appointment, dated March 14, 2013, pursuant to which Orlans Moran, PLLC ratified and confirmed the appointment of Andrew Kadlick as its agent for purpose of foreclosing the mortgage; a Certificate of Entry, dated September 13, 2012; a Foreclosure Deed dated March 27, 2013; an Affidavit of Sale executed by James Southard, Esq. of Orlans Moran, referencing and attaching the mortgagee’s notice of sale published on August 23, 2012, August 30, 2012 and September 6, 2012; and a “Post-Foreclosure Affidavit Regarding Note[,] ‘Eaton’ Affidavit[,]” pursuant to which Gina Gray, Vice President of Selene Finance, LP, as servicer for U.S. Bank, certified that as of the dates when the notice of sale relating to the mortgage at issue were mailed and published pursuant to M.G.L. Chapter 244, Section 14 up to and including the Foreclosure Sale Date, the Foreclosing Mortgagee was: ... [t]he holder of the promissory note secured by the above mortgage.”2
The material facts necessary to determine the Motion are not in dispute. Neither party specifically requested an evidentiary hearing, although the Debtor requested that the Motion be consolidated with her pending adversary proceeding against U.S. Bank.3 The Court now makes the following findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
II. FACTS
On or about December 3, 2002, Debtor became acquired the Property pursuant to a Condominium Unit Deed. On or about July 18, 2005, in connection with refinancing the Property, WMC Mortgage Corp. (“WMC”), identified as the Lender on the mortgage, extended a loan to the Debtor in the original principal amount of $476,250. The loan was evidenced by a promissory note executed by Debtor, but a copy of the note was not submitted as an exhibit to any documents filed with the Court in connection with the Motion. The note was secured by a mortgage on the Property executed by Debtor. In the mortgage, Mortgage Electronic Registration Systems, Inc. (“MERS”) was identified as the “beneficiary under this Security Instrument” and described as “acting solely as a nominee for Lender and Lender’s successors and assigns,”, i.e., WMC. In addition to being identified as the Lender, WMC also was identified as the “the mortgagee under this Security Instrument.” The mortgage was duly recorded in the Plym*12outh County Registry of Deeds on July 25, 2005.
The mortgage provides in pertinent part the following
This Security Instrument secures to Lender (i) the repayment of the Loan ...; and (ii) the performance of Borrower’s covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS with power of sale, the following described property.... which currently has the address of 3 Whiting Lane, Hingham, Massachusetts 02043 ... TOGETHER WITH all the improvements now or hereafter erected on the property.... All of the foregoing is referred to in this Security Instrument as the “Property.” Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right to exercise any or all of those interests, including but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling the Security Instrument.
(emphasis supplied).
On or about August 3, 2009, MERS assigned the “mortgage and the note and claim” to Residential Funding Real Estate Holdings, LLC (“Residential”) by assignment recorded on September 16, 2009 in the Plymouth County Registry of Deeds in Book 37720 at Page 341. On or about August 23, 2010, Residential assigned the mortgage to Residential Funding Company LLC fka Residential Funding Corporation (“Residential 2”) by assignment recorded on December 14, 2010 in the Plymouth County Registry of Deeds in Book 39398 at Page 160. On or about May 4, 2011, Residential 2 assigned the mortgage to CPCA Trust 1 by assignment recorded on May 26, 2011 in the Plymouth County Registry of Deeds in Book 39968 at Page 229. On or about April 4, 2012, CPCA Trust 1 assigned the mortgage to U.S. Bank by assignment recorded on July 12, 2012 in the Plymouth County Registry of Deeds in Book 41637 at Page 11. As a result of Debtor’s default under the terms of the note and mortgage for nonpayment, and following statutory notice, U.S. Bank through the firm of Orlans Moran PLLC conducted a foreclosure sale of the Property on September 13, 2012 pursuant to the statutory power of sale in the mortgage. US Bank was the successful bidder at the sale. It recorded a Foreclosure Deed, dated March 14, 2013, on April 2, 2013 in the Plymouth County Registry of Deeds in Book 42884 at Page 158. According to U.S. Bank, on or about April 30, 2013, it mailed the Debtor a Notice to Vacate, requiring her to vacate the Property.
Approximately eight months after the foreclosure sale, on May 20, 2013, and approximately one month after the issuance of the Notice to Vacate, the Debtor filed a petition under Chapter 13. On June 17, 2013, the Debtor filed her Schedules of Assets and Liabilities. She listed the Property on Schedule A-Real Property with a value of $587,000, subject to secured claims in the sum of $582,250. The Debtor proposed a “cure and maintain plan” pursuant to 11 U.S.C. § 1322(b)(5) to which U.S. Bank has objected.
III. POSITIONS OF THE PARTIES
A. US Bank
US Bank identifies the issue as whether MERS was the mortgagee of the mortgage *13thereby enabling it to effectively assign legal title. According to U.S. Bank, the provisions of the mortgage reproduced above, while not specifically labeling MERS as the mortgagee, contain a grant to MERS of all rights typically associated with that of a mortgagee, such as the power to assign and the power to foreclose. Citing, inter alia, Starr v. Fordham, 420 Mass. 178, 190, 648 N.E.2d 1261, 1269 (1995) (“ ‘[cjontract interpretation is largely an individualized process, with the conclusion in a particular case turning on the particular language used against the background of other indicia of the parties’ intention.’ ”),4 it maintains that the intent of the parties must be gathered from a fair construction of the contract as a whole. It adds that interpreting the mortgage to mean that WMC is the only party with the power to assign legal title would ignore plain language to the contrary and would render MERS’s role as superfluous, producing an irrational result. US Bank cites Eaton v. Fed. Nat’l Mortg. Assoc., 462 Mass. 569, 586, 969 N.E.2d 1118, 1131 (2012), for the proposition that the Supreme Judicial Court defined the term mortgagee as not only the note holder, but one who acts as the authorized agent of the note holder, to stand “in the shoes” of the mortgagee.5 US Bank also cites Cul-*14hane v. Aurora Loan Servs. of Nebraska, 708 F.3d 282, 293 (1st Cir.2013), for the proposition that the MERS framework is faithful to the tenants of Massachusetts mortgage law, giving it the ability to assign mortgage.6
B. The Debtor
The Debtor argues that MERS was never the mortgagee under the mortgage. She asserts that the mortgage document plainly and unambiguously defined WMC as the “mortgagee” and MERS as the “beneficiary.” In her view, because WMC explicitly retained “mortgagee” status, MERS, as “beneficiary,” had no authority to assign the mortgage, and, as a result, its assignment to Residential was void, and all subsequent assignments were ineffective. Thus, she posits the foreclosure sale was void as well.
The Debtor also urges this court to adopt the reasoning of the court in Farmer v. Fed. Nat’l Mortg. Ass’n, No. 2012-3736B, 31 Mass.L.Rptr. 204, 2013 WL 1976240 (Mass.Super.Ct. May 9, 2013). In that case, the mortgage identified MERS as the mortgagee but otherwise contained language identical to the language utilized in the mortgage executed by the Debtor in favor of WMC Corp. The court in Farmer stated;
The question ... becomes: what does it mean that MERS’ capacity as mortgagee is “solely as nominee for Lender (Omega) and (its) successors and assigns?”
*15Black’s Law Dictionary (9th ed. 2009) defines “nominee” as “2. A person designated to act in place of another, usu. in a very limited way. 3. A party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.” Furthermore, as developed in the limited case law on this issue:
“[T]he word ‘nominee’ ordinarily indicates one designated to act for another as his/her representative in a rather limited sense [Schuh Trading Co. v. Commissioner of Internal Revenue, 95 F.2d 404, 411 (7th Cir.1938) ]. In its commonly accepted meaning, the word ‘nominee’ connotes the delegation of authority to the nominee in a representative capacity only, and does not connote the transfer or assignment to the nominee of any property in or ownership of the rights of the person nominating him/her [Cisco v. Van Lew, 60 Cal.App.2d 575, 583-584, 141 P.2d 433 (1943); Middle East Trading & Marine Service, Inc. v. Mercantile Financial Corp., 49 Ill.App.3d 222, 7 Ill.Dec. 595, 364 N.E.2d 886 (1977); see Lee v. Ravanis, 349 Mass. 742, 745, 212 N.E.2d 480 (1965) ].” Kolakowski v. Finney, 1983 Mass.App.Div. 360, 363-364 (1983).
This question, what does it mean to be “mortgagee solely as nominee of lender,” was specifically reserved in Eaton v. Federal National Mortgage Association, 462 Mass. 569, 590 fn. 29 [969 N.E.2d 1118] (2012). Specifically, in fn [sic] 29 the SJC stated:
“As noted at the outset of this opinion, the mortgage identifies MERS as mortgagee, but one that acts as the ‘nominee’ of the lender. It is not clear what ‘nominee’ means in this context, but the use of the word may have some bearing on the agency question. We express no opinion whether MERS or Green Tree was acting as agent of the note holder or with the note holder’s authority at the time of the foreclosure sale. Eaton is entitled to pursue discovery on this issue in connection with her Superior Court action.”
Given the limited appellate case law in Massachusetts, this court reasonably infers that “nominee” in this context means that MERS can only act in its nominee capacity when it acts as the agent of Omega.
Farmer, 2013 WL 1976240, at *8-9 (footnotes omitted). The court in Farmer concluded “it is incumbent on the defendants asserting the validity of MERS’ ... assignment of its interest in the mortgage to show [the lender’s] direction to MERS.” Id. at *9 (footnote omitted). The Debtor points to the absence of evidence as to the extent of MERS’s agency authority and the absence of evidence as to WMC’s directions, if any, to MERS to assign the mortgage, adding that MERS did not have the power to assign the mortgage in any event. In other words, the Debtor argues that because MERS was not named as “mortgagee” it could not assign the authority to carry out the foreclosure sale, and, even if it were designated mortgagee, there is no evidence as to how and/or when WMC directed its actions.
Dismissing the language in the mortgage, i.e., “Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS with power of sale ...,” and U.S. Bank’s reliance on that language, the Debtor states that it is not the mortgage that grants rights to MERS, but the agency agreement between WMC and MERS, adding that the Debtor had no contractual relationship with MERS and emphasizing that “[i]t is whatever agency *16agreement WMC and MERS had that defines what powers MERS had, and that agreement is not in the present record.” The Debtor also states that “there is no evidence of what the rights granted by WMC to MERS are but “the foregoing case law [Farmer v. Fed. Nat’l Morg. Ass’n, 2013 WL 1976240, at *9] makes is [sic] clear that an exercise of those rights is permissible only when the lender, as principal in the agency relationship, authorizes such exercise.”
The Debtor focuses on the identification of MERS as “beneficiary,” stating:
MERS and WMC chose to make a distinction between “mortgagee” and “beneficiary” and it is not appropriate for the court to disregard, at the request of a third party (i.e., U.S. Bank), the distinction that the parties to the agency relationship chose to use to define that relationship. In the present case, it is perfectly rational (in the absence of contrary evidence) to construe the mortgage to mean, for example, that WMC retained the rights of a mortgagee (including assigning or foreclosing it), while MERS, as beneficiary, was merely the “record keeping” entity that kept track of assignments if and when WMC chose to assign the mortgage, which it never did.
The Debtor cites US Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011), for the proposition that absent a valid assignment WMC remained the mortgagee. She relies upon the following language in the decision:
In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. Barnes v. Boardman, 149 Mass. 106, 114, 21 N.E. 308 (1889). Rather, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. Id. (“In some jurisdictions it is held that the mere transfer of the debt, without any assignment or even mention of the mortgage, carries the mortgage with it, so as to enable the assignee to assert his title in an action at law.... This doctrine has not prevailed in Massachusetts, and the tendency of the decisions here has been, that in such cases the mortgagee would hold the legal title in trust for the purchaser of the debt, and that the latter might obtain a conveyance by a bill in equity”). See Young v. Miller, 72 Mass. 152, 6 Gray 152, 154 (1856). In the absence of a valid written assignment of a mortgage or a court order of assignment, the mortgage holder remains unchanged. This common-law principle was later incorporated in the statute enacted in 1912 establishing the statutory power of sale, which grants such a power to “the mortgagee or his executors, administrators, successors or assigns,” but not to a party that is the equitable beneficiary of a mortgage held by another. G.L. c. 183, § 21, inserted by St. 1912, c. 502, § 6.
Ibanez, 458 Mass. at 652-53, 941 N.E.2d 40.
The Debtor asserts that “absent some evidence to the contrary, MERS took title as a representative of WMC, and there [was] no ‘transfer or assignment to [MERS] of any property in or ownership of the rights of [WMC],’” including the right to assign or foreclose the mortgage. In her view, U.S. Bank completely ignored the holding in Eaton v. Fed. Nat’l Mortg. Ass’n, 462 Mass. 569, 969 N.E.2d 1118 (2012), that the foreclosing entity must be *17the holder the promissory note as well as the mortgage, or the lawful agent of that single entity. She adds that U.S. Bank proffered no evidence that the promissory note was ever negotiated in accordance with the Uniform Commercial Code. The Debtor concludes:
U.S. Bank has failed to make such a demonstration since it has failed to trace its chain of title to the mortgage or demonstrate that it was the lawful holder of the promissory note. Given that a motion for relief from stay is a “summary proceeding” in which the court does not necessarily finally determine the issues presented, Id., the motion should be denied without prejudice to determination in adversary proceeding number 13-01324, in which U.S. Bank and certain other parties has filed [sic] an answer, or the motion should be consolidated with the adversary proceeding.
IV. DISCUSSION
A. Standard Applicable to Lift Stay Motions
According to the United States Court of Appeals for the First Circuit Grella v. Salem Five Cent Savs. Bank, 42 F.3d 26 (1st Cir.1994),
The limited grounds set forth in the statutory language, read in the context of the overall scheme of § 362, and combined with the preliminary, summary nature of the relief from stay proceedings, have led most courts to find that 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. The Grella court further observed:
The statutory and procedural schemes, the legislative history, and the case law all direct that the hearing on a motion to lift the stay is not a proceeding for determining the merits of the underlying substantive claims, defenses, or counterclaims. Rather, it is analogous to a preliminary injunction hearing, requiring a speedy and necessarily cursory determination of the reasonable likelihood that a creditor has a legitimate claim or lien as to a debtor’s property. If a court finds that likelihood to exist, this is not a determination of the validity of those claims, but merely a grant of permission from the court allowing that creditor to litigate its substantive claims elsewhere without violating the automatic stay.
Id. at 33 (footnote omitted).
B. Analysis
The United States Court of Appeals for the First Circuit in Culhane v. Aurora Loan Sews, of Nebraska, 708 F.3d 282 (1st Cir.2013), held that a mortgagor has standing to challenge a mortgage assignment as invalid, ineffective, or void “if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee.” Id. at 291. See also Ross v. Deutsche Bank Nat'l Trust Co., 933 F.Supp.2d 225, 230 (D.Mass.2013) (citing Culhane, 708 F.3d at 290-91).
The Court, in the context of U.S. Bank’s Motion, rejects the Debtor’s argument that the assignment from MERS to Residential is void. The Court finds that U.S. Bank established a colorable claim for relief from the automatic stay based upon the provisions of the mortgage. The mortgage contains an express grant of the mortgage to MERS, i.e. “Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS with power of sale, the following described property....”). Additionally, the mort*18gage provides: “Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including but not limited to, the right to foreclose and sell the Property ... ”). The Court concludes that this unambiguous grant of a mortgage provided MERS with the authority to execute the assignment to Residential dated August 3, 2009. The identification of WMC as “mortgagee” does not change that result; nor does the identification of MERS as the beneficiary of the Security Instrument. The Court construes the mortgage as whole and rejects the notion that the language used to identify the lender and MERS requires the Court to ignore the granting clause in the mortgage. As the court in Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034 (9th Cir.2011), explained:
At the origination of the loan, MERS is designated in the deed of trust as a nominee for the lender and the lender’s “successors and assigns,” and as the deed’s “beneficiary” which holds legal title to the security interest conveyed. If the lender sells or assigns the beneficial interest in the loan to another MERS member, the change is recorded only in the MERS database, not in county records, because MERS continues to hold the deed on the new lender’s behalf. If the beneficial interest in the loan is sold to a non-MERS member, the transfer of the deed from MERS to the new lender is recorded in county records and the loan is no longer tracked in the MERS system.
Id. at 1039. Cf. Edelstein v. Bank of New York Mellon, - Nev. -, 286 P.3d 249 (2012).7
*19In addition, the court in Eaton recognized the ambiguity in the term “mortgagee.” In construing the mortgage for purposes of the Motion, the Court, to reit*20erate, rejects the Debtor’s emphasis of single words rather than the intent evidence by the mortgage read as a whole, although as the court in Edelstein determined the status of MERS as beneficiary and as nominee are reconcilable. MERS was granted authority to act for WMC solely as its nominee or for its successors and assigns. The Debtor’s suggestions that U.S. Bank did not hold either the mortgage or the note at the time of the foreclosure sale are without evidentiary support of any sort. More importantly, they are belied by the exhibits attached to U.S. Bank’s Memorandum. The Debtor seeks to thwart her eviction by challenging the assignment, relief which is in the nature of an injunction. See Grella, 42 F.3d at 33. As the court noted in Eaton, “an allegation that is supported on ‘information and belief does not supply an adequate factual basis for the granting of a preliminary injunction.” 462 Mass, at 590, 969 N.E.2d at 1134.
In this regard, the Court also is not persuaded by the decision in Farmer. In the context of a motion for relief from stay, the requirement that foreclosing mortgagees establish the validity of assignments by showing the lender’s direction to MERS would undermine the summary nature of lift stay proceedings. Moreover, the court in Farmer recognized that other courts, including the First Circuit in Cul-hane, and other Superior Court justices disagreed with its determination. Farmer, 2013 WL 1976240, at *9 n. 18.
Y. CONCLUSION
In view of the foregoing, the Court shall enter an order granting the Motion of U.S. Bank for Relief from the Automatic Stay.
. In Bailey, the court stated:
In a summary process action for possession after foreclosure by sale, the plaintiff is required to make a prima facie showing that it obtained a deed to the property at issue and that the deed and affidavit of sale, showing compliance with statutory foreclosure requirements, were recorded. See Lewis v. Jackson, 165 Mass. 481, 486-487, 43 N.E. 206 (1896); G.L. c. 244, § 15. BNY failed to submit an affidavit of sale "showfing] that the requirements of the power of sale and of the statute have in all respects been complied with.” Id.
460 Mass, at 334-35, 951 N.E.2d 331 (footnotes omitted).
. Although the foreclosure sale took place on September 13, 2012, the Affidavit Regarding the Note was recorded on April 2, 2013.
. The Debtor filed a Complaint against U.S. Bank, Orlans Moran PLLC, Wells Fargo Bank Minnesota, NA; Homecomings Financial, Ac-qura Loan Services and Selene Finance, LP on August 6, 2013. The Verified Complaint contains the following counts: Count I — Declaration that the Foreclosure is Void; Count II — Violation of Federal and State Fair Debt Collection Practices Act; Count III — Chapter 93A Counterclaim to Motion for Relief from Stay; and Count IV — RESPA. As of the date of this Memorandum, U.S. Bank, Selene Finance, LP and Acqura Loan Services have filed a joint answer to the Complaint. The remaining defendants have not filed answers or other responsive pleadings, although the time within which to do so has expired.
. The court also stated that contracts must be construed "with reference to the situation of the parties when they made it and to the objects sought to be accomplished.” Id. It added:
As a result, the scope of a party’s obligations cannot "be delineated by isolating words and interpreting them as though they stood alone. Commissioner of Corporations & Taxation v. Chilton Club, 318 Mass. 285, 288, 61 N.E.2d 335 (1945). Not only must due weight be accorded to the immediate context, but no part of the contract is to be disregarded.” Boston Elevated Ry. v. Metropolitan Transit Auth., 323 Mass. 562, 569, 83 N.E.2d 445 (1949).
Starr v. Fordham, 420 Mass. at 190, 648 N.E.2d at 1269.
. The court in Eaton stated:
[W]e construe the term "mortgagee” in G.L. c. 244, § 14, to mean a mortgagee who also holds the underlying mortgage note. The use of the word "mortgagee” in § 14 has some ambiguity, but the interpretation we adopt is the one most consistent with the way the term has been used in related statutory provisions and decisional law, and, more fundamentally, the one that best reflects the essential nature and purpose of a mortgage as security for a debt. See Negron v. Gordon, 373 Mass. 199, 204, 366 N.E.2d 241 (1977), and cases cited; Maglione v. BancBoston Mtge. Corp., 29 Mass. App.Ct. 88, 90, 557 N.E.2d 756 (1990), and cases cited. See generally Restatement (Third) of Property (Mortgages) §1.1 comment. (1997) (“The function of a mortgage is to employ an interest in real estate as security for the performance of some obligation. ... Unless it secures an obligation, a mortgage is a nullity”).
Eaton, 462 Mass, at 584-85, 969 N.E.2d at 1129-30. The court added that principles of agency apply and a mortgagee may act as agent of the note holder. It also observed:
The dictionary definition of “mortgagee” is consistent with the construction we give to the term. "[Mjortgagee” is defined as "[o]ne to whom property is mortgaged; the mortgage creditor, or lender.” Black's Law Dictionary 1104 (9th ed. 2009). This definition does not draw a clear distinction between a mortgagee and a note holder; in fact, it points the other way, suggesting that the mortgagee is the note holder (i.e., lender). As noted by the Supreme Court of Kansas, the legal dictionary definition reflects the fact that the law "generally understands that a mortgagee is not distinct from a lender.” Landmark Nat’l Bank v. Kesler, 289 Kan. 528, 539, 216 P.3d 158 (2009). Accord Mortgage Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 295 (Me.2010), quoting Black's Law Dictionary, supra ("The plain meaning and common understanding of mortgagee is '[o]ne to whom property is mortgaged,’ " meaning mortgage creditor or lender).
462 Mass, at 584 n. 22, 969 N.E.2d at 1130 n. 22. The Supreme Judicial Court concluded by stating:
[W]e do not conclude that a foreclosing mortgagee must have physical possession of the mortgage note in order to effect a valid fore*14closure. There is no applicable statutory language suggesting that the Legislature intended to proscribe application of general agency principles in the context of mortgage foreclosure sales. Accordingly, we interpret G.L. c. 244, §§ 11-17C (and particularly § 14), and G.L. c. 183, § 21, to permit one who, although not the note holder himself, acts as the authorized agent of the note holder, to stand "in the shoes" of the "mortgagee" as the term is used in these provisions.
462 Mass, at 586, 969 N.E.2d at 1131 (footnotes omitted).
. The First Circuit stated:
Massachusetts law makes pellucid that the mortgage and the note are separate instruments; when held by separate parties, the mortgagee holds a bare legal interest and the noteholder enjoys the beneficial interest. See Eaton, 969 N.E.2d at 1124. The mortgagee need not possess any scintilla of a beneficial interest in order to hold the mortgage. Thus, MERS’s role as mortgagee of record and custodian of the bare legal interest as nominee for the member-note-holder, and the member-noteholder's role as owner of the beneficial interest in the loan, fit comfortably with each other and fit comfortably within the structure of Massachusetts mortgage law.
Here, moreover, MERS had the authority twice over to assign the mortgage to Aurora. This authority derived both from MERS's status as equitable trustee and from the terms of the mortgage contract. We already have explained the question of the resulting trust that arises in this context. ...
The terms of the mortgage contract, to which the plaintiff expressly agreed, authorize the transfer to Aurora. The mortgage papers denominated MERS as mortgagee "solely as nominee for [Preferred] and [Preferred]^ successors and assigns.” Under Massachusetts law, a nominee in such a situation holds title for the owner of the beneficial interest. See Morrison v. Lennett, 415 Mass. 857, 616 N.E.2d 92, 94-95 (1993); Black’s Law Dictionary 1149. MERS originally held title as nominee for Preferred; Preferred assigned its beneficial interest in the loan to Deutsche; and Deutsche designated Aurora as its loan ser-vicer. MERS was, therefore, authorized by the terms of the contract to transfer the mortgage at the direction of Aurora.
In the assignment, MERS transferred to Aurora what it held: bare legal title to the mortgaged property. That transfer was valid. See Eaton, 969 N.E.2d at 1124. It follows that Aurora properly held the mortgage and thus possessed the authority to foreclose. Mass. Gen. Laws ch. 183, § 21; id. ch. 244, § 14; see Eaton, 969 N.E.2d at 1124, 1129; Ibanez, 941 N.E.2dat53.
Culhane, 708 F.3d at 293 (footnote omitted).
. In a case in which the mortgage identified MERS as both a beneficiary and the nominee of the Lender using language substantially similar to that employed in the WMC mortgage, the Supreme Court of Nevada stated:
In this case, New American Funding was the initial holder of the note, whereas MERS was characterized in the deed of trust as “a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns.” (Emphasis added.) The deed of trust also stated that "MERS is the beneficiary under this Security Instrument.” (Emphasis added.) When interpreting a written agreement between parties, this court "is not at liberty, either to disregard words used by the parties ... or to insert words which the parties have not made use of. It cannot reject what the parties inserted, unless it is repugnant to some other part of the instrument.” Royal Indem. Co. v. Special Serv., 82 Nev. 148, 150, 413 P.2d 500, 502 (1966) (internal quotations omitted). Thus, we examine the effect of designating MERS both as a nominee for New American Funding and its successors and assigns, and as a beneficiary of the deed of trust. Other courts have held that MERS' designation as nominee "is more than sufficient to create an agency relationship between MERS and the Lender and its successors.” In re Tucker, 441 B.R. at 645; In re Martinez, 444 B.R. 192, 205-06 (Bankr.D.Kan.2011) (concluding that based on the language in the relevant documents giving MERS a role as "nominee” for "[the lender] and its successors and assigns, ... sufficient undisputed evidence [was presented] to establish that MERS was acting as an agent,” and that the choice of the word " 'nominee,' rather than 'agent,' does not alter the relationship between the [ ] ... parties, especially given the fact that the two terms have nearly identical legal definitions”); Cervantes, 656 F.3d at 1044 (explaining MERS’ role as an agent).
We agree with the reasoning of these jurisdictions and conclude that, in this case, MERS holds an agency relationship with New American Funding and its successors and assigns with regard to the note. Pursuant to the express language of the deed of trust, "MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right *19to foreclose and sell the Property,' and to take any action required of Lender...." Accordingly, MERS, as an agent for New American Funding and its successors and assigns, had authority to transfer the note on behalf of New American Funding and its successors and assigns
The deed of trust also expressly designated MERS as the beneficiary; a designation we must recognize for two reasons. First, it is an express part of the contract that we are not at liberty to disregard, and it is not repugnant to the remainder of the contract. See Royal Indent. Co., 82 Nev. at 150, 413 P.2d at 502. In Beyer v. Bank of America, the United States District Court for the District of Oregon examined a deed of trust which, like the one at issue here, stated that “MERS is the beneficiary under this Security Instrument.” 800 F.Supp.2d 1157, 1160-62 (D.Or.2011). After examining the language of the trust deed and determining that the deed granted "MERS the right to exercise all rights and interests of the lender,” the court held that "MERS [is] a proper beneficiary under the trust deed.” Id. at 1161-62. Further, to the extent the homeowners argued that the lenders were the true beneficiaries, "the text of the trust deed contradicts [their] position.” Id. at 1161; accord Reeves v. ReconTrust Co., N.A., 846 F.Supp.2d 1149 (D.Or.2012). Similarly here, the deed of trust's text, as plainly written, repeatedly designated MERS as the beneficiary, and we thus conclude that MERS is the proper beneficiary. Second, it is prudent to have the recorded beneficiary be the actual beneficiary and not just a shell for the "true” beneficiary. In Nevada, the purpose of recording a beneficial interest under a deed of trust is to provide "constructive notice ... to all persons.” NRS 106.210. To permit an entity that is not really the beneficiary to record itself as the beneficiary would defeat the purpose of the recording statute and encourage a lack of transparency. However, whether designating MERS as the beneficiary on the deed of trust demonstrates an agreement to separate the promissory note from the deed of trust is an issue of first impression for this court.
Although we conclude that MERS is the proper beneficiary pursuant to the deed of trust, that designation does not make MERS the holder of the note. Designating MERS as the beneficiary does, as Edelstein suggests, effectively "split” the note and the deed of trust at inception because, as the parties agreed, an entity separate from the original note holder (New American Funding) is listed as the beneficiary (MERS). See generally In re Agard, 444 B.R. 231, 247 (Bankr.E.D.N.Y.2011). And a beneficiary is entitled to a distinctly different set of rights than that of a note holder. See Cervantes, 656 F.3d at 1039 (explaining that a “holder of [a] note is only entitled to repayment,” whereas a "holder of [a] deed alone does not have a right to repayment,” but rather, . has the right "to use the property as a means of satisfying repayment” (emphasis added))....
However, this split at the inception of the loan is not irreparable or fatal. “Separation of the note and security deed creates a question of what entity would have authority to foreclose, but does not render either instrument void.” Morgan v. Ocwen Loan Servicing, LLC, 795 F.Supp.2d 1370, 1375 (N.D.Ga.2011). Rather, "[a]ssumming ar-guendo, that there was a problem created by the physical separation of the Security Deed from the Note, that problem vanished]” when the same entity acquires both the security deed and the note. In re Corley, 447 B.R. 375, 384-85 (Bankr.S.D.Ga. 2011). Indeed, while entitlement to enforce both the deed of trust and the promissory note is required to foreclose, nothing requires those documents to be unified from the point of inception of the loan. In re Tucker, 441 B.R. 638, 644 (Bankr. W.D.Mo.2010). Instead, "[a] promissory note and a security deed are two separate, but interrelated, instruments,” Morgan, 795 F.Supp.2d at 1374, and their transfers are also “distinctly separate,” Leyva [v. National Default Servicing Corp., 127 Nev. at -, 255 P.3d [1275] at 1279 [(2011)].
286 P.3d at 258-60 (footnotes omitted). The court thus held that MERS is capable of being a valid beneficiary of a deed of trust, separate from its role as an agent (nominee) for the lender and that such separation is not irreparable or fatal to either the promissory note or the deed of trust, although it does prevent enforcement of the deed of trust through foreclosure unless the two documents are ultimately held by the same party. Id. at 260. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496355/ | MEMORANDUM OF DECISION ON CHAPTER 13 TRUSTEE’S MOTION FOR ORDER DISMISSING CASE
FRANK J. BAILEY, Bankruptcy Judge.
The matter before the court is the motion of the chapter 13 trustee, Carolyn Bankowski (the “Trustee”), for an order dismissing the bankruptcy case of debtor Priscyla Garajau (the “Debtor”). The Trustee alleges that where certain real property of the Debtor has appreciated in value as a result of a post-confirmation settlement of a lawsuit involving a right of way that serviced the property, the new equity must effectively be devoted to the general unsecured creditors, and that the Debtor’s failure to amend her confirmed plan to do so constitutes bad faith that is cause for dismissal pursuant to 11 U.S.C. § 1307(c). The Debtor argues that the value of the Property is determined as of the petition date or no later than upon confirmation of a Chapter 13 plan; but the settlement was entered into after confirmation of her chapter 13 plan, and therefore the new equity need not be devoted to general unsecured creditors.
Procedural History and Facts
This case was filed on August 4, 2010. Since before that date, the Debtor has owned the real property at 125 Heath Street, Somerville, Massachusetts (the “Property”). As of the date of her bankruptcy filing, the Debtor valued the Property at $275,913, and the Property was subject to a mortgage securing debt of $281,362.
Before her bankruptcy filing, the Debtor had commenced an action in Middlesex Superior Court regarding a right of way that serviced the Property. After the Debtor had purchased the Property, the state-court defendants had constructed a fence that blocked the Debtor’s use of the right of way and prevented the Debtor from using her rear lots for parking spaces. The defendants had also signed and recorded a document with the Registry of Deeds that purported to remove a parking easement from the Property. Through the litigation, the Debtor sought to regain the use of the right of way and to have the inappropriate document removed from the Registry of Deeds. Though the Debtor did not initially disclose the lawsuit in her bankruptcy schedules, on March 9, 2011, she amended the relevant schedule by listing the then pending lawsuit and valuing it at $8,000.00; and she also amended her schedule of property claimed *45as exempt by claiming the lawsuit as exempt under 11 U.S.C. § 522(d)(5) to the extent of $8,000. The Debtor’s Chapter 13 plan was confirmed on December 20, 2011; under it, she is obligated to make payments of $268 per month for 36 months, which will fund a one percent (1%) distribution to general unsecured creditors. The plan was confirmed on the basis of a liquidation analysis, set forth by the Debt- or in the plan itself for purposes of § 1325(a)(4), showing no value for unsecured creditors in the Property or in the lawsuit, and no value in any asset that would be available for distribution to creditors were this a case under chapter 7.
After confirmation of the plan, the Debt- or entered into a settlement agreement as to the state court action (the “Settlement”) and, on September 11, 2012, moved in the bankruptcy court for approval of the Settlement. By order of September 20, 2012, the Court approved the Settlement. The Settlement resulted in (i) removal of the fence at no expense to the Debtor, (ii) the execution of an appurtenant covenant regarding the passageway at issue running with the land forever, which ensured keeping the passageway passable, unobstructed, and clear forever to allow ingress, egress, and parking of vehicles, and (iii) mutual releases. On February 5, 2013, at the Trustee’s request, the Debtor adduced a new, post-Settlement appraisal for the Property that showed a value of $359,000. The Debtor has not moved to modify her plan to increase the dividend to unsecured creditors.
On account of her failure to move to modify the plan to increase the dividend by an amount corresponding to the amount of her post-Settlement equity in the Property, less exempt portions thereof and costs of liquidation, the Trustee filed the present motion to dismiss. The Court held a preliminary hearing and ordered the Debtor to file a memorandum of law in support of her position as to when the Property should be valued and instructed the Trustee to file a subsequent reply to the Debtor’s memorandum of law. Neither party requested an evidentiary hearing.
The Trustee’s contention is that, in view of the new value of the Property, it is bad faith for the Debtor not to modify her plan to increase total payments under the plan by such an amount as would satisfy § 1325(a)(4), given the new valuation of the Property. This would result in a substantial increase in total plan payments; the precise amount is neither determined nor necessary. The Debtor states that she cannot afford to increase the amount of her monthly plan payment and therefore, if required to modify her plan, would be forced to sell the Property in order to fund the increased dividend, and this would itself defeat the purpose of the plan. As the Debtor made this statement in a brief to which no response was required, the Trustee’s position on it is unclear.
Jurisdiction
The matter before the Court is a motion for order dismissing ease. This matter arises under the Bankruptcy Code and in a bankruptcy case and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by standing order of reference,1 referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(1).2 Under *46these statutes, the bankruptcy court has authority to enter a final order on a motion to dismiss.
Discussion
The parties have briefed this motion as if it were one to modify the confirmed plan or perhaps to vacate the confirmation order. It is neither. The Trustee has not moved to modify the plan, does not seek to vacate or revoke the confirmation order, and does not contend that the confirmation order is in any respect infirm, subject to challenge, or the result of error or mischief. Rather, the only relief she seeks is dismissal of the case under 11 U.S.C. § 1307(c) (permitting the court to dismiss a case under chapter 13 “for cause”); the sole cause she advances for dismissal is bad faith; and the sole basis she advances for a finding of bad faith is that the Debtor has not moved to modify her confirmed plan.
Section 1307(c) of the Bankruptcy Code states in relevant part that “the court ... may dismiss a case under this chapter ... for cause[J” 11 U.S.C. § 1307(c). It goes on to enumerate eleven things that constitute “cause,” none of which are bad faith or lack of good faith, but the list, headed by the word “including,” is not exhaustive. Id.; 11 U.S.C. § 102(d) (“In this title, ‘includes’ and ‘including’ are not limiting.”). The Trustee has adduced no authority for the proposition that, in the circumstances of this case or any circumstances at all, failure of a debtor to modify a confirmed plan constitutes bad faith or other cause for dismissal; and I know of no such authority.
The Bankruptcy Code, which expressly addresses the “modification of a plan after confirmation” in § 1329, nowhere requires a chapter 13 debtor to modify a confirmed chapter 13 plan for any reason or in any circumstance. Rather, on that subject, § 1329 is entirely permissive: “At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified^]” 11 U.S.C. § 1329(a) (emphasis added). That same subsection goes on to specify who may request a modification: the plan may be modified “upon request of the debtor, the trustee, or the holder of an allowed unsecured claim[.]” Id. Accordingly, when a chapter 13 trustee believes a confirmed plan should be modified, she may herself move to modify the plan. In view of the expressly permissive and non-mandatory language of § 1329(a), and of the ability thereunder of a trustee or creditor to seek modification where a debtor does not, I conclude that the Bankruptcy Code has addressed the matter of modification and has deliberately stopped short of making it mandatory in any circumstance. As a matter of law, there is no bad faith in a debtor’s not doing what the Bankruptcy Code permits her not to do, especially where the trustee may herself do the deed if she (the debtor) does not.
I need not address the specific facts of this ease, which are in any event undeveloped, even as a matter of allegation. The Trustee has not even specified the details of the modifications she would fault the Debtor for not implementing. The Court therefore is in no position to evaluate the merits of any proposed modification. I do not purport by the order on the present motion to do so.
Conclusion
For the reasons set forth below, the Trustee’s motion for order dismissing the case will be denied.
. The order of reference is codified in the district court's local rules at L.R. 201, D. Mass.
. See 28 U.S.C. § 157(b)(2)(A), (L), and (O) (core proceedings include matters concerning the administration of the estate, confirmations *46of plans, and proceedings affecting the liquidation of the assets of the estate). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496358/ | MEMORANDUM OF DECISION ON (1) CONFIRMATION OF DEBTOR’S SEVENTH MODIFIED FIRST AMENDED PLAN OF REORGANIZATION AND ON (2) MOTION OF ONEUNITED BANK TO DISMISS CHAPTER 11 CASE FOR CAUSE
FRANK J. BAILEY, Bankruptcy Judge.
The matters before the court are the proposed confirmation of the Seventh Modified First Amended Plan of Reorganization of debtor Charles Street African Methodist Episcopal Church of Boston (“CSAME”) and the Motion of OneUnited Bank (“OneUnited”) to Dismiss Chapter 11 Case for Cause. OneUnited objects to confirmation and CSAME to dismissal. For the reasons set forth below, including principally that the Plan would release a third-party guaranty without justification, the Court will deny confirmation; the court will also deny dismissal but order the appointment of an examiner.
PROCEDURAL HISTORY
a. The Petition
CSAME is an incorporated congregation of the African Methodist Episcopal Church (the “AME Church”). OneUnited is CSAME’s largest creditor, having extended to it two loans that, as of January 2012, were in default. On March 20, 2012, facing foreclosure on its church building and two other properties, CSAME filed a petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). OneUnited moved to dismiss the case, arguing that CSAME was not eligible to be a debtor. By order of September 11, 2012, the court ruled that CSAME was eligible and denied dismissal. OneUnited appealed from that order; on September 30, 2013, the District Court affirmed, but that affirmance remains subject to possible further appeal.
b. Claims of OneUnited
OneUnited filed a proof of claim, asserting secured claims based on two loans made by OneUnited to CSAME on October 3, 2006: the “Church Loan,” through which CSAME refinanced an earlier mortgage, under which CSAME borrowed $1,115,000, with principal and unpaid inter*73est due in full on December 1, 2011; and the “Construction Loan” (together with the Church Loan, “the Loans”), an 18-month non-revolving line of credit of up to $3,652,000 for the purpose of constructing a community center, the Roxbury Renaissance Center (“RRC”). OneUnited claims that the balances on the petition date were $1,188,562.90 on the Church Loan and $3,815,795.70 on the Construction Loan, including “defauli/maturity interest” of $792,425.92 on the Construction Loan and $58,416 on the Church Loan. In addition to the prepetition balances, OneUnited also asserts entitlement to “post-petition interest, attorney’s fees and costs, pursuant to 11 U.S.C. § 506(b).” CSAME objected to the default/maturity interest component of OneUnited’s claim. After an evidentiary hearing, the Court sustained that objection; OneUnited appealed, and on September 30, 2013, the District Court affirmed, but that affirmance remains subject to possible further appeal. The OneUnited Claims are also subject to other challenges in state court litigation between CSAME and OneUnited, which litigation was automatically stayed upon CSAME’s bankruptcy filing.
The Loans are secured by CSAME’s real property. The Church Loan is secured by mortgages on 551 and 553-565 Warren Street, Roxbury, Massachusetts and on 70 Summer Street, Milton, Massachusetts (the “Milton Parsonage”). The property at 551 Warren Street is the church building itself. CSAME and OneUnited agree that the current value of the properties securing the Church Loan exceeds the amount of OneUnited’s claim on the Church Loan as of the date of the bankruptcy filing. The Construction Loan is secured by mortgages on 567-575 Warren Street, which is the site of the RRC, and on 5-15 Elm Hill Avenue, Roxbury, known as the Old Parsonage and an adjoining parking lot. CSAME and OneUn-ited agree that the current fair market value of the properties securing the Construction Loan is less than the amount of OneUnited’s Claim on the Construction Loan as of the date of the bankruptcy filing. The Construction Loan was also originally secured by an $850,000 cash deposit of CSAME at OneUnited, but no one contends that a cash deposit continues to secure the loan.
c. Claim of FEDAME
In order to help CSAME obtain the Construction Loan, the First Episcopal District of the African Methodist Episcopal Church (“FEDAME”), of which CSAME is a member church, guaranteed CSAME’s obligation to OneUnited on the Construction Loan (but not the Church Loan). Facing potential liability on the guaranty, FEDAME filed a proof of claim against CSAME in this case for rights of subrogation and contribution arising from the guaranty. OneUnited has objected to that proof of claim on two grounds: that FE-DAME has waived any right of recourse it may otherwise have had against CSAME for liability arising from the guaranty; and that FEDAME’s claim remains only a contingent claim — FEDAME disputes liability on the guaranty and to date has made no payment on it — which, for its contingency, must be denied. For the reasons set forth in a separate memorandum of decision issued today, the objection to claim has been overruled without prejudice as moot.
d. Motion Regarding Designation, Subordination, and Fees
Early in the case, OneUnited moved to prematurely terminate the period in which a debtor enjoys the exclusive right to file a plan (the “Exclusivity Motion”). More to the point, OneUnited described in that motion, and attached to the motion a copy of, a proposed plan (the “OneUnited Plan”) that it stood ready to file should its motion *74be granted. CSAME opposed the Exclusivity Motion, and the Court denied it. However, arguing that OneUnited had, through the filing of the Exclusivity Motion, violated CSAME’s rights of exclusivity by publishing a competing plan, CSAME further responded by filing a motion for (i) designation under § 1126(e) of the votes of OneUnited Bank and (ii) costs and attorney’s fees and, in the same document, a statement in support of the equitable subordination of the claims of OneUnit-ed Bank to those of unsecured creditors (the “Designation, Subordination, and Fee Motion”).1 By order of September 11, 2012, the Court denied so much of this motion as sought designation of the votes of OneUnited. In the memorandum of decision issued in support of that order, the Court indicated that it would address costs and attorney’s fees separately, “when it addresses the issue of subordination in conjunction with confirmation of the plan.” As set forth below, the plan presently under consideration would, if the Court agrees that the acts in question warrant equitable subordination, subordinate the claims of OneUnited to the claims in Classes 3 and 5. In a separate memorandum issued today on the Designation, Subordination, and Fee Motion, the Court concludes that, although OneUnited’s conduct warrants fee relief, that conduct is not cause for equitable subordination.
e. The Plan
With its bankruptcy petition, CSAME filed a plan of reorganization, then later an amended plan and a series of modified versions thereof. With respect to its Second Modified First Amended Plan, CSAME filed and, on June 11, 2012, the Court approved an Amended Disclosure Statement (the “Disclosure Statement”). Pursuant to approved solicitation procedures, CSAME solicited votes on the plan and obtained the acceptance of two of the plan’s four impaired classes; OneUnited, the holder of the sole claim in each other impaired class, voted to reject as to both and objected to the plan’s confirmation. No other creditor has opposed confirmation.
The court held an evidentiary hearing on confirmation of the Second Modified First Amended Plan, as further modified from time to time, on seven days over a period of ten months, commencing on August 15, 2012 and ending on June 28, 2013.2 The evidentiary hearing included a judicial site visit of CSAME’s properties. On September 28, 2012, which was to be the fifth day of the evidentiary hearing, CSAME’s counsel indicated that the Disclosure Statement contained inaccuracies in its presentation of certain historical financial information, inaccuracies that he had just discovered and that pertained to the ability of CSAME to make plan payments to OneUnited and Tremont Credit Union. This occasioned further discovery and eventually a motion by CSAME to approve a supplement to the Disclosure Statement (the “Supplemental Disclosure”) and cer*75tain resolicitation procedures that would afford OneUnited and Tremont Credit Union an opportunity to change their votes. Over the objection of OneUnited, the Court approved the Supplemental Disclosure and resolicitation procedures. The resolicitation resulted in no change of vote.
After approval of the Disclosure Statement as to the Second Modified First Amended Plan, CSAME moved repeatedly to make “nonmaterial” modifications to the plan, nonmaterial in the sense of requiring no resolicitation of votes or further disclosure. The Court granted these motions in part, resulting in the plan presently under consideration, CSAME’s Seventh Modified First Amended Plan of Reorganization (“the Plan”). Its features are as follows.
Class Name Description
Class 1 Other Priority Claims All priority claims (if any) that are not administrative claims or priority tax claims.
Class 2 OneUnited Church Secured Claim OneUnited’s secured claim on the Church Loan.
Class 3 Tremont Secured Claim Any secured claim on a promissory note in favor of Tremont Credit Union.
Class 4 OneUnited RRC Secured Claim OneUnited’s secured claim on the Construction Loan.
Class 5 General Unsecured Claims The claims of nonpriority unsecured creditors.
Class 6 Other Secured Claims All secured claims other than those in Classes 2, 3, and 4,
Classes 1 and 6 are unimpaired. Each holder of a Class 1 claim will receive cash equal to the unpaid amount of its claim (except to the extent that it agrees to less favorable treatment) on or as soon as practicable after the latest of (x) the Plan’s effective date, (y) the date on which the claim becomes allowed, and (z) such other date as the holder and CSAME may mutually agree. CSAME contends that there are no Class 1 claimants. Each holder of a Class 6 claim will have its agreement with CSAME reinstated. CSAME explains that the Class 6 claims total less than $18,000 and relate to payments CSAME makes in the ordinary course of business: ongoing utility and tax obligations, and purchase-money secured financing of CSAME’s audio system.
All other classes are impaired. In addition, as to all other classes, the Plan provides for two possible treatments: one that would apply in the event the Court determined that the claims of OneUnited should, as CSAME would effect through diverse provisions of the Plan, be equitably subordinated to the claims in Classes 3 and 5, and another that would apply if not. Having determined that equitable subordination is not justified, I will limit the description of the treatment of Classes 2 through 5 to their non-subordination alternatives. Although the Plan requests equitable subordination, CSAME does not regard equitable subordination as necessary to the Plan, and CSAME asks that the Plan be confirmed even if equitable subordination is denied.
On its Class 2 claim, the secured claim on the Church Loan, OneUnited would receive in full satisfaction and discharge of such claim (i) the Milton Parsonage and (ii) a new promissory note from CSAME (the “New OneUnited Church Note”), secured by a new mortgage on the remaining properties that secure the Church Note. The *76New OneUnited Church Note would have the following terms: equal quarterly payments, a 20-year term with 30-year amortization, an original principal amount equal to the difference of (x) $1,062,120.13 plus accrued interest at 7.875% from November 1, 2011 to the effective date minus (y) $380,000.00, and an interest rate equal to 5.75% per annum (noncompounding). The subtraction of $380,000.00 would effect a credit in that amount for turnover of the Milton Parsonage. The new promissory note and new mortgage would have fewer and different covenants from the note and mortgage that form the basis of the Church Claim. In addition, on the Effective Date, CSAME would dismiss with prejudice all counterclaims with respect to the Church Note and mortgage that are currently pending in state court litigation between CSAME and OneUnited. Section 7.6 of the Plan establishes a postconfirmation bar date for OneUnited’s assertion of any claim for postpetition interest, fees, and other charges under § 506(b) of the Bankruptcy Code with respect to the OneUnited Church Secured Claim. It therefore appears, and I conclude, that CSAME and the Plan contemplate some adjustment to the principal amount of the New OneUnited Church Note for items that may be allowed under § 506(b) but that are not otherwise accounted for in the Plan’s description of the original principal amount of the New OneUnited Church Note, up to (but not exceeding) the agreed value of the collateral securing the OneUn-ited Church Secured Claim.
On its Class 4 claim, the secured claim on the Construction Loan, OneUnited would receive, in full satisfaction and discharge of such claim, a new promissory note from CSAME (the “New OneUnited RRC Note”), secured by a new mortgage on the properties that secure the Construction Loan note. The New OneUnited RRC Note would have the following terms: equal quarterly payments (which shall be paid into escrow between the Effective Date and the entry of a Final Order resolving the pending state court litigation), a 20-year term with 30-year amortization, an original principal amount equal to the Litigated OneUnited RRC Note Amount, and an interest rate equal to 5.75% per annum (non-compounding). The new promissory note and new mortgage would have fewer and different covenants from the note and mortgage that form the basis of the Class 4 claim. In addition, the Plan would release and discharge the liability of FEDAME to OneUnited on its Guaranty of the Construction Loan. However, by ¶ 4.6 of the Plan, if the Court determines that the New OneUnited RRC Note and OneUnited RRC Loan Mortgage do not provide treatment sufficient to confirm the Plan, then OneUnited shall instead receive, on its Class 4 claim, a modified New OneUnited RRC Note with an interest rate of 5.25% per annum (all other terms remaining the same), secured by the OneUnited RRC Loan Mortgage, which note would be guaranteed by a new guaranty from FEDAME of certain of the Debtor’s obligations under the New OneUnited RRC Note (the “New Guaranty”). The proposed New Guaranty specifies (i) that it is a guaranty of CSAME’s performance under the New OneUnited RRC Note (“each and every debt, obligation, and liability arising under that certain promissory note given by the Borrower to Bank under the Plan ”) and (ii) that “any contrary provision hereof notwithstanding, the Obligation of the Guarantor hereunder at any time shall be limited to [INSERT RRC LOAN AMOUNT MINUS DISTRICT’S PLAN CONTRIBUTION] (sic).” The terms RRC Loan Amount and District’s Plan Contribution are not defined in the New Guaranty or the Plan.
*77With respect to Class 3, the Plan provides that the holder of the secured claim of Tremont Credit Union (“Tremont”) shall, if Tremont makes an election under § 1111(b) of the Bankruptcy Code, receive in full satisfaction and discharge of such claim the Restructured Tremont Payments and retain its lien under the Tremont Mortgage, a mortgage on the church building, in security thereof. Tremont has made an election under § 1111(b). “Restructured Tremont Payments” means equal monthly debt service payments to Tremont of principal and interest, with a 15-year maturity, an interest rate of 4.625% per annum, and an original principal amount equal to the amount of the Tremont Secured Claim set forth in the Schedules. In ¶ 7.5 of the Plan, CSAME expressly agrees that the Tremont Secured Claim is equal to the Scheduled amount of the Tremont Claim, and that therefore Tremont has no deficiency and Class 5 Claim.
With respect to Class 5, the class of general unsecured creditors, the Plan provides that if (as is the case) subordination is not approved, Class 5 claimants will receive no distribution.
In addition to the foregoing, the Plan includes four further provisions of note. First, it provides that on the effective date, FEDAME shall (i), as a condition of the Plan’s becoming effective, provide a donation of cash to CSAME of $1.5 million, which donation shall be used exclusively for the costs associated with completion of the RRC, including payments to cure the Thomas Construction Contract (as described below), and (ii) waive its claims against CSAME, including its claim for contribution in connection with its guaranty of the Construction Loan. Second, the Plan further provides that, also on the effective date, CSAME shall assume its prepetition contract with Thomas Construction Company, Inc. (“Thomas” and the “Thomas Contract”)— a 2006 agreement for construction and renovation of the RRC, for which CSAME ran out of funding before the project was completed — as amended by a negotiated amendment to the contract (the “Thomas Contract Amendment”), and shall cure all defaults thereunder by the payment on the Effective Date of $300,000 and allowing Thomas a general unsecured claim of $763,619.50.3 Third, at its § 8.7, the Plan further provides that “[sjubstantial consummation of the Plan under section 1101(2) of the Bankruptcy Code shall be deemed to occur on the Effective Date.” And fourth, in its § 9.2, the Plan would provide to CSAME a discharge: “Pursuant to section 1141(d) of the Bankruptcy Code, and except as otherwise specifically provided in the Plan, the distributions, rights, and treatment that are provided in the Plan shall be in complete satisfaction, discharge, and release, effective as of the Effective Date, of all Claims and causes of action of any nature whatsoever arising on or before the Effective Date.”
f. Objections to Confirmation
Only OneUnited has objected to confirmation of the Plan, but it has done so on (by rough count) some 19 distinct grounds. For immediate purposes, it suffices to hit only the high points. First, OneUnited objects to the Plan’s release of FE-DAME’s guaranty of the Construction Loan on jurisdictional, substantive, and equitable grounds. Second, it objects to the equitable subordination of its claims to those of Class 3 and 5 claimants. Third, it contends that the treatment of its claims is not fair and equitable under § 1129(b) be*78cause (i) the 20-year term of repayment is too long, (ii) the interest rates are too small, (iii) the covenants in the new promissory notes and mortgages are inadequate, and (iv) the credit for turnover of the Milton Parsonage is excessive. And fourth and fifth, OneUnited argues that the Plan is not feasible and that CSAME has not proposed it in good faith.
g. Second Motion to Dismiss
On March 13, 2013, OneUnited filed its second motion to dismiss this bankruptcy case. It seeks dismissal for cause under 11 U.S.C. § 1112(b)(1) and (4). CSAME and Tremont have objected to the motion. The last three days of the evidentiary hearing on confirmation — June 24, 25, and 28, 2013 — also served as the evidentiary hearing on this motion to dismiss.
At the commencement of the last day of the evidentiary hearing, OneUnited’s counsel brought to the Court’s attention a concern about whether CSAME’s properties continued to be insured. The Court inquired of CSAME’s counsel, who stated: “I am informed that the two properties that are occupied that are used are fully insured and that the other three do not have current insurance.... I know that my client is working strenuously to try to rectify that today. They were working on that yesterday.” This statement was not evidence; and no evidence was submitted regarding this apparent gap in coverage. OneUnited had not raised the insurance concern as “cause” under § 1112(b)(1) for dismissal of the case and did not then or at any time move to amend its motion or to reopen the evidence with respect to this issue.
FINDINGS OF FACT
As to both confirmation of the Plan and the Second Motion to Dismiss, the Court now makes the following findings of fact.
A. CSAME, FEDAME, and the Origination of the Loans
1. The AME Church was formed in Philadelphia, Pennsylvania in 1816.
2. Under the name “the First African Methodist Episcopal Society in the City of Boston,” CSAME was incorporated by act of the Massachusetts General Court on January 28, 1839. Chapter 4 of the Acts of 1839. In 1978, the “Society” amended its name to Charles Street African Methodist Episcopal Church of Boston. CSAME has remained continuously incorporated in the Commonwealth of Massachusetts since its incorporation.
3. At all times from its incorporation through the present, CSAME has been and remains a congregation, or local church, of the AME Church and in good standing as such. It has no plans to sever its affiliation with the AME Church.
4. At present, CSAME has approximately 1,400 members on its rolls, 1000 of them active. It employs a pastor and other religious and administrative employees and pays their salaries. It conducts regular worship services, provides pastoral care and counseling, provides religious education, and engages in charitable activities of various sorts, much of it in the nature of activities, education, and support for children. It raises money through congregational giving in remarkable sums to support its regular program and special projects and to support the larger AME Church. It has expenses that it must and, for the most part, has paid.
5. Since 1994, the pastor of CSAME has been Rev. Gregory Groover. In accordance with AMEC polity, Rev. Groover became pastor by virtue of appointment by the bishop of CSAME’s episcopal district, the appointments being always of a year’s duration, subject to renewal. Rev. Gro-over serves not only as pastor and preach*79er but also, in essence, as (in his own characterization) the CEO of the management and operations of CSAME; he is the chair of all the governing boards at the church. Since 1998, Rev. Opal Adams has been the associate pastor of CSAME. Her duties have included actual maintenance of the financial records of CSAME and payment of its debts from CSAME’s accounts.
6. CSAME owns six parcels of real estate:
a. The “Church Building,” located at 551 Warren Street, Roxbury, Massachusetts. For purposes of the Plan, CSAME and OneUnited agree that this property has a value of $1,300,000. CSAME makes heavy, regular, and continuous use of the Church Building as its place of worship and for its offices and meeting spaces. The Church Building is crucial to the mission and life of CSAME. CSAME has given a first position mortgage on the Church Building to OneUnited to secure the Church Loan and a junior mortgage to Tremont to secure its loan.
b. The “Storefronts,” located 553-565 Warren Street, Roxbury, adjacent to the Church Building. For purposes of the Plan, CSAME and OneUnited agree that this property has a value of $400,000; the property is encumbered by a 2006 mortgage to OneUnited to secure the Church Loan. As the name implies, this single-story building was designed as two retail storefronts. For some time, CSAME used it as office space for “pastoral residents” who have worked and studied with CSAME. In the spring of 2010, however, the building suffered catastrophic flooding in heavy rains, resulting in mold that has rendered the property unusable for any purpose. Remediation likely would require a teardown and complete rebuilding — or a renovation just as expensive. An appraisal in evidence notes that the building requires “fairly significant renovations, including a new roof (significant water damage and mold was noted), new flooring, new heating systems and a good overall cleanup and updating (significant deferred maintenance).” The appraisal estimated the cost of needed renovations at $103,551, but this sum, and the itemized measures it would fund, appear inadequate to fully address the mold. CSAME, which was already financially strapped by its obligations to OneUnited in conjunction with the RRC, has been unable to address this need. OneUnited would have the Court find the condition of this property “shameful,” but this is hyperbole, and there is no shame, negligence, or bad faith in CSAME’s failing to remediate what it had no means to remediate. CSAME still has no plan or means to renovate this property, and confirmation of the Plan would not change that fact. CSAME has indicated that, in conjunction with the Plan, it would retain and use this property to generate rental income, but this is plainly unrealistic: the property cannot serve that purpose without a substantial investment that CSAME concedes it has no means at present to make. CSAME has offered no justification for its decision to retain this property and not to sell it, or turn it over to OneUnited, in partial satisfaction of the debt to OneUnited that it secures.4 The Storefronts appear to be useless to CSAME and, insofar as they must be insured at least for liability,5 a net drain on CSAME’s resources.
*80c.The “Milton Parsonage,” located at 70 Summer Street, Milton, Massachusetts. This property is subject to a 2006 mortgage to OneUnited that secures the Church Loan. Acquired by CSAME in 1982, this property, a single-family home in a residential neighborhood, served for some time as the residence of CSAME’s pastor, but it has not been used for that purpose for years — how many is not clear — and today is unused, unusable, and in considerable disrepair. Here, too, OneUnited would have the Court find the condition of this property “shameful” and evidence of bad faith, but this too is unjustified: there is no evidence that the condition of this property deteriorated through the fault of CSAME, that the deterioration occurred after CSAME mortgaged it to OneUnit-ed or after the bankruptcy filing, that CSAME had the resources to renovate or rebuild the home, or that the commitment of resources for that purpose would have constituted a sound exercise of CSAME’s business judgment or been otherwise consistent with its purposes and mission. In the Plan, CSAME would turn this property over to OneUn-ited. Before CSAME modified its plan to provide for turnover of this property to OneUnited, at a time when the pending plan contemplated that CSAME would retain the Milton Parsonage, CSAME and OneUnited stipulated that “solely in connection with the confirmation proceedings of the First Amended Plan,” the value of the Milton Parsonage is $380,000. Neither party intended that the Stipulation would apply to the currently proposed treatment of this property. In view of the material difference in the treatment of this property between the plan then under consideration and the current Plan, the parties’ agreement as to the value of this property does not apply to the present Plan. The record also includes an “exterior only” appraisal of the property as of February 20, 2012; using the sales comparison approach and an assumption that the interior, not inspected, is in average condition, it fixes the fair market value at $380,000. On the strength of the appraisal and my own observation that interior is in worse than average condition, I find that the value is less than $380,000; how much less I cannot determine.
d. The “Old Parsonage,” located at 5-15 Elm Hill Avenue, Roxbury. This property, located across the street from the Church Building, is a house that serves not as a parsonage but as office and meeting space for some of CSAME’s various programs and ministries. For purposes of the Plan, CSAME and OneUnited agree that this property has a value of $240,000. It is encumbered by a 2006 mortgage to OneUnited that secures the Construction Loan.
e. The “Parking Lot,” a parking lot located at 5-15 Elm Hill Avenue, Rox-bury, adjacent to the Old Parsonage. For purposes of the Plan, CSAME and OneUnited agree that this property has a value of $50,000. It is encumbered by a 2006 mortgage to OneUnited that secures the Construction Loan.
f. The “RRC Property,” located at 567-575 Warren Street, Roxbury, adjacent to the Storefronts. This property is currently under construction; the construction has been stalled since 2009 and remains incomplete. For purposes of the Plan, CSAME and OneUnited agree that this property, “as complete,” would have a value of $2,600,000. The parties have not agreed on the current “as is” value. The evidence includes an appraisal that fixes the “as is” value at $2.3 million as of February 29, 2012. I find *81that the “as is” value is no more than this and, consistent with the appraisal, further find that this value is based on its use as “a function hall (community center) or a religious type facility,” which the appraiser opined was the property’s highest and best use. The appraiser opined that the property, as complete, would sell for no more than $2.4 million but arrived at a higher value on the basis of a combined sales and cost approach. Discounting for the cost of completion, which is at least $260,000 and likely more, and accounting for the unlikelihood that a buyer would want the property for its highest and best use, I find that a fair market sale of this property would yield no more than $2 million, quite possibly much less. I need not find a precise value.
7.Prior to 2006, CSAME conducted a number of community development activities and programs through a separately incorporated Massachusetts nonprofit corporation that it formed. The corporation has been known since August 2005 as the Charles Street A.M.E. Roxbury Renaissance Center, Inc. (“CSRRC, Inc.”), and for five years before that as the Charles Street A.M.E. Life Development Center, Inc., and before that as the Marcheta H. Taylor Life Enrichment Center, Inc. The by-laws of this corporation specify that the chairperson of its board of directors will always be the pastor of CSAME, and that at least 51 percent of the membership of the board will always be CSAME members. This corporation was dissolved on June 18, 2012 for failure to file seven annual reports but, upon application to revive it and cure of the deficiencies, revived on August 10, 2012. Also, its § 501(c)(3) status has lapsed and is in the process of being restored. Its executive director from 2005 through the bankruptcy filing in 2012 was Dennis Lloyd, who, during some of that period, was also the facilities manager for CSAME. The programs and activities of this entity have to date been conducted out of the Old Parsonage. They have included primarily an arts and music program for youths and an elder care program, both of which continue, and a now discontinued program for at-risk youths.
8. In 2006, following upon many years of planning, CSAME undertook to develop the RRC Property into a community center to be known as the Roxbury Renaissance Center (“RRC”). Though the RRC would be operated by CSRRC, Inc., its creation and the development of the building it will occupy are charitable initiatives of CSAME. CSAME anticipates that ownership of the RRC Property will remain in CSAME and that CSRRC, Inc. will occupy the RRC Property under a lease from CSAME. CSAME envisions the RRC as a mixed use facility. It would serve in part as space for charitable initiatives of CSAME, including as a community center for its neighborhood, the Grove Hall section of Boston. But CSAME also contemplates that the RRC would produce revenue through rental of its space — especially its ballroom for weddings and other functions, but also office space for nonprofit groups and perhaps for small for-profit start-ups — by which it would pay for its maintenance and staff and yield a surplus, payable to CSAME, as rent or some other contractual charge, to pay down the cost of its construction, especially the Construction Loan.
9. CSAME and CSRRC, Inc. have developed projections under which they anticipate that a portion of the debt service on the restructured Construction Loan obligation would be funded from RRC revenues. These projections, in more than one iteration, are useful but rough, incomplete (they include no line item for insurance), and necessarily somewhat speculative. *82They forecast that the RRC would have annual program expenses, excluding debt service, of $770,000 and revenues from office and event rentals of only $240,000.6 These projected revenues include approximately $40,000 from rental of space in the Storefronts, which revenues can’t possibly be achieved, so projected revenues are in fact only $200,000. The shortfall of $570,000, 74 percent of the amount needed to break even, would be covered by annual charitable giving to CSRRC, Inc. in the projected amount of $660,000, this sum being over and above CSAME’s own revenues from tithes and offerings. Given these projections, the RRC could at best yield $90,000 for payment of debt service. This would require revenue from donations at a level that CSRRC, Inc. might reach for a year or two but is unlikely to approach in most of the 20 years of the restructured obligation on the Construction Loan. CSAME makes the point that the expenses of CSRRC, Inc. can be reduced to adjust for lower-than-budgeted revenues. Even so, it is unrealistic to expect the RRC to support debt service at all. At best, it will help defray its own expenses. Debt service on the restructured loan would likely be borne entirely by CSAME, without help from the RRC or the Storefronts.
10. CSAME’s decision and initiative to enter into the Construction Loan and Church Loan with OneUnited and to grant mortgages as security were the decision and initiative of CSAME. The rules of the AME Church required that the granting of these mortgages be approved by two ecclesiastical authorities — the Quarterly Conference and the Annual Conference (about which more below) — and the necessary permissions were granted, but the higher authorities did not direct that mortgages be granted. Their role was limited to oversight and permission; the initiative resided in the local church, CSAME, not in any other authority of the AME Church at any level.
11. The AME Church is structured, in its own nomenclature, as “a connection” or “connectional church.” That is, although its “local churches,” such as CSAME, may be separately incorporated, they are connected through a multi-tiered network of “conferences” of various regional breadths and of “episcopal districts,” each having such authority as is specified in the AME Church’s Book of Discipline. Local churches meet on their own, in Local Church Conferences presided over by the local church’s minister in charge. For each local church, the pastor, ministers, and certain officers also meet in special quarter-annual meetings knows as Quarterly Conferences, presided over by a “presiding elder” for a given presiding-elder district (to be distinguished from an episcopal district). Each Quarterly Conference sends a representative to an annual District Conference for the presiding-elder district. Also annually, there is held a meeting of an Annual Conference, which is both an incorporated entity and a meeting, for the oversight of the local churches within the presiding-elder districts within the Annual Conference. The Annual Conferences are themselves organized into Episcopal Districts, of which (according to the 2008 Book of Discipline) there are twenty, each presided over by a bishop. Finally, the whole AME Church is overseen by a quadrennial General Conference, a legislative meeting of the bishops and an equal number of ministerial and lay delegates, which constitutes “the supreme body of the AME Church,” and, between General Conferences, by a Council of Bishops, which is “the executive branch of the *83eonneetional church.” CSAME belongs to the Boston-Hartford District of the New England Annual Conference of the First Episcopal District, the latter being the entity referred to herein as FEDAME.
12. The AME Church relies on the connections among its congregations to accomplish its mission and purpose and regards its various parts as interdependent. It defines “eonneetional” as “[a] structural organizational principle that all (national and international) AME church congregations are a connected network of unique, compatible, interdependent relationships to accomplish the mission and purpose of the church.” The term is more than neutrally descriptive and clearly has ecelesio-logical significance for the denomination.
13. The structure and regulations of the AME Church are set forth in The Book of Discipline of the African Methodist Episcopal Church, the most-recently published (at least when this evidence was presented) being that of 2008. Subject to certain exceptions, the General Conference may make and amend the rules and regulations of the AME Church that are set forth in the Book of Discipline.
14. As a condition of making the Construction Loan, OneUnited insisted on receiving a guaranty of the loan from FE-DAME, and FEDAME, at the request of CSAME, did give OneUnited a guaranty of the Construction Loan (the “Guaranty”). The Guaranty extends to all obligations of CSAME under the Construction Loan. It includes the following provisions:
a.FEDAME “hereby unconditionally guarantees to the Bank [OneUnited] that: (a) the Borrower [CSAME] will duly and punctually pay or perform ... all indebtedness, obligations and liabilities of the Borrower to the Bank now or hereafter owing or incurred (including without limitation costs and expenses incurred by the Bank in attempting to collect or enforce any of the foregoing) which are chargeable to the Borrower either by law or under the terms of the Bank’s arrangements with the Borrower accrued in each case to the date of payment hereunder arising under the [Construction Loan promissory note] (the ‘Obligation’) and (b) if there is a mortgage or other agreement or instrument evidencing or executed and delivered in connection with an Obligation, the Borrower will perform in all other respects strictly in accordance with the terms thereof.” Guaranty, p. 1.
b. “If for any reason the Borrower ... is under no legal obligation to discharge any of the Obligation undertaken or purported to be undertaken by it or on its behalf, or if any of the monies included in the Obligation have become unrecoverable from the Borrower by operation of law or a for any other reason, the Guaranty shall nevertheless be binding on the Guarantor [FEDAME] to the same extent as if the Guarantor at all times had been the principal debtors on all such Obligation.” Guaranty, p. 3.
c. “The obligations of the undersigned hereunder [FEDAME] shall not be affected ... by any release, discharge, or invalidation, by operation of law or otherwise, of the Liabilities[.] ... Interest and Costs of Collection shall continue to accrue and shall continue to be deemed Liabilities guaranteed hereby notwithstanding any stay to the enforcement thereof against the Borrower or disallowance of any claim therefor against the Borrower.” Guaranty, p. 3.
*84d. “The undersigned: shall not exercise any rights against the Borrower, by way of subrogation or otherwise shall not prove any claim in competition with the Bank in respect of any payment hereunder or bankruptcy or insolvency proceeding of any nature; shall not claim any set-off or counterclaim against the Borrower in respect of any liability of the undersigned to the Borrower; and waives any benefit of, and any right to participate in, any collateral which may secure the Liabilities. The payment of any amounts due with respect to any indebtedness of the Borrower now or hereafter held by the undersigned is hereby subordinated to the prior payment in full of the Liabilities. The undersigned will not demand, sue for, or otherwise attempt to collect any such indebtedness, and any amounts which are collected, enforced and received by the undersigned shall be held by the undersigned as trustee for the Bank, and shall be paid over the Bank in account of the Liabilities without affecting in any manner the liability of the undersigned under the other provisions of the Guaranty.” Guaranty, p. 4.
15. Before the Construction Loan closed, FEDAME supplied to OneUnited a financial statement for the fiscal year ended May 31, 2006. The statement, which was prepared by an independent accountant, included the following note, known as “Note 1”: “There are 330 associated churches in the First Episcopal District. The African Methodist Episcopal Church organization grants to the bishop of the First Episcopal District the authority to transfer funds at his discretion between organizations and member churches of the First Episcopal District and/or the district’s central office. This authority also extends to any organization created or controlled by the district.” This same statement, or a close variant thereof-modified only by substituting “direction” for “discretion” — appeared in several financial statements of FEDAME for succeeding years.
16. It is unclear whether, and to what extent, the bishop of FEDAME, or any bishop of the AME Church, has the authority represented in Note 1. One witness testified that the authority so described exists by tradition.7 None of the four who were asked about it,8 at least three of whom had considerable and long familiarity with the Book of Discipline, knew of authority for Note 1 in the Book of Discipline. Rev. Gregory Groover, the pastor of CSAME, who also served as first vice-chairperson on the revisions committee of the 2008 and 2012 General Conferences, for revisions to rules and regulations that appear in the Book of Discipline, testified that Note 1 was inconsistent with his understanding, and that a bishop who attempted to invade the accounts of a local church would meet resistance in doing so. Another witness also testified that it was his understanding that a bishop’s ability to *85transfer funds from a local church’s accounts would be contingent on the local church’s consent.
17. The FEDAME Financial Statement for fiscal year ended May 31, 2006, an unaudited, consolidated financial statement for the entire First Episcopal District, indicated that the entire District had cash of $23,588,192, of which $238,983 was in the District Office, $23,273,206 was in the Conference Churches, and another $76,003 was in certain District Activities. As is clear from its loan underwriting memo for the Construction Loan, OneUn-ited relied on these figures, and on the ability of the presiding Bishop to have recourse to the cash of the Conference Churches at his discretion, as represented in Note 1, in deciding to make the Construction Loan. There is no evidence that OneUnited, in relying on this critical, unusual, and intra-ecclesial language, ever inquired of FEDAME about the limits on and conditions under which the bishop would be exercising the discretion referred to in Note 1.
18. OneUnited maintains that Note 1 was a correct statement of the authority of a bishop. Nonetheless, OneUnited alleges that Note 1 and the financial documents containing it were produced, or at least given to OneUnited, with a belief that they were false and with intent to deceive. No evidence for this proposition was cited in OneUnited’s proposed findings of fact,9 and, notwithstanding OneUnited’s considerable discovery into the issue, the proposition has not been established.
19. OneUnited makes two related allegations [both in doc. # 552, at p. 2] to support an overall allegation of bad faith by CSAME and FEDAME. The first is that someone — this allegation is in the passive voice, so the subject is unclear — renounced financial statements of FEDAME on which OneUnited relied. This allegation does not specify the subject, the financial statements (much less the specific content at issue), or the content and manner of the repudiation. The second is that CSAME and FEDAME have represented that, notwithstanding the Guaranty, FE-DAME is in fact unable to satisfy the guaranteed obligations of CSAME. I am aware of no evidence as to either of these allegations, and OneUnited has proposed no findings as to either.
20. CSAME has since at least January of 2000 been conducting an internal capital campaign, known as Vision to Victory (“V2V”), to help fund the construction of the RRC. From January 2001 through April 2005, it raised $681,428. From May 2005 through November 2009, it raised a further $858,250.00. Thereafter, through December 2012, it raised at least another $308,000 and perhaps as much as $200,000 more (the overlapping of accounting periods makes a precise figure impossible). Virtually all of this money has now been expended on the RRC construction project.
21. The Church and Construction Loans closed in October 2006. (Their terms and collateralization are set forth in the Procedural History and need not be repeated here.) The RRC Loan, in the form of a construction line of credit, contemplated a term of 18 months, with a maximum of two 90-day maturity date ex*86tensions, to be exercised at the option of the Debtor.
B. Construction, Defaults, and Bankruptcy Filing
22. The construction work, for which CSAME had hired Thomas as general contractor, took longer and cost more than had been contemplated. CSAME had to and did fund, from its V2V fund, unanticipated costs of preparing the building before the loan-funded portion of the project could commence. This and the intervening winter delayed the project by many months. OneUnited granted two contractual 90-day extensions and three additional discretionary extensions of the maturity date, for a total of five such extensions. The last of these, dated September 1, 2009, was scheduled to expire on December 1, 2009.
23. On November 4, 2009, as the December 1, 2009 expiration of the fifth extension approached, RRC Executive Director Dennis Lloyd notified OneUnited that the construction work would not be completed until late April, 2010. OneUnit-ed disallowed any further drawdown on the Construction Loan; by this point OneUnited had advanced only $2.8 million of the $3,652 million available under that loan. The Construction Loan facility expired on December 1, 2009.
24. When OneUnited and CSAME entered into the Construction Loan, both contemplated that OneUnited would refinance the Loan with a new five-year loan at prime plus one percent and a 30-year amortization. By the fall of 2009, however, the credit crisis of 2008 had made it much more difficult for CSAME to refinance with OneUnited or any other lender. Also, the resulting downturn in the economy caused a slowing in the V2V capital campaign needed to complete construction and otherwise fund the project.
25. Negotiations continued. With no progress, OneUnited declared the Construction Loan in default on April 19, 2010 but did not immediately undertake to enforce its rights against the collateral or under the Guaranty. Instead, it continued to work with CSAME to find an exit solution. By letter dated June 11, 2010, CSAME thanked OneUnited “for [its] extraordinary support and assistance ... stepping up to the plate when other lenders wouldn’t even consider us.”
26. In the summer of 2010, the amicable relationship soured. CSAME obtained the assistance of third-party benefactors, whose buy-out offer to OneUnited on behalf of CSAME appears to have elicited only resentment. Negotiations devolved into threats to defame and ad hominem attacks in both directions, many public, and differences became personal among the principals. On September 2, 2010, OneUnited filed suit on the Construction Loan against CSAME, as borrower, and against the First District, as guarantor, in the Suffolk County (Massachusetts) Superior Court (the “State Court Action”). CSAME and FEDAME responded with counterclaims. The Superior Court dismissed the counterclaims, but upon interlocutory appeal, the Appeals Court reinstated them. The claims and counterclaims remained pending when CSAME filed its bankruptcy petition.
27. Over the life of the Church Loan, CSAME made all but two of the monthly payments of interest (and even at least one of these was made but returned by OneUnited when it opted to proceed with foreclosure), albeit in many instances late, and also paid 43 of 46 assessed late charges. The Church Loan matured on December 1, 2011, at which point the entire principal balance came due and went unpaid. On December 12, 2011, OneUnited issued a Notice of Default and Demand for *87Payment. Two months later, having received no payment, OneUnited scheduled a foreclosure sale on the Church Building and two other properties, which sale was stayed by CSAME’s bankruptcy filing on March 20, 2012.
C. The Plan
28. The details of the Plan are set forth in the Procedural History and incorporated here by reference.
29. The Plan provides that the completion of construction of the RRC Building will be funded by a $1.5 million donation to the Debtor by FEDAME. The funds for the donation will be raised from donors in the greater Boston area. The fundraising effort is being led by Stephen Pagliuca, a managing partner of Bain Capital. An organization called the Friends of the First Episcopal District, of which Mr. Pa-gliuca is an authorized agent, has committed to pledge $750,000 toward the $1.5 million donation. Mr. Pagliuca remains committed to the pledge and raising the money for the donation. OneUnited has not disputed that, if the Plan is confirmed, the promised donation will be made; in any event, the Plan, by its own terms, cannot become effective unless it is made.
30. OneUnited has argued that it is a fiction to describe the above donation as being made by FEDAME; in fact, OneUn-ited contends, it is coming from Boston-area donors, was not raised by FEDAME, and is merely a device to help justify the Plan’s release of the Guaranty. The Court disagrees. All of FEDAME’s monies and assets originate in donations, so the dona-tive nature of the fund is of no moment. Also, it is the joint intent of the originating donor and of FEDAME that the donation be FEDAME’s; the evidence shows that, but for this structuring of the donation, the donation would be made at all.10 The testimony of Ryan Cotton is clear, and I find, that Mr. Pagliuca’s intent in arranging the donation is to help not only CSAME but also FEDAME and, by the donation, to resolve FEDAME’s liability on the Guaranty, to obtain a comprehensive resolution of claims arising from the Construction Loan and Guaranty among CSAME, OneUnited, and FEDAME. The donation is in fact, in the first instance, a gift to FEDAME, and only then from FEDAME to CSAME. Moreover, by virtue both of FEDAME’s Guaranty and the connectional nature of the AME Church, FEDAME has a strong interest in resolution of CSAME’s debt on the Construction Loan; and CSAME has a strong reciprocal interest in protecting the positions of FE-DAME and its member churches. The present reorganization is in significant part an effort by CSAME to make itself right with FEDAME. It is simply untrue that the local church’s fund-raising initiative is not also undertaken for and on behalf of the episcopal district.
31.Under the Plan, CSAME would assume the Thomas Contract for a cure cost of essentially $300,000; Thomas would also receive a sizable unsecured claim but, by virtue of the treatment of Class 5, get nothing for it. For this cure payment, Thomas would perform work remaining under the original contract valued at $262,350. In addition, Thomas would provide further services under an amendment to the contract for which CSAME would pay an additional $1.2 million. The total cost of Thomas’s further work is thus $1.5 million, which would be paid in full by the FEDAME donation, which is itself earmarked for this purpose and would not be *88made except for this use under the Plan. The agreement with Thomas for assumption and amendment of the original contract is designed to complete the RRC and render it functional. The contract is likely to achieve that goal within budget and within a reasonable time. CSAME did not solicit other bids for this work and instead negotiated exclusively with Thomas because Thomas is known to CSAME, loyal to and familiar with the project, a neighbor of CSAME, and committed to the church’s neighborhood.
D. Pastoral Residency Program
32. CSAME’s mission and program has for many decades included the training of new ministers. Since 2003, this effort has taken the form of a program known as the Pastoral Residency Program (“PRP”). The PRP permits seminary-educated but inexperienced ministers-in-training in the AMEC to train, in cohorts of three, for a two-year period at CSAME under the tutelage of CSAME’s pastor, a program coordinator hired for this purpose, and (to lesser extents) CSAME’s entire staff and congregation. As part of their training, the residents provide pastoral service to CSAME. The program pays the residents a stipend and health insurance, supplies them with a laptop, phone service, office space, and supplies, funds their travel to denominational meetings, and pays the salary of a program coordinator.
33. The program has been funded mostly by three grants from the Lilly Endowment, Inc. (the “Endowment”), each of four years’ duration: $795,489, funded in December 2002 for operation of the PRP from December 1, 2002 through October 31, 2007;$850,000, funded in December 2006 for operation of the PRP from December 1, 2007 through October 31, 2010; and $875,000, funded in December 2010 for operation of the PRP from December 1, 2010 through August 31, 2015. Each grant was received subject to a grant agreement and the conditions specified therein, including: (i) that the grant be used solely for the PRP (“Under no circumstances may grant funds be expended, borrowed (inter-fund), pledged or transferred for reasons unassociated with the stated purpose of this grant.”), (ii) that the grant be used in accordance with a budget appended to the agreement, with minor variations permitted, provided prior written notice is given to the Endowment, and larger variations permitted only on prior written approval, and (iii) that CSAME furnish the Endowment with annual written reports on the progress of the PRP and the financial management of the grant. The budget appended to the 2010 grant agreement contemplated that CSAME would itself contribute $275,888 to the PRP over the life of the grant, but the grant agreement did not require this contribution. CSAME has at all times administered the PRP not as or through a separate entity but as part of CSAME’s own program; the PRP’s income and expenses are CSAME’s. Financial management and oversight of the PRP has been in the charge of Rev. Adams, but all disbursements of grant funds have required, and been made upon, the direction of Rev. Groover. Rev. Adams held the endowment funds in a segregated account, separate from other CSAME funds. None of the Endowment grants came with assurance of renewal, and, when it made the 2010 grant, the Endowment informed CSAME that it would be the last.
34.Upon application of CSAME, the Endowment also funded a two-year PRP grant in the approximate amount of $416,000, known as the Boston Cluster Grant, to be administered by CSAME but for the benefit of three other Boston-area congregations. This grant covered a two-year period ending in the summer of 2013. *89When CSAME received this grant, Rev. Groover instructed Rev. Adams to hold the funds in a separate account from the other Endowment funds, but, for reasons not in evidence, Rev. Adams deposited the Boston Cluster Grant in the same account as CSAME’s other Endowment grant monies.
35. Commencing in 2007 and in each year thereafter through 2012, Rev. Gro-over directed Rev. Adams to pay Endowment monies in satisfaction of obligations of CSAME that were not related to the PRP, and Rev. Adams, at Rev. Groover’s direction (never on her own), transferred Endowment monies as so directed. These diversions occurred on numerous occasions and totaled $875,000, including $51,000 from the Boston Cluster Grant and one transfer, of $23,000 for insurance, that occurred after the bankruptcy filing, in April 2012. Rev. Groover and Rev. Adams made each diversion with knowledge that the funds in issue were restricted and, with one exception, that the diversions were contrary to the terms of the grants. The exception is that Rev. Groover was not aware that the monies diverted from the Boston Cluster Grant were being diverted from that grant; he believed they were being diverted from the third grant for CSAME’s own PRP. That is, he knew he was violating grant terms but not that he was violating the terms of the Boston Cluster Grant — or a duty to the churches for whom CSAME was administering the Boston Cluster Grant. The diversions were made only to fund pressing needs of CSAME, including interest payments to OneUnited on the Church Loan, payments for work by Thomas that the Construction Loan would not fund, payments to OneUn-ited for extensions of the Construction Loan, denominational assessments, and insurance coverage. None of the monies were appropriated for the personal benefit of Rev. Groover or Rev. Adams. Rev. Groover has acknowledged the wrongfulness of, and his responsibility and regret for, the diversions and the misrepresentations and omissions they entailed.
'36. Rev. Groover thought of and referred to these diversions as “borrowing.” He understood and conceded that they were made without notice to the Endowment and were not consensual. Nonetheless, he and Rev. Adams both always intended that the diverted funds would be fully restored and that the PRP would suffer “no interruption or hiccup” on their account. He cannot always have been confident of achieving either goal, especially as total “borrowing” approached 80 percent of CSAME’s annual budget. Still, I find that the intent was real; restoration began in 2010, long before the diversions were first disclosed. As of June 28, 2013, by payment from CSAME’s own resources of expenses that would otherwise have been funded from the grants, some $288,000 of the diverted total had been restored, including the one post-petition diversion. I have no evidence that the diversions have disrupted or affected the PRP, either for CSAME’s residents or for those of the Boston Cluster.
37. The diversions were made without prior notice to or the consent of the Endowment. In annual reports that Rev. Adams made to the Endowment from 2007 through 2012, she did not report the diversions, and Rev. Groover approved these reports. In the applications they made for the 2010 grant and the Boston Cluster Grant, Rev. Groover and Rev. Adams did not disclose the diversions. They did not list the Endowment as a creditor in their bankruptcy schedules, as a consequence of which the Endowment did not initially get notice of the bankruptcy case. Nor did Rev. Groover otherwise disclose the “borrowing” in the bankruptcy case, including in the Disclosure Statement. Until the fall of 2012, only Rev. Groover and Rev. *90Adams knew of the diversions. Rev. Gro-over then disclosed the diversions to his bishop and to one or more members of the CSAME committee charged with advising the pastor on CSAME’s finances. The bishop did not require CSAME to take any immediate action with respect to the diversions. In early February 2013, Rev. Gro-over further disclosed the diversions in response to questions posed to him in depositions in this case. Finally, after the depositions, Rev. Groover, by phone call and several letters, notified the Endowment of the diversions and accounted for its full scope. He also informed the Endowment that it was the intention of CSAME to restore the misappropriated funds by continuing to fund the PRP through the term of the third grant and beyond.
38.The Endowment, now aware of the diversions and of this bankruptcy case, has expressed disappointment about the diversions and pleasure at the congregation’s commitment to replenish the restricted grant funds. It has not asserted a claim in the bankruptcy case or an objection to confirmation. CSAME disclosed the diversions in the Supplemental Disclosure and also indicated there that CSAME intends to continue to operate the PRP from its own resources at a level of approximately $162,000 per year (but with no indication of duration). The Boston Cluster Grant has expired by its own terms. By the budget that was approved with the third PRP grant, the PRP at CSAME is scheduled to continue through the end of the third grant, in August 2015. As Rev. Groover indicated in his communications with the Endowment, it is CSAME’s intent to finish restoring the diverted funds by funding the PRP from CSAME’s own resources 11 according to the grant budget through 2015 and then at a reduced level— only one resident and no program coordinator — through 2017, at which point the restoration would be complete.
39. OneUnited has complained that Rev. Adams apparently accounted for the diverted funds in the financial records and reports of CSAME as income. Nowhere has OneUnited explained why it believes this was wrongful, as an accounting practice or otherwise. The grants were income to CSAME, albeit of restricted purpose. OneUnited does not allege that Rev. Adams was counting them as income twice, once when first received and again later when actually used. There is no evidence that they were counted as evidence when first received; better then to treat them as income when they are used than not at all. To be sure, the accounting at CSAME is no model, but counting the grant funds as income was neither deceptive nor intended by Rev. Adams to deceive. However, it is important to note that this particular source of revenue will not be available after confirmation.
40. OneUnited further alleges that Rev. Adams acted with intent to deceive by failing to distinguish the income from members’ tithes and offerings from the Endowment income. It appears that Rev. Adams practice, beginning several years before the bankruptcy filing, was simply to list these two kinds of income together under a single line item in CSAME’s records and in its self-generated financial reports. The latter apparently made their way into the CSAME’s disclosure statement. OneUnited contends that was a deliberate deception that made CSAME’s income from tithes and offerings seem considerably larger than it really was. This allegation is unsupported by the evidence. The practice in question commenced years *91before the bankruptcy filing and well before even the defaults on the OneUnited Loans. They affected not just documents produced in this case but all of CSAME’s internal financial records, records on which CSAME itself relied, both for its own internal accounting and for intra-denomina-tional reports. The evidence does not support a finding that this was all done— starting in 2009 — with intent to deceive in the disclosure statement in 2012. It is even more implausible in light of the fact that it was CSAME itself that pointed out inaccuracies in the disclosure statement. Bad accounting is sometimes just bad accounting.
41. The diversions were not CSAME’s first use of restricted Endowment funds. Notwithstanding that the Endowment’s grant agreements expressly prohibited the pledging of these funds for reasons unassociated with the grant, OneUnited prevailed upon CSAME to pledge $850,000 of grant monies for 15 months to secure the Construction Loan, the funds to be held in an interest bearing certificate of deposit at OneUnited. This pledge was a condition of the granting of the loan. The pledge was subject to an agreement under which CSAME was permitted to withdraw “up to $150,000 for a related program,” the PRP. Rev. Groover’s understanding when the loan was negotiated was that the funds would not in fact be collateral for the loan. He testified: “There was an understanding, again by the Bank and the Church, that this $850,000 totally had to be used exclusively for the program,” the PRP. The funds would simply be held on deposit at OneUnited. This agreement notwithstanding, in the letter by which OneUnited informed CSAME that its application for the Construction Loan was accepted, and which Rev. Groover signed on behalf of CSAME to accept the loan terms and conditions stated therein, the deposit is characterized as “additional collateral,” with no stated limitation on its use as collateral except CSAME’s right to withdraw up to $150,000. The deposit is also treated as collateral in OneUnited’s loan underwriting memorandum. In that memorandum, the $850,000 deposit is referred to as a significant part of the “total collateral value”; and OneUnited further states:
The Church does not have adequate cash flow to service this debt at the qualifying or start rate. This can be partly mitigated by a forecast of post-construction cash flows based on new revenues from the renovated facility. It is further mitigated by an $850K reserve now deposited with [OneUnited], which more than covers one year’s debt service at the qualifying rate.
Loan Underwriting Memorandum of May 4, 2006, OneUnited Exhibit 43 (emphasis added). It therefore appears that internally — but not in its mutual understanding with Rev. Groover regarding restrictions on the use of the deposit — -OneUnited was treating the funds as collateral in the full sense: they were not an untouchable deposit but could be reached to cover debt service.
E. Feasibility and § 1129(b) Issues
42. As of May 31, 2013, CSAME had unrestricted cash of only $5,400 and Endowment funds, for the PRP, of $7,500. The latter is by now exhausted. The Plan would bring $1.5 million into CSAME’s coffers, but all of it would be dedicated to Thomas and completion of the RRC. None would be available as working capital, of which CSAME has virtually none. Without an appreciable level of savings, CSAME will be unable to address contingencies — from emergency roof repairs to cash flow interruptions occasioned by (among many other things) snow storms that cancel Sunday services.
*9243.Debt service on the three obligations that the Plan would pay over time — the Church, Tremont, and Construction Loans — would total approximately $316,000.12 This sum will need to be paid entirely from CSAME’s current income. Going forward, this will include the tithes and offerings of CSAME’s members, including their giving to the V2V capital campaign and other special efforts, and, to a much smaller extent, interest income. It will no longer include Endowment grants.
44.CSAME’s expert, Timothy Drage-lin, painstakingly reconstructed from CSAME’s accounting records the amount of CSAME’s income from the donations of its members for the roughly six years ending December 31, 2012. In this reconstruction, he carefully identified and separated out income from Endowment funds. His results, which I find credible, are as follows:
12 mos end 12 mos end 12 mos end 12 mos end 12 mos end 12 mos end Income $000s_3/31/08_3/31/09_3/31/10_3/31/11_3/31/12_12/31/12
General Offering_^023_1^200_969_797_836_815
Special Events 2 66 — 25 47 31
Interest 11 6 4 6 26 18
V2V_29_237_WO_71_£7_20
Totals 1065 1509 1143 899 956 884
45.Over the 15 months between the commencement of this case and the completion of the evidentiary hearing at the end of June 2013, CSAME has operated at an average deficit of approximately $14,166 per month.13 This has been possible only because CSAME has until now been able to draw on grant monies to fund the PRP portion of its budget (approximately $16,500 per month) and on other savings. Going forward, that will not be possible, though CSAME plans to continue funding the PRP from its own resources through 2017.
46.In view of its debt service obligations and present deficit, CSAME would need, in order just to break even, some combination of increased giving and cuts in its expenditures totaling $330,000, plus its current annual deficit, approximately $170,000, plus at least a small cushion for contingencies, say $50,000, for a total of at least $550,000. After August 2015, this burden will lessen by approximately $100,000 with the scaling back of the PRP, and by another $62,000 two years later if the PRP is then fully eliminated.
*9347. CSAME has recently implemented a series of budget cuts. Staff positions have been eliminated, and the compensation of the remaining staff has been cut by ten percent, except Rev. Groover, whose reduction is twenty percent (notwithstanding that his compensation has not increased in twelve years). The savings reportedly total $175,000 per year. The resulting budget gap is $375,000 in the first two years of the plan, $275,000 in the next two, and approximately $215,000 thereafter.
48. Can CSAME generate the necessary increase in congregational giving for these periods and durations? CSAME argues that it can, pointing to the years just before litigation with OneUnited began, in which it achieved giving at or near the necessary level. It contends that the deterioration of relations with OneUnited, and then the bankruptcy filing, affected members’ willingness to give and caused CSAME to suspend its RRC capital campaign, believing that OneUnited might be permitted to seize donations. CSAME maintains that with confirmation of the Plan, confidence and willingness would be restored, and giving at the necessary levels would once again be achieved. OneUn-ited says this is pure speculation and wildly improbable.
49. I find that confirmation of a Plan would likely enable giving to return to substantially higher levels than CSAME is presently achieving. There is evidence that CSAME has achieved higher levels in the past, that giving was actively suppressed, and, as the conditions attached to the $1.5 million Plan donation demonstrate, that confirmation of a plan that resolves all issues would restore confidence and lead to higher giving.14 Still, I have three concerns. First, in the first four years of the Plan, income will need to be $375,000 and then $275,000 higher than at present, but CSAME has matched or exceeded the higher level in only one year and the lower in only two (counting one year that was a near miss); it is less than clear that CSAME can achieve the necessary level immediately, to meet debt service in month 1 of the Plan, and sustain it for four years. Second, after the first four years, giving would have to exceed present levels by only $215,000, but even that level has been achieved in only two years, with extraordinary effort and for a special purpose; it is less than clear that CSAME can reach and sustain that level for 16 consecutive years, especially where it would follow four years of even higher giving. Third, these extraordinary exertions would enable CSAME just barely to make debt service and break even, with little ability— for 20 years — to respond to contingencies that will inevitably arise, much less to ease out of the austerity mode into which it has recently shifted. In sum, even with a likely increase in giving, feasibility would be highly uncertain — too uncertain to satisfy 1129(a)(ll). CSAME would remain at best on the edge of insolvency for two decades — a congregation living for its debt.
50.Each of the above concerns can be mitigated or allayed in part by development of cash reserves and demonstration that credit support from FEDAME (or another source) is a real, ready, and substantial supplement and backstop, both for short term cash flow issues and, in the event of default, for the whole of the obligations to OneUnited. At present, cash reserves are nonexistent; and CSAME has made little effort to demonstrate FE-DAME’s creditworthiness and willingness, *94going forward, to supplement CSAME’s efforts and perform when called upon.
51. CSAME has appointed a committee of its members to recommend new procedures and measures to strengthen CSAME’s ability to perform on the Plan, to stabilize its finances going forward, to approve its accounting and funds management procedures, and to avoid the possibility of future secretive diversions of resources. CSAME has adopted a raft of this committee’s recommendations that will help with accountability, transparency, and fund-handling issues. OneUnited argues that these do not go far enough. I find that they at least go a long way and can be fine-tuned to address remaining concerns. Work is ongoing on the other issues. To date, however, I have no evidence of recommendations from this committee, or other initiatives from CSAME, regarding measures that might be taken to avoid cash flow issues that have plagued CSAME, especially routine and costly lateness of payments. A working capital reserve would be a large help here, but one that CSAME does not appear to have used its Chapter 11 respite from debt service to address. Aso, as the present Plan indicates, CSAME has not made a priority of limiting its debt service obligations to manageable levels.
RULINGS OF LAW CONCERNING CONFIRMATION
For reasons set forth below, the Court concludes that confirmation of the currently proposed plan must be denied. This conclusion could rest on a single blocking determination, such as the conclusion that the proposed release of FEDAME’s guaranty is not justified, which by itself would require denial of confirmation. However, CSAME has indicated its intent to propose another plan (should this one be denied confirmation), and it is only fair, after their considerable expenditure of time and effort on the present plan, that the parties know where the Court stands on the various issues, especially those that may resurface in some form. Accordingly, the Court will address most of the issues in contention, albeit not in every instance with the detail that one might bring to that issue were it alone dispositive.
Given the vital mission of CSAME— vital to its members and its community- — - the debtor must be afforded considerable latitude in achieving financial stability. Ml constituents in this case were well aware of the core mission of CSAME; indeed they were motivated to deal with CSAME because of that mission and no doubt derived a benefit from its vitality. The Court will indulge all reasonable efforts to ensure reorganization.
a. Jurisdiction
The matter before the Court is the confirmation of a chapter 11 plan. It arises under the Bankruptcy Code and in a bankruptcy case and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by a standing order of reference (codified in the district court’s local rules at LR. 201, D. Mass.), referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). It is a core proceeding within the meaning of 28 U.S.C. § 157(b)(1). 28 U.S.C. § 157(b)(2)(L) (core proceedings include confirmations of plans). The bankruptcy court accordingly has authority to enter final judgment.
b. Standard and Burden
Section 1129 of the Bankruptcy Code governs confirmation of a chapter 11 plan and sets forth the requirements for confirmation. 11 U.S.C. § 1129. Where, as here, an impaired class has voted to reject a plan, the plan may be confirmed only if it (a) satisfies every applicable provision of § 1129(a) other than subsection *95(a)(8) (requiring, as to each class, that it either have accepted the plan or be unimpaired) and (b) does not discriminate unfairly and is “fair and equitable” with respect to the dissenting classes’ impaired claims. 11 U.S.C. § 1129(b)(1); RadLAX Gateway Hotel, LLC v. Amalgamated Bank, — U.S. -, 132 S.Ct. 2065, 2069, 182 L.Ed.2d 967 (2012); Beal Bank, S.S.B. v. Waters Edge Ltd. P’ship, 248 B.R. 668, 678 (D.Mass.2000). The plan proponent bears the burden of proof. In re RTF Boston Hotel Venture, LLC, 460 B.R. 38, 51 (Bankr.D.Mass.2011). The bankruptcy court has an independent obligation to ensure that the plan satisfies the requirements. Id. The standard of proof is the preponderance of the evidence. Heartland Fed. Savs. & Loan Assoc’n v. Briscoe Enters., Ltd. II (In re Briscoe Enters. Ltd. II), 994 F.2d 1160, 1163-65 (5th Cir.1993).
c. Section 1129(a)(1): Whether the Plan Complies with the Bankruptcy Code
Section 1129(a)(1) of the Bankruptcy Code requires that “a plan comply with the applicable provisions of this title.” 11 U.S.C. § 1129(a)(1). Courts have interpreted this provision as requiring that a plan comply with the requirements of §§ 1122 (governing classification of claims) and 1123 (governing the contents of a plan), as well as other Code provisions. OneUnited’s objections implicate six of these: § 1122(a) (classification of Tremont and Lilly); § 1123(a)(5) (the release; lack of means to fund the Plan); § 1125(b) (adequacy of disclosure); § 109(d) (eligibility); § 510(c)(1) (equitable subordination); and § 365 (assumption of Thomas Construction Contract).
1. Section 1122(a): Classification of Tremont and Lilly
(A) Classification of Tremont Claim
OneUnited argues that the Tre-mont claim is in fact wholly unsecured (because postpetition growth in the Church Claim has fully consumed the equity in the property securing it, leaving no value to fund Tremont’s junior mortgage), and therefore that § 1122(a), in combination with § 1123(a) and the law construing these provisions in this circuit, requires that Tremont’s claim be classified with the general unsecured creditors in Class 5, not separately in Class 3 and treated as fully secured. For the following reasons, the court disagrees. In doing so, the Court assumes for the sake of argument OneUn-ited’s Church Claim fully consumes the equity in the property securing it, such that, under § 506(a), Tremont’s claim is wholly unsecured and substantially similar to the claims in Class 5.15
First, § 1122(a) states that, subject to an exception not applicable here, “a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.” 11 U.S.C. § 1122(a). It thus limits the circumstances in which claims may be joined together in a single class. It does not require that substantially similar claims be joined together in the same class.
Second, in relevant part, § 1123(a) states that “a plan shall ... provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a *96less favorable treatment of such particular claim or interest.” 11 U.S.C. § 1123(a)(4) (emphasis added). Here, the creditors whose ox would be gored by the classification of which OneUnited complains, the general unsecured creditors in Class 5 (in which OneUnited has no claim), have assented to the treatment in question by voting, unanimously, to accept the Plan; and no creditor in that class has objected to the Plan. It follows that even if CSAME were required to join Tremont and the general unsecured creditors in a single class, CSAME would not be precluded from treating them differently, in the manner that it has.
Third, the cited circuit-level authority states that “[t]he general rule regarding classification is that all creditors of equal rank with claims against the same property should be placed in the same class,” and that “[sjeparate classifications for unsecured creditors are only justified where the legal character of their claims is such as to accord them a status different from the other unsecured creditors.” Granada Wines, Inc. v. New England Teamsters and Trucking Industry Pension Fund, 748 F.2d 42, 46 (1st Cir.1984) (internal quotations omitted). On the basis of the rules thus stated, Granada Wines sustained the objection to confirmation of a plan by a creditor, a pension fund, whose claim would have been paid half the dividend that the other creditors in its class were to be paid. The Court of Appeals for the First Circuit held that the debtor did not and could not have separately classified the pension fund claim from those of other creditors; implicitly, it also held that the plan could not treat the pension fund differently from other creditors in the same class. In doing so, however, it did not address § 1123(a)(4) or § 1122(a) and was not faced with the disparate treatment of an assenting class. Moreover, insofar as the Court of Appeals appeared to be applying any provision of the Bankruptcy Code, it was § 1129(b)(2)(B)(ii), which, the Court noted, applies and is necessary only with respect to the treatment of classes that have not accepted the plan. Granada Wines, 748 F.2d at 46 (“Section 1129(b)(2)(B)(ii) of the Bankruptcy Code provides for a method of confirming a reorganization plan over the objection of an impaired class of creditors” (emphasis added)). Granada Wines differs from the present case in that the affected creditor in that case did not assent to its disparate, lesser treatment. Here, the affected creditors assent, a difference that, in view of § 1123(a)(4), makes a difference. Granada Wines therefore does not govern the present facts.
Fourth, the alleged impropriety in classification and treatment of Tremont’s claim does not affect OneUnited or its treatment. OneUnited lacks standing to raise it.
I add that the same objection as OneUn-ited raises here on behalf of the Class 5 unsecured creditors could be made about the Plan’s treatment of the Construction Loan: it treats the claim as secured to the extent of $3,815,795.70, but the value of the property securing that claim is much less, such that the Plan effectively prefers OneUnited’s unsecured debt over that of the Class 5 claimants. Yet OneUnited does not raise this objection. More importantly, neither have the Class 5 claimants.
(B) Nonclassification of Alleged Lilly Endowment Claim
OneUnited argues that the Lilly Endowment has an unsecured claim for restoration of misapplied restricted-use funds and that, in violation of §§ 1122 and 1123(a), the Plan (i) does not classify the claim of the Lilly Endowment at all and (ii) affords the Endowment disparate treatment by promising full payment of its unsecured claim while, absent equitable *97subordination, other unsecured creditors will receive nothing. Although OneUnited says that “the Plan promises” full treatment of the Endowment’s claim, the Plan actually says nothing about any claim the Endowment may have. OneUnited’s point, as I understand it, is that CSAME has promised to make the Endowment whole on an unsecured claim that should properly have been treated the same as the general unsecured creditors in Class 5, a violation of the equal treatment requirement in § 1123(a)(4), and that this promise was made outside the Plan and without disclosure to the Class 5 creditors. CSAME responds that (i) OneUnited lacks standing to make this objection, (ii) the Lilly Endowment is aware of the case and the diversion of the restricted-use funds and has not filed a claim, (iii) the misuse of restricted funds does not give rise to a claim, (iv) CSAME does not plan to pay any monies to the Endowment, only to continue the PRP, (v) the continuation of the PRP involves no transfer of value to the Endowment, and (vi) CSAME is continuing the PRP as part of its mission, not as payment of a claim.
I do not understand OneUnited to be arguing that the Plan’s classification of claims does not include whatever unsecured claim the Endowment may have. If the Endowment has an unsecured claim, that claim is part of Class 5. Nothing in the Plan’s definition of the membership of Class 5 would exclude the Endowment’s nonpriority unsecured claim (if any) from Class 5; and it is not necessary for the Plan to identify by name each member of such a class- — most plans do not, and this one does not specifically identify any member of Class 5 (except Thomas Construction, and then only because that is part of the agreement for assumption of its contract).
Nor do I understand OneUnited to be complaining of unfairness or nondisclosure to the Endowment. Rather, the gist of this objection is that CSAME has, by means outside the Plan and without disclosure to other Class 5 claimants, promised to make the Endowment whole by continuing to fund the PRP at a particular level, and thereby has unfairly preferred the Endowment over similarly-situated class 5 claimants, without fair disclosure to them.
The Court agrees that OneUnited lacks standing to make this objection — it is not a member of Class 5. The Court nonetheless has an independent duty to determine that the requirements of confirmation are satisfied but finds no cause here for concern. The Plan itself is the governing document. It makes no specific provision for the Endownment. The Endownment is aware of the case and of the Plan and has not filed a proof of claim; but should it do so, that claim would be paid to the extent specified in the treatment of Class 5 (that is, no dividend) and would otherwise be discharged. In the Supplemental Disclosure, CSAME made clear its intent to continue funding the PRP at a specific level, which funding would effectively restore to the PRP what was diverted, but were the Plan confirmed, CSAME would have no obligation to the Endowment, on account of any claim it may have, to follow through on this intent. In any event, a debtor always retains the prerogative of honoring any discharged obligation. 11 U.S.C. § 524(f). And CSAME is being reorganized to carry on its mission and programs; this is no secret from any creditor. One long-standing part of that program is the PRP. CSAME would carry on this program regardless of any obligation to the Endowment. For these reasons, I conclude that disclosure to the Class 5 creditors was not inadequate concerning CSAME’s intention to fund the PRP.
*982. Section 1123(a)(5): Means to Effectuate the Plan
Section 1123(a)(5) states that “Notwithstanding any otherwise applicable non-bankruptcy law, a plan shall ... provide adequate means for the plan’s implementation!;.]” 11 U.S.C. § 1123(a)(5). OneUnit-ed contends that the means of implementation are inadequate in three respects.
(A)Income from RRC and Storefronts
OneUnited argues that the Plan relies on income from the RRC and from rental of the Storefronts, but (i) the Plan provides no means to restore the Storefronts to rentable condition, (ii) the RRC cannot generate income while incomplete, and (iii) the RRC would be run by an entity that CSAME does not control. For reasons articulated in the findings above, the Court agrees that income from the Storefronts and the RRC cannot be counted on to fund the Plan. However, the Plan provides other means for its implementation, especially membership giving, the adequacy of which the Court will address in its feasibility analysis under § 1129(a)(ll).
(B)The Release of Insiders
For the first time in the brief it filed after the evidentiary hearing on confirmation and even after CSAME had filed its post-trial brief, OneUnited objected to confirmation on the basis that “sections 9.3(a) and 9.4 of the Plan” — respectively, a release of the Chapter 11 Parties (a defined term) and an exculpation and limitation of liability for Chapter 11 Parties— “propose to release claims [CSAME] has or may have against non-debtor insiders (including First District and Rev. Groover) despite the fact such claims might arise from gross misconduct and fraud.” In the circumstances of this case, OneUnited maintains, this release would be “contrary to substantive bankruptcy law.” By virtue of its timing, this objection is deemed waived. I note, moreover, that the briefing of this objection is almost entirely undeveloped, that § 9.4 contains an express exception for gross negligence, willful misconduct, or bad faith, and that Rev. Gro-over does not appear to be a Chapter 11 Party.
(C)The Release of FEDAME’s Guaranty
In opposition to the Plan’s release of FEDAME’s liability to OneUnited on the Guaranty of the Construction Loan, One United contends that the release is an impermissible means of implementation, arguing that: (i) the bankruptcy court lacks subject matter jurisdiction to approve a plan containing a third-party release; (ii) the bankruptcy court, a non-Article III tribunal, lacks constitutional authority to adjudicate a plan containing a third-party release; (iii) Bankruptcy Code § 524(e) bars third-party releases; (iv) a third-party release cannot be approved where the affected party does not consent; (v) equity bars the release because FE-DAME fraudulently induced OneUnited to rely on the Guaranty and approve the Construction Loan through financial statements it knew to be false; and (vi) even under the “Master Mortgage factors,” the oft-cited factors articulated in In re Master Mortgage Investment Fund, Inc., 168 B.R. 930, 934-35 (Bankr.W.D.Mo.1994) that CSAME urges the Court to adopt, the release fails because (a) the affected party opposes it, (b) the Plan does not pay the released claim in full, (c) the release is unnecessary, (d) FEDAME is not contributing substantial assets to the reorganization, and (e) there is no indemnity relationship or identity of interest between the debtor and the party being released.
(i) Subject Matter Jurisdiction
OneUnited argues that the Guaranty is unrelated to this bankruptcy case, and its release in the plan is a two-party *99dispute to which neither the debtor nor its estate is a party; therefore, OneUnited would have the Court conclude, the proposed release is beyond the outer, “related-to” reaches of bankruptcy jurisdiction. The Court disagrees. Bankruptcy jurisdiction, conferred in the first instance in § 1334(b) of title 28 (and then referred to the bankruptcy courts under 28 U.S.C. § 157(a)), includes “all civil proceedings arising under title 11” and extends, in its outermost reaches, to all civil proceedings “related to cases under title 11” (“related-to jurisdiction”). 28 U.S.C. § 1334(b). The matter before the Court is a plan of reorganization, the confirmation of which arises under title 11, the Bankruptcy Code. It is what chapter 11 is all about, see 11 U.S.C. §§ 1121-1144, the quintessential bankruptcy matter. It is not the mere adjudication of a single claim by a creditor against a third-party guarantor but a unitary omnibus civil proceeding for the reorganization or adjustment of all obligations of the debtor and disposition of all the debtor’s assets. It may or may not be appropriate for a court exercising bankruptcy jurisdiction to confirm a plan containing a third-party release — and, if it is appropriate, the manner and degree of relation of the released claim to the case are certainly factors in the analysis — but the court undoubtedly has jurisdiction to adjudicate the plan, even without recourse to its related-to jurisdiction. Accordingly, for example, the Court of Appeals for the First Circuit held that the third-party release in a confirmed plan had preclusive effect notwithstanding that the propriety of third-party releases was unsettled in the circuit. Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 983-84 (1st Cir.1995). In any event, the Court is well satisfied, for reasons articulated below, that the Guaranty and release are related to this case. The matter is easily within the Court’s statutory subject matter jurisdiction.
(ii) Constitutional Authority of the Bankruptcy Court
Citing Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), OneUnited argues that approval of the release is tantamount to adjudication of the guaranty, which, as a two-party dispute that arises under state law between non-debtor parties, cannot constitutionally be adjudicated by a non-Article III judge, even if that controversy is part of a statutorily defined “core proceeding” in 28 U.S.C. § 157(b). Again, the Court disagrees. The matter before the Court is not a suit on the Guaranty; the merits of the Guaranty are not in controversy. To reiterate, the matter before the Court is the confirmation of a plan, a unitary omnibus civil proceeding for the reorganization of all obligations of the debtor and disposition of all its assets. Confirmation of a plan is not an adjudication of the various disputes it touches upon — the Guaranty being here but one of many; it is a total reorganization of the debtor’s affairs in a manner available only in bankruptcy. The release may be proposed and approved only as part of a plan and only (if at all) pursuant to powers of adjustment afforded by the Bankruptcy Code, such as in sections 1123(a)(5) and 105(a). Accordingly, the confirmation of a plan — including any third-party release it may propose — is a matter of “public rights” that, under Stem, Congress may constitutionally assign to a non-Article III adjudicator. Stem, 131 S.Ct. at 2618 (the question is “whether the action at issue stems from the bankruptcy itself’ and thus falls within one of the limited circumstances covered by the public rights exception). There is no constitutional infirmity in Congress’s having provided, in 28 U.S.C. § 157(b)(1) and (b)(2)(L), that confirmation of a plan, in-*100eluding one of the variety here presented, is a proceeding that a bankruptcy judge may hear, determine, and enter appropriate orders and judgment on.
(iii) Section 524(e) and Master Mortgage
The Plan proposes a third-party release, a release not of CSAME’s rights, rights it undoubtedly controls, but rights belonging to OneUnited: specifically, OneUnited’s rights under the Guaranty against FEDAME. The Bankruptcy Code does not expressly authorize third-party releases but neither does it expressly prohibit them. Section 524(e) states that “a discharge of a debt of the debtor does not affect the liability of any other entity on ... such debt,” 11 U.S.C. § 524(e), but it does not preclude the bankruptcy court from limiting the liability of co-obligors in appropriate circumstances. 11 U.S.C. § 524(e). In § 1123(a)(5), the Bankruptcy Code grants a debtor extraordinary — albeit not unlimited or clearly delimited— latitude to propose means for implementation of a plan, means that may preempt otherwise applicable nonbankruptcy law. See Irving Tanning Co. v. Maine Superintendent of Ins. et al. (In re Irving Tanning Co.), 496 B.R. 644, 661-66 (1st Cir. BAP 2013) and cases cited. And in § 105(a), the Bankruptcy Code grants to the court authority to issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” Against this statutory background, the Court cannot conclude, a prio-ri, that no third-party release, however well-tailored and justified, may ever be permitted in a plan of reorganization.
The state of the law on third-party releases, unsettled in the First Circuit, was concisely summarized by Judge Hoffman of this district in In re Quincy Medical Center, Inc., 2011 WL 5592907 (Bankr.D.Mass.2011). I adopt his summary by reference and agree with him, with the circuit-level majority, and with Judge Hillman of this district that a chapter 11 plan may, in appropriate circumstances, include a third-party release, and that the Master Mortgage factors are useful considerations in assessing the propriety of a proposed release. Id. at *2. “These factors are neither exclusive nor conjunctive requirements.” In re Washington Mutual, Inc., 442 B.R. 314, 346 (Bankr.D.Del.2011). They are a useful starting point.
The first consideration is whether there is an identity of interest between the debtor and the third party, FEDAME, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete assets of the estate. CSAME argues that the identity of interests is present here because any payment by FE-DAME on the Guaranty gives rise to an equal claim by FEDAME against CSAME for indemnification or contribution. OneUnited argues that there is no such relationship here because (i) in the Guaranty, FEDAME waived any right of indemnification or contribution it may otherwise have had and (ii) FEDAME’s claim remains contingent — because FEDAME has not yet made a payment to OneUnited on the Guaranty — and, 11 U.S.C. § 502(e)(1)(B) requires that a contingent claim be denied. FEDAME, in responding to OneUnited’s objection to its claim, answered that the Guaranty contains no waiver of rights, only, at best, a covenant to forbear from suing CSAME or from sharing in a distribution of OneUnited’s collateral.
The Court concludes that there is an identity of interest between CSAME and *101FEDAME.16 The present contingency of FEDAME’s claim is of no moment: a claim disallowed for contingency under § 502(e)(1)(B) can be reconsidered when it becomes fixed, see 11 U.S.C. § 502(j) (“[a] claim that has been ... disallowed may be reconsidered for cause”), and, upon reconsideration, would be determined and allowed or disallowed “the same as if such claim had become fixed before the filing of the petition.” 11 U.S.C. § 502(e)(2). The Court also agrees with FEDAME that the Guaranty does not waive all rights of indemnification and contribution against CSAME; in essence, it merely obligated FEDAME not to compete with OneUnited for recovery against CSAME and its assets. But even if this were not the case, two further reasons establish identity of interest. First, even without a legally enforceable obligation to repay, CSAME would still be bound by its “connectional,” intra-ecclesial relationship to FEDAME to make FEDAME whole for losses it sustains on CSAME’s account. Second, both CSAME and FEDAME, obligated on the same debt, have an interest in paying the debt, not paying it more than once, and not wasting resources on developing one means of payment (such as a plan in this case) that OneUnited might render moot by enforcing and obtaining payment on the Guaranty.
The second Master Mortgage factor is whether the non-debtor, FEDAME, has contributed substantial assets to the reorganization. The short answer is: yes, but not in a way that matters much. In the findings of fact, I found that it is not a fiction to treat the promised contribution of $1.5 million as FEDAME’s.17 I further conclude that the contribution is substantial, probably in the ballpark of the sum that FEDAME would be obligated to pay on the Guaranty were OneUnited to liquidate its collateral today and then to seek the balance from FEDAME. The problem is that the plan contribution would serve a purpose that, though legitimate, is not, directly or even indirectly, the restructuring of CSAME’s obligations to OneUnited. The contribution would be entirely devoted to assumption of the Thomas Construction Contract ($300,000) and the funding of an amendment to that contract that would enable CSAME to complete the RRC construction project ($1,200,000), the cure being a cost of obtaining the contract amendment. None of this money would pay down the debt to OneUnited. To be sure, the investment of $1.5 million would, if all went according to plan, increase the value of the RRC Property and thereby substantially enhance the value of OneUnited’s collateral; this is a benefit, but, as. the Plan would not liquidate the completed property to pay OneUnited, not a significant one. If the Plan were confirmed and OneUnited got to the point of foreclosing on the RRC Property, the Plan would have failed. Moreover, in a foreclosure scenario, the mortgagee usually realizes considerably less than fair market value, so much of the gain in value from completion would be lost. The investment might also bring the RRC to the point of being able to produce income for CSAME, but the RRC would have its own expenses, and the likelihood of significant net income is too speculative to count on here. In sum, completion of the RRC Property serves pastoral purposes of CSAME and FEDAME; for the most part, it does not inure to the benefit of OneUnited.
The third Master Mortgage factor is whether the injunction is essential to re*102organization, such that, without it, there would be little likelihood of success. For the same reasons as just articulated, the Court finds that the contribution is essential to one of the Plan’s purposes, completion of the RRC Property, a pastoral initiative of CSAME, but not to its more important purpose (important in bankruptcy, if not in the larger scheme of things), repayment of debt. It repays only a portion of the Thomas Construction unsecured debt but does not benefit OneUnited or unsecured creditors (other than Thomas). And the cure payment to Thomas Construction is being made only to facilitate the completion of the RRC. If anything, the release detracts from the likelihood of the Plan’s success by depriving it of a critical measure of credit support. At least to the extent of the New Guaranty, the release is also not necessary in the further sense that FEDAME is evidently willing to remain a guarantor to that significant extent. The Court must further ask whether, if a modification of the Guaranty is needed to produce a contribution that makes a difference in the Plan’s treatment of the Construction Loan debt, it would not suffice for that modification to be more limited, such as adjustments to covenants to permit the guarantor to cure defaults before OneUn-ited could make demand on the entire obligation. The record provides no answer.
The fourth Master Mortgage factor is whether a substantial majority of the creditors, and especially the affected classes, agree to the release and have overwhelmingly voted to accept the proposed plan treatment. Master Mortgage, 168 B.R. at 935. The consent of the affected creditors can render irrelevant many other concerns. Here, the Class 3 and 5 claimants support the Plan, but OneUnit-ed, holder of the vast majority of the debt and the sole affected creditor, opposes the release and the Plan. Among those courts that subscribe to the Master Mortgage approach to releases, some, including Judge Hoffman, take the position that “only consensual releases are permissible.” In re Quincy Medical Center, Inc., 2011 WL 5592907, at *4 and cases cited. I do not hold that no nonconsensual release, however narrowly tailored and otherwise justified, can ever be approved. Certainly, however, no nonconsensual release can be approved where the plan does not replace what it releases with something of indubitably equivalent value to the affected creditor.
This raises the fifth Master Mortgage consideration: whether the plan provides a mechanism for the payment of all, or substantially all, of the claims of the class or classes affected by the injunction. Only Class 4, the class of OneUnited’s Construction Loan Claim, is affected by the release. CSAME maintains that the Plan proposes to pay OneUnited “all obligations [CSAME] legally owes OneUnited in full, granting the Bank new notes in the amount of its outstanding obligationsf.]” This is true in a sense, but not in the sense needed to justify the release. The Plan proposes to pay the Construction Loan only to the extent of the amount of the debt on the petition date. The Plan treats that sum as entirely secured, but because the value of the collateral has never exceeded that sum, by operation of 11 U.S.C. §§ 506(a) and 502(b)(2), any claim that OneUnited may have for postpetition interest, fees, and other charges is disallowed. Its claim is frozen at the amount owing on the petition date. On the Guaranty, however, FEDAME’s liability extends to all of what CSAME owes on the Construction Loan, regardless of the Bankruptcy Code’s limitations on the re-coverability of those sums against CSAME. The Plan would pay postconfir-*103mation interest, but at a lower rate than the contract rate, and the interest would run only from the effective date of confirmation, not the petition date. In short, the Plan does not propose to pay the full debt on which FEDAME is obligated. In addition, because the Construction Loan is undersecured, and feasibility in even the best of circumstances is never assured, the release would deprive OneUnited of a critical measure of credit support. The New Guaranty would restore some of that support, but only on the new obligation, the New OneUnited RRC Note, less $1.5 million. For these reasons, the Plan does not replace what it releases with something of equivalent value.
The parties would have the Court consider two further factors. First, CSAME asks the Court to consider that the Guaranty is subject to potentially serious counterclaims — serious because an appellate court has said that the counterclaims do not fail to state a claim on which relief can be granted — and therefore is of doubtful value. I give no weight to this argument. The merits of the Guaranty and counterclaims are in litigation in another forum, not here. For purposes of evaluating the merits of the release, I assume without finding or ruling that the Guaranty is enforceable and that FEDAME is solvent and can honor it — whether by recourse to the authority referenced in Note 1 or otherwise.
Second, OneUnited argues that the release, if otherwise meritorious, should nonetheless be disallowed in equity for unclean hands because, OneUnited alleges, FEDAME fraudulently induced OneUnit-ed to make the Construction Loan by inserting Note 1 into financial statements that it gave OneUnited. Note 1 is a representation that the AMEC “grants to the bishop of the First Episcopal District the authority to transfer funds at his discretion between organizations and member churches of the First Episcopal District and/or the district’s central office.” Several individuals with knowledge of AMEC polity testified that Note 1 was inconsistent with their understandings or that they were unaware of authority for it; one testified that authority for the proposition exists by tradition. The burden of alleging and proving fraud here falls on OneUnited but has not been carried. Fraud would require a false statement, but OneUnited maintains that Note 1 is true, so whatever is alleged here, it is not fraud. In any event, OneUnited has not established that Note 1 and the financial documents containing it were produced, or given to OneUnited, with intent to deceive (the apparent theory being that an intended deception was bungled in the execution by the inadvertent truth of the intended falsehood). Accordingly, I give this argument no weight.
The Court is left with a release that is not essential to the debt repayment objectives of the Plan, that does not have the assent of the affected creditor, and that does not treat that creditor so well that the release is of virtually no concern. On these considerations, the release is an impermissible means of implementation.
3. Section 1123(b)(2): Assumption of Thomas Construction Contract
Section 1123(b)(2) of the Bankruptcy Code states that subject to § 365, a plan may provide for the assumption of an executory contract. OneUnited contends that the Plan’s proposed assumption of the Thomas Construction contract for a $300,000 cure payment, as part of an agreement in which Thomas Construction would also be hired at a cost of an additional $1.2 million to complete the RRC construction project and would get a general unsecured claim of $763,000, should be disallowed under § 365 as an abuse of the *104CSAME’s business judgment. In light of the denial of equitable subordination, the $763,000 unsecured claim in this agreement would receive no dividend, and it is unclear whether, in light of that development, OneUnited would still make this argument. In any event, I find no fault in CSAME’s business judgment here.
When considering a debtor’s request to assume an executory contract under § 365, “the only issue properly before a court is whether the assumption or rejection of the subject contract is based upon a debtor’s business judgment.” Eagle Ins. Co. v. BankVest Capital Corp. (In re BankVest Capital Corp.), 290 B.R. 443, 447 (1st Cir. BAP 2003). The business judgment standard “merely requires a showing” that assumption of the executory contract will benefit the estate. In re MF Global Holdings, Ltd., 466 B.R. 239, 242 (Bankr.S.D.N.Y.2012). Once a debtor articulates a valid business justification, “[t]he business judgment rule ‘is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’ ” Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del.1985)).
Assumption of the contract is well-justified. Thomas Construction is known to and a neighbor of CSAME, is familiar with the project, and has demonstrated commitment to the project and to CSAME, all of which reduces the risk that Thomas Construction would abandon the project or seek to alter terms at a key construction juncture. The assumption agreement, a compromise, was negotiated at arm’s length. By accepting most of its cure in the form of an unsecured claim, which without equitable subordination is entitled to no distribution, it has effectively agreed to accept a cure payment, $300,000, that is close in value to the work remaining on the original contract, which OneUnited itself fairly estimates to be worth $262,350. The premium being paid, if there is one at all— OneUnited has adduced no evidence that the work might be contracted to another builder for less — is more than justified by the fact that any other contractor would be unknown and unfamiliar with the project, and would have to add cost for coming up to speed. Thomas Construction will likely complete the RRC in a reasonable time. Significantly, all funds to pay Thomas Construction are coming from outside sources and earmarked for such payment; the assumption therefore does not affect other creditors or the estate except by enhancing the value of the RRC.
4. Section 1123(b)(6): Equitable Subordination under § 510(c)(1)
The Plan proposes, in the first instance, to subordinate OneUnited’s claims to the claims in Classes 3 and 5. The Court has addressed the issue of equitable subordination in a separate memorandum of decision issued today (the findings and rulings in which I incorporate by reference) and, for the reasons stated therein, has denied subordination. The Plan provides for alternative treatments of the affected classes, and therefore denial of subordination does not itself require denial of confirmation.
d. Section 1129(a)(2): Whether the Plan Proponent Complies with the Bankruptcy Code
Section 1129(a)(2) is a requirement that the proponent of the plan comply with the applicable provisions of the Bankruptcy Code. OneUnited would find fault here in two respects.
*1051. Adequacy of Disclosure under § 1125(b)
Section 1125(b) requires that the solicitation of votes occur with the benefit of a written disclosure statement approved as containing adequate information. As required, the Court did approve both the Disclosure Statement and later the Supplemental Disclosure as containing adequate information before the solicitations occurred. Section 1129(a)(2) permits the court to revisit the adequacy of disclosure in light of what is known at confirmation. OneUnited argues that the requirement of adequate information was not satisfied because (i) the Disclosure Statement’s presentation of historic financial data was erroneous, (ii) other financial reports from an outside accountant were not included in the Disclosure Statement, (iii) CSAME’s accounting erroneously counted the Lilly Endowment monies as income, (iv) the diversion of restricted Lilly Endowment funds was not initially disclosed, and (v) CSAME’s schedules did not list the Endowment as a creditor or the Endowment’s funds among its cash assets. All of this, OneUnited concludes, amounted to a purposeful withholding of accurate financial information from creditors, including OneUnited, and the presentation of misleading information to the unsecured creditors.
The question presented here is not good or bad faith — the Code treats that issue separately in § 1129(a)(3) — but whether the solicitation and voting occurred with adequate information. The Court continues to find that they did. OneUnited, having twice voted to reject the Plan, was not misled into acceptance. The Class 5 unsecured creditors, who did vote to accept, clearly did not do so for the dividend they would receive without equitable subordination, which is nothing. If they were self-interested at all, they must have accepted because the Plan proposed equitable subordination that, if permitted, would pay their claims from the first dollars that would otherwise go to OneUnited, then-only hope of recovery; none of the alleged inaccuracies in disclosure would affect that dynamic. Tremont, which has had legal representation throughout and was supplied the Supplemental Disclosure and permitted to change its vote, is aware of all the alleged inadequacies of disclosure that OneUnited cites — the Supplemental Disclosure expressly put Tremont on notice of those issues — and elected not to change its vote; it supports confirmation. Under a different heading, OneUnited raised and the Court has addressed other disclosure issues raised by CSAME’s intent to carry on the PRP. The Court is satisfied that disclosure has been adequate.
2. Eligibility to be a Debtor under § 109(d)
OneUnited objects to confirmation on the basis that the CSAME, the Plan proponent, is ineligible to be a debtor under § 109(d) of the Bankruptcy Code: that is, not eligible for bankruptcy relief at all. By order of September 11, 2012, and on the basis of findings and rulings articulated with the order [doc. # 359], the Court denied dismissal and ruled that CSAME was eligible. That order has been affirmed on appeal but remains subject to possible further appeal. The Court need not address the issue anew but incorporates by reference its earlier findings and rulings.
e. Section 1129(a)(3): Whether the Plan has been Proposed in Good Faith
Section 1129(a)(3) requires that CSAME have proposed the Plan “in good faith and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). This is “generally interpreted to mean that there *106exists a reasonable likelihood that the plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code.” In re Weber, 209 B.R. 793, 797 (Bankr.D.Mass.1997). OneUnited contends that, for lack of honesty of purpose and nondisclosure and misrepresentations of material facts, the Plan has been proposed in bad faith. It would base this conclusion on the following allegations: (i) foremost, the plan seeks an unjustified third-party release of FEDAME and thus favors an insider; (ii) it does so by falsely characterizing as FEDAME’s a donation originating in another entity; (iii) CSAME included false historical financial information in its Disclosure Statement; (iv) Revs. Groover and Adams secretly diverted restricted-use funds; and (v) they failed to disclose the diversions in CSAME’s schedules and Disclosure Statement.
This objection is now moot: the Court ruled above that the release is impermissible, which requires denial of confirmation; and any succeeding plan will be another plan, with its own separate manner of proposal, subject to its own good faith analysis. Because the good faith requirement figured so large in OneUnited’s efforts, however, I note for the record the following. It was not bad faith to file a plan featuring a third party release, especially where the scope of the release has considerably narrowed over time, and a plan is always in bankruptcy as much a tentative negotiating position as a litigation position. CSAME was either entitled to the release or not — and if not, confirmation would be denied on that basis, not for requesting it — but testing the waters was not bad faith. The provenance of the FE-DAME donation is also of no moment; the parties can argue about whether it should properly be credited to FEDAME, but the origins of the funds have always been clear and fully and fairly disclosed. The financial errors in the Disclosure Statement were pointed out by CSAME itself, which is highly inconsistent with an intent to deceive; the implication that the errors had their origins in bad faith is not proven. And the diversions of restricted — use funds were not part of the proposal of the Plan, the focus of § 1129(a)(3). The nondisclosure and misrepresentations concerning the diversions are germane, but they do not taint or derail the whole effort, which in substance represents a fair and serious effort by a 1400 member congregation, not Rev. Groover or Rev. Adams, to address CSAME’s obligations to OneUnit-ed and the universe of its solvency issues. Certainly the Plan promises to OneUnited a far better recovery than it can hope for in a liquidation or dismissal scenario (especially if, as OneUnited contends, the Guaranty is worthless), all by the membership’s putting itself under considerable debt service strain that it has no obligation to undertake. This is not bad faith.
f. Section 1129(a)(5): Continuance in Office of Officers
Sections 1129(a)(5)(A)® and (ii) require that the Plan proponent disclose the “identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer or voting trustee of the debtor,” and requires a finding that “the appointment to, or continuance in, such office of such individual, is consistent with the interests of creditors and equity security holders and with public policy.” 11 U.S.C. § 1129(a)(5)(A)®, (ii). OneUnit-ed argues that the Court cannot find that the continuance in office of Rev. Groover and Rev. Adams is consistent with the interests of creditors and with public policy. Specifically, under the Plan, Rev. Gro-over would be tasked with receiving $1.5 million for completion of the RRC, but Rev. Groover, and Rev. Adams at his direction, diverted restricted funds from *107their intended use and concealed the diversion. I do not understand OneUnited to suggest that the Court, or public policy, has a legitimate interest in telling the bishop of the FEDAME how to staff the pastorate of CSAME. The concern is limited to oversight of the disposition of funds dedicated to a specific use. OneUnited contends that the Recommended Policies and Procedures that CSAME has put in place do not go far enough in this respect, as they fail to address the principal means by which monies were diverted: electronic bank account transfers. The Court agrees that, if a future plan involves restricted use funds and does not place them in the charge of a plan fiduciary or other functionary, the policies and procedures will at least need further amendment.
g.Section 1129(a)(7): Best Interests of Creditors
Section 1129(a)(7), known as the “best interest of creditors test,” provides (in relevant part):
With respect to each impaired class of claims or interests—
(A) each holder of a claim or interest of such class
(i) has accepted the plan; or
(ii) will 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 debt- or were liquidated under chapter 7 of this title on such date.
11 U.S.C. § 1129(a)(7)(A). OneUnited argues that this requirement is unsatisfied for two sets of reasons. The first concerns the interests of the impaired claims in classes 3 and 5 and of CSAME, all of whom OneUnited argues would fare better, or no worse, in a chapter 7 liquidation. This argument is irrelevant: § 1129(a)(7) is satisfied as to Classes 3 and 5 by their acceptance of the plan, see § 1129(a)(7)(i), and it does not inquire at all into the interests of the debtor. After completion of the evidentiary hearing, OneUnited raised for the first time a second set of concerns, arguing that OneUnited itself would do better in a chapter 7 liquidation because the Plan deprives it of the value of the Guaranty, an asset it would retain in chapter 7. CSAME responds that this argument is untimely and that, in any event, the retention of outside assets, assets that don’t belong to the estate, should not be considered in the § 1129(a)(7) calculus. In view of the rulings above on the proposed release of the Guaranty, this argument is now moot. OneUnited does not deny, and I readily conclude, that, if the Guaranty is not part of the calculus, the best interest test is satisfied as to both claims of OneUnited.
h. Section 1129(a)(8): Acceptance by All Impaired Classes
Section 1129(a)(8) requires that each impaired class of claims or interests accept the Plan. Here, two impaired classes have voted to reject. The Plan may therefore be confirmed only by satisfaction of the requirements of § 1129(b) as to each impaired class that has not accepted the Plan, the classes of OneUnited’s claims.
i. Section 1129(a)(9): Payment in Full of Allowed Priority Claims
Section 1129(a)(9) sets forth requirements for the payment through a plan of priority claims. No administrative or other priority claim has been filed or asserted in the case, and CSAME’s professionals’ services have been provided pro bono. Therefore this requirement is not applicable. OneUnited nonetheless objects, arguing that CSAME’s cash on hand is insufficient to pay any administrative claims that *108may arise. OneUnited cites no existing claims but indicates that it will file such a claim itself, for substantial contribution to the case. It did not file such a claim before completion of the evidentiary hearing, and it did not establish (or even allege) during the hearing that it has a meritorious claim. The objection under subsection (a)(9) is therefore overruled.
j. Section 1129(a)(10): Acceptance by at Least One Impaired Class
If any class of claims is impaired, § 1129(a)(10) requires that the plan have been accepted by at least one impaired class, determined without including any acceptance of the plan by an insider. 11 U.S.C. § 1129(a)(10). CSAME contends that this requirement is satisfied, citing the undisputed acceptance of the Plan by Classes 3 and 5, both impaired (and the acceptance of Class 5 having being determined without the vote of FEDAME).18 OneUnited argues that § 1129(a)(10) is not satisfied because Tremont’s claim is not properly classified in Class 3. Tremont is wholly unsecured, OneUnited maintains, and “[w]hen Tremont’s claim is properly re-classified as along with other unsecured claims, there is no accepting impaired class because OneUnited has not accepted the Plan and its deficiency claim controls the unsecured class.” This argument is not wholly intelligible: by virtue of the treatment of its two claims as secured to at least their extent on the petition date, OneUnited has no deficiency claim. In any event, this is not properly an objection to satisfaction of § 1129(a)(10) but to both the classification and treatment of Tre-mont. I have dealt with and rejected that objection elsewhere. Given the class structure of the Plan, § 1129(a)(10) is satisfied.
k. Section 1129(a)(ll): Feasibility
Section 1129(a)(ll) requires a showing that
[cjonfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.
11 U.S.C. § 1129(a)(ll). This “feasibility test” requires the court to make an independent determination as to whether the Plan is workable and has a reasonable likelihood of success. See In re SW Boston Hotel Venture, LLC, 460 B.R. 38, 58 (Bankr.D.Mass.2011). A plan proponent need only demonstrate that there exists a reasonable prospect of success and a reasonable assurance that proponents can comply with the plan. Berkeley Fed. Bank & Trust v. Sea Garden Motel & Apartments (In re Sea Garden Motel & Apartments), 195 B.R. 294, 304-05 (D.N.J.1996). “A plan proponent need not guarantee the success of the plan, but rather must introduce evidence that its plan is realistic.” SW Boston Hotel, 460 B.R. at 58. A court scrutinizing a plan should consider “(1) the adequacy of the capital structure; (2) the earning power of the business; (3) economic conditions; and (4) the ability of management.” In re Agawam Creative Mktg. Assocs., Inc., 63 B.R. 612, 619-20 (Bankr.D.Mass.1986).
In view of the Plan’s high level of debt service, the extraordinary demands *109this would make on congregational giving for twenty years, CSAME’s lack of working capital reserves, and the lack of evidence that FEDAME, as giver of the New Guaranty, is both credit worthy and willing to supplement CSAME’s efforts and perform when called upon, I cannot find that this Plan satisfies § 1129(a)(ll).
1. Section 1129(b): Fair and Equitable to Rejecting Classes
Where a plan proponent has satisfied all the applicable requirements of § 1129(a) except only the requirement in paragraph (8) that each impaired class of claims or interests accept the plan, “the court ... shall confirm the plan ... if the plan 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). Certain requirements of fair and equitable treatment for secured claims are set forth in § 1129(b)(2)(A). OneUnit-ed argues that the treatment of its claims is less than fair and equitable in five ways; and it argues that the treatment of Class 5 unsecured creditors falls short in another.
1. The 20-year Term
OneUnited takes issue with the 20-year term of the two promissory notes it would receive in the Plan, arguing that notes of longer than ten years for “loans” of this kind are “wholly detached from market realities and fall far short of the indubitable equivalent treatment” that § 1129(b)(2)(A) requires. I conclude that the 20-year term is not in itself inadequate. The touchstone in § 1129(b)(2)(A) is whether the proposed treatment provides to OneUnited the indubitable equivalent of the value of its secured claim. A plan’s treatment of a secured claim is not a loan, and “conformity to market realities” does not appear in the statutory language. I will consider the term and rate of amortization, especially the risks these entail, in determining whether the overall treatment of OneUnited’s secured claims satisfy the indubitable equivalent standard and are otherwise fair and equitable. Provided they do, however, the 20-year term, standing alone, is no problem. This is especially so where the actual value of OneUnited’s collateral is far less than the present value of what the Plan is proposing to give OneUn-ited for its secured claim.
2. Sufficiency of Covenants in Restructured Notes and Mortgages
OneUnited objects to the almost complete lack of covenants in the promissory notes and mortgages it would be given under the Plan. The parties are in agreement about the state of the law on this question. The Bankruptcy Code requires no particular set of covenants in restructured loans. The issue is whether the terms are fair and equitable, considering all the circumstances. The Court must consider “(1) whether the proposed terms and covenants unduly harm the secured creditor with respect to its collateral position; and (2) whether the inclusion of terms and conditions from the pre-bank-ruptcy loan documents would unduly impair the debtor’s ability to reorganize.” In re Am. Trailer & Storage, Inc., 419 B.R. 412, 441 (Bankr.W.D.Mo.2009). CSAME emphasizes the second prong, arguing that it would now be reasonable to expect that at the first technical breach of even the most minor covenant, OneUnited would not act as a normal lender, but would accelerate and thus cause the Plan to fail; and CSAME further points out that before the deterioration in relations between the parties, OneUnited showed little concern for the covenants. OneUnited emphasizes the first prong, arguing that the standard covenants are so wholly lacking that its collateral position is severely compro-*110raised, especially because most relevant covenants would not here be satisfied.
The Court agrees with CSAME that, in view of OneUnited’s conduct in this case and since its declaration of default, it should be expected that OneUnited would use standard covenants for maximum leverage, beyond their intended purpose. The Court would insist that collateral be insured (with due regard for the fact that three of the six properties have virtually no value beyond that of their land) and that nonpayment be an event of default after a suitable grace period. Beyond that, the Court will consider other covenants provided they are fashioned in a manner acceptable to CSAME or to otherwise allay CSAME’s valid concern.
3. Sufficiency of Interest Rates
OneUnited objects to the interest rates of the promissory notes and mortgages it would be given under the Plan: for the Church Loan, 5.75 percent; for the Construction Loan, 5.75 percent, unless the Plan cannot be confirmed with that rate, in which event OneUnited would be given the New Guaranty and the interest rate would be reduced to 5.25 percent. As a preliminary matter, I find that the feasibility of the proposed repayment of the Construction Loan at 5.75 percent is far too risky to confirm without benefit of third-party credit support. With respect to the Construction Loan, I therefore would evaluate the proposal to pay interest at 5.25 percent with the New Guaranty.
I need not settle on a number here; the next Plan will be different, and the details matter. I offer the following observations to assist in further plan formulation. CSAME’s expert defended the proposed rates, and OneUnited’s expert opined that the appropriate rates would be at least 15.5 percent for the Church Loan and 18 percent for the Construction Loan. OneUnited’s expert was less than convincing in a number of respects, among them arithmetic errors and his opinion that a 20-year term should have the same effect on the rate as a 30-year. Also, for each risk factor that should affect the rate calculus — among others, the inadequacy of collateral, the insufficiency of current income to cover debt service, the bare margin that even augmented income would supply, the terms of the replacement notes, the lack of cash reserves, and the history of cash flow and financial management issues — he increased the rate by an amount of his choosing, but he offered no reasons for the amounts he chose, a problem of calibration, precisely what his testimony was most meant to address. He also assumed that FEDAME’s New Guaranty would have no mitigating effect on the risk of nonpayment, something that has not been established; his failure to address the curative effects of credit support is a major omission that would affect much else in his analysis. With respect to calibration, CSAME’s expert was more persuasive, but he too made assumptions about the guarantor: that its creditworthiness was established by the fact that OneUnited relied on it in making the Construction Loan. I do not regard the creditworthiness of FEDAME as so established, both because OneUnited’s opinion in the matter has changed since it made the loan — to what is not clear, perhaps not even to OneUnited, but it has changed — and because CSAME has simply not addressed the issue. In view of the strain that the Plan’s debt service would place on CSAME, much rests on this issue that neither side has seen fit to address, and also on CSAME’s ability to obtain a sizable working capital reserve.
4. Credit for Turnover of Milton Property
In the Plan’s treatment of OneUn-ited’s Class 2 Claim, regarding the Church *111Loan, CSAME proposes to turnover to OneUnited the Milton Parsonage, one of three properties that secures that loan, and, more to the point, to receive a credit therefor against the claim it secures of $380,000. OneUnited objects to the amount of the credit, arguing that valuation on which CSAME relies was established by a stipulation that was not intended to apply to the present iteration of the plan, the first to propose turnover, not retention, of the Milton Parsonage. The Court agrees that the stipulation cannot be used for this purpose, retention and turnover being materially different for purposes of valuation. The burden is on CSAME to establish that the amount of the credit is fair and equitable. On the basis of the appraisal in evidence and the fact that the interior of the property is in worse condition than the appraiser assumed, I have found that the value is appreciably less than $380,000. Moreover, the net value of the property to OneUnit-ed, after deduction of the costs of resale, would be lower still. The amount of the credit is therefore not fair and equitable under § 1129(b)(2)(A)(iii) (a plan is fair and equitable to a class of secured claims if it provides for the realization by the claim holders of the indubitable equivalent of such claims). This ground of objection must be sustained.
5. Right of Appeal
In its § 8.7, the Plan dictates that it will be deemed “substantially consummated” as of the Plan’s effective date; and, under the Plan’s definition of Effective Date, the Plan could conceivably become effective on the date of confirmation. Substantial consummation can render an appeal moot. OneUnited objects, arguing that the occurrence of substantial confirmation on the effective date could unfairly deprive OneUnited of its right of appeal. This raises questions of whether a plan can artificially accelerate the date of substantial consummation and, conversely, whether for the sake of a creditor wanting to appeal, substantial consummation can be deemed to occur later than it actually does occur. For simplicity, and to preserve intact the right of appeal, if the Court were to confirm a future plan iteration containing this same language, the Court would simply add to the confirmation order a proviso that the Effective Date shall in no event occur until after expiration of 14 days from the date of confirmation.
6. Absolute Priority Rule
In its earliest objection to confirmation [doc. #261], OneUnited objected on the basis that Plan violates the absolute priority rule, § 1129(b)(2)(B)(ii), one of the conditions of a plan’s being fair and equitable with respect to a class of unsecured creditors. OneUnited did not reiterate this objection in later statements of its position and thus appears to have abandoned it. In any event, the absolute priority rule is irrelevant because the class of unsecured creditors has accepted the plan. Section 1129(b)(1) requires a showing that a plan is fair and equitable only “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) (emphasis added).
m. Conclusion as to Confirmation
Having sustained OneUnited’s objections concerning release of the Guaranty, inadequacy of covenants, and valuation of the Milton Parsonage, the Court will enter a separate order denying confirmation of the Seventh Modified First Amended Plan of Reorganization.
RULINGS OF LAW CONCERNING MOTION TO DISMISS
a. Section 1112(b)(1) and Cause for Dismissal
OneUnited has moved under 1112(b)(1) of the Bankruptcy Code to dis*112miss this chapter 11 case for cause. Section 1112(b)(1) states:
Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.
11 U.S.C. § 1112(b)(1). The parties and the Court agree that conversion to chapter 7 is not a viable or useful option here, and therefore this motion is about dismissal only. Subsection 1112(b)(4) sets forth a non-exhaustive list of examples of “cause” within the meaning of § 1112(b)(1). These include “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation,” § 1112(b)(4)(A); “gross mismanagement of the estate,” § 1112(b)(4)(B); “failure to maintain appropriate insurance that poses a risk to the estate,” § 1112(b)(4)(C); and “unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter,” § 1112(b)(4)(F). OneUnited relies on each of these and others not enumerated. “One ground, however, is sufficient, standing alone, to establish cause under the statute.” In re Colon Martinez, 472 B.R. 137, 144 (1st Cir. BAP 2012) (internal quotations and citations omitted). The burden of proving cause is on the party moving to convert, and the standard is a preponderance of the evidence. In re Cranney, 2013 WL 2383594, *2 (Bankr.D.Mass.2013). Once cause is established, the court “shall” convert or dismiss unless doing so is excused by subsection (b)(1) or (b)(2). 11 U.S.C. § 1112(b)(1) & (2). The first step, however, is to determine the existence of cause.
1. Section 1112(b)(4)(A)
OneUnited first contends that cause exists under § 1112(b)(4)(A). This subsection requires proof of “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” 11 U.S.C. § 1112(b)(4)(A). Both prongs must be satisfied.
A. Absence of Reasonable Likelihood of Rehabilitation
OneUnited has not established an absence of a reasonable likelihood of rehabilitation. CSAME is being denied confirmation of its present ambitious plan — primarily for its third-party release and debt burden — but many alternatives are conceivable. CSAME has benefactors interested in helping it to succeed. CSAME can adjust its ambitions regarding the RRC and the amount of debt service it takes on in a plan. CSAME can increase its level of donations. It can liquidate properties in partial satisfaction of secured debt. It may be able to cram down remaining secured debt. It may even hit upon a proposal that OneUnited would accept, which in theory should be achievable. The possibilities are numerous, CSAME has able counsel, and, contrary to OneUn-ited’s urgings, there exists no a priori reason why none of these possibilities can be confirmed.
B. Substantial or Continuing Loss to or Diminution of the Estate
In view of the above ruling on the rehabilitation prong of § 1112(b)(4)(A), there can be no “cause” within the meaning of that subsection. Nonetheless, under the banner of the other prong, OneUnited alleges not just loss and diminution but ad*113ministrative insolvency, and therefore I proceed to address these allegations. OneUnited makes four allegations19 to support a finding of “substantial or continuing loss to or diminution of the estate.”
Three may be quickly rejected. First, OneUnited alleges that CSAME has suffered the Storefronts and the Milton Parsonage to exist in a continuing state of disrepair. This is not cause for dismissal because there is no evidence that the properties have deteriorated in value or condition since the filing of the bankruptcy petition. Second, OneUnited alleges that CSAME lacks equity in any of its real property. This is a nonstarter. A debt- or’s lack of equity in its property is not loss to or diminution of the estate. I do not understand OneUnited to allege that the CSAME has less equity today than it did on the petition date; if it does so allege, the allegation is not proven.20 Third, OneUnited complains that CSAME has “eliminated the collateral value” available to Tremont on its second-position mortgage on the Church Building. This argument fails on the law. Where property is fully encumbered, then by operation of § 506(a) and (b), the postpetition passage of time causes a senior lien to grow and consume the equity that would otherwise inure to junior liens on the same property. The resulting loss or diminution is to the junior lienholder, not the estate.
The fourth allegation is that “[a]n analysis of the Monthly Operating Reports [MORs’] filed by CSAME with the Office of the U.S. Trustee (March 2012 through January 2013) reveals a substantial post-Petition operating loss.” OneUnited did not supply the analysis in its motion to dismiss or in its separate memorandum. After trial it now argues that the MORs show a negative post-petition cash flow of $300,877.40, an average loss of $20,058.49 per month. CSAME responds that these “losses” are nothing but the expenditure of restricted grant funds for grant purposes, which is not properly characterized as a loss, and CSAME’s non-restricted accounts have shown a slight increase.
I need not decide the proper characterization of the use of grant funds. CSAME has used up, and not been replenishing, its cash; and this has occurred notwithstanding a suspension of debt service. The average monthly deficit is substantial, at least $14,166 (Mr. Dragelin’s reconstructed figure) if not $20,056 (if the MORs are taken at face value). CSAME’s remaining cash is near to nothing. After the eviden-tiary hearing, OneUnited requested a further finding that administrative expenses now render the estate administratively insolvent, citing two potential claims that have neither been filed nor tested. On both substantive and due process grounds, I do not so find. Nonetheless, CSAME can now avoid administrative insolvency only by some combination of spending cuts and increases in donations. It has recognized the need for spending cuts and begun to implement them. For these reasons, I find cause for concern but not administrative insolvency of any degree and not cause for dismissal.
*1142. § 1112(b)(4)(B): Gross Mismanagement of the Estate
Under § 1112(b)(4)(B), cause includes “gross mismanagement of the estate.” OneUnited argues that CSAME has grossly mismanaged the bankruptcy estate by failing to restore or maintain the Storefronts and the Milton Parsonage, by concealing the prepetition diversion of Endowment funds, and by failing to raise more money in congregational giving than it has during the post-petition period. None of this is mismanagement of the estate, which is concerned with the handling of estate assets. In support of its position, OneUnited offered no evidence whatsoever that restoration of either the Storefronts or the Milton Parsonage was in the best interest of the estate. The concealment of Endowment diversions, though wrongful, involved no management of estate assets. And the potential contributions of CSAME’s members are not property of CSAME or its estate.
3. § 1112(b)(4)(C): Failure to Maintain Insurance
Section 1112(b)(4)(C) states that cause includes “failure to maintain appropriate insurance that poses a risk to the estate or to the public.” 11 U.S.C. § 1112(b)(4)(C). OneUnited seeks relief on this basis in its post-trial arguments, but it did not articulate this basis for relief before the eviden-tiary hearing, either in its motion or in the memorandum later filed in support of it. The facts that constitute the basis for dismissal under this subsection were the subject of a late interruption in the evidentia-ry hearing, but they were not the subject of the evidentiary hearing itself. OneUnit-ed might have moved to amend its motion and to reopen the evidence, to add this subsection and the underlying facts as a basis, but it did not do so. Not surprisingly, CSAME did not address this issue in its otherwise comprehensive post-trial brief on the motion to dismiss. For lack of due process, then, this subsection may not be the basis for a finding of cause.
Even substantively, cause has not been demonstrated. OneUnited relies on a statement by CSAME’s counsel to the effect that three of five properties were uninsured for some unspecified time; the properties in question were not identified except as unoccupied. CSAME, however, owns six properties, including four that are unoccupied. OneUnited itself asked for clarification as to which of the properties were uninsured, but no answer was supplied on the record. Of the four unoccupied properties, three — the Milton Parsonage, the Storefronts, and the Parking Lot — have no demonstrated value above the value of the land they occupy, which, being land, is not at risk. Therefore, even if there was a lapse in “appropriate insurance” of some appreciable length, the case has not been made that the estate was put at risk. “Cause” in this subsection requires proof not just of a failure to maintain appropriate insurance but also that the estate was thereby put at risk.21 11 U.S.C. § 1112(b)(4)(C).
4. § 1112(b)(4)(D): Unauthorized Use of Cash Collateral
Under § 1112(b)(4)(D), cause includes the unauthorized use of cash collateral substantially harmful to one or more creditors. 11 U.S.C. § 1112(b)(4)(D). In its motion to dismiss, OneUnited “preserved the argument” that cause for dismissal includes CSAME’s use of “cash collateral” belonging to the Endowment, but OneUn-ited acknowledged uncertainty about *115whether the funds in question were in fact cash collateral, and therefore stopped short of actually “making” this argument. OneUnited now makes no mention of this theory in its post-trial brief; the argument is deemed waived.
5. § 1112(b)(4)(F): Failure to Satisfy Reporting Requirement
Under § 1112(b)(4)(F), cause includes “unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter.” The movant must specify a filing or reporting requirement and prove a failure to satisfy it. In its post-trial brief, OneUnited’s entire argument under this subsection is founded on an alleged failure of CSAME to satisfy investigation and reporting requirements that OneUnited contends were imposed upon CSAME, as debtor in possession, by § 1106(a)(3) and (4) (defining duties of a trustee) via § 1107(a) (specifying the duties of a trustee that a debtor in possession shall perform). But the duties imposed on a trustee by § 1106(a)(3) and (4) are expressly excepted from those that § 1107(a) imposes on a debtor in possession. 11 U.S.C. § 1107(a) (“a debtor in possession ... shall perform all the functions and duties, except the duties specified in section 1106(a)(2), (3), and (4), of a trustee serving in a case under this title”). The requirement in question did not apply to CSAME.
In its Motion to Dismiss, OneUnited also complains that CSAME failed to list the Endowment on its schedule of creditors holding nonpriority unsecured claims (“Schedule F”) and on the list of the twenty largest unsecured creditors. CSAME does not dispute this allegation but contends that, where CSAME did file its schedules and list of unsecured creditors, and where it has undertaken remedial measures with respect to the omitted creditor, its omission of the Endowment from the schedule and list is not cause for dismissal.
While I do not find these factors wholly irrelevant to § 1112(b), their relevance to a determination of cause under subsection (b)(4)(F) is limited to whether the failure in question was, as that subsection requires, “unexcused.” 11 U.S.C. § 1112(b)(4)(F). Not every minor omission or inaccuracy in complex and voluminous schedules is cause for dismissal. However, this failure was the omission of a creditor that CSAME does not contend was inadvertent. Even if there had been no diversion here, the Endowment would have had a claim — because CSAME had not yet fully performed under the latest grant agreement. The Endowment was entitled to notice of the case. The failure to schedule the debt to the Endowment frustrated the notice purpose and served to disenfranchise the Endowment. The diversion and the affirmative measures by which they were hidden from the Endowment: these only make matters worse. So the failure here was not insignificant or “excused.” The omission of the endowment from Schedule F and from the list of the twenty largest unsecured creditors is cause under § 1112(b)(4)(F).
Under the heading of § 1112(b)(4)(F), OneUnited also lists other alleged misrepresentations and omissions that are not tied to specific filing or reporting requirements. I need not address these. Cause under this subsection is limited to failure to satisfy a specific filing or reporting requirement.
6. Bad Faith and Other Cause
The list of items constituting cause in § 1112(b)(4) is not exclusive. OneUnited urges the Court to find cause in a raft of alleged misrepresentations and material omissions. I find no intent to deceive in *116any of these. Having addressed them in the findings of fact, I need not rehearse them again here. They are not bad faith and not “cause” under § 1112(b). For the same reasons as I found that the Plan was proposed in good faith, I would find that CSAME has acted in good faith.
7. Conclusion Regarding “Cause”
I find far less cause for dismissal than OneUnited alleges, but one ground is sufficient. Cause exists under § 1112(b)(4)(F) for omission of the Endowment from Schedule F and from the list of the twenty largest unsecured creditors.
b. Exceptions
Once cause is established, conversion or dismissal may be avoided only by showing that the case falls into one of the exceptions set forth in § 1112(b)(1) and (2). Subsection (b)(1) specifies that conversion or dismissal is not mandatory if “the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.” 11 U.S.C. § 1112(b)(1). As each party for its own reasons agrees, the appointment of a trustee would be neither useful nor appropriate here. Section 1104(c) states that the court may appoint an examiner at any time before the confirmation of a plan “to conduct such an investigation of the debtor as is appropriate ... if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate.” 11 U.S.C. § 1104(c).22
CSAME’s position is that there is no cause to appoint an examiner, but also that if the Court finds such cause, then the appointment of an examiner, with duties appropriately limited to protect the religious liberty interests of CSAME, is preferable to dismissal of the case, the former being more in the interests of creditors and the estate. OneUnited does not dispute that there is cause to appoint an examiner but argues that dismissal of the case better serves the interests of creditors and the estate because (i) there is no prospect of a confirmable plan, despite substantial resources and competent representation, (ii) the case is administratively insolvent, such that further administrative costs will accrue to the detriment of creditors and the estate, and (iii) unsecured creditors stand to recover nothing even under the proposed plan.
There is cause to appoint an examiner. CSAME apparently allowed insurance coverage to lapse on three of its properties. The circumstances of this lapse are unclear, but whatever they are, the lapse is reason to appoint an examiner to monitor the existence and continuance of insurance coverage. Also, CSAME’s accounting standards and practices have left something to be desired in this case. While the church is entitled to its own standards for its own internal purposes' — and I do not find that its records, in combination with Rev. Adams’s familiarity with them and the peculiar needs of CSAME and the denomination, are inadequate for internal purposes — the Court and creditors are entitled to more reliability and clarity. Therefore, especially as CSAME’s cash reserves have dwindled to nothing, it would be useful for an examiner to review CSAME’s MORs going forward.
These limited duties would not require the examiner to cross boundaries protecting the religious liberty interests of CSAME. They fit comfortably within parameters that CSAME has indicated would *117be acceptable. The order for appointment of an examiner would include express limitations to protect these interests.
I further find that the interests of creditors and the estate are better served by not dismissing the case. It has not been established that CSAME cannot reorganize and confirm a plan. The current plan cannot be confirmed, but others, especially of more modest ambition, could well succeed. Any number of proposals would supply to both OneUnited and to unsecured creditors substantially more value than each would receive from CSAME outside of bankruptcy. Outside of bankruptcy, the unsecureds would likely receive nothing; OneUnited would receive, at best, the liquidation value of its collateral, and probably not for quite some time; OneUn-ited’s litigation with CSAME and FE-DAME would continue; Tremont might bring a marshaling complaint against OneUnited; Thomas would seek to establish the priority of its claim as against the RRC; and a 200-year-old congregation of 1400 members with the ability and willingness to repay a substantial portion of its debt might well be foreclosed out of existence, a needless loss to its members, denomination, and community.
It may be that OneUnited would object to any plan that CSAME might propose, regardless of its merits, preferring evidently to be able to use a threat of foreclosure on CSAME’s most necessary properties as leverage against FEDAME. During closing arguments, the Court inquired of counsel to OneUnited: “What’s [OneUnited] going to do [if the case is dismissed] that I can take into account in deciding whether it’s in the best interests of creditors and the estate?” Counsel had no answer other than that OneUnited has mortgages and powers of sale, armed with which it would attempt to negotiate with FEDAME and CSAME. It conceded that unsecured creditors — virtually every creditor other than OneUnited — would get nothing and that litigation would continue, possibly on multiple fronts. In essence, OneUnited wants dismissal in order to be able to threaten foreclosure against CSAME as leverage in negotiations with FEDAME — to treat CSAME as a pawn or hostage on a claim against a third party. As against CSAME itself, however, dismissal would not be in the best interest of any constituency in this case, not even OneUnited. All stand to get more from CSAME — the appropriate focus of this analysis — through a chapter 11 plan.
This analysis gets to the very core of chapter 11. The Bankruptcy Code offers a collective action that preserves the going concern of the debtor while preventing undue damage to creditors. Dismissing this case would serve no purpose. It would launch CSAME into a destructive spiral from which it might well not recover. Moreover, despite judicial probing, even OneUnited could not explain how it would be advantaged by dismissal.
The appointment of an examiner requires payment of the examiner’s fee as an administrative expense. In view of the limited resources available in this case for that purpose, the examiner’s fees should be kept to a minimum, and the examiner’s charge shall be narrow and limited. Accordingly, by separate order, the Court will deny dismissal and order the appointment of an examiner.
CONCLUSION
For the reasons set forth above, the Court will enter separate orders denying confirmation of the Plan and dismissal of the case and ordering the appointment of an examiner.
. To be clear, the motion did not itself request subordination but merely set forth the argument for subordination that would be effected through a plan and is in fact a feature of the plan now under consideration. Insofar as the basis for subordination is the same conduct as constitutes the basis for the relief that the motion did request (designation and fees), the issue was briefed in the context of that motion and will be addressed there.
. The first two days also included the eviden-tiary hearings on OneUnited’s first motion to dismiss, CSAME’s objection to OneUnited’s claim, and CSAME's Designation, Subordination, and Fee Motion; and the last three days also included the evidentiary hearing on a second motion by OneUnited to dismiss the case. The evidence received in conjunction with those matters was also received in conjunction with confirmation.
. This general unsecured claim would be a Class 5 claim for which, consistent with the trealment of Class 5 claims, Thomas would receive nothing.
. I do not find that there is no justification, only that the case has not been made.
. The structure likely has no value to protect, and land does not burn.
. These figures are approximate averages for the first five years of the plan.
. Deposition of Rev. Vernard Leak, pp. 55-56. This testimony raises the question of whether tradition, or long standing practice, is a separate source of authority, alongside the Book of Discipline, in the AME Church.
. They are: (i) Dr. Clement Fugh, presently a bishop (but not of the FEDAME), who has been involved in the revision and compilation of the Doctrine and Discipline of the AME Church since 1980; (ii) Rev. Vernard Leak, administrator for bank relations for the First Episcopal District and a presiding elder; (iii) Clarence Fleming, chief financial officer for the First Episcopal District since 1998; and (iv) Rev. Gregory Groover, pastor of CSAME since 1994 and a pastor in AME churches since 1987.
. OneUnited requests a finding that FE-DAME, "by its own account, presented enormously inflated financial statements to a federally insured banking institution in aid of an application for millions of dollars in financing to an otherwise unqualified borrower,” but for this proposition it cites only a federal statute that is not evidence for the proposition. OneUnited Bank’s Post-trial Brief [doc. # 630], p. 27. In addition, the proposed finding does not allege knowledge (or at least belief) of falsity and intent to deceive.
. I do not find or suggest that if this plan is rejected, the donation would not be made in a different form. That would be speculation. The point is only that the present donation does in fact have the structure it purports to have.
. The grant monies having recently run out, all future funding must come from CSAME, or not at all; and there is no possibility of further misappropriation of grant funds.
. The Plan provides for two possible treatments of the Construction Loan, If, as CSAME would prefer, the Construction Loan were paid at 5.75 percent interest without a guarantee, total debt service would be $330,000. The Plan cannot be confirmed with that treatment, and therefore, per the Plan, the alternative treatment governs, under which the Construction Loan would be paid at 5.25 percent, which, given the proposed 30-year amortization, makes a difference of approximately ($14,000) in annual debt service.
. CSAME’s monthly operating reports (“MORs”) show average deficits of $20,000 per month over the postpetition period, but Rev. Adams conceded she made errors in at least some of these, carrying forward incorrect numbers as the beginning balance. Timothy Dragelin testified that on the basis of his reconstruction of the 12-month period ending December 31, 2012, there was a total deficit for the period of $170,000, or $14,166 per month. Mr. Dragelin’s reconstruction is more reliable than the MORs.
. I do not rely on the opinion of CSAME's expert for this conclusion, though it is corroborative.
. See 11 U.S.C. § 506(a)(1) ("An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor’s interest ... is less than the amount of such allowed claim”).
. For these same reasons I conclude that the Guaranty is "related to” the bankruptcy case within the meaning of 28 U.S.C. § 1334(b).
. I do not mean to suggest that a rough guesstimated equivalence would suffice.
. In view of the Plan’s acceptance by Class 3, I need not decide whether, by virtue of the denial of subordination and the resulting treatment of Class 5- — it would get nothing— Class 5 must be deemed, by operation of 11 U.S.C. § 1126(g), to have rejected the Plan, despite its vote of acceptance. OneUnited does not dispute that the Plan has been accepted by Class 5.
. The Motion to Dismiss included a fifth allegation, regarding unaccounted uses of grant funds; but OneUnited asked for no finding on that allegation in its post-trial brief and appears to have abandoned the allegation.
. The parties’ stipulation as to values applies only to the Plan, not the Motion to Dismiss, and in any event does not address liquidation values. The three properties that secure the Construction Loan have always concededly had less value than the amount of the loan they secure. It is not established that the other three properties had sufficient liquidation value on the petition date to cover the combined amounts of the Church Loan and Tremont Loan on that date.
. OneUnited does not invoke the portion of subsection (b)(4)(C) concerning risk "to the public,” only the portion concerning risk “to the estate.”
. Although § 1112(b)(1) refers to a determination to appoint an examiner “under section 1104(a),” the appointment of an examiner is governed entirely by § 1104(c), not § 1104(a); the latter governs the appointment of a trustee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496359/ | MEMORANDUM OF DECISION
FRANK J. BAILEY, Bankruptcy Judge.
By its complaint in the adversary proceeding, plaintiff Morgan Keegan & Company, Inc. (“Morgan Keegan”) seeks a determination that a debt owed to it by defendant and chapter 7-debtor Diana Swan (“Ms. Swan”) is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(B) as a debt arising from a materially false financial statement. After a trial, the Court now makes the following findings of fact and rulings of law, and on the basis thereof, concludes that Morgan Keegan’s claim is excepted from discharge. Facts
From 1988 to November 2007, Ms. Swan maintained two margin accounts at UBS Paine Weber (“UBS”). One was a joint account with her 86-year-old mother, Dorothy Swan, and the other was in Ms. Swan’s name alone.1 Both accounts held *121stock in Video Display Corporation (“VIDE”). In early November 2007, UBS expressed concern over the number of shares she held in VIDE — the stock being very speculative, and the accounts being heavily invested in it — and asked her to either sell some of the shares or to transfer the accounts to another brokerage firm. On or about November 13, 2007, Ms. Swan transferred the accounts to Morgan Keegan.
To transfer the accounts, Ms. Swan spoke with a sales assistant at Morgan Keegan, Jennifer Borus, and with Ms. Bo-rus alone.2 By answering questions from Ms. Borus over the phone, Ms. Swan completed a new account questionnaire, which collected, among other things, financial information about Ms. Swan, including her annual income, net worth and liquid net worth. Ms. Borus entered all of the information into Morgan Keegan’s computer system. The same process was done for the joint account. Warren Allen, a delegate of the branch manager, reviewed the information regarding both accounts for typographical and other obvious errors and approved the account transfers. Two “new account forms” (“NAF”s) were generated; these NAFs included the information that Ms. Swan had given Ms. Borus over the phone; and Morgan Keegan mailed these to Ms. Swan and Dorothy Swan to review and, by their signatures thereon, to verify. They signed the new account forms, which are not complex, lengthy, or difficult to understand, and returned them to Morgan Keegan. Above the signature line, the NAFs included the following language: “I/We have REVIEWED THE FINANCIAL INFORMATION AND INVESTMENT OBJECTIVES AND AGREE THAT THIS INFORMATION IS CORRECT.”
Ms. Swan testified at trial that she had signed not a completed form but a blank form, but, after trial, she made no request for a finding to this effect. In any event, this testimony is not credible. Ms. Borus testified credibly that all of the information must be complete and entered into Morgan Keegan’s system in order for an NAF to be generated. Morgan Keegan could not and, I find, did not send her a blank NAF to sign.
The new account forms that Ms. Swan signed contained the following information: that Ms. Swan was single; that her approximate annual income was over $150,000; that her approximate liquid net worth was over $1,000,000; that her approximate net worth was between $1,000,000 and $5,000,000; that her tax bracket was 28%; that her occupation was a homemaker; and that speculation was her top investment objective. Notwithstanding these assertions, Ms. Swan’s joint federal tax returns with her husband showed annual income of $91,802 in 2006 and $98,310 in 2007. Of that combined income, only $19,000 was attributable to her- — the balance was her husband’s. With respect to liquid net worth, at the time she signed the new account forms, Ms. Swan had a stock portfolio worth approximately $802,354.763 and additional cash of $50,000 to $60,000.
*122Ms. Swan testified that she had “overestimated” her liquid net worth and annual income on the new account forms. She stated that at the time she signed the new account forms, she believed that all of the information she provided was accurate. She explained that because her husband owned his own business, she had believed that their annual income was $150,000. She also testified that she is an unsophisticated investor who does not understand the risk involved with a margin account or regularly check her account statements. Lastly, she stated that she never intended to deceive Morgan Keegan.
I do not find Ms. Swan’s testimony credible. In April of 2007, Ms. Swan had signed her and her husband’s joint federal income tax returns for 2006. She was aware that her annual income was less than what she represented to Morgan Kee-gan; and her tax return for the next year shows no material change in income during 2007. She does not contend that she did not understand the meaning of “liquid net worth,” and she offers no explanation for the substantial overstatement of that amount. I conclude that she made the misrepresentations with knowledge of their falsity or, in the case of the liquid net worth, at least with reckless disregard for the accuracy of her representation.
Ms. Borus testified, and I find, that it is not Morgan Keegan’s normal business practice to require proof of income or assets or to further investigate the financial information provided by a prospective client. She further testified that based on her considerable experience in the industry, both at Morgan Keegan and two other firms, it was not ordinary practice in the industry to require proof of assets or to run credit checks on potential clients. She explained that once an account is opened, Morgan Keegan’s practice is to update a client’s information every three years or at the request of the client. I credit Ms. Borus’s testimony on these issues.
The last witness was Mr. Hamilton, the branch manager of the office where the accounts were held. As he explained, a prospective client’s annual income and liquid net worth affect Morgan Keegan’s decision to approve an account. Annual income affects the overall approval of the account, as it reflects the ability of the client to meet his or her obligation when borrowing money. Liquid net worth is more important when approving a margin account: any liquid net worth in excess of assets that Morgan Keegan holds goes to the ability of the client to cover a margin call.4 Morgan Keegan relies on this representation in deciding whether to approve a new account. Lastly, he stated, credibly, that based on in his 36 years of working in the industry, it is not customary to investigate any of the financial information provided by a prospective client. I find that Morgan Keegan relied on the representations of income and liquid net worth in making its decision to accept Ms. Swan’s accounts, and that this reliance was in keeping with its own internal standards and with standards in its industry.
Sometime after the accounts were transferred, Ms. Swan and Dorothy Swan authorized the transfer of all assets from the joint account into Ms. Swan’s individual account. After the two accounts were merged, and on or around January, 2009, the value of the stock declined, and Morgan Keegan therefore made a margin call. Ms. Swan covered the margin call and paid Morgan Keegan $60,000, which was essentially all of her liquid assets. Then shortly *123after, Morgan Keegan made a second margin call, which Ms. Swan was unable to cover. On or around March, 2009, Morgan Keegan therefore liquidated the remaining stock in her account, leaving a debit balance of approximately $240,000. Subsequently, per their client agreement, Ms. Swan and Morgan Keegan went to arbitration. Morgan Keegan was awarded a judgment for compensatory damages in the amount of $242,116.96 plus costs and attorneys’ fees in the amount of $72,480.00.
Procedural History
On July 29, 2011, Ms. Swan filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Morgan Keegan commenced the instant adversary proceeding seeking a determination that the debt owed to it by Ms. Swan pursuant to the arbitration award is nondischargeable under 11 U.S.C. § 523(a)(2)(B). At trial, Ms. Swan and two representatives from Morgan Keegan, Ms. Borus and Mr. Hamilton, testified. At the conclusion of evidence, I took the matter under advisement. Both parties submitted post-trial briefs.
Jurisdiction
The matter before the court is the complaint under 11 U.S.C. § 523(a) to determine the dischargeability of a debt. The matter arises under the Bankruptcy Code and in a bankruptcy case and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by standing order of reference, referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). It is a core proceeding. 28 U.S.C. § 157(b)(2)(I) (core proceedings include determinations as to the discharge-ability of particular debts). This court accordingly has authority to enter final judgment in the matter. 28 U.S.C. § 157(b)(1).
Positions of the Parties
Morgan Keegan asserts that the debt owed to it by Ms. Swan is nondischargeable under § 523(a)(2)(B) because the debt was incurred by the use of materially false statements regarding her financial condition. Morgan Keegan contends that the financial information Ms. Swan provided on the NAFs was materially false, that it relied on this information when deciding to approve the transfer of the accounts, that this reliance was reasonable, and that Ms. Swan submitted the false NAFs with intent to deceive.
Ms. Swan argues that the falsity of the NAFs was not material. Ms. Swan does not dispute that Morgan Keegan relied on the false information in the NAFs but contends that this reliance was not reasonable because Morgan Keegan made no independent investigation of the information she provided and did not update the information once the accounts were transferred. Additionally, she contends, there were “red flags” in the new account forms that should have alerted Morgan Keegan that further investigation of the information on the NAFs was required. Lastly, Ms. Swan asserts that she never intended to deceive Morgan Keegan; she maintains that, at the time she completed the forms, she believed all the information she provided was accurate.
Discussion
Section 523(a)(2)(B) provides:
(a) A discharge under 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—
(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, *124property and services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
11 U.S.C. § 523(a)(2)(B). A creditor seeking to except a debt from discharge bears the burden of proving each element by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “In furtherance of the Bankruptcy Code’s ‘fresh start’ policy, exceptions to discharge are narrowly construed.” Danvers Savings Bank v. Alexander (In re Alexander), 427 B.R. 183, 193 (Bankr.D.Mass.2010), citing Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997).
There is no dispute that the new account forms signed by Ms. Swan were written statements concerning her financial condition. The remaining issues before the Court are: (a) whether falsehoods in the NAFs were material; (b) whether Morgan Keegan’s reliance on the false information when approving the transfer of the accounts was reasonable; and (c) whether Ms. Swan submitted the new account forms with the intent to deceive Morgan Keegan.
a. Materially False Statement
To except a debt from discharge under § 523(a)(2)(B), the creditor must prove that, when the financial statement was made, it was not only false but “materially” so. A financial 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. The question of materiality should be judged not on the basis of size or seriousness of the error but by a comparison of the debt- or’s actual financial condition with the picture he paints of it. A financial statement which markedly overstates the value of a person’s assets, so as to distort his financial picture must be considered materially false.
Merchants Nat’l Bank v. Denenberg (In re Denenberg), 37 B.R. 267, 271 (Bankr. D.Mass.1983) (internal citations omitted).
The new account forms grossly overstated Ms. Swan’s actual financial condition. The forms reported annual income of $150,000 and liquid net worth of over one million dollars. The actual figures were quite different. Her 2006 and 2007 federal tax returns showed combined annual income with her husband of $91,802 and $98,310. Of that combined income, only $19,000 was Ms. Swan’s own income. With respect to liquid net worth, she had a stock portfolio worth approximately $802,000 and cash of approximately $50,000 to $60,000.
Ms. Swan contends that “material falsity” requires proof that the debtor must have known of the falsity of the representations when she made them.” For this she cites case law interpreting preCode bankruptcy law. Her reliance on pre-Code law is misplaced and, in any event, a misinterpretation of § 523(a)(2)(B), which deals with the debtor’s state of mind and specific intent in § 523(a)(2)(B)(iv) (requiring intent to deceive), not § 523(a)(2)(B)(i) (requiring that statement be “materially false”).
Accordingly, the Court concludes that the gross misrepresentations of annual income and liquid net worth were material.
b. Reasonable Reliance
The reasonableness of reliance is to be objectively determined in view of the totality of the circumstances. In re Figge, 94 B.R. 654, 665 (Bankr.C.D.Cal. *1251988); see also Collier on Bankruptcy, at ¶ 523.08[2][d]. In cases of lending institutions, this standard is determined by comparing the lender’s “actual conduct with its normal business practice, the standards and custom in the industry and the particular circumstances concerning the loan application.” In re Denenberg, 37 B.R. 267, 272 (Bankr.D.Mass.1983) (internal citations omitted); see also In re Herzog, 140 B.R. 936, 938 (Bankr.D.Mass.1992) (courts in this district have held that such reliance may be determined by comparing a bank’s regular practice with industry standard and with that which occurred during the transaction in question).
Ms. Swan argues that Morgan Keegan’s reliance on the falsehoods in the NAF was not reasonable because Morgan Keegan made no independent inquiry of the information she provided and did not update the information once the accounts were transferred. Both Ms. Borus and Mr. Hamilton testified that it was not Morgan Keegan’s normal business practice to run credit checks or verify proof of income and assets of potential new clients. Both further testified that it is not customary in the brokerage industry to make such an inquiry when opening a margin account. Moreover, it is Morgan Keegan’s policy to update account information only every three years or at the request of a client. As Ms. Swan’s account was opened in 2007, it was not scheduled to be updated until 2010. Finally, Ms. Swan did not contact Morgan Keegan to report any changes to the account information. Accordingly, the Court finds that Morgan Keegan acted reasonably when relying on the information she provided on the new account form without conducting further inquiry.
Ms. Swan also argues that any reliance by Morgan Keegan was unreasonable because there were “red flags” that should have put Morgan Keegan on notice that the information was inaccurate. While a lender is not required to make affirmative inquiries upon a receipt of a financial statement, it will nevertheless be considered to have acted unreasonably if it ignores obvious “red flags.” In re Herzog, 140 B.R. at 938.
Ms. Swan contends that her annual salary of $150,000 as a homemaker should have raised a red flag that required further verification. Ms. Borus testified that Morgan Keegan has several clients that are homemakers with comparable annual income derived from sources such as alimony, trust payments, and income from rental property. The Court finds credible this explanation as to why this did not raise a red flag.
Alternatively, Ms. Swan asserts that the high-risk, speculative investment objective listed as a top priority for the joint account with her 86-year-old mother should have alerted Morgan Keegan to an issue. Based on the totality of the circumstances surrounding the transfer of the accounts, the Court does not see this as an obvious red flag for two reasons. First, Ms. Swan was listed as the primary account holder on the joint account. As the primary account holder, Ms. Swan’s age, investment objectives and financial information were also considered when deciding to approve the account. The priority of the speculative objective on Ms. Swan’s joint account was consistent with the objectives listed on her individual account. Furthermore, the VIDE stock Ms. Swan sought to transfer to Morgan Keegan was highly speculative. Again, this was consistent with the speculative investment objective listed on the joint account form. The Court concludes that Morgan Keegan did not ignore obvious “red flags” and that its reliance on the new account forms was reasonable. In any event, even if this should have raised a *126red flag, the flag would not have concerned income or liquid net worth, only the prudence of the investment strategy.
c. Intent to Deceive
Intent to deceive may be proven by direct or circumstantial evidence. In re Sheridan, 57 F.3d 627, 633 (7th Cir.1995). Because direct evidence of intent is rarely available, courts have held that intent to deceive may be inferred from the totality of the circumstances surrounding the debtor’s act, including the debtor’s reckless indifference to, or reckless disregard of, the accuracy of the financial information submitted to the creditor. Ins. Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1119 (3rd Cir.1995). “A debtor’s mere unsupported assertions of honest intent will not overcome natural inferences derived from admitted facts.” Agribank v. Webb (In re Webb), 256 B.R. 292, 297 (Bankr.E.D.Ark.2000).
Ms. Swan denies that she had the requisite intent to deceive Morgan Kee-gan. Although the financial information was materially false, Ms. Swan contends that at the time she completed the new account forms, she believed that all information she provided was accurate. The Court does not find these assertions credible. As to her income, Ms. Swan made her statement with knowledge of its falsity. As to liquid net worth, she made the statement either with knowledge of its falsity or, at least, with reckless disregard for the truth of the matter asserted, which was easily determinable from account statements and published daily valuations of her stock holdings. The Court simply does not view as credible Ms. Swan’s assertions that she is an unsophisticated investor who did not understand the risk involved with a margin account. Ms. Swan maintained two margin accounts with UBS for over 19 years. Her portfolio was comprised of high-risk, speculative VIDE stock. Her blanket assertions that she did not have the intent to deceive Morgan Keegan does not overcome the inference that she acted with reckless disregard for the accuracy of the financial information she submitted to Morgan Keegan.
Conclusion
For the reasons set forth above, Morgan Keegan’s debt is excepted from discharge. A separate judgment shall enter accordingly.
. "A margin account is a device used to extend credit to investors who buy securities. Initially, the investor pays only a percentage of the purchase price, borrowing the difference from the brokerage firm. The purchased securities are themselves used as collateral for the loan. The arrangement is a dynamic one, however, because the value of stock fluctuates. If the market price of the securities decreases, the collateral’s value is *121diminished and the broker may demand that the investor deposit incremental funds.” Advest, Inc. v. McCarthy, 914 F.2d 6, 7 (1st Cir.1990).
. Ms. Borus did not also speak to Dorothy Swan, who had no role in the transfer of the accounts.
. The stocks in her portfolio were worth $1,292,670 less an outstanding debit balance of$490,315.24, which Morgan Keegan paid UBS when the accounts were transferred.
. He provided the following example: “If I [Morgan Keegan] hold a half million dollars of assets for a client and a client reflects liquid net worth of a million, then I believe that the client has a half a million dollars of liquid net worth somewhere else.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496361/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the “Amended Complaint of Marshall L. Field, Administrator C/T/A of the Estate of Barbara B. Tighe, for Determination Excepting Judgment Debt from Dischargeability” filed by Marshall L. Field (“Field” or the “Administrator”), in his capacity as an administrator of the Probate Estate of Barbara B. Tighe (“Mrs. Tighe” or the “Estate”) against Stacey Hughes-Birch (the *137“Debtor”). Field maintains that the Debt- or willfully and maliciously usurped real estate belonging to the Estate resulting in a number of contempt judgments issued against her by the Essex County Probate and Family Court Department of the Trial Court (the “Probate Court”). He seeks an exception from discharge of the debt owed to the Estate arising from the judgments pursuant to 11 U.S.C. § 523(a)(6). The Court conducted a trial on July 16, 2013 at which two witnesses, the Debtor and Field, testified and nine exhibits were introduced into evidence. Following the trial, both parties filed post-trial briefs.
The debt owed to the Estate arises from litigation spanning more than six years and involving the filing of hundreds of documents in the Probate Court as well as in numerous other trial and appellate courts concerning the scope of a devise to the Debtor of certain portions of real property under Mrs. Tighe’s will. The issue presented is whether the debt owed to the Estate was caused by the Debtor’s willful and malicious injury and thus should be excepted from discharge.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(a) and (b) and the order of reference from the United States District Court for the District of Massachusetts. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The Court now makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.
II. FACTS AND PROCEDURAL HISTORY
The Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on March 1, 2012. On Schedule A — Real Property, she listed real property located at “95 Lacy Street, North Andover, MA (as inherited per Probate Court order)” with a value of $350,000 unencumbered by any liens. On Schedule C — Property Claimed as Exempt, the Debtor listed the Lacy Street property as exempt pursuant to the Massachusetts homestead statute, Mass. Gen. Laws ch. 188, § 1, in the amount of $500,000. On Schedule F— Creditors Holding Unsecured Nonpriority Claims, the Debtor listed a single creditor, namely Field, as “Executor of the Estate of Barbara Tighe” as the holder of a disputed claim for $150,000. She identified William N. Hurley, Esq., as the “Assignee or other notification for: Marshall L. Field.”
On May 2, 2012, Field, as Administrator, filed an Objection to the Debtor’s claimed homestead exemption. Field asserted that the Debtor’s homestead declaration, which was recorded on August 19, 2011 in the Northern Essex District Registry of Deeds, was defective because the source of the Debtor’s title to the Property was identified as a “Deed” recorded in the •Northern Essex District Registry of Deeds at Book 12574, Page 275, when, in fact, no deed had been recorded at that book and page because her interest in the Lacy Street property was derived only from Mrs. Tighe’s Estate. The Debtor filed a response, and the Court conducted a hearing on July 10, 2012. The Court overruled Field’s Objection by Order dated August 20, 2012, ruling that a deed is not required to establish the Debtor’s interest in the Lacy Street property under the Massachusetts homestead statute.
On May 2, 2012, Field also filed a timely complaint for a determination of the non-dischargeability of the debt owed to the Estate pursuant to 11 U.S.C. § 523(a)(6). He filed an amended complaint (the “Complaint”) the following day which was the subject of the July 16, 2013 trial. Field later filed a Second Amended Complaint on June 4, 2012, without leave of Court, in which he purported to add a claim for *138denial of the Debtor’s discharge pursuant to 11 U.S.C. § 727(a)(2)(A). The Debtor filed a Motion to Strike that count which the Court allowed on August 3, 2012. On June 13, 2012, Field, on behalf of the Estate, timely filed a proof of claim asserting a general unsecured claim for $187,050 based upon “Judgment 3/23/10 Essex Probate Ct. Docket 04E0083.”
The Court issued a Pretrial Order on August 6, 2012 requiring, among other things, that the parties file a Joint Pretrial Memorandum, which they did on December 3, 2012. In the Joint Pretrial Memorandum, the Debtor identified a number of proposed exhibits she planned to introduce at trial, including copies of Mrs. Tighe’s will and codicils as well as pleadings and transcripts of proceedings previously litigated in the Probate Court, as well as other courts, in the protracted litigation between the Estate and the Debtor. Under the heading “Issues of Fact Which Remain to be Litigated,” the Debtor included factual issues concerning the scope of the devise to her under Mrs. Tighe’s will as well as issues relating to the conduct of Field as Administrator of the Estate.
On July 15, 2013, Field filed a Motion in Limine in which he asserted that all pre-petition actions between the parties concerning Mrs. Tighe’s devise to the Debtor had been resolved by judgments which were affirmed on appeal, and that the Debtor’s plans to proffer certain exhibits and testimony at trial, as set forth in the Joint Pretrial Memorandum, were an attempt to impermissibly relitigate issues resolved by the Probate Court and an attempt to collaterally attack its final orders. The Court heard the Motion in Limine on July 16, 2013, immediately prior to the trial. The Court ruled that the various judgments of the Probate Court which set forth, among other things, the amount of land inherited by the Debtor from Mrs. Tighe, the Debtor’s liability for contempt and the amount of the debt owed by her to the Estate were final orders and were binding on this Court. The Court prohibited the Debtor from introducing any evidence to challenge those judgments under principles of collateral estoppel, see Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), the Full Faith and Credit Act, 28 U.S.C. § 1738, and the Rooker-Feldman doctrine. The sole issue for trial, the Court ruled, was whether the debt owed to the Estate, as determined by the Probate Court, should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(6). The Court also reiterated its dismissal of the count for denial of the Debtor’s discharge contained in the second amended complaint as it was “incomprehensible, poorly pled and failed to state a claim under § 727(a)(2)(A).”
III. FACTS ADDUCED AT TRIAL
To establish the debt owed to the Estate, Field introduced a number of judgments, memoranda and orders issued by the Probate Court between January 29, 2004 and May 27, 2010. The specific details of the protracted litigation, discussed below, were extracted from those documents, as supplemented by the testimony of the witnesses at trial.
Mrs. Tighe died on November 6, 2002. At the time of her death, she owned approximately eleven (11) acres of land containing at least one dwelling house, barn(s), sheds, stables and a riding ring located on Lacy Street in North Andover, Massachusetts (the “Property”) which she operated as a farm. The Debtor first met Mrs. Tighe in 1965, when she was five years old, through her father who boarded horses' on the Property. The Debtor worked for Mrs. Tighe while she was growing up, doing farm work and taking care of horses. The Debtor graduated *139from high school, attended college for two years, and worked for an insurance company for twenty years while continuing to work with horses on Mrs. Tighe’s farm. She helped Mrs. Tighe, who had two children, and her companion, Eddie, when they both became ill and disabled in the late 1990s, and she did so without compensation. In or around 2001, Mrs. Tighe approached the Debtor about living in her house and taking control of the farm after she died, explaining that she did not wish to leave the Property to her children who would not “keep it a farm.”
Mrs. Tighe died on November 6, 2002, and Eddie passed away a week later. Mrs. Tighe left a Last Will and Testament dated September 14, 1999, a Codicil dated October 12, 2000 and a Second Codicil dated September 20, 2002 which was executed six weeks prior to Mrs. Tighe’s death (hereinafter, the “Will”). Following a will contest initiated by Mrs. Tighe’s daughter, the Will was admitted to Probate in an action in the Probate Court entitled In re Estate of Barbara B. Tighe, Docket No. 02P2876EP1 (the ‘Will Contest”).
Pursuant to a Judgment issued by the Probate Court on January 29, 2004 (Manzi, J.) Field and Edward F. Finnegan (“Mr. Finnegan”), now deceased, were appointed as Co-Administrators of the Will (jointly, the “Administrators”). Admission of the Will into probate effected a devise to the Debtor of:
... that certain parcel of real estate now occupied by me as my residence, with the barn and other appurtenances and improvements attached in connection therewith, located in the Town of North Andover and situated on Lacy Street, ... and being a portion of that land described in a certain Deed dated December 21, 1967 ... intending to include no less than three (3) acres of land, upon which my home with attached barn is located and which parcel shall also include the hill behind such home with barn. It is my intention to have this parcel surveyed for a more definite description.
(emphasis added).1
No survey was conducted and no “definite description” of the Debtor’s devise was prepared prior to Mrs. Tighe’s death. The Probate Court, however, directed in the January 29, 2004 Judgment that a survey be commissioned and conducted “to determine the least amount of land in excess of a minimum of three acres ... in order to establish a lot consistent with applicable Zoning regulations, inclusive of Barbara B. Tighe’s Home with attached barn and inclusive of the hill behind said home with barn.” In other words, the Probate Court determined that the Debtor had rights in approximately 3 acres of the Property, with the remainder being the Estate’s portion. The vague and imprecise language of the Will and the confusion resulting from the absence of a barn attached to Mrs. Tighe’s house created an ambiguity about which outbuildings were intended to be given to the Debtor.
In 2004, the Debtor, her husband and two daughters moved into the main house, formerly occupied by Mrs. Tighe, despite the ongoing litigation and the lack of finality with respect to the boundaries applicable to her portion of the Property. The water and electricity she used came from lots which were later determined by the Probate Court to belong to the Estate and not the Debtor. At some point, Mr. Fin*140negan advised her that she could only have access to the house, and not other portions of the Property, and he directed that padlocks be placed on the Property’s other buildings including the barn where she kept her horses. In response, the Debtor testified that she “had to climb over a wall to get to the barn where my horses were.”
Following the admission of the Will into Probate and the Debtor’s use of various lots on the Property, a dispute arose among the Debtor, the Administrators and the putative heirs of the Estate concerning what portion of the Property and which specific buildings were included in the grant to the Debtor. The parties were unable to agree on these issues. This dispute over the ambiguous description of the devise to the Debtor, which was not sufficiently clarified by the January 29, 2004 Judgment, spawned litigation in the Probate Court, the Essex County Superior Court, the Massachusetts Land Court, and the United States District Court for the District of Massachusetts which continued in some form until at least 2010.
On November 15, 2004, the Administrators initiated suit against the Debtor in the Probate Court in an action entitled Edward F. Finnegan and Marshall L. Field, Co-Administrators of the Estate of Barbara Tighe v. Stacey Hughes-Birch, Docket No. 04E0083-GCI through the filing of a “Complaint for Instructions.” In that complaint, the Administrators requested that the court determine, inter alia, the area of land and the buildings devised to the Debtor pursuant to the January 29, 2004 Judgment, the portion of the Property the Debtor could continue to use and occupy, and the pro rata share of real estate taxes owed by the Debtor.
On December 1, 2004, the Administrators filed a “Motion for Determination” in the Probate Court through which they asserted that the parties were unable to agree what land and buildings on the Property were devised to the Debtor and which buildings she was entitled to use pending resolution of the case. The Debt- or opposed the Motion for Determination. On December 23, 2004, the Probate Court entered an Order on the Motion for Determination, finding that the words “attached barn” utilized in the Will referred to the structure known as the “shed” located on Lot # 2, but encroaching on Lot # 3 of a 1989 subdivision plan.2 The court further ordered that a survey be conducted to determine the land to which the Debtor was entitled and that she was to have continued use of the building identified as the shed and, with the approval of the Administrators, could continue to utilize the barn, located on Lot # 3, pending completion of the survey and resolution of the Complaint for Instructions. The Debtor filed a Motion for Clarification of the December 23, 2004 Order which the Probate Court denied.
Following the December 23, 2004 Order, further litigation between the parties ensued. On February 18, 2005, the Administrators filed a “Motion to Vacate” through which they sought to compel the Debtor to vacate the barn located on Lot # 3 of the 1989 subdivision plan because she was using it without their approval as required by the December 23, 2004 Order. The Debtor opposed the Motion to Vacate. She also sought the appointment of a Com*141missioner to conduct a survey, arguing that she had used the barn located on Lot # 3 for ten years and that the “only logical interpretation on [Mrs. Tighe’s] Will was that she intended to include Lot # 2 and Lot # 3, with appurtenances, in the devise to [her].” On March 9, 2005, the Probate Court allowed the Administrators’ Motion to Vacate and ordered that the Debtor “shall forthwith vacate the premises identified as Lot 3 and [sic] Existing Barn upon such Lot, except that portion of Lot 3, upon which the Shed (located primarily on Lot 2) encroaches.” The court denied the Debtor’s request for the appointment of a Commissioner and ordered the Administrators to promptly complete a survey, which they had previously commissioned, to define the boundary lines on all lots on the Property. The Administrators complied. On May 8, 2006, they filed a Motion for Acceptance of the 2006 Plan (the “2006 Plan”), requesting that the Probate Court approve the plan showing that portion of the Property which was to be conveyed to the Debtor, comprised of 3.310 acres of land known as Lot 2A. The Debtor opposed the Motion for Acceptance.
In the meantime, the Debtor did not vacate Lot 3 or the barn located on that lot. The Administrators filed two separate complaints for contempt against her between April, 2005 and May, 2006 (jointly, the “First Complaint for Contempt”), and the parties filed numerous related oppositions, motions and memoranda. During this time, Debtor’s counsel in the probate matter also withdrew, and the Debtor thereafter appeared pro se in the Probate Court litigation until 2010.
In an Order dated July 28, 2006, the Probate Court (Cronin, J.) found that the Debtor was not in contempt but that her conduct was “contrary to the spirit of the December 23, 2004 and March 9, 2005 orders.” The Probate Court entered a “Contempt Judgment”3 on that date requiring that, no later than August 12, 2006, the Debtor “must cease and desist from entering into or in any way using of [sic] occupying the structure(s) and land constituting lot three” and “shall remove from Lot 3 all animals, equipment and other personal property[,]” failing which she would have to pay sanctions to the Administrators of $50.00 per day, beginning on August 13, 2006, and continuing each and every day thereafter until full compliance (the “First Contempt Judgment”). The Debtor appealed the First Contempt Judgment.
The Debtor testified at the trial in this proceeding that, following the issuance of the First Contempt Judgment, she was aware of the provisions of the judgment but was unsure of “what my lot consisted of because the survey had not been completed.” 4 She testified that she continued to use the “entire property” during this time out of necessity because the electric meter, water well and driveway she used were all situated, in whole or in part, on the Estate’s lots:
Q: [You continued to occupy the whole property] ... with the knowledge that for each day after August 12, 2006 a penalty of $50 a day began to accrue?
A: Yes. I guess so, yes.
Q: So each day when you were occupying that premises in violation of the Court’s order you were aware that you were accruing these damages?
*142A: I had to go to on the [Estate] property to get to my house. My water was on the other lots. My electricity was on the other lots. The driveway was on the other lots.[5] So it didn’t matter where if — to get into my home I had to violate the order.
When asked if she was using the barn, she replied: “Yes, because part of the barn was on — as far as I knew should have been on my property because there was another acre due to me.” At trial, the Debtor repeatedly voiced her unwillingness to comply with the Probate Court’s orders because compliance would have made access to her house and utilities difficult:
Q: .... [Y]ou were doing a lot more than getting in and out of your house.
A: ... I was going to be held in contempt whether I walked up my driveway or whether I used ten feet of the property. What would be the difference? It still wasn’t — it—I could not access my home without being in the wrong.”
She reiterated this rationale for disregard of the Probate Court orders throughout the trial:
A: ... If I was going to be guilty of something, it’s — it doesn’t matter if I’m violating the order by stepping on my driveway or if I’m violating the order by stepping ten feet in the other direction.... You would have had the contempt on me no matter what I did just to get into my home.
On September 5, 2006, the Administrators and certain co-defendants in the Probate Court matter, including members of the Tighe family, filed an Agreement for Judgment which provided, inter alia, that the 2006 Plan complied with the Probate Court’s Orders dated January 29, 2004 and December 23, 2004; that Lot 2A as shown on the 2006 Plan “defines and incorporates all real property ... to be conveyed to [the Debtor];” that all real estate taxes on Lot 2A, totaling $22,592.13, must be paid prior to court approval and that the Debtor is entitled to retain and use possession of Lot 2A only. On the same date, September 5, 2006, the Probate Court entered an Equity Judgment (Manzi, J.) (the “Equity Judgment”) on the Complaint for Instructions which incorporated and merged the Agreement for Judgment.
Specifically, the Equity Judgment provided that the Debtor was to “... remove any and all personalty and/or livestock [owned by] her, or which may be present [on Lot 3A] ... from said structures on or before September 20, 2006 ... and that the [Debtor] shall not interfere in any manner with the physical removal of said structures and the restoration of the premises by the petitioners.” Paragraph 8 of the Equity Judgment also confirmed that the land and buildings devised to the Debt- or by Mrs. Tighe “... are defined by and entirely contained within Lot 2A of the plan of land entitled ‘Plan of Land in North Andover, Mass. Prepared for the Estate of Barbara Tighe, 95 Lacy Street, dated February 21, 2006’ ” the so-called 2006 Plan. Accordingly, the Probate Court approved the 2006 Plan which gave the Debtor the right to use and occupy only Lot 2A of the Property as delineated by the Plan, with the remaining lots, numbered 3A, 4A and 5B, belonging to the Estate. The Debtor testified at trial that she was aware that the Probate Court approved the 2006 Plan, although she was *143dissatisfied with it. The Debtor appealed the Equity Judgment and sought a stay pending appeal of the judgment, and later filed several Motions for Relief from Judgment pursuant to Mass. R. Civ. P. 60(b). The Debtor acknowledged at trial that the Massachusetts Appeals Court affirmed the Equity Judgment.6
The Debtor testified at trial that, at the time of the appeal, she was aware of, and familiar with, the provisions of the Equity Judgment including the requirements that she was to remove herself, her personal property and her livestock from Lots 3A, 4A and 5B. Notwithstanding the approval of the 2006 Plan in the Equity Judgment, which delineated only Lot 2A as belonging to her, the Debtor still maintained that as of September 5, 2006, she “was never told what my lot was [and] where it was” because the 2006 Plan had not yet been approved by the Town of North Andover. Her dissatisfaction with her inheritance was still evident at trial in this Court when she summarized her rationale for continued violation of Probate Court orders including the July 28, 2006 First Contempt Judgment:
A: But what I’m saying is, is that as far as I knew that I inherited a residence and the residence was where Mrs. Tighe lived and Mrs. Tighe was able to access her residence by a driveway.[7] She had access to clean water. And it said in the will that I was to get appurtenances and my attorney had told me that appurtenances are wells or driveways or things of that nature.
Q: But you were aware, were you not, that the judgment of September 5, 2006 was a final judgment as a result of the affirmation by the Appeals Court?
A: Yes, but ... [t]hey hadn’t done the plan. It had not gone through the town, so I was under the impression that the town was not going to accept this [2006 Plan] because it wasn’t giving me a residence. I — that was my assumption and obviously I was extremely wrong, but I just assumed that when somebody was left a home they were left a home as whole and not basically a shed that doesn’t have electricity, that doesn’t have a driveway into it, doesn’t have any access to it and the barn that they had said that I had, there was no access to that either.
... what I’m saying is is that I just assume that people have rights and we’re entitled to certain things ... you know, in a civilized society.
At some point in time, the 2006 Plan was approved by the Town of North Andover, over the Debtor’s objection, and she filed lawsuits in the Essex Superior Court attempting to overturn that decision.
On November 3, 2006, the Administrators filed another Complaint for Civil Contempt (the “Second Complaint for Contempt”), in which they alleged that the Debtor violated the Probate Court order of March 9, 2005, the First Contempt Judgment (dated July 28, 2006) and the Equity Judgment (dated September 5, 2006) by
*144[c]ontinuing open, exclusive and adverse use of the structures on Lot 3, by denying the plaintiffs ... access to the parcel, by threatening arrest of the plaintiffs and their ... invitees, by threatening their persons by releasing her dogs against them, and by seeking to collaterally attack the court’s order by suing the Plaintiffs in Superior Court to enjoin them from carrying out the Probate Court’s Orders and Judgments.
The parties filed various motions with respect to the venue of the hearing on the Second Complaint for Contempt, and the Debtor sought recusal of Judge Manzi who had issued the January 24, 2004 Will Contest order and the Equity Judgment.
The Probate Court conducted a trial on the Administrators’ Second Complaint for Contempt on December 17, 2007, which had been rescheduled from a prior date due to the Debtor’s complaints of chest pains on the original trial date. The Debt- or appeared at the trial pro se. The Probate Court (Cronin, J.) issued a Judgment on the Complaint for Civil Contempt (the “Second Contempt Judgment”) on February 7, 2008, finding the following:
At all times relevant and material to this contempt action, Defendant has willfully engaged in a course of conduct which is accurately described as “clear and undoubted” disregard for and violation of the specific terms and requirements of the above described [First Contempt Judgment and the Equity Judgment] including, without limitation:
A.Interfering with the lawful efforts of the duly-authorized agents of the Administrators relating to the agents’ attempts to prepare estimates for removal of certain structures on Lot 3A ... [by releasing on two of their contractors] two boxer dogs each weighing ... 100 pounds which dogs charged at the contractors ...;
B. Utterly refusing to take any steps whatsoever to vacate Lot 3A or to cease using any portion of it;
C. Utterly refusing to remove any of her horses or other animals or other personal property from Lot 3A;
D.unilaterally [choosing] to disregard and knowingly disobey ... Orders of the Court including, without limitation, the July 28, 2006 Judgment and the September 5, 2006 Judgment.
E. [She] has no present intention of complying with the aforesaid Judgments of the Court.
F. Her actions and failures to act regarding the matters alleged in this contempt action are willful and contumacious.
G. She has not paid any money owed as daily sanctions pursuant to the terms of the July 28, 2006 Contempt Judgment; nor is she otherwise in compliance with the terms of that Judgment. The Probate Court found the Debtor
guilty of civil contempt for having “willfully neglected and refused to obey the judgment of the Court.” The Court ordered the Debtor to pay to the Administrators the sum of $26,850 in past due sanctions by March 15, 2008 (representing 537 days from August 13, 2006 to January 31, 2008 at $50 per day). The Second Contempt Judgment further required the Debtor, not later than February 29, 2008, to “cease and desist from entering into or in any way using or occupying any portion of the structure(s) or land consisting of and shown as Lots 3A, 4A, or 5B” on the 2006 Plan and to remove all horses, livestock and personalty from those lots, failing which she would be required to pay daily sanctions to the Administrators in the amount of $200 per day beginning on March 1, 2008 until full compliance. Last*145ly, the Second Contempt Judgment provided that “the Co-Administrators ... are hereby provided with a Judicial Lien on [the Debtor’s] interest, if any, in the real estate shown as Lot 2A on the 2006 Plan ..., in order to secure timely payment to the Estate of all sums owed to it pursuant to the terms of this Judgment.”
During this time period, the Debtor filed at least four appeals in the Massachusetts Appeals Court and at least two requests for further appellate review in the Massachusetts Supreme Judicial Court in which she raised several issues, including whether the Probate Court trial judge had authority to act. All appeals were decided against the Debtor.
Further noncompliance by the Debtor with the Probate Court orders, and more litigation between the parties followed the Second Contempt Judgment. On September 22, 2009, Field filed another Complaint for Civil Contempt (the “Third Complaint for Contempt”) against the Debtor for her continued willful interference with his administration of the Tighe Estate and for her continued failure to comply with prior Probate Court orders.8 The Debtor filed a Motion for Summary Judgment, a Motion to Dismiss and a Special Motion to Dismiss the Third Complaint for Contempt, all of which were denied by the Probate Court. A trial was conducted on the Third Complaint for Contempt on January 14, 2010, during which the Debtor orally moved for recusal of the presiding trial judge.9 The Court denied the recusal motion.
On March 26, 2010, the Probate Court issued a Judgment (Cronin, J.) (the “Third Contempt Judgment”) finding the Debtor, again, guilty of civil contempt for her refusal to obey the First and Second Contempt Judgments and the Equity Judgment. In his lengthy findings, the trial judge noted that the Debtor had been ordered to vacate certain portions of the Property and to remove livestock and property more than five years ago and that she had not complied with any of the requirements of the two prior contempt judgments. Further, he found that the Debtor was a “knowledgeable and experienced self-represented litigant” who had “made it clear at the contempt trial that she has no intention of complying with the prior Court Orders” and that “[s]he continues to argue, in essence, that her analysis of the facts and law should supersede that of the Appeals Court and of the Supreme Judicial Court....” Lastly, the Probate Court found that the Debtor, at all relevant times, had the “ready ability and capacity to comply with the Judgments, but she adamantly and perpetually chooses not to do so.”
The Probate Court found that the Debt- or owed the Administrator $171,050 in unpaid court ordered sanctions for the period of August 13, 2006 through February 7, 2010 and ordered the Debtor to repay $20,000 of that amount by May 14, 2010, with the terms of payment of the remaining balance to be determined at a later hearing following the Debtor’s submission of financial statements to the court. The Third Contempt Judgment further provid*146ed that the Debtor was to cease and desist from entering onto or using any portion of Lots 3A, 4A or 5B and to remove all livestock and personal property from those lots. Additionally, the Probate Court committed the Debtor to jail for ninety (90) days until she complied with the $20,000 payment order and the order to vacate and remove items from Lots 3A, 4A and 5B. The sentence was suspended until May 27, 2010 on certain conditions. The court also provided the Administrator with a judicial lien on the Debtor’s interest in Lot 2A to secure timely payment to the Estate and ordered the Debtor to pay the Estate its reasonable attorney’s fees and costs. The Debtor appealed the Third Judgment of Contempt; the judgment was affirmed on appeal.
The Probate Court conducted a further hearing on the Debtor’s compliance with the Third Contempt Judgment on May 27, 2010, following which it issued a Further Judgment on the same date. During the hearing, the Debtor admitted twice that she had not complied with the Third Contempt Judgment, and the court also found that there was additional credible evidence of her “flagrant” noncompliance with that judgment. Numerous photographs were introduced into evidence at the compliance hearing which clearly showed the Debtor’s continued use of the Estate’s lots. She also failed to produce financial statements and to respond to the Administrator’s financial discovery requests. As a result, the Probate Court revoked the previous suspension of the jail sentence and committed the Debtor to jail for ninety (90) days or until she purged herself of the contempt by: (1) paying $20,000 of the sanction award; and (2) providing written confirmation that she had given written instructions to her agents to remove from Lots 3A, 4A and 5B all livestock, personalty and related items. Additionally, the Further Judgment provided that the Debt- or was to pay the Administrator’s counsel $10,739 in attorney’s fees by October 1, 2010 (the three Contempt Judgments and the Further Judgment hereinafter collectively referred to as the “Contempt Judgments”).
The Debtor spent fourteen days in jail. She was released after she paid the Estate $20,000, a sum given to her by her father, and after her husband removed her animals and personalty from the Estate’s lots.10 Issues regarding her use of those lots persisted, however. Following her release from jail, in July, 2010, the police arrived at the Property to remove the electric meter she used which was situated on Lot 4A. As a result, she had no access to power or water.11 In December, 2010, Lots 3A, 4A and 5B were sold to a third party for $535,000, and a dispute arose between the Debtor and the buyers concerning her use of the well and the driveway. The Debtor commenced an action in Land Court against the buyers. In July, 2011, the Debtor installed her own driveway on Lot 2A.
The Debtor borrowed sums to pay $10,000 for installation of the new driveway, $3,500 for access to electric service, and $8,500 for a new well on Lot 2A. When questioned by the Court regarding why she did not take those actions sooner, the *147Debtor testified that she did not have the money to do so and, notably, because she believed she was entitled to more land than the 2006 Plan provided:
Q: You wanted the whole thing?
A: Well, I was told that I was getting the whole front portion of the property.
She added that she litigated these matters so extensively to get what she believed was her rightful devise. The Debtor also emphasized in her testimony that she resorted to litigation against various parties in this matter because she was repeatedly told by the Estate and the Town of North Andover that she “is not the true owner” of Lot 2A due to the absence of a deed from the Estate to her.12 In support, she introduced the Complaint through which the Estate made general allegations regarding the Debtor’s “adverse use and occupation of real estate belonging to the estate” and did not differentiate between the Estate’s lots and Lot 2A. It is unclear from the record why a deed has never been executed in favor of the Debtor for Lot 2A.
Field also testified at trial. He had represented Mrs. Tighe and the corporation which operated the farm on the Property for several years prior to her death. He testified that the documents presented to the Probate Court in connection with Mrs. Tighe’s Will were an accurate reflection of Mrs. Tighe’s intentions with respect to the Debtor. During the Will Contest, he considered the Estate’s interests to be aligned with those of the Debtor. As chronicled above, the relationship between the parties quickly soured after the Will was admitted into Probate.
Field testified in detail about his efforts to record the 2006 Plan. Recordation of the Plan required payment by the Estate of outstanding real estate taxes on Lot 2A because the Debtor failed to pay them as well as approval of the Plan by the Town of North Andover Planning Board. The Planning Board determined that the 2006 Plan complied with all applicable zoning laws and regulations and approved it following a Planning Board hearing at some point in 2008. Field thereafter recorded the 2006 Plan at the Essex County (Northern) Registry of Deeds. According to Field, the Debtor was unhappy with the course of events and attempted to thwart the approval and recording process by suing the Town of North Andover and by making visits to town offices. During this time, Field testified, that he personally witnessed the Debtor using the Estate’s lots which led him to file the three contempt complaints against her. Field also testified that he never advised the Debtor that she did not own Lot 2A, testimony disputed by the Debtor.
Field prepared an estate tax return and an inventory in 2003 for the Estate. He testified that he received an appraised value of $825,000 for the Estate’s lots (consisting of Lots 3A, 4A and 5B). Field maintained that the Estate incurred a loss of $290,000, representing the difference between the appraised value of $825,000 and the eventual sale price for those lots of $535,000, which was directly attributable to the conduct of the Debtor. The Debtor, in contrast, testified that the $825,000 appraisal did include Lot 2A which was not part of the 2010 sale. Field did not introduce the appraisal or the purchase and sale agreement into evidence and did not demonstrate through other evidence that the reduction in value was solely attributable to the Debtor. Field also testified that the $20,000 payment made by the *148Debtor which secured her release from jail in 2010 is the only payment she has made with respect to the Contempt Judgments.
IV. POSITIONS OF THE PARTIES
Field argues that the factual determinations made by the Probate Court, detailed in the exhibits introduced at trial and illuminated by trial testimony, establish that the debt owed to the Estate arose as a result of the Debtor’s willful and malicious injury. He further contends that the Debtor is foreclosed by collateral estoppel from asserting in this proceeding her prior excuses for noncompliance with the Probate Court’s orders, namely that she believed that she was entitled to the whole premises and that she needed access to the Estate’s portion of the Property to access her home and obtain utilities. Field maintains that these are positions which have been resolved against the Debtor by final judgments and, in any event, they do not constitute a just cause or excuse for her willful and malicious injury to the Estate.
Field also asserts that the Estate was damaged by the loss in value of Lots 3A, 4A and 5B during the extensive litigation with the Debtor ($290,000). That amount is $100,000 greater than the amount set forth in the Estate’s proof of claim and in the prayer for relief in the Complaint, i.e., $187,050.
The Debtor maintains that she resorted to the legal system to the best of her ability as a pro se litigant but, given her lack of legal training and limited college level education, she became overwhelmed to the point where her legal responses became “disorderly and often times not sensible.... ” The Debtor argues that her sole intent was to secure the necessary appurtenances of water, electricity and access to her property and at no time did she act maliciously or intend to harm the Estate. Lastly, she asserts that she did not vacate the Estate’s land where the appurtenances were located or stop her opposition to the Probate Court’s “wrong finding” because she feared she and her family would have to move out of the home given to her by Mrs. Tighe.
V. DISCUSSION
As stated by this Court at the outset of the trial, the doctrine of collateral estoppel applies in bankruptcy discharge-ability proceedings. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The Probate Court entered numerous judgments, including the Contempt Judgments, following extensive litigation between the same parties where each had a full and fair opportunity to litigate all issues between them concerning the Will and the Debtor’s use and occupancy of her portion of the Property. Those judgments, after the resolution of all appeals, constitute final judgments on the merits. See generally Backlund v. Stanley-Snow (In re Stanley-Snow), 405 B.R. 11, 18 (1st Cir. BAP 2009) (“To apply the doctrine [of collateral estoppel], a court must determine that: (1) there was a valid and final judgment on the merits in the prior adjudication; (2) the party against whom estoppel is asserted was a party (or in privity with a party) to the prior litigation; (3) the issue in the prior adjudication is identical to the issue in the current litigation; and (4) the issue in the prior litigation was essential to the earlier judgment.”) (citing Alba v. Raytheon Co., 441 Mass. 836, 809 N.E.2d 516, 521 (2004)). The Probate Court determined the scope of the devise to the Debtor, her liability for contempt for her violation and evasion of court orders and the amount of the debt owed to the Estate. The Probate Court judgments have a binding and preclusive effect in this adversary proceeding with respect to those issues.
*149Additionally, the Rooker-Feld-man doctrine bars this Court from acting as an appellate tribunal with respect to the judgments as it “‘strip[s] federal subject matter jurisdiction over lawsuits that are, in substance, appeals from state court decisions.’ ” In re Sanders, 408 B.R. 25, 33 (Bankr.E.D.N.Y.2009) (quoting Book v. Mortg. Elec. Registration Sys., 608 F.Supp.2d 277, 288 (D.Conn.2009) (citing Hoblock v. Albany Cnty. Bd. of Elections, 422 F.3d 77, 84 (2d Cir.2005))). Moreover, the Full Faith and Credit Act, 28 U.S.C. § 1738, requires a federal court to give the same preclusive effect to a state court judgment as another court of that State would give. “Congress has specifically required all federal courts to give preclusive effect to state-court judgments whenever the courts of the State from which the judgments emerged would do so[.]” Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980).
Accordingly, the sole matter for determination here is whether the Debtor’s violations of the various Probate Court orders constitute “willful and malicious injury” by the Debtor to the Estate such that the debt should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(6). This is a separate and distinct legal theory and claim than the matters which were litigated and determined in the Probate Court. See In re Stanley-Snow, 405 B.R. at 18 (collateral estoppel requires the issue in the prior adjudication to be identical to the issue in the current litigation).
This Court recently set forth the standard for determining an exception to discharge pursuant to 11 U.S.C. § 523(a)(6) in Cowart v. Elias (In re Elias), 494 B.R. 595 (Bankr.D.Mass.2013). The Court stated:
Section 523(a)(6) of the Bankruptcy Code excepts from discharge any debt that results from “willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). The terms “willful” and “malicious” are two distinct elements, and each must be proven to establish an exception to discharge. Fischer v. Scarborough (In re Scarborough), 171 F.3d 638, 641 (8th Cir.1999). The [p]laintiff bears the burden of proving her claim nondischargeable under § 523(a)(6) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
In Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), the United States Supreme Court addressed the definition of the term “willful.” The Court determined that the term “willful” modifies the word “injury” in § 523(a)(6) and therefore “nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Id. at 61, 118 S.Ct. 974 (emphasis in original). Thus, recklessly or negligently inflicted injuries are not excepted from discharge under § 523(a)(6). Id. at 64, 118 S.Ct. 974. See also Trenwick America Reinsurance Corp. v. Swasey (In re Swasey), 488 B.R. 22 (Bankr.D.Mass.2013).
In Read & Lundy, Inc. v. Brier (In re Brier), 274 B.R. 37 (Bankr.D.Mass. 2002), this Court reviewed post Geiger case law with respect to the willful element of § 523(a)(6):
In McAlister v. Slosberg (In re Slosberg), 225 B.R. 9 (Bankr.D.Me.1998), the bankruptcy court observed that [the Supreme Court in Geiger] ... did not indicate whether the willfulness element includes “acts intentionally done and which are known by the actor to be ‘substantially certain to cause injury.’ ” Id. at 18 (emphasis in original). Noting that the “substan*150tially certain” formulation had been adopted in most post-Geiger decisions, id. n. 12, and is prominent in the Restatement (Second) of Torts § 8A, the bankruptcy court in Slosberg adopted that formulation. It concluded that “a debtor who intentionally acts in a manner he knows, or is substantially certain, will harm another may be considered to have intended the harm and, therefore, to have acted willfully within the meaning of § 523(a)(6).” Id. at 19 (footnote omitted).
Brier, 274 B.R. at 43-44.
The United States Court of Appeals for the First Circuit in Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, 859 (1st Cir.1997), held that the element of malice in § 523(a)(6) requires that the creditor show that the willful injury was caused without justification or excuse.
Elias, 494 B.R. at 601-602. The Printy court added that “personal hatred, spite or ill-will” need not be established to find the element of malice. Printy, 110 F.3d at 859.
In Bauer v. Colokathis (In re Colokathis), 417 B.R. 150 (Bankr.D.Mass.2009), this Court construed Geiger and Printy, as well as post-Geiger cases such as Slosberg and concluded that for an exception to discharge under 11 U.S.C. § 523(a)(6) to apply, the creditor has the burden of showing that “1) the creditor suffered injury; 2) the debtor intended to cause the injury or that there was substantial certainty that the injury would occur; and 3) the debtor had no justification or excuse for the action resulting in injury.” Id. at 158.
There is no dispute that the Debt- or violated a number of Probate Court orders which led to multiple findings of contempt and her eventual incarceration. A debtor’s failure or refusal to obey a court order, alone, is not necessarily determinative of a finding of willful and malicious injury under § 523(a)(6). “Section 523(a)(6) does not make ‘contempt’ sanctions nondischargeable per se, and neither does any other subpart of section 523(a)).” Suarez v. Barrett (In re Suarez), 400 B.R. 732, 737 (9th Cir. BAP 2009), aff'd 529 Fed.Appx. 832, 2013 WL 3070518 (9th Cir. 2013). But see PRP Wine Int’l, Inc. v. Allison (In re Allison), 176 B.R. 60, 64 (Bankr.S.D.Fla.l994)(“Failure to comply with court directives contained in an injunction order satisfies the definition of ‘willful and malicious’ within 11 U.S.C. § 523(a)(6).”).13 See also Liddell v. Peckham (In re Peckham), 442 B.R. 62, 84 (Bankr.D.Mass.2010), in which this Court noted that “courts addressing the issue of whether contempt judgments are nondis-chargeable are not uniform in their analysis” and concluded that “the case law is fact driven, and the holdings in the decisions ... often are the result of both egregious and affirmative misconduct by debtors in contravention of court orders or injunctions.... ”).
With respect to the first element of the “willful” injury test of § 523(a)(6), i.e., that the Estate suffered an injury, the Court finds that Field has sustained his burden of proof by more than a preponderance of the evidence. The injury to the Estate was the Debtor’s continuous and unabated invasion of and interference with its exclusive possession of its land following the Probate Court’s issuance of the First Contempt Judgment on July 28, 2006, which required her to “cease and desist from entering into or in any way using of [sic] occupying the structure(s) and land constituting lot three” and to “remove from Lot 3 all animals, equipment *151and other personal property.”14 The Equity Judgment was issued five weeks after the First Contempt Judgment, on September 5, 2006, and it confirmed that the Debtor’s devise was “defined by and entirely contained in Lot 2A.” The evidence established at trial irrefutably demonstrates that the Debtor continuously traversed and used land in excess of that devise which belonged to the Estate during the summer of 2006 through the spring of 2010. Although not specifically labeled as such in the Contempt Judgments, this Court finds that the Debtor’s actions, following the entry of the First Contempt Judgment, constituted intentional and continuous trespass on the Estate’s land. See Saab v. Kostorizos, 06 Misc. 335736(HMG), 2012 WL 5907075 (Mass.Land Ct. Nov. 26, 2012): In Saab, the court stated:
At the heart of an action for trespass to real property is that the defendant intentionally entered the land of another, without privilege to do so, regardless of any harm caused to the land. Gage v. Westfield, 26 Mass.App.Ct. 681, 695 n. 8 [532 N.E.2d 62] (1988). The tort is actionable even where the trespasser is ignorant that his invasion violates the title or right of possession of the plaintiff. United Electric Light Co. v. Deliso Const Co., 315 Mass. 313, 318 [52 N.E.2d 553] (1943). An ongoing invasion of the plaintiffs land without legal right may constitute a continuing trespass, and an ‘intentional and continuing trespass to real estate may be enjoined. ... Damages are usually inadequate because the plaintiff is not to be compelled to part with his property for a sum of money.’
Id. at *15 (quoting Chesarone v. Pinewood Builders, Inc., 345 Mass. 236, 240, 186 N.E.2d 712 (1962); Massachusetts Practice, Summary of Basic Law, c. 14 § 17.24). Significantly, the Restatement (Second) of Torts § 158 (1965) provides:
One is subject to liability to another for trespass, irrespective of whether he thereby causes harm to any legally protected interest of the other, if he intentionally
(a) enters land in the possession of the other, or causes a thing or a third person to do so, or
(b) remains on the land, or
(c) fails to remove from the land a thing which he is under a duty to remove.
Restatement (Second) of Torts § 158 (1965).
The Debtor engaged in each of the enumerated examples of intentional trespass provided in the Restatement: she repeatedly entered the Estate’s lots, stored her animals and equipment there, persisted in using portions of the Estate lots for years, and failed to remove her property therefrom despite repeated mandates to do so. In doing so, she injured the Estate by invading its interest in exclusive possession of its land. See generally Amaral v. Cuppels, 64 Mass.App.Ct. 85, 90-91, 831 N.E.2d 915 (2005) (trespass is an invasion of the plaintiffs interest in the exclusive possession of his land). The Probate Court effectively decided injury to the Estate when it issued the Contempt Judgments which imposed monetary sanctions on the Debtor, payable directly to the Administrator, and enjoined her from continued unauthorized entry and use of the Estate’s land. The Court finds that both the injunctive relief and the monetary sanctions were imposed to redress and compensate the Estate for her entry onto Estate land and its lost use of same. Indeed, in the Debtor’s post-trial brief, she *152acknowledges that the amounts assessed against her by the Probate Court were compensatory and not punitive fines.
The Debtor’s pattern of protracted and vexatious litigation in numerous courts after the entry of the First Contempt Judgment, both against the Estate and third parties, also caused the Estate injury in the form of costs and fees incurred to prosecute, defend and monitor those actions. Additionally, the Estate’s entanglement in these various lawsuits delayed the Administrator from selling the Estate’s portion of the Property and from fulfilling his fiduciary obligation to implement the provisions of Mrs. Tighe’s Will, resulting in further injury to the Estate.
The second element of the “willful” injury test is whether the Debtor intended to injure the Estate or whether there was a substantial certainty that the injury to it would result from her conduct. As stated above, the injury to the Estate was the Debtor’s trespass, the resulting deprivation of its right to possess its portion of the Property, and her incessant litigation strategy following the First Contempt Judgment. The Debtor’s intent to interfere with and deprive the Estate of its land and delay the recording and implementation of the 2006 Plan is manifestly clear from the findings of the Probate Court and the Debtor’s own testimony.
The Probate Court cited numerous examples of the Debtor’s efforts to deprive the Estate of its land including: the Debt- or’s release of her dogs on the Estate’s contractors who were working on Lot 3A, her use of the portions of the driveway and the well situated on the Estate’s lots, her failure to vacate the Estate’s lots and/or remove property and livestock therefrom and her failure to pay daily sanctions. She undertook all of these actions to deprive the Estate of its land so that she could use it as her own. The Debtor’s trial testimony also supports the finding of willful injury. She testified that she was aware of and knowledgeable about the established boundaries of the Property, the provisions of the various Contempt Judgments, and of the imposition of daily sanctions for her noncompliance but that she nonetheless continued her unauthorized entry to take from the Estate what she continued to frivolously insist was hers.
As noted by the Probate Court, the Debtor was a “knowledgeable and experienced self-represented litigant.” She systematically employed a vigorous litigation strategy over a period of years through which she challenged and then disregarded adverse rulings while she pursued her goal of using portions of the Estate’s land to which she believed she was rightfully entitled. She initiated litigation in numerous trial and appellate courts, filed countless pleadings, sought recusal of and initiated suit against at least two judges who had ruled against her, sued the Town of North Andover in an attempt to prevent the Estate from recording the 2006 Plan and generally caused the Estate to fund the defense or prosecution of multiple actions while she enjoyed the use of its land without any compensation to the Estate. Accordingly, the Court finds that the Debtor intended to injure the Estate and it need not reach the issue of whether injury to the Estate was substantially certain to occur from the Debtor’s actions.
This case is distinguishable from Trenwick Am. Reinsurance Corp. v. Swasey (In re Swasey), 488 B.R. 22 (Bankr. D.Mass.2013), in which this Court considered whether a judgment under Mass. Gen. Laws ch. 93A entered against the debtor by the United States District Court for the District of Massachusetts collaterally estopped the debtor from litigating an action to except the judgment from discharge under § 523(a)(6), where the dis*153trict court “ ‘determined that the debtor ..., disavowed a reinsurance contract in bad faith, raised sham defenses, gave false and misleading testimony, and engaged in other outrageous pre- and post-litigation misconduct in a deliberate effort to frustrate Plaintiffs’ contractual rights.’ ” Id. at 25. The Bankruptcy Court determined that “[although the District Court made detailed findings about the Debtor’s actions, this Court is unable to discern whether he specifically intended to injure the Plaintiffs....” Id. at 45. Unlike the District Court decision and the litigation history in Swasey, which did not involve multiple contempt proceedings, the Probate Court judgments here do establish that the Debtor intended to injure the Estate by continuously depriving it of its land while she was aware that daily sanctions for doing so were accruing against her.
This case is more analogous to two cases from the District of Massachusetts in which debts arising from a debtor’s trespass were excepted from discharge pursuant to § 523(a)(6). See Caci v. Brink (In re Brink), 333 B.R. 560 (Bankr.D.Mass. 2005). In Brink, this Court considered the dischargeability of a judgment debt arising out of Chapter 7 debtors’ trespass, when they intentionally cut down trees on their neighbor’s property. The Court ruled that the debtors “acted with an intent to cause injury to [their neighbor’s] property and that they acted without just cause or excuse having failed to obtain the permission from [their neighbor] to enter upon his property.” Id. at 571. See also Bairstow v. Sullivan (In re Sullivan), 198 B.R. 417 (Bankr.D.Mass.1996). In Sullivan, the court excepted the debt in question from discharge pursuant to § 523(a)(6) because the debtor knew that a continuing trespass was being committed by his agents and employees and did nothing about it. The court concluded:
It was proven at the trial that agents, employees or those under the direction and control of the debtor had intentionally and deliberately trespassed upon land of the Plaintiffs and damaged their property. The conduct also contained aggravating features making it malicious. The trespass and injurious activities continued for several months after it was brought to the attention of the Debtor’s workcrew a trespass existed. I therefore conclude the conduct was willful and malicious within the meaning of section 523(a)(6), and hence non-dis-chargeable.
Id. at 423 (footnote omitted).
Lastly, the Court finds that the Plaintiff established that the Debtor acted without just cause or excuse for purposes of the “malicious” component of § 523(a)(6). See Bauer v. Colokathis, 417 B.R. 150, 158 (Bankr.D.Mass.2009). In Liddell v. Peckham (In re Peckham), 442 B.R. 62 (Bankr.D.Mass.2010), this Court considered whether a debtor willfully and maliciously injured the plaintiff by failing to respond to discovery in aid of execution of the plaintiffs judgment and subjecting himself to contempt and civil arrest. The Court determined that the debtor’s contravention of court orders was not the result of egregious and affirmative misconduct but rather the result of the “virtual paralysis” of the debtor who suffered from depression. Unlike the debtor in Peckham against whom a default judgment was entered and who “buried his head in the sand and presumably hoped that the whole matter would go away,” the Debtor here fully litigated the disputed matters long after the adjudication of her rights in the Property was final and engaged in a pattern of defiant, obstructive and injurious behavior which targeted the Estate to achieve her goal of obtaining the portions of the Property she wanted.
*154The Debtor offered a number of excuses for her conduct, including the need to access a full driveway and utilities, the cost of installing her own driveway and well, and the need to acquire proof of her ownership of Lot 2A. These excuses merely reflect the Debtor’s unshakable belief throughout her years of long conflict with the Estate that she was entitled to more land and appurtenances than were awarded to her under the Will. This is not to say that the Debtor was not entitled to vigorously pursue legitimate legal strategies to prevail when the dispute between the parties arose. Indeed, the Debtor’s initial stance could be considered rational given the ambiguous legal description of the devise, her past use of the Property, including the barn, and her long service to and relationship with Mrs. Tighe. Her efforts to secure what she thought was her rightful inheritance, however, morphed with the passage of time into a fanatical crusade in which she sued multiple parties whom she believed impeded her goal of securing more than Lot 2A. The Debtor’s scorched earth litigation tactics were employed well beyond the time when the parties’ rights in the Property were finally determined by the Probate Court.
The Debtor’s trial testimony, as detailed above, is replete with examples of her unwillingness to accept, even now, the rulings of the Probate Court. Indeed, the Probate Court considered and discounted these excuses and finally imposed a jail sentence which ultimately forced her to cease her trespass upon the Estate’s land. It is also clear from the pleadings the Debtor filed in this adversary proceeding, including the Joint Pretrial Memorandum, that she persists in arguing the scope of her devise. The Debtor’s beliefs cannot be considered “just cause or excuse” for her injury to the Estate and her blatant and willful contempt of court orders. Rather, her actions constitute the type of aggravated and unjustified misconduct which warrants a finding of malice under § 523(a)(6).
A person who persists unabated in unlawful conduct, after the entry of a court order specifically and unambiguously enjoining such conduct, and who continues her unlawful conduct in violation of further orders of the court, cannot be characterized as the ‘honest but unfortunate’ debtor whom Congress intended to favor with the extraordinary relief of a discharge in bankruptcy.
Bundy American Corp. v. Blankfort (In re Blankfort), 217 B.R. 138, 146 (Bankr. S.D.N.Y.1998).
VI. CONCLUSION
For all of the above stated reasons, the Court finds that Field has established by a preponderance of the evidence that the debt owed to the Estate, as determined by the Probate Court in the Contempt Judgments, is the result of the Debtor’s willful and malicious injury to the Estate. Accordingly, the debt owed to the Estate, in the amount set forth in its proof of claim and in the Complaint, is nondischargeable under 11 U.S.C. § 523(a)(6). To the extent Field seeks to except a greater amount from discharge based upon an appraisal which he did not introduce into evidence and which is not referenced in the Estate’s proof of claim or in the Complaint, that request is denied. The Court shall enter a judgment in favor of Field.
. Although it is unclear from the record, it appears that the above quoted granting language comes from paragraph thirteenth of the original will, as amended by paragraph fourth of the Second Codicil.
. As discussed below, the 1989 subdivision plan was later replaced by a survey commissioned by the Administrators and approved by the Probate Court in 2006 which renumbered the Debtor's portion of the Property as Lot 2A. Before that determination, the Debtor apparently was authorized to use Lot # 2 and not Lot # 3 owned by the Estate, as delineated in the 1989 subdivision plan.
. Although the Probate Court found that the Debtor was not in contempt, the July 28, 2006 Judgment is referred to as a "Contempt Judgment” in Exhibit 2B introduced at trial.
. At this time, the 2006 Plan had been completed but had not yet been approved by the Probate Court.
. As discussed further below, there was only one driveway on the Property which traversed both the Estate's and the Debtor’s lots, and the Debtor continued to use the driveway to access her home.
. One of the Probate Court Memoranda introduced into evidence, see Exhibit 3A, indicates that the appeal was dismissed by the Massachusetts Appeals Court for lack of prosecution. In either event, the Equity Judgment is a final order.
. A reduction of the 2006 Plan was marked as a chalk at trial. According to the chalk, only one driveway existed on the Property which originated on Lacy Street, entered the Property on Lot 3A and continued to the Debtor's house onto Lot 2A. Accordingly, the Debtor had to enter and use Lot 3A whenever entering and exiting the Property to reach her house via the driveway.
. At trial, the parties referenced a filing date of December 22, 2009. The Probate Court orders introduced at trial, however, reflect a filing date of September 22, 2009.
. The Debtor sought recusal of the trial judge, Cronin, J., on the basis that he, as well as Probate Judge Manzi, members of the North Andover Planning Board and other professionals connected with the Tighe Estate, were named defendants in a lawsuit commenced by the Debtor in the United States District Court for the District of Massachusetts. In a Memorandum and Order dated March 15, 2010 (Woodlock, J.), the U.S. District Court dismissed the action.
. In the Complaint, the Administrator computed the debt at $187,050, representing the Third Contempt Judgment amount of $171,050, less the $20,000 paid by the Debtor following her incarceration ($151,050), plus statutory post-judgment interest.
. The record is unclear regarding the Debt- or's access to and use of power and water following removal of the electric meter. She apparently had an agreement with the Estate for limited use of the driveway while she made arrangements to build her own separate driveway.
. This issue also arose in the context of the Estate's objection to the Debtor’s homestead objection which the Court overruled and determined in the Debtor’s favor.
. The Court notes that this case was decided prior to Geiger.
. As stated above, Lot 3 was the original designation of the Debtor’s lot and was later renumbered as Lot 2A with the approval of the 2006 Plan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496362/ | MEMORANDUM OF DECISION ON MOTION OF GREEN TREE SERVICING LLC FOR RELIEF FROM STAY
MELVIN S. HOFFMAN, Bankruptcy Judge.
Green Tree Servicing LLC has moved for relief from the automatic stay provisions of the Bankruptcy Code, 11 USC § 362, in order to foreclose its first mortgage on the Lowell, Massachusetts home of Jeffrey and Kelly Martin, the debtors in this case. The Martins, who have not made a mortgage payment since 2011, did not oppose the motion having stated in papers accompanying their bankruptcy petition their intention to surrender the property. There is no equity in this property for the bankruptcy estate. Nevertheless, the chapter 7 trustee has objected to Green Tree’s motion on the grounds that Green Tree has not provided evidence that it holds the note secured by the mortgage which is a prerequisite to foreclosure under Massachusetts law. Essentially, the trustee is attacking Green Tree’s standing to seek stay relief.
The trustee does not dispute that Green Tree is the current mortgagee. In its motion for relief from stay and attached exhibits Green Tree traces the mortgage’s travels from National City Mortgage a division of National City Bank (“NCM”) the original mortgagee, to PNC Bank, National Association, the successor by merger of NCM, to PNC’s assignee, Green Tree. According to the note which is secured by a mortgage and is also attached to Green Tree’s motion for relief, the note was originally payable to NCM which endorsed it payable to “National City Mortgage Co., a subsidiary of National City Bank,” which in turn endorsed the note in blank. Green Tree avers that either it or its agent has possession of the note.
The chapter 7 trustee, relying on the Massachusetts Supreme Judicial Court’s landmark ruling in Eaton v. Federal National Mortgage Association, 462 Mass. 569, 969 N.E.2d 1118 (2012), objects to Green Tree’s motion on the basis that it has neither produced the note nor filed an affidavit that in response to Eaton is now required by state law as a prerequisite to foreclosure.1 Thus, she reasons, Green Tree may not foreclose under state law and consequently is not entitled to relief *157from stay. When questioned as to why she was objecting given that there is no equity in the Lowell property for the bankruptcy estate or its creditors, the trustee responded that if Green Tree did not hold the note she could bring an adversary proceeding to invalidate its secured claim.
There are significant flaws in the trustee’s position. First, it is by now old news that Massachusetts law permits a note and mortgage to be held by different parties. In such instances the mortgagee holds the mortgage for the benefit of the noteholder, including holding the power of foreclosure sale for the benefit of the note-holder if such power is contained in the mortgage. U.S. Bank Nat. Ass’n v. Ibanez, 458 Mass. 637, 652, 941 N.E.2d 40 (2011). In Eaton the Supreme Judicial Court ■ reaffirmed Massachusetts law regarding the severability of ownership rights in a note and mortgage but held that to effect a valid foreclosure of a mortgage, ownership of the note and mortgage must reunite prior to commencement of the foreclosure process or at the very least the mortgagee must receive authority to foreclose from the noteholder on whose behalf it holds the mortgage. Eaton, 462 Mass. at 586, 969 N.E.2d at 1131. Eaton does not alter existing state law prior to the commencement of foreclosure2 and thus there appears to be no basis for extending Eaton’s holding to require reuniting of a mortgage and note as a condition to conferring standing on a lender to file a motion for stay relief.
The United States Court of Appeals for the First Circuit has instructed that the test for determining standing to bring a motion for stay relief is whether the moving party has a “colorable claim” to property of the estate. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 33 (1st Cir.1994). The First Circuit elaborated:
The statutory and procedural schemes, the legislative history, and the case law all direct that the hearing on a motion to lift the stay is not a proceeding for determining the merits of the underlying substantive claims, defenses, or counterclaims. Rather, it is analogous to a preliminary injunction hearing, requiring a speedy and necessarily cursory determination of the reasonable likelihood that a creditor has a legitimate claim or lien as to a debtor’s property. If a court finds that likelihood to exist, this is not a determination of the validity of those claims, but merely a grant of permission from the court allowing that creditor to litigate its substantive claims elsewhere without violating the automatic stay.
Id. at 33-34 (footnote omitted). Green Tree as the current holder of the mortgage on the Lowell property has demonstrated a colorable claim to an interest in property of the estate.
The trustee’s argument that she can avoid Green Tree’s security interest if it does not own the note misconstrues the holding in Eaton. Separating ownership of a note and mortgage does not render the mortgage invalid under Massachusetts law. The mere fact that Green Tree has not established to the trustee’s satisfaction in its motion for stay relief that it holds the Martins’ note does not make its mortgage voidable. In any event, as Grella observes the lift stay process is not a proceeding to determine the merits of the underlying substantive claims, defenses or *158counterclaims. To the extent the trustee believes Green Tree’s mortgage is voidable she is not precluded from bringing suit to void it.
For these reasons, Green Tree’s motion for relief from stay will be allowed. A separate order consistent with this memorandum shall issue.
. Mass. Gen Laws ch. 244, § 35C provides in relevant part:
(b) A creditor shall not cause publication of notice of foreclosure, as required under section 14, when the creditor knows or should know that the mortgagee is neither the holder of the mortgage note nor the authorized agent of the note holder.
Prior to publishing a notice of a foreclosure sale, as required by section 14, the creditor, or if the creditor is not a natural person, an officer or duly authorized agent of the creditor, shall certify compliance with this subsection in an affidavit based upon a review of the creditor’s business records. The creditor, or an officer or duly authorized agent of the creditor, shall record this affidavit with the registry of deeds for the county or district where the land lies. The affidavit certifying compliance with this subsection shall be conclusive evidence in favor of an arm's-length third party purchaser for value, at or subsequent to the resulting foreclosure sale, that the creditor has fully complied with this section and the mortgagee is entitled to proceed with foreclosure of the subject mortgage under the power of sale contained in the mortgage and any 1 or more of the foreclosure procedures authorized in this chapter....
. Technically Eaton does not even alter state law in the foreclosure context but rather informs practitioners that based on their misinterpretation of the word "mortgagee” in MASS. GEN. LAWS ch. 244, § 14 they have been improperly foreclosing mortgages since time immemorial. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496363/ | MEMORANDUM OPINION
BRUCE A. HARWOOD, Chief Judge.
I. INTRODUCTION
The Court has before it Claim 5-4, in which the United States Department of Agriculture (the “USDA”) claims entitlement to a $16,962.18 administrative expense pursuant to 11 U.S.C. §§ 503(b) and 507(a)(2). The chapter 7 trustee objects to the allowance of this priority claim. For the reasons set forth below, the Court finds that the $16,962.18 claim is not allowable as an administrative expense and should be disallowed against the estate.
The Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334, 157(a), and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
*160II. FACTUAL BACKGROUND
The parties do not dispute the relevant facts. On March 11, 2010, the debtor, Hopkinton Independent School, Inc., (the “Debtor”) filed a voluntary petition pursuant to chapter 7 of the Bankruptcy Code. Michael S. Askenaizer was appointed chapter 7 trustee (the “Trustee”) for the Debt- or’s estate. Shortly thereafter, the USDA filed Proof of Claim 5-1 asserting a claim of $714,475.86, secured by several mortgages on the Debtor’s real property located at 20 Beech Hill Road, Hopkinton, New Hampshire (the “Property”).
During April 2010, the Trustee and the USDA discussed the process by which the Trustee might attempt to market and sell the Property. Their discussions included the subject of who would pay to preserve and maintain the Property while the Trustee marketed it for sale. To this end, the Trustee informed the USDA that the estate had no money on hand to pay for the Property’s upkeep, and requested that the USDA pay the necessary costs. See Ex. A.l. There is no evidence that the Trustee and the USDA came to any specific agreement about who would ultimately bear the associated costs and expenses, other than a general expectation or hope that the sale proceeds would be sufficient to cover all of those costs and expenses, satisfy the USDA’s claim, and generate a dividend for unsecured creditors. On April 20, 2010, the Trustee sought permission to employ Concord Commercial, LLC to market the Property for sale at an asking price of $895,000. The Court approved this request the following day. See Doc. No. 34.
Over the next few months, the USDA paid for various expenses associated with preserving and disposing of the Property. These expenses included landscaping for the area immediately around the Property’s structures, the cost of winterization, supplying the Property with electricity to power a fire alarm system as well as the costs of monitoring the system, and property insurance — both liability and casualty. Ultimately, these efforts resulted in the following expenditures, all of which the USDA paid directly to the respective service providers:
_Expense_Amount
Property Maintenance $ 1,000.00
Winterization Costs_$ 4,000.00
_Alarm Costs_$ 1,626.68
Property Insurance Costs $10,335.50
TOTAL$16,962.18
See Ex. E.
The Trustee was unable to sell the Property after several months of marketing. In early August 2010, he informed the USDA that he would like to reduce the asking price from $895,000 to between $700,000-$600,000, and also sought the USDA’s agreement to limit its claim against the estate so that the Debtor’s unsecured creditors might benefit from the Property’s sale. See Ex. C.l. The USDA responded that it was unwilling to so limit its claim; that it was confident that it could obtain “very close to” $750,000 at a foreclosure sale, and that given the Trustee’s inability to sell the property thus far, the USDA would seek relief from the automatic stay and sell the property on its own — stating that regardless of whether the Trustee or the USDA sold the property, “there will not be any benefit to unsecured creditors, given the amount of the USDA’s mortgage.” Ex. C.2.
Shortly thereafter, the USDA filed a Motion for Relief from Stay. Doc. No. 65. The Trustee, who was continuing in his efforts to sell the Property, initially objected to the lifting of the stay, but he withdrew his objection before the Court held a hearing on the USDA’s motion. The USDA obtained relief from the stay on November 9, 2010, see Doc. No. 79, foreclosed on the Property, and was unable to *161realize the amount of its initial secured claim. It eventually filed an unsecured deficiency claim for $393,062.43, asserting that it was entitled to administrative priority for $28,344.49 of that amount. See Claim No. 5-3.
On February 2, 2013, the Trustee objected to Claim No. 5-3 (the “Objection”). Doc. No. 93. The Trustee argues that Claim 5-3 should be disallowed to the extent that it seeks administrative priority because — as the USDA acknowledged in August, 2010 — the estate received no benefit from the expenditures of the USDA; all the benefit went to the USDA itself when it sold the Property. The USDA responded to the Objection, stating that all of its expenditures for upkeep of the Property, as specified in the priority portion of its claim, were necessary to preserve property of the bankruptcy estate, and that the Trustee had effectively admitted to the necessity of the expenditures by requesting the aid of the USDA.
The Court held a hearing on the Objection, at which the Trustee and the USDA agreed to stipulate to the foregoing facts. The Court also ordered the USDA to amend Claim 5-3, based on the USDA’s voluntary withdrawal of the portion of its claim that sought post-petition interest. Doc. No. 116. The USDA filed Claim 5-4 to effect this amendment, and in the process reduced its administrative priority claim from $28,344.49 to $16,962.18, but increased its overall claim to $396,674.27.1 After the parties had made their submissions, the Court took the matter under advisement.
III. DISCUSSION
The only question before the Court is whether the USDA is entitled to an administrative expense for the $16,962.18 included in Claim 5-4. 11 U.S.C. § 503(a) provides that “an entity may timely file a request for payment of an administrative expense.”2 Section 503(b) defines “administrative expense.” An administrative expense can include “the actual, necessary costs and expenses of preserving the estate including — wages, salaries, and commissions for services rendered after the commencement of the case.” § 503(b)(l)(A)(i). An expense may qualify for treatment under section 503(b) if “(1) the right to payment arose from a postpe-tition transaction with the debtor” and “(2) the consideration supporting the right to payment was beneficial to the estate of the debtor.” Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 5 (1st Cir.1992) (citing Cramer v. Mammoth *162Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 954 (1st Cir.1976)). As these requirements are presented in the conjunctive, if one is not met, the administrative claimant will not be entitled to the priority. Thus, if a transaction is determined not to have benefitted the estate of the debtor, a court need not also determine whether the transaction took place with the debtor estate.
If an expense is administrative in nature, it is afforded second priority in payment from the assets of the bankruptcy estate. § 507(a)(2). These requirements are to be construed strictly: “The traditional presumption favoring ratable distribution among all holders of unsecured claims counsels strict construction of the Bankruptcy Code provisions governing requests for priority payment of administrative expenses.” Hemingway, 954 F.2d at 4-5. The Court will apply this standard in analyzing whether each type of expense in the USDA’s priority claim is “administrative” in nature and therefore entitled to priority in the distribution of the assets of the bankruptcy estate. Additionally, as the USDA is the party requesting the allowance of administrative expenses, it has the burden to prove its entitlement to a priority in the scheme of distribution. Id., at 5.
The Court will first address the $1,000 in property maintenance costs. From the invoices included in Exhibit E and emails in Exhibits A and C, it appears that the property maintenance costs were essentially for mowing the lawn in the area immediately around the school building on the Property. These expenses were incurred in relation to the marketing of the Property for sale, namely to improve its appeal to a prospective purchaser. See Ex. A, April 16, 2010 e-mail from Trustee to USDA (“[T]he school is a beautiful building but it doesn’t present well — which could result in lower than optimum offers. The lawns are growing and haven’t been mowed and the parking lot and walkways are covered with sand from the winter plowing and sanding.”) A1 of these expenses were incurred between July 2010-October 2010, during the time the Trustee was in possession of the Property and while the automatic stay was in effect.
The Court does not find that these marketing expenses benefitted the Debtor’s bankruptcy estate. Although they were incurred while the Trustee had possession of the Property, and while he was actively marketing it for sale, the Trustee did not end up selling the Property. In fact, the USDA likely received whatever benefit came from this marketing of the Property when it ultimately sold the Property in 2011. And although the property maintenance likely assisted the Trustee’s efforts in attempting to sell the Property, the opportunity to market the Property was not “the type of concrete, actual benefit contemplated by § 503(b)(1)(A).” Ford Motor Co. v. Dobbins, 35 F.3d 860, 866-67 (4th Cir.1994). Because the $1,000 of property maintenance costs did not benefit the estate, they cannot be allowed as administrative expenses.
The Court will address the remaining categories of the requested administrative expenses — winterization costs, alarm costs, and property insurance costs — together, because they are all of the same type: the ordinary costs of owning and preserving the value of the Property, which ultimately benefitted the USDA. The costs of preserving the Property are different in kind than the marketing costs addressed above. The Trustee has a “fiduciary obligation to conserve the assets of the estate and to maximize distribution to creditors.” United States v. Aldrich (In re Rigden), 795 F.2d 727, 730 (9th Cir. 1986) (citation omitted). Indeed, a trustee *163can be liable for “not only intentional but also negligent violations of duties imposed upon him by law.” Id.; accord Barrows v. Bezanson (In re Barrows), 171 B.R. 455, 459 (Bankr.D.N.H.1994). The failure of a trustee to “carefully preserve the estate’s assets from deterioration or dissipation,” would be a breach of such duties. Collier on Bankruptcy ¶ 704.04 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). If the Trustee did not protect the Property from risk of loss and deterioration, he would potentially breach his obligations if such a failure adversely affected the value of the estate’s property. Accordingly, had the USDA not paid the preservation costs, the Trustee would likely have been forced to find some way to pay for them (such as, perhaps, a surcharge under section 506(c)), or to abandon the Property.
Despite the absence of an express agreement between them, the USDA was willing to pay the preservation costs for at least several months while the Trustee attempted to sell the Property. The Court is in a position to see whom those costs benefit-ted, and while their benefit to the USDA was not as direct as that of the marketing costs, it is clear that the USDA ultimately received whatever benefit they may have generated, in the form of all the Property’s sale proceeds. The USDA should not receive an administrative expense for costs that did not benefit the estate. The restrictive view of section 503(b) taken by Hemingway, the purpose of the administrative priority, and the interplay of sections 503(b) and 506(c) convince the Court that this outcome is correct.
The Court must take a narrow view of the expenses to be allowed under section 503(b). In re Diomed Inc., 394 B.R. 260, 265-66 (Bankr.D.Mass.2008). In line with this narrow view, the expense must have provided a concrete (rather than attenuated) benefit to the bankruptcy estate. For example, in Ford Motor Credit, the debtor-in-possession retained a car dealership, to which Ford Motor Credit held a deed of trust, so that it could attempt to sell the property. 35 F.3d at 863-64. Ultimately, the debtor was unable to sell the dealership, and Ford obtained relief from the automatic stay. After selling the dealership, Ford filed a deficiency claim, which included a priority claim for various expenses incurred while the debtor retained the property. The court held that “we do not believe that the mere opportunity to market collateral is the type of concrete, actual benefit contemplated by § 503(b)(1)(A).” Id. at 866-67. The court’s analysis focused on the “critical distinction between an actual benefit to the estate resulting from the actual postpetition use of collateral and a potential benefit to the estate resulting from a debtor’s mere possession of collateral.” Id. at 867. In that court’s analysis, the estate would need to use or sell a creditor’s collateral in order to benefit; possession without use or a completed sale is not beneficial to the estate. But, if the estate were to sell the collateral and profit from the sale, that sale would constitute an actual use of property that generated a concrete benefit. In the latter case, the creditor might assert an administrative claim. See Id.
This contrast is evident in another case, In re Sports Shinko (Florida) Co., Ltd., where the court allowed a creditor an administrative expense priority for the costs of maintenance and utilities services incurred while the chapter 7 trustee marketed and successfully sold estate property. 333 B.R. 483 (Bankr.M.D.Fla.2005). In Sports Shinko, the debtor owned about half of the condominium units located in a condominium complex. The remaining units were owned by a condominium association. Id. at 489. During the chapter 7 case, the association paid for grounds *164maintenance, electricity, and property insurance for all of the condominium units, including those owned by the estate. Id. The chapter 7 trustee was able to sell the estate’s condominium units, along with other related property, to a single purchaser. The proceeds were sufficient to pay off multiple secured claims, as well as the trustee’s professional fees. Id. at 491. The court allowed the association’s request for administrative expenses based on the fact that the association’s expenditures had accrued directly to the estate’s benefit when the condominium units were sold. The court contrasted the facts before it with other cases in which the chapter 7 trustee “did not use, operate, or sell specific property,” where condominium associations were not awarded an administrative expense priority. Id.
Here, the Trustee did not use, operate, or sell the Property. The Court finds persuasive the reasoning from Ford Motor Credit that an opportunity to sell property is not an actual benefit to the estate. In the absence of a sale by the Trustee, the USDA is not entitled to an administrative expense for costs it incurred to provide the Trustee with the opportunity to market the Property. Additionally, the facts in this case are not like the facts before the court in Sports Shinko. There, the trustee sold property for the benefit of several secured creditors, and the proceeds were sufficient to cover the trustee’s professional fees. The expenditures of the condominium association directly benefitted the estate by maintaining the value of the property, value that was captured by the estate when it sold the property. Here, the only creditor that benefitted from the USDA’s expenditures on the Property was the USDA itself. To allow the USDA to recover the costs of maintaining the Property’s value, in the form of an administrative expense, would be to allow the USDA a windfall to the detriment of other creditors. In a very real sense, the USDA already recovered this value when it sold the Property.
The statutory purpose of the administrative expense priority also persuades the Court that disallowance of the USDA’s claim is proper. The purpose of section 503(b) is to incentivize businesses to provide services to the bankruptcy estate — services that make it possible for chapter 7 trustees to administer the assets of the estate or chapter 11 debtors-in-possession to operate. In re Boston Reg’l Med. Ctr. Inc., 291 F.3d 111, 124 (1st Cir.2002) (“The justification for this rule is that the administrative priority is necessary to induce potential contractors to do business with the debtor-in-possession, which in turn is necessary to prevent the business from collapsing entirely with the filing.”). The test applied to determine whether an expense ought to merit an administrative priority — i.e., whether the transaction was a post-petition transaction with the estate and whether the transaction actually benefitted the estate — -is “essentially an effort to determine whether the underlying statutory purpose will be furthered by granting priority to the claim in question.” In re Jartran Inc., 732 F.2d 584, 587 (7th Cir.1984) (discussing and applying the standard from In re Mammoth Mart, 536 F.2d at 954).
Here, the USDA falls outside the class of entities that section 503(b) was designed to induce to contract with the estate. The USDA’s pre-petition mortgage constituted its primary source of recovery on its claim. The USDA’s incentive was to protect the Property from loss of value pending a sale (whether by the Trustee or by foreclosure), which it did while permitting the Trustee to attempt to sell the Property, and then by foreclosing. As the holder of a secured claim (even if as an underse-*165cured creditor), its status is qualitatively different from a unsecured post-petition service provider, whose sole source of recovery is as the holder of an administrative expense claim.
The relationship between sections 503(b) and 506(c) also supports the Court’s decision. While section 503(b) generally places the burden of the cost of the estate’s administration on the estate itself, section 506(c) allows the trustee to shift some of those same costs onto a secured creditor. Section 506(c) provides that “the trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.” In order for a trustee to recover such costs from a secured creditor, the trastee must establish “(1) the expenditure was necessary, (2) the amounts expended were reasonable, and (3) the secured creditor benefitted from the expenses.” In re Parque Forestal, Inc., 949 F.2d 504, 512 (1st Cir.1991); see also In re Felt Mfg. Co., 402 B.R. 502, 510 (Bankr.D.N.H.2009).
Although no motion under section 506(c) is before the Court, and the Court is not making an affirmative ruling under that section, the potential application of section 506(c) to the facts of this case informs the Court’s decision about which party should bear the preservation costs of the Property. That the expenditures on winterization, electricity and alarm costs, as well as property insurance, were both necessary and reasonable seems indisputable; the USDA itself willingly paid for these services. And the Court has already decided that these expenditures benefitted the USDA. Indeed, these are the types of costs often recoverable by a trustee under section 506(c). See In re Strategic Labor, Inc., 467 B.R. 11, 22 (Bankr.D.Mass.2012) (“typical examples of allowed surcharge costs include appraisal fees, auctioneer fees, moving expenses, maintenance and repair costs, and advertising costs”) (quoting In re Swann, 149 B.R. 137,143 (Bankr. D.S.D.1993)). Thus, it seems that these are the types of costs and expenses that are “reasonable, necessary costs and expenses of preserving” the Property. Were the Court to adopt the USDA’s position, on the one hand, the USDA would recover its expenses under section 503(b), but on the other the Trustee might be able to recover the very same expenses from the USDA as a surcharge.3 The correct application of two different statutory provisions should not lead to a contrary result. See Rake v. Wade, 508 U.S. 464, 471, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993) (“We generally avoid construing one provision in a statute so as to suspend or supersede another provision. To avoid £deny[ing] effect to a part of a statute,’ we accord ‘significance and effect ... to every word.’ ” quoting Ex parte Public Nat. Bank of New York, 278 U.S. 101, 104, 49 S.Ct. 43, 73 L.Ed. 202 (1928)); Washington Mkt. Co. v. Hoffman, 101 U.S. 112, 116, 25 L.Ed. 782 (1879) (“Another rule equally recognized is that every part of a statute must be construed in connection with the whole, so as to make all the parts harmonize, if possible, and give meaning to each.”) The Court will not allow the USDA to recover costs of preserving its collateral under section 503(b) when these are the very types of *166costs recoverable by a trustee under section 506(c).
IV. CONCLUSION
For all the foregoing reasons, the Court finds that the USDA’s $16,962.18 claim under sections 503(b) and 507(a)(2) ought to be disallowed against the estate. This opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Federal Bankruptcy Rule of Procedure 7052. The Court will issue a separate order consistent with this opinion.
. Because the arguments asserted in Objection to Claim 5-3 apply with equal force to Claim 5-4, the Court did not require that the Objection be amended or restated. It is unclear whether the reduction in amount of the administrative expense claim was due to the withdrawal of the claim for post-petition interest, or for some other reason not in the record.
. The USDA did not file a separate motion to request the allowance of administrative expenses. This would have been the proper procedure. See, e.g., In re Lakeshore Constr. Co. of Wolfeboro, Inc., 390 B.R. 751 (Bankr. D.N.H.2008) (creditor moved for the allowance of administrative expenses by filing a "Motion, for Allowance and Payment of Administrative Expense Claim”). Here, the USDA included its administrative expense claim in Claim 5-3 and noted its request for priority under section 507(a)(2) by checking the requisite box on the official form. Thus, the USDA put the burden on the Trustee to raise the issue in Objection to Claim 5-3. The parties agreed to waive any procedural arguments generated by the USDA's failure to file a separate motion so that the Court could more expediently address the merits of the USDA’s position. In effect, the Court has treated the USDA's Response to Objection to Claim 5-3 as a request for the allowance of administrative expenses.
. The Court is not suggesting that sections 503(b) and 506(c) are mutually exclusive, i.e., that if a trustee could potentially recover expenses under section 506(c), these expenses would never be recoverable by a secured party under section 503(b). The Court does suggest that given the specific expenses sought and the unique facts of this case, the result under section 503(b) ought to jibe with the result under section 506(c). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496364/ | MEMORANDUM OPINION
J. MICHAEL DEASY, Bankruptcy Judge.
I. INTRODUCTION
This matter is before the Court on the Motion for Summary Judgment (Doc. No. 46) filed by the defendants, Federal National Mortgage Association, Lamper, and Haughey, Philpot & Laurent P.A. (collectively “FNMA”) as well as the Cross Motion for Summary Judgment (Doc. No. 48) filed by the debtor-plaintiff, Norman A. Carbonneau (the “Debtor”). FNMA conducted a foreclosure auction on real property owned by the Debtor and was the high-bidder. Following the auction, FNMA recorded a foreclosure deed to perfect its title to the property. The Debtor then filed this bankruptcy case pursuant to chapter 13 of the Bankruptcy Code.1 This adversary proceeding was commenced to recover damages from FNMA’s alleged violations of the automatic stay, resulting from FNMA’s post-petition conduct relating to the property. For the reasons set forth below, the Court finds that the prop*168erty is not property of the estate and that FNMA did not violate the automatic stay.
This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334, 157(a), and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
II. FACTS
The parties do not dispute the salient facts: The Debtor granted a mortgage on real property located at 121 Derry Road, Hudson, New Hampshire (the “Property”) to Fleet National Bank. Shortly thereafter, an assignment was recorded by Cendant Mortgage Corporation as “Authorized Agents” [sic] purporting to assign Fleet National Bank’s interest in the mortgage to Cendant. Subsequently, Fleet National Bank was acquired by Bank of America.
On May 25, 2011, defendant Mark H. Lamper sent a notice to the Debtor on behalf of PHH Mortgage Services Corp.— the servicer of the mortgage — and Federal National Mortgage Association, who was represented to be the current holder of the note and mortgage. The notice stated FNMA’s intent to accelerate the note and commence foreclosure proceedings immediately. On July 7, 2011, Bank of America executed an assignment of the mortgage to FNMA. This assignment was recorded later that month.
After providing public notice of the foreclosure for three consecutive weeks, FNMA foreclosed on the Property on August 25, 2011. This foreclosure sale proceeded according to the terms outlined in the notice that was provided to the Debtor and to the public. About a week later, on August 31, 2011, FNMA recorded a foreclosure deed, an affidavit of sale, and a copy of a notice of foreclosure sale in the appropriate registry of deeds. The copy of the notice of foreclosure sale was for the wrong property — 7 Pine Avenue in Keene, New Hampshire, rather than the Debtor’s property at 121 Derry Road.
On September 6, 2011, the Debtor filed his bankruptcy petition. The Debtor listed the Property on Schedule A of his petition and disclosed the foreclosure sale in his statement of financial affairs, stating that he intended to contest the validity of the foreclosure deed. A week after the bankruptcy had been filed, defendant Lamper, acting on behalf of FNMA, recorded a confirmatory affidavit of sale in the registry of deeds for the sole purpose of correcting the notice of foreclosure sale. The confirmatory affidavit replaced the faulty notice with a copy of the same notice that the Debtor had received prior to the foreclosure auction and that had been published pursuant to the statutory requirement.
Soon after the recording of the confirmatory affidavit, the Debtor filed the one count complaint that instigated this adversary proceeding. In the complaint, the Debtor seeks a declaration that FNMA’s filing of the confirmatory affidavit and its efforts to ascertain when the Debtor would vacate the Property constituted violations of the automatic stay of 11 U.S.C. § 362(a). FNMA never filed an answer, but at a pretrial hearing, FNMA denied the substantive allegations in the complaint, and the Court ordered the matter to proceed on with discovery. The Debtor never raised any objection to FNMA’s failure to file an answer, and given the current procedural posture of this case, the Court considers any such arguments to be waived. After a period of discovery, FNMA moved for summary judgment.
FNMA argues that it is entitled to judgment as a matter of law for two reasons: (1) the Debtor failed to enjoin the foreclo*169sure proceeding under New Hampshire law and accordingly lost any standing he had to contest the foreclosure sale, and (2) once the bankruptcy petition was filed, the Property did not become property of the estate under 11 U.S.C. § 541 and accordingly FNMA did not violate the automatic stay.
In response, the Debtor opposed FNMA’s motion and filed a cross motion for summary judgment. The Debtor proffers two separate bases for the Court to grant his motion and deny FNMA’s. First — the Debtor arg-ues — section 1322(c) allows him to cure any default with respect to the note and mortgage on the Property because the Property has not been “sold at a foreclosure sale” within the meaning of section 1322(e); the defective notice of foreclosure sale effectively prevented title from passing to FNMA, leaving the conveyance incomplete. Thus, the Debtor believes he has a federal interest in the Property, an interest that is protected by the automatic stay.
Second, the Debtor argues that the entire foreclosure sale is void because FNMA had no interest in the Property when it conducted the auction. According to the Debtor, Bank of America could not have assigned the note and mortgage to FNMA because Fleet National Bank— Bank of America’s predecessor in interest — had already assigned the note and mortgage to Cendant Mortgage Co. Because the assignment from Bank of America to FNMA was void, so was the foreclosure sale. This chain of events, the Debtor would have it, leaves Cendant holding a note and mortgage to the property, with the Debtor holding the deed free and clear of any interest of FNMA. FNMA opposed the Debtor’s cross motion for summary judgment, reiterating the arguments in its own motion.
After all the pleadings were filed, the Court took both motions under advisement.
III. DISCUSSION
A. Summary Judgment Standard
Under Rule 56(a) of the Federal Rules of Civil Procedure, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056, a summary judgment motion should be granted only “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.” An issue is “genuine” if a reasonable jury could resolve the point in favor of the nonmoving party. Tropigas de Puerto Rico, Inc. v. Certain Underwriters at Lloyd’s of London, 637 F.3d 53, 56 (1st Cir.2011). A fact is “material” if its existence or nonexistence has the potential to change the outcome of the suit. Id.
[T]he role of summary judgment is to “pierce the pleadings” and to determine whether there is a need for trial. Garside v. Osco Drug, Inc., 895 F.2d 46, 50 (1st Cir.1990). The moving party must “put the ball in play” by averring the absence of any genuine issue of fact. Id. at 48. Once the ball is in play, however, the non-moving party must come forward with competent evidence to rebut the assertion of the moving party. Id.; see also Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Not every factual discrepancy is sufficient to defeat a motion for summary judgment. “[E]vi-dence that ‘is merely colorable or is not significantly probative’ ” cannot defeat the motion. Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
*170Evans Cabinet Corp. v. Kitchen Int’l, Inc., 593 F.3d 135, 140 (1st Cir.2010). If the movant makes a preliminary showing that no genuine issue of material fact exists, the nonmovant must produce suitable evidence to establish a trial-worthy issue. Clifford v. Barnhart, 449 F.3d 276, 280 (1st Cir. 2006). Otherwise, the nonmovant’s failure to produce evidence on essential factual elements on which it would bear the burden of proof at trial requires summary judgment for the movant. Id. As part of the summary judgment record, a court may take judicial notice of its own docket. See Fed. R. Bankr.P. 9017 (incorporating Fed.R.Evid. 201); LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 8 (1st Cir.1999). “In evaluating whether there is a genuine issue of material fact, the court examines the record — pleadings, affidavits, depositions, admissions, and answers to interrogatories— viewing the evidence in the light most favorable to the party opposing summary judgment.” Rivera-Colon v. Mills, 635 F.3d 9, 12 (1st Cir.2011); see Maldonado-Denis v. Castillo-Rodriguez, 23 F.3d 576, 581 (1st Cir.1994). While courts draw all reasonable inferences in favor of the non-movant, Mendez-Aponte v. Bonilla, 645 F.3d 60, 64 (1st Cir.2011), courts afford no evidentiary weight to “conclusory allegations, empty rhetoric, unsupported speculation, or evidence which, in the aggregate, is less than significantly probative.” Rogan v. City of Boston, 267 F.3d 24, 27 (1st Cir.2001), cited in Tropigas de Puerto Rico, 637 F.3d at 56.
B. The Automatic Stay Applies Only to Property of the Estate
The Debtor claims FNMA’s post-petition actions against the Property constitute a violation of the automatic stay in that (1) FNMA attempted to gain possession or control of the Property in contravention of section 362(a)(3) and to “collect, assess, or recover a claim” from the Debt- or within the meaning of section 362(a)(6). In order for an action to be stayed by the automatic stay under (a)(3) or (a)(6) it must be an act with respect to “property of the estate” or an act to recover “a claim against the debtor.” The automatic stay does not stay actions against property that is not part of the bankruptcy estate. 11 U.S.C. § 362(c)(1); Donarumo v. Furlong (In re Furlong), 660 F.3d 81, 89 (1st Cir. 2011) (“[T]he stay is inapplicable to property that has been removed from the estate.”). Accordingly, if the Property was not part of the bankruptcy estate when the petition was filed, FNMA’s motion for summary judgment must be granted and the Debtor’s cross motion denied.
Section 541 delimits the property constituting the bankruptcy estate. The estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). See In re DeSouza, 493 B.R. 669, 672 (1st Cir.BAP2013) (“[Sjection 541(a)(1) provides the general rule that property of the bankruptcy estate consists of all legal and equitable interests of the debtor in property as of the commencement of the case, subject to certain exceptions not applicable here.”).
The Bankruptcy Code does not generally define whether an entity has an interest in specific property; such determinations are left to state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“Property interests are created and defined by state law. Unless some federal interest requires a different result there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”). Neither does the Bankruptcy Code serve to augment or diminish the property rights defined by state law — unless a spe*171cific provision of the code is applicable. In re Stephens, 221 B.R. 290, 292-93 (Bankr. D.Me.1998) (Maine foreclosure law determined whether the debtors had an interest in realty for the purpose of section 362.).
This Court addressed the effect of a chapter 13 case filed after the conclusion of a foreclosure auction but before the recording of a foreclosure deed in In re Beeman, 235 B.R. 519, 525 (Bankr.D.N.H. 1999). In Beeman, the Court held that section 1322(c) preempts “state redemption law in the context of determining which point in time a Chapter 13 debtor’s rights to cure and reinstate are terminated.” Id. Section 1322(c)(1) provides that:
Notwithstanding subsection (b)(2) and applicable nonbankruptcy law—
(1) a default with respect to, or that gave rise to, a lien on the debtor’s principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law;
Under Beeman, a court must determine whether the property in question has been “sold at a foreclosure sale” in order to decide whether a debtor may still exercise the ability to cure defaults under section 1322(b)(2) or (5). In this case, the Debtor has filed a chapter 13 plan that attempts to cure the defaults under the note and mortgage on the Property and so attempts to invoke section 1322(c) to save the Property. However, if the foreclosure sale process was complete before the bankruptcy case was filed, the Debtor may not make use of section 1322(c).
The Completion of the Sale Under New Hampshire Law
The requirements for the completion of a foreclosure sale are set out in RSA § 479:26:
I. The person selling pursuant to the power shall within 60 days after the sale cause the foreclosure deed, a copy of the notice of the sale, and his affidavit setting forth fully and particularly his acts in the premises to be recorded in the registry of deeds in the county where the property is situated; and such affidavit or a duly certified copy of the record thereof shall be evidence on the question whether the power of sale was duly executed. If such recording is prevented by order or stay of any court or law or any provision of the United States Bankruptcy Code, the time for such recording shall be extended until 10 days after the expiration or removal of such order or stay. If such recording is, in accordance with the provisions of this chapter, made more than 60 days after the sale, the reasons therefor shall be set forth fully and particularly in the affidavit.
II. Failure to record said deed and affidavit within 60 days after the sale shall render the sale void and of no effect only as to liens or other encumbrances of record with the register of deeds for said county intervening between the day of the sale and the time of recording of said deed and affidavit.
III. Title to the foreclosed premises shall not pass to the purchaser until the time of the recording of the deed and affidavit. Upon such recording, title to the premises shall pass to the purchaser free and clear of all interests and encumbrances which do not have priority over such mortgage. In the event that the purchaser shall not pay the balance of the purchase price according to the terms of the sale, and at the option of the mortgagee, the down payment, if any, shall be forfeited and the foreclosure sale shall be void.
*172In Beeman, the court interpreted RSA § 479:26 to mean that until the foreclosure deed is recorded, the property has not been “sold at foreclosure” within the meaning of New Hampshire law. Accordingly, until such time as the foreclosure deed is recorded, a chapter 13 debtor has an ability to cure defaults on a note and mortgage under section 1322(c). In re Beeman, 235 B.R. 519, 526 (Bankr.D.N.H. 1999).
In Beeman, there was no dispute that the mortgagee had not recorded the foreclosure deed before the filing of the bankruptcy petition. See id. at 520. Here, all parties agree that the foreclosure deed was recorded before the bankruptcy petition was filed. Rather, the Debtor argues that the recording of the deed was defective because the wrong notice of foreclosure was recorded along with the deed and affidavit. FNMA counters that the recording was proper because RSA § 479:26 only requires the recording of a deed and affidavit for the sale to be complete.
Section 479:26(1) requires three things to be done within 60 days of the foreclosure sale: the foreclosure deed, a copy of the notice of the sale, and the affidavit of the foreclosing mortgagor — “setting forth fully and particularly his acts in the premises” — must all be recorded in the appropriate registry of deeds. Section 479:26(11) decrees that the failure to record “said deed and affidavit within 60 days after the sale shall render the sale void and of no effect only as to liens or other encumbrances of record ... intervening between the day of the sale and the time of recording of said deed and affidavit.” Finally, section 479:26(111) provides that “title to the foreclosed premises shall not pass to the purchaser until the time of the recording of the deed and affidavit.”
RSA § 479:26 makes it clear that both the deed and affidavit are integral to the foreclosure sale conveyance. It is also clear from the statute that the affidavit cannot be examined in isolation; it must be construed along with both the foreclosure deed and the notice of foreclosure sale, as the statute requires the filing of all three.
The Debtor recognizes this and urges the Court to find that the wrongly attached foreclosure notice combined with the affidavit, which incorporates the attached notice by reference, have the effect of invalidating the entire conveyance. It appears as though the New Hampshire Supreme Court has not decided this granular legal issue — neither the parties nor the Court have found a dispositive decision. When confronted with an open legal question of state law, this Court “must endeavor to predict how the state’s highest tribunal would likely resolve the matter.” In re Williams, 171 B.R. 451, 453 (D.N.H. 1994) (citing Moores v. Greenberg, 834 F.2d 1105, 1107 (1st Cir.1987)). In predicting the likely outcome here, the Court finds instructive the New Hampshire case law dealing with deeds containing misleading or vague descriptions of transferred real property.
In New Hampshire, “when interpreting deeds, the general rule is to determine the intent of the parties at the time of the conveyance in light of the surrounding circumstances.” Chao v. Richey Co., Inc., 122 N.H. 1115, 1117, 455 A.2d 1008 (1982) (citing MacKay v. Breault, 121 N.H. 135, 139, 427 A.2d 1099 (1981)). When the description in a deed is ambiguous or erroneous, certain default rules govern: “It is well established that a mistaken term, course, or boundary, used inadvertently in a deed, may be rejected where its effect would be to defeat the purpose of the parties to the deed.” Chao, 122 N.H. at 1118, 455 A.2d 1008. Indeed, “that the deed description burdens the title examiner with an enormous task of research to *173determine what is conveyed, has no bearing on the validity of the conveyance, if, in fact, the property conveyed can be reasonably determined from the description.” Smith v. Wedgewood Builders Corp., 134 N.H. 125, 129-130, 590 A.2d 186 (1991).
In Wedgewood, the court was faced with two parties seeking title to the same parcel of land. Both alleged the descriptions in their respective deeds covered the parcel. One party alleged that the other’s deed described the property conveyed so vaguely that the conveyance was void. Id. at 129, 590 A.2d 186. The description made reference to a then-existing road which “bounded” the transferred property. The Court, acknowledging the difficulty this type of description posed for title examiners, stated that nonetheless it was possible to discern what property the parties intended to convey. That intention would carry the day, despite the difficulty involved in making the interpretation. Id. at 130, 590 A.2d 186.
The Court finds the treatment of ordinary deeds and foreclosure deeds under New Hampshire Law to be analogous. Both the ordinary deed and the foreclosure deed are instruments that transfer real property and both involve essential secondary documents, namely descriptions and affidavits. A description is integral to an ordinary deed much like an affidavit is essential to a foreclosure deed. Both an affidavit and a description contain essential information that informs the world about a given conveyance. If the description in an ordinary deed is vague enough, a court cannot determine what property was conveyed. Similarly, if the affidavit appended to a foreclosure deed is so vague that it is impossible to tell what actions were taken to effect the power of sale, a foreclosure deed would be invalid — it would be as if the affidavit had not been filed at all. Accordingly, the Court shall apply this same standard to the conveyance documents at hand.
After considering the undisputed facts, it is apparent that the affidavit is not so vague as to void the conveyance. First, the affidavit contains all of the essential information required by the statute. Under RSA § 479:26(1), an affidavit must set forth “fully and particularly” the acts of the foreclosing party with respect to the property. And in this affidavit, defendant Lamper describes: (1) the grantor of the deed, (2) the default on the mortgage, (3) the acts taken to notice the foreclosure auction, (4) the publication dates the notice of sale, (5) where the auction was held, (6) who acquired the Property, and (7) for how much. The only factual error in the affidavit is the statement that the notice of foreclosure sale published on July 8, 2011, August 4, 2011, and August 11, 2011 “is attached hereto as Exhibit A.” The Court finds that this error is not misleading enough to defeat the conveyance because the information in the erroneously attached notice is so incongruous that its flawed nature is readily apparent. In the relevant part the notice of sale reads:
NOTICE OF FORECLOSURE SALE Pursuant to a power of sale contained in a certain mortgage deed given by ANNE L. AUDETAND PHILLIP AU-DET to MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., as nominee for COUNTRYWIDE HOME LOANS, INC., its successors and assigns, as lender, dated April 18, 2006, recorded in the Cheshire County Registry of Deeds at Book 2339, Page 814, assigned to FEDERAL NATIONAL MORTGAGE ASSOCIATION.... will sell on the mortgaged premises (street address: 7 Pine Avenue) in Keene, Cheshire County, at:
PUBLIC AUCTION
On September 7, 2011 at 2:00 P.M.
*174With even a cursory inspection, the foreclosure deed and affidavit conflict with the notice of sale — the name of the mortgagor, the property address, and the publication date are all wrong. The Court also notes that because the affidavit sets out what dates the actual notice of sale was published in the Union Leader, it is possible for an inquiring party to find a copy of the missing notice. This is analogous to the put-upon title examiner referenced in Wedgewood, supra. It would be extra work for the title examiner to find the correct notice of sale, given that it was not properly attached, but it would be possible, and likely with less effort than that expended by the title examiner in Wedge-wood.
Accordingly, the Court finds that the information provided in the affidavit is not so vague as to render the conveyance void. The affidavit provides the particular information required by RSA § 479:26 and provides a sufficient reference so that a party could find the notice of sale. Thus, under New Hampshire Law, the foreclosure sale process was completed before the Debtor filed his bankruptcy petition, and the Property did not become part of the bankruptcy estate. Because the Property was not bankruptcy estate property, FNMA’s post-petition actions did not violate the automatic stay.
C. The Debtor is Barred from Contesting the Validity of the Foreclosure Sale
The Debtor makes a separate argument in an attempt to contest the validity of the foreclosure sale. The Debtor claims that FNMA had no authority to foreclose on the Property, because it did not hold the mortgage or the note. The Debtor argues that Cendant Mortgage Corp. holds the note and mortgage by assignment from Fleet National Bank, Bank of America’s predecessor in interest. Because Bank of America did not hold the note and mortgage when it purported to assign its interest to FNMA, the assignment was void and FNMA did not have the power of sale to foreclose on the Property. Regardless of the merit of these claims, the Debtor does not have standing to pursue them at this juncture.
Under state law, the Debtor lost his ability to challenge the validity of the foreclosure sale when he failed to file a petition to enjoin before the conclusion of the foreclosure auction. In re PM Cross, LLC, 494 B.R. 607, 616 (Bankr.D.N.H.2013) (“The mortgagor loses both legal and equitable interest in the encumbered property ‘once the auctioneer’s hammer [falls] and the memorandum of sale [is] signed.’ ”) (quoting Barrows v. Boles, 141 N.H. 382, 393, 687 A.2d 979 (1996)).2 RSA § 479:25(11) requires a mortgagee foreclosing under the power of sale to send the following notice to the mortgagor: “You are hereby notified that you have a right to petition the superior court for the county in which the mortgaged premises are situated, with service upon the mortgagee, and upon such bond as the court may require, to enjoin the scheduled foreclosure sale.” The statute then provides that “failure to institute such petition and complete service upon the foreclosing party, or his agent, conducting the sale prior to sale shall thereafter bar any action or right of action of the mortgagor based on the valid*175ity of the foreclosure.” Id. The effect of this section is that:
[A] mortgagor, “to preserve a challenge to the validity of the foreclosure sale,” must file an action to enjoin the foreclosure prior to the sale. Gordonville Corp. N.V. v. LR1-A Ltd. P’ship, 151 N.H. 371, 377 [856 A.2d 746] (2004). If the mortgagor fails to do so, he or she may not challenge the foreclosure’s validity “based on facts which the mortgagor knew or should have known soon enough to reasonably permit the filing of a petition prior to the sale.” Murphy v. Fin. Dev. Corp., 126 N.H. 536, 540 [495 A.2d 1245] (1985); see also People’s Utd. Bank v. Mtn. Home Developers of Sunapee, LLC, 858 F.Supp.2d 162, 167-68 (D.N.H.2012).
Calef v. Citibank, N.A., 11-CV-526-JL, 2013 WL 653951, at *3 (D.N.H. Feb. 21, 2013). The assignment from Fleet National Bank to Cendant Mortgage Co. has been on file in the registry of deed since 2003. See Joint Statement of Material Facts, ¶ 2 (Doc. No. 25). Accordingly, the Debtor had more than enough notice of this issue to afford him the opportunity to file a petition under RSA § 479:25(11) pri- or to the beginning of the foreclosure auction.
The Debtor has not set forth any basis under the Bankruptcy Code that would alter this result. As discussed, supra, unless the Bankruptcy Code provides otherwise, the Debtor’s bankruptcy case does not affect property rights, including claims a debtor may bring. § 541(a)(1) (Property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”). Thus, because New Hampshire law would not allow the Debtor to contest the validity of the foreclosure sale, and because the Debtor has not demonstrated how the Bankruptcy Code alters that result, his argument necessarily fails.
IV. CONCLUSION
For the reasons set forth above, the Court shall grant FNMA’s motion for summary judgment. For those same reasons, the Debtor’s cross motion for summary judgment must be denied. This opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue separate orders and a judgment consistent with this opinion.
. The Court shall refer to Title 11 of the United States Code as the "Bankruptcy Code.” See Local Bankruptcy Rules, Preface.
. Until the foreclosure sale is completed under state law by the recording of a deed after completion of the auction sale, a debtor may have a federal interest that permits redemption in a chapter 13 proceeding under section 1322(c)(1) of the Bankruptcy Code. In re Beeman, 235 B.R. 519, 524 (Bankr.D.N.H.1999). However, a debtor's state law rights and remedies are governed by applicable sate law. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496365/ | OPINION AND ORDER
ENRIQUE S. LAMOUTTE, Bankruptcy Judge.
This case is before the court upon the Chapter 7 Trustee’s Amended Objection to Claimed Exemptions (the “Objection ”, Docket No. 23) and the Debtors’ Response thereto (Docket No. 26). The Chapter 7 Trustee objects to several claimed exemptions under Puerto Rico law1 and requests *179the turnover of certain amounts and/or the surplus not allowed under certain exemption statutes. The Debtors contend the claimed exemptions are proper. For the reasons stated below, the Chapter 7 Trustee’s Objection is granted in part and denied in part.
Procedural Background
The Debtors filed their voluntary bankruptcy petition on November 9, 2012 (Docket No. 1). In Schedule C, they claimed the following exemptions under Puerto Rico law (Docket No. 1, p. 17):
Property_Legal grounds_Value of exemption
Primary residence PR Act No. 195 enacted $130,000 on September 13, 2011, _as amended_
Stove $200; Refrigerator $600; 32 L.P.R.A. § 1130(14) $1,050 Microwave $150; Kitchen Utensils $40; Dinnerware $30; Cookware $30_
Washer and Dryer_32 L.P.R.A. § 1130(14) $200_
Living Room Set $100; Bedroom Set 32 L.P.R.A. § 1130(2) $50 $100; Chest and Nightstands $150_
Dinning Room Set $100; Tables and 32 L.P.R.A. § 1130(1) $150 Chairs $50_
Television Set $300; DVD Player $30; 32 L.P.R.A. § 1130(14) $430 TV Sound System $100_
Mobile Phone $75; Computer $100; 32 L.P.R.A. § 1130(14) $200 Printer $25 Personal Clothes, Shoes, Jewelry and 32 L.P.R.A. § 1130(2) $440 Other Apparel_
Undefined Benefit From Marriott San 25 L.P.R.A. § 383 $1 Juan Retirement Plan_
1993 Nissan Pathfinder_32 L.P.R.A. § 1130(6) $897_
2005 Mitsubishi Montero_32 L.P.R.A. § 1130(6)_$375_
TOTAL$134,093
On February 15, 2013, the Chapter 7 Trustee filed her Objection to Debtors’ claimed exemptions (Docket No. 23). She sustains that the Debtors have not demonstrated compliance with Articles 11 and 12 of Puerto Rico’s Home Protection Act No. 195 enacted on September 13, 2011 (the “2011 PR Home Protection Act”) and therefore the homestead exemption must be denied. In regards to the stove, microwave, kitchen utensils, dinnerware and cookware, the Chapter 7 Trustee avers that 32 L.P.R.A. § 1130(14) does not include those specific exemptions. As to the living room set, bedroom set, chest, nightstands, dining room set, tables, chairs and television set, the Chapter 7 Trustee argues that the claimed amounts exceed the ones allowed in the pertinent Puerto Rico statutes, which warrants the exemption to be disallowed or have the excess value turned over to the bankruptcy estate. The Chapter 7 Trustee further contends that the DVD Player, sound system, mobile phone, computer or printer are not expressly allowed in 32 L.P.R.A. § 1130(14), that the Debtors did not sufficiently detail the wearing apparel they claimed exempt, and that they did not prove that the motor vehicles constitute a working tool, especial*180ly since they are retired and receiving retirement pensions. Finally, in regards to the interests the Debtors claim in the Marriott San Juan Retirement Plan, the Chapter 7 Trustee argues that the benefits in 25 L.P.R.A. § 383 are reserved for pensions for disability or death in the line of duty in regards to State Internal Security and that the Debtors have not established that the proceeds of such retirement plan fit its legislative purpose. Thus, the Chapter 7 Trustee seeks the turnover of Debtors’ funds in the 401(k) plan.
On March 13, 2013, the Debtors filed an Amendment to Schedules to “correct exemptions” (Docket No. 25). The only “correction” was changing the legal grounds on the Debtors’ benefit from the Marriott San Juan Retirement Plan from 25 L.P.R.A. § 383 to 11 U.S.C. § 522(b)(3)(C). Thus, in their new amended Schedule C, Debtors claim the following exemptions and values:
Property_Legal grounds_Value of exemption
Primary residence PR Act No. 195 enacted $130,000 on September 13, 2011, _as amended_
Stove $200; Refrigerator $600; 32 L.P.R.A. § 1130(14) $1,050 Microwave $150; Kitchen Utensils $40; Dinnerware $30; Cookware $30_
Washer and Dryer_32 L.P.R.A. § 1130(14) $200_
Living Room Set $100; Bedroom Set 32 L.P.R.A. § 1130(2) $350 $100; Chest and Nightstands $150_
Dinning Room Set $100; Tables and 32 L.P.R.A. § 1130(1) $150 Chairs $50_
Television Set $300; DVD Player $30; 32 L.P.R.A. § 1130(14) $430 TV Sound System $100_
Mobile Phone $75; Computer $100; 32 L.P.R.A. § 1130(14) $200 Printer $25_
Personal Clothes, Shoes, Jewelry and 32 L.P.R.A. § 1130(2) $440 Other Apparel_
Undefined Benefit From Marriott San 11 U.S.C. § 522(b)(3)(C) $1 Juan Retirement Plan_
1993 Nissan Pathfinder_32 L.P.R.A. § 1130(6) $897_
2005 Mitsubishi Montero_32 L.P.R.A. § 1130(6)_$375_
TOTAL$134,093
On March 14, 2013, the Debtors filed a Response to [the Chapter 7] Trustee’s Objection (Docket No. 26). In regards to the personal exemptions claimed under 32 L.P.R.A. § 1130(14) for the stove, kitchen utensils, dinnerware and cookware, the Debtors sustain that under the liberal interpretation in which Puerto Rico case law has construed exemptions, the term “home-use kitchens” includes these kitchen items. As to the amounts of the exemptions claimed over the living room set, bedroom set, chest and nightstands, dining room set, tables and chairs, the Debtors sustain that they can each claim the full amount afforded in the relevant Puer-to Rico statutes because they are two joint debtors. The Debtors also argue that the television set, stereo equipment and DVD Player were also correctly claimed under 32 L.P.R.A. § 1130(14) because although not expressly mentioned in the statute, they have an intrinsic resemblance to the property allowed as exempt therein, and thus they should be meant to be included in the exemption scheme. The *181Debtors further contend that the wearing apparel and jewelry exemption under 32 L.P.R.A. § 1130(2) is limitlessly exempted and therefore whether the property is specifically detailed or not, it is completely exempted regardless. As to the 2005 Mitsubishi Montero and the 1993 Nissan Pathfinder, the Debtors assert that although 32 L.P.R.A. § 1130(6) does not expressly exempt “motor vehicles”, Puerto Rico’s Supreme Court has ruled that a liberal construction of the statute must include motor vehicles. In regards to the Marriott San Juan Retirement Plan, the Debtors allege that because they changed the legal grounds in their amended Schedule C to 11 U.S.C. § 522(b)(3)(C) the Chapter 7 Trustee’s objection has become moot. Finally, the Debtors aver that their homestead right was properly claimed because they executed the homestead deed prior to filing their bankruptcy petition, although the real property is not registered in favor of the Debtors’ at the Property Registry.
No further replies were filed.
Applicable Law and Analysis
(A) Exemptions in General
When a debtor files a bankruptcy petition, all of his/her/its assets become property of the bankruptcy estate [11 U.S.C. § 541] subject to the debtor’s right to reclaim certain property as exempt under 11 U.S.C. § 522. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). A property becomes exempt by operation of law when no objections are filed. See 11 U.S.C. § 522(i). But the mere fact that debtors claim an exemption does not necessarily mean that they are entitled to it, since there must be compliance with statutory requirements and then an order that effect. See 9A Am. Jur. 2d Bankruptcy § 1392; In re Gutierrez Hernández, 2012 Bankr.LEXIS 2735 at *8, 2012 WL 2202931 at *2 (Bankr.D.P.R.2012); In re Rolland, 317 B.R. 402, 412 (Bankr.C.D.Cal. 2004); In re Colvin, 288 B.R. 477, 483 (Bankr.E.D.Mich.2003); Carlucci & Legum v. Murray (In re Murray), 249 B.R. 223, 230 (E.D.N.Y.2000). Exemptions should be liberally construed in furtherance of the debtor’s right to a “fresh start”. In re Gutierrez Hernández, 2012 Bankr.LEXIS 2735 at *5, 2012 WL 2202931 at *2; In re Newton, 2002 Bankr.LEXIS 2089 at *7, 2002 WL 34694092 at *3 (1st Cir. BAP 2002); Christo v. Yellin (In re Christo), 228 B.R. 48, 50 (1st Cir. BAP 1999). A “fresh start”, however, does not translate to a “head start”. In re Goldberg, 59 B.R. 201, 208 (Bankr. N.D.Okla.1986). “The basis for exemption laws is that by providing a debtor to retain a minimum level of property, the debtor and his or her family will not be completely destitute and thus a burden to society.” Id. at 208.
(B) Hoiv to Claim Exemptions under 11 U.S.C. § 522
“In order to be effective, a debt- or must specifically describe the property claimed as exempt and inform the value.” In re Gutierrez Hernández, 2012 Bankr.LEXIS 2735 at *5, 2012 WL 2202931 at *2. Also see Nancy C. Dreher and Joan N. Feeney, Bankruptcy Law Manual, Volume 1 § 5:43 (2012-2), p. 1015. Thus, a debtor is required to list the property claimed as exempt on the schedule of assets that must be filed with the bankruptcy petition. See 11 U.S.C. § 522(Z); Fed. Rs. Bankr.P. 1007(b), 1007(I)(b) & 4003. A party in interest or the trustee may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under 11 U.S.C. § 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, *182whichever is later. Fed. R. Bank. P. 4003(b)(1). If an interested party fails to object to a claimed exemption within the time allowed, the subject property will be excluded from the bankruptcy estate even if the exemption’s value exceeds the statutory limits. 11 U.S.C. § 522(Z); Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). In the instant case, there is no dispute that the Chapter 7 Trustee’s Objection is timely.
In Schwab v. Reilly, 560 U.S. 770, 130 S.Ct. 2652, 2668, 177 L.Ed.2d 234 (2010), the Supreme Court held that the time limits for objecting to an exemption do not apply if the claimed exemption is “valid on its face”. Schwab’s analysis rests on the determination that Section 522(a)(3)(B) defines the “ ‘property’ a debt- or may ‘clai[m] as exempt’ as the debtor’s ‘interest’ — up to a specified dollar amount — in the assets described in the category, not as the assets themselves.” Id. at 2661-2662 (citations omitted). Under the Schwab doctrine, treating the entries as exemptions of an in-kind interest would violate the Bankruptcy Code’s limits and fail to account for the distinction between exemptions that include a monetary cap and those that allow debtors to exempt property regardless of value. Id. at 2663, n. 10. Thus, Schwab mandates that exemptions be claimed “in a manner that makes the scope of the exemption clear”. Id. at 2668. In Massey v. Pappalardo (In re Massey), 465 B.R. 720 (1st Cir. BAP 2012), the debtor did not assign a monetary value to the claimed exemption for his car and residence in their Schedule C, but rather claimed “100% of FMV [Fair Market Value]”. Id. at 721. The Trustee timely challenged those claimed exemptions alleging that they were improper. Id. at 722. The Massey court adopted the analysis in In re Salazar, 449 B.R. 890 (Bankr.N.D.Tx. 2011), where the court posed two possible solutions to dealing with this type of claimed exemptions. First, the court may hold an evidentiary hearing on the value of the debtor’s exemptions. At such a hearing, the debtor has the initial burden of showing a plausible basis for the claim that “100% of FMV” of an asset falls within the statutory limit on the amount that may be exempted under Section 522. In accordance with Schwab, if the objection is overruled, the asset claimed will no longer be part of the estate, but if the objection is sustained, the debtor must forfeit the value in excess of the statutory allowance. The second approach is for the court to “simply declare that an objection to an exemption claim of ’100% of FMV’ is a facially valid objection because the debtor has failed to claim a set amount as contemplated by the exemption statute allowing the exemption.” Salazar, 449 B.R. at 897. In this situation, the court will sustain the objection “unless the debtor amends his exemptions to claim a dollar amount for his exempt interest in the property.” Id. at 897. The Salazar court adopted this approach [Id. at 902], and the Massey court held that said approach “best recognizes the reasoning in Schwab ”. Massey, 465 B.R. at 728. Under either scenario, Fed. R. Bankr.P. 4003(c) mandates that “the objecting party has the burden of proving that the exemptions are not properly claimed.”
“In any event, the debtor should clearly describe the object and its value especially where the statute limits the dollar amount of the exception, or where the debtor owns more than one of the objects.” Jay M. Zitter, J.D., Jewelry and Clothing as Within Debtor’s Exemptions Under State Statutes, 44 A.L.R. 6th 481, § 3 (2008).
(C) Exemptions when Co-Debtors File a Joint Bankruptcy Petition
“In joint cases, Section 522 [of the Bankruptcy Code] applies separately to each *183debtor pursuant to subsection (m), subject to the limitation set forth in subsection (b), which was added by the 1984 amendments to the Code.” Allan N. Resnick and Henry J. Sommer, 4 Collier on Bankruptcy, ¶ 522.04[5] (16th ed. 2013). Also see In re Gentile, 483 B.R. 50, 54 (Bankr.D.Mass. 2012). Notwithstanding, “[w]henever a husband and wife both become debtors under the Code through voluntary or involuntary proceedings, and their cases are jointly filed and jointly administered, they must both elect the same ‘slate’ of exemptions”, meaning that “if one spouse elects the federal Code exemptions, the other spouse must also elect federal exemptions”. Allan N. Resnick and Henry J. Sommes, 4 Collier on Bankruptcy, ¶ 522.04[6] (16th ed. 2013).
(D) Exemptions Claimed on Stove, Micro-ivave, Kitchen Utensils, Dinnerware and Cookware
The Debtors claim exemptions on the stove, microwave, kitchen utensils, dinnerware and cookware under 32 L.P.R.A. § 1130(14). The Chapter 7 Trustee objects to these exemptions alleging that “there is no mention in [that statute] as to a stove, microwave, kitchen utensils, dinnerware or cookware” and therefore they must be disallowed (Docket No. 23, p. 4). The Debtors contend that “kitchen items utilized for home-use are exempt”, that 32 L.P.R.A. § 1130(14) “exempts common iceboxes (refrigerators) expressly designed for ‘home use’ and wash machines ‘for home uses’ ”, and that under Puerto Rico case law “statutes exempting certain properties from execution are remedial in character [which] must be construed liberally in favor of the debtor” (Docket No. 26, pp. 2-3).
Article 249(14)2 of Puerto Rico’s Code of Civil Procedure provides as follows:
In addition to the homestead exempted by the Homestead Law, the following property belonging to an actual resident of this Commonwealth of Puerto Rico shall be likewise exempted from execution, except as herein otherwise provided:
(14) Common iceboxes expressly designed and commercially known for home use; home-use kitchens; wash machines for home use whose cash price does not exceed two hundred (200) dollars; radio receiving sets whose cash price does not exceed one hundred (100) dollars; television sets for home use whose cash price does not exceed two hundred and fifty (250) dollars per unit, and electric irons for home use, are likewise exempted from attachment and execution. 32 L.P.R.A. § 1130(14).
Puerto Rico’s Supreme Court has ruled that the exemptions afforded in Article 249 of Puerto Rico’s Code of Civil Procedure are repairing in nature, and thus its statutes must be construed in the most liberal light to effectuate the humanitarian purpose of the lawmaker. Laguna v. Quiñones, 23 P.R.R. 358, 360-361, 23 D.P.R. 386, 389 (1916). “[E]ven if any doubt [regarding exemptions] could be harbored ... the doubt should be resolved in favor of the exemption.” Quintana v. Superior Court, 104 P.R. Off. Trans. Part I 26, 28, 104 D.P.R. 18, 20 (1975). It then *184follows that the terms “tools or implements” and “other equipment” used in 32 L.P.R.A. §§ 1130(4) and (6), respectively, are applicable to include properties that would otherwise be excluded under a strict technical interpretation. Laguna v. Quiñones, 23 P.R.R. at 361, 23 D.P.R. at 389; Quiñones v. Gutierrez, 29 P.R.R. 718, 722-723, 29 D.P.R. 772, 777 (1921).
Pursuant to the liberal trend upon which Puerto Rico exemptions must be construed, the court finds that the Debtors’ claimed exemptions on the stove, kitchen utensils, dinnerware and cookware are comprised in the term “home-use kitchens” in 32 L.P.R.A. § 1130(14) up to the amount of $200 for each co-debtor, for a total of $400. Consequently, those exemptions are allowed.
(E)Exemptions Claimed on the Living Room Set, Bedroom Set, Chest and Nightstands
In the instant case, each co-debtor claims as exempt the living room set ($100), bedroom set ($100), chest and nightstands ($150) under 32 L.P.R.A. § 1130(2). The Chapter 7 Trustee objects because the total amounts exceed the ones allowed in the statute.
Article 249(2) of Puerto Rico’s Code of Civil Procedure provides as exempt:
Necessary household, table and kitchen furniture belonging to the judgment debtor, including one sewing machine in actual use in the family, or belonging to a woman, and stove, furniture, beds, bedding and bedsteads, not exceeding in value two hundred (200) dollars, wearing apparel, hanging pictures, oil paintings and drawings, drawn or painted by any member of the family, and family portraits and their necessary frames, provisions actually provided for individual or family use sufficient for one month; one cow with her suckling calf, and one hog with her suckling pigs. 32 L.P.R.A. § 1130(2).
Article 249(2), supra, does not provide a monetary cap on living room sets, chests or nightstands. The $200 cap established therein only applies to “bedding and bedsteads”. The only limitation on the exemptions of the remaining properties in Article 249(2), supra, is that the they be “necessary”. Because the case at bar is a joint petition, each co-debtor is entitled to claim his/her own exemptions under 11 U.S.C. § 522(m). Consequently, the court finds that the exemptions claimed on the living room set, chest and nightstands are reasonable within the “necessary” scope required in 32 L.P.R.A. § 1130(2) and are therefore allowed.
(F) Exemptions Claimed on the Dining Room Set, Tables and Chairs
Each co-debtor claims as exempt the dining room set ($100), tables and chairs ($50) under 32 L.P.R.A. § 1130(1). The Chapter 7 Trustee objects because the total amounts exceed the ones allowed in the statute.
Article 249(1) of Puerto Rico’s Code of Civil Procedure provides as exempt:
Chairs, tables, desks and books, to the value of one hundred (100) dollars, belonging to the judgment debtor. 32 L.P.R.A. § 1130(1).
Because the case at bar is a joint petition, each co-debtor is entitled to claim his/her own exemptions under 11 U.S.C. § 522(m). Consequently, the amounts claimed for those exemptions do not exceed the limits of the statute and are therefore allowed.
(G) Exemptions Claimed on the Television Set, DVD Player, Sound System, Mobile Phone, Computer and Printer
The Debtors claim as exempt the television set ($300), stereo equipment ($100), *185DVD Player ($80) mobile phone ($75), computer ($100) and printer ($25) under 32 L.P.R.A. § 1130(14). The Chapter 7 Trustee objects alleging that, except for the TV Set, for which a total value is set at $250, the remaining properties are not expressly mentioned in that statute.
Article 249(14) of Puerto Rico’s Code of Civil Procedure provides as exempt:
Common iceboxes expressly designed and commercially known for home use; home-use kitchens; wash machines for home use whose cash price does not exceed two hundred (200) dollars; radio receiving sets whose cash price does not exceed one hundred (100) dollars; television sets for home use whose cash price does not exceed two hundred and fifty (250) dollars per unit, and electric irons for home use, are likewise exempted from attachment and execution. 32 L.P.R.A. § 1130(14).
In regards to the TV Set, contrary to the Chapter 7 Trustee’s assertion, because the case at bar is a joint petition, each co-debtor is entitled to claim his/her own exemptions under 11 U.S.C. § 522(m). Consequently, the amount claimed per debtor for the TV Set does not exceed the limits of the statute and is therefore allowed.
As to the stereo equipment ($100), DVD Player ($30) mobile phone ($75), computer ($100) and printer ($25), the Debtors aver that because exemptions must be liberally construed3 and because these properties have “an intrinsic resemblance in their nature”, these properties should be meant to be included in the exemption scheme” (Docket No. 26, p. 4, § (d)).
The court finds that the stereo equipment bears an intrinsic resemblance to the “radio receiving set whose cash price does not exceed one hundred (100) dollars” in 32 L.P.R.A. § 1130(14), and because each debtor is allowed to claim $100 pursuant to 11 U.S.C. § 522(m), it does not exceed the limits of the statute and is therefore allowed.
Notwithstanding, the remaining claimed exemptions, to wit, the DVD Player ($30), mobile phone ($75), computer ($100) and printer ($25), are not allowed or mentioned in Article 249(14) of Puerto Rico’s Code of Civil Procedure nor do they have any “intrinsic resemblance in their nature” to the properties afforded in the statute. Thus, the exemptions claimed on those properties are denied.
(H) Exemptions Claimed on Wearing Apparel and Jewelry
The Debtors claim as exempt personal clothes, shoes, jewelry and other apparel in the amount of $440 ($220 per co-debtor) under 32 L.P.R.A. § 1130(2). The Chapter 7 Trustee objects claiming that they “should be disallowed for the reason that the Debtors did not sufficiently detail the value of the group of items claimed” and furthermore, a jewelry exemption is not allowed in the statute (Docket No. 23, p. 5, § (f)). The Debtors reply that in the meetings of creditors they “testified regarding all the information submitted in the voluntary petition”, and that the Chapter 7 Trustee “had the opportunity to investigate concerning Debtors’ properties” and yet she did not (Docket No. 26, pp. 4-5, § (e)). Furthermore, they also sustain that under 32 L.P.R.A. § 1130(2), “the property is limitlessly exempted” and that “it is of no significance whether the property has been specifically detailed or not, it is completely exempted regardless” (Docket No. 26, p. 5, § (e)).
*186“According to some courts, a debtor may not hold any ornamental jewelry as ‘wearing apparel’, but some exemptions have been allowed in this respect. A statute may explicitly provide that necessary wearing apparel does not include jewelry of any type other than wedding rings.” 31 Am. Jur. 2d Exemptions § 135. To determine whether to classify “jewelry” as exempt “wearing apparel”, courts may inquire whether the jewelry is properly characterized as ornamentation or a nonexempt substantial investment, as well as whether the jewelry has great sentimental value. In re Westhem, 642 F.2d 1139, 1140 (9th Cir.1981) (holding that the engagement ring had acquired sentimental value and was not just another “expensive ornament”). Accordingly, exempt wearing apparel may include articles such as an engagement diamond ring or a watch. See In re Goldberg, 59 B.R. at 208 (holding that a watch was exempt from the estate as wearing apparel). To determine what is reasonably sufficient or of such value as to serve a need or purpose to come within a ‘necessary and proper wearing apparel’ exemption, a court must consider whether an item’s value is more than the value of less expensive utilitarian items that would serve the same function. In re Lebovitz, 360 B.R. 612, 622 (6th Cir. BAP 2007); Los Angeles Finance Co. v. Flores, 243 P.2d 139, 110 Cal.App.2d Supp. 850, 856 (1952) (“[t]he determination of whether or not a certain article is exempted in the hands of a debtor under the term “necessary wearing apparel” involves a determination of whether or not under all the circumstances that article is necessary to be worn by that debtor”). Thus, the jewelry’s value may determine whether it is “necessary and proper” wearing apparel. In re Peterson, 280 B.R. 886, 890-891 (Bankr.S.D.Ala. 2001). The court may also determine whether or not a debtor’s jewelry is necessary or proper wearing apparel for one’s social, business, or professional engagements that are in keeping with the debt- or’s habits. In re Lebovitz, 360 B.R. at 620 (“it cannot be gainsaid that debtors require ‘necessary and proper wearing apparel’ to be employed and support their families. According to the definition of “necessaries” set forth by the Tennessee Supreme Court, debtors may need “necessary and proper wearing apparel” to attend social, business or professional engagements which are suitable to their “means, condition, and habits of life.”) Other courts have also considered whether the items claimed as exempt were acquired and used as apparel, or as an investment. In re Mims, 49 B.R. 283, 288 (Bankr. E.D.N.C.1985); In re Leech, 171 F. 622, 626 (6th Cir.1909). “Jewelry and watches must be intended as wearing apparel and not retained principally to demonstrate that debtor has achieved a ‘certain level of wealth.’ ” In re Peterson, 280 B.R. at 890 (citations omitted). “When an item is solely designed to enhance prestige or status of its owner, then the item is not necessary and proper wearing apparel.” In re Hendrick, 45 B.R. 965, 972 (Bankr.M.D.La. 1985).
Article 249(2) of Puerto Rico’s Code of Civil Procedure provides as exempt the following:
Necessary household, table and kitchen furniture belonging to the judgment debtor, including one sewing machine in actual use in the family, or belonging to a woman, and stove, furniture, beds, bedding and bedsteads, not exceeding in value two hundred (200) dollars, wearing apparel4, hanging pictures, oil paint*187ings and drawings, drawn or painted by any member of the family, and family portraits and their necessary frames, provisions actually provided for individual or family use sufficient for one month; one cow with her suckling calf, and one hog with her suckling pigs. 32 L.P.R.A. § 1130(2) (emphasis added).
Puerto Rico case law has not defined “wearing apparel” within the context of 32 L.P.R.A. § 1130(2). Notwithstanding, Article 249 of Puerto Rico’s Code of Civil Procedure stems from Article 690 of California’s Code of Civil Procedure5, Cal.Code Civ. Proc. § 690, and Article 3542 of Idaho’s Code of Civil Procedure6. See the annotations in 32 L.P.R.A. § 1130; Lamboglia v. Junta Escolar, 15 D.P.R. 318, 323 (1909) (adopting California’s case law to interpret Article 249 of Puerto Rico’s Code of Civil Procedure).
Former Article 690(2) of California’s Code of Civil Procedure exempted from execution or attachment “necessary household, table, and kitchen furniture belonging to the judgment debtor, including one sewing-machine, stove, stovepipes and furniture, wearing-apparel, beds, bedding and bedsteads, hanging pictures, oil-paintings and drawings drawn or painted by any member of the family, and family portraits and their necessary frames, provisions and fuel actually provided for individual or family use, sufficient for three months, and three cows and their suckling calves, four hogs and their suckling pigs, and food for such cows and hogs for one month; also one piano, one shotgun and one rifle.” In re Estate of Millington, 63 Cal.App. 498, 500, 218 P. 1022 (Court of Appeals California, 3rd App. Dist.1923). In interpreting that exemption statute, the Court of Appeals for the Third Appellate District of California determined that the word “necessary” applied to “wearing apparel”. Id. at 501, 218 P. 1022. It further reasoned that:
While no general rule can be drawn from the foregoing conflicting decisions, *188it may be said that they generally recognize that wearing apparel may include something more than mere clothing. In many of them the value of the article claimed has been given weight, and logically so; because it is neither usual nor appropriate for one who is unable to pay his debts to wear expensive ornaments, and such ornaments, therefore, are not considered “necessaries” in the sense in which the word is used in exemption statutes. Watches are so generally worn and considered necessities by persons of every financial condition that, under a liberal construction of section 690, it is reasonable to presume that the legislature intended to include them as necessary wearing apparel. The same may be said as to ornaments of a character and value generally worn by persons of small income or little property. It is not to be presumed, however, that the legislature intended to exempt expensive diamonds worn as mere ornaments. The purpose of exemption laws is to save debtors and their families from want, not to enable them to wear luxurious ornaments at the expense of their creditors. In re Estate of Millington, 63 Cal.App. at 504, 218 P. 1022 (citations omitted).
Likewise, former Section 6920 of Idaho’s Code of Civil Procedure7 declared as exempt the “[njecessary household, table and kitchen furniture belonging to the judgment debtor, including one sewing machine in actual use in a family or belonging to a woman, stoves, stovepipe and stove furniture, beds, bedding and bedsteads, not exceeding in value $300; wearing apparel, hanging pictures, oil paintings and drawings, drawn or painted by any member of the family, and family portraits and their necessary frames; provisions actually provided for individual or family use sufficient for six months; two cows with their sucking calves and two hogs with their sucking pigs.” McMillan v. United States Fire Ins. Co., 48 Idaho at 167, 280 P. 220.
Although this court could not find Idaho case law interpreting the extent of the “wearing apparel” within the context of the repealed personal property exemption statute, current Idaho Code § 11-605(2) provides that “[a]n individual is entitled to exemption of jewelry, not exceeding one thousand dollars ($1,000) in aggregate value, if held for the personal use of the individual.”
The court concludes that the phrase “wearing apparel” includes jewelry for the exemption afforded in Article 249 of Puer-to Rico’s Code of Civil Procedure, supra. Notwithstanding, because “wearing apparel” is subjected to the condition of “necessary”, the court adopts the reasoning in In re Estate of Millington: “the word ‘necessary’ does not limit wearing apparel to that which is indispensable, but it is sufficiently flexible to include things which are usual and appropriate for the reasonable comfort and convenience of a debtor, although they may not be absolutely necessary for mere subsistence.” 63 CalApp. at 501, 218 P. 1022. The court also adopts the reasoning in In re Peterson, 280 B.R. at 890-891, inasmuch as the jewelry’s value may determine whether it is “necessary and proper” wearing apparel.
In the instant case, the Debtors have not described with specificity the jewelry they claim exempt nor its specific face value, for they accumulated the claimed $440 under “personal property, shows, clothes, jewelry and other apparel”. See Amended Schedule C, Docket No. 25, p. 3. The Chapter 7 Trustee objects for lack of specificity and because jewelry is not an *189allowed exemption (Docket No. 23, p. 5). The court partially agrees with the Chapter 7 Trustee in that the Debtors’ claimed exemption on jewelry does not provide sufficient information to determine their value nor if they are usual and appropriate for the reasonable comfort and convenience of a debtor. The value of the claimed jewelry is essential to determine the need or purpose of the property and whether the property is a “necessary and proper wearing apparel” under the scope of a less expensive utilitarian items that would serve the same function. In re Lebovitz, 360 B.R. at 622; Los Angeles Finance Co. v. Flores, 243 P.2d 139, 110 Cal.App.2d Supp. at 856. Thus, an evidentiary hearing is necessary to establish the value of the claimed jewelry and to determine if it is necessary and proper. The same reasoning applies to the exemptions claimed on the Debtors’ personal clothes and shoes.
(I) Interest in Undefined Benefit from Marriott San Juan Retirement Plan
Although the Debtors initially claimed all their exemptions under Puerto Rico law (Docket No. 1, p. 17), they subsequently amended their Schedule C to claim an undefined benefit from Marriott San Juan Retirement Plan under the federal exemption scheme afforded in 11 U.S.C. § 522(b)(3)(C) (Docket No 25, p. 3).
All states, including Puerto Rico for bankruptcy purposes8, have exemption laws that permit the retention of certain properties beyond the reach of an individual’s creditor. See Hon. Nancy C. Dreher, Hon. Joan N. Feeney and Michael S. Step-an, Esq., Bankruptcy Law Manual, Volume 1 § 5:34 (2012-2), p. 987. In fact, “[ujnder prior [bankruptcy] law, exemptions available to debtors in bankruptcy cases were determined entirely under non bankruptcy law” and “debtors were limited to the exemptions available in the state of their domicile”. Alan N. Resnick & Henry J. Sommer, 4-522 Collier on Bankruptcy ¶ 522.02 (16th ed. 2013) citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 360 (1977). Also see the Former Bankruptcy Act § 6 and Hon. Nancy C. Dreher, Hon. Joan N. Feeney and Michael S. Stepan, Esq., Bankruptcy Law Manual, Volume 1 § 5:34 (2012-2), p. 987. Currently, there is a “dual exemption scheme in Section 522, affording two exemption systems for debtors unless a state declines to permit the dual system by opting out of the federal bankruptcy exemption system.” Hon. Nancy C. Dreher, Hon. Joan N. Feeney and Michael S. Stepan, Esq., Bankruptcy Law Manual, Volume 1 § 5:34 (2012-2), p. 987, citing 11 U.S.C. § 522(b)(2). Also see In re Pérez Hernández, 473 B.R. 496, 499-500 (Bankr.D.P.R.2012), subsequently abrogated on other grounds by In re Pérez Hernandez, 487 B.R. 353 (Bankr.D.P.R. 2013).
Although Section 522(b)(1) of the Bankruptcy Code provides for the election of either federal or state exemptions, “the debtor still is not permitted to pick and choose several state law exemptions and several federal bankruptcy exemptions; the debtor must choose one scheme of exemptions.” Hon. Nancy C. Dreher, Hon. Joan N. Feeney and Michael S. Step-an, Esq., Bankruptcy Law Manual, Volume 1 § 5:35 (2012-2), p. 990. In other words, federal exemptions and state exemptions are generally mutually exclusive. Furthermore, Section 522(b)(1) of the Bankruptcy Code also mandates that even when a joint petition is filed by a husband and wife, “one debtor may not elect to exempt property [under state law] and the other debtor elect to exempt property [un*190der federal law]. If the parties cannot agree on the alternative to be elected, they shall be deemed to elect [state law], where such election is permitted under the law of the jurisdiction where the case is filed.” 11 U.S.C. § 522(b)(1).
Notwithstanding, even when a debtor chooses state and other nonbank-ruptcy exemptions, he/she may still claim nontaxable retirement funds under Section 522(b)(3)(C) of the Bankruptcy Code “to the extent that those funds are in a fund or account that is exempt from taxation under Section 401, 403, 408, 408A, 414, 414, 457 or 501(a) of the Internal Revenue Code of 1986.” 11 U.S.C. § 522(b)(3)(C). Also see Hon. Nancy C. Dreher, Hon. Joan N. Feeney and Michael S. Stepan, Esq., Bankruptcy Law Manual, Volume 1 § 5:36 (2012-2), p. 991.
In the instant case, there is no evidence of compliance with Section 522(b)(3)(C) of the Bankruptcy Code nor have Debtors demonstrated that the fund or account where they keep the $1 claimed exemption is tax-exempted under the pertinent sections of the Internal Revenue Code, as mandated by 11 U.S.C. § 522(b)(3)(C). Consequently, an evidentiary hearing is warranted for Debtors’ claimed exemption for their Interest in Undefined Benefit from Marriott San Juan Retirement Plan under 11 U.S.C. § 522(b)(3)(C).
(J) The 1993 Nissan Pathfinder and 2005 Mitsubishi Montero
The Debtors assert that although 32 L.P.R.A. § 1130(6) does not expressly exempt “motor vehicles”, Puerto Rico’s Supreme Court has ruled that a liberal construction of the statute must include motor vehicles like their 1993 Nissan Pathfinder and 2005 Mitsubishi Montero (Docket Nos. 25, p. 3, and 26, p. 5).
Article 249(3) of Puerto Rico’s Code of Civil Procedure provides as exempt the following:
Two (2) oxen, two (2) horses, or two (2) mules, and their harness; and one cart, wagon, dray or truck by the use of which a cartman, drayman, truckman, huckster, peddler, hackman, teamster or other laborer habitually earns a living; and one horse with vehicle and harness, or other equipment used by a physician, surgeon or minister of the gospel, in making his professional visits, with food for such oxen, horses or mules for one month. 32 L.P.R.A. § 1130(6).
In Quiñones v. Gutierrez, supra, Puerto Rico’s Supreme Court ruled that the word “equipment” used in Article 249(3) of Puerto Rico’s Code of Civil Procedure, supra, “following the idea of a liberal interpretation ... must refer to any other means by which a physician makes his rounds.” 29 P.R.R. at 721, 29 D.P.R. at 775. It further found that “while [32 L.P.R.A. § 1130(6) ] does not use ‘or other vehicle’ it does say ‘or other equipment’, and these words in their connection must mean automobile, because the one horse vehicle and harness described in the statute are already the equipment of a physician to attend to his patients.” 29 P.R.R. at 723, 29 D.P.R. at 777.
Following the liberal interpretation of Puerto Rico exemption statutes established in Laguna v. Quiñones, supra, and the inclusion of automobiles under 32 L.P.R.A. § 1130(6) pursuant to Quiñones v. Gutierrez, supra, within the scope of the statute, the court finds that both automobiles (one for each co-debtor) are allowed as exempt as long as the Debtors demonstrate that the automobiles are essential to conduct their professional responsibilities, if any9, which warrants an evidentiary hearing.
*191
(K) The Homestead Exemption
The Debtors claim a homestead exemption on their primary residence located at Jardines de Carolina I 37, Calle I, Carolina, PR 00987, consisting of a concrete house with 3 bedrooms and 1 bathroom (299 squared mts.) under the 2011 PR Home Protection Act. See Amended Schedule C, Docket No. 25, p. 3.
The Chapter 7 Trustee’s objection to the homestead exemption is not at all clear. She alleges that in this case Articles 9 and 11 were not complied with pre-petition. “Articles 9 and 11 of the PR Home Protection Act distinguish between real properties that are registered at the Property Registry and those that are not. The methods for claiming the homestead exemption in both instances are different. In cases where the real property is registered at the Property Registry, Article 9 governs the procedure by which homestead is claimed. In cases where the real property is not registered at the Property Registry or where the declaration of homestead has not yet been recorded or annotated, Articles 11 and 12 will govern. ... If the real property is registered, [the debtor] must show pre-petition compliance with Article 9 of the 2011 PR Home Protection Act. If the real property is not registered, the debtor must submit with the bankruptcy petition the sworn statement required in Article 12 of the PR Home Protection Act, but instead of declaring that the real property was a principal residence before the service of process of foreclosure, [the debtor] must declare that the real property was his/her pre-petition principal residence.” In re Pérez Hernandez, 487 B.R. at 368. The Chapter 7 Trustee does not state whether or not the Debtors’ real property in this case is or not registered at the Puerto Rico Property Registry even though she carries the burden to do so under Fed. R. Bankr.P. 4003(c).
The Debtors aver that their real property is registered at the Puerto Rico Property Registry but not to their names, and that they executed a public deed no. 6 before Notary Public Luis R. Núñez Martinez (the “Homestead Deed”) to have their homestead right registered at the Property Registry on November 5, 2012, that is, five days prior to filing their bankruptcy petition on November 9, 2012. See Docket Nos. 1 and 26, p. 6. There is no evidence in the record as to whether or not the Debtors actually filed that the Homestead Deed before the Property Registry pre or post petition, if at all, nor to whose name the real property is currently registered nor any explanation whatsoever as to why the Debtors did not correct or update the registration of their primary residence before filing for bankruptcy. Therefore, an evidentiary hearing is warranted to determine the allowance of the homestead exemption claimed by the Debtors.
Conclusion
In view of the foregoing, the court allows the Debtors’ claimed exemptions on the stove, kitchen utensils, dinnerware and cookware under 32 L.P.R.A. § 1130(14) up to the amount of $200 for each co-debtor, for a total of $400. In addition, the court finds that the exemptions claimed on the living room set, chests or nightstands are reasonable within the “necessary” scope required in 32 L.P.R.A. § 1130(2) and are *192therefore allowed. Also allowed are the exemptions claimed on the dining room set, tables and chairs under 32 L.P.R.A. § 1130(1), and the exemptions claimed on the TV Set and the stereo equipment under 32 L.P.R.A. § 1130(14).
The court denies the exemptions claimed on the DVD Player, mobile phone, computer and printer under 32 L.P.R.A. § 1130(14).
The remaining claimed exemptions on wearing apparel, jewelry, automobiles, homestead and the interest in undefined benefit from Mariott San Juan Retirement Plan are scheduled for an evidentiary hearing to be held on September 17, 2013 at 2:00 p.m. Five (5) days prior to the hearing each party shall file proposed findings of fact and conclusions of law. Each finding of fact shall make reference to either a document to be substantial as exhibits, or a witness.
SO ORDERED.
. The Debtors claim one exemption under Section 522(b)(3)(C) of the Bankruptcy Code, *179which may be claimed even when debtors elect state and other nonbankruptcy exemptions. See Subsection (I) of the instant Opinion and Order, infra.
. As of the date this Opinion and Order was drafted, there is a pending Bill filed by Puerto Rico’s House of Representatives (P. de la C. 356) to amend Article 249 of Puerto Rico’s Code of Civil Procedure to increase the value of the exemptions afforded therein and update the types of properties exempted. The Bill was filed on January 4, 2013 and referred to the Commission of Legal Affairs on January 17, 2013, where it is still pending. See http:!I www.oslpr.org.
. Debtors cite Quiñones v. Gutierrez, supra, to support that assertion.
. The Spanish version of 32 L.P.R.A. § 1130(2) provides as exempt 'Vestidos”, which translates into English as "clothes”, which does not imply jewelry or other wear*187ing apparel. Notwithstanding, because Article 249(2) of Puerto Rico's Code of Civil Procedure finds its origin in Article 690 of California’s Code of Civil Procedure and Article 3542 of Idaho's Code of Civil Procedure, infra, the court will analyze those statutes and jurisprudence to interpret Puerto Rico's. See Article 13 of Puerto Rico's Civil Code, 31 L.P.R.A. § 13 ("In case of discrepancy between the English and Spanish texts of a statute passed by the Legislative Assembly of Puerto Rico, the text in which the same originated in either house, shall prevail in the construction of said statute, except in the following cases: (a) If the statute is a translation or adaptation of a statute of the United States or of any State or Territory thereof, the English text shall be given preference over the Spanish.”)
. Although Article 690 of California's Code of Civil Procedure was repealed in 1983, its old text is the one with the most resemblance to the current version of Article 249 of Puerto Rico’s Code of Civil Procedure, which was enacted in 1904.
. Although the annotations in 32 L.P.R.A. § 1130 state that Article 249 of Puerto Rico's Code of Civil Procedure also derives from Article 3542 of Idaho’s Code of Civil Procedure, this court could not find such statute. As of 1978, Idaho's personal property exemptions are governed by Idaho Code § 11-605 (Exemptions of personal property and disposable earnings subject to value limitations). Prior to that, Idaho’s exemptions were governed by Section 6920 of Idaho’s Code of Civil Procedure. See McMillan v. United States Fire Ins. Co., 48 Idaho 163, 280 P. 220 (1929). Current Idaho Code § 11 — 605(l)(b) exempts "to the extent of a value not exceeding seven hundred fifty dollars ($750) on any one (1) item of property and not to exceed a total value of seven thousand five hundred dollars ($7,500) ... [i]f reasonably held for the personal use of the individual or a dependent, wearing apparel, animals, books, and musical instruments”.
. See footnote 6, supra.
. See 11 U.S.C. § 101(52).
. The Chapter 7 Trustee asserts, without making reference to any docket or document, that *191the Debtors are "retired and receiving retirement pensions” (Docket No. 23, p. 7). Notwithstanding, the Debtors have informed the court that co-debtor David Roman-Rivera is currently a sous-chef at Luxury Hotels International of PR (Hotel Ritz Carlton San Juan), where he has been working for the past 14 years, earning monthly gross wages in the amount of $3,992.73 as of the petition date, while his wife, co-debtor Madeline Quiñones-Colon, is a homemaker with no income {Schedule I, Docket No. 1, p. 25). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496367/ | OPINION AND ORDER
ENRIQUE S. LAMOUTTE, Bankruptcy Judge.
This case is before the court upon the Chapter 13 Trustee’s Objection to Debtor’s [sic] Claimed Exemption (the “Objection”, Docket No. 24) over the Debtors’ stove under 32 L.P.R.A. § 1130(14), and their jewelry under 32 L.P.R.A. § 1130(2). The Debtors filed a Reply to Trustee [sic] Objection (Docket No. 38) sustaining that the exemptions were properly made. For the reasons stated below, the Chapter 13 Trustee’s Objection (Docket No. 24) is hereby denied.
Procedural Background
The Debtors filed their Chapter 13 bankruptcy petition on April, 15, 2013 along with the corresponding schedules (Docket No. 1). In Schedule C, the Debtors claimed a $100.00 exemption under 32 L.P.R.A. § 1130(2) for fantasy wedding gold bands and a $75.00 exemption under 32 L.P.R.A. § 1130(14) for a 15 year old stove (Docket No. 1, p. 15).
On June 17, 2013, the Chapter 13 Trustee filed the Objection (Docket No. 24) to the Debtors’ claimed exemptions on a stove and a ring alleging that they were improperly made under 32 L.P.R.A. *211§§ 1130(14) and 1130(2). The Chapter 13 Trustee sustains that the Debtors incorrectly claimed an exemption on the stove under 32 L.P.R.A. § 1130(14) instead of 32 L.P.R.A. § 1130(2), which expressly provides the exemption for stoves. In addition, the Chapter 13 Trustee argues that 32 L.P.R.A. § 1130(2) does not exempt jewelry.
On July 9, 2013, the Debtors filed a Motion Requesting Extension of Time to File Answer to Trustee’s Objection To Debtor’s Claimed Exemptions (Docket No. 28) requesting an granted the extension of time (Docket No. 29). On July 29, 2013, the Debtors filed another Motion Requesting Extension of Time to File Answer to Trustee’s Objection To Debtor’s Claimed Exemptions (Docket No. 33) requesting an additional five (5) days, which the court granted on July 30, 2013 (Docket No. 35).
On August 6, 2013, the Debtors filed Amended Schedules B & C claiming the same exemptions for the stove and wedding bands under the same legal provisions stated in former Schedule C (Docket No. 37, p. 5). Also on August 6, 2013, the Debtors filed a Reply to Trustee [sic] Objection to Debtor’s [sic] Claimed Exemption [sic] (Docket No. 38) sustaining that the claimed exemption under 32 L.P.R.A. § 1130(14) is proper.
Jurisdiction
The court has jurisdiction over this contested matter and the parties pursuant to 28 U.S.C. §§ 157(a) and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
Legal Analysis and Discussion
(A) Exemptions in General
When a debtor files a bankruptcy petition, all of his/her/its assets become property of the bankruptcy estate [11 U.S.C. § 541] subject to the debtor’s right to reclaim certain property as exempt under 11 U.S.C. § 522. See Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Property becomes exempt by operation of law when no objections are filed. See 11 U.S.C. § 522(1). Exemptions should be liberally construed in furtherance of the debtor’s right to a “fresh start”. In re Gutierrez Hernandez, 2012 Bankr.LEXIS 2735 at *5, 2012 WL 2202931 at *2; In re Newton, 2002 Bankr.LEXIS 2089 at *7, 2002 WL 34694092 at *3 (1st Cir. BAP 2002); Christo v. Yellin (In re Christo), 228 B.R. 48, 50 (1st Cir. BAP 1999). A “fresh start”, however, does not translate to a “head start”. In re Goldberg, 59 B.R. 201, 208 (Bankr. N.D.Okla.1986). “The basis for exemption laws is that by providing a debtor to retain a minimum level of property, the debtor and his or her family will not be completely destitute and thus a burden to society.” Id. at 208.
(B) How to Claim Exemptions under 11 U.S.C. § 522
“In order to be effective, a debt- or must specifically describe the property claimed as exempt and inform the value.” In re Gutierrez Hernandez, 2012 Bankr.LEXIS 2735 at *5, 2012 WL 2202931 at *2. Also see Nancy C. Dreher and Joan N. Feeney, Bankruptcy Law Manual, Volume 1 § 5:43 (2012-2), p. 1015. Thus, a debtor is required to list the property claimed as exempt on the schedule of assets that must be filed with the bankruptcy petition. See 11 U.S.C. § 522(Z); Fed. Rs. Bankr.P. 1007(b), 1007(I)(b) and 4003. A party in interest or the trustee may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under 11 U.S.C. § 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. Fed. R. Bank. P. *2124003(b)(1). If an interested party fails to object to a claimed exemption within the time allowed, the subject property will be excluded from the bankruptcy estate even if the exemption’s value exceeds the statutory limits. 11 U.S.C. § 522(Z); Taylor v. Freeland & Kronz, 503 U.S. 638, 643-644, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). In the instant case, there is no dispute that the Chapter 13 Trustee’s Objection (Docket No. 24) is timely.
(C) Exemptions when Co-Debtors File a Joint Bankruptcy Petition
“In joint cases, Section 522 [of the Bankruptcy Code] applies separately to each debtor pursuant to subsection (m), subject to the limitation set forth in subsection (b), which was added by the 1984 amendments to the Code.” Allan N. Res-nick and Henry J. Sommer, 4 Collier on Bankruptcy, ¶ 522.04[5] (16th ed. 2013). Also see In re Gentile, 483 B.R. 50, 54 (Bankr.D.Mass.2012). Notwithstanding, “[wjhenever a husband and wife both become debtors under the Code through voluntary or involuntary proceedings, and their cases are jointly filed and jointly administered, they must both elect the same ‘slate’ of exemptions”, meaning that “if one spouse elects the federal Code exemptions, the other spouse must also elect federal exemptions”. Allan N. Resnick and Henry J. Sommes, 4 Collier on Bankruptcy, ¶ 522.04[6] (16th ed. 2013).
In the instant case, both Debtors opted to claim the exemptions under Puerto Rico law. Thus, each co-debtor is entitled to claim the values established in the Puerto Rico exemption scheme under 11 U.S.C. § 522(m).
(D) Exemptions on the Debtors’ Stove
The Debtors claimed an exemption on their 15 year old stove in the amount of $75.00 under 32 L.P.R.A. § 1130(14). See Docket No. 37, p. 5. The Chapter 13 Trustee avers that the stove exemption can only be claimed under 32 L.P.R.A. § 1130(2). See Docket No. 24, p. 2, ¶ 5.
Article 249(2) and (14) of Code of Civil Procedure of Puerto Rico provides as follows:
In addition to the homestead exempted by the Homestead Law, the following property belonging to an actual resident of this Commonwealth of Puerto Rico shall be likewise exempted from execution, except as herein otherwise provided:
(2) Necessary household, table and kitchen furniture belonging to the judgment debtor, including one sewing machine in actual use in the family, or belonging to a woman, and stove, furniture, beds, bedding and bedsteads, not exceeding in value two hundred (200) dollars, wearing apparel, hanging pictures, oil paintings and drawings, drawn or painted by any member of the family, and family portraits and their necessary frames, provisions actually provided for individual or family use sufficient for one month; one cow with her suckling calf, and one hog with her suckling pigs.
(14) Common iceboxes expressly designed and commercially known for home use; home-use kitchens; wash machines for home use whose cash price does not exceed two hundred (200) dollars; radio receiving sets whose cash price does not exceed one hundred (100) dollars; television sets for home use whose cash price does not exceed two hundred and fifty (250) dollars per unit, and electric irons for home use, are likewise exempted from attachment and execution. 32 L.P.R.A. § 1130(2) and (14) (emphasis added).
*213The exemption amount established in subsections (2) and (14) of Article 249 is the same: $200.00. The Debtors’ claimed exemptions for the stove is $75.00. See Docket No. 37, p. 5. Therefore, the court will consider the exemption claimed on the stove under 32 L.P.R.A. § 1130(2) and because the amount claimed does not exceed the cap established in that subsection, the court allows it 1.
(E) Exemptions Claimed on the Debtors’ Fantasy Wedding Bands
The Debtors claimed an exemption on their fantasy jewelry wedding gold bands in the amount of $100.00 under 32 L.P.R.A. § 1130(2). See Docket No. 37, p. 5. The Chapter 13 Trustee sustains that said legal statute does not afford an exemption on jewelry. See Docket No. 24, p. 2, ¶ 6.
Article 249(2) of Code of Civil Procedure of Puerto Rico exempts:
Necessary household, table and kitchen furniture belonging to the judgment debtor, including one sewing machine in actual use in the family, or belonging to a woman, and stove, furniture, beds, bedding and bedsteads, not exceeding in value two hundred (200) dollars, wearing apparel, hanging pictures, oil paintings and drawings, drawn or painted by any member of the family, and family portraits and their necessary frames, provisions actually provided for individual or family use sufficient for one month; one cow with her suckling calf, and one hog with her suckling pigs. 32 L.P.R.A. § 1130(2) (emphasis added).
In In re Rivera, supra, this court was presented with the same jewelry exemption controversy posed by the Chapter 13 Trustee in the instant case under the same legal grounds. After a careful analysis of that legal provision, its history and the applicable case law from its origin jurisdictions, the court ruled as follows:
The court concludes that the phrase “wearing apparel” includes jewelry for the exemption afforded in Article 249 of Puerto Rico’s Code of Civil Procedure, supra. Notwithstanding, because “wearing apparel” is subjected to the condition of “necessary”, the court adopts the reasoning in In re Estate of Millington: “the word ‘necessary’ does not limit wearing apparel to that which is indispensable, but it is sufficiently flexible to include things which are usual and appropriate for the reasonable comfort and convenience of a debtor, although they may not be absolutely necessary for mere subsistence.” 63 Ca. App. [498], 501 [218 P. 1022] [ (Court of Appeals California 3rd App. Dist.1923) ]. The court also adopts the reasoning in In re Peterson, 280 B.R. [886], 890-891 [ (Bankr.S.D.Ala.2001) ], inasmuch as the jewelry’s value may determine whether it is “necessary and proper” wearing apparel. In re Rivera, 2013 Bankr.LEXIS 2362 at *28, 2013 WL 2477277 at *10.
Applying that reasoning to the exemption claimed by the Debtors in the instant case, the court finds that the claimed exemption on their wedding bands in the amount of $100.002 is a reasonable *214exemption for that kind of jewelry, which does not warrant a valuation hearing. Therefore, the exemption claimed on the fantasy wedding gold bands is allowed.
Conclusion
In view of the foregoing, the Chapter 13 Trustee’s Objection (Docket No. 24) is hereby denied and the Debtors’ claimed exemptions on the stove and fantasy wedding gold bands (Docket No. 37, p. 5) is hereby allowed.
SO ORDERED.
. In In re Rivera, 2013 Bankr.LEXIS 2362 at *14, 2013 WL 2477277 at *5 (Bankr.D.P.R. 2013), this court considered a joint exemption on a stove, microwave, kitchen utensils, dinnerware and cookware under 32 L.P.R.A. § 1130(14). Upon review, the court considers that a stove exemption is only proper under 32 L.P.R.A. § 1130(2), which expressly provides for that particular exemption.
. This court parts from the premise that each co-debtor is claiming a $50.00 exemption on their respective wedding band pursuant to 11 U.S.C. § 522(m). See subsection (C) of this Opinion and Order, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496368/ | OPINION AND ORDER
BRIAN K. TESTER, Bankruptcy Judge.
Before this Court is Defendant’s Motion for Summary Judgment and its accompanying Statement of Uncontested Material Facts [Dkt. No. 15, 16], Trustee/Plaintiffs Opposition to Defendant’s Motion for Summary Judgment and its accompanying Statement of Uncontested Material Facts [Dkt. No. 20, 21], and Defendant’s Reply to *216Trustee/Plaintiff Opposition to Defendant’s Motion for Summary Judgment and its accompanying Statement of Uncontested Material Facts [Dkt. No. 22]. For the reasons set forth below, Defendant’s Motion for Summary Judgment is GRANTED.
I. Background
Debtor, PMC Marketing Corporation filed for Chapter 11 bankruptcy protection on March 18, 2009. Debtor’s bankruptcy case was converted to chapter 7 on May 21, 2010. On March 2, 2012, Debtor’s Chapter 7 trustee, Noreen Wiscovitch Rentas brought this adversary proceeding to avoid, as a preferential transfer, a payment for $77,088.00 which Debtor made to Defendant Triple-S on February 27, 2009. Defendant’s Motion for Summary Judgment, Plaintiffs Opposition and Defendant’s Reply followed.
II. Summary Judgment Motion
A. Summary Judgment Standard
The role of summary judgment is to look behind the facade of the pleadings and assay the parties’ proof in order to determine whether a trial is required. Under Fed.R.Civ.P., Rule 56(c), made applicable in bankruptcy by Fed.R.Bankr.P., Rule 7056, a summary judgment is available if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P., Rule 56(c); Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 4 (1st Cir.2010). As to issues on which the movant, at trial, would be compelled to carry the burden of proof, it must identify those portions of the pleadings which it believes demonstrates that there is no genuine issue of material fact. In re Edgardo Ryan Rijos & Julia E. Cruz Nieves v. Banco Bilbao Vizcaya & Citibank, 263 B.R. 382, 388 (1st Cir. BAP 2001). A fact is deemed “material” if it potentially could affect the outcome of the suit. Borges, 605 F.3d at 5. Moreover, there will only be a “genuine” or “trial worthy” issue as to such a “material fact,” “if a reasonable fact-finder, examining the evidence and drawing all reasonable inferences helpful to the party resisting summary judgment, could resolve the dispute in that party’s favor.” Id. at 4. The court must view the evidence in the light most favorable to the nonmoving party. Alt. Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 26 (1st Cir.2004). Therefore, summary judgment is “inappropriate if inferences are necessary for the judgment and those inferences are not mandated by the record.” Rijos, 263 B.R. at 388.
Although this perspective is favorable to the nonmoving party, she still must demonstrate, “through submissions of eviden-tiary quality, that a trial worthy issue persists.” Iverson v. City of Boston, 452 F.3d 94, 98 (1st Cir.2006). Moreover, “[o]n issues where the nonmovant bears the ultimate burden of proof, [she] must present definite, competent evidence to rebut the motion.” Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991). These showings may not rest upon “conclusory allegations, improbable inferences, and unsupported speculation.” Medina-Muñoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir.1990). But, the evidence offered by the nonmoving party “cannot be merely colorable, but must be sufficiently probative to show differing versions of fact which justify a trial.” Id. See also Horta v. Sullivan, 4 F.3d 2, 7-8 (1st Cir.1993) (the materials attached to the motion for summary judgment must be admissible and usable at trial.) “The mere existence of a scintilla of evidence” in the nonmoving *217party’s favor is insufficient to defeat summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); González-Pina v. Rodriguez, 407 F.3d 425, 431 (1st Cir. 2005).
In the summary judgment motion presently before the court, Defendant argues that there are no genuine issues as to any material facts and that therefore the moving party is entitled to judgment as a matter of law. Defendant provided employer sponsored monthly health insurance plans for the employees of Debtor. Defendant billed Debtor by sending monthly invoices in advance of the date of payment, with payment due at the end of each month. In this instant adversary proceeding, Trustee seeks to set aside the November 2008 invoice payment made by Debtor. Defendant argues that because Debtor had a history of making late payments, such transfer cannot be avoided. Debtor’s November 2008 payment was made 119 days late. This is the usual business relationship between Debtor and Defendant because monthly invoices were always accepted months late.1 Debtor paid its November 1, 2008 invoice 119 days late on February 27, 2009. Because Debtor’s payment history before and during the 90-day preference period demonstrates that the payment for the November 2008 invoice was “ordinary” for purposes of § 547(c)(2) consistent with prior course of dealing between the parties, such transfer cannot be avoided.
In opposition, Trustee argues that Defendant did not provide sufficient evidence because Defendant only produced a sworn statement by Defendant’s employee. Trustee contends that such a statement only proves that the payment received by the Defendant in the preference period was outside of the contracted business terms, that the payment was received 119 days late, and that Defendant had received late payments varying from 7 to 248 days late. Trustee argues that such pattern does not present a normal course of business because Defendant fails to present evidence such as a statement of account or relevant copies of the invoice and checks. Summarily, Defendant argues that this summary judgment should be denied because at the very least, due to the lack of evidence, there is a genuine issue of material fact as to what constitutes the ordinary course of business between both parties.
After reviewing the Defendant’s arguments, and the relevant law, this Court concludes that there are no genuine issues as to the material facts and that the moving party is entitled to judgment as a matter of law. In a motion for summary judgment, in order to carry its burden of production, the moving party must either produce evidence negating an essential element of the nonmoving party’s claim or defense or demonstrate that the nonmov-ing party does not have sufficient evidence of an essential element to carry its ulti*218mate burden of persuasion at trial. Lopez v. Corporacion Azucarera de Puerto Rico, 938 F.2d 1510, 1516-17 (1st Cir.1991); High Tech Gays v. Defense Indus. Sec. Clearance Office, 895 F.2d 563, 574 (9th Cir.1990). In order to carry its ultimate burden of persuasion on the motion, the moving party must persuade the court that there is no genuine issue of material fact. Id.
Therefore, if a moving party fails to carry its initial burden of production, the nonmoving party has no obligation to produce any evidence, even to the extent that the nonmoving party would have the ultimate burden of persuasion at trial. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 160, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); High Tech Gays, 895 F.2d at 574. With such scenario above, the nonmoving party can then defeat a summary judgment motion without producing any evidence. See High Tech Gays, 895 F.2d at 574; Clark v. Coats & Clark, Inc., 929 F.2d 604, 607 (11th Cir.1991). On the contrary, if a moving party carries out its burden of production, the nonmoving party must produce evidence to support its claim or defense. See High Tech Gays, 895 F.2d at 574; Cline v. Industrial Maintenance Eng’g. & Contracting Co., 200 F.3d 1223, 1229 (9th Cir.2000). Therefore, if the nonmoving party fails to produce sufficient evidence to create a genuine issue of material fact, the moving party prevails in the motion for summary judgment. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (“Rule 56(c) 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.”). Alternatively, if the nonmoving party produces sufficient evidence to establish a genuine issue of material fact, the nonmoving party defeats the motion. See id.
B. Preferential Transfers
The question the court must answer is whether Debtor’s payment of $77,088.00 deposited by the Defendant on February 27, 2009 constitutes an avoidable transfer. See e.g., In re PMC Mktg. Corp., 09-02048, 2013 WL 3367500 (Bankr.D.P.R. July 5, 2013).
In order for payments to be recoverable as preferential transfers, such payments must satisfy all of the requirements of 11 U.S.C. § 547(b). The Plaintiff bears the burden of proving the transfers were: (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such Transfers were made; (3) made while the debtor was insolvent; (4) on or within ninety (90) days before the date of filing of the petition; and (5) enabled the benefited creditor to receive more than such creditor would have received had the case been a chapter 7 liquidation and the creditor had not received the transfer. 11 U.S.C. § 547(b). This Court is satisfied per the evidence provided by the Plaintiff that Debtor’s payments to Defendant meet the criteria of § 547(b), and therefore are preferences as defined by the Code. Id.
i. Ordinary Course of Business
Defendant argues that, even if it had received preferential payments, those payments fall under the “ordinary course of business” exception found in 11 U.S.C. § 547(c)(2) that thus makes these payments unrecoverable by the Trustee. Section 547(c)(2) of the Bankruptcy Code, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), provides that:
(c) The trustee may not avoid under this section a transfer
*219(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was;
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.
(emphasis added). 11 U.S.C. § 547(c)(2); 11 U.S.C. § 547(g); In re Healthco Int'l Inc., 132 F.3d 104, 109 (1st Cir.1997); In re PMC Mktg. Corp., 09-02048, 2013 WL 3367500 (Bankr.D.P.R. July 5, 2013); Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1047 (4th Cir.1994); Sulmeyer v. Suzuki (In re Grand Chevrolet, Inc.), 25 F.3d 728, 732 (9th Cir.1994); Jones v. United Sav. & Loan Ass’n (In re U.S.A. Inns of Eureka Springs, Ark., Inc.), 9 F.3d 680, 682 (8th Cir.1993). This Congressional statutory change in BAPCPA established that creditors no longer had to meet all three prongs under § 547(c)(2), but merely the first and second prongs2 or the first and third prongs.
The ordinary course of business exception thrives from the core of bankruptcy preference law. As such, this exception cries to strike a dragon-fly landing-like balance between shielding payments received by creditors to the extent that those creditors who remain committed to a debt- or during times of financial distress, and maintaining an elastic area of flexibility to creditors in dealing with the debtor so long as the steps taken are consistent with customary practice among specific industry participants. Congressional records are consistent with this interpretation as they reveal that the purpose of this exception is to “leave undisturbed normal financial relations, because it does not detract from the general policy of the preference section to discourage unusual action by either the debtor or [its] creditors during the debt- or’s slide into bankruptcy.” H.Rep. No. 595, 95th Cong., 1st Sess. 373 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 6329.
Sections 547(c)(2) and 547(c)(2)(A) in relevant part, state that: “The trustee may not avoid under this section a transfer to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee and such transfer was — (A) made in the ordinary course of business or financial affairs of the debtor and the transferee.” Under the first two prongs of §§ 547(c)(2) and 547(c)(2)(A), Defendant needs to demonstrate, by a preponderance of the evidence, that the specific transaction was ordinary as between the parties. Daly v. Radulesco (In re Carrozzella & Richardson), 247 B.R. 595, 603 (2d Cir. BAP 2000); see also In re Enron Creditors Recovery Corp., 376 B.R. 442, 459 (Bankr.S.D.N.Y.2007) (stating that the subjective test focuses solely on the prior dealings of debtor and creditor). So while a late payment is usually non-ordinary, the defendant can rebut this presumption if late payments were the standard course of dealing between the parties. See id. (quoting 5 ALAN N. RESNICK & HENRY J. SOMMER, COLLIER ON BANKRUPTCY ¶ 504.04[2][ii], at 547-55 (16th ed. 2010) (“COLLIER”)). In determining whether a transfer satisfies the requirements of § 547(c)(2)(A), courts examine several factors including “(i) the pri- or course of dealing between the parties, *220(ii) the amount of the payment, (iii) the timing of the payment, (iv) the circumstances of the payment, (v) the presence of unusual debt collection practices, and (vi) changes in the means of payment.” Buchwald Capital Advisors LLC v. Metl-Span I., Ltd. (In re Pameco Corp.), 356 B.R. 327, 340 (Bankr.S.D.N.Y.2006); Official Comm. of Unsecured Creditors of 360networks (USA) Inc. v. U.S. Relocation Servs. (In re 360networks (USA) Inc.), 338 B.R. 194, 210 (Bankr.S.D.N.Y.2005); see also Hassett v. Goetzmann (In re CIS Corp.), 195 B.R. 251, 258 (Bankr.S.D.N.Y. 1996); In re PMC Mktg. Corp., 09-02048, 2013 WL 3367500 (Bankr.D.P.R. July 5, 2013).
To a certain extent, Defendant must establish a “baseline of dealings” between the parties to “enable the court to compare the payment practices during the preference period with the prior course of dealing.” In re Fabrikant & Sons, Inc., 2010 WL 4622449, at *3; Cassirer v. Herskowitz (In re Schick), 234 B.R. 337, 348 (Bankr.S.D.N.Y.1999); In re PMC Mktg. Corp., 09-02048, 2013 WL 3367500 (Bankr. D.P.R. July 5, 2013). Defendant therefore must “demonstrate some consistency with other business transactions between the debtor and the creditor.” Id. at *3. Summarily, this Court would have to engage in a comparison of the average number of days between the invoice and payment dates during the pre-preference and preference periods. In re Quebecor World (USA), Inc., 08-10152 SHL, 491 B.R. 379 (Bankr.S.D.N.Y.2013); Also see In re Fabrikant & Sons, Inc., 2010 WL 4622449, at *4.
Defendant, in this instant case, submitted a sworn testimony demonstrating the following:
Payment Year_2006_2007_2008_
Least late payment 120 days late 248 days late 123 davs late
Most late payment 61 days late 92 days late Not applicable
As seen in the chart above, in 2006, all of Debtor’s payments were late, the latest payment being 120 days late, and the least being 61 days late. In 2007, the latest payment was 248 days late and the least was 92 days late. In 2008, the invoice billed for January 1, 2008, was paid on May 2, 2008, exactly 123 days late. On February 27, 2009, Debtor paid its November 1, 2008 invoice exactly 119 days late. In comparing the three years altogether, this Court observes that payment practices during the preference period is consistent with Defendant’s argument that there is sufficient evidence demonstrating a late prior course of dealing with the Debtor. Suffice it to say, a baseline of dealing has been established.
For Circuit guidance purposes, this Court will proceed to examine case law interpreting § 547(c)(2)(B). Unlike, § 547(c)(2) and § 547(c)(2)(A), which the interpretation relies on the proof of the parties’ own dealings, § 547(c)(2)(B) has an objective element which requires reference to some external datum. A survey of circuit case law reveals that the majority of the Circuit Court of Appeals with the exception of the Eleventh Circuit Court of Appeals3 concluded that the “ordinary *221business terms” meaning is to be held broadly to customary terms and conditions used by other individuals in the same industry witnessing exact or similar problems. In re Roblin Industries, Inc., 78 F.3d 30, 39 (2nd Cir.1996) (collecting cases). Such conduct between the debtor and the creditor should be held objectively in light of the industry practices. Therefore, “only dealings so idiosyncratic as to fall outside that broad range should be deemed extraordinary and therefore outside the scope of subsection [B].” In re Tolona Pizza Products Corp., 3 F.3d 1029, 1033 (7th Cir.1993). This interpretation is in line with the Congressional legislative history as it reveals:
The purpose of the preference section is two-fold. First, by permitting the trustee to avoid pre-bankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during [its] slide into bankruptcy. The protection thus afforded the debtor often enables [it] to work [its] way out of a difficult financial situation through cooperation with all of [its] creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debt- or. Any creditor that received a greater payment than others of [its] class is required to disgorge so that all may share equally. The operation of the preference section to deter “the race of diligence” of creditors to dismember the debtor before
bankruptcy furthers the second goal of the preference section — that of equality of distribution. H.Rep. No. 595, 95th Cong., 1st Sess. 177-78 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6138.
This Court agrees with the objective standard that 11 U.S.C. § 547(c)(2)(B) mandates, i.e. that a payment for which a creditor seeks the protection of the ordinary course of business exception falls within the ordinary practice of others similarly situated within the same industry.
Having established this objective standard under § 547(c)(2)(B), “ordinary business terms” must include those terms employed by similarly situated debtors and creditors facing the same or similar situations. Therefore, if the terms in question are ordinary for industry participants under financial distress, then that is ordinary for the industry. This objective standard serves a protective function to which a creditor that agrees to restructure a debt in a manner consistent with industry practice in those circumstances would not lose the benefit of such exception. Such objective standard also serves a dual policy function in which an industry creditor acting in a specific manner would not be viewed as performing an unusual practice when such creditor does no more than follow usual industry practice — precisely the kind of behavior the ordinary course of business exception was intended to protect; would lessen the restriction a creditor would experience in courses of action typical in untroubled times in order to allow room for realistic debt workouts and would not unfairly penalize those creditors who take conventional steps to institute a repayment plan. See In re U.S.A. Inns of Eureka Springs, Arkansas Inc., 9 F.3d 680 at 682-86.
In this instant case, Defendant presented sufficient evidence to meet the requirements of §§ 547(c)(2) and 547(c)(2)(A) therefore, this Court will not delve unnecessarily into the facts that would have been applied to an analysis of § 547(c)(2)(B). This Court notes that Trustee’s argument on the best evidence *222rule has no merit here as the Defendant has to meet preponderance of evidence standard to which this Court simply balances the probabilities that the proposition is more likely to be true than not.
III. Conclusion
Summarily, the primary inquiry this Court must decide first is whether Defendant, as the moving party, carried its initial burden of production and accordingly whether the Plaintiff, as the nonmoving party, had an obligation to produce evidence in response. The Supreme Court provided for such analytical framework in Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970), and Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
The Supreme Court, under Adickes and Celotex, offered guidance that a moving party without the ultimate burden of persuasion at trial may regardless carry its initial burden of production by either of two methods: the moving party may produce evidence negating an essential element of the nonmoving party’s case, or, after suitable discovery, the moving party may show that the nonmoving party does not have enough evidence of an essential element of its claim or defense to carry its ultimate burden of persuasion at trial. In practice, the first method mentioned above or the Adickes method, may be more commonly employed because the moving party may find it easier to produce affirmative evidence negating an essential element of the nonmoving party’s claim or defense than it is to show that the nonmoving party has insufficient evidence to carry its ultimate burden of persuasion at trial. Regardless, the second or the Celotex method, is equally favored legally, where in appropriate eases, a moving party can carry its initial burden of production by demonstrating that the nonmoving party does not have enough evidence to carry its ultimate burden of persuasion at trial.
In this instant case, Defendant successfully carried out the burden as mandated by Adickes. Defendant succeeded in producing evidence negating an essential element of the nonmoving party’s Opposition. Because either Adickes or Celotex are plausible in meeting the requirements or prevailing in a summary judgment motion, this Court will not evaluate this motion based on the Celotex standard as well. Therefore, Defendant presented sufficient evidence to demonstrate that there are no genuine issues of fact in dispute for a trial.
WHEREFORE, IT IS ORDERED that Defendant’s Motion for Summary Judgment shall be, and it hereby is, GRANTED. Clerk to enter Judgment dismissing the Complaint, and close this adversary.
SO ORDERED
. In 2006, all of Debtor’s payments were late, the latest payment being 120 days late, and the least being 61 days late. In 2007, the latest payment was 248 days late and the least was 92 days late. In 2008, the invoice billed for January 1, 2008 was paid on May 2, 2008, exactly 123 days late. As of June 1, 2008, Debtor had made no further payments although it had continued to receive invoices. Shortly after, Defendant and the Debtor agreed to a payment plan for past due amounts up until June of 2008. The general terms of the payment plan were for PMC to make six monthly payments in the amount of $200,000.00 each, on consolidated present and past due monthly invoices, which would cover most arrears. Both parties completed the payment plan with a final payment on December 8, 2008. Debtor then normally resumed making late payments on monthly invoices as it had before the payment plan.
. For the purpose of the analysis, § 547(c)(2) is the “first prong,” § 547(c)(2)(A) is the "second prong,” and § 547(c)(2)(B) is the "third prong.”
. See Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1566-67 (11th Cir. 1986) (The Eleventh Circuit adopted the conduct of the parties standard instead of the objective inquiry adopted by the other Cir-cults. The conduct of the parties standard observes the conduct of the parties themselves to determine if the terms of a preferential transfer are ordinary). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496369/ | OPINION AND ORDER
EDWARD A. GODOY, Bankruptcy Judge.
This contested matter was taken under advisement by the court to determine whether in a chapter 13 case the holder of a claim secured by a security interest in the debtors’ principal residence must use Supplement 2 to Official Proof of Claim Form 10 (“Form 10S2”) when filing a response which disagrees with a notice of final cure payment under Rule 3002.1(g) of the Federal Rules of Bankruptcy Procedure. For the reasons stated below, the court finds that the use of Form 10S2 or a substantially identical form of the holder’s own crafting is necessary to comply with Fed. R. Bankr.P. 3002.1(g) when a holder disagrees with the notice of final cure payment.
The debtors filed a voluntary petition for relief under chapter 13 on February 8, 2008. (Docket No. 1.) At the commencement of the case, the debtors were in arrears in the payment of their home mortgage with Oriental Bank and Trust, which is serviced by Banco Popular de Puerto Rico. (Claims Register No. 5-1.) They cured the mortgage arrears through their plan, and successfully completed all plan payments on February 26, 2013. (Docket No. 54.) Upon completion of plan payments, the chapter 13 trustee filed the notice of final cure payment required by Rule 3002.1(f). (Docket No. 49, the “Notice.”) The Notice stated that the total amount required to cure the default on *224Oriental’s claim had been paid in full by the trustee. (Id.) The Notice also stated that, according to Rule 3002.1(g), Banco Popular had to serve within 21 days a statement on the debtors, the debtors’ counsel, and the trustee indicating “1) whether it agrees that the Debtor(s) has/ have paid in full the amount required to cure the default on the claim; and 2) whether the Debtor(s) is/are otherwise current on all payments consistent with 11 U.S.C. § 1322(b)(5).” (Id.) The Notice also pointed out that the statement to be filed by a secured creditor had to “itemize the required cure or post-petition amounts, if any, that the holder contends remain unpaid as of the date of the statement] [and that it] ... shall be filed as a supplement to the holder’s proof of claim.... ” (Id.)
On March 21, 2013, Banco Popular as servicing agent of Oriental filed a response to the Notice, which it titled “BPPR’s Statement Pursuant to Fed. R. Bank. P. 3002.1(g).” (Docket No. 50; hereinafter, the “BPPR Statement.”) In it, Banco Popular stated that the debtors had cured the default on Oriental’s mortgage, but were behind one monthly payment of $628.00, plus late charges of $694.10, legal fees of $222.60, and fees of $40.00 for inspections and photocopies of documents, for a total of $1,584.70. (Id.) The BPPR Statement neither discloses the accrual dates of the missing payment and of the additional charges nor is it signed under penalty of perjury. (Id.)
On March 22, 2013, the debtors filed an objection to the BPPR Statement. (Docket No. 51.) The objection points out the BPPR Statement fails to disclose the accrual dates of the charges and whether they are the result of a change in the interest rate or an escrow account adjustment. (Id.) Banco Popular on March 27, 2013, replied to the objection of the debtors by simply stating that a review of the BPPR Statement shows that it complies with the provisions of Rule 3002.1(g). (Docket No. 52.) A hearing on this contested matter was held on April 5, 2013. (Docket No. 58.). After hearing the parties, the court took the matter under advisement. (Id.)
The parties do not dispute the application of Rule 3002.1(g) to this matter. Oriental Bank’s claim was secured by an interest in the debtors’ principal residence, and the debtors’ plan provided for its payment under section 1322(b)(5) of the Bankruptcy Code. What the parties disagree on is the amount of detail needed to be included in the BPPR Statement and if it must be signed under penalty of perjury to comply with Rule 3002.1(g). Rule 3002.1(g) requires that the BPPR Statement “itemize the required cure or postpetition amounts, if any, that the holder contends remain unpaid as of the date of the statement.” Fed. R. Bankr.P. 3002.1(g).
If Banco Popular had filed a Rule 3002.1(c) notice of postpetition fees, expenses, or charges, this disagreement would not exist. Like Rule 3002.1(g), Rule 3002.1(c) requires the holder of the claim to file and serve “a notice itemizing all fees, expenses, or charges (1) that were incurred in connection with the claim after the bankruptcy case was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence.” Fed. R. Bankr.P. 3002.1(c). And Rule 3002.1(d) requires that the Rule 3002.1(c) notice be prepared using Form 10S2. Form 10S2 requires the claim holder to “[ijtemize the fees, expenses, and charges incurred on the debtor’s mortgage account after the petition was filed” by providing a description, dates incurred, and amount, item by item. And the form must be signed by the holder under penalty of perjury.
*225The court concludes that the detail of itemization required by Rule 3002.1(g), when a claim holder disagrees with a trustee’s notice of final cure payment, is the same as that required by Rule 3002.1(c) and Form 1052. See In re Carr, 468 B.R. 806, 808 (Bankr.E.D.Va.2012) (“The only thing necessary ... for the creditor to respond to' the trustee’s Notice of Final Cure ... is [to] complete Official Form 10 (Supplement 2), ‘Notice of Postpetition Mortgage Fees, Expenses and Charges,’ and file it as a supplement to its proof of claim.”).1 It makes no sense to give a significantly different meaning to the word “itemize” or “itemizing” in Rules 3002.1(c) and 3002.1(g) and Form 1052 depending on which subsection of the Rule is at issue. The detailed information required for a debtor to contest a claim holder’s notice under Rule 3002.1(c) is equally necessary to a debtor to contest a holder’s response under Rule 3002.1(g). So, “[t]he creditor must respond to that notice [of final cure payment] by acknowledging that it is correct, or if it is not, stating with particularity the amounts that remain unpaid.” In re Carr, 468 B.R. at 808 (emphasis added).
The court also concludes that the Rule 3002.1(g) response must be signed by the holder under penalty of perjury. The Rule 3002.1(c) notice must be signed by the holder under penalty of perjury. Fed. R. Bankr.P. 3002.1(c) & (d) and Form 1052. Both the Rule 3002.1(c) notice and the Rule 3002.1(g) response disagreeing with the trustee’s notice require the same information. Thus, there is no reason why one should be signed under penalty of perjury and the other not. Also, the Rule 3002.1(g) response must be filed as a supplement to the holder’s proof of claim. Fed. R. Bankr.P. 3002.1(g). A proof of claim must be signed by a claim holder under penalty of perjury. Fed. R. Bankr.P. 3001(a) and Bankruptcy Official Form 10. Thus, again, the Rule 3002.1(g) response—as supplement to a proof of claim—must also be signed under penalty of perjury.
The BPPR Statement includes neither the itemization nor signature under penalty of perjury required by Rule 3002.1(g). If Banco Popular does not agree with the trustee’s Notice, it must either complete Form 10S2 or a substantially similar form of its own crafting and file it as a supplement to its proof of claim.
Therefore, the objection filed by debtors (at Docket No. 51) to the BPPR Statement (at Docket No. 50) is sustained. Banco Popular shall file within the next fourteen days a new response to the trustee’s Notice of Final Cure Payment (at Docket No. 49) that is in compliance with this opinion and order and Bankruptcy Rule 3002.1(g).
SO ORDERED.
. Form 1052 does not work neatly when a claim holder agrees with a trustee's notice of final cure payment because it has no box for a claim holder to check and indicate its agreement. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496372/ | OPINION AND ORDER
EDWARD A. GODOY, Bankruptcy Judge.
The Department of Treasury of the Commonwealth of Puerto Rico (“Hacienda”) filed an amended proof of claim, numbered 8-3, for unpaid taxes in the total amount of $101,103.62, consisting of a secured portion of $27,753.34, an unsecured priority portion of $67,229.13, and a general unsecured portion of $6,121.15. [Claims Register No. 8-3; “POC 8-3”.] Debtors Eli J. Tilen Bernabé and Marta Isabel Souffront Vicente (the “debtors”) objected to the priority portion of POC 8-3. [Docket No. 32.] The parties then filed cross motions for summary judgment. [Docket Nos. 64 & 65.] For the reasons stated below, Hacienda’s motion for summary judgment is hereby denied and the debtors’ motion for summary judgment and objection to the Hacienda’s POC 8-3 are granted.
Jurisdiction
This court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the General Order of Referral of Title 11 Proceedings to United States Bankruptcy Court for the District of Puerto Rico, dated July 19,1984 (Torruella, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Procedural Background
The debtors filed a petition for relief under chapter 13 of the Bankruptcy Code on October 29, 2011. [Docket No. 1.] Hacienda filed its first proof of claim on April 10, 2012, and subsequently amended it twice. [Claims Register Nos. 8-1, 8-2 & 8-3.] On June 20, 2012, the debtors filed an objection to the priority of portion of POC 8-3 on the ground that no evidence was provided to support its priority status. [Docket No. 32.] Hacienda, on August 20, 2012, filed an opposition to the objection, and both parties have since replied. [Docket Nos. 39, 40 & 51.]
A hearing was held on September 19, 2012, at which the court granted the parties a term to file dispositive motions and a joint statement of material facts. [Docket No. 53.] On February 1, 2013, Hacienda and the debtors filed a joint statement of uncontested material facts. [Docket No. 63.] And on that same date, both parties filed their respective motions for summary judgment. [Docket Nos. 64 & 65.] On February 27, 2013, the debtors filed their opposition to Hacienda’s motion for summary judgment. [Docket No. 68.] On March 1, 2013, Hacienda filed its opposition to the debtors’ motion for summary judgment. [Docket No. 69.]
*243
Uncontested Facts
The following facts are uncontested pursuant to Fed.R.Civ.P. 56 and D.P.R. Civ. R. 56, made applicable to this contested matter by Fed. R. Bankr.P. 9013(c) and 7056 and P.R. LBR 1001-l(b) and (d):
Mr. Tilen started to work for the Municipality of Mayagüez in 2005. [Joint Statement of Uncontested Material Facts (“Joint Statement”), Docket No. 63, ¶ 1.] Having accrued significant tax debt, Mr. Tilen signed on November 3, 2005 a document entitled Request and Approval of Payment Plan for the Payment of Taxes (the “Payment Plan”). [Joint Statement, Docket No. 63, ¶2; Cert. Trans, to Joint Exhibit 1, Docket No. 75-1.] The Payment Plan covered tax debt for assessed years 1995 to 2004; it required that Mr. Tilen pay $500 per month for 59 months from December 1, 2005 to December 1, 2010; at which time, he had to make a final payment for the outstanding balance of the tax debt. [Joint Statement, Docket No. 63, ¶¶ 2-3; Cert. Trans, to Joint Exhibit 1, Docket No. 75-1.] However, the Payment Plan also allowed Mr. Tilen to make smaller payments in the amount of $300.00 per month until his economic situation improved. [Joint Statement, Docket No. 63, ¶ 2; Cert. Trans, to Joint Exhibit 1, Docket No. 75-1.]
On March 10, 2007, Mr. Tilen stopped making payments. [Hacienda’s Motion for Summary Judgment, Docket No. 64 at 13; Debtors’ Legal Memorandum, Docket No. 65 at 2.] On June 2, 2008, Hacienda sent the Municipality of Mayagüez a Notification of Debt ordering the municipality to garnish Mr. Tilen’s wages (“Notice of Garnishment”). [Joint Statement, Docket No. 63, ¶ 4; Cert. Trans, to Joint Exhibit 2, Docket No. 75-1.] The Notice of Garnishment required monthly deductions in the amount of $500 from Mr. Tilen’s paychecks for 35 months, starting in July 2008, and a final payment of $73,784.33, to cover tax debt assessed for years 1995 to 2006. [Joint Statement, Docket No. 63, ¶¶ 3 & 4; Cert. Trans, to Joint Exhibit 2, Docket No. 75-1.] The debtors filed a petition for relief under chapter 13 of the Bankruptcy Code on October 29, 2011. [Docket No. 1.]
Summary Judgment Standard
Pursuant to Rule 56, made applicable to this contested matter by Fed. R. Bankr.P. 9013(c) and 7056, summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 4 (1st Cir.2010). The moving party bears the burden of showing that “no genuine issue of fact exists as to any material fact” and that he is “entitled to judgment as a matter of law.” Vega-Rodriguez v. P.R. Tel. Co., 110 F.3d 174, 178 (1st Cir.1997).
Once a properly supported motion has been presented before the court, the opposing party “can shut down the machinery only by showing that a trial-worthy issues exists” that would warrant the court’s denial of the motion for summary judgment. McCarthy v. Northwest Airlines, 56 F.3d 313, 315 (1st Cir.1995). For issues where the opposing party bears the ultimate burden of proof, that party cannot merely “rely on the absence of competent evidence, but must affirmatively point to specific facts that demonstrate the existence of an authentic dispute.” Id. However, not every factual dispute is sufficient to frustrate summary judgment; the contested fact must be material and the dispute over it must be genuine. Id. An issue is “genuine” if it could be resolved in favor of either party. A fact is “material” is it is potentially outcome-determinative. See *244Calero-Cerezo v. U.S. Dep’t of Justice, 355 F.3d 6, 19 (1st Cir.2004).
In assessing a motion for summary judgment, the court “must view the entire record in the light most hospitable to the party opposing summary judgment, indulging in all reasonable inferences in that party’s favor.” Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990) (citations omitted). The court may safely ignore “conclusory allegations, improbable inferences, and unsupported speculation.” Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir.1990) (citations omitted). However, there is “no room for credibility determinations, no room for the measured weighing of conflicting evidence such as the trial process entails, [and] no room for the judge to superimpose his own ideas of probability and likelihood (no matter how reasonable those ideas may be).... ” Greenburg v. P.R. Mar. Shipping Auth., 835 F.2d 932, 936 (1st Cir.1987); see also Mulero-Rodriguez v. Ponte, Inc., 98 F.3d 670, 677 (1st Cir.1996) (reversing summary judgment and emphasizing that “determinations of motive and intent ... are questions better suited for the jury”) (quoting Petitti v. New England Tel. & Tel. Co., 909 F.2d 28, 34 (1st Cir.1990)).
Legal Analysis
Under section 507(a)(8),1 unsecured claims of governmental units are entitled to priority to the extent that such claims are for “a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition” if the tax was assessed within 240 days before the date of the filing of the petition, exclusive of “any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days.” 11 U.S.C. § 507(a)(8)(A)(ii)(I). “The reason for according priority treatment to taxing authorities is because taxing authorities, unlike most other creditors, did not voluntarily extend credit to the debtor.” 4 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 507.11[l][b] (16th ed. 2013).
The Bankruptcy Code does not define an “offer in compromise.” However, bankruptcy courts have used the definition of offer in compromise found in the Internal Revenue Code and Treasury Regulations to construe that same term in section 507(a)(8). See e.g. In re Serapio Laureano Molina, 487 B.R. 73, 76-77 (Bankr.D.P.R.2013) (“An offer in compromise pursuant to 26 U.S.C. § 7122(c) and (d) is ‘an administrative proposal, evaluation, and negotiation, to determine if the IRS will accept a longer payment period, or a lesser amount than the full tax due.’ ”). An offer to compromise a tax debt under 26 U.S.C. § 7122 “must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary.” 26 C.F.R. § 301.7122-l(d). An offer to compromise is not deemed accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer’s representative. 26 C.F.R. § 301.7122-1(e). However, the court need reach the issue of whether the Payment Plan is an offer in compromise only if it finds that the Notice of Garnishment extended the Payment Plan, as Hacienda argues.
Because the debtors filed for bankruptcy relief on October 29, 2011, an offer in compromise had to be “pending or in effect” on February 1, 2011 to be entitled to *245priority treatment under section 507. Hacienda argues that the Payment Plan was an offer in compromise and that it was extended by the Notice of Garnishment on June 2, 2008. Since Hacienda was still garnishing Mr. Tilen’s wages in February 2011 under the Notice of Garnishment, Hacienda further argues that the Payment Plan, as extended by the Notice of Garnishment, falls within the 270-day period of section 507(a)(8)(A)(ii)(I) and, thus, a portion of POC 8-3 is entitled to priority treatment.
Hacienda bases its argument on another contention: that the Payment Plan included a clause that allowed Hacienda to seek any remedy available to it under the laws of Puerto Rico in the event of a default in payments.2 Ultimately, however, the court concludes that, even accepting as true this last factual contention, the Notice of Garnishment is not an extension of the Payment Plan. The extension argument fails for two reasons.
First, the Notice of Garnishment was neither voluntary nor signed by the taxpayer, and thus does not comply with the requirements of the Internal Revenue Code for offers in compromise. See Fitzgerald v. Comm’r of Internal Revenue, 135 T.C. 344, 351, 2010 WL 3564430 (2010) (a proposal not submitted in writing by a taxpayer cannot be an offer in compromise). Rather, the Notice of Garnishment was unilaterally imposed on Mr. Tilen by Hacienda when it exercised its rights under Article 9(j) of Act No. 230 (P.R. Stat. Ann. tit. 3, § 283h(j)) and ordered the Municipality of Mayagüez to make deductions to his paychecks. And the Notice of Garnishment makes no reference to the Payment Plan. Rather, it plainly states that Hacienda is exercising its rights under P.R. Stat. Ann. tit. 3, § 283h(j) to garnish Mr. Tilen’s wages.
Second, the terms of the Payment Plan are significantly different from those under the Notice of Garnishment. The Payment Plan included taxes assessed for the years 1995 to 2004. The Notice of Garnishment included taxes assessed for the years 1995 to 2006. Also, the Payment Plan required Mr. Tilen to make monthly payments of $300.00 each month for five years, starting in December 2005. But the Notice of Garnishment imposed a $500.00 deduction on his paycheck each month for three years, starting in July 2008. The terms and conditions of payment in the two documents are too incompatible to consider them both one, extended agreement.
The Payment Plan terminated on March 10, 2007, when Mr. Tilen stopped making the required monthly payments to Hacienda. Hacienda then pursued its rights under P.R. Stat. Ann. tit. 3, § 283h(j) by sending the Notice of Garnishment to the Municipality of Mayagüez. Even had Mr. Tilen complied with the terms of the Payment Plan, the plan would have ended on December 12, 2010. Having concluded that the Notice of Garnishment did not extend the Payment Plan, the court further holds that there was no offer in compromise “pending or in effect” during the 270 days prior to the bankruptcy filing. Thus, the tolling provision of section 507(a)(8)(ii)(I) is not triggered and the priority portion of POC 8-3 is not entitled to priority treatment under section 507(a)(8).
*246The motion for summary judgment filed by the Treasury Department of Puerto Rico [at Docket No. 64] is denied. The debtors’ objection to Proof of Claim 8-3 [at Docket No. 32] and the motion for summary judgment [at Docket No. 65] are granted. Proof of Claim 8-3 is, thus, allowed in the amounts of $27,753.34 as secured and $73,350.28 as general unsecured.
SO ORDERED.
. All statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., unless otherwise indicated.
. The debtors deny that the second page of the Payment Plan, which contains the default clause, was part of the agreement signed by Mr. Tilen. The debtors contend that the second page was not signed by Mr. Tilen, was not part of the Payment Plan, and is merely a letter from Hacienda accepting the Payment Plan. [Docket No. 65, ¶¶ 14-15.] This fact is not material for disposing by summary judgment this contested matter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496374/ | SCHERMER, Bankruptcy Judge.
Mirella S. Goben (the “Debtor”) appeals from the bankruptcy court’s1 order sustaining Corydon State Bank’s (the “Bank”) objection to the Debtor’s claimed exemption in a vehicle, and ruling that the Debt- or cannot avoid the Bank’s lien under § 522(f) of Title 11 of the United States Code (the “Bankruptcy Code”).2 We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.
ISSUE
The first issue in this case is whether the bankruptcy court properly concluded that the Debtor had no interest in a vehicle in which she could claim an exemption where the vehicle was fully encumbered. We agree with the bankruptcy court’s decision that the Debtor could not claim an exemption in the Vehicle. The second issue is whether Bankruptcy Code § 522(f) allows the Debtor to avoid the Bank’s lien. We also agree with the bankruptcy court’s ruling that the Bankruptcy Code provides for no such avoidance.
BACKGROUND
On January 2, 2013, the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On her Schedule C (claimed exemptions), the Debtor claimed a $1,000 exemption in her 2000 Hyundai Tiburón (the “Vehicle”) under Iowa law. The Debtor listed the value of this vehicle as $1,000 on her Schedule C.
The Bank objected to the Debtor’s claimed exemption in the Vehicle, stating that it made loans to the Debtor, and claiming a perfected security interest in the Vehicle. The Debtor filed an Objection to Bank’s Objection to Exemption (the “Debtor’s Objection”). After a hearing, the bankruptcy court held that it was “unclear whether the Bank holds a perfected lien against [the Vehicle].” The court then ordered the Bank to provide documents to show that it had a perfected lien against the Vehicle. The court stated that after receipt of the requested documents, the court would make a decision without a further hearing.3
*328In May 2013, the bankruptcy court entered an order on its docket finding that the Debtor had listed the Vehicle on her Schedule C with a value of $1,000, and as exempt (under Iowa Code § 627.6) in the amount of $1,000. The court stated that the Bank objected to the claimed exemption “based upon two loans with an outstanding balance of $4,233.39,” that the loans were secured by the Vehicle and that the Bank’s lien was noted on the Vehicle’s Certificate of Title. The court concluded that the debt secured by the Vehicle exceeded the value of the Vehicle and, therefore, “the Debtor has no interest in the motor |V]ehicle to claim as exempt.” The bankruptcy court also stated that § 522(f) of the Bankruptcy Code “is not available to the Debtor to avoid this type of lien.” Therefore, the bankruptcy court sustained the Bank’s objection to the Debtor’s exemption and overruled the Debtor’s Objection.4
STANDARD OF REVIEW
The bankruptcy court’s findings of fact are reviewed for clear error, and it conclusions of law are reviewed de novo. Abdul-Rahim v. LaBarge (In re Abdul-Rahim), 720 F.3d 710, 712 (8th Cir.2013) (citation omitted).
DISCUSSION
“The Bankruptcy Code allows debtors to exempt certain property from their bankruptcy estates, which are otherwise comprised of all the debtor’s legal or equitable interests in property.” Abdul-Rahim, 720 F.3d at 712 (citing 11 U.S.C. §§ 522(d) and 541(a)). We construe exemption statutes liberally. Foellmi v. Ries (In re Foellmi), 473 B.R. 905, 908 n. 7 (8th Cir. BAP 2012) (citations omitted).
Generally, a debtor may exempt property that is exempt under § 522(d), or under applicable state law and federal law other than § 522(d). 11 U.S.C. §§ 522(b)(1), (2) and (3). A state may “opt out” of the Bankruptcy Code’s § 522(d) exemptions, which Iowa has done. 11 U.S.C. § 522(b)(2); Iowa Code § 627.10.
The Debtor claimed an exemption under § 627.6(9) of the Iowa Code, which provides that “[a] debtor who is a resident of [Iowa] may hold exempt from execution ... [t]he debtor’s interest in one motor vehicle, not to exceed in value seven thousand dollars.” Iowa Code § 627.6(9).
The bankruptcy court correctly determined that the Debtor is not entitled to an exemption under Iowa Code § 627.6 because she does not hold an interest in the Vehicle that she could claim to be exempt. To determine the Debtor’s interest in the Vehicle that is subject to her claim of an exemption, we subtract the amount of the secured debt from the value of the Vehicle. The Debtor does not dispute that the value of her Vehicle is less than the amount she owes to the Bank. Therefore, the Debtor enjoys no equity, and has no interest in the Vehicle to exempt.
We also agree with the bankruptcy court’s statement that “11 U.S.C. [§ ] 522(f) is not available to Debtor to avoid this type of lien.” Section 522(f)(1) provides that:
*329(1) ... the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debt- or would have been entitled under subsection (b) of this section, if such lien is—
(A) a judicial lien ...;
(B) a nonpossessory, non-purchase money security interest in any—
(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;
(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or
(iii) professionally prescribed health aids for the debtor or a dependent of the debtor.
11 U.S.C. § 522(f)(1). Nothing in the record suggests, even remotely, that the Bank’s interest in the Vehicle qualifies under any category enumerated in § 522(f)(1).
CONCLUSION
For the reasons set forth above, the decision of the bankruptcy court is AFFIRMED.
. The Honorable Anita L. Shodeen, Chief Judge, United States Bankruptcy Court for the Southern District of Iowa.
. It is unclear whether the Debtor appeals the § 522(f) portion of the bankruptcy court’s decision. To give the benefit of the doubt to the Debtor, we address the § 522(f) ruling.
.The Debtor did not provide us with a copy of the hearing transcript, so we do not know the exact arguments that were made at that hearing. However, the orders entered by the bankruptcy court on the merits of this matter rule on both the Debtor's claimed exemption, and on whether § 522(f) applies to avoid the Bank's liens.
. On June 12, 2013, the bankruptcy court entered an order including the same findings and conclusions as those set forth in the May 2013 order, and also recognizing that the Debtor was not able to timely appeal the May 2013 order because service of it was not made on her. The bankruptcy court stated that "[t]he time period for appeal pursuant to Bankruptcy Rule 8002(a) will be governed by the date this Nunc Pro Tunc Order is filed on the docket.” The Debtor timely appealed the June 2013 order. The May 2013 order is technically res judicata as to the June 2013 order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496375/ | SHODEEN, Bankruptcy Judge.
The Debtor, Wilma Pennington-Thurman, appeals the May 16, 2013 order entered by the Bankruptcy Court1 denying her Motion to Reopen her case to pursue an alleged violation of the discharge inunction. For the reasons that follow, we AFFIRM.
BACKGROUND
A Chapter 13 bankruptcy petition was filed pro-se by Wilma Pennington-Thurman (the “Debtor”) on July 10, 2009. On schedule A she listed an ownership interest in her residence located at 8722 Partridge Ave., St. Louis, MO 63147 (the “Property”) and claimed it exempt as her homestead. Her case was converted to a Chapter 7 bankruptcy on October 8, 2009 and updated schedules were filed. The statement of financial affairs identified causes of action she had commenced against Bank of America, N.A. (“BOA”) after filing her chapter 13 petition but before the conversion date.2 These cases alleged improprieties by BOA in a foreclosure action against the Property. A discharge was entered in the Debtor’s case on January 27, 2010. The chapter 7 trustee filed an Application to Approve Compromise and Settlement related to the pending litigation. The Bankruptcy Court overruled the Debtor’s objection to the *331proposed compromise and approved the trustee’s Application. The Debtor’s case was fully administered and closed by final decree on December 29, 2011.
After the bankruptcy case was closed, BOA initiated foreclosure proceedings against the Property. On April 3, 2013, the Debtor filed A Motion to Reopen (the “Motion”) her bankruptcy case for the purpose of filing an adversary proceeding against BOA for violation of the discharge injunction. Her Motion states that BOA sent forty-one notices, two Transfers of Service Provider, nine Recent Inquiries, and placed six notices on her front door. She asserts that each of these documents, and their combined effect, constitute attempts to collect a discharged debt. BOA resisted the Debtor’s Motion, arguing that the notices were not attempts to collect a debt against the Debtor, personally. Rather they were related to enforcement of its mortgage against the real estate, an action that is not subject to the discharge injunction. The Bankruptcy Court denied the Motion finding that the notices were not attempts to collect a debt as a personal liability of the Debtor and did not violate the discharge injunction. The Debtor timely appealed the Bankruptcy Court’s order.
STANDARD OF REVIEW
A bankruptcy court’s findings of facts are reviewed for clear error and its conclusions of law are reviewed de novo. First Nat’l Bank v. Pontow, 111 F.3d 604, 609 (8th Cir.1997) (quoting Miller v. Farmers Home Admin. (In re Miller), 16 F.3d 240, 242 (8th Cir.1994)). A decision denying a motion to reopen is reviewed for an abuse of discretion. Apex Oil Co. v. Sparks (In re Apex Oil Co.), 406 F.3d 538, 541 (8th Cir.2005). Under this standard, our review focuses upon whether there was a failure to apply the proper legal standard or whether the findings of fact are clearly erroneous. Official Comm. Of Unsecured Creditors v. Farmland Indus. (In re Farmland Indus.), 397 F.3d 647, 650-51 (8th Cir.2005). A bankruptcy court’s ruling will not be reversed unless there is a “ ‘definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors.’” Apex Oil Co., 406 F.3d at 541 (quoting Dworsky v. Canal St. Ltd. P’ship (In re Canal St. Ltd. P’ship), 269 B.R. 375, 379 (8th Cir. BAP 2001)).
DISCUSSION
A bankruptcy case may be reopened to “administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b) (2012); Fed. R. Bank. Pro. 5010. Several factors may be applied to determine whether cause exists to reopen a bankruptcy case. In re Wilson, 492 B.R. 691, 695 (Bankr.S.D.N.Y.2013). Of importance in this case is the factor which considers “whether it is clear at the outset that no relief would be forthcoming to the debtor by granting the motion to reopen” and is dispositive of the Debtor’s arguments. Id. (citing In re Otto, 311 B.R. 43, 47 (Bankr.E.D.Pa.2004)).
“A discharge ... operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.” 11 U.S.C. § 524(a)(2). Although personal liability to pay a debt does not continue, a discharge does not operate to extinguish a creditor’s in rem rights to foreclose against property in which it holds a lien. Johnson v. Home State Bank, 501 U.S. 78, 82-83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991); Long v. Bullard, 117 U.S. 617, 620-21, 6 S.Ct. 917, 29 *332L.Ed. 1004 (1886). The mortgage against the Debtor’s home remains enforceable. See Bank One Wis. v. Annen (In re Annen), 246 B.R. 337, 340-41 (8th Cir. BAP 2000).
The notices received by the Debtor contain a declaration that they were provided “for information purposes” related to the status of foreclosure or options to cure the default. The communications also recognized that a bankruptcy case had been filed, a discharge entered, and stated that the notice was not an attempt to collect against the Debtor, personally. According to Missouri cure notice laws, if a borrower defaults by not making payment, a lender is required to give notice to the borrower of his or her right to cure in order to accelerate, take possession, or enforce a security interest. Mo.Rev.Stat. § 408.555.1 (2012). Before BOA could foreclose upon the Property, it was required to give notice to the Debtor of her right to cure, and this information can properly be included in the notices. See 11 U.S.C. § 524(j)(3) (the discharge does not operate as an injunction if the creditor’s act “is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien”); Jones v. BAC Home Loans Servicing, LP (In re Jones), Bankr.No. 08-05439-AJM-7, Adv. No. 09-50281, 2009 WL 5842122, at *3 (Bankr.S.D.Ind. Nov. 25, 2009) (creditor’s communication was excepted from the discharge injunction by the section 524(j)(3) exception).
The Bankruptcy Court determined that the notices and letters sent by BOA were not attempts to collect against the Debtor personally and did not violate the discharge injunction. Other courts have reached this same conclusion. See, e.g., Mele v. Bank. Of Am. Home Loans (In re Mele), 486 B.R. 546 (Bankr.N.D.Ga.2013); Pearson v. Bank of Am., No. 3:12-cv-00013, 2012 WL 2804826, 2012 U.S. Dist. LEXIS 94850 (W.D.Va. July 10, 2012); In re Jones, 2009 WL at *3.
We have previously addressed the issue of whether a motion to reopen is properly denied if the purpose is to bring a claim that has no merit, holding that:
Ordinarily, when a request is made to reopen a case for the purpose of filing a dischargeability complaint, the court should reopen routinely and reach the merits of the underlying dispute only in the context of the adversary proceeding, not as part of the motion to reopen. However, where, as here, the proposed dischargeability complaint is completely lacking in merit, it is not inappropriate for the court to examine the issues, nor is it an abuse of discretion to deny the motion to reopen.
Arleaux v. Arleaux, 210 B.R. 148, 149 (8th Cir. BAP 1997). Under this standard, and based upon the record, the Bankruptcy Court did not abuse its discretion in denying the relief requested by the Debtor.
BOA argues that the Debtor has raised other causes of action involving state-law wrongful-foreclosure theories and violations of the Fair Debt Collection Practices Act (“FDCPA”) which were not preserved for appeal. Issues raised for the first time on appeal are not considered and cannot form the basis for reversal by an appellate court. Drewes v. Schonteich, 31 F.3d 674, 678 n. 6 (8th Cir.1994); Wendover Fin. Servs. v. Hervey (In re Hervey), 252 B.R. 763, 767 (8th Cir. BAP 2000). Three exceptions exist to this general rule. In re Hervey, 252 B.R. at 767. The first arises in “exceptional cases where the obvious result would be a plain miscarriage of justice or inconsistent with substantial justice.” Id. at 768 (quoting Kelley v. Crunk, 713 F.2d 426, 427 (8th Cir.1983)). The second exception occurs when the resolu*333tion of the legal issues is “beyond any doubt.” Id. The third exception is applied when the new issue is purely legal in nature and additional evidence is not necessary and would not affect the outcome. Id. (quoting Krigel v. Sterling Nat’l Bank (In re Ward), 230 B.R. 115, 119 (8th Cir. BAP 1999)). None of the permitted exceptions are appropriate in this case. Accordingly, these arguments are not addressed here.
Because the Bankruptcy Court correctly concluded that the Debtor’s allegations were without merit, we find that it did not abuse its discretion in denying the Motion to Reopen her bankruptcy case. Accordingly, the decision of the bankruptcy court is affirmed.
. The Honorable Barry S. Schemer, United States Bankruptcy Judge for the Eastern District of Missouri.
. Amended schedule B did not reflect these potential claims as assets. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496377/ | THIRD MEMORANDUM ON “CONSOLIDATED ISSUES” TREATMENT OF MOTIONS FOR DISMISSAL IN TRUSTEE’S LITIGATION FOR AVOIDANCE AND RECOVERY: AVOID ABILITY AND ACTIONABILITY UNDER LAW AND IN EQUITY; ONE LAST ISSUE OF PLEADING.
GREGORY F. KISHEL, Chief Judge.
PREFACE
This is the third (and last) memorandum of general rulings to be entered, as the *346basis for the disposition of pending motions for dismissal in a docket of adversary-proceedings in these cases. This litigation was commenced to redress the failure of a massive Ponzi scheme conducted by one Thomas J. Petters — the largest case of investor fraud in Minnesota history and one of the largest in United States history.
The Debtors in these cases were all entities in Tom Petters’s enterprise structure. The plaintiff is the Trustee for the Debtors’ bankruptcy estates. He commenced the litigation to avoid a large number of pre-petition transfers of funds by the Debtors, and to recover money judgments to effectuate the avoidance. His last complaint was filed on October 10, 2010, one day before the second anniversary of the commencement of the lead case in this group, that of Petters Company, Inc. (“PCI”). At that time, the adversary proceedings totaled over 200 in number.
The majority of the defendants elected to file motions for dismissal in lieu of answers, a right they had under Fed. R.Civ.P. 12(b) and Fed. R. Bankr.P. 7012(b). This resulted in a massive number of contests for adjudication. To cope with that, a “consolidated issues” procedure was adopted by order, to coordinate the presentation of issues that were common to the theories for dismissal raised across the range of the motions made by the defense. The plan was to issue general rulings, where such common issues went to the adequacy of the Trustee’s pleading or the ascertainment of the substantive law that would be applied when there was no extant governing precedent.
Further detail about the procedure can be found in the first two memoranda entered on the submission of the “consolidated issues.” See Dkt. Nos. 1951 and 2018, reported as In re Petters Co., Inc., 494 B.R. 413, 58 B.C.D. 53 (Bankr.D.Minn. 2013) and 495 B.R. 887 (Bankr.D.Minn. 2013).1 The earlier memoranda also gave more detail on the origin of these cases and this litigation.
This Third Memorandum sets forth rulings on the balance of the common issues presented via that procedure. Fewer of the issues at bar were formally raised by as many defendants as those in the first two sets. But, all of them are substantial. Two go to the very core of the Trustee’s statutory avoidance powers as it is brought to bear toward the greatest potential recovery. A third goes to the sustainability of the Trustee’s major alternative theory of recovery, through equitable remedies. All of these rulings will have applicability to defendants who did not formally raise the points treated in their own motions for dismissal.
As before, the issues will be organized by the subject matter of their theory. Formal rulings will be expressly articulated for each issue. The numbering of the discussion and the rulings will be sequential to the first two sets. The same conventions of nomenclature for parties and parts of the record will be used. See Amended Second Memorandum [Dkt. No. 2018], 4 n. 3. These are the four issues presented on the third day of oral argument, as previously directed by the procedures order, plus a fifth raised by the structure of oral argument.
Through three of them, the lender-constituency within the defense challenges square-on the Trustee’s right to use fraudulent transfer remedies against the sort of *347transaction they had with the Debtors. For all of those three, the lender-defendants rely heavily on a 2005 decision by the Second Circuit, In re Sharp Int’l Corp., 403 F.3d 43, and several other decisions by circuits other than the Eighth.
ISSUE # 8:
ACTIONABILITY AS FRAUDULENT TRANSFER, OF TRANSFER AND PAYMENT ON TRANSACTION DOCUMENTED AS A LOAN.2
The lender-defendants argue that fraudulent transfer remedies simply cannot lie against the transfers that the Debtors made to them, in repayment on financing that those defendants furnished for the ostensible “diverting” business of the Pet-ters organization. To support this argument, they cite Sharp Int’l and they characterize it as on-point authority. The gist of their theory lies in the phrase they use throughout, in the fashion of a litany: “A preference is not a fraudulent conveyance.”
Sharp Int’l came out of fraudulent-transfer litigation commenced by the trustee in the bankruptcy case of a business that imported, assembled, and distributed real consumer goods.3 The company had a succession of major operating lenders under lines of credit, plus other debt-investors under subordinated-note arrangements.4
This financing, however, funded not only operations but also a massive looting of corporate assets by the company’s individual principals. To obtain the inflated amounts of capital needed, the principals falsified internal company records for customer base, sales, and assets. Then they used these documents to induce the lending. This fraud is described as having taken place over a period of two years or more (from “some point prior to 1997, ... through October 1999”). The creditors thus induced are identified as one major operating lender, State Street Bank and Trust Company — which first lent to the debtor in November, 1996 — and a group of subordinated note-lenders — that first loaned in July, 1998 and was then induced by the debtor to advance substantial additional sums in March, 1999 to pay off the majority of the State Street debt.5
The trustee in Sharp Int’l pleaded that the impetus for the takeout of State Street came from that creditor itself, under the following fact averments. One of State Street’s officers “began to suspect fraud [on the part of Sharp International] in the summer of 1998,” from several factors: the lack of transparency in the company’s accounting procedures; its “fast growth and voracious consumption of cash”; and her own experience as banker with specific cases of borrower fraud that had shown similar characteristics. After several months of investigation and pressing for information from the debtor, the single-*348transfer takeout of State Street was demanded, arranged, and consummated.
The debtor corporation in Sharp Int’l ended up in bankruptcy. Its trustee challenged the payoff of State Street on several grounds, including the theory that it was a constructively- and actually-fraudulent transfer avoidable under the Bankruptcy Code and New York State fraudulent-transfer law:
The nub of the complaint is that State Street then arranged quietly for the [individual principals] to repay the State Street loan from the proceeds of new loans from unsuspecting lenders, thus avoiding a repeat of the ... losses ... [caused by a similar borrower fraud with which the State Street officer had had direct experience].
403 F.3d at 47.
On State Street’s motion, the bankruptcy court dismissed the trustee’s complaint in its entirety. As to the fraudulent-transfer count for actual fraud, the bankruptcy court held that the trustee had not pled sufficient facts to support a finding of actual intent to defraud other creditors, on the inferential process that uses the “badges of fraud” approach. The constructive-fraud count was dismissed for failure to antieipa-torily plead that State Street had lacked good faith in receiving the payment. 403 F.3d at 48.
On appeal, the district court affirmed on a slightly-variant theory, but otherwise endorsed the bankruptcy court’s analysis. 403 F.3d at 48-49.6
On appeal, the Second Circuit affirmed the dismissal of the actual-fraud count. It held that the trustee had not pled facts on which to characterize as intentionally fraudulent the specific transfer he would have avoided:
... the intentional fraudulent conveyance claims fails [sic] for the independent reason that [the trustee] inadequately alleges fraud with respect to the transaction that [the trustee] seeks to avoid, i.e., Sharp’s $12.25 million payment to State Street.
403 F.3d at 56. Laying in the centerpiece characterization that the lender-defendants appropriated here, the Second Circuit observed:
The fraud alleged in the complaint relates to the manner in which Sharp obtained new funding from the Notehold-ers, not Sharp’s subsequent payment of part of the proceeds to State Street. The $12.25 million payment was at most a preference between creditors and did not “hinder, delay, or defraud either present or future creditors.” •
Id.
As the lender-defendants emphasize, this last thought has rooted antecedents:
Fraudulent conveyance law is basically concerned with transfers that “hinder, delay or defraud” creditors; it is not ordinarily concerned with how such debts were created.
... to find an actual intent to defraud creditors when ... an insolvent debtor prefers a less worthy creditor, would tend to deflect fraudulent conveyance law from one of its basic functions (to see that an insolvent debtor’s limited funds are used to pay some worthy creditor), while providing it with a new function (determining which creditor is the more worthy).
*349Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504, 1510-1511 (1st Cir.1987) (Breyer, J.).7 See also B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 477 (7th Cir.2005) (rejecting application of fraudulent-transfer remedies, to payoff of prior lender to over-extended business-borrower, on challenge by other lenders that alleged that their advances funded payoff and furthered operations, “because the best description of what happened here is a preference among creditors. [The debt- or] retired the First Union debt while leaving other creditors in the lurch....”; dismissal of later creditors’ fraudulent-transfer action warranted even if prior lender knew of debtor’s financial instability and over-extension and suspected “that mischief [i.e., fraudulent operations] was afoot... .”).8
In the eases at bar, the Trustee sued a large number of entities and institutions that had lent money to one or more of the Debtors. These defendants engaged in transactions with the Debtors that were documented and treated by the parties as loans of money, made on the lenders’ understanding that the proceeds were to be used for the general or transaction-specific support of the “diverting business” in inventory of consumer goods that the Debtors were ostensibly carrying on.9 The Trustee seeks to recover on account of the repayments made on these prior loans. He would have these transfers of funds characterized in alternate ways: as actually fraudulent on current and future creditors ensnared in the Petters Ponzi scheme, or as constructively fraudulent, i.e., not made for reasonably equivalent value that was actually received by the Debtor-recipients.
The lender-defendants make a blunt, frontal attack on the fundamental availability of fraudulent-transfer remedies to the Trustee here, as against them. However, their reliance on the pronouncements of Sharp Int’l, B.E.L.T., and Boston Trading Group is too broad-brush at best, and in-apposite at worst. The argument glosses over differences between the two varieties of fraudulent transfers. It inappropriately assigns pivotal significance to the contractual origin of the subject transfers, for the application of fraudulent-transfer remedies against them. And most tellingly, it ignores a crucial difference between the factual matrices pleaded in those three cases and the historical facts pleaded at bar. This difference makes the three decisions fully-distinguishable from the cases at bar.
In all of the three cited opinions, the courts correctly envision the intent that must be proven for the avoidance of an actually-fraudulent transfer, as that harbored by the transferor. They correctly require this intent to have been directed to the transfer that is sought to be avoided. Sharp Int’l, 403 F.3d at 56; B.E.L.T., Inc., 403 F.3d at 478; Boston Trading Group, 835 F.2d at 1510-1511. Hence, the standards for pleading required that facts be averred to make out such contemporaneous, linked fraud.10 In all three cases, the *350courts addressed motions for dismissal in which the facial adequacy of pleadings was challenged. Hence they looked to the complaints’ averments as to this specific sort of transferor intent.
In all three, the courts found that the complaints lacked any averments that, if true, would establish that the specific event of payoff— of the defendant-creditors on their long-preexisting debts — was motivated or accompanied by any intent to defraud other creditors — even the ones whose cash infusions were alleged to have funded or enabled the payoffs. The factual averments going to fraud went at most to the debtor’s inducement to those later lenders, that enabled the payoff; or more generally, they went to the shadiness of the debtors’ business operations in surreptitiously piling up debt they could not reasonably repay. Sharp Int'l, 403 F.3d at 56-57; B.E.L.T., Inc., 403 F.3d at 478; Boston Trading Group, 835 F.2d at 1506-1507.
Hence, the three courts’ conclusions that actual fraud had not been pled as to the acts of transfer that had to be found so tainted in order to be avoidable. And hence, the outcome, that avoidance remedies could not be supported on the facts pled. Thus, the lower courts were affirmed in their dismissals of the complaints. And finally, the comments — probably to be classified as dicta — that the transfers were at most preferential, in the understandings of bankruptcy law.11
None of the three courts collapsed the transactions toward deeming a common and extended fraudulent intent. One could take exception with the soundness of that, whether it was explicitly rejected (as in Sharp Int'l, 403 F.3d at 55) or not; it is reasonably clear from the summarized fact pleading that the plaintiffs in all three cases believed that the pressing, earlier lender could not have been removed absent the gulling of new lenders, and thus the targeted transfer could not have been made absent the victimization of other parties that became new creditors or had their preexisting claims increased.
This made the situation in all three cases not so pure as the simple, classic preference in bankruptcy — where an insolvent debtor disproportionately favors one creditor over others similarly-situated by using current resources that are inadequate to satisfy all. The summary pronouncement in dictum may have been a bit too pat on the facts pleaded there. And in any case this suggests that it should not have been brandished here quite so categorically or so vigorously.12
More to the point, however, the claims in suit in Sharp Int’l, B.E.L.T., and Boston Trading Group involved a much more lim*351ited cast of historical participants, and a much simpler transactional matrix. They were the parties that had effected a single transactional process, the takeout of that one pressing, preexisting creditor from a foundering debtor’s debt structure. In the level of complexity and (more crucially) in the nature and breadth of the transferor’s motivation to make the transfer, the distinction between that and the situation here is not only material for the focus of the avoidance remedy; it is decisive.
This key difference shunts the rationale and the outcome in those three cases away from the historical facts pleaded here. The complaints at bar allege a massive, multi-year Ponzi scheme that involved many dozens of lender-investors and tens of thousands of transfers on transactions documented and treated as loans. Such an operation would be absolutely dependent on the pervasive exploitation of fraudulent misrepresentation and false pretense, as to all parties with which the Debtors transacted. The fraud that is necessary to the sustaining of a Ponzi scheme does not end until the collapse. Its active projection and its consequence only shift from one generation of investor-transferees to another. See Kathy Bazoian Phelps and Steven Rhodes, The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (2012), § 1.02, pp. 1-3 to 1-5.
As a result, where the pleading lies in avoidance litigation brought to redress an alleged Ponzi scheme, the fact averments necessary to make out fraudulent intent are different. Fraudulent intent is properly assumed to pervade the operation of a Ponzi scheme. In litigation to redress its failure, the intent element is adequately pleaded on three basic facts: the existence of the scheme; the funding of the subject transfer by the engine of the scheme (a continuing churning of involved investors and invested money); and the service of the subject transfer in furtherance of the scheme, via the maintenance of a facade of normalcy and success and the satisfaction of previous creditors that otherwise could have forced a collapse.
With that pleading, the intent element is adequately stated and avoidance remedies may lie on an actual-fraud theory. It matters not whether the transferee nominally received its due in payment on a contract that was regular on its face, or even one fully-enforeeable under state law. If the contractually-sourced act of making payment on a previous extension of credit is tainted by the purveyor-party’s motivation to sustain a Ponzi scheme in which that past credit had played a role, the transferee is not entitled to the deference given by the courts in Sharp Int’l, B.E.L.T., and Boston Trading Group to a prior lender in a financing history of the much simpler sort pleaded there.13
*352The inapposition of the lender-defendants’ reliance on B.E.L.T. and Shao"p Int’l is also apparent from reference to other, more relevant case law.
First, the text of B.E.L.T. does not even mention significant precedent from that very circuit, Scholes v. Lehmann, 56 F.3d 750 (7th Cir.1995). In that opinion, the Seventh Circuit treated fraudulent-transfer remedies as fitting surely and readily to the remediation of a failed Ponzi scheme. The application is given a replete, multi-faceted rationale. The analysis is premised on assigning a different status to unwitting funders of the scheme’s operation, after the fact and by judicial declaration. The status is that of creditors of the vehicle-entity. Then they are to be treated as such in working out the consequences of the scheme’s collapse. Through the hindsight of equitable principles, this rebranding is imposed even where the participation was facially structured as equity investment under documentation and through transaction.
B.E.L.T.’s rejection of fraudulent-transfer status for the situation it treated has nothing to do with the different and more complex situation treated in Scholes v. Lehmann. B.E.L.T.’s ruling did not even require a reference to Scholes, let alone an express distinguishing. The situations treated were so different as to permit both analyses to coexist. And in the end, Scholes’s assignment of hypothetical creditor status gives its rationale a platform common with B.E.L.T., at the lowest level, on their classification-related predicates.14
This outcome is consistent with an on-point holding on a somewhat different articulation, from an appellate-level court within the Second Circuit, the circuit that issued Sharp Int’l. In In re Manhattan Inv. Fund Ltd., 397 B.R. 1 (S.D.N.Y.2007), the court held that Sharp does not vitiate the application of fraudulent transfer remedies to a bankruptcy case commenced to remediate a failed Ponzi scheme. It analyzed Sharp Int’l at length, and distinguished it from the Ponzi scheme-spawned litigation before it. This was done on both fact-pleading and law. 397 B.R. at 9-11.
The Manhattan Inv. Fund court noted that various circuits had adopted the Ponzi scheme presumption before Sharp Int’l, as had the federal trial courts within the Southern District of New York. 397 B.R. at 10. It emphasized that Sharp Int’l did not involve a failed Ponzi scheme, so the Sharp Int’l court had not been required to address the presumption of intent applicable to Ponzi-scheme cases. Id. Most crucially, “the transaction at issue in Sharp was different from the typical transaction in a Ponzi scheme.” 397 B.R. at 11. The creation of the underlying debt in Sharp Int’l predated the pleaded commencement of fraudulent activity by the debtor there. This specific circumstance had been cited by the Second Circuit for its holding in Sharp that there was “no ground ... to ‘collapse’ that loan with other (non-contemporaneous) bad-faith maneuvers” by the debtor, because the transactional structure that resulted in the challenged payment was “unrelated to” the pleaded acts of *353fraud. Id. (quoting Sharp Int’l, 403 F.3d at 55). Thus, as the Manhattan Inv. Fund court held, “Sharp does not dispose of the Ponzi scheme presumption” of fraudulent intent, in the sense of making it inapplicable to the avoidance of transfers made through loan-format transactions; “[a]t most, it simply means that courts must be sure that the transfers sought to be avoided are related to the scheme.” Id.
That latter characteristic, relatedness, is best equated to the concept of being “in furtherance of’ the Ponzi scheme, in the parlance of the presumption — -a matter mostly of fact but with some legal dimension.15 Here, the Trustee has pleaded that payments made to lender-defendants were done in furtherance of a Ponzi scheme, and the operational aspects of the scheme were pleaded at length; so, complaints seeking avoidance of such payments are not subject to dismissal as a matter of law. Since the Ponzi scheme presumption applies to this litigation, see Amended Second Memorandum [Dkt. No. 2018], 25-26, the averment of such a connection is sufficient to plead a basis for avoidance as an actually-fraudulent transfer under either Minn. Stat. § 513.44(a)(1) or 11 U.S.C. § 548(a)(1).
The lender-defendants also relied on Sharp Int’l for their motion to dismiss the constructive-fraud counts of the Trustee’s complaints. The opinion in Sharp Int’l does use some of the previously-described notional structure to treat the counts on constructive fraud before it. The lender-defendants seem to rely on this part of Sharp Int’l toward the general shelter from avoidance that they seek for repayments on loans. The same rationale that was applied to the actual-fraud alternative applies equally here, however, and the constructive-fraud counts are not to be dismissed on this rationale.16
Thus, Ruling #8: The Trustee is not barred from invoking fraudulent-transfer remedies as to transfers of money made by the Debtors, in repayment to those defendants that had previously lent money to the same Debtors, merely because the payments were made on transactions documented as loans and treated as such by the parties thereto. As long as the Trustee adequately pleads that the transfers in loan repayment were made in furtherance of a Ponzi scheme, they are actionable as actually- or constructively-fraudulent.
ISSUE # 9: AY OID ABILITY AS CONSTRUCTIVELY-FRAUDULENT TRANSFER, OF PAYMENT MADE ON ANTECEDENT DEBT OF DEBTOR.
Before the hearings, the next issue was queued up in deceptively-simple wording: “Whether the Trustee has sufficiently pleaded that transfers on purported antecedent debt were made for less than reasonably equivalent value, where the *354complaint alleges that the transfers satisfied the debt.”17
As it emerged through later briefing and argument, the issue was not one of pleading. It was whether the Trustee even had a right to recover under the theory of a constructively-fraudulent transfer for which a Debtor had not received a reasonably equivalent value, in consequence of payments that Debtor had made to a lender-defendant — and as to any component thereof, principal and interest alike.
The question thus was whether the Trustee could even make out a prima facie case against a lender-defendant under governing law, given the uncontested predicate of a payment’s linkage to a Debtor’s repayment under an earlier contractual extension of credit. The substantive dimension of the issue then spilled over to the Trustee’s claims of aetually-fraudulent transfer, though it was material there at the secondary stage of an affirmative defense.
This line of argument was an attempted hammer-blow at a whole theory of recovery for the bankruptcy estates, and potentially to all recovery under fraudulent-transfer theories against a major constituency of the defense. That made it serious. After that, the issue got more complicated, and more confusing, when both the lender-defendants and the Trustee hardened into absolutized, all-or-nothing positions as to avoidability.
Both sides pushed the ante to the top. As it turns out, the best legal authority on these issues requires the blanket to be divided. And in consequence, the issues narrow markedly for the litigation going forward.
For the treatment of this issue, the origin lies in definitional provisions in the federal and Minnesota fraudulent transfer statutes:
... “value” means property, or satisfaction or securing of a present or antecedent debt of the debtor, ...
11 U.S.C. § 548(d)(2)(A); and,
[vjalue is given for a transfer ... if, in exchange for the transfer ... an antecedent debt is secured or satisfied ...
Minn.Stat. § 513.48(a).
These provisions assign the character of “value” to the legal result of any payment made by a debtor-transferor to its creditor, i.e., the satisfaction or securing of a preexisting debt. They apply anywhere the concept of “value” is legally relevant in a fraudulent-transfer action.18 Here, the lender-defendants claim the benefit of this characterization for all monies they received from a Debtor on any debt owed to them before the making of the payment. They demand dismissal of the Trustee’s constructive-fraud claims against them, to the extent he seeks to avoid any such payments on preexisting debt.
This issue is conceptually intertwined with Issue # 7, treated in the Amended Second Memorandum [Dkt. No. 2018], 38-45. There, the lender-borrower relationship was examined toward gauging the adequacy of the Trustee’s pleading of a *355constructively-fraudulent transfer. Here, the lender-defendants advance similar considerations; but they cite them to support a frontal challenge to the Trustee’s right under law to recover anything against them.
At the stage of the Trustee’s prima facie case, that challenge succeeds only in part — i.e., as to one component of the subject transfers. On the very same authority, the outcome is opposite as to the other component; the Trustee gets the advantage of a decisive classification as a matter of law for his prima facie case. Further, the treatment for the statutory affirmative defense is firmly structured under the very same considerations.19
The elements of the lender-defendants’ argument are summarized at p. 42 and n. 45 of the Amended Second Memorandum [Dkt. No. 2018]:
First, the payment [the lender-defendants] received in both principal and interest was no more than their contractual due on a preexisting debt.
Second, the partial or full satisfaction of the debt was statutorily-recognized “value” received by the particular Debtor, to the extent of the amount paid.
Third, because the payment reduced or abated the debt dollar-for-dollar, the reasonable equivalence is undeniable.
Thus, the lender-defendants argue, the Trustee cannot argue or prove that the particular Debtor received less than a reasonably equivalent value in exchange for the payment it made, 11 U.S.C. § 648(a)(1)(B)® and Minn.Stat. § 513.44(a)(2). They seek to bar him as a matter of law from avoiding any of the payments to them as constructively-fraudulent transfers.
There is case law to buttress this argument, at least as to the principal component of the payments made. However, that is all the further it can go, under the weight of authority.
The bellwether opinion is Scholes v. Leh-mann, cited supra at p. 352 and one of the earlier circuit-level decisions (1995) in the recent evolution of fraudulent transfer law as it applies to a failed Ponzi scheme.20 Scholes v. Lehmann treats a half-dozen major issues, not all of them relevant here.21 The pertinent parts of the opinion, however, establish an analytic framework for determining the avoidability on constructive-fraud theories, of payments made by the purveyor to defendants that had infused money into the scheme under the documentary form of investment, and had received substantial payment back ostensibly on account of their investment.
*356The analysis is piercing.22 It goes beyond the papered top-layer of nominal relationships between scheme-vehicle and investor-infuser, to the corrupt imposthume of a Ponzi scheme as it actually lies and is operated. It legally recategorizes the nature of relationships and the status of participants throughout such a scheme, to an understanding that matches the reality. This then enables the sorting-out of consequences toward a greater equity and a more salubrious outcome, than just leaving a collapsed scheme in place with big end-losers and fully-escaped net-winners.23
That greater equity is deemed to lie in favor of unsatisfied creditors and investors. 56 F.3d at 757. The equities are given effect on an underlying reality: the returns paid to prior, satisfied and exited investors were funded not from legitimate business transactions into which they were ostensibly investing, but from the perpetration of further fraud on later investors. Id.
Yet the other side of equity’s balance is honored as well. All defrauded infusers of capital, past-out and still-hooked alike, are deemed to have or to have had the legal status of “tort creditors,” i.e., potential claimants against the perpetrator or the vehicle-entity on a fraud-in-the-inducement theory. 56 F.3d at 754-755. As such, they would be entitled to receive the principal amount of their original infusion back, by way of rescission and restitution; or they are deemed to have been so entitled prior to their satisfaction, in the same status.24 Id. As Scholes v. Lehmann articulates it, the deemed surrender of this right of recovery equates to a “fair exchange” of consideration for that component of the challenged transfer, in the vocabulary of the pre-UFTA Illinois law applied there, or “reasonably equivalent value” under § 548(a) (or statutes like MUFTA). 56 F.3d at 756. As a result, the past repayment of paid-in equity investment is not avoidable as constructively-fraudulent under statute. Id.
The “profit” component of such a payment, however it is denominated contractually, is recoverable in avoidance. The principle is that its ostensible accrual and later payment to the investor was not “offset by an equivalent benefit” received by the vehicle-entity of the scheme, in the sense of being linkable to the sustaining of a legitimate, viable business that was profitable in reality, or to a reinvestment by the recipient-investor that would have in*357creased the net worth of a bona fide, operating vehicle-entity. 56 F.3d at 757. Rather, given the inherent insolvency of a Ponzi scheme, “[t]he paying out of profits to the [recipient-defendant] not offset by further investments by him conferred no benefit on the [vehicle-entities] but merely depleted their resources faster.” Id.
As a result, the payment of “profit” (or interest) is not insulated from avoidance by the considerations applicable to a return of principal. More broadly, in the greater goals of equity the paid and exited earlier investor should not be allowed to benefit from an ongoing fraud to the detriment of remaining and unsatisfied later investors, merely because the earlier investor was not itself to blame for the fraud. The earlier investor need return only “the net profits of [its] investment— the difference between what [it] put in at the beginning and what [it] had at the end.” 56 F.3d at 757-758.
The analysis in Scholes v. Lehmann is communicated in a condensed style. The text itself resonates more with abstract concepts than with specific statutory language. However, it is very much of a whole and it is structured throughout by a notion of balance. The elements of the analysis very much dovetail with the statutory vocabulary of § 548(a)(1)(B) and MUFTA.
And, there is no compelling reason to distinguish its analysis from a case where participants in a Ponzi scheme’s operation did so through infusions documented as lending under fixed terms, rather than investment whether through equity participation in a vehicle-entity or through the ostensible management of placement into third-party forms with a segregation of principal for the investor.25 Under the same considerations, the thing received by the debtor-transferor is equally illusory, whether it is associated with payment attributable to a fictitious profit (in the case of an investment-denominated infusion) or interest at a contractual rate (in the ease of a loan-denominated infusion).
For the analysis of value and reasonable equivalence, the relevant consideration here is the benefit received by the vehicle-entity in exchange for the payment out to those who infused money earlier. The return of capital or investment improves the balance sheet of the vehicle-entity by reducing debits to net worth. But, as to profit or interest paid out from other parties’ infusions, nothing is identifiable to real generation of income from past infusions, and nothing is retained or received. It has been siphoned, on an ongoing basis, toward the satisfaction of earlier infusers of money and away from the purposes represented to later infusers.
In reality, the only consequence of the payment and receipt is the prolongation of a fraudulent shell, and the piling-up of further harm to future investor-infusers. And these are the central considerations for the Scholes analysis, regardless of how the facade for the scheme was legally-structured and documented. Cf Perkins v. Haines, 661 F.3d 623, 628 (11th Cir. 2011) (“... no court has distinguished between equity investments and debt-based claims when applying the general rule to fraudulent transfer actions arising out of a Ponzi scheme”).26
*358So, under the statutes to be applied here, there is no value to be attributed to the payment of anything beyond return of principal to a lender-defendant. The status of lender-creditor, held under a fraudulently-induced contract, is overridden in equity by the status of tort creditor; and the only debt cognizable from such a status is an entitlement to restitution of the principal. Nor, really, could there be reasonable equivalence for the full amount of the transfer, regardless of a contractual entitlement to interest that would otherwise equate to a debt owing in the understanding of the statutes. No legitimate benefit is to be assigned to the vehicle-entity from the siphoning toward such purposes. The value of the payment-out of ostensible interest has no corresponding input received by the vehicle-debtor.
The analysis of Scholes v. Lehmann has been adopted in subsequent circuit-level opinions. E.g., In re Hedged-Inv. Assoc., Inc., 84 F.3d 1286, 1290 (10th Cir.1996); M & L Business Mach. Co., Inc., 84 F.3d 1330, 1340-1342 (10th Cir.1996); Donell v. Kowell, 533 F.3d 762, 770 (9th Cir.2008); and Perkins v. Haines, cited earlier. See also In re Bernard L. Madoff Inv. Secs. LLC, 454 B.R. 317, 333-334 (Bankr. S.D.N.Y.2011) (collecting cases). Perkins v. Haines most succinctly summarizes the structure of avoidability under this line of authority:
In the case of Ponzi schemes, the general rule is that a defrauded investor gives “value” to the Debtor in exchange for a return of the principal amount of the investment, but not as to any payments in excess of principal.... Courts have recognized that defrauded investors have a claim for fraud against the debtor arising as of the time of the initial investment. ... Thus, any transfer up to the amount of the principal investment satisfies the investors’ fraud claim (an antecedent debt) and is made for “value” in the form of the investor’s surrender of his or her tort claim. Such payments are not subject to recovery by the debt- or’s trustee.
661 F.3d at 627.
Since Scholes, the division of challenged transfers into components equating to principal and profit (or interest) and its respective assignment of avoidability to each has become a virtual rule of thumb to begin an application of fraudulent-transfer remedies, in this context. The “prevailing view” carries forward Scholes’s first postulate, that value is received by the debtor on repayment of principal, because “the debtor, and therefore the [later-arising bankruptcy] estate of the debtor is neither richer nor poorer for having returned the principal investment, since the payment thereby reduced the Ponzi debtor’s [deemed] restitution liability....” See Phelps and Rhodes, supra at p. 10, § 3.02[3][a], at p. 3-12. There does not seem to be any controversy in the case law *359over the reasonable equivalence of the amount repaid on principal to the benefit to be deemed to the debtor, dollar-for-dollar. Id,27 See, in particular, In re Independent Clearing House Co., 77 B.R. at 857. And though a few courts have held that payments to investors above the return of principal do constitute reasonably equivalent value, e.g., In re Churchill Mtg. Inv. Corp., 256 B.R. 664, 680 (Bankr. S.D.N.Y.2000), aff'd, Balaber-Strauss v. Lawrence, 264 B.R. 303 (S.D.N.Y.2001), their rulings require an inappropriately-blindered focus on the proprieties of the specific transaction. The holistic approach of Scholes, its predecessors, and its progeny is the appropriate one. See Phelps and Rhodes, supra at p. 10, § 3.02[l]-[3], at pp. 3-2 to 3-19.
Thus, as to the Trustee’s pleaded case for avoidance on grounds of constructively-fraudulent transfer, Ruling # 9: The Trustee cannot exercise the power of avoidance under the constructive-fraud theories of applicable statute as to any Debtor’s repayment to any defendant of principal on a loan or other extension of credit previously made by that defendant to the Debtor, because that repayment gave reasonably equivalent value to the Debtor via the satisfaction of a preexisting debt on a claim for restitution. However, on behalf of the appropriate bankruptcy estate, the Trustee may avoid, as a con-struetively-fraudulent transfer within the scope of 11 U.S.C. § 548(a)(1)(B) and Minn.Stat. §§ 513.44(a)(2) and 513.45(a), that portion of any payment to any such defendant that was in excess of the amount of principal paid, whether denominated as profit, interest, or otherwise, because the paying Debtor did not receive a reasonably equivalent value from the defendant in exchange for the payment.
ISSUE # 10: AVAILABILITY OF AFFIRMATIVE DEFENSE TO AVOIDANCE OF ACTUALLY-FRAUDULENT TRANSFER, ON ACCOUNT OF PAYMENT RECEIVED ON ANTECEDENT DEBT.
The analysis of Scholes v. Leh-mann applies directly to claims of constructive-fraudulent transfer. However, it is only there that the concept of value bears on the avoidability of the transfer in the first instance. A transfer impugned as actually fraudulent (here, under 11 U.S.C. § 548(a)(1)(A) or Minn.Stat. § 513.44(a)(1)) may be subjected to avoidance without considering any exchange of value between the Debtor-transferor and the recipient. As a matter of a plaintiffs case in chief, a transfer is avoidable upon proof of the specified intent on the transferor’s part and no more need be proven.
From that limited perspective, it would seem that the actual-fraud theory is the far more powerful of the two — even considering the general difficulties of proof for subjective intent as an element.28 However, the lender-defendants invoke a value-oriented affirmative defense, the one under 11 U.S.C. § 548(c) and Minn.Stat. § 513.48(a), which applies to both varieties *360of fraudulent-transfer claim.29 On this defense, they insist that their receipt of payment from any Debtor is immune to avoidance as an actually-fraudulent transfer, even if the Ponzi scheme presumption gives the Trustee a ready way to satisfy the sole element of a specific intent.30
With that in mind, the lender-defendants challenge the sufficiency of the Trustee’s complaints. They argue that he has not stated enough facts to make out a lack of good faith on their part in accepting the payments. (As a preliminary for the defense, they proffered the classification of the payments as satisfaction of a debt for principal and interest owing under contract, as indisputably meeting the element of “takes for value.” This was put forth quite perfunctorily — in fact, it was close to a matter of assumption.)
When first advanced, this argument led to a point-counterpoint over whether the Trustee was required to plead a detailed basis for a lack of good faith on the part of the lender-defendants, in anticipation that his opponents might raise the defense but before any lender-defendant had responded to his fraudulent-transfer claims in any way. The Trustee insisted that he had no such initial duty and there is much to be said for that. The surface rectitude of his position was reinforced by the procedural posture of most of the lender-defendants: they had not even bothered to responsively plead and instead had rushed into motions for dismissal toward terminating the litigation early in any way possible.31
The sides then took “I win, I take all” approaches to the matter of value under statute. This antagonism obscured the place of this distinct issue in an effective consolidated-issues procedure. When the true implications of adopting Scholes’s analysis are realized, however, this issue is put right out front. And the affirmative defense can be addressed at this stage on the grounds of substance; the adequacy of pleading has only secondary significance. The resulting disposition of the good-faith issue will have real effect in channeling this litigation.
Given the rulings on Issue # 9, the following points should be obvious. The affirmative defense of value received in good faith might shelter the lender-defendants against the Trustee’s actual-fraud claims to a like extent as his constructive-fraud *361theories are sheltered. The payment of principal constitutes “value” for the purposes of 11 U.S.C. § 548(c) and Minn.Stat. § 513.48(c), in the very same way as it does for § 548(a)(1)(B)© and Minn.Stat. § 513.44(2). But under Scholes’s rationale, the payment of interest or profit lacks all value for the purposes of § 548(c) and Minn.Stat. § 513.48(c), just as it does on the merits of a plaintiffs case in chief.
If a defendant in a fraudulent transfer action cannot prove both elements of this affirmative defense, it cannot have its shelter. See e.g., Taylor v. Sturgell, 553 U.S. 880, 907, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008) (explaining the “traditional allocation of the proof burden” for an affirmative defense is to the party asserting them). See also Smith v. Sac Cnty., 11 Wall. 139, 78 U.S. 139, 147, 20 L.Ed. 102 (1870) (recognizing the principle by which a defendant is bound to prove all the facts necessary to constitute a defense). Clearly, under Scholes’s analysis, the receipt of interest in this specific context does not qualify as value received by a debtor. The lender-defendants cannot assert that any Debtor-transferor received value from paying the interest they received in transfers that were in furtherance of the Pet-ters Ponzi scheme.
The defense, then, would fail as a matter of law as to this component of payments received, for want of the ability to establish one of its essential elements. Cf., Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (summary judgment on claim or defense is properly granted to opponent of claim or defense, where record as a whole, including all extant fruits of investigation and discovery, shows complete lack of evidence to support an essential element, and respondent-proponent of claim or defense fails to produce evidence to support finding to satisfy such element). Without question, the Trustee could recover the interest component of such a transfer on his case in chief, in avoidance under an actual-fraud theory, upon proof of the requisite intent.
The receipt of repaid principal, however, would constitute value for the purposes of the affirmative defense.32 So, if a lender-defendant can meet its own burden of proof on the other element, receipt in good faith, the Trustee may not recover the principal component of payments made, even under an actual-fraud theory.
This doubles the discussion back around to the lender-defendants’ attack on the content of the Trustee’s pleading, the orientation originally framed for this issue. The argument seems to stem from two different premises, one more enveloping than the other.
The broader point is an insinuation that the Trustee’s own fact averments in his complaints, if taken as true, set forth a full basis on which good faith could be found in the lender-defendants’ favor. Were this so, the Trustee would have largely routed himself on the affirmative defense, however inadvertently, and his complaints would fail on their own content.
The lender-defendants’ relied on Wycoff v. Menke, 773 F.2d 983 (8th Cir.1985), for this thrust. The cited authority, however, is inapposite. In that case, the affirmative defense in question was the statute of limitations. Without the pleading of circumstances on which to invoke tolling, a discovery allowance, or the like, the complaint’s citation of a single date for the event that constituted the cause of action in suit did indeed enable a time-barring *362analysis to conclusive result; no extrinsic material had to be consulted or used.
Wycojf, however, involved a defense much less fact-intensive in its core operation. Here, the lender-defendants seem to be saying that good faith just screams out from the Trustee’s threshold recitations: the lender-defendants loaned money to the Debtors; the Debtors paid it back per terms — and thus how could that possibly not be in good faith?
The detailed backdrop allegations take care of that pat construction of the pleadings: all of this was done in the Debtors’ furtherance of a Ponzi scheme. The lender-defendants would cast the Trustee as loading a weapon against himself; but the attempt fails, just like that.
Their other spin is that the Trustee had an affirmative burden to plead far more facts on their lack of good faith than he did, to anticipate their raising of the defense; and hence he should either be subjected to dismissal or ordered to replead in detail.
The potential defense here is far more fact-specific than the one in Wycoffv. Menke. That puts much more significance on the stage in litigation at which the lender-defendants raise their point. In the specific context of a fraudulent transfer action, it has been held locally that facts going to a defendant’s potential good faith defense have no relevancy at the stage of a motion for dismissal brought on the ground that the plaintiff has not pleaded a prima facie basis for its claim, and hence the state of pleading as to such facts is irrelevant then. S.E.C. v. Brown, 643 F.Supp.2d 1077, 1078 (D.Minn.2009); United States v. Bame, 778 F.Supp.2d 988, 993 (D.Minn.2011). There is authority to the contrary from other jurisdictions33; but the rule applied by our district court is the rule to apply here. See also In re Bernard L. Madoff Inv. Secs., LLC, 454 B.R. 317, 331 (Bankr.S.D.N.Y.2011); In re Dreier LLP, 453 B.R. 499, 510 n. 6 and 511 (Bankr.S.D.N.Y.2011).
It nonetheless is appropriate to make a short reference to the factual content of the Trustee’s complaints that was expressly directed toward the issue of defendant-transferees’ good faith. For his pleading against most of the lender-defendants, the Trustee cites the Debtors’ consent to interest rates alleged to have been abnormally high, as a basis on which to deem the lender-defendants on inquiry notice of something very wrong behind the Debtors’ facade. He proposes this circumstance, and sometimes others, as the basis for an ultimate finding, lack of good faith on their part in taking payment.
The thought behind this position is somewhat attenuated; such averments certainly do not shout for a finding of complicity in the Petters scheme. In isolation, the implications of such circumstance may not be enough to defeat a case for the affirmative defense. However, for pleading purposes it was not the Trustee’s burden to recite more by way of circumstances, greater in number or more anomalous, in anticipation of a future raising of the defense.
Thus, Ruling #10: The defense of receipt for value in good faith under 11 U.S.C. § 548(c) and Minn.Stat. § 513.48(c) is not available to the lender-defendants, as to any amount paid to them by the Debtors in interest or on any account other than repayment of principal, because the Debtors did not receive “value” in return for the payments thus made. The same defense may be available to the lend*363er-defendants as to an avoidance of repayments of principal that the Debtors made to them, upon invocation by responsive pleading and proof that they received such payments in good faith. The Trustee had no duty to anticipatorily plead facts going to the issue of the lender-defendants’ receipt in good faith. His complaints are not deficient as to this issue.
ISSUE # 11: ADEQUACY OF PLEADING ON INSIDER STATUS OF EMPLOYEE-DEFENDANTS.
A. Introduction.
As part of his original “clawback” effort, the Trustee sued 26 individual defendants for the avoidance of transfers that had been made to them in connection with their employment by one or more of the Debtors. He alleged that these defendants had been insiders of one or more employer-Debtors when they received the transfers, in a specific sense under statute. For his legal basis of suit, the Trustee invoked Minn.Stat. § 513.45(b), under the empowerment of 11 U.S.C. § 544(b).34 Were insider status properly pleaded and then proven, the substantive advantage to the estates under the state-law theory of suit is significant: the Trustee need not prove a lack of reasonably equivalent value as he must for a case of constructive fraud, and insider-defendants may be per se barred from asserting good faith toward maintaining the affirmative defense of Minn.Stat. § 513.48(c). See Bartholomew v. Avalon Capital Grp., Inc., 828 F.Supp.2d 1019, 1029 (D.Minn.2009), and Minnesota state cases cited there.
Most of the employee-defendants joined forces early in the litigation. They coordinated a common defense to the Trustee’s claims. As part of that, they jointly argued that the Trustee had failed to plead sufficient fact allegations to make out insider status as to any of them, even if the Trustee’s actual fact pleading were assumed to be true.35
This argument directly resonates with the Supreme Court’s recent articulation of the standard for pleading, which requires “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (emphasis added). In particular, a complaint must provide “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 555, 127 S.Ct. 1955. Thus, after a canvassing of fact pleading to identify and segregate such empty assertions, the court is to “assume [the] veracity” of “well-pleaded factual allegations ... and then determine whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, *364173 L.Ed.2d 868 (2009). As noted earlier, the statutory irrelevance of value to a pri-ma facie case for Minn.Stat. § 513.45(b) benefits the estates; the possible issues in contention are significantly narrowed, and the latitude of defense is restricted. Given that impact, it is appropriate to require the Trustee to adequately plead the special status of insider for each such defendant sued in that capacity.
B. Insider Status: Nature and Proof.
For avoidance litigation in a bankruptcy case, the determination of insider status “is a mixed question of law and fact and not merely a question of fact.” In re Rosen Auto Leasing, Inc., 346 B.R. 798, 803 (8th Cir. BAP 2006). Where, as here, a trustee relies on the empowerment of § 544(b) to invoke the state law of fraudulent transfer, insider status is governed by state law. However, the definition of the term “insider” under MUFTA is almost identical to the Bankruptcy Code’s. Thus, “one can fairly make use of [case law construing] both to determine” whether a given defendant was an insider under one statute or the other. In re Northgate Computer Systs., Inc., 240 B.R. 328, 362 (Bankr.D.Minn.1999).36
In the parts pertinent to this litigation, Minn.Stat. § 513.41(7) defines the term “insider” as:
(...)
(ii) if the debtor is a corporation,
(A) a director of the debtor;
(B) an officer of the debtor;
(C) a person in control of the debtor;
(D) a partnership in which the debtor is a general partner;
(E) a general partner in a partnership described in clause (D); or
(F) a relative of a general partner, director, officer, or person in control of the debtor;
(iv) an affiliate, or an insider of an affiliate as if the affiliate were the debtor; and
(v) a managing agent of the debtor.37
This non-exclusive roster of examples is essentially identical to the relevant part of 11 U.S.C. § 101(31).38 Given the lack of case law authority under the Minnesota statute, the near-coincidence of the specific statutory texts, and the texts’ placement in cognate statutes for the very same remedies, it is appropriate to consult judicial constructions of the Bankruptcy Code’s definition to apply the Minnesota one.
Most of these provisions exemplify “insider” by concrete characteristics. However, the concept encompasses any entity that had “a sufficiently close relation*365ship with the debtor that his conduct is made subject to closer scrutiny than those dealing at arm’s length with the debtor.” In re Krehl, 86 F.3d 737, 741 (7th Cir.1996) (quoting S.Rep. No. 989, 95th Cong., 2d Sess. (1978) (cited In re Dygert, 2000 WL 630833 (Bankr.D.Minn. May 11, 2000))).
As a result, in construing § 101(31) the courts have referred to two categories: statutory insiders, i.e., those possessing an office or status among those enumerated in the statute; and non-statutory insiders, those who fall within the legislative intent for the definition but are “outside of any of the enumerated categories.” E.g., In re Winstar Commc’ns, Inc., 554 F.3d 382, 395 (3rd Cir.2009).
For all but one of the cited categories of statutory insider, the mere possession of the specified formal legal or contractual relationship with a corporate debtor, 11 U.S.C. § 101(31)(B)(i)-(ii), is enough to make a defendant an insider. This is a per se rule. As to directors, officers, and managing agents, it stems from the ability to influence corporate decision-making that customarily comes with such formal status. In re El Comandante Mgmt. Co., LLC, 388 B.R. 469, 474 (D.Puerto Rico 2008); In re Badger Frtwys., Inc., 106 B.R. 971, 980-981 (Bankr.N.D.Ill.1989). Where a defendant holds the title of officer but the position is not vested with major decision-making authority in its own right, the possession of the titled status alone still suffices to make such a defendant an insider. In re Fieldstone Mortg. Co., 2008 WL 4826291 (D.Md. Nov. 5, 2008).39
Thus, for defendants who are formal office-holders of any of the Debtors at bar, or who were familial relatives of such office-holders, the mere averment that the defendant held the status is sufficient to plead insider status plausibly.
However, the one other alternative (under Minn.Stat. § 513.41(7)(ii)(c) and 11 U.S.C. § 101(31)(B)(iii)), “a person in control of the debtor,” is fact-intensive. In re ABC Elec. Servs., Inc., 190 B.R. 672, 675 (Bankr.M.D.Fla.1995). This sort of statutory insider status turns on “whether ... the facts indicate an opportunity to self-deal or [to] exert more control over the debtor’s affairs than is available to other creditors.” Id.
The defendant must have “actual control (or its close equivalent).” In re Winstar Commc’ns, Inc., 554 F.3d at 396. This actual control has been identified as “the ability of the [defendant] to ‘unqualifi-ably dictate corporate policy and the disposition of corporate assets.’” In re U.S. Medical, Inc., 531 F.3d 1272, 1279 (10th Cir.2008). A finding of actual control may be based upon the direction of “such things as the [djebtor’s personnel or contract decisions, production schedules or accounts payable.” In re ABC Elec. Servs., Inc. 190 B.R. at 675.
Given the expressly non-exclusive character of the statutes’ enumeration, non-statutory insider status may be found on other aspects of a relationship between debtor and defendant. The issue is again fact-intensive, and the determination must be made on a case-by-case basis. In re Richmond, 429 B.R. 263, 297 (Bankr. E.D.Ark.2010); In re A. Tarricone, Inc., 286 B.R. 256, 262 (Bankr.S.D.N.Y.2002). The courts have identified two major considerations for the determination:
1. the closeness of the relationship between debtor and defendant; and
2. the place of the transfers in a transaction that was conducted at arms-length, or not.
*366In re Winstar Commc’ns, Inc., 554 F.3d at 397-398; In re Bruno Mach. Corp., 435 B.R. 819, 833 (Bankr.N.D.N.Y.2010). “[T]he degree of control or influence the transferee exert[ed] over the debtor” may be considered. In re Oakwood Homes Corp., 340 B.R. 510, 523 (Bankr.D.Del. 2006). However, a showing of such “control is not required” for non-statutory insider status. In re Winstar Commc’ns, Inc., 554 F.3d at 395-396.40 And, a closeness of relationship alone is not sufficient to establish insider status for the avoidance of a particular transfer. There must also be something anomalous, beyond arms-length, about the transaction that featured the transfer. In re Miller Homes, LLC, 2009 WL 4430267 (Bankr. D.N.J. Nov. 25, 2009) (trusted lawyer for corporation-debtor could not be classified as insider for avoidance action; though lawyer had unusually close relationship to debtor-client, transaction in question appeared to have been conducted at arms length).
Because non-insider status is fact-intensive, a plaintiff-trustee’s assertion of it is not to be Anally determined on a motion to dismiss as long as sufficient facts have been pleaded toward the two considerations. Clearly, those facts can vary greatly on a case-by-case basis. A few examples meriting the status appear in the previously-cited eases:
1.A major creditor to a deeply-indebted debtor-borrower forcing the debt- or to purchase equipment long before it was actually needed and then forcing the turnover of other corporate monies by threatening to cut off lending under a revolving facility. In re Winstar Commc’ns, Inc., 554 F.3d at 394.
2. A golf buddy of a statutory insider of the debtor, who was a former director of the debtor himself, having made a $200,000.00 loan to the debtor without having performed due diligence and on the request of the statutory insider alone. In re A. Tarricone, Inc., 286 B.R. at 269-270.
3. A close personal friend of the owner of a corporation-debtor who made an unsecured loan of $300,000.00 to his friend’s company without inquiring into the company’s ability to pay. In re Bruno Mach. Corp., 435 B.R. at 834-835.
4. A lawyer who maintained a close personal relationship with the company’s owner and who then participated in the fraudulent activities of the debtor. In re Continental Capital Inv. Servs., Inc., 2006 WL 6179374 (Bankr.N.D.Ohio 2006).
C. Pleading Standard for Insider Status, in Application.
In general, the Trustee’s pleading for insider status is terse, across all of the complaints against employee-defendants. Its content separates out in line with the case law’s analysis, though most of the complaints allege in the alternative that a particular defendant held insider status on two or three different bases.
1. Defendants Alleged to be Insiders in Capacity of Officers or Directors of a Debtor. Minn.Stat. § 513.41(7)(ii)(A)-(B).
As an example involving a specific status as an officer or director of a referent Debt- *367or, the Trustee’s complaint against David Baer read:
Defendant was the Chief Legal Officer of PCI and PGW and, consequently, had special knowledge or access to information regarding the Ponzi scheme, was a control person of PCI and PGW, and was an insider within the meaning of Section 101(31) of the Bankruptcy Code.
Complaint, Kelley v. Baer, ADV 10-4370 [Dkt. No. 1, ¶ 44]. There is a simple identification of the defendant as the holder of a specific corporate office with two named Debtors, held at all times relevant to the Trustee’s fraudulent transfer claims.41 Given the per se operation of MinmStat. § 513.41(7)(ii)(B), this is the only fact essential to pleading this sort of insider status, as to such a defendant. For any defendant expressly alleged to have held a status designated as “officer” for one of the Debtors, particularly an office designated in articles or bylaws; or for any defendant alleged to have been a “director” in the sense of a member of a governing board, such a statement of fact will suffice as a plausible basis for insider status under Minn.Stat. § 513.41 (7)(ii)(A)— (B).
2. Defendants Alleged to Have Been Insiders of Affiliates of a Debtor. Minn.Stat. § 513.41(7)(iv).
For other defendants, the Trustee pleaded derivative statutory insider status under the rubric of being an insider of an affiliate of one of the Debtors (in the sense of being an officer, director, or in control of that entity). Generally, this was coupled with the pleading of non-statutory insider status as to a Debtor or an affiliate, under comparable considerations that did not expressly allege control. For instance,
Defendant was the President of Petters International, a wholly owned subsidiary of PGW, and CEO of Petters Consumer Brands, LLC. Consequently, Defendant had special knowledge or access to information regarding the Ponzi scheme, was a control person of Petters International and Petters Consumer Brands, LLC, and was an insider within the meaning of Section 101(31) of the Bankruptcy Code.
Complaint, Kelley v. O’Shaughnessy, ADV 10 4401 [Dkt. No. 1, ¶44].42
Defendant was the President of Petters International, a wholly owned subsidiary of PGW, and CEO of Petters Consumer Brands, LLC. Consequently, Defendant had special knowledge or access to information regarding the Ponzi scheme, was a control person of Petters International and Petters Consumer Brands, LLC, and was an insider within the meaning of Section 101(31) of the Bankruptcy Code.
Complaint, Kelley v. Harmer, ADV 10-4372 [Dkt. No. 1, ¶ 44];
Defendant is a former Deputy Chief Legal Counsel of PGW, General Counsel for SpringWorks, LLC and General Counsel for Polaroid Corporation, both subsidiaries of PGW, and was part of Petters’ and his affiliated entities’ management team and inner circle. Consequently, he is an insider within the meaning of Section 101(31) of the Bankruptcy Code.
Complaint, Kelley v. Phelps, ADV 10-4342 [Dkt. No. 1, ¶ 44]; and
*368Defendant is the former Chief Executive Officer of SpringWorks, LLC, a wholly owned subsidiary of PGW, and was part of Petters’ and his affiliated entities’ management team and inner circle. Consequently, he is an insider within the meaning of Section 101(31) of the Bankruptcy Code.
Complaint, Kelley v. Danko, ADV 10-4339 [Dkt. No. 1, ¶44].
Such pleading does allege enough for insider status as an insider of an affiliate of a debtor-transferor, Minn.Stat. § 513.41(7)(iv), when one assumes as true the recitation of status as officer with a subsidiary of one of the named Debtors.43
Where the Trustee pleads such affiliate-insider status, he usually tries to augment it by alleging the possession of “control,” whether over the affiliates or over the Debtors. This is usually done in summary fashion, coupled with the allegation of membership in a “management team and inner circle” to support an allegation of de facto “control of the debtor.” To similar attempted effect, the O’Shaughnessy complaint, quoted previously, pleads the status of “control person of’ a Debtor, which is alleged to have featured the ability “to exert influence over the Debtors and attain (sic) [the] excessive Transfers.” As to such defendants, the only fact pleading is this unspecified “close relationship” to a referent Debtor or Debtors, a eonnotative phrasing of an informal status that is supposed to equate without more to the historical de facto exercise of “control of the debtor.”
This sort of inferential jump in pleading makes sense for high corporate officers of a debtor itself, and probably for officers of an affiliate that is alleged to be operationally intertwined with a debtor. For instance, a chief executive officer by nature makes and executes decisions that affect the full range of a corporate entity’s operations. A CEO both is vested with control, and presumptively exercises it. That inferential process is entirely natural for the very top officer of a corporation; and it must apply absent specific pleading (responsive or otherwise) of figurehead or dummy status with a mere title.
For any other officer status with a debt- or or an affiliate, particularly ones outside the top recognized echelons of CEO or other management-officers, the terse pleading of an individual defendant’s membership in an “inside circle” or the maintenance of a close relationship with a debtor or its principal, coupled or not with the words “control” or influence, is only a “label or conclusion.” Here, if such an averment is directed toward an additional statutory-insider status as a person in control, it must be accompanied by some pleading of acts of real exercise of decisive control over one of the Debtors, or at least control over important, major functions of the Debtor’s business. To the extent that such pleading is lacking and there is no pleading of per se insider status as officer or director, a complaint does not plausibly state the case under Minn.Stat. § 513.41(7)(ii)(C) and that alternative claim of insider status may not be maintained under it.
3. Allegation of Membership in “Management Team and Inner Circle” as Basis for Non-Statutory Insider Status. Minn.Stat. § 513.41(7), in General.
For most or all defendants, the Trustee seemed to plead the more generalized status of non-statutory insider in the alternative to one or more of the other classes. For a small group, this appeared to be the only pleaded classification. The following *369is the most salient such pleading among the adversary proceedings still pending:
Defendant is the former Executive Vice-President of Sales for a number of Pet-ters entities, PGW, Petters Consumer Brands, LLC, Brand Management Americas, and Polaroid Corporation and the former Vice-President of Sales for RedTagOutlet.com, also a PGW subsidiary. He also was identified by Petters as a “Strategic Partner” with special access to Petters and his Associates and was an influential part of Petters’ and his affiliated entities’ management team and inner circle at all times relevant herein. By virtue of his close relationship with Petters, his Associates and the Debtors, Defendant was able to exert influence over the Debtors and attain excessive Transfers. Consequently, he is an insider within the meaning of Section 101(31) of the Bankruptcy Code.
Complaint Kelley v. Ratliff, ADV 10-4409, ¶ 45. This pleading lacks a basis for statutory-insider status, whether position- or control-derived. By its very wording, the identified position, “Executive Vice-President of Sales,” cannot denote the sort of control over general policy and full operations held by those in the status of director or upper officer. If the averments of this complaint could qualify for insider status at all, it would have to be under the rubric of non-statutory insider.
Because the cases have emphasized the fact-intensive nature of this classification, the Twombly/Iqbal standard clearly puts a premium on specificity in pleading for it. A bare recitation that a defendant had a favored spot on a “team” or “circle” speaks nothing to the nature of the challenged transfer or the surrounding transaction as arms-length or anomalous. It does not speak in any decisive way to the “closeness” of a relationship, or to the degree of true access or power derived from it. (After all, the “team” or “circle” around a charismatic but amoral schemer can include individuals who are not really in the know, who function only as “yes-persons,” whose actual interface with the action of corporate governance is sporadic or shallow, or who function as window-dressing toward a facade of inclusiveness and objectively-based decision-making. History features many examples of such.)
The fact-pleading for non-statutory insider status must go beyond a eonclusory recitation of such membership. As one alternative, there should be more specific allegations of the frequency, nature, setting, and quality of the interaction between the alleged insider-defendant and the Debtor and its governing principles. As to defendant Ratliff, that is satisfied by the allegation that he had “Strategic Partner” status, conferred by Tom Petters himself, and that this entailed both “special access” to Petters and his confederates (i.e., those individuals involved in the operation of the Ponzi scheme) and “influence over the Debtors” toward levering the challenged payments to him.
As importantly, the Trustee’s complaints against employee-defendants must also be measured as to the arms-length character of transfers made to defendants in the course of employment relationships, measured objectively, as another point of fact bearing on insider status. In their briefing, the employee-defendants argue that the Trustee’s pleading is devoid of such detail.
This is not entirely fair to the Trustee because the argument on this point focused exclusively on the complaints’ single paragraph that went specifically to insider status. It ignored the rest of the complaints’ text. In pursuing the avoidance of such transfers characterized as unwarranted bonus payments and overly-lavish compensation, the Trustee did include separate fact-pleading to support his case on constructive fraud: allegations that the magnitude of payments made at Tom Pet-*370ters’s direction was grossly in excess of the reasonable value of services that the employees had actually rendered to their employing Debtors. The adequacy of the Trustee’s pleading against employee-defendants on the reasonable equivalence of these values was analyzed in the second stage of the consolidated-issues presentation, and that pleading was ratified as to plausibility. Amended Second Memorandum [Dkt. No. 2018], 45-48.
Those same facts relate reasonably well to the issue of arms-length character or lack thereof, in the sense of normality versus anomality, as it bears on non-statutory insider status.44 To the extent that the Trustee averred that challenged payments significantly exceeded general norms for employee compensation or any other disbursement of an unusual character or amount, his pleading will meet muster for plausibility under the second consideration. And, such fact averments need not be in proximity to any more eonclusory assertion of a defendant’s insider status, or even feature a pleaded cross-reference between the relevant parts of the text.
4. Conclusions.
Thus, Ruling #11: For any defendant who was an employee of any Debtor or an affiliate of a Debtor, the Trustee adequately pleads the status of insider within the examples enumerated in MUFTA when he avers that such a defendant held the position of officer or director with a named Debtor in these cases; or with a named company identified as a subsidiary of such a Debtor and qualifying as an affiliate of that Debtor under applicable law. To plead the status of insider as a “person in control of’ a Debtor under applicable statute, an averment solely of that defendant’s membership in a “management team” or an “inner circle” formed by persons who were legally in control of a Debtor, is not sufficient; the Trustee must also plead additional facts going to the defendant’s actual exercise of decisive control over a Debtor or important, major functions of a Debtor. To plead insider status on grounds other than those enumerated in applicable statute, the Trustee must plead that a defendant had a status with, or access to, persons in control of a Debtor, with a corresponding close relationship and the opportunity to influence the decision-making for the Debtor’s activities, and coupled with specific allegations that the transfers to the defendant were not at arms length.
ISSUE # 12: ACTIONABILITY OF CLAIMS FOR UNJUST ENRICHMENT OR OTHER EQUITABLE REMEDIES ON SAME PLEADED FACTS AS CLAIMS FOR AVOIDANCE OF FRAUDULENT TRANSFER.
A. Introduction.
As an alternate substantive theory of recovery, the Trustee pleaded claims un*371der the rubric of equity against most or all of the defendants, specifically unjust enrichment or “equitable disgorgement.” He based these claims on an incorporation-by-reference of all the same fact allegations on which he brought his fraudulent-transfer claims, without pleading additional factual matter. An example of the text for these claims is found in his complaint against defendant David Baer:
107. At all times relevant hereto, all funds received by Defendant were part and parcel of the Ponzi scheme and were derived from monies fraudulently obtained by Petters and PCI and from other investors or participants in the Ponzi scheme.
108. Defendant, as the recipient of fraudulently obtained proceeds of the Ponzi scheme has no rightful or legitimate claim to such monies.
109. Defendant knowingly received monies from the Debtors and those monies were derived from the Ponzi scheme, and he was unjustly enriched through his receipt of the fraudulently obtained monies to the detriment of the PCI and PGW estates, and in equity and good conscience must be required to repay the proceeds received.
110. Defendant would be unjustly enriched to the extent he is allowed to retain the monies and proceeds received during its participation in the Ponzi scheme.
111. Defendant must, therefore, in equity be required to disgorge all proceeds received through the operation of the Ponzi scheme, so as to allow the Trustee to distribute in equity any such ill-gotten gains among all innocent investors and creditors of PCI and PGW.
Complaint, Kelley v. Baer, ADV 10-4370, ¶¶ 107-111.
The Trustee’s assertion of these claims generated a welter of arguments for dismissal from the defense.45 In number and nature, most of them parallel the defense’s multiple attacks on the Trustee’s fraudulent transfer claims:
1. Standing: Does the Trustee assert standing to sue the defendants on unjust enrichment claims under 11 U.S.C. § 105(a), or derivative to the right of a creditor pursuant to 11 U.S.C. § 544(b)?46 If the latter, how does the Trustee’s assertion of standing meet governing Eighth Circuit precedent, i.e., In re Ozark Rest Equip. Co., 816 F.2d 1222 (8th Cir.1987)? And if he does, must the Trustee identify a specific creditor from which he derives standing, and is he required to name a creditor that was injured by the specific transfers the Trustee would have avoided, i.e., that had an unpaid claim against a Debtor at the very time of the transfer?
2. The Scope of Asserted Remedy: If the Trustee has a platform for derivative standing to sue any particular defendant under § 544(b), is a claim for monetary relief on the ground of unjust enrichment the sort of right of action with which § 544(b) vests him? Put another way, does the recovery of a money judgment equate to the avoidance of a transfer of an interest of the debtor in property that is *372specified as the remedy that § 544(b) vests in a trustee?
3. Adequacy of Pleading: Is the Trustee required to plead that a defendant acted illegally or unlawfully in receiving the subject transfers? Need the Trustee plead knowledge on the part of a defendant-transferee, that it was receiving something of value to which it was not entitled?
4. Actionability of Transfers Received Pursuant to Contract: May a party claiming to be aggrieved under an unjust-enrichment theory, on account of past third-party transfers made by its debtor, recover from a transferee that received the transfers pursuant to a contract, which the transferee asserts to have been regular on its face and valid and legally enforceable at that time?
5. Timeliness of Suit: Though there is no dispute that the Trustee’s unjust enrichment claims are subject to a six-year limitations period under Minn.Stat. § 541.05, Subd. 1(1), which began at the time the subject transfers were made,47 was this period subject to tolling under the fraudulent concealment doctrine, on account of the clandestine activity of Tom Petters and his confederates in concealing the Ponzi scheme?
6. Defense of In Pari Delicto: Are the Trustee’s claims for unjust enrichment barred by the doctrine of in pari delicto?
7. Equitable Remedies and Legal Remedies: Is the Trustee barred from asserting the equitable remedy of unjust enrichment as to the same transfers he seeks to have avoided as fraudulent transfers, a remedy at law, where he relies on the very same facts in invoking both remedies?
B. Resolution (Occam’s Razor in Action).
Airing, examining, and ruling on these issues would have required another lengthy memorandum for them alone. It would have been another grueling task of adjudication. And, the effort would have been put to a theory of recovery that was only asserted in the alternative, a lawyerly hedge on the part of the Trustee and his counsel.
That burden was eased by the issuance of an opinion from the Eighth Circuit Court of Appeals only seven weeks ago. United States v. Bame, 721 F.3d 1025 (8th Cir.2013) specifically addresses the propriety of jointly invoking the very same bank of remedies, in litigation with a comparable posture, against the recipient of transfers from a plaintiffs debtor. This is the very same subject as the seventh subsidiary-issue just summarized. The treatment of it in Bame preempts the Trustee’s whole position and the rest of the defense’s contentions alike. It cuts down the whole controversy between the parties at bar, and enables a complete resolution right now.
Bame was an action by the United States to redress the erroneous disbursement of over half a million dollars to an individual, Fred Bame, in the form of an income tax refund to which he was not entitled. Fred Bame negotiated the check and dissipated the funds quickly. He used a major part of the money to settle third-party debts owed by his ex-wife Jo Anna Bame. (The marriage between Fred and Jo Anna had been legally dissolved four years before the issuance of the erroneous tax refund. But, per the Eighth Circuit’s recitation of facts, the two clearly had a *373continuing personal relationship and cooperation.)
Fred Bame died in 2007. The Government tried to recoup its loss through the probate process. That effort was unavailing. It then pursued a recovery from surviving ex-wife Jo Anna and two business entities owned by her. (The corporate defendants were associated with the operation of a resort in Canada. The resort had previously been owned by Fred and Jo Anna, successively, in their individual capacities.)
The Government’s lawsuit was styled in ways familiar to the participants in the PCI/PGW litigation: claims in the alternative for avoidance of fraudulent transfers and for recovery under equitable theories — money had and received and unjust enrichment. Jo Anna’s motion to dismiss the fraudulent transfer count on adequacy of pleading was denied. United States v. Bame, 778 F.Supp.2d 988 (D.Minn.2011). The parties later brought cross-motions for summary judgment on all counts. The district court granted summary judgment for the United States on the unjust enrichment claim. It “did not discuss or rule on the statutory claims, noting only that they ‘raised several issues’ which the court ‘need not address.’ ” United States v. Bame, 721 F.3d at 1028.
Jo Anna appealed on alternate arguments. The first was that summary judgment had been inappropriately granted due to the existence of triable fact issues on her affirmative defenses (good faith and legal “entitlement to the money”). The second was that the equitable remedy of unjust enrichment was unavailable to the Government on the facts pled in common for all counts, in light of the simultaneous assertion of other claims that sounded in law.
The Eighth Circuit agreed with Jo Anna on her arguments under Rule 56(c). It held that the record contained enough evidence to support findings in her favor on both of her defenses. The grant of summary judgment was reversed and the matter was remanded for further proceedings. 721 F.3d at 1029.
But, the Bame panel went on to discuss Jo Anna’s alternate argument for appeal, and at some length. It “point[ed] out the following regarding the unjust enrichment claim ... [for] consideration] by the district court on remand” — even though the reversal on procedural grounds meant that the circuit court “need not resolve [the second issue] at this time.” 721 F.3d at 1029-1030.
The ensuing discussion is trenchant.
It starts with Minnesota law’s recognition of a fundamental precept of equity jurisprudence — that a “party may not have equitable relief where there is an adequate remedy at law available.” 721 F.3d at 1030 (citing ServiceMaster of St. Cloud v. GAB Bus. Servs., Inc., 544 N.W.2d 302, 305 (Minn.1996)). It then cites a half-dozen recent decisions in which the United States District Court for the District of Minnesota applied this general precept, to dismiss claims for monetary recovery on unjust-enrichment theories where various statutes provided the plaintiff with remedies at law on the same facts. Id. These included cases where the alternate pleaded claims at law were based on MUFTA. Id. (citing, inter alia, Kelley v. College of St. Benedict, 901 F.Supp.2d 1123, 1132 (D.Minn.2012)).
Directly to the point of the Trustee’s rejoinder at bar, the Bame court observed that “[t]he issue here is not one of pleading” in the alternative, as a strategic hedge to preserve an equitable remedy for invocation after the failure of one at law. 721 F.3d at 1031. Rather, “it is the existence of an adequate legal remedy that pre-*374eludes unjust enrichment recovery.” Id. (emphasis added). Even more pointedly,
... [i]t should make no difference that [a plaintiff] pleaded and pursued its statutory claims.... It would be anomalous to allow unjust enrichment recovery, despite law to the contrary, merely because the plaintiff fashioned the pleadings in a certain way.
Id. And finally, the abstract applicability of statutory fraudulent transfer remedies to such common events and facts clears equitable remedies off the field, even if the statutory remedies are time-barred by the statute of limitations. This includes the remedy of unjust enrichment. Id.
Yes, these pronouncements are dicta. However, they are a powerful advisory endorsement of a straight line of authority in the very trial court to which remand was being made. They are an unmistakable exhortation to track with that authority consistently, after the specific, procedurally-oriented mandate of the remand was addressed as a preliminary. Id. (“But all matters relating to the unjust enrichment claim are for the district court’s further consideration on remand.”)
As one might say colloquially, there is dictum, and there is dictum. That is to say, on the one hand judges do make offhanded observations on the legal import of rulings at bar, to hypothetical extensions of the facts before them. They do this sometimes to better frame or illustrate the disposition they are about to make, by a contrast. They sometimes use it to highlight a threshold principle that is not itself at issue. Often judicial dictum is only an engagement in abstract, semi-speculative observations, on subject matter that has become a preoccupation for the presiding judge through the intensity of parsing the more specific matter at hand.48
But on the other hand, judges do have to anticipate the next dispute upcoming in the very litigation at bar before them, if it is not terminated by rulings on the procedure at hand. They sometimes try to channel the handling and presentation of those issues by extending the rulings at hand. This can be a valid warrant to make observations that are technically dictum. It has its justification in the judicial duty of case administration, not to mention a judge’s personal impulse to simplify future tasks in cases that have already been difficult and time-consuming. And unquestionably, judges have an obligation to rein in the accrual of public and private costs toward the resolution of large controversies. Nudging the parties in a particular, precedent-structured direction can promote that. Dictum of this sort is always given with the tacit understanding that a final, binding ruling will await an opportunity for the parties to submit persuasion to the contrary. However, when observations like this are presented in a careful form and a firm, principled, and supported manner, they should be heeded.
Here, the extended statements in Bame not only should be heeded; they must. The reasoning of the discussion is that tight, as to the unavailability of alternate equitable remedies due to the primacy of pleaded legal remedies. It is also founded in clear, indisputable, and longstanding case law authority.
Under Bame’s reasoning, only one ruling is possible and only one ruling is necessary. It moots all of the defense’s other contentions with the Trustee’s, claims for unjust enrichment.
*375Thus, Ruling #12: The Trustee may not simultaneously maintain his claims for avoidance of transfers as fraudulent under statute, and his claims for monetary recovery under the equitable theory of unjust enrichment, as to the same transfers and on the same pleaded facts. Because the equitable remedy is not available to the Trustee due to the existence of fraudulent transfer remedies in his favor and his pleading and maintenance of those claims, all of his unjust enrichment claims against all defendants must be dismissed.
CONCLUSION
The rulings on this third and final group of issues are reprised as follows:
Ruling # 8: The Trustee is not barred from invoking fraudulent-transfer remedies as to transfers of money made by the Debtors, in repayment to those defendants that had previously lent money to the same Debtors, merely because the payments were made on transactions documented as loans and treated as such by the parties thereto. As long as the Trustee adequately pleads that the transfers in loan repayment were made in furtherance of a Ponzi scheme, they are actionable as actually- or constructively-fraudulent.
Ruling #9: The Trustee cannot exercise the power of avoidance under the constructive-fraud theories of applicable statute as to any Debtor’s repayment to any defendant of principal on a loan or other extension of credit previously made by that defendant to the Debtor, because that repayment gave reasonably equivalent value to the Debtor via the satisfaction of a preexisting debt on a claim for restitution. However, on behalf of the appropriate bankruptcy estate, the Trustee may avoid, as a constructively-fraudulent transfer within the scope of 11 U.S.C. § 548(a)(1)(B) and MinmStat. §§ 513.44(a)(2) and 513.45(a), that portion of any payment to any such defendant that was in excess of the amount of principal paid, whether denominated as profit, interest, or otherwise, because the paying Debtor did not receive a reasonably equivalent value from the defendant in exchange for the payment.
Ruling # 10: The defense of receipt for value in good faith under 11 U.S.C. § 548(c) and Minn.Stat. § 513.48(c) is not available to the lender-defendants, as to any amount paid to them by the Debtors in interest or on any account other than repayment of principal, because the Debtors did not receive “value” in return for the payments thus made. The same defense may be available to the lender-defendants as to an avoidance of repayments of principal that the Debtors made to them, upon invocation by responsive pleading and proof that they received such payments in good faith. The Trustee had no duty to anticipatorily plead facts going to the issue of the lender-defendants’ receipt in good faith. His complaints are not deficient as to this issue.
Ruling #11: For any defendant who was an employee of any Debtor or an affiliate of a Debtor, the Trustee adequately pleads the status of insider within the examples enumerated in MUFTA when he avers that such a defendant held the position of officer or director with a named Debtor in these cases; or with a named company identified as a subsidiary of such a Debtor and qualifying as an affiliate of that Debtor under applicable law. To plead the status of insider as a “person in control of’ a Debtor under applicable statute, an averment solely of that defendant’s membership in a “management team” or an “inner circle” formed by persons who were legally in control of a Debtor, is not sufficient; the Trustee must also plead additional facts going to the defendant’s actual exercise of decisive control over a Debtor or important, major functions of a Debtor. To plead insider status on *376grounds other than those enumerated in applicable statute, the Trustee must plead that a defendant had a status with, or access to, persons in control of a Debtor, with a corresponding close relationship and the opportunity to influence the decision-making for the Debtor’s activities, and coupled with specific allegations that the transfers to the defendant were not at arms length.
Ruling #12: The Trustee may not simultaneously maintain his claims for avoidance of transfers as fraudulent under statute, and his claims for monetary recovery under the equitable theory of unjust enrichment, as to the same transfers and on the same pleaded facts. Because the equitable remedy is not available to the Trustee due to the existence of fraudulent transfer remedies in his favor and his pleading and maintenance of those claims, all of his unjust enrichment claims against all defendants must be dismissed.
. A Second Memorandum was originally issued on July 12 under Dkt. No. 2005. Its text was amended on motion of the Trustee, which was unopposed. The sole effect was to add one word at two points, which the Trustee believed was crucial to the meaning of the particular ruling. Further references will be to the amended version.
. For this memorandum, the order of the 8th and 9th issues is in reverse of the sequence set in the procedures order for the consolidated-issues treatment [Dkt. No. 961]. Thematically and logically, the reversal of this part of the discussion makes more sense.
. Contrasted with the cases at bar, the debtor in Sharp Int’l actually did have a real, functioning business that dealt in real goods. It was just that there were not as many goods, or as much business, as the debtor there represented to its lenders.
. The following summary of pleaded facts is taken from 403 F.3d at 46-48.
. In March, 1999, State Street was taken out of the debtor-company's debt structure completely. The balance of the company's debt to State Street was shifted over to the personal liability of the company’s principals, by new guarantees.
. The Sharp Int’l trustee's third theory of recovery — aiding and abetting a breach of fiduciary duty by the debtor and its principals— was treated at greater length by all three courts. 403 F.3d at 48-53. Those rulings are not relevant here.
. This decision was issued while its author was a member of the First Circuit Court of Appeals, and before his appointment to the Supreme Court.
. They also cite analogous pronouncements from state courts, including the Minnesota Supreme Court: Johnson v. O’Brien, 275 Minn. 28, 31, 144 N.W.2d 720, 721-722 (1966); and, e.g., Ultramar Energy v. Chase Manhattan Bank, N.A., 191 A.D.2d 86, 599 N.Y.S.2d 816 (1993).
. As to the nature of the “diverting” business when conducted in a bona fide fashion, see Amended Second Memorandum [Dkt. No. 2018], 21 n. 27, and In re Polaroid Corp., 472 B.R. 22, 36-37 (Bankr.D.Minn.2012).
. Rules 8 and 9, with the gloss of the Supreme Court’s decisions in Bell Atlantic Corp. *350v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), set the standard for the sufficiency of fact-pleading for a fraudulent transfer action. Amended Second Memorandum [Dkt. No. 2018], 4-9.
. Only one of these three opinions came out of litigation in a bankruptcy case. The other two were generated by “private” fraudulent transfer actions commenced by the frustrated takeout lenders, or perhaps other unpaid creditors, and the transferors were not in bankruptcy.
. In Boston Trading Group, the court did recognize the possible availability of avoidance as a preference for the transfer before it, in a hypothetical bankruptcy case in which the transferor would be the debtor. 835 F.2d at 1511. However, the observation was purely academic, because the court was dealing with a fraudulent-transfer action commenced in a United States district court by a receiver for the transferor. And, nowhere in Boston Trading Group is there the categorically-exclusive statement that the lender-defendants use here.
. Of the three opinions, only B.E.L.T. used any wording evocative of the characteristics of a Ponzi scheme; and it was only a reference in passing to how the debtor before it was said to have “prolonged the fraud, borrowing more money until it finally collapsed.” 403 F.3d at 478. The verbs for those participles often feature in the description of a Ponzi scheme; but there is no mention in B.E.L.T. of fact pleading as to the exploitation of any creditors other than vague "other lenders." 403 F.3d at 476. The duration of relevant events in that case is identified at around two years. And there is no mention of the complicated multi-party turnover of funds that is the hallmark of a Ponzi scheme. B.E.L.T.'s author makes a side-reference to ‘'selling] a car at the market price to Charles Ponzi” to make a point in distinction. 403 F.3d at 477. However, this is a stylistic flourish, a sort of exaggeration-to-make-the point: even in the more egregious context of a Ponzi scheme, some transfers of money made by the purveyor may not be subject to later legal challenge in redress of the purveyor's fraud. The text of the opinion itself does not at all support the lender-defendants' characterization of B.E.L.T. as a Ponzi scheme case. By contrast, the fraud *352that would have been requisite to actionability in Sharp Int’l, B.E.L.T., and Boston Trading Group was necessarily more limited in scope and victim(s). Although significant in value, the harm was limited to a smaller number of mulcted lenders that saw themselves as the goats for the prior creditor paid off and taken out. And in each case only one party received the benefit of the debtor-transferor's more circumscribed machinations.
. Definitionally, the Bankruptcy Code conceives of creditors as having pre-petition claims against the debtor, 11 U.S.C. § 101(10)(A); and claims are conceived of as ”right[s] to payment,” whether legal or equitable, 11 U.S.C. § 101(15)(A).
. See Amended Second Memorandum [Dkt. No. 2018], 26-27; In re Polaroid Corp., 472 B.R. at 35-36.
. Sharp Infl does treat its constructive-fraud counts more directly under a different rubric, the whole question of value received in exchange for the payment, or not. 403 F.3d at 53-56. (The lack of a balancing value received by the debtor-transferor is an essential element of any case-in-chief for avoidance under a constructive-fraud theory.) Sharp Infl applied the New York statute's wording “without fair consideration" as used in the Uniform Fraudulent Conveyance Act, rather than “for less than reasonably equivalent value” as used in both the federal and Minnesota statutes. There may be a qualitative conceptual difference between the two forms of language. However, the thought is cognate enough for present purposes. See Phelps and Rhodes, supra p. 10, at § 3.01 [3], at 3-3 n. 2. This point of fact is germane to the next matter in the order of consolidated-issues business; it is not relevant to this one.
. The wording was finalized by the court in the procedures order, but it was formulated with prior input from the parties. When the issue was presented later for decision, the Trustee's counsel insisted that his client had never conceded that any "debt” was "satisfied” by any lender-defendant’s payment. This dithering could have introduced yet another complication; but in the end the notion of a. full "satisfaction” is irrelevant.
. The Bankruptcy Code’s definition is prefaced by the words ”[i]n this section — ,” i.e., all of § 548. The Minnesota statute's provision is right in the middle of MUFTA. It is a simple declaration that logically applies to the whole statute and nothing else.
. Yes, it was suggested that a dispositive treatment of value and reasonable equivalence was premature at this point in the litigation, in remarks made for the treatment of Issue # 7 in the Amended Second Memorandum [Dkt. No. 2018], 41-45 and n. 47. On a deeper analysis, and with better substantive focus on extant case law, it became clear that the issue could be reached now.
. Some of the components of Scholes's sequential analysis featured first in In re Independent Clearing House Co., 77 B.R. 843 (D.Utah 1987), in the construction given to parts of the constructive-fraud provisions of 11 U.S.C. § 548(a) for application to a failed Ponzi scheme. The overall conceptualization of parties, their status as conceived in equity, and their resultant rights and liabilities is original to Scholes.
.Among those not relevant are the standing and empowerment of a court-appointed receiver to invoke fraudulent transfer remedies on the ground of the fraud of the person and entities in receivership; the availability of the in pari delicto defense; the avoidability of an individual purveyor’s charitable donations and his payment of support obligations to an ex-spouse from monies traceable to the Ponzi scheme's operation; and evidentiary matters.
. Judge Richard Posner, then Chief of the Seventh Circuit, is the author of Scholes v. Lehmann.
. This is pretty much the way the Petters-related cases would be left, were the lender-defendants’ arguments adopted in their entirety. In oral argument, counsel blithely exhorted the court to dismiss all fraudulent-transfer claims against the lender-defendants, and "leave the Trustee with his preference actions.” The record throughout these cases suggests that the tightening of the financial markets in late 2007 left Tom Petters with dwindling sources of capital. And, apparently, the same systemic contraction left lenders that entered the Petters operation in 2006-2007 locked in. Thus, most likely, there is relatively little for the Trustee to recover in avoidance of preferential transfers in comparison to the end-shortfall at the scheme’s collapse, given the maximum one-year reach-back under 11 U.S.C. § 547(b)(4).
.From a real-world perspective, there is no reasonable way to deny the attribution. For instance, there is little doubt that all of the lender-defendants here would have gone to law and sued Tom Petters and the Debtors for the very same relief, had they not been paid off and had they gained an inkling of the true state of affairs. A number of such actions were pending when the receivership over Tom Petters and his assets was established in the district court. Attempts by those creditor-plaintiffs to return to their original forums of suit were rejected, in favor of the central, global forums of receivership and bankruptcy.
. The latter as in the Madoff scheme — or, for that matter, in the original scheme purveyed by Charles Ponzi almost a century ago.
. The court in Perkins v. Haines was addressing a posture of claims and defenses different from the one here. There, a suing trustee was seeking to entirely bar defendants who had been equity investors from invoking the statutory notion of "value” for their infusions and the repayments to them, for their defense against the trustee’s case in chief. The trus*358tee's argument was rejected with, the quoted pronouncement. This was done on the observation that the Ninth Circuit, the only one to treat this argument to that point, had “rejected any attempts to distinguish between the forms of the investment” on an application of the Scholes analysis. Id. (citing In re AFI Holding, Inc., 525 F.3d 700, 708-709 (9th Cir.2008)). One is tempted to say that the obverse application should be allowed here, on the principle of "sauce for the goose" and nothing else. But there is a better reason for not excepting lending-case infusions from the application of Scholes: it would elevate form over substance to inequitable effect, when there is no defensible distinction to be drawn on the undeniable equitable considerations that so strongly structured the rationale in Scholes. There is also no distinction as to the expectancy of repayment between an outright lender and an account-based or transaction-based "investor” with a contractual right to return of principal.
. Phelps and Rhodes do identify a difference in the case law, as to whether only the raw amount of original principal investment alone is to be deemed as reasonably equivalent, or whether the investor should get additional credit against avoidance on a consideration of the time value of money. See Phelps and Rhodes, supra at p. 10, § 3.02[3][f], at pp. 3-18 to 3-19. This issue is not presented by the parties here.
. These difficulties have been recognized in the context of fraudulent-transfer litigation in the case law; inter alia, In re Armstrong, 141 F.3d 799, 802 (8th Cir.1998).
. The relevant text of these statutes is:
... a transferee ... of such a transfer ... that takes for value and in good faith ... may retain any interest transferred ..., to the extent that such transferee ... gave value to the debtor in exchange for such transfer....
11 U.S.C. § 548(c) (the prefatory exception, "... to the extent that a transfer ... voidable under 11 U.S.C. § 548(a) is voidable under [11 U.S.C. §§ ] 544, 545, or 547,” is irrelevant to the issue at bar), and
[a] transfer ... is not voidable under [Minn.Stat. § ] 513.44(a)(1) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee....
. See Amended Second Memorandum [Dkt. No. 2018], 24-33 for discussion on the presumption and the use of it for this litigation.
.But then there was the Trustee’s substantive argument, that only "innocent” lender-recipients should be allowed to retain a portion of payments received, with the insinuation that lender-defendants had lacked good faith in taking payment when the terms of the underlying deal had been so far from prevailing market norms that the lenders' mere participation evidenced their complicity with the Petters scheme. The Trustee premised this thrust on citations to prominent authority, e.g., Donell v. Kowell, 533 F.3d at 772; and In re Bernard L. Madoff Inv. Secs., LLC, 440 B.R. 243, 262-263 (Bankr.S.D.N.Y.2010) and other cases cited therein. This gambit not only contained an inflamed hornet's nest; it tipped it right over. Luckily, it need not be addressed now.
. And because the receipt of "value” alone is the first element of the defense, the element is satisfied. The matter of reasonable equivalence is irrelevant.
. In re Churchill Mortg. Inv. Corp., 256 B.R. at 676, aff'd, 264 B.R. at 308; In re Image Masters, Inc., 421 B.R. 164, 183 (Bankr. E.D.Pa.2009).
. As to empowerment of the Trustee under § 544(b), to wield avoidance powers under state law, see First Memorandum [Dkt. No. 1951] at 8, n. 6, 494 B.R. at 421 n. 6, and Eighth Circuit opinions cited there. The provision of MUFTA that gives special treatment to claims against insider-defendants is:
(b) 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.
Minn.Stat. § 513.45(b).
. Many of the employee-defendants, including some alleged to have been insiders, engaged in mediation with the Trustee during the course of the consolidated-issues procedure, and quite a few settlements were reached. Fewer than a dozen adversary proceedings remain pending against employee-defendants alleged to have been insiders. In general, the amounts the Trustee seeks to recover from these remaining defendants are large; and the proceedings remain open and actively defended.
. In other contexts, the Eighth Circuit has expressly favored harmonizing the judicial construction of the states’ enactments of the Uniform Fraudulent Transfer Act with the construction of 11 U.S.C. § 548, where the wording of applicable substantive provisions is closely cognate. See discussion in Amended Second Memorandum [Dkt. No. 2018], at 24 n. 32.
. The statutory text that applies to debtors that are individuals or partnerships is not relevant here, and hence is not quoted.
. The term ''insider” includes—
al if the debtor is a corporation—
(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;
(v) general partner of the debtor; or
(vi) relative of a general partner, director, officer, or person in control of the debtor;
(E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and
(F) managing agent of the debtor. 31
. Insider status is also assigned to defendants who have a familial relationship with a possessor of such a legal status with a corporate debtor (11 U.S.C. § 101(31)(B)(vi)). This type of insider status is not implicated in any of the adversary proceedings here.
. The Winstar Commc’ns court appropriately reached this conclusion from the incongruity that would otherwise arise from the full content of the statute. Were a high degree of control required for non-statutory insider status, the option for statutory insider status as "a person in control of the debtor,” § 101(3 l)(B)(iii), would render meaningless the nonexclusivity of the statutory enumeration. 554 F.3d at 396.
. While fairly terse in the quoted allegations, the Baer complaint does simultaneously plead toward all three alternatives for insider status.
. The quoted paragraph does not include an allegation that any of the named companies (for which defendant O’Shaughnessy is alleged to have served as an officer), were subsidiaries of any of the named Debtors. The record in other litigation in these and the Polaroid Corporation cases suggest that the full ownership of the Polaroid Corporation and its affiliates was traceable up into Debtor PGW.
. A subsidiary in which a debtor in bankruptcy holds at least 20% of the outstanding voting securities is an “affiliate.” 11 U.S.C. § 101(2)(B).
. An observation as to a nuance that some defendant will probably raise later: yes, the notion of a transaction not at arms-length can carry the connotation of overreaching, excessive influence, manipulation, on up to overt coercion. And, of course, such exploitation logically presupposes an inducement that overwhelms resistance, or some other manipulative exercise of control over the transferor. Such control likely was not possessed by administrative-employee recipients of bonuses, or even some specialized corporate officers within the Petters enterprise structure. In context, however, the use of the phrase "arms-length” for this consideration is more appropriately read as a reference to the character of the transfer itself, i.e., whether it falls within a range of normality for similar surrounding circumstances, than it is to the motive power exercised to bring about the transfer. Of the four examples of transactional backdrop cited for non-statutory insider status at pp. 367-68, supra, only one involved a formal legal structure through which threats could convincingly be enforced and decisive de facto control could be exploited.
. Most of these arguments were best and most fully articulated by the defendants in Kelley v. General Electric Capital Corp. [ADV 10-4418] and Kelley v. Westford Special Situations Master Fund, L.P., et al [ADV 10-4396]. However, when it came time to brief their own motions and then to line up for the consolidated-issues treatment, numerous defendants took benefit from the work of these heavy lifters and adopted their arguments by reference.
. For the nature of the vesting of standing under § 544(b), see First Memorandum [Dkt. No. 1951], 8 n. 6.
. Bonhiver v. Graff, 311 Minn. 111, 248 N.W.2d 291, 296 (1976); Block v. Litchy, 428 N.W.2d 850, 854 (Minn.Ct.App.1998).
. One is minded of H.L. Mencken’s oft-quoted observation: "A judge is a law student who marks his own examination papers.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496378/ | MEMORANDUM OPINION AND ORDER
CYNTHIA A. NORTON, Bankruptcy Judge.
On the 10th day of April 2013, the Court heard opening statements and took evidence on the remaining unresolved issues with respect to the claims of Plaintiff, U.S. Bank National Association, in its capacity as trustee (the “Trustee ” or “Plaintijf”)oi the IBC Creditors’ Trust (the “Trust ”) against Defendant, Premium Food Sales, *380Inc. (“Premium”). Plaintiff appeared by and through its counsel, Andrew J. Nazar and Brendan L. McPherson of Polsinelli Shughart PC, and in person through W. Terrence Brown, a member of the Trust’s Trust Advisory Board. Premium appeared by and through its counsel, Jeannie M. Bobrink and James F. Freeman of Swanson Midgley, LLC and by telephone1 through Donald Couture, its principal, with Irvin Schein, Premium’s Canadian counsel. There were no other appearances.
The Court, after reviewing the Memorandum Opinion of the Honorable Jerry W. Venters, now retired, (Docket No. 97) (the “Opinion on the Trustee’s Motion”), the Memorandum Opinion of this Court (Docket No. 123) (the “Opinion on Premium’s Motion ”), Plaintiffs Trial Brief and Motion in Limine (Docket No. 113), Premium’s Suggestions in Support of Motion and suggestions in Support of Disallowance of Interest both pre-and post judgment and Extraordinary means of collection (Docket No. 124), the Order on Plaintiffs Motion to Correct Clerical Mistake, (Docket No. 125) (the “Order Correcting Clerical Mistake ”), the Stipulation regarding admissibility of certain exhibits (Docket No. 128), reviewing the Court file, hearing the statements of counsel, considering the admitted exhibits and testimony and credibility of the witnesses, and being otherwise duly advised in the premises, FINDS, ORDERS AND ADJUDGES as follows:
PROCEDURAL BACKGROUND
1.The procedural background with respect to the Chapter 11 filing of Interstate Bakeries Corporation and related debtors (collectively, the “Debtor” or “IBC”), the creation of the Trust, and the filing of the Trustee’s original and bifurcated adversary proceedings to recover alleged preferential transfers against various defendants is set forth in a related matter, U.S. Bank National Association v. SMF Energy Corporation (In re Interstate Bakeries Corp.), 460 B.R. 222 (8th Cir. BAP 2011) and need not be repeated here. This adversary is the last of approximately 240 avoidance actions filed in connection with the IBC case.
2. The Trustee filed its bifurcated complaint in this Adversary against six unrelated defendants on September 14, 2009. The Trustee has dismissed or taken judgment against five of the defendants, leaving only the transfers from the Debtor to Premium at issue.
3. In particular, the Trustee seeks to recover a portion of $412,240.00 in allegedly preferential transfers (the “Transfers ”) that the Debtor made to Premium in the 90 days before the Debtor’s bankruptcy petition date.
4. Following the Trustee’s Motion for Partial Summary Judgment (Docket No. 82) and briefing on the matter, the Honorable Jerry W. Venters, now retired, entered his Opinion on the Trustee’s Motion, granting the Trustee’s Motion “in all respects.” Specifically, Judge Venters found:
The uncontroverted facts establish judgment as a matter of law that: 1) the Transfers are avoidable under 11 U.S.C. § 547(b); 2) Premium cannot shield the Transfers from avoidance under § 547(c)(1); 3) Premium’s ability to shield the Transfers from avoidance under § 547(c)(2) and (c)(4) will be determined at the trial ... and 4) any credit for new value will be calculated using the delivery dates and amounts set forth *381in numbered paragraph 7 [of the Opinion],
5. Before trial, Premium moved for summary judgment with respect to its defenses. This Court denied Premium’s Motion in the Opinion on Premium’s Motion, and this matter proceeded to trial on Premium’s §§ 547(c)(2) and (c)(4) defenses. The Court’s Opinion on Premium’s Motion outlines much of the relevant and binding law with respect to Premium’s §§ 547(c)(2) and (c)(4) defenses.
6. In the Court’s Opinion on Premium’s Motion, the Court determined that, to prevail on its ordinary course of business defense under § 547(c)(2), Premium must meet all three prongs of the pre-BAPCPA version of § 547(c)(2).2 The Court determined that the Trustee had conceded that Premium established the first prong under subsection (A), i.e., that the debt was incurred in the ordinary course of Premium’s and the Debtor’s business or financial affairs.
7. The Court also granted the Plaintiffs motion for Order Correcting Clerical Mistake, which modified and corrected the chart in Paragraph 7 in the Court’s previous Opinion on Trustee’s Motion affecting the new value defense asserted by Premium.
FINDINGS OF FACT
§ 547(c)(2)(B)/Subjective Ordinary Course
8. Prior to trial, the parties agreed on a Joint Stipulation (Docket No. 128). In the Stipulation, the parties agreed on data relating to the timing of payments for both the 90-day preference period (the “Preference Period”) and the approximate nine month period of time prior to the Preference Period (the “Pre-Preference Period ”).
9. Premium’s only witness, Mr. Couture, identified and addressed briefly Premium’s various exhibits that related to Preference Period and Pre-Preference Period data, including Premium’s Exhibits A, C, and H-K. The Court admitted each of these exhibits.
10. The Trustee’s only witness, Mr. Brown, identified and addressed Preference Period and Pre-Preference Period data from his Expert Witness Report, admitted by this Court as Exhibit 1. The Court did not find that Mr. Brown was an “expert,” however, but that his testimony related to a summary of dates and calculations was helpful to the Court and therefore should be admitted in that light.
11. The Court finds that the substance of the data from the parties’ competing exhibits and the Joint Stipulation is the same. The only difference in presentation of this data was the “days to pay” or “payment gap” data. The Trustee’s presentation of this data, through its witness Mr. Brown, was calculated from the invoice date3 to the deposit date of a check by Premium. Premium, in its Exhibit C, presented a “payment gap” from the invoice due date (i.e. 15 days from the invoice/shipment date) to the check date and the deposit date.
12. Premium’s presentation and analysis of this data was based on several iterations: (i) Exhibit H — is a combination of new value and ordinary course analysis, using the Transfer (Received) Date which Premium estimated based on a two day *382subtraction of the deposit date of the checks4 and mistakenly uses the wrong action date to organize its data; (ii) Exhibit I — is the same data as Exhibit H, but uses the Transfer Date (i.e. Check Date) instead of the Transfer (Received) Date and indicates one payment as not subject to the ordinary course defense; (in) Exhibit J — is the same data as Exhibit I, but mistakably excludes characterization of certain data and characterizes more payments as not subject to the ordinary course defense without explanation as to why; and (iv) Exhibit K — is the same data as Exhibit J (including the mistaken omission) but uses the Transfer (Deposit) Date, instead of the check date and indicates more payments as not subject to the ordinary course defense, again without explanation as to why.
13. It was apparent that Premium’s charts were prepared by Premium’s counsel, and that Mr. Couture did not have actual knowledge of the assumptions or methodology used to prepare the charts.
14. Given the lack of explanation, including specifically why Premium deemed some payments to be “preference payments,” while others are not, along with the lack of certain data on Premium’s charts, the Court finds that Premium’s charts are not helpful to the Court.
15. Premium offered the Court no analysis on the difference in timing of payments from the Pre-Preference Period to the Preference Period. Rather, Mr. Couture offered only that he noticed some delay in the receipt of payments in the Preference Period. Premium provided no report with respect to the timing of payments, either expert or lay, prior to the Court’s deadlines in its Amended Scheduling Order.
16. The Trustee, through Mr. Brown, offered several useful mechanisms for this Court to compare the Pre-Preference Period and the Preference Period, including the difference in average days to pay in the Pre-Preference Period to the Preference Period: 31 to 41, for a 10 day shift in timing. Mr. Brown quantified the percentage shift in timing as 32 %. Mr. Brown also testified that the entire Pre-Preference range of days to pay was 11 to 52 days, whereas in the Preference Period, it was 25 to 62 days.
17. Although Premium’s charts are not helpful to the Court with respect to whether the Transfers were subjectively ordinary, the Court did find helpful the credible testimony of Mr. Couture.
18. Mr. Couture testified that he is the sole full-time employee of Premium, and that Premium is a honey broker based in Toronto, Canada. He stated that there are only 3 or 4 honey brokers such as Premium in Canada, perhaps 50 wholesalers in the United States, and that they are generally small, family run businesses.
19. Mr. Couture testified that Premium operated under quarterly contracts with its customers, including the Debtor.5 Premium quoted honey prices to the Debtor’s individual bakeries. The bakeries, through the Debtor, then contracted to buy honey from Premium on an as-needed *383basis at the set price for the quarter. The Debtor called or faxed a request for honey to Premium, Premium contacted a warehouse to ship the honey, and with the shipment Premium issued an invoice. Premium had been doing business with Debt- or since sometime in 2003, and the exhibits reflect numerous transactions between September 2003 through the Preference Period and even after the date of filing.
20. Premium’s invoices with the Debtor provided for payment on a “net 15 days” basis.
21. Premium and the Debtor did not follow the invoice terms.
22. Payment times varied, according to the information presented in both parties’ exhibits.
23. Mr. Couture did not keep a record of when Premium received checks from the Debtor, but Mr. Couture usually deposited the check the day they arrived, unless it was a weekend.
24. Mr. Couture acknowledged at trial that, during the Preference Period, Debt- or’s payments were later than they were in the Pre-Preference Period, but not so significantly later that he made payment demands or had concerns. He testified that during the Preference Period, the invoices were sent to the Debtor’s headquarters instead of the Debtor’s regional bakeries, so he presumed that was the reason for the delay. Mr. Couture believed the payments were later because of Debtor’s change to a centralized payment system.
25. Specifically, throughout the course of Debtor’s and Premium’s business relationship, Debtor’s payments to Premium were, on average, made in 31 days during the Pre-Preference period.
26. During the Preference Period, the payments were, on average, made within 41 days, an increase of 32%, according to Mr. Brown’s testimony and the Court’s own calculations.
27. Although Mr. Couture communicated with the Debtor during the Preference Period about the longer period of time it was taking for payment, such communication would be expected and not unusual when a company changes its payment practices.
28. The Court finds Mr. Couture’s testimony that he did not make payment or collection demands on the Debtor during the Preference Period to be credible. Plaintiff, on the other hand, produced no evidence of collection efforts or threats by Premium during the Preference Period or otherwise, and there is no evidence that Premium took advantage of or was even aware of Debtor’s deteriorating financial condition.
29. Thus, throughout the course of what the Court finds to be their longstanding relationship, the Debtor consistently made late payments to Premium, despite the fact that the terms of the contract were “net 15.” The form and tender and varying amounts of the payments did not change and were the same during the Pre-Preference and Preference Periods.
30. The Court finds that Debtor and Premium did not follow the invoice terms; that the Debtor’s payments to Premium were always generally late, such that late payments constituted the ordinary course of business between the parties. Although the payments were slightly later during the Preference Period, the 10-day shift in lateness was not so late or inconsistent that it rendered the payments outside the ordinary course. Rather, the Court finds as a factual matter that the payments were made in the ordinary course of the business of the Debtor and Premium.
*384§ 547(c)(2)(C)/Objective Ordinary-Course
31. Premium offered the testimony of Mr. Couture as the only evidence in support of its burden on the objective prong of ordinary course.
32. Mr. Couture testified as to his experience within the honey business and specifically, the honey broker business. His educational background was in entomology and apiaries. He started his first honey buying business in 1988. He is a member of multiple trade associations and attends trade conventions where he discusses beekeeping practices with others in the industry.
33. Mr. Couture is an expert qualified by knowledge and experience with respect to the daily operations of the honey brokering business and beekeeping.
34. Premium did not meet its burden to prove that the Transactions were objectively within the ordinary course of the honey brokering business.
35. Mr. Couture’s testimony about payment terms in the honey brokering business, while credible, was not based on personal knowledge of any businesses other than his own, and was not based on knowledge of the industry at the time of the Transactions.
36. Mr. Couture is not an expert qualified by knowledge or experience with respect to whether the payments at issue were made according to ordinary business terms of similarly situated members in the industry facing the same problem.
37. Attempting to establish Premium’s industry, Mr. Couture identified only three competitors of Premium, while also referring to, but failing to identify Premium’s competitors that the Debtors were also buying honey from in the Preference Period, and Premium’s competitors that its other customers (such as Flower Foods) were buying honey from in the Preference Period. Mr. Couture also indicated that there were numerous honey wholesalers, but failed to identify any of them by name.
38. Mr. Couture offered no specific payment terms, aging of invoices, or collection practices from competitors, or the industry as a whole (from the Preference Period or any other time period).
39. Mr. Couture testified that he has been employed with Premium since 2002, had not worked for any other company other than Premium since that time, and that most of his career he has been self-employed.
40. Mr. Couture testified to his involvement with several trade associations including the Ontario Beekeepers Association and the Honey Counsel, but he did not provide testimony regarding specific knowledge or information, for instance, on payment terms, aging of invoices, or collection practices which he obtained from his involvement in these trade associations. Mr. Couture’s deposition, admitted into evidence as Plaintiffs Exhibit 6, clarifies that Mr. Couture’s experience was limited to production and cost issues with these trade organizations, not to payment practices, which were held confidential.
41. Mr. Couture did not have any experience in the baking industry outside of his dealings with his customers such as the Debtor.
42. Mr. Couture testified at his deposition that he had talked to other honey brokers in an effort to investigate bakery industry payment standards, but such efforts occurred after the Preference period and in connection with this litigation.
43. Premium did not submit an expert report regarding Mr. Couture’s testimony as an expert in accordance with Rule 26 in accordance with the Court’s scheduling or*385der. At trial, when Premium’s counsel attempted to elicit such expert testimony, counsel for Plaintiff objected. The Court pointed out the failure to submit a report but indicated she would give counsel for Premium some leeway. Counsel for Premium chose instead to withdraw the line of questioning, and therefore did not qualify Mr. Couture as an expert with respect to ordinary business terms in the honey brokering industry.
44. The evidence related to whether Mr. Couture could testify as an expert with respect to whether the payments were made according to ordinary business terms of similarly situated members in the industry facing the same problems thus comes in through the stipulated use of the deposition transcript.
45. Despite his otherwise credible testimony, Mr. Couture did not testify based on any personal knowledge, experience or training as either an expert or lay witness of similarly situated members of the honey brokering business with respect to what the standard for ordinary business payment terms were at the time of the payments at issue.
46. Mr. Couture did not have any knowledge, experience or training as either an expert or lay witness about ordinary business payment terms in the baking industry at the time of the payments at issue.
47. At the close of Mr. Couture’s testimony, Plaintiff orally moved for a directed verdict on the grounds that the Defendant did not offer any evidence regarding the objective prong, but the Court denied the motion. The motion is now moot based on the Court’s written ruling.
48. As a factual matter, the payments Debtor made to Premium during the Pref-erenee Period were not made according to ordinary business terms.
New Value
48. With respect to Premium’s new value defense under § 547(c)(4), the Court admitted Plaintiffs Exhibit 2, a chart titled “New Value Analysis (with no Ordinary Course Defense Considered)” (“Plaintiff’s New Value Chart ”).
49. Although the Court admitted by agreement four charts presented by Premium, based on the Court’s review of these charts,6 and the testimony of Mr. Couture, the Court finds that none of Premium’s charts adequately address Premium’s new value argument. Accordingly, Premium has offered this Court no evidence of the discount it is entitled to receive solely under the new value defense.
50. Rather, the Court adopts and incorporates Plaintiffs New Value Chart (Exhibit 2).
51. Plaintiffs New Value Chart establishes that, during the Preference Period, Premium provided new value to the Debt- or of $177,360.
52. Premium’s Exhibit H, a chart purporting to establish Premium’s evidence of new value, contains an analysis of new value in a column titled “Amount of New Value,” with the amounts highlighted in yellow. Those amounts correspond to the “Amount of New Value” on Plaintiffs Exhibit 2.
53. The net preferential transfers Debtor made to Premium during the Preference Period that are avoidable thus total $234,880 (total payments of $412,240 minus $177,360 new value credit).
*386CONCLUSIONS OF LAW
§ 547(c)(2) — Ordinary Course
To succeed in its ordinary course defense, Premium bore the burden of proving all three elements of the prior version of § 547(c)(2), that the transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debt- or and the transferee; and
(C) made according to ordinary business terms.
Courts must construe the defense narrowly, as it puts one creditor “on better footing than all other creditors.” In re Armstrong, 291 F.3d 517, 527 (8th Cir.2002). To succeed, a defendant must prove each element by a preponderance of the evidence. 291 F.3d at 526.
The Trustee conceded that the first element was met. The Court concludes as a matter of law that Premium met its burden of establishing the second “subjective” element but failed its burden of establishing the third “objective” element. Therefore, as explained below, Premium does not have an ordinary course defense so as to render the Transfers unavoidable.
§ 547(c)(2)(B) — Made In the Ordinary Course — Subjective Element
The second element of the ordinary course defense is frequently referred to as the “subjective” element because it requires Courts to “engage in a ‘peculiarly factual analysis.’ ” In re Lovett, 931 F.2d 494, 497 (8th Cir.1991) (cites omitted). “The cornerstone of this element of a preference defense is that the creditor needs to demonstrate some consistency with other business transactions between the debt- or and the creditor.” Id. (emphasis added). To determine whether payments were consistent, Courts should examine factors such as: “(1) the length of time the parties were engaged in the transaction, (2) whether the amount or form of tender differed from past practices, (3) whether the debtor or the creditor engaged in any unusual collection or payment activity, and (4) whether the creditor took advantage of the debtor’s deteriorating financial condition.” In re Spirit Holding Co., Inc., 214 B.R. 891 (E.D.Mo.1997), aff'd by 153 F.3d 902 (8th Cir.1998); see also Laclede Steel Co., 271 B.R. 127, 131-32 (8th Cir. BAP 2002) (discussing the four factors and a sliding scale analysis in applying them).
The Eighth Circuit provides guidance to this Court on how to apply this defense through its decision in Lovett v. St. Johnsbury Trucking, 931 F.2d 494 (8th Cir. 1991). In Lovett, the debtor made a series of payments to a freight carrier during the preference period. Lovett, 931 F.2d at 495. According to the contract between the parties, payments for shipments were due 30 days after the shipment. Id. In reality, payments were generally made about 60 days after shipment. 931 F.2d at 496. The Eighth Circuit disagreed with the District and Bankruptcy Courts in their finding that ordinary course should be determined by the contract between the parties, and instead held that “[t]he ordinary course of business ... was the way the parties actually conducted their business dealings, not the conditions specified in the agreement that the parties in fact rarely followed.” 931 F.2d at 497. If late payments were the standard course of dealing, then the court should not consider lateness alone sufficient to defeat the ordinary course defense. 931 F.2d at 498.
Instead of looking to the contract to determine the subjective standard for ordinary behavior between the parties, the *387Lovett Court looked to the parties’ payment history during the 12 months before the preference period and compared it to that during the preference period. Id. During the pre-preference period, the payments were made, on average, within 62 days of the shipment. Id. During the preference period, the average was 52 days. Id. The Court found this difference in payments was not significant enough to indicate that the payments were outside the ordinary course of business. Id.
Subsequent cases have examined fact patterns to determine when late payments are so late as to fall outside the subjective ordinary business practices of frequently late-paying debtors. Late payments during the preference period will not be subjectively ordinary if the payments during the preference period are “substantially later.” In re Accessair, 314 B.R. 386 (8th Cir. BAP 2004). In Acces-sair the Court held that when the amount of time it took the debtor to pay increased during the preference period as compared with the pre-preference period by 294 %, the payments were substantially late enough to be outside the ordinary course. Similarly, in Gateway Pacific, the Court found late payments to be not within the subjective ordinary course when the payments were on average 19 days later during the preference period. In re Gateway Pacific Corp., 214 B.R. 870, 875 (8th Cir. BAP 1997). In addition, the Court in Gateway Pacific found persuasive that during the pre-preference period, nine out of 155 payments were more than 50 days old, while during the preference period 24 out of 28 were. Id.
As in Lovett, the subjective ordinary course of business between Premium and the Debtor was for the Debtor to pay late. Mr. Couture testified that he believed the Debtor never paid on time. Evidence provided by the parties’ shows that payments were, on average, made 31 days after an invoice was issued during the pre-preference period (16 days after the invoices were due) and 41 days post-invoice during the preference period (26 days after the invoices became due). The question is whether the 10-day increase was substantial. The payment gap in this case is exactly the same as Lovett, where the Court found that a 10-day change in payments did not mean the payments were outside the subjective ordinary course. Similarly, the increase in tardiness of the payments is 32% is not substantial: it is significantly lower than the 54% increase in Gateway Pacific or the 254% increase in Accessair. This payment difference, then, without more, is not substantial enough to warrant finding the payments were outside the subjective ordinary course of business between Premium and the Debtor.
The Trustee argues that there is more here — that Premium engaged in “unusual collection activity.” The Court, however, is not convinced. To be “unusual,” Courts typically require some evidence of the creditor putting “economic pressure” on the debtor to pay. Lovett, 931 F.2d at 499; see Accessair, 314 B.R. at 394. While Lovett acknowledges that “the burden is on the defendant to prove the absence of unusual collection activity,” the Court also notes that “it is hardly unusual for a creditor to urge its debtor to pay more promptly.” Lovett, 931 F.2d at 499.
The alleged “collection activity” took place during one of the monthly phone calls between Mr. Couture and the Debtor. During the call, Mr. Couture discussed with the Debtor’s representative recent changes in the billing practices. Mr. Couture mentioned that the payments were later but did not think they were substantially so. He testified that he did not demand payments or threaten to stop *388delivering product if the invoices remained unpaid. The Court, again, finds his testimony credible.
When considering the other factors, such as the length of Premium’s relationship with the Debtor, that the form and amounts of payments during the relationship did not change, and that there is no evidence Premium took advantage of the Debtor, the Court concludes as a matter of law that the 10-day shift in lateness during the Preference Period alone is not sufficient to deem the payments subjectively outside the ordinary course. Rather, the Court is satisfied that Premium met its burden of proving that the Transfers were made in the ordinary course of the business affairs of Premium and the Debtor within the meaning of the applicable version of § 547(c)(2)(B).
§ 547(c)(2)(C) — Made According to Ordinary Business Terms — Objective Element
There is no question that, under the current Bankruptcy Code, Premium would have been able to establish an ordinary course defense. Perhaps it is cases like these that show why Congress changed the law. Unfortunately for Premium, however, the Court is duty bound to follow the pre-BAPCPA law, and under that law, Premium has simply not met its burden.
Section 547(c)(2)(B) requires the creditor to prove that the transactions were made in accordance with the ordinary terms of the relevant industry. In re U.S.A. Inns of Eureka Springs, Inc., 9 F.3d 680 (8th Cir.1993). It requires a creditor to establish “the existence of some uniform set of business terms within the industry.” 9 F.3d at 685. The creditor must provide evidence of the “prevailing practice among similarly situated members of the industry facing the same or similar problems.” Id. The prevailing industry is that of the creditor.7 Id.
To satisfy its burden, the creditor must provide evidence regarding the practices of the creditor’s competitors. Spirit Holding, 214 B.R. at 899. An employee can establish the prevailing industry standards, but the employee must be able to testify objectively about those standards. Accessair, 314 B.R. at 394. For example, in Lovett, the creditor was able to satisfy its burden with testimony from two of its officials about common industry practices. Lovett, 931 F.2d at 499. In Accessair, the creditor was unable to meet its burden when the only testimony introduced discussed the creditor’s subjective experience with other customers. Accessair, 314 B.R. at 394. Finally, in Eureka Springs, the creditor, a savings and loan, met its burden by introducing testimony of the company’s president asserting that it was common practice in the industry to work with delinquent customers provided they continued paying and that the Office of Thrift Supervision directed the savings and loan to work with customers in accordance to industry-wide standards. Eureka Springs, 9 F.3d at 685.
*389Mr. Couture testified that he had extensive experience in the honey industry. He earned degrees in entomology and aviculture. He had worked in an apiary research station, as an apiary inspector, started two companies that brokered honey, held memberships in the Ontario Beekeepers’ Association and the American Beekeepers’ Association, and attended trade association meetings. Mr. Couture could not, however, testify as to any knowledge regarding how other honey brokers dealt with their customers. His knowledge was limited to his personal knowledge of honey production and Premium’s interactions with other customers. This testimony does not provide the Court with objective evidence regarding the creditor’s industry, or whether the payments here were made according to ordinary business terms of similarly situated members of the industry facing the same problem.
Because Mr. Couture’s testimony could not provide the Court with objective evidence regarding payment terms in the honey brokering industry, and no other objective evidence was adduced, the Court concludes that Premium failed to satisfy its burden of proof that the Transfers were made in the ordinary course of business within the meaning of § 547(c)(2)(C).
New Value Defense
Premium also asks the Court to find that the Transfers are unavoidable on a new value theory. Under the “new value defense,” the trustee may not avoid a preferential transfer made by the debtor to a transferee in exchange for unsecured new value that remained unpaid (or on account of which new value the debtor did not make an otherwise unavoidable transfer). 11 U.S.C. § 547(c)(4); Accessair, 314 B.R. at 395. The purpose of § 547(c) is to “encourage creditors to deal with troubled businesses in the hope of rehabilitation.” In re Kroh Bros. Development Co., 930 F.2d 648, 651 (8th Cir.1991). The defense is “finely tuned to protect those creditors who, after receiving a preference, in effect return the preference to the estate by providing new value.” In re Indian Capitol Distributing, Inc., 484 B.R. 394, 414 (Bankr.N.M.2012). Avoidable transfers such as those that occurred here will not deprive a creditor of § 547(e)(4) protection, as the transfers must be “otherwise unavoidable.” In re Jones Truck Lines, Inc., 130 F.3d 323, 329 (8th Cir.1998) (emphasis original).
At issue in this case is what date the Court should use to determine when the preferential transfers were made for the purposes of § 547(c)(4). In the Eighth Circuit, a transfer for the purposes of § 547(c) occurs upon the delivery of the check. Kroh Bros., 930 F.2d at 650. Doing so recognizes that “creditors who ordinarily provide goods to purchasers on credit treat a payment by check as a cash transaction, and therefore ship a new order of goods upon receipt of a check.” 930 F.2d at 651. If a Bankruptcy Court were to find otherwise — that the transfer was made upon the check payment — -it would result in an enhancement to the bankruptcy estate from the time of the shipment (the receipt of the check) but deprive the creditor of § 547(c)(4) protection for that same shipment because the transfer does not occur until post-shipment. Id. In the alternative, if creditors dealing with debtors in financial distress delayed shipments while waiting for a check to clear, this could disrupt the debtor’s business and force unnecessary bankruptcies. Id.
The Trustee, while acknowledging that under Eighth Circuit law transfers occur upon delivery, argues that the Court should use the dates the checks were deposited as the dates of the transfers because Premium did not record the dates *390the checks were delivered. The Court agrees. Mr. Couture testified that he generally deposited the checks on the day they were received. If he was busy, or the checks came in on a Friday afternoon, he would sometimes deposit them the following business day. Based on this testimony, the Court is not convinced, as is suggested by Premium’s counsel, that it should simply subtract two days from the deposit date to determine the transfer date when there is no testimony from Mr. Couture supporting such a measure.8
Rather, the Court concludes as a matter of law that Trustee’s New Value Chart (Exhibit 2) accurately applies the subsequent new value rule to the facts of this case. Exhibit 2 incorporates the undisputed relevant facts or data (such as the amounts of invoices, dates invoiced shipped9, and the amounts of checks and their deposit dates) that had already been established in the Opinion on the Trustee’s Motion. The Trustee’s Exhibit 2 carefully considers potential new value and the Transfers, in their appropriate chronological order. Furthermore, the preference running sum column does not carry forward surplus new value.10
As a matter of law, and considering only the new value defense under § 547(c)(4), Premium is entitled to a new value credit in the amount of $177,360, leaving a net of new value liability of $234,880 without consideration of any other defenses.
Prejudgment Interest
In its post-trial submission, the Trustee requests that the Court award prejudgment interest at the federal judgment rate of 0.14% on the sum of $234,880, from September 9, 2009, the date of the filing of the Adversary complaint, to the date of judgment. The Court in its discretion denies the request.
Because the Trustee’s cause of action arises under a federal statute, federal law governs the allowance and rate of prejudgment interest. In re Living Hope Southwest Medical SVCS, LLC, 450 B.R. 139, 157 (Bankr.W.D.Ark.2011). The Bankruptcy Code does not contain a provision controlling whether and in what amount prejudgment interest is allowed, therefore this Court must look to federal common law. In re Matlock, 361 B.R. 879, 886 (Bankr.W.D.Mo.2007). Federal common law permits a court to award prejudgment interest in its discretion on a preference claim “if the transferee creditor had *391the ability to ascertain the amount of its liability on the preference claim without judicial determination.” In re Bellanca Aircraft Corp., 850 F.2d 1275, 1281 (8th Cir.1988). A trustee is not generally entitled to prepetition interest if there existed a good faith dispute as the creditor’s liability. Armstrong 291 F.3d at 528.
In this case, the Trustee offered several theories for the amount of Premium’s liability, eventually conceding in the summary judgment briefing that a trial would be necessary to establish Premium’s liability. The Trustee submitted four exhibits at trial with different analyses of how much Premium might owe. The Trustee originally urged the Court to apply the Missouri judgment rate. Without this Court’s adjudication of its defenses, Premium could not have ascertained what it owed. Furthermore, it was the Trustee who chose to sue six unrelated defendants in one adversary proceeding, resulting in unnecessary delay of the adjudication. Even if Premium could have ascertained its liability before trial, the Court believes it would be particularly inequitable to allow the Trustee prejudgment interest from the date of filing of the complaint under these circumstances.
CONCLUSION
For the reasons set forth above, the Court finds that $234,880 of the Transfers are avoidable as a preference under 11 U.S.C. § 547(b). Accordingly, the Court will enter a judgment against Premium in the amount of $234,880. A separate and consistent clerk’s judgment will be entered. Plaintiff shall serve notice of this Judgment.
SO ORDERED.
. The Court allowed Mr. Couture to testify by phone and he was sworn in on the record by a court reporter in the room with him. Mr. Schein, Premium's attorney, established it was Mr. Couture speaking, and Trustee consented to the procedure.
. Premium had conceded that the pre-BAPC-PA law applied to this Adversary, since the IBC Chapter 11 case was filed prior to BAPC-PA's effective date.
. The invoice date is the same as the shipment date pursuant to the Court's Opinion on the Trustee’s Motion.
. Don Couture of Premium testified that Premium kept no record of the actual receipt date so this date is merely an estimation.
. Premium offered evidence of prior contracts with the Debtor but did not have a record of a contract with the Debtor during the Preference Period. Mr. Couture testified that he was certain there was a contract in place but that the record had been inadvertently lost or destroyed prior to litigation. The Court found Mr. Couture's testimony believable. Even without Mr. Couture’s testimony, as discussed below, the physical contract itself is not dis-positive or arguably relevant to the Court’s ordinary course of business analysis.
. Premium did not submit its exhibits to the Court in advance of the trial, so the Court had no opportunity to review Premium’s charts before the hearing.
. The Court recognizes that in Accessair the Eighth Circuit analyzed § 547(c)(2)(C) by looking at the prevailing practices in the debt- or’s industry. 314 B.R. at 394. In doing so, the Court cited Eureka Springs for the rule that the proper industry to analyze is the debtor's industry, but did not discuss why it read Eureka Springs to hold as such, nor did the parties contest this formulation. The Court disagrees with this reading of Eureka Springs, particularly as in discussing the relevant industry, Eureka Springs cites In re Tolona Pizza Prod. Corp., 3 F.3d 1029, 1033 (7th Cir.1993) which clearly uses the creditor industry analysis, as well as multiple other cases that stand for the same rule. Regardless, even under the debtor industry standard, Premium did not meet its burden as Mr. Couture testified that he had no knowledge of the baking industry.
. Even if the Court were to find that Premium's determination of delivery date had sufficient factual support, the Court finds that the only transfer that would be affected is the payment deposited on July 27, 2004 in the amount of $37,024. This would mean that the Defendant received the check on July 25, 2004, a Sunday. While the Court is well aware that many people work on Sundays, it would be unreasonable, without further proof, particularly in light of Mr. Couture’s testimony that he would hold off depositing checks over the weekend, to conclude that the Defendant’s place of business was open to receive mail on Sundays or that the Canadian post delivered on Sundays.
. As modified by the Order Correcting Clerical Mistake.
.See In re Isis Foods, Inc., 39 B.R. 645, 652 (W.D.Mo.1984) (stating that surplus new value may no longer be carried forward under § 547(c)(4), “as was formerly the case under the old net result rule.”); In re Hancock-Nelson Mercantile Co., Inc., 122 B.R. 1006, 1015-1016 (Bankr.D.Minn.1991); In re Acoustiseal, Inc., 318 B.R. 521, 525-527 (Bankr.W.D.Mo.2004); In re Interstate Bakeries Corp., 2011 WL 96815, 2011 Bankr.LEXIS 140 (Bankr.W.D.Mo.2011) (Venters, J.); see also In re Sharoff Food Service, Inc., 179 B.R. 669, 677 (Bankr.D.Colo.1995); In re Tennessee Chem. Co., 159 B.R. 501, 516 (Bankr. E.D.Tenn.1993); In re El Paso Refinery, L.P., 178 B.R. 426, 450 (Bankr.W.D.Tex.1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496379/ | Chapter 13
MEMORANDUM OF DECISION
SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE
Before the Court is a motion to dismiss the above-captioned Chapter 13 case (the “Motion”) (ECF No. 50), filed by the United States of America, on behalf of the Department of the Treasury, Internal Revenue Service (the “IRS” or “Government”). The Government argues that debtor Chia-mu May Lin’s case should be dismissed for cause pursuant to 11 U.S.C. § 1307(c) because Debtor engaged in bad faith conduct, notably lying about the disappearance of some $1.7 million as part of an effort to avoid paying her IRS debt. More specifically, the Government argues that the Debtor falsely claims to have paid this $1.7 million as part of an extortion scheme against her. Debtor opposes the Motion, arguing that she has exhibited good faith in the case under the totality of the circumstances. As the Court finds the Debt- or’s extortion story wholly unbelievable and other aspects of her case problematic, the Court grants the Motion. This decision constitutes the Court’s findings of fact and conclusions of law.
BACKGROUND
Debtor moved to the United States of America in 1989 to attend college and thereafter obtained a bachelor’s degree from the Pratt Institute. Evidentiary Hearing Transcript, June 26, 2013 (“Hr’g Tr.”) (ECF No. 81), at 11:5-12:3. Debtor also obtained two graduate degrees, one from the Pratt Institute and another from the School of Visual Arts. Debtor is currently self-employed as a computer graphics designer and developed two patented inventions. Id. at 12:25-13:22.
In 1998, Debtor bought a three-story property located at 436 West 18th Street, New York, New York (the “Property”) for approximately $865,000.00, and assumed the existing mortgage. Id. at 14:4-15:8. On May 9, 2005, Debtor sold the Property for $3.5 million, netting $2,568,125.49 from the sale. Id. at 16:16-17, 18:1-6. As a result of the sale, Debtor incurred federal income tax liability for 2005 of $303,733.00. Id. at 19:17-19. On April 21, 2006, Debtor paid her New York State taxes in full, but sent the IRS a check for partial payment in the amount of only $65,600.00. See Letter from Neil B. Katz to United States Trustee, dated Sept. 16, 2010, at 3 (ECF No. 26 at Ex. C, Document 15) (“Katz Letter of Sept. 2010”); see also Letter from Neil B. Katz to United States Trustee, dated Jan. 12, 2011, at 10 (ECF No. 26 at Ex. F, Document 34) (“Katz Letter of Jan. 2011”). To date, Debtor has not paid the remaining portion of her 2005 federal income tax liability to the IRS.
A. The Alleged Extortion
Debtor claims that, right around the time of the Property sale, she was the victim of an extortion scheme. She contends that, because of the extortion, she could not pay her 2005 federal income taxes. While some of the details of Debt- or’s account vary, the essential facts of her story are the same. In the days shortly before and after the Property sale, Debtor allegedly received two phone calls from an unidentified caller. During the first call, the caller said, “[y]ou have to give the money to us ... otherwise your family, *433your brother ... will be in trouble.” Hr’g Tr. 22:20-25; Rule 2004 Deposition Transcript, Dec. 1, 2010, at 41:14-19 (“Dep. Tr.”) (ECF No. 26 at Ex. D, Documents 26-29). The caller never specified an amount of money sought. Hr’g Tr. 25:23-26:7; Dep. Tr. 44:10-12. Debtor stated the caller was female, but she did not recognize the voice. Dep. Tr. 39:2-6. After the purported first call, Debtor did not attempt to identify the caller. Hr’g Tr. 27:18-28:11; Dep. Tr. 39:15-40:2. Debtor did not report the alleged call to anyone, including the police, FBI, IRS, family, or friends because the caller allegedly requested that she not do so. Hr’g Tr. 27:21-28:15; 41:12-42:7.
Debtor contends that she received a second call around the time of the closing or a few days thereafter. Dep. Tr. 46:3-47:12. The second caller was also female, but Debtor was not sure if the voice was the same as the first caller. Id. at 48:18-23. The caller directed Debtor to “spread [the money] out to a lot of bank[s]” and “just give us the money as soon as possible” but again did not specify the amount of money. Id. at 49:1-7, 21-25.
After the alleged second call, Debtor opened numerous bank accounts and a safety deposit box to spread the money around. Hr’g Tr. 42:21-44:13. Between May 26, 2005, and July 14, 2005, Debtor made over eighty cash withdrawals totaling $1,730,100.00. Hr’g Tr. 44:18-21, 45:25-46:4; see also Katz Letter of Jan. 2011, at 21-28 (ECF No. 26 at Ex. F, Document 33). Debtor withdrew this large sum of money, even though the caller had not yet demanded or even discussed a specific sum and even though Debtor believed the caller was unaware of the amount Debtor received from the sale of the Property. Dep. Tr. 86:19-24, 87:13-24. Debtor kept some of the money in the safety deposit box and the remaining cash at her apartment. Dep. Tr. 75:2-19.
Debtor purportedly received a third call in mid-July 2005. Hr’g Tr. 45:18-24. The caller asked Debtor how much cash she had accumulated, to which Debtor responded that she had $1.7 million. Hr’g Tr. 45:25-46:4; Dep. Tr. 59:12-21. The caller told Debtor to meet at a parking lot at the corner of Sixth Avenue and 25th Street in Manhattan to hand over the money. Hr’g Tr. 47:3-5; Dep. Tr. 61:25-64:6. Debtor brought the $1.7 million in cash in three bags to the appointed street corner that same day. Hr’g Tr. 47:6-19; Dep. Tr. 85:18-86:4. Two women drove up in a cab, and one of them exited the taxi and said, “Give me the money.” Dep. Tr. 83:12-84:13. Debtor complied and the two women drove away in the cab. Hr’g Tr. 47:23-48:7. Debtor did not recognize either woman. Id. at 84:21-85:8. Debtor never reported any of these events to the police, family, or friends.
B. Debtor’s Financial Activity After the Alleged Extortion
Shortly after the alleged extortion payment, Debtor opened two brokerage accounts, where she deposited $347,488.00 between July 21, 2005 and September 30, 2005.1 Hr’g Tr. 58:6-24, 60:8-61:8. Debt- or’s brokerage accounts generated proceeds of $795,450.00 in 2005. Declaration of Karen Burke, May 21, 2012 at ¶ 7 (“Burke Decl.”) (ECF No. 51); see also IRS Returns Processing Transcript (“IRP”) for 2005, Burke Decl. Ex. A at 1. In addition, from July 2005 to December *4342005, Debtor withdrew over $104,900.00 in cash and paid credit card bills in the amount of $128,000.00. See Katz Letter of Jan. 2011, at 4-19 (ECF No. 26 at Ex. F, Document 33); Katz Letter of Sept. 2010, at 3 (ECF No. 26 at Ex. C, Document 15). As Debtor admitted, she went “a little bit crazy” after the sale of her Property on “luxury things” such as spa treatments, luxury hotels, perfume, clothing and gifts for friends. Dep. Tr. 97:4-98:17.
Debtor continued to trade through her two brokerage accounts, generating substantial proceeds: $3,468,553.00 in 2006, $3,090,382.00 in 2007, and $3,374,739.00 in 2008. See Burke Decl. ¶¶ 8-10; 2006-2008 IRPs, Burke Decl. Exs. B, C, D. In 2009, Debtor opened a new brokerage account with E-Trade Clearing LLC (“E-Trade”), which generated proceeds of $876,641.00. Burke Decl. ¶ 11; 2009 IRPs, Burke Decl. Ex. E.
Despite her lavish spending and trading activity, Debtor maintained that she could not pay her 2005 Taxes. On February 15, 2007, Debtor told the IRS she could not pay her 2005 federal income taxes because she used the proceeds from the sale to pay some debt and some taxes and loaned $1.5 million to a Mend whom she could not locate. Burke Decl. ¶ 14. On March 24, 2007, Debtor again contacted the IRS, and reiterated that she had loaned $1.5 million to a friend. Id. at ¶ 15. In February 2008, Debtor submitted an amended 2005 federal income tax return, which included a signed statement summarizing the extortion scheme and stating that she did “ ‘not have any money to pay’ her federal income taxes.”2 Adversary Compl. Ex. B, Amended Income Tax Return at 5 (ECF No. 26, Document 6). The large IRS tax assessment was the “sole reason” for Debtor’s Chapter 7 filing. Petition, Statement of Financial Affairs (“SOFA”) ¶ 10 (ECF No. 1).
C. Procedural History
On November 9, 2009 (the “Petition Date”), Debtor filed a Chapter 7 voluntary petition. In Debtor’s Chapter 7 Petition, she claimed she could not pay her IRS tax liability because she was extorted in the sum of $1.7 million. Id. Debtor’s schedules indicate the IRS held an unsecured priority tax claim in the amount of $344,937. Petition, Schedule E (ECF No. I).3 Debtor’s schedules also indicate an unsecured non-priority liability for credit card debt totaling $53,861. See Petition, Schedule F. Debtor listed assets totaling $8,251. See Petition, Schedule B.
The United States Trustee (the “US Trustee”) conducted a Rule 2004 examination of Debtor on December 1, 2010, to uncover information regarding the alleged extortion. See Dep. Tr. (ECF No. 26, Documents 26-29). On February 7, 2011, the U.S. Trustee commenced an adversary proceeding against the Debtor, objecting to Debtor’s discharge pursuant to 11 U.S.C. § 727 for failure to adequately explain her disposition of more than $1.7 million (the “Adversary Proceeding”) (Case No. 11-01448).
On November 14, 2011, four days prior to the scheduled trial in the Adversary Proceeding, Debtor filed a motion to convert her Chapter 7 case to a Chapter 13 case. See Motion to Convert (ECF No. *43527). The Government informed the Court that it did not object to the Debtor’s motion to convert, “with the understanding that the IRS would not waive any of the arguments or rights that it had, including the right to maintain objections raised by the United States Trustee in the Adversary Proceeding, and to object to the confirmation of the Debtor’s Chapter 13 plan.” Gov’t Letter to Court, dated Dec. 19, 2011 (ECF No. 33). On December 20, 2011, the Court entered an order granting the motion to convert. Order, dated Dec. 21, 2011 (ECF No. 36.)
On May 22, 2012, the Government filed the instant Motion. Debtor filed an opposition to the Motion on March 29, 2013. Given factual disagreements between the parties, the Court held an evidentiary hearing on the Motion on June 26, 2013, at which time the Debtor testified and documents were introduced without objection to supplement the evidence submitted with the Motion.4 See Hr’g Tr. 4:19-8:15. At the evidentiary hearing, the Court requested that the parties submit supplemental briefing on two possible grounds for dismissal — whether this case is a two-party dispute and whether Debtor has caused unreasonable delay prejudicial to her creditors. Both parties filed briefs addressing the applicability of these two issues in this case. See Brief in Support of Debtor’s Opposition to Motion to Dismiss (ECF No. 82); Memorandum of Law in Further Support of IRS’s Motion to Dismiss (ECF No. 85).
DISCUSSION
I. Motion to Dismiss Standard
“One of the primary purposes of the bankruptcy act is to ‘relieve the honest debtor from the weight of oppressive indebtedness, and permit [her] to start afresh free from the obligations and responsibilities consequent upon business misfortunes.’”' In re Nassoko, 405 B.R. 515, 522 (Bankr.S.D.N.Y.2009) (citation omitted); see also Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)) (noting the “principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor’ ”).
Pursuant to Section 1307(c) of the Bankruptcy Code, a court may dismiss a Chapter 13 ease for cause, including where there is “unreasonable delay by the debtor that is prejudicial to creditors.” 11 U.S.C. § 1307(c). While Section 1307(c) identifies several circumstances warranting dismissal, that list is not exhaustive. “Although 11 U.S.C. § 1307(c) does not expressly equate bad faith with ‘cause,’ the bankruptcy court can also dismiss the petition ... under § 1307(c) if the debtor files his petition in bad faith.” In re Eatman, 182 B.R. 386, 392 (Bankr.S.D.N.Y.1995) (citations omitted); see also Plagakis v. Gelberg (In re Plagakis), 2004 WL 203090 at *4, 2004 U.S. Dist. LEXIS 2458 at *12 (E.D.N.Y. Jan. 27, 2004) (bad faith filing constitutes “cause” for dismissal).
To determine whether a debtor filed her petition in bad faith, the Court must review the totality of the circumstances. Eatman, 182 B.R. at 392. Dismissal based on lack of good faith is determined on an ad hoc basis and only in “egregious cases” entailing concealed or misrepresented assets and/or sources of *436income, excessive and continued expenditures, lavish lifestyle, and intention to avoid singular debts incurred through fraud, misconduct, or gross negligence. In re Blumenberg, 263 B.R. 704, 712 (Bankr. E.D.N.Y.2001); In re Zick, 931 F.2d 1124, 1129 (6th Cir.1991). “Bankruptcy courts routinely allow for dismissal of proceedings when pre-petition bad faith conduct is present, as courts treat such conduct as ‘for cause.’ ” In re Ramos, 2009 WL 2913445 at *1, 2009 Bankr.LEXIS 1086 at *4 (Bankr.S.D.N.Y. May 14, 2009). Further, determination of bad faith is a “highly factual determination” that may also “sweep broadly.” In re C-TC 9th Ave. P’ship, 118 F.3d 1304, 1312 (2d Cir.1997). Courts have looked to a variety of factors when considering bad faith. Those factors include: whether the debtor was forthcoming with the court, whether the debtor accurately stated facts, debts, and expenses, whether the debtor misled the court through fraudulent misrepresentation, how the debtor’s actions affect creditors, and whether the debtor has abused the purpose of the bankruptcy code. In re Klevorn, 181 B.R. 8, 11 (Bankr.N.D.N.Y. 1995).
Courts have routinely held that dishonesty of a debtor is an indication of bad faith conduct and warrants dismissal. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re Leavitt, 171 F.3d 1219 (9th Cir.1999) (holding bad faith of dishonest debtor, who failed to disclose assets, warranted dismissal); In re Powers, 135 B.R. 980, 992 (Bankr.C.D.Cal.1991) (noting “lack of an honest and genuine desire to use the statutory process to effect a plan of reorganization” is an indicia of bad faith).
II. Debtor’s Case Should be Dismissed For Cause
The Court finds ample basis to dismiss the case for cause. Debtor has not been forthcoming with the Court about her assets. She also appears to have filed this bankruptcy case as a way to avoid paying a single creditor, the IRS. Based on the totality of the circumstances as discussed in detail below, the Court finds cause to dismiss Debtor’s case.
First and foremost, the Debtor’s claim of extortion rings false, and her dishonesty in this regard is grounds for dismissal. Notably, Debtor did not report or otherwise mention the alleged extortion to anyone until 2008. She did not report it to the police, her accountant, her family or friends. She first disclosed the alleged extortion to the IRS in her amended 2005 tax return, which she filed in February of 2008. Hr’g Tr. 54:20-55:1. It seems highly unlikely that, as a victim of extortion, she would only first report it several years later. Debtor explained that she was afraid to report the extortion at first, but offers no reason why she felt comfortable revealing it later.
Moreover, Debtor’s story has changed over the years. Debtor did not mention any purported extortion prior to 2007. Then, in two phone calls to the IRS in 2007, Debtor claimed that she had loaned $1.5 million to a friend. Finally, in February 2008, Debtor filed an amended 2005 tax return where she attributed the loss of $1.5 million for the first time to the alleged extortion. Amended Income Tax Return, at 5 (ECF No. 26 at Ex. B, Document 6); Hr’g Tr. 54:20-55:1.
Other inconsistencies undermine Debt- or’s credibility here. Debtor referred to the alleged extortionist as a male in her Chapter 7 petition and at the Section 341 meeting, see Hr’g Tr. 49:17-23, 50:21-51:3, but as a female in subsequent papers and hearing testimony. Hr’g Tr. 49:21-23. Debtor also changed the amount, first claiming she gave the extortionist $1.5 mil*437lion and later alleging it was $1.7 million. Hr’g Tr. 51:12-52:10.
The Debtor is an accomplished individual. She holds two master’s degrees, developed two patented inventions, and has earned several million dollars through her real estate and brokerage activities. It is implausible that such a sophisticated individual would voluntarily inform her alleged extortionist that she had $1.7 million in cash available, rather than seek to pay a lower amount when she believed the extortionist did not know how much she had received for the sale of the Property. It is also unbelievable that Debtor did not attempt to identify her alleged extortionist or tell the authorities of the purported extortion, especially if the extortionist had threatened her family’s safety. The implausibility of her story was only further undermined by her wholly unpersuasive demeanor during her cross examination at the evidentiary hearing.
Taken as a whole, Debtor’s story is inconsistent and simply implausible. Her dishonesty constitutes bad faith and warrants dismissal for cause.
In addition, dismissal is warranted because the Debtor’s bankruptcy case is a two-party dispute. Debtor has taken steps to pay off all of her other creditors, leaving the IRS as the sole creditor in this case. Bankruptcy courts have found that bad faith exists where the “Debtor’s reorganization essentially involves the resolution of a two-party dispute.” In re Fonke, 310 B.R. 809, 817 (Bankr.S.D.Tex.2004); see also In re Klevorn, 181 B.R. at 11. In such cases, the debtor’s bad faith was apparent from a filing motivated by or targeted at one sole creditor. The court in Fonke found that the debtor in that case abused “the provisions, purposes, and spirit of Chapter 13” and that the debtor’s bad faith was cause to convert the Debtor’s ease to Chapter 7. Fonke, 310 B.R. at 818; see also In re Aichler, 182 B.R. 19, 21-22 (Bankr.S.D.Tex.1995).
Here, the IRS contends, and there is ample evidence to support, that the Debtor took steps to isolate the IRS as her only creditor. Shortly after the alleged extortion, she deposited almost $350,000.00 into brokerage accounts, from which she generated over $3 million in proceeds each year from 2006 to 2008. She also generated almost $800,000.00 in proceeds in 2009. During this time, she incurred substantial credit card debt, which she paid off while leaving the IRS debt untouched. Indeed, her petition concedes that her IRS debt is the sole reason for her bankruptcy.
Finally, cause for dismissal exists because Debtor has caused unreasonable delay that is prejudicial to her sole creditor, the IRS. Debtor first filed her Chapter 7 bankruptcy petition almost four years ago. In the two years since converting to a Chapter 13 case, she has failed to confirm a plan. See 11 U.S.C. § 1307(c)(1) (a court may dismiss a ease where there is “unreasonable delay by the debtor that is prejudicial to creditors”). In fact, Debtor’s third amended plan does not appear feasible. As Debtor explained in a letter to the Court, she intends to pay $126,000.00 under the current proposed Chapter 13 plan, and then file another Chapter 13 petition to pay the additional $150,000.00 in priority tax debt under a second 60-month plan. See Letter of David J. Doyaga, Sr. to Court, dated June 21, 2013 (ECF No. 77). Under the Debtor’s proposal, the IRS claim would be outstanding until at least 2022, thirteen years after the case was first filed and seventeen years after her federal income tax was due. Moreover, the Debtor’s proposed plan in this case would not pay off her priority tax debt to the IRS. But pursuant to Section 1322(a)(2), a Chapter 13 plan must pay priority claims in full unless the priority *438creditor agrees to different treatment of its claim. As evidenced by its Motion, the IRS has not agreed to such treatment, and therefore Debtor’s current plan cannot be confirmed.
The Debtor opposes the dismissal, arguing that she has exhibited good faith when one focuses solely on the bankruptcy case itself. In fact, some courts have expressed concern about a bad faith dismissal based solely on pre-petition conduct. See In re Keach, 243 B.R. 851, 868 (1st Cir. BAP 2000). But as other courts have noted, such pre-petition conduct can be relevant to a debtor’s motivation and sincerity in filing for bankruptcy relief. See In re Virden, 279 B.R. 401, 409 (Bankr.D.Mass. 2002) (“The bottom line is whether a debt- or is attempting to thwart [her] creditors, or making an honest effort to repay them to the best of [her] ability.”). The Debt- or’s failure here to be truthful regarding her assets is prejudicial to creditors, who rely on transparency in bankruptcy proceedings to determine how best to protect their rights. See In re Ramos, No. 09-10858, 2009 WL 2913445 at *2 (Bankr. S.D.N.Y. May 14, 2009) (noting that the debtor’s failure to disclose the existence of assets was an abuse of the bankruptcy process); Marrama, 549 U.S. at 371, 127 S.Ct. 1105 (finding bad faith where, inter alia, debtor failed to disclose information about assets, including transfer of property prior to filing petition).5
Debtor’s lack of transparency regarding her financial situation distinguishes Ms. Lin from the honest but unfortunate debt- or who may have suffered serious economic setbacks prior to bankruptcy. See Virden, 279 B.R. at 408 (noting that courts totality of circumstances test focuses on, inter alia, “the debtor’s honesty in the bankruptcy process, including whether [s]he has attempted to mislead the court and whether [s]he has made any misrepresentations.”) (citing Education Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir.1987), among other cases); cf. In re Park, 492 B.R. 668, 681-82 (Bankr. S.D.N.Y.2013) (noting Bankruptcy Code’s policy in favor of a fresh start in rejecting claim that large gambling debt was non-dischargeable); In re Wright, 191 B.R. 291, 294 (S.D.N.Y.1995) (affirming the Bankruptcy Court’s determination that the Debtor’s tax debts were non-dischargeable by noting debtor’s failure to pay taxes was not the result of dishonesty but rather a defining characteristic of all debtors — honest and dishonest alike — insufficient resources to pay all obligations) (citing In re Haas, 48 F.3d 1153 (11th Cir.1995)).
CONCLUSION
For the reasons discussed above, the Court dismisses the Debtor’s Chapter 13 case based on the totality of the circumstances under 11 U.S.C. § 1307(c).
. Debtor opened one account with Scottrade with an initial deposit of $100,000 and followed by a second deposit of $50,000. Hr’g Tr. 58:6-24. Debtor also opened a brokerage account with HSBC Securities USA with an initial deposit of $97,488 and followed by an additional deposit of $100,000. Hr'g Tr. 60:8-61:8.
. At the evidentiary hearing, the Government noted that Debtor had over $300,000.00 in her HSBC account on April 18, 2006. Hr'g Tr. 56:14-16. This amount was enough to pay her federal income tax in full.
. On February 9, 2012, the IRS filed a proof of claim in this case, asserting a claim for $347,277.36 for unpaid federal income taxes and penalties for the 2005 tax year. See Claims Register, Claim 1-1.
. The Government introduced Exhibits A through G at the evidentiary hearing. Each of these documents had previously been filed as exhibits to Karen Burke's Declaration in Support of the Motion (ECF No. 51), and the U.S. Trustee’s Adversary Complaint against Debtor.
. Both the Ramos and Marrama cases addressed a motion to convert a case from Chapter 7 to Chapter 13, which can be challenged on the basis of bad faith. See In re Kerivan, No. 09-14581, 2010 WL 2472674 at *2 (Bankr.S.D.N.Y. June 15, 2010) (discussing requirements of conversion under § 1307(c)); In re Ramos, 2009 WL 2913445 at *2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496380/ | Chapter 7
RE: Adv. Docket Nos.: 79 and 81
OPINION
1
Sontchi, J.
INTRODUCTION
This matter requires the Court to determine whether a substantial tax refund is property of the estate due to a tax sharing agreement between the debtor, Downey Financing Corp. (“DFC” or the “Debtor”), and its non-debtor subsidiary, Downey Savings and Loan Association, F.A. (“Dow-ney Bank”). The tax sharing agreement established a method for (i) allocating the consolidated tax liability, (ii) reimbursement and payment of such tax liability, and (iii) establishing procedures for filing tax returns. The Debtor and its affiliates, including Downey Bank, acted pursuant to the tax sharing agreement under which the Debtor filed returns, paid taxes, received refunds, etc. for many years prior to the Debtor’s bankruptcy in November 2008. At or around the time of the Debt- or’s bankruptcy, the Federal Deposit Insurance Corporation was appointed as receiver (“FDIC-R”) for Downey Bank.
After the Debtor’s bankruptcy, the Trustee for the Debtor’s estate filed various tax returns that resulted in a substan*445tial tax refund due from the carry-back of Downey Bank’s net operating losses. Under the normal course of the tax sharing agreement, the Debtor would file the return and allocate the liability and/or refund relating to its various subsidiaries. In an instance such as this, the Debtor would then transfer to Downey Bank the amount of the refund allocated to it. The question here is whether the Debtor holds Downey Bank’s (substantial) share of the refund in trust; thus, entitling Downey Bank to the entirety of the tax refund allocable to it, 1.e., the res of the trust, or whether the refund is property of the estate and Dow-ney Bank has a claim for its unpaid share of the refund. Such a claim would share pro rata with the Debtor’s other liabilities, including a $200 million claim filed by Wilmington Trust Company as Indenture Trustee under certain Notes issued by the Debtor. Not surprisingly, the Trustee and the Indenture Trustee asserts that the tax refund is property of the estate and the FDIC-R argues to the contrary. As a result of the dispute, the Trustee filed a declaratory judgment action in this Court regarding, among other things, the ownership of the tax refunds.
Pending before the Court are two motions for summary judgment regarding the ownership of the tax refund. The resolution of the motions hinges on the language of the tax sharing agreement and, as mentioned above, whether it creates a debtor-creditor relationship between the parties or whether the tax sharing agreement creates an agency or trust relationship. Based upon the plain, unambiguous language of the tax sharing agreement, the Court finds, as a matter of law, that the tax sharing agreement creates a debtor-creditor relationship. Additionally, the Court finds that no resulting trust was created between the parties. As a result, the tax refund is property of the Debtor’s estate. Summary judgment will be entered in favor of the Trustee and the Indenture Trustee.2
JURISDICTION
The Court has jurisdiction over the motions pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a “core” proceeding as that term is defined in 28 U.S.C. § 157(b). This Court has the judicial power to enter a final order.
BACKGROUND
A. The Parties
1. Downey Financial Corp.
DFC is a bank holding company. On or about January 23, 1995, DFC acquired all of the outstanding shares of Downey Bank, a federal chartered bank under the regulation of the Office of Thrift Supervision (“OTS”). Prior to the Receivership Date (described infra), DFC was the parent corporation for its subsidiaries, including Downey Bank (collectively, the “Affiliated Group”). Other than its investment in Downey Bank, DFC had little other assets and a majority of its revenues were also generated by Downey Bank.
In DFC’s own words:
We are a holding company and we conduct substantially all of our operations through ... [Downey] Bank and its subsidiaries, DSL Service Company. We derive substantially all of our revenues from, and substantially all of our ongoing operating assets are owned by ... *446[Downey] Bank. As a result, our cash flow and our ability to service our debt, including the notes, depend primarily on the results of ... [Downey] Bank and upon the ability of ... [Downey] Bank to provide us cash to pay amounts due on our obligations, including the notes .3
2. The Trustee
On November 25, 2008, DFC filed a voluntary petition under Chapter 7 of Title 11 of the United States Code. The Office of the United States Trustee appointed Montague S. Claybrook as the Chapter 7 Trustee; thereafter Mr. Claybrook resigned and the Office of the United States Trustee appointed Alfred T. Giuliano as interim successor trustee4 (hereinafter, the “Trustee”).
3. The Indentured Trustee
Wilmington Trust Company is the indenture trustee (the “Indenture Trustee”) with respect to certain 6 /é% Senior Notes due on July 1, 2014 issued by DFC under that First Supplemental Indenture, dated as of June 23, 2004 (the “Notes”). The Indenture Trustee has filed a proof of claim on behalf of the Noteholders asserting, among other things, a claim for $200 million in principal amount outstanding under the Notes. The Noteholders’ collective claim comprises substantially all of the Debtor’s undisputed general unsecured claims.
4.The FDIC-R and Downey Bank
The Federal Deposit Insurance Corporation (“FDIC”) is a corporation organized and existing pursuant to the Federal Deposit Insurance Act.5 The FDIC acts in two capacities: in its corporate capacity as a regulator (FDIC) and in its capacity as a receiver for failed financial institutions (FDIC-R). In this action, FDIC-R has been sued in its capacity as receiver for Downey Bank.
On November 21, 2008 (the “Receivership Date”), the Director of Thrift Supervision appointed FDIC-R as the receiver of Downey Bank. Upon its appointment, FDIC-R sold substantially all of the former assets of Downey Bank to U.S. Bank National Association (“U.S.Bank”) under a purchase and assumption agreement dated November 21, 2008.
FDIC-R has filed a “protective” claim against DFC in an unliquidated amount for, among other things, its allocation of the Tax Refund.
B. Procedural Background
In October 2010, the Trustee commenced this adversary proceeding by filing a complaint (the “Complaint”) against FDIC-R seeking declaratory judgment regarding ownership of tax refunds under section 541 of the Bankruptcy Code.6 Thereafter, FDICR filed an answer and counterclaims, which were subsequently amended (the “Counterclaims”).7 The *447Trustee filed its answer and affirmative defenses to FDIC-R’s answer.8 On January 28, 2011, this Court allowed the Indenture Trustee to intervene as a plaintiff.9
The Indenture Trustee and the Trustee filed motions for summary judgment as to the ownership of the Tax Refund and as to their allegations that FDIC-R violated the automatic stay.10 In addition, they seek summary judgment on FDIC-R’s counterclaims seeking ownership of the Tax Refund.11 The motions for summary judgment have been fully briefed12 and are ripe for the Court’s consideration.
C. Factual Background
1. The Tax Sharing Agreement.
On or about February 29, 2000, the Debtor and its affiliates, including Downey Bank, executed a Termination and Amendment Number 1 to Tax Sharing Agreement (hereinafter the “TSA”).13 The TSA allowed the Debtor and Downey Bank to take advantage of the beneficial tax treatment afforded to affiliated corporations that file consolidated tax returns, and to address inter-corporate tax policies and procedures. Consolidated tax returns permitted the Debtor to utilize losses by one group member to reduce the consolidated group’s overall tax liability.
The TSA states:
It is the desire and intent of the parties to this [TSA] to establish a method for allocating the consolidated tax liability of each member among the Affiliated Group ... for reimbursing Financial14 for payment of such tax liability, for compensating members of the Affiliated Group for use of their losses or tax credits, and to provide for the allocation and payment of any refund arising from a carry back of losses of tax credits from subsequent taxable years.15
The TSA creates a system of payment obligations between the Debtor and the Affiliated Group members.
Historically, the Debtor and Downey Bank adhered to the process established by the TSA. As required by the TSA, estimated taxes were calculated on a stand-alone basis and reflected the amount *448that each Affiliated Group member would have owed to the IRS had it filed separately.16 The Affiliated Group members would then pay their estimated tax payments to DFC.17 When DFC received estimated tax payments from the Affiliated Group members, it would deposit them into its operating account, commingling them with its existing funds. Thereafter, DFC paid the consolidated taxes electronically to the IRS and other taxing authorities.18 The Affiliated Group’s year-end tax returns were similarly calculated on a stand-alone basis as required by the TSA. Although, the tax liability for each member of the Affiliated Group was calculated on a standalone basis, each member’s taxable income was reported to the IRS on a consolidated scheduled submitted with the Affiliate Group’s consolidated return.
The TSA gives broad authority to the Debtor regarding the preparation, filing, and manner in which the tax returns are prosecuted. The TSA states, in relevant part:
[The Debtor] shall have the right, in its sole discretion: (i) to determine (A) the manner in which such returns shall be prepared and filed, including, without limitation, the manner in which any item of income, gain, loss, deduction or credit shall be reported; provided, however, that [the Debtor] shall consider in good faith any treatment proposed by the Affiliated Group members, (B) whether any extensions of the statute of limitations shall be granted and (C) the elections that will be made pursuant to the Code on behalf of any member of the consolidated group (it being agreed, however, that [the Debtor] shall not unreasonably withhold its consent to any elections which members of the Affiliated Group desire to make); (ii) to contest, compromise or settle any adjustment or deficiency proposed, asserted or assessed as a result of any audit of any such returns; (iii) to file, prosecute, compromise or settle any claim for refund; and (iv) to determine whether any refunds to which the consolidated group may be entitled shall be paid by way of refund or credited against the tax liability of the consolidated group.19
Furthermore, if the Debtor determines that an Affiliated Group member made an overpayment of its estimated taxes, the Debtor has a contractual obligation to refund the overpayment to the group member.20 In such a case, the Debtor has to make the payment “within seven (7) business days of the earlier of 1) the receipt of such overpayment from the taxing authorities, or 2) at such time as, and to the extent that, the overpayment is reflected in reduced quarterly installments of taxes due.”21
The TSA further provides that if adjustments of the consolidated tax liability occur as a result of the filing of an amended return, claim for a refund or an audit, “the liability of the Affiliated Group members shall be recomputed by [the Debtor] to give effect to such adjustments. In the case of a refund, [the Debtor] shall make payment to each Affiliated Group member for its share of the refund ... within seven *449(7) business days after the refund is received by [the Debtor].”22 Besides the payment obligation, there are no further restrictions on the Debtor’s use of any such refund (i.e. no requirements that the refund be held in escrow or segregated from other funds).
Refund checks received from the IRS were made payable to DFC.23 However, prior refund checks, even though made payable to DFC, were deposited directly into one of Downey Bank’s accounts (and in turn, Downey Bank distributed the respective portions of the refund to other members of the Affiliated Group).24
2. The Anticipated Tax Refund.
On September 15, 2009, the Trustee, on behalf of the bankruptcy estate and the Affiliated Group, filed a 2008 consolidated tax return (the “2008 Tax Return”). As a result of the sale of substantially all of the former assets of Downey Bank to U.S. Bank, the value of the Debtor’s interest in the stock of Downey Bank became “worthless” under the Internal Revenue Code. Accordingly, in the 2008 Tax Return, the Trustee, on behalf of the Debtor’s estate, claimed an ordinary loss attributable to the worthlessness of its investment in Downey Bank of approximately $1.7 billion (the “Worthless Stock Deduction”) with respect to all of the Debtor’s issued and outstanding stock in Downey Bank.
Shortly thereafter, the Trustee filed a Form 1139, Corporate Application for Tentative Carryback Refund, for a tentative carryback refund claim (the “Tentative Carryback Refund”). The Tentative Car-ryback Refund sought to carryback the losses claimed in the 2008 Tax Return and sought a tax refund of approximately $145 million for the tax years ending December 31, 2006 and 2007.
By letter dated October 26, 2009, the IRS refused to process the Trustee’s Form 1139 because FDIC-R had filed a Form 56-F with the IRS without informing the Trustee or seeking leave of this Court, as explained infra.
On December 31, 2009, the Trustee filed amended tax returns asserting claims for refunds for the tax years 2003-2007 (the “Amended Tax Returns”).25 The Amended Tax Returns claimed refunds, including statutory interest, of $314,335,197.20.
On September 10, 2010, the Trustee supplemented the claims asserted earlier in the Amended Tax Returns to claim a total refund of $373,791,733 (the “Second Amended Tax Returns”), and an entitlement to statutory interest (this amount, or such other amount as may be due to the Debtor, the “Tax Refund”). For the purposes of these motions, the parties concede that the overpayments arise from the car-ryback of Downey Bank’s net operating losses in 2008 to the taxable income reported by the Affiliated Group with respect to the tax years 2003 through 2007.26
*450FDIC-R filed competing tax returns on behalf of the Debtor and the entire Affiliated Group. Downey Bank (and its subsidiary DSL Service Company) claims that it generated substantially all of the taxable income reported by the Affiliated Group to the IRS between 2003 and 2007. As a result, Downey Bank was the source (through the TSA) of substantially all of the tax payments made to the IRS in the years at issue.27 As such, FDIC-R’s competing tax return seeks the same amount of refund sought in the returns filed by the Trustee.
Thereafter, on October 29, 2010, the Trustee commenced an action in the United States Court of Federal Claims against the United States seeking, among other things, to liquidate the amount of the Tax Refund.28 The Court of Federal Claims action is currently pending. This Court understands that the matter is settled in principle, although approval from the requisite governmental agencies has not been obtained to date. The litigation in the Court of Federal Claims has been effectively stayed pending the outcome of the settlement process. Although the full amount of the Tax Refund has not been liquidated, for the purposes of this Opinion, there is a Tax Refund.
3. Post-Petition Actions by FDIC-R
After the Petition Date, the Trustee alleges that FDIC-R has violated the automatic stay by asking the IRS repeatedly to freeze the processing of the Debtor’s Tax Refund and to reject the Trustee’s returns in favor of those filed by FDIC-R.
On November 28, 2008, three days after the Petition Date, and again in October 2009, FDIC-R filed a Form 56-F “Notice Concerning Fiduciary Relationship of Financial Institution” (the “Form 56-F”) with the IRS.29 One purpose of the Form 56-F is, FDIC-R states, “to notify the IRS of a fiduciary relationship only if the relationship is with respect to a financing institution (such as a bank or thrift).”30 Furthermore, a Form-56 may “secure [FDIC-R’s] position with respect to any refund which may be available to a consolidated group.”31 FDIC-R filed the Form 56-F *451in support of its claim for the Tax Refund.32
Although the Form 56-F represents that FDIC-R was providing notice of its filing to the Debtor, FDIC-R did not notify the Debtor that it had filed the Form 56-F until March 2009.33 Furthermore, the Trustee asserts that FDIC-R advocated directly to the IRS (without the Trustee’s knowledge) that the Chapter 7 Trustee’s tax returns should be rejected in favor of the returns to be filed by FDIC-R. In October 2009, James Vordtriede, a senior member of FDIC-R’s Division of Resolutions and Receiverships, Tax Unit, wrote to Le Hashimoto, a revenue agent at the IRS, requesting a freeze of the Debt- or’s IRS accounts:
The FDIC has requested ... a freeze on the 2005-8 CYE 1120 accounts for Dow-ney Financial Corporation ... currently in bankruptcy.... The FDIC as receiver for [Downey Bank] has a definite interest in filing claims for refund under Section 6402(k). Leo asked me to contact you; he said a bankruptcy freeze was already in place, but to request through you for the freeze to be maintained and not lifted... I am going to send a fresh Form 56-F to your attention regarding this, and please let me know if you need anything else. As per the attached, we are expecting the trustee for the parent to file a Form 1139 which we view is based on an inaccurate 2008 1120.34
In Mr. Vordtriede’s deposition he confirmed that he knew that the Debtor was in bankruptcy and that he was requesting that the IRS not pay any tax return to the Trustee until FDIC-R could assert its own claim for the funds.35
In early January 2010, the Debtor’s filed a motion against FDIC-R for violation of the automatic stay. Thereafter, FDIC-R sent an e-mail to the IRS advocating that “the trustee’s claim’s can be rejected on technical grounds alone” and therefore, “the freeze of Downey Financial Corporation’s group 1120 accounts [should] remain in place pending submissions by the FDIC of its own set of claims allowed under Reg. 301.6402-7(e)(l).”36 Later, FDIC-R attempted to clarify its position and said that it was not taking any formal position or requesting any action.37 However, Mr. Vordtriede stated at the end of this “clarifying” e-mail: “My [previous] e-mail was to outline for you the FDIC’s technical grounds for its position and update you.”38 As such, FDIC-R in no way withdrew its position regarding the freeze on the accounts.
This Court demanded that all ex parte communications with the IRS be stopped. On September 13, 2010, this Court advised FDIC-R that it “will not allow any sharing of documents with the IRS without further order of the Court or consent of the parties. And that goes - that’s designed to - hopefully, to the extent a well has been poisoned, to keep it from getting any worse.”39 The very same day as this Court’s ruling, FDIC-R had additional ex parte communications with the IRS, in which it requested “that the refunds be *452made payable to the FDIC and forwarded to our attention pursuant to IRC Reg. 103.6402-7.”40 This Court held a further hearing regarding the violation of this Court’s ruling.41 The Court again ordered that FDIC-R stop communicating with the IRS.42 Thereafter, to the Court’s knowledge, the parties have abided by the automatic stay as the litigation continued here and in the Court of Federal Claims.
LEGAL DISCUSSION
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56(c), made applicable to these proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment should 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,”43 after considering the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits.” 44
In deciding a motion for summary judgment, all factual inferences must be viewed in the light most favorable to the nonmov-ing party.45 After sufficient proof has been presented to support the motion, the burden shifts to the nonmoving party to show that genuine issues of material fact still exist and that summary judgment is not appropriate.46 A genuine issue of material fact is present when “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”47
In order to demonstrate the existence of a genuine issue of material fact in a jury trial, the nonmovant must supply sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant ,48 The same principles apply in a bench trial where the judge is the ultimate trier of fact; the nonmovant must obviate an adequate showing to the judge to find for the nonmovant.49 In a situation where there is a complete failure of proof concerning an essential element of the nonmoving party’s case, Rule 56(c) necessarily renders all other facts immaterial and mandates a ruling in favor of the moving party.50
B. The Parties’ Positions
The Trustee and the Indenture Trustee (collectively, the “Movants”) argue that the tax refunds are property of the Debtor’s estate because (i) affiliated companies are free to allocate their ultimate tax liability among themselves pursuant to the TSA; *453(ii) the TSA creates a debtor-creditor relationship and not a trustee-beneficiary relationship; (iii) the TSA does not establish a trust relationship; (iv) the Affiliated Group’s course of dealings confirmed the debtor-creditor relationship; and (v) no grounds exist for the imposition of a constructive trust.
FDIC-R responds that the Tax Refund is property of Downey Bank receivership estate because (i) the TSA does not expressly transfer ownership of the Tax Refund to DFC; (ii) the Movant’s interpretation of the language of the TSA would render the TSA internally inconsistent, ambiguous and unlawful; (iii) the course of performance among the Affiliated Group members established that the funds were, in fact, property of Downey Bank; and (iv) the Trustee (as successor to DFC) holds the Tax Refund as FDIC-R’s agent and in trust for FDIC-R.
C. Property of the Debtor’s Estate
On November 25, 2008, when DFC filed a chapter 7 petition, a bankruptcy estate was created to hold “all legal or equitable interests of the debtor [DFC] in property as of the commencement of the case.”51 The Petition Date sets a “date of cleavage” and “establishes the moment at which the parties’ respective rights in property must be determined.”52 The scope of an estate’s property interests is broad.53
Estate property includes all of a debt- or’s rights and expectancies and is a concept that “has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.” Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966); see also, e.g., 11 U.S.C. § 541(c)(1)(A) (providing that assets become estate property notwithstanding any provision of nonbankruptcy law that would prevent their being liquidated or transferred by the debtor); H.R. REP. No. 95-595, at 175-76 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6136 (making clear that “property of the estate” includes all “contingent interests and future interests, whether or not transferable by the debtor”).54
“In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of [section] 541.”55
D. The TSA is Not Ambiguous.
The crux of the dispute is the interpretation of the TSA and the facts surrounding the TSA to the extent that there are ambiguities in the TSA’s language. Interpreting the terms of the TSA is essential in establishing who owns the Tax Refund. To begin, the TSA states that this Court should interpret the TSA in accordance with the laws of the State of *454California.56 Furthermore, this matter is appropriate for summary judgment because “the determination whether contract language is ambiguous is a question of law.”57
Generally, “[w]hen interpreting a contract, the plain language within the four corners of the contract must first be examined to determine the mutual intent of the contracting parties.”58 “In cases of contracts, language is to be given, if possible, its usual and ordinary meaning. The object is to find out from the words used what the parties intended to do.”59 “In addition, we must interpret the contract in a manner that gives meaning to all of its provisions and makes sense. Further, business contracts must be construed with business sense, as they naturally would be understood by intelligent men of affairs.”60 If terms are “susceptible to more than one reasonable interpretation,” then they are ambiguous.61 “The fact that the parties dispute a contract’s meaning does not establish that the contract is ambiguous.”62 In other words, “for there to be an ambiguity both interpretations must be reasonable.” 63
2. The TSA
“A significant amount of case law has emerged in determining ownership of tax refunds between parents and their subsidiaries arising from consolidated tax returns filed on behalf of the group.”64
The Ninth Circuit case of Bob Richards Chrysler-Plymoth Corp., Inc.65 establishes that in the absence of a written agreement expressly stating the rights and obligations of parties filing a consolidated tax return, a tax refund resulting solely from offsetting losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member.66 Without a written agreement, the party receiving the refund from the government receives the refund in its capacity as “agent” for the consolidated group.67 “The absence of an express or implied agreement that the agent had any right to keep the refund meant the agent was under a duty to *455return the tax refund to the party that incurred the loss.”68
FDIC-R urges that the TSA does not change the “ownership rules” set forth in Bob Richards. The Court, however, disagrees. If an express written agreement is in effect then the agreement controls the disposition of the tax refund.69 To that extent, the Court will look at the four-corners of the TSA to determine whether the agreement created an agency or debtor-creditor relationship between the Debtor and Downey Bank.
E. The TSA Establishes a Debtor-Creditor Relationship Between DFC and Downey Bank.
The bankruptcy court in IndyMac Bancorp examined three key factors when considering whether a particular document or transaction establishes a debtor-creditor relationship or a different relationship (such as trust, mere agency, or bailment relationship).70 The three factors are whether (1) the TSA creates fungible payment obligations among the parties; (2) there are no escrow obligations, segregation obligations nor use restrictions under the TSA; and (3) the TSA delegates the tax filer under the agreement with sole discretion regarding tax matters. Each of these factors, which are discussed at length below, favor a finding under the unambiguous terms of the TSA of a debt- or-creditor relationship between the Debt- or and Downey Bank.
1. The TSA Creates Fungible Payment Obligations Unrelated to Any Refunds.
As set forth in the IndyMac Bancorp decisions:
[Cjourts have repeatedly found that the use of such terms as “reimbursement” or “payment” in a tax sharing agreement evidences a debtor-creditor relationship. The reason is that such terms create “ordinary contractual obligations” or “an account, a debtor-creditor relationship, which is the quintessential *456business of bankruptcy.” This precept fully accords with the Ninth Circuit’s application of California law in the bankruptcy context to “conclude that as a matter of law a debtor-creditor relationship” exists when the parties’ prepetition agreements create fungible payment obligations.71
As in IndyMac Bancorp, the TSA creates a system of intercompany “payments” and “reimbursements” that may differ materially from the amount of any tax refund actually received by DFC. For example:
Payment of the consolidated tax liability for a taxable period shall include the payment of estimated tax installments due for such taxable period, and members of the Affiliated Group shall pay to Financial their estimated tax payments no earlier than ten (10) days prior to the due date for the payment, and in no event later than such due date. Over-payments of estimated tax by members of the Affiliated Group as determined by Financial shall be refunded to the appropriate members of the Affiliated Group within seven (7) business days of the earlier of 1) the receipt of such overpayment from taxing authorities, or 2) at such time as, and to the extent that, the overpayment is reflected in reduced quarterly installments of taxes due.72
The TSA further provides that if adjustments of the consolidated tax liability occur as a result of the filing of an amended return, claim for a refund or an audit, “the liability of the Affiliated Group members shall be recomputed by Financial to give effect to such adjustments'. In the case of a refund, Financial shall make payment to each Affiliated Group member for its share of the refund ... within seven (7) business days after the refund is received by Financial.” 73 The TSA continues:
Financial shall have the right, in its sole discretion: (i) to determine (A) the manner in which such returns shall be prepared and filed, including, without limitation, the manner in which any item of income, gain, loss, deduction or credit shall be reported; provided, however, that Financial shall consider in good faith any treatment proposed by the Affiliated Group members, (B) whether any extension of the statute of limitations may be granted and (C) elections that will be made pursuant to the Code on behalf of any members of the consolidated group (it being agreed, however, that Financial shall not unreasonably without its consent to any elections which members of the Affiliated Group desire to make); (ii) to contest, compromise or settle any adjustments or deficiency proposed, asserted or assessed as a result of any audit of any such returns; (iii) to file, prosecute, compromise or settle any claims for refund; and (iv) to determine whether any refunds to which the consolidated group may be entitled shall be paid by way of refund or credited against the tax liability of the consolidated group.74
So not only does the TSA create a system of intercompany “payments,” the TSA also makes DFC responsible to prepare and file the consolidated tax return, as well as, responsible for making all tax payments. As in IndyMac Bancorp, the TSA expressly authorizes DFC, in its “sole discretion,” to determine whether any tax refunds to which the Affiliated Group is entitled will be paid or credited against future tax ha-*457bilities of the Affiliated Group.75 Furthermore, the TSA says that DFC will “refund” overpayments.76
In a similar case to that sub judice, the District Court for the Southern District of California held in Imperial Capital Bancorp, Inc. v. FDIC (In re Imperial Capital Bancorp, Inc.) 77 that:
This Court agrees with Imperial that the TAA [tax allocation agreement] clearly creates a debtor/creditor relationship. The TAA contemplates that Imperial prepares and files all tax returns on behalf of the consolidated group, and requires that Imperial pay all of the group’s tax liability. The Bank, in turn, is required to pay to Imperial the amount of its hypothetical stand-alone tax liability, calculated as if the Bank had filed a separate federal or state income tax return. If the consolidated group is entitled to a refund, the appropriate governing tax authority pays such refund directly to Imperial.78
The terms “refund” and “payment,” along with the terms of the TSA, are indicative of a debtor-creditor relationship and, in comparison, are completely inconsistent with the existence of a trust or agency relationship.79
Recently, however, the Circuit Court of Appeals for the Eleventh Circuit has issued two seemingly contrary opinions.80 Notwithstanding that neither is binding precedent upon this Court, the cases are readily distinguishable.
(a) Zucker v. FDIC (In re BankUnited Fin. Corp.)
In BankUnited, the Eleventh Circuit looked at the narrow and seemingly identical issue of whether a tax refund was property of the holding company or its subsidiary bank. The BankUnited tax sharing agreement, however, differed significantly from the TSA in the following ways: (i) the BankUnited tax sharing agreement provided that the bank, not the holding company, pay taxes to the government; (ii) it described the process and accounting methods in which members of the BankUnited group determine their individual income tax liabilities; (iii) it described how the individually determined income tax liability for each member of the group was aggregated and adjusted for the preparation of a consolidated tax return; (iv) it used different terms for intercompa-ny obligations - “income tax payable” to refer to the amount that a member owed to the bank as reimbursement for the bank paying its share of the taxes owed to the government and “income tax receivable” to refer to the amount to which a member is entitled from the bank as a result of a tax refund from the government; (v) it provided that within 30 days of the bank paying the consolidated tax liability to the government, the other members of the group would reimburse the bank; and (vi) although the BankUnited holding company *458filed the consolidated tax return and received the refund, the bank remained obligated to distribute any tax refunds that the holding company received to the group members.81 Ultimately, the Eleventh Circuit found that the BankUnited tax sharing agreement was ambiguous because the agreement did not state when the holding company must forward a tax refund to the bank and because the agreement did not explain whether the holding company “owned” the refund before forwarding it to the bank.82
The BankUnited Court also held that there was no language in the tax sharing agreement from which it could reasonably infer that the parties agreed that the holding company “would retain the tax refunds as a company asset and, in lieu of forwarding them to the [b]ank, would be indebted to the [b]ank in the amount of the refunds.” 83 Nor could the Court find “any words from which the terms of the indebtedness could be inferred.”84
A debtor-creditor relationship is created by consent, express or implied. We find no words in the [tax sharing agreement] from which it could reasonably be inferred that the parties agreed that the Holding Company would retain the tax refunds as a company asset and, in lieu of forwarding them to the Bank, would be indebted to the Bank in the amount of the refunds. Nor do we find any words from which the terms of the indebtedness could be inferred. If, as the Bankruptcy Court concluded, the parties created a debtor-creditor relationship, we would expect to find some means of protection for the creditor that would help guarantee the debtor’s obligation, such as a fixed interest rate, a fixed maturity date, or the ability to accelerate payment upon default.85
Ultimately, the BankUnited Court held that the purpose of the tax sharing agreement was to “ensure that the tax refunds [were] delivered to the [g]roup’s members in full and with dispatch.”86
The BankUnited Court’s chief concern appears to have been that the bank paid the tax liability and the bank was liable to the other members of the consolidated group for any tax refunds, while the holding company filed the return and received the actual tax refund. That is not the case here. In this case, Downey Bank (and other members of the Affiliated Group) paid their estimated tax liability to DFC (the holding company), DFC had the sole discretion to prepare and file the tax returns, the Tax Refund was paid by the taxing authorities to DFC, and then DFC would recomputed each member’s tax liability, and DFC could retain any refund for seven business days (and in the event of tax overpayments, DFC, in its sole discretion, would determine whether to refund the overpayments to the members of the Affiliate Group or credit the overpayment against the tax liability of the Affiliated Group). Ultimately, DFC paid all taxes, received the Tax Refund and remained liable to the other members of the Affiliated Group for their respective portions.
(b) FDIC v. Zucker (In re NetBank, Inc.)
In NetBank,87 the Eleventh Circuit, reversing the lowers courts’ decisions, held that a tax sharing agreement was ambiguous.
*459Based on the language of the TSA and the Policy Statement, we conclude that the parties intended to establish an agency relationship with respect to refunds from the IRS attributable solely to the Bank. Specifically, our conclusion is based on the language of the TSA (e.g., the indication in Section 9 that NetBank acts in an agency capacity with respect to tax refunds, and the expressly stated intent of the parties in Section 10(a) to comply with the Policy Statement) and on the language of the Policy Statement that a parent company such as NetBank should be deemed to receive tax refunds in an agency capacity.88
The NetBank tax sharing agreement contained the following language: “This Agreement is intended to allocate the tax liability in accordance with the Inter-agency Statement on Income Tax Allocation in a Holding Company....”89 The Interagency Statement on Income Tax Allocation in a Holding Company (the “Inter-agency Policy Statement”) counsels against entering into a tax allocation agreement that would grant ownership to the parent of refunds attributable to the bank.90 The NetBank court found that this reference was a clear indication of the parties’ intention. NetBank, however, is factually distinguishable from this case. Here, the parties did not reference the Interagency Policy Statement, even though the Interagency Policy Statement was issued in 1998 and the latest iteration of the TSA was entered into in February 2000. Furthermore, unlike in NetBank, the TSA does not contain language stating that DFC acts in an agency capacity with respect to tax refunds.91 Although there are many similarities between the Net-Bank tax sharing agreement and the TSA, the NetBank tax sharing agreement contained language that the TSA does not.
Although the BankUnited and NetBank cases seem to offer contrary decisions to the cases discussed above, they are factually distinguishable and do not persuade this Court that DFC and Dow-ney Bank had anything other than a debt- or-creditor relationship.
2. The TSA Contains No Escrow, Segregation Requirement, or Use Restrictions on Any Refund that DFC Receives.
The second factor to consider in determining if the Debtor and Downey Bank have a debtor-creditor relationship is whether the TSA contains any escrow requirements, segregation requirements and/or use restrictions in connection with the Tax Refund. More specifically, as set forth in IndyMac Bancorp:
courts have repeatedly found that the lack of provisions requiring the parent to segregate or escrow any tax refunds and the lack of restrictions on the parent’s use of the funds while in the parent’s possession further evidences a debtor-creditor relationship.92
“It is a firmly established principle that if a recipient of funds is not prohibited from using them as his own and commingling them with his own monies, a debtor-creditor, not a trust, relationship exists.”93 As *460set forth in IndyMac Bancorp, the Court will look at the broader range of actions that are permitted or forbidden by the TSA.94
The TSA contains no escrow provisions, segregation requirements or restrictions on DFC’s use of any tax refund that the government pays to DFC. Nothing in the TSA imposes any duty upon DFC to hold these funds in trust or to treat them as trust funds for the benefit of any other parties. Prior to the payment of any tax refund to the Affiliated Group members, DFC has complete dominion and control over the monies received from the governmental authorities for over a week.95 Furthermore, Downey Bank’s rights (and those of the other Affiliated Group members) are limited to the expectancy of payment of a sum at future date.96
FDIC-R argues that because the TSA does not explicitly discuss ownership of the Tax Refund, that the Court should rely on the following language:
In no instance shall the allocation of tax liability to any member of the Affiliated Group pursuant to this [Tax Sharing] Agreement be less favorable than the tax liability which result from such member filing a separate tax return.97
The above-quoted language is contained in several places is the TSA. More specifically, it arises in relation to computing tax liability;98 the payment of estimated tax liability;99 an increase in tax liability from recomputed tax liability (in the case of an amended tax return, claim for refund, or tax audit);100 and state and other taxes.101 As stated in IndyMac Bancorp, the separate-return language is a right “to receive fungible ‘payments’ using a formula calculated as if the Bank were a separate tax filer is meaningfully different from the right to receive any specific refunds upon receipt.”102
The Court finds that the stand-alone language refers to the amount of tax liability to be paid by the members of the Affiliated Group and does not create a trust or agency relationship or ownership of any refund. Nothing herein affects the amount of FDIC-R’s claim against DFC - this Opinion relates solely to who “owns” the Tax Refund.
Here, the debtor-creditor relationship is created by the lack of segregation provisions or use restrictions.103 When DFC *461receives the tax refund, DFC stands as a future debtor of Downey Bank (after the passage of seven business days) and not as trustee or agent.104
3. The TSA Delegates Complete and Unrestrained Decision-Making to DFC Regarding All Tax Matters.
The last factor to consider in determining whether a debtor-creditor relationship exists between the parties is whether contractual provisions give “a parent sole discretion to prepare and file consolidated tax returns and to elect whether or not to receive a refund.”105
Section 2.4 of the TSA gives DFC “sole discretion over (1) the manner in which tax returns are prepared and filed, (2) whether any tax refund should be paid or credited against future tax liability, and (3) how to resolve disputes with the taxing authorities.” 106 In fact, the TSA provisions in this matter are almost identical to those in IndyMac Bancorp.107 This Court agrees with IndyMac Bancorp and finds that this language does not subject DFC to the direction or control of any member of the Affiliated Group and does not establish a principal-agent relationship between the members of the Affiliated Group and DFC.108
FDIC-R argues that the “mere use of certain words” should not over-ride the intention of the parties.109 However, the preliminary consideration of extrinsic evidence does not trump the TSA’s clarity.110 For example, FDIC-R submits (and the Movants do not dispute) that prior tax refund checks were deposited directly into Downey Bank’s accounts (rather than first being deposited into DFC’s accounts).111 This practice, however, only reinforces the debtor-creditor relationship because DFC had to consent and direct the deposit of the check into Downey Bank’s account.112
As set forth herein, it is beyond the “mere words.” The Court is persuaded by (i) the absence of a precise provision establishing a trust or agency relationship; (ii) DFC’s sole discretion to prepare and file the consolidated tax return, including “the manner in which any item of income, *462gain, loss, deduction or credit shall be reported;” (iii) DFC’s sole discretion to determine whether any overpayments to which Downey Bank may have been entitled to be paid by way of refund or credited against the tax liability of the consolidated group; and (iv) DFC’s ability to hold any refund for more than a week. These provisions giving complete discretion to DFC along with the specific words of “payment” and “reimbursement,” leads this Court to find that DFC owns any Tax Refund. And, consequently, FDIC-R has a claim against DFC’s estate for the amount of its separate-return basis.113
In conclusion, all three of the IndyMac Bancorp factors favor, as a matter of law, a finding that under the unambiguous terms of the TSA the relationship of the Debtor and Downey Bank in connection with the Tax Refund is that of a debtor and a creditor, respectively.114
E. Course of Performance
Notwithstanding that the parties have a debtor-credit relationship under the unambiguous terms of the TSA, FDIC-R argues that the Affiliated Group’s course of performance indicates that Downey Bank owns the tax refund. In support of its position, FDIC-R submitted (along with other evidence) both a factual declaration and an expert declaration. As such, the Court must first determine whether it should consider these declarations.
1. Extrinsic Evidence
FDIC-R has submitted the declaration of Donald E. Royer, the former Executive Vice President, General Counsel and Corporate Secretary for Downey Bank and DFC (“Royer Declaration”) and the declaration of William Lesse Castleberry, Esq., an attorney who specializes in federal income taxation (the “Castleberry Declaration”). The Castleberry Declaration was submitted as an expert opinion regarding the TSA. The Movants object to the Royer Declaration and the Castleberry Declaration on the basis that these declarations are impermissible extrinsic evidence.
California law allows the admission of parol evidence only if it is (1) “relevant” to prove (2) “a meaning to which the language of the instrument is reasonably susceptible.”115 “California recognizes the objective theory of contracts, under which it is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of one of the parties, that controls interpretation. The parties’ undisclosed intent or understanding is irrelevant to contract interpretation.”116
[However, in California,] rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. Such evidence includes testimony as to the circumstances surrounding the making of the agreement * * * including the object, nature and subject mat*463ter of the writing * * * so that the court can place itself in the same situation in which the parties found themselves at the time of contracting. If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, is fairly susceptible of either one of the two interpretations contended for * * *, extrinsic evidence relevant to prove either of such meanings is admissible.117
The Royer Declaration states that the TSA “intended to provide a mechanism by which DFC would act as agent for the consolidated group members, including [Downey Bank], with respect to tax matters. The TSA was not intended to grant to DFC ownership of any tax refunds to which another member of the consolidated group was entitled, either because it acted as agent for the group or otherwise.”118 Although Mr. Royer states that he was one of the drafters of the TSA, he is not a signatory to the TSA; so in effect, his “intent” as one of the drafters, cannot be the “intent” of the signatories to the TSA. Furthermore, Mr. Royer did not submit any evidence in support of this conclusory statement made over 13 years after the TSA was executed;119 nor did he claim that his alleged “intent” was discussed among or communicated to the parties to the TSA. Indeed, the TSA, an integrated contract,120 states that the “intent” of the parties is:
to establish a method for allocating the consolidated tax liability of each member among the Affiliated Group ... for reimbursing Financial for payment of such tax liability, for compensating members of the Affiliated Group for use of their losses or tax credits, and to provide for the allocation and payment of any refund arising from a carryback of losses or tax credits from subsequent taxable years.121
Nothing therein suggests an agency or trust relationship. As such, Mr. Royer’s conclusory statements do not override the “intent” expressly stated in the TSA. As a result, the Royer Declaration is impermissible extrinsic evidence and will not be considered by the Court.
The Castleberry Declaration, submitted as an expert declaration, will similarly not be considered. In California, the “interpretation of contractual language is a legal matter for the court ... expert opinion on contract interpretation is usually inadmissible.”122 As interpretation of the TSA is a legal matter and the Court has found that the TSA is unambiguous, *464the Court will not consider the testimony of Mr. Castleberry.123
2. The Course of Performance
In addition to the declarations discussed (and disposed of) above, FDIC-R asserts that three elements of the performance of the parties, i.e., the Debtor, Downey Bank and their affiliates, under the TSA support a finding that Downey Bank owns the Tax Refund. None of these arguments, however, are persuasive. First, FDIC-R argues that the parties historically treated tax refunds as property of Downey Bank. The prior tax refund checks were deposited directly into Dow-ney Bank’s accounts and Downey Bank remitted payments to the other members of the Affiliated Group for their portion of the tax refund. FDIC-R argues that the tax refund money was never comingled in DFC’s accounts because the tax refunds were deposited directly into Downey Bank’s accounts. FDIC-R continues that according to IRS regulations that, as between the IRS and the Affiliated Group, for the convenience of the IRS, the parent acts as the agent for the Affiliated Group on “all matters relating to tax liability.”124
Second, FDIC-R asserts that the books and records of Downey Bank and DFC reflect that the parties recorded transactions relating to payment of taxes in a manner inconsistent with the debtor-creditor relationship because their books and records were maintained exactly as one would expect if Downey Bank filed its tax returns on a separate return basis.
Third, FDIC-R asserts that in filings with the SEC and the OTS parties understood that Downey Bank owned any refunds arising from overpayment of taxes.125 Each of these arguments fail,
a. Deposit of the Refund Checks into Downey Bank’s Account
FDIC-R asserts that, in the parties’ course of performance, tax refund checks were deposited directly into Dow-ney Bank’s account (and not comingled with DFC’s funds). And, as such, all the parties considered the refunds to “belong” to Downey Bank.126 This argument fails for several reasons.
*465(i) The refund checks were made payable to DFC.127 It would be impossible for Downey Bank to deposit the refund checks without the consent and direction of DFC.128
(ii) DFC deposited the entire tax refund for the consolidated group into Downey Bank’s account and Downey Bank, in turn, sent checks to other members of the Affiliated Group for their individual refund amount. If the money “belonged” to the other members of the Affiliated Group, why would DFC deposit it into Downey Bank’s account? 129 If DFC considered the refund “owned” by Downey Bank - it would have had to consider each member’s refund “owned” by that member and DFC would be breaching its duties to the other members by depositing the check into Downey Bank’s account. The IRS only issued one check and the refunds had to be given to each member of the Affiliated Group - the only way to accomplish this task is to deposit the check into one of the member’s accounts and then send each member their portion of the refund. DFC directing Downey Bank to do this ministerial task cannot create some sort of agency or trust relationship.
(iii) This deposit process only enforces the Court’s finding that DFC was to have the entire tax refund and then had a contractual duty to deliver each member their allocated portion. Again, nothing herein affects FDIC-R’s claim against DFC. Indeed, per the terms of the TSA (as discussed above) and the course of performance, it appears to the Court that the FDIC-R does have a claim against the Debtor’s estate based on DFC’s contractual relationship with Downey Bank.
(iv) The consolidated tax return regulations “are basically procedural in purpose and were adopted solely for the convenience and protection of the federal government.” 130 “Federal law does *466not govern the allocation of the [Affiliated] Group’s tax refunds; hence, a parent and its subsidiaries are free to provide for the allocation of tax refunds by contract.” 131 As such, the tax return regulations do not alter the relationship the parties created in the TSA.
b. Books, Records and Public Filings
FDIC-R next argues that DFC’s books and records do not reflect a debtor-creditor relationship. FDIC-R asserts that if there was a debtor-creditor relationship then DFC’s books would reflect a receivable and corresponding payable in the full amount of Downey Bank’s tax liability and/or refund. Furthermore, FDIC-R continues that in filings with the SEC and the OTS, the parties recognized that Dow-ney Bank owned refunds arising from overpayment of taxes. In support, FDIC-R submitted the declaration of accountant Stephan Wasserman.
The Wasserman Declaration states that DFC did not treat the payment to the U.S. Treasury as its own expense.132
In DFC’s instance, when consolidated taxes became due, DFC would collect a payment from Downey Bank and the other subsidiaries for their separate return tax liability. DFC would deposit the checks into its bank account, thereby recording an increase to cash (a Debit entry) and record the corresponding payable to the U.S. Treasury for Federal taxes (a Credit entry which increased the corresponding payable).133
The declaration continues that DFC recorded the tax payments to the taxing authorities as a reduction of its cash and a reduction of its taxes payable account.134 However, this accounting method (and as reflected in various public filings) appears consistent with the TSA’s mandate that taxes be calculated on a stand-alone basis, as well as, in compliance with the policies issued by the OTS, among other federal agencies.135 Furthermore, the Movants concede that the Tax Refund is generated from the carryback of Downey Bank’s net operating losses. Contractually, the Affiliated Group members calculated their tax liability on a stand-alone basis (and indicated such in public filings). However, in practice to the TSA governed the tax filings, payments and returns - and, ultimately, the ownership of the Tax Refund.
F. Trust Relationship
FDIC-R’s final argument is that the TSA did not transfer ownership of any tax refunds from Downey Bank to DFC. Rather, a trust relationship was created where the Debtor held any tax refunds in trust for Downey Bank. FDIC-R’s argument fails as an initial matter because, as discussed above, and for the sake of clarity below, the TSA does not contain any trust language.
Nonetheless, FDIC-R argues that Bob Richards and the resulting progeny of cases make clear that DFC would have received such funds as an agent of Downey Bank and, as such, would hold the Tax Refund in trust for the benefit of FDIC-R, as successor to Downey Bank. FDIC-R claims that the TSA limited DFC’s actions by the provisions about separate filing, and *467requiring consideration in good faith any treatment proposed by the Affiliate Group member, and requiring that DFC had to make refund payments to the Affiliated Group members within seven business days. All of these TSA provisions highlighted by FDIC-R are discussed above. But, to reiterate, this Court agrees with IndyMac Bancorp and finds that this language does not subject DFC to the direction or control of any member of the Affiliated Group and does not establish a principal-agent relationship between the members of the Affiliated Group and DFC. 136 Furthermore, as discussed above, Bob Richards and its progeny of cases only applies when there is no express agreement between the parties, which is not the case here.137
FDCI-R continues that, even if this Court finds that Bob Richards and its progeny do not apply,138 a trust relationship exists under state law. In order to establish a trust, the burden is on FDIC-R to identify some factual disagreement139 to “(1) demonstrate that the trust relationship and its legal source exist, and (2) identify and trace the trust funds if they are commingled.”140 Furthermore, this Court must look California state law to determine whether FDIC-R has established a trust relationship.141
1. Express Trust
Under California law, a voluntary trust is created by acts or words of the trustor which indicate: “(1) an intention to create a trust and (2) the subject, purpose, and beneficiary of the trust. A trust is established where the trustee’s acts or words express (1) his acceptance of the trust, or his acknowledgment, made upon sufficient consideration, of its existence, and (2) the subject, purpose, and beneficiary of the trust.”142
If the intention is that the money shall be kept or used as a separate fund for the benefit of the payor or a third person, a trust is created. If the intention is that the person receiving the money *468shall have the unrestricted use thereof, being liable to pay a similar amount whether with or without interest to the payor or a third person, a debt is created Whether a debt or trust is created by payment of money depends on circumstances surrounding the transaction, including: (1) the presence or absence of an agreement to pay interest; (2) the amount of money paid; (3)-the time to elapse before the payee must perform his agreement; (4) the relative financial positions of the parties; (5) the relationship between the parties; (6) the custom in similar transactions.143
As set forth above in more detail, there was nothing express in the TSA that created a trust relationship; furthermore, DFC’s unrestricted use of any tax refund for seven business days also leads this Court to find that no express trust was created.
b. Constructive Trust
A constructive trust remedy exists to prevent unjust enrichment realized through acts of wrongdoing.144 There have been no allegations or evidence to support a finding of wrongdoing on behalf of DFC; therefore, no constructive trust was created between DFC and Downey Bank.
3. Resulting Trust
A resulting trust is an equitable remedy145 that differs from an express trust.
A resulting trust arises by operation of law from a transfer of property under circumstances showing that the transferee was not intended to take the beneficial interest. Such a resulting trust carries out and enforces the inferred intent of the parties. It has been termed an “intention-enforcing” trust, to distinguish it from the other type of implied trust, the constructive or “fraud-rectifying” trust. The resulting trust carries out the inferred intent of the parties; the constructive trust defeats or prevents the wrongful act of one of them. It differs from an express trust in that it arises by operation of law, from the particular facts and circumstances, and thus it is not essential to prove an express or written agreement to enforce such a trust. The trustee has no duties to perform, no trust to administer and no purpose to carry out except the single task of holding onto or conveying the property to the beneficiary.146
The burden is on FDIC-R to establish unequivocally that there is no genuine *469dispute as to any material fact147 that the parties intended to establish a trust.148
However, there is nothing in the TSA that indicates that DFC and Downey Bank intended to create a trust.149 Here, DFC had duties to file consolidated tax returns (prepared in their “sole discretion”). Furthermore, DFC remained responsible to contest, compromise, and settle any adjustments or deficiencies as a result of any tax authority audit. DFC also decided if estimated tax overpayments were to be returned or reflected in reduced quarterly installments of taxes due. The TSA gave DFC sole authority to manipulate the funds and the tax returns, and DFC had the discretion to use any tax refunds for seven business days.
FDIC-R cites to this Court’s decision in In re Catholic Diocese of Wilmington, Inc.,150 where the Court was faced with an unsecured creditors’ committee who sought a declaration under Delaware law (which is not controlling here) that no trust relationship existed between a diocese and individual parishes who had delivered funds to the diocese to invest pursuant to the diocese’s pooled investment program. The funds were deposited into the diocese’s operating account and comin-gled with the diocese’s own funds before being placed into the investment pool where they were again commingled. The Court found that a resulting trust was established by the actions and intent of the parties. However, as the funds were comingled with the diocese’s general funds and then again in the investment account, the funds were not traceable. As such the parishes could not identify their specific property placed in trust, even though the diocese meticulously recorded the investors’ shares of the funds in the investment account.
Importantly, unlike here, in the Catholic Diocese case there was no written agreement governing the parties’ rights to the funds at issue. This Court found that the relationship between the parties was “akin to that between an investor and a broker,” 151 which is not the relationship among the Affiliated Group members. Furthermore, the whole purpose of the TSA was to consolidate and commingle funds by creating one tax return and one tax payment to and from the taxing au*470thorities, thereby reducing the consolidated group’s overall tax liability.152
Furthermore, the tax refund checks here were made payable to DFC.153 Although FDIC-R asserts that the tax returns were deposited directly into Downey Bank’s accounts which would indicate “ownership” of the refunds, such deposit could only occur with the consent and direction of DFC;154 as such, the “economic reality” is that DFC had complete dominion and control over the tax payments and tax refunds and was empowered to satisfy its contractual payment obligation by authorizing Downey Bank to deposit the check.
As a resulting trust would be an equitable remedy, even if FDIC-R could claim that the Debtor is being unjustly enriched - “[e]nrichment alone will not suffice to invoke the remedial powers of a court of equity. The inquiry is whether, as between the two parties to the transaction, the enrichment be unjust.”155 There is nothing “unjust” about enforcing the parties’ contractual obligations set forth in the TSA. Furthermore, as set forth in IndyMac Bancorp:
[T]he Court does not perceive any equitable rule requiring the Court to protect the FDIC fully at the great expense of Bancorp’s other creditors; the equities, as well as the principles underlying the bankruptcy laws, point in the other direction. Thus, because there will be no unjust enrichment if the Trustee retains the tax refunds for the benefit of Ban-corp’s estate, there is no factual basis for imposing the quasi-contractual remedy of Bob Richards.156
The Ninth Circuit, in discussing imposition of a constructive trust, has stated:
We necessarily act very cautiously in exercising such a relatively undefined equitable power in favor of one group of potential creditors at the expense of other creditors, for ratable distribution among all creditors is one of the strongest policies behind the bankruptcy laws.157
This policy is equally applicable to resulting trusts.158 Here, FDIC-R provides no *471evidence to support its resulting trust theory and “[i]f such an intention existed, then evidence of such intent should be readily available.... ”159 As in IndyMac Bancorp, FDIC-R provided the Court with no contemporaneous documents or any other material showing any intent by anyone to create any sort of “trust” or similar relationship. In fact, the TSA indicates by the “sole discretion” to file returns and negotiate with the taxing authority, as well as, the seven day delay in payment that the parties intended that DFC obtain beneficial interest in the refunds it received.
As a result, FDIC-R has not unequivocally established, i.e., it could not demonstrate the existence of a genuine issue of material fact,160 that a resulting trust was formed between and among the Affiliated Group members.
G. Violations of the Automatic Stay.
Finally, as noted above, the Movants also seek for summary judgment regarding their allegations that FDIC-R willfully violated the automatic stay in section 362(a) of the Bankruptcy Code, which the FDIC-R refutes. As this Court understands that a settlement in principle has been reached in the Court of Federal Claims action (although approval from the requisite governmental agencies has not been obtained to date) and the Movants have not asserted that the (prospective) Tax Refund was somehow diminished by FDIC-R’s (alleged) actions, the Court finds that while the violation of the stay arguments are very strong, they are, effectively, moot. As such, for the purposes of clarity of the record, the Court will deny, without prejudice, the motions for summary judgment regarding FDIC-R’s (alleged) violations of the automatic stay.
CONCLUSION
At its core, this is a case of contract interpretation. Under the plain, unambiguous language of the TSA, the Court finds, as a matter of law, that the TSA creates a debtor-creditor relationship and, as a result, the Tax Refund is property of the Debtor’s estate. The Court further finds that FDIC-R did not meet its burden in showing that a resulting trust was intended by the parties; nor that the parties’ course of performance indicates a trust or agency relationship. Lastly, the Court finds that the allegations of violations of the automatic stay are moot.
As such, summary judgment will be granted as to Count I of the Complaint, and denied, without prejudice, as to Court II of the Complaint. Furthermore, summary judgment will be entered in movant’s favor on FDIC-R’s First and Tenth Counterclaims. An order will be issued.
. This Opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
. As discussed below, the movants also seek summary judgment on FDIC-R’s (alleged) violation of the automatic stay. The Court will deny the motions, without prejudice, regarding whether FDIC-R violated the automatic stay.
. Declaration of Peter Feldman in Support of the FDIC-R's Memorandum of Law in Opposition to the Motions for Partial Summary Judgment of the Trustee and Wilmington Trust Company (“Feldman Declaration”) Exh. 4 (Risks Relating to the Notes section of Prospectus Supplement to Downey Financial Corp. $200,000,000 6 1/2 % Senior Notes Due 2014, at S — 13).
. D.I. 973. Thereafter, the Court entered an order substituting Mr. Giuliano as plaintiff in this adversary action. Adv. Pro. No. 10-53731 D.I. 133 (Docket items in the adversary action are referred to herein as "Adv. D.I. #”).
. 12U.S.C. § l&U, etseq.
. Adv. D.I. 1.
. Adv. D.I. 29.
. Adv. D.I. 35.
. Adv. D.I. 42.
. More specifically, the movants seek summary judgment on Count I of the Complaint for declaratory judgment under section 541 of the Bankruptcy Code relating to ownership of the tax refunds and Count II of the Complaint for violation of the automatic stay. See Adv. D.I. 1, 79 and 81.
. More specifically, the movants seeks summary judgment on FDIC-R's First Counterclaim, which also seeks declaratory judgment under section 541 of the Bankruptcy Code relating to the ownership of the tax refunds, and its Tenth Counterclaim, which seeks a declaration that the Trustee is not entitled to and is barred from seeking any or all of the tax refunds. Id.
. In addition to the motions and supporting memoranda, FDIC-R’s opposition thereto, and movants' reply briefs (Adv. D.I. 79, 80, 81, 82, 92, 94, and 95); the parties have filed ten (10) additional sets of supplemental briefing (Adv. D.I. 106, 107, 108, 109, 111, 112, 114, 115, 116, 117, 119, 120, 122, 123, 124, 125, 128, 128, 130 and 131).
. Declaration of William H. Gussman, Jr. in Support of Plaintiff Wilmington Trust Company’s Motion for Partial Summary Judgment (there "Gussman Declaration”); Exhibit 1 (Termination and Amendment Number 1 to Tax Sharing Agreement among Downey Financial Corp. and Affiliates, dated February 29, 2000). Adv. D.I. 80. The TSA makes reference to an earlier tax sharing agreement, dated December 1, 1998.
. The Debtor is referred to as "Financial” in the TSA.
. TSA, § 2.1(a).
. TSA, § 2.1(d) ("In no instance shall the allocation of tax liability to any member of the Affiliated Group pursuant to this [Tax Sharing] Agreement be less favorable than the tax liability which would result from such member filing a separate tax return.’’).
. TSA, § 2.1(e).
. Id.
. TSA, § 2.4(a).
. TSA, § 2.1(e).
. Id.
. TSA, § 2.1(h).
. See Gussman Declaration, Exh. 10.
. See Declaration of Stephan H. Wasser-man, CPA/ABV, CFF (“Wasserman Declaration”), Exh. D.
. On November 6, 2009, the Worker, Home-ownership and Business Assistance Act was signed into law permitting the Trustee to car-ryback losses for up to five years, instead of the former two year carryback rule. 26 U.S.C. §§ 6511 & 172(b)(1)(H) (as amended by § 13 of the Workers, Homeownership, and Business Assistance Act of 2009 (Pub.L. No. 111-92, 123 Stat. 29840) (the “2009 Act”)).
.The Trustee has already received approximately $17 million in tax refunds related to overpayments of taxes paid in 2007, which are being held in the Trustee's escrow account pursuant to Stipulations approved by this Court. See D.I. 67 and 347. The remainder of the Tax Refund is being sought in *450litigation pending before the United States Court of Federal Claims, discussed infra.
. Payment of Taxes by Downey Bank:
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See Wasserman Declaration at p. 11, ¶ 17.
. Fed. Cl. Case No. 10-734T.
. Gussman Declaration, Exh. 11.
' AC Exh. 12, p.2 "Purpose of Form.”
. Id.
. Id., Exh. 13.
. Id., Exh. 14.
. Id., Exh. 13.
. Id., Exh. 15 (Vordtriede Dep. at 146:9-10; 146:17-147:0; 147:14-148:7).
.Id., Exh. 16.
. Id., Exh. 17.
. Id.
. D.I. 468 (Transcript of Sept. 13, 2010 Hearing at p. 36).
. Gussman Declaration, Exh. 19.
. D.I. 608 (Transcript of Nov. 17, 2010 Hearing at p. 6); D.I. 552 (Transcript of Dec. 1, 2010 Hearing at p. 11).
. D.I. 552 (Transcript of Dec. 1, 2010 Hearing at p. 11).
. Fed.R.Civ.P. 56(a).
. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-588, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)).
. Id. at 587, 106 S.Ct. 1348.
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Olson v. Gen. Elec. Astrospace, 101 F.3d 947, 951 (3d Cir.1996).
. In re Broadstripe, LLC, 444 B.R. 51, 76-77 (Bankr.D.Del.2010) (citing Leonard v. General Motors Corp. (In re Headquarters Dodge), 13 F.3d 674, 679 (3d Cir.1993).
. Id. at 77-78 (citing Celotex Corp., 477 U.S. at 317-18, 106 S.Ct. 2548).
. 11 U.S.C. § 541(a)(1).
. In re IndyMac Bancorp, Inc., 2:08-BK-21752-BB, 2012 WL 1037481, *12 (Bankr. C.D.Cal. Mar. 29, 2012) report and recommendation adopted sub nom. In re IndyMac Bancorp Inc., CV 12-02967-RGK, 2012 WL 1951474 (C.D.Cal. May 30, 2012) (citations omitted). Hereinafter, the IndyMac Bancorp bankruptcy court report and recommendations (which were accepted by the District Court) will be referred to herein as "IndyMac Bancorp." When the Court refers to the district court’s opinion, it will be indicated as the "IndyMac Bancorp District Court Opinion.”
. Id. (citing United States v. Whiting Pools, inc., 462 U.S. 198, 204, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) and In re Central Ark. Broad. Co., 68 F.3d 213, 214 (8th Cir.1995)).
. Id.
. Matter of Yonikus, 996 F.2d 866, 869 (7th Cir.1993) (citations omitted).
. TSA, § 3.3.
. United States v. Westlands Water Dist., 134 F.Supp.2d 1111, 1135 (E.D.Cal.2001).
. Westlands Water Dist., 134 F.Supp.2d at 1134 (citing United States v. Clark, 218 F.3d 1092, 1096 (9th Cir.2000)).
. Id. (citations and internal quotation marks omitted).
. Giove v. Dep't of Transp., 230 F.3d 1333, 1340-41 (Fed.Cir.2000) (citations and internal quotation marks omitted).
. McAbee Const. Inc. v. United States, 97 F.3d 1431, 1435 (Fed.Cir.1996) (citations omitted).
. Westlands Water Dist., 134 F.Supp.2d at 1135 (citations and internal quotation marks omitted).
. Giove, 230 F.3d at 1341. Thus, if the "provisions are clear and unambiguous, they must be given their plain and ordinary meaning, and the court may not resort to extrinsic evidence to interpret them.” McAbee Const. Inc., 97 F.3d at 1435 (citations and internal quotation marks omitted).
. In re Vineyard Nat. Bancorp, 2:10-BK-21661RN, 2013 WL 1867987, *7 (Bankr. C.D.Cal. May 3, 2013).
. Western Dealer Mgmt., Inc. v. England (In re Bob Richards Chrysler-Plymouth Corp., Inc.), 473 F.2d 262 (9th Cir.1973) (hereinafter "Bob Richards ").
. Id. at 265.
. Id.
. Vineyard Nat. Bancorp, 2:10-BK-21661RN, 2013 WL 1867987 at *7 (interpreting Bob Richards Chrysler-Plymouth Corp., 473 F.2d at 265).
. Id. (citations omitted). See, e.g., Bob Richards, 473 F.2d at 265 (“Since there is no express or implied agreement that the agent had any right to keep the refund, we agree with the referee and the district court that WDM was acting as a trustee of a specific trust and was under a duty to return the tax refund to the estate of the bankrupt.” (emphasis added)); Capital Bancshares, Inc. v. Fed. Deposit Ins. Corp., 957 F.2d 203, 208 (5th Cir.1992) holding that "the refund is the property of the Bank in the absence of a contrary agreement.” (emphasis added)); Matter of Bevill, Bresler & Schulman Asset Mgmt. Corp., 896 F.2d 54, 58 (3d Cir.1990) ( holding that “the parties specified by explicit contractual language that the Treasury Bond coupon interest and the GNMA principal and interest payments would be the property of AMC.” (emphasis added)); Vineyard Nat. Bancorp, 2:10-BK-21661RN, 2013 WL 1867987 at *7 (finding that “if an express written agreement is in effect, such an agreement controls the disposition of the tax refund." (emphasis added)); F.D.I.C. v. AmFin Fin. Corp., 490 B.R. 548, 551 (N.D.Ohio 2013) (holding that "the Court finds no merit in the FDIC's contentions that the tax sharing agreements do not fully address the rights and obligations of the entities. Accordingly, the Court declines to adopt and rely upon the Bob Bichareis rule to create an agency or trust as an operation of law.”); Team Financial, Inc. v. FDIC (In re Team Financials, Inc.), 09-10925, 2010 WL 1730681, *8 (Bankr.D.Kan. Apr. 27, 2010) ("The parties to the TAA [tax allocation agreement] in this case made a 'differing agreement,' taking this case out of the Bob Richards general rule.”).
. IndyMac Bancorp, at *13. See also F.D.I.C. v. AmFin Fin. Corp., 490 B.R. 548, 554 (N.D.Ohio 2013) ("The Court adopts the IndyMac analysis in its entirety.”).
. Id. (citations omitted).
. TSA, § 2.1(e) (emphasis added).
. TSA, § 2.1(h) (emphasis added).
. TSA, § 2.4(a) (emphasis added).
. TSA, § 2.4(a). Compare IndyMac Ban-corp, at *14.
. TSA, § 2.1(e).
. 492 B.R. 25 (S.D.Cal.2013).
. Id. at 30 (citations to the tax allocation agreement omitted).
. IndyMac Bancorp at *14. See also In re Imperial Capital Bancorp, Inc., 492 B.R. 25, 30 (S.D.Cal.2013); In re Team Financials, Inc., 09-10925, 2010 WL 1730681, *10 (Bankr.D.Kan. Apr. 27, 2010); In re First Cent. Fin. Corp., 269 B.R. 481, 497 (Bankr.E.D.N.Y.2001)subsequently aff'd, 377 F.3d 209 (2d Cir.2004).
.Zucker v. FDIC (In re BankUnited Fin. Corp.), 727 F.3d 1100 (11th Cir.2013) (hereinafter, "BankUnited.") and FDIC v. Zucker (In re NetBank, Inc.),729 F.3d 1344 (11th Cir. 2013) (hereinafter, "NetBank ").
. Id. at 1346-49.
. Id.
. Id. at 1349.
. Id.
. Id.
. Id.
.NetBank, 729 F.3d 1344.
. Id. at 1351.
. Id. at 1348.
. Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 63 Fed.Reg. 64757, 64759 (Nov. 23, 1998).
. See NetBank at 1347 and 1351.
. IndyMac Bancorp, at *15 (citations omitted).
. In re Black & Geddes, Inc., 35 B.R. 830, 836 (Bankr.S.D.N.Y.1984). See In re Coupon Clearing Serv., Inc., 113 F.3d 1091, 1101 (9th Cir.1997) (quoting In re Black & Geddes, Inc.,35 B.R. at 836); Lonely Maiden Prods., LLC v. GoldenTree Asset Mgmt., LP, 201 Cal. *460App.4th 368, 380, 135 Cal.Rptr.3d 69 (2011) (quoting In re Black & Geddes, Inc.,35 B.R. at 836).
. IndyMac Bancorp, at *15.
. TSA, § 2.1(h) (proscribing seven business days for DFC to pay the Affiliated Group member’s refund). The FDIC-R relies on In BSD Bancorp, Inc v. FDIC, No. 93-12207-A11 (S.D.Cal. Feb. 28, 1995) (Feldman Declaration, Exh. 57), however, the BSD Bancorp opinion does not set forth terms of tax sharing agreement; so it is impossible to compare that tax sharing agreement to the one sub judice. Regardless, the BSD Bancorp court concluded that the parent was required to give subsidiary its share of the refund in cash and immediately; as discussed, here, no such requirement exists (Debtor controls the amount it determines to pay its subsidiary for 7 business days, if at all. See TSA, § 2.h.).
. See IndyMac Bancorp, at *16.
. TSA, § 2.1(d).
. Id.
. TSA, § 2.1(e). The TSA also refers to a “separate-return basis” when discussing unused losses. TSA, § 2.1(g).
. TSA, § 2.1(h).
. TSA, §§ 2.2 and 2.3.
. IndyMac Bancorp, at *14 (emphasis supplied).
. Id. at *16 (finding that "a debtor-creditor relationship is created because lack of segregation provisions or use restrictions undermines the direction and control necessary to establish an agent or trustee relationship.” (citations omitted)).
. See id.
. Id. at *16 (citations omitted).
. TSA, § 2.4(a).
. IndyMac Bancorp, at *16.
. Id.
. Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 38, 69 Cal.Rptr. 561, 442 P.2d 641 (1968) (“A court must ascertain and give effect to this intention by determining what the parties meant by the words they used. Accordingly, the exclusion of relevant, extrinsic, evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.”).
. Zenger-Miller, Inc. v. Training Team, GmbH, 757 F.Supp. 1062, 1068 (N.D.Cal. 1991).
. Feldman Declaration, Exh. 15, Buck Tr. 152:4-153:12. See also Feldman Declaration, Exh. 23.
. See, e.g. Unlimited Adjusting Grp., Inc. v. Wells Fargo Bank, N.A., 174 Cal.App.4th 883, 94 Cal.Rptr.3d 672, 676-77 n. 6 (2009) (“When a payee receives a check, the payee becomes its holder. The payee may negotiate the check by indorsing it and transferring it to another person, who then becomes its holder.” (citations and internal quotation marks omitted)); Pac. Indem. Co. v. Sec. First Nat. Bank, 248 Cal.App.2d 75, 56 Cal.Rptr. 142, 150 (1967) ("Where a depositor issues a check instructing the drawee bank to make a payment from his funds on deposit to a specified person, his account may not be charged for this amount unless this person actually endorses and negotiates this check.”).
. See generally TSA, § 2.4(a).
. IndyMac Bancorp at *2.
. U.S. Cellular Inv. Co. v. GTE Mobilnet, Inc., 281 F.3d 929, 938 (9th Cir.2002) (citations and internal quotation marks omitted).
. Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal.App.4th 944, 135 Cal.Rptr.2d 505, 514 (2003) (citations and internal quotations marks omitted). See also Yount v. Acuff Rose-Opryland, 103 F.3d 830, 836 (9th Cir. 1996) (citations omitted) (holding that “[c]on-tract interpretation is governed by the objective intent of the parties as embodied in the words of the contract.... However, evidence of the “subjective, uncommunicated intent of one of the parties” cannot be used to contradict the express terms of the contract.”).
. Pac. Gas & Elec. Co., 69 Cal.Rptr. 561, 442 P.2d at 645-46 (citations, footnotes and internal quotation marks omitted).
. Royer Declaration, ¶ 8.
. Heston v. Farmers Ins. Grp., 160 Cal. App.3d 402, 413, 206 Cal.Rptr. 585 (Ct.App. 1984) ("A dispute over the terms of the Agreement clearly had arisen at the time the January 25 letter was sent, even if no dispute between Heston and Farmers had yet occurred. Farmers cannot impose its own interpretation six years after the signing of the Agreement, after it had become apparent that paragraph H presented a problem ... ”).
. TSA, §3.1.
. TSA, § 2.1(a).
. In re Tobacco Cases I, 186 Cal.App.4th 42, 111 Cal.Rptr.3d 313, 320 (2010) (citations and internal quotations omitted); Oceanside 84, Ltd. v. Fid. Fed. Bank, 56 Cal.App.4th 1441, 66 Cal.Rptr.2d 487, 494 (1997)("The interpretation of a written instrument, even though it involves what might properly be called questions of fact, is essentially a judicial function to be exercised according to the generally accepted canons of interpretation so that the purposes of the instrument may be given effect.... It is therefore solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence, (internal citations and quotation marks omitted)).
. Similarly, the IndyMac Bancorp court similarly rejected the use of a similar Castle-berry Declaration. IndyMac Bancorp, at *10 (“[T]he TSA is not ambiguous, and thus parol evidence such as the Castleberry Declaration is not relevant to its interpretation. Moreover, opinion or "expert” testimony about legal issues is not admissible evidence. Because the interpretation of a contract such as the TSA is a legal issue for the Court, Mr. Castleberry's testimony would be inadmissible as evidence even if the Court believed the TSA is ambiguous (which the Court does not).” (citations omitted)).
. Section § 1.1502-77(a) states in part:
(a) Scope of agency — (1) In general — (i) Common parent .... the common parent (or a substitute agent described in paragraph (a)(l)(ii) of this section) for a consolidated return year is the sole agent (agent for the group) that is authorized to act in its own name with respect to all matters relating to the tax liability for that consolidated return year, for—
(A) Each member in the group
(2) Examples of matters subject to agency. With respect to any consolidated return year for which it is the common parent- ... (v) The common parent files claims for refund, and any refund is made directly to and in the name of the common parent and discharges any liability of the Government to any member with respect to such refund;
26 C.F.R. § 1.1502-11(a).
. FDIC-R, relying wholly on the Royer Declaration, asserts that the TSA was not supposed to transfer ownership of the tax return (based on the statement in the Royer Declaration that the TSA was not supposed to transfer ownership of the tax return). As stated above, the Court considers the Royer Declaration extrinsic evidence and, as a result, this argument by FDIC-R will not be considered herein.
. FDIC-R also asserts that the fact that DFC issued the consolidated tax payment to *465the IRS is immaterial. See Cohen v. Un-Ltd. Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790, 810 (Bankr.E.D.Va.1999). However, the tax allocation agreement in In re Nelco, Ltd. did not “not address the allocation of tax refunds among the consolidated group.” Id. at 809. As a result the Nelco court, following the Bob Richards progeny of cases, without a written agreement "a member of a consolidated group can participate in a tax refund only to the extent of tax payments made by that member.” Id. at 810. Here, the parties are governed by the TSA; as such the holding in Nelco is not applicable.
.FDIC-R argues that the receipt by DFC from the U.S. Treasury of the refund check is not relevant, because all the members assumed the Downey Bank owned the refunds. The Court disagrees, the fact that the consolidated return check is made payable to DFC is, in fact, relevant considering the facts of this case. The refund checks made payable to DFC could not be negotiated without the direction and consent of DFC. If the parties did not want DFC to have that control then the TSA would have been drafted accordingly.
. See, e.g., supra at n. 112.
. On at least one occasion, Downey Bank remitted a portion of the refund to DFC. See Wasserman Declaration at V 24 and Exh. D. If the Court were to accept Downey Bank's argument, then DFC would have given "ownership” of its own refund to Downey Bank - this would not make logical sense. Logically, DFC was delegating a ministerial task of depositing the refund check and then distributing the allocated refund to the other members of the Affiliated Group.
. BankUnited, 727 F.3d at 1102 (citations and internal quotation mark omitted); In re First Cent. Fin. Corp., 269 B.R. 481, 489 (Bankr.E.D.N.Y.2001) ("[U]nder applicable I.R.S. regulations, a parent company acts as agent for the consolidated group in filing consolidated tax returns [but] this agency is purely procedural in nature, and does not affect *466the entitlement as among the members of the Group to any refund paid by the I.R.S.”).
. BankUnited, 727 F.3d at 1102-03.
. Wasserman Declaration § 20(B)(iv).
. Id. at ¶ 20(B)(iii).
. Id. at ¶ 20(B)(iv), n. 11.
.Interagency Policy Statement 63 FR 64757-01 (Nov. 23, 1998) ("Regardless of the method used to settle intercorporate income tax obligations, when depository institution members prepare regulatory reports, they must provide for current and deferred income taxes in amounts that would be reflected as if the institution had filed on a separate entity basis.”).
. IndyMac Bancorp, 2:08-BK-21752-BB, 2012 WL 1037481 at *16.
. See, supra, n. 69.
. FDIC-R also points to several other cases that also are not applicable here: (i) In Cohen v. Un-Ltd. Holdings, Inc. (In re Nelco, Ltd.), 264 B.R. 790, 805 (Bankr.E.D.Va.1999), the court found the tax allocation agreement ambiguous and, as a result, looked to the economic realities and intention of the parties. Here, the TSA is not ambiguous, (ii) In BSD Bancorp, Inc v. FDIC, No. 93-12207-A11 (S.D.Cal. Feb. 28, 1995) (Feldman Declaration, Exh. 57), the tax allocation agreement contained language that allowed the holding company, in unusual circumstances, to "borrow” the refund from the subsidiary (and specified the any loan would be subject to regulations governing loans to affiliates), and absent those “unusual” circumstances the holding company had to pay the refund to the Bank immediately. This is distinguishable from the present case where no such language exists, (iii) In Lubin. F.D.I.C., 10-CV00874, 2011 WL 825751, *5 (N.D.Ga. Mar. 2, 2011), was based upon precise language in the tax sharing agreement that created agency, specifically stating that funds were "obtained as agent” for the group members. No such language exists in the case sub judice.
. Mesnick v. General Electric Co., 950 F.2d 816, 822 (1st Cir.1991), cert. denied, 504 U.S. 985, 112 S.Ct. 2965, 119 L.Ed.2d 586 (1992) (quoting Garside v. Osco Drug, Inc., 895 F.2d 46, 50 (1st Cir.1990)) ("In order to continue, the burden shifts to the nonmovant to identify some factual disagreement sufficient to deflect brevis disposition.”).
. City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 95 (3d Cir.1994) (citations omitted).
. Id.
. Weststeyn Dairy 2 v. Eades Commodities Co., 280 F.Supp.2d 1044, 1075 (E.D.Cal.2003) (footnote omitted) (citing Abrams v. Crocker-Citizens Nat. Bank, 41 Cal.App.3d 55, 59, 114 Cal.Rptr. 913 (1974)).
. Id. at 1075-76 (emphasis added) (quoting Abrams, 41 Cal.App.3d at 59, 114 Cal.Rptr. 913 (citing Restatement (Second) of Trusts § 12, cmt. g)).
. Id. at 1083-84 ("One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he or she has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it." (citations and internal quotation marks omitted)).
. In re Foam Sys. Co., 92 B.R. 406, 409 (9th Cir. BAP 1988) aff'd, 893 F.2d 1338 (9th Cir.1990) and aff'd sub nom. Ins. Co. of the W. v. Simon, 893 F.2d 1338 (9th Cir.1990) ("If the only parties to be considered were Insurance Co. and the debtor, then the equities might favor the imposition of a resulting trust. However, in light of the Bankruptcy Code’s strong policy of ratable distribution among all creditors, the bankruptcy court properly declined to exclude the funds in the account from the debtor’s estate by imposing a resulting trust.” (citations omitted)); In re Lewis W. Shurtleff, Inc., 778 F.2d 1416, 1420 (9th Cir. 1985) (holding that the bankruptcy code has a “strong policy in favor of ratable distribution among all creditors” (citations omitted)).
. Fid. Nat. Title Ins. Co. v. Schroeder, 179 Cal.App.4th 834, 101 Cal.Rptr.3d 854, 864 (2009) (citations and internal quotation marks omitted).
. Fed.R.Civ.P. 56(a).
. Weststeyn Dairy 2, 280 F.Supp.2d at 1086. Aikin v. Neilson (In re Cedar Funding, Inc.), 08-52709-MM, 2009 WL 2849122, *5 (Bankr.N.D.Cal. July 20, 2009) vacated and remanded, C 09-4311 RMW, 2012 WL 1110023 (N.D.Cal. Mar. 31, 2012) (“When evidence establishes that both parties to a transaction intended that the holder of the property was to hold it in trust for another, the court may use a resulting trust to accomplish that goal. The resulting trust enforces a relationship that was always intended to be that of trustee and beneficiary.”)
. In NetBank, the Eleventh Circuit held that is does “not believe that the absence of language requiring a trust or escrow has much persuasive value. That factor is offset entirely by the similar absence of any language indicative of a debtor-creditor relationship-e.g., provisions for interest and collateral.” NetBank at 1351 (footnote omitted). See also BankUnited Fin. Corp., 727 F.3d at 1107-08. However, absent language creating an express trust, the FDIC-R has the burden to show the parties unequivocally intended to establish a resulting trust - and even if this Court were to adopt the Eleventh Circuit’s finding, if the absence of trust language is a “wash” due to the absence of debtor-creditor language - the FDIC-R cannot meet its burden of showing unequivocal intent. See West-steyn Dairy 2, 280 F.Supp.2d at 1086 (holding that a "resulting trust is inapplicable because the evidence does not show the parties unequivocally intended to establish a trust”).
. In re Catholic Diocese of Wilmington, 432 B.R. 135 (Bankr.D.Del.2010).
. Id. at 148.
. See TSA, § 2.1(a).
. Furthermore, any reliance on BSD Bancorp, Inc v. FDIC, No. 93-12207-A11 (S.D.Cal. Feb. 28, 1995) (Feldman Declaration, Exh. 57), would be unfounded because therein the parent received the tax refund it placed them in a segregated account. Id. at p. 12. Furthermore, in BDS Bancorp the tax allocation agreement provided various circumstances where the parents could “borrow” refunds which could not be fully funded when due. When the parent deposited the refund into the segregate account the requirement that the refunds could "not be fully funded” was not met; as such, the parent had no right to borrow the refund under the tax allocation agreement, and therefore held the fund in trust for the subsidiary bank. Id. In the case sub judice, there is no such ability to "borrow” language in the TSA nor was the refund deposited into a segregated account.
. See, supra n. 112.
. McGrath v. Hilding, 41 N.Y.2d 625, 629, 394 N.Y.S.2d 603, 363 N.E.2d 328, 331 (1977) (citing Restatement (First) of Restitution § 1 (1937), Comments a and c).
. IndyMac Bancorp, at *28 (citations and internal quotations marks omitted).
. In re N. Am. Coin & Currency, Ltd., 767 F.2d 1573, 1575amended, 774 F.2d 1390 (9th Cir.1985) (while balancing the request to impose a constructive trust) (citations omitted). See In re Visiting Home Servs., Inc., 643 F.2d 1356, 1360 (9th Cir.1981) ("The purpose of the bankruptcy law is to establish a uniform system to place the property of the bankrupt, wherever it is, under the control of the court for equal distribution among creditors.”).
. IndyMac Bancorp, at *29 (holding that "a resulting trust is an equitable remedy subject to the same strict limitations imposed on constructive trusts in bankruptcy.” (citations and footnote omitted)).
. Id.
. United States v. Jamas Day Care Ctr. Corp., 152 Fed.Appx. 171, 173 (3d Cir.2005) (quoting Olson v. GE Astrospace, 101 F.3d 947, 950 (3d Cir.1996) (citing Coolspring Stone Supply, Inc. v. American States Life Ins. Co., 10 F.3d 144, 148 (3d Cir.1993)) (In order to demonstrate the existence of a genuine issue of material fact in a jury trial, the non-movant must supply sufficient evidence (not mere allegations) for a reasonable jury to find for the nonmovant.)). See also Mesnick, 950 F.2d at 822. ("... ‘genuine’ means that the evidence about the fact is such that a reasonable jury could resolve the point in favor of the nonmoving party [and] 'material' means that the fact is one that might affect the outcome of the suit under the governing law”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496381/ | MEMORANDUM
ERIC L. FRANK, Chief Judge.
I.
In this adversary proceeding, Plaintiff Kevin Bieros (“the Plaintiff’) requests that the court deny the chapter 7 discharge of the debtor, Edward W. Pocius (“the Debt- or”) pursuant to 11 U.S.C. § 727(a)(2), (3), (4), (6), (7). The Debtor has filed a Motion to Dismiss the Complaint under Fed. R.Civ.P. 12(b)(6) (“the Motion to Dismiss”).1
For the reasons set forth below, the Motion will be granted and the Plaintiffs Complaint dismissed with prejudice.
II.
On October 2, 2012, the Debtor filed a voluntary chapter 11 bankruptcy petition. The case was converted to chapter 7 on December 12, 2012. The Plaintiff filed an adversary complaint (“the Complaint”) objecting to the Debtor’s discharge on July 3, 2013.
In the Complaint, the Plaintiff alleges that he obtained a money judgment against the Debtor on February 18, 2010 *473in the amount of $1,014,501.60 and that this bankruptcy case was filed just prior to a scheduled execution on the judgment (i.e., a personal property sheriffs sale) against the Debtor’s personal property. The Plaintiff asserts that the Debtor’s personal property includes a valuable trophy/animal head collection (“the Trophies”). The Plaintiff further alleges that, during the course of the chapter 7 case, the Debtor obstructed the chapter 7 trustee’s efforts to administer the Trophies. (Complaint ¶ 11-17). Finally, without specificity, the Plaintiff asserts that: (a) the Debtor “failed to disclose assets” and (b) “to the extent” the Debtor “tried to or made transfers ... to frustrate the purpose of the Trustee, there are grounds to deny discharge.” (Id. 118-19).
On August 30, 2013, the Debtor filed the Motion to Dismiss. The parties’s completed their submissions on the Motion on October 1, 2013 and the matter is now ready for decision.
III.
The Debtor seeks dismissal on the ground that the Complaint is untimely under Fed. R. Bankr.P. 4004.2 Rule 4004(a) provides:
In a chapter 7 complaint, or a motion under § 727(a)(8) or (a)(9) of the Code, objecting to the debtor’s discharge shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a).
Rule 4004(b) also provides that an extension of time to object to discharge must be requested before the expiration of the deadline, unless it is based on facts that would support a revocation of discharge under 11 U.S.C. § 727(d) and the movant did not have knowledge of those facts in time to file a timely objection. See also Fed. R. Bankr.P. 9006(b)(3) (restricting the court’s ability to enlarge the time for filing an objection to discharge to the extent specified in Rule 4004).
Read together, Rules 4004 and 9006
serve three primary purposes. First, they inform the pleader, ie., the objecting creditor, of the time he has to file a complaint. Second, they instruct the court on the limits of its discretion to grant motions for complaint-filing-time enlargements. Third, they afford the debtor an affirmative defense to a complaint filed outside the Rules 4004(a) and (b) limits.
Kontrick v. Ryan, 540 U.S. 443, 456, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004).
In this case, the § 341 meeting of creditors was first scheduled for January 28, 2013. Therefore, the deadline for filing objections to discharge was March 29, 2013. Notice of the meeting of creditors, which advised creditors of the March 29, 2013 deadline, was sent to the Plaintiffs counsel electronically via the court’s EOF system on January 3, 2013 and by first class mail on January 5, 2013. (See Bky. No. 12-19380, Doc. #’s 78, 80). The Plaintiff has not asserted that he was unaware of the deadline.
The Plaintiff filed his Complaint on July 3, 2013, more than three (3) months *474after the expiration of the deadline. Thus, the Complaint was untimely. An untimely filed complaint objecting to discharge must be dismissed upon the defendant’s motion.3
The Plaintiff seeks to avoid dismissal by way of a negative implication distilled from Fed. R. Bankr.P. 4007(c). Rule 4007(c) provides that a complaint to determine dischargeability under 11 U.S.C. § 523(c) must be filed within 60 days of the first date set for the meeting of creditors. Section 523(c) refers to dis-chargeability complaints under 11 U.S.C. § 523(a)(2), (4), and (6). Based on Rule 4007(c), the Plaintiff seems to reason that the only complaints relating to a debtor’s discharge that must be filed within the 60 day deadline are complaints under § 523(a)(2), (4), and (6) and therefore, a complaint under § 727(a) is not subject to a 60 day filing deadline.4
The Plaintiffs argument is without merit. He conflates dischargeability of a particular debt with an objection to discharge. “Dischargeability” and “objections to discharge” are two (2) distinct proceedings, with different outcomes (non-dischargeability of a single debt versus nondischargeability of all debts). They are based on different Bankruptcy Code provisions (§ 523(a) versus § 727(a)). And, most significantly for our purposes, the two (2) types of proceedings are governed by different procedural rules (Rule 4007 versus Rule 4004). Simply put, Rule 4007 has no applicability whatsoever to an objection to discharge; such a proceeding is governed solely by Rule 4004. See In re Saunders, 440 B.R. 336, 349 (Bankr. E.D.Pa.2006) (observing that Rule 4004 governs the deadline for filing complaints under § 727(a) while Rule 4007 applies to complaints under § 523(a)). Rule 4004 sets a 60 day deadline for objections to discharge, that deadline applies here and the Plaintiffs Complaint was filed after the expiration of the deadline.
IV.
For the reasons set forth above, the Plaintiffs Complaint is untimely. Therefore, the Motion to Dismiss will be granted and the Complaint dismissed with prejudice.5
ORDER
AND NOW, upon consideration of the Defendant’s Motion to Dismiss Complaint, *475the Plaintiffs response there, and for the reasons stated in the accompanying Memorandum, it is hereby ORDERED
1. The Motion is GRANTED.
2. The Complaint is DISMISSED WITH PREJUDICE.
. Fed.R.Civ.P. 12(b)(6) is applicable in this adversary proceeding pursuant to Fed. R. Bankr.P. 7012(b).
. The statute of limitations is not listed in Rule 12(b) as a defense that may be raised in a motion to dismiss. Thus, ''[t]echnically, the Federal Rules of Civil Procedure require that affirmative defenses [such as the statute of limitations] be pleaded in the answer.” In re Aslansan, 490 B.R. 675, 684 (Bankr.E.D.Pa. 2013) (quoting Robinson v. Johnson, 313 F.3d 128, 135 (3d Cir.2002)). However, in this Circuit, a limitations defense may be made by Rule 12(b)(6) motion if the limitations bar is apparent on the face of the complaint. Id. (citing Robinson, 313 F.3d at 135); accord Brawner v. Educ. Mgmt. Corp., 513 Fed.Appx. 148 (3d Cir.2013). In this case, all of the facts necessary to decide the Motion are apparent from the face of the Complaint and the court docket.
. See In re Miller, 228 B.R. 399 (6th Cir. BAP 1999); In re Hill, 251 B.R. 816, 820-21 (Bankr.N.D.Miss.2000); In re Kearney, 105 B.R. 260, 266 (Bankr.E.D.Pa.1989); see also In re Bugarenko, 373 B.R. 394, 399-400 (Bankr.E.D.Pa.2007) (refusing to vacate discharge order because filing complaint objecting to discharge would be futile due to its untimeliness); In re MacKay, 324 B.R. 566, 569 (Bankr.M.D.Pa.2005) (same), aff'd, 253 Fed.Appx. 244 (3d Cir.2007); cf. Kontrick, 540 U.S. at 458-459, 124 S.Ct. 906 (time bar defense under Rule 4004 is lost if not raised by the defendant).
. The Plaintiff has not asserted that the 60 day deadline in Rule 4004(a) can be equitably tolled and that there is a basis for doing so here (perhaps because the record is so clear that his attorney had ample notice of the March 29, 2013 deadline). I note that courts are divided on the issue whether the Rule 4004 deadline may be equitably tolled. Compare In re Rychalsky, 318 B.R. 61, 63-64 (Bankr.D.Del.2004), with In re Harper, 489 B.R. 251, 257-58 (Bankr.N.D.Ga.2013) (decided under Rule 4007); In re Eaton, 327 B.R. 79, 83 (Bankr.D.N.H.2005). See generally In re Fellheimer, 443 B.R. 355, 373 (Bankr. E.D.Pa.2010) (in case under Rule 4007, court assumes arguendo that Rule 4004(a) deadline can be equitably tolled, but finding it inappropriate to do so based on the facts of the case). I express no opinion on the issue.
.After granting motion to dismiss complaint under Rule 12(b)(6), a court should grant plaintiff leave to amend "unless an amendment would be inequitable or futile.” Alston v. Parker, 363 F.3d 229, 235 (3d Cir.2004). In this case, an amendment would be futile. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496384/ | MEMORANDUM OPINION
RUSSELL F. NELMS, Bankruptcy Judge.
The debtors sold their homestead after filing for bankruptcy under chapter 13. More than six months passed after the sale and the debtors did not reinvest the proceeds in another homestead. The debtors have moved to modify their plan to permit them to keep the proceeds.
The trustee objects to the plan modification. He argues that the proceeds are no longer exempt, and so the modified plan must provide for their distribution to unsecured creditors. The debtors argue that the homestead proceeds are exempt because their homestead exemption became final when no party timely objected to their claim of exemption. They say that the effect of the exemption is to forever withdraw the homestead and its proceeds from the estate. Alternatively, they argue that the trustee’s objection is barred by res judicata because he failed to lodge his objection when the debtors sought this court’s authority to sell the homestead.
*509The court concludes that (1) the homestead proceeds lost their exempt status after six months from the date of sale and (2) the trustee’s objection is not barred by res judicata. The plan modification must be denied.1
Facts
The debtors filed a chapter 13 case in February 2011. Upon filing, they claimed an exemption under section 41.001(a) of the Texas Property Code for their homestead in Fort Worth, Texas. No party objected to the exemption and it became final on May 8, 2011.
The court confirmed a plan that required the debtors to pay $750.00 per month to the chapter 13 trustee. While most of this amount was directed to the reduction of pre-petition arrearages on the debtors’ homestead, a small portion was to be distributed to unsecured creditors.
In September 2012 the debtors moved for authority to sell their homestead. In the motion, the debtors disclosed that the sale would net approximately $64,000, less certain additional expenses. The debtors claimed the proceeds as exempt and proposed that all equity be distributed to them. No party, including the chapter 13 trustee, objected to the motion. Instead, the trustee, the mortgage company and the debtors entered into an agreed order of sale. In the order the court approved the sale and ordered that the net proceeds “be disbursed to the Debtor(s) as their exempt equity in the home.” The debtors closed on the sale of their homestead sometime in November 2012. While there is no evidence in the record of what the debtors did with the proceeds, they concede the proceeds were not used to purchase a new homestead.2
Because the debtors’ plan included monthly payments to reduce pre-petition mortgage arrearages and those arrearages were satisfied in full by the sale of their homestead, the debtors moved to modify their plan. As part of the modified plan, the debtors propose to keep the $64,000 in homestead proceeds.
The trustee objects to the proposed modification, arguing that it violates 11 U.S.C. § 1325(a)(4) because it fails to provide for the distribution of the amount of the homestead proceeds to unsecured creditors. The debtors contend that the proposed modification complies with section 1325(a)(4) because the proceeds are *510exempt and need not be accounted for in satisfying the best interests test. Moreover, they say that even if the plan modification does not satisfy the best interests test, they should still prevail because the trustee’s objection is barred by res judica-ta due to his failure to object to their retention of the proceeds in connection with the sale motion.
Discussion
A. The Best Interests of Creditors Test
Section 1325(a)(4) of the Bankruptcy Code requires as a condition to both plan confirmation and plan modification that chapter 13 debtors pay unsecured creditors at least the amount they would receive if the estate were liquidated in chapter 7. 11 U.S.C. §§ 1325(a)(4), 1329(b). To determine whether a plan modification satisfies this requirement, the court must consider what a hypothetical liquidation of non-exempt property of the estate would bring “as of the effective date of the plan.” 11 U.S.C. § 1325(a)(4).
1. What is the “Effective Date of the Plan” for Purposes of Section 1325(a)(4)?
When dealing with plan modifications, courts are divided about whether the “effective date of the plan” refers to the effective date of the original plan or the date of the modified plan. Judge Robert Jones of this district addressed this issue in In re Moran, 2012 WL 4464492, 2012 Bankr.LEXIS 4426 (Bankr.N.D.Tex.2012). After analyzing each position, Judge Jones adopted the majority view that the “effective date of the plan” for purposes of section 1325(a)(4) is the date of the modified plan. Id. at *4, 2012 Bankr.LEXIS 4426, at *10. This court agrees with Judge Jones and follows Moran for the reasons stated in that decision. Consequently, the court must determine whether the liquidation test is satisfied as of the date of the debtors’ modified plan.
2. Would the Homestead Proceeds be Subject to Distribution in a Chapter??
Only property that could be liquidated to pay creditors in a chapter 7 — that is, nonexempt property of the estate— need be considered in the hypothetical liquidation test. See, Id. at *5, 2012 Bankr.LEXIS 4426, at *12 (failure to use the non-exempt portion of an asset to fund a plan modification results in failure to satisfy section 1325(a)(4)); 11 U.S.C. § 1325(a)(4)(only property that would be distributed under a plan need be valued); 11 U.S.C. § 522(c)(exempt property is not liable for most pre-petition debts). So, the court must consider whether the proceeds from the sale of the homestead are nonexempt property of the estate as of the date of the modified plan.
Section 541(a) of the Bankruptcy Code provides that property of the estate includes all legal or equitable interests in property held by the debtors as of the commencement of the case, including all proceeds from such property. 11 U.S.C. § 541(a)(1), (6). In a chapter 13 case, property of the estate includes all of the assets described in section 541 plus the same kinds of assets acquired by the debt- or after the commencement of the case. 11 U.S.C. § 1306. Although all property of the estate vests in the debtor upon confirmation of a chapter 13 plan, this court has held that the estate continues to exist and, as such, assets acquired by the debtor post-petition are property of the estate. In re Hymond, 2012 WL 6692196, *3-4, 2012 Bankr.LEXIS 5861, *8-11 (Bankr.N.D.Tex.2012).
Initially, the proceeds from the sale of the homestead fall under the definition of property of the estate because (1) they *511are the proceeds of the homestead, an asset held as of the commencement of the case, or (2) the proceeds themselves are an asset acquired by the debtors post-petition. Nevertheless, the debtors argue that the sale proceeds are not property of the estate because they derive from an exempt asset that was removed from the estate when the homestead exemption became final.
There is no question that the homestead was exempt when it was sold by the debtors. As permitted by 11 U.S.C. § 522(b), the debtors elected state exemptions when they filed their bankruptcy petition. The debtors designated their homestead as exempt pursuant to section 41.001(a) of the Texas Property Code. No party objected to the debtors’ homestead exemption and, so, that exemption became final. 11 U.S.C. § 522(Z); Taylor v. Freeland & Kronz, 503 U.S. 638, 643, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Still, the debtors have a problem. Section 41.001(c) of the Texas Property Code provides that when a Texas homeowner sells his homestead, the proceeds are exempt for only six months from the date of the sale. Tex. Prop.Code § 41.001(c). In In re England, 975 F.2d 1168, 1174 (5th Cir.1992), the court held that the purpose of the six-month exemption is to give Texas homeowners the opportunity to reinvest the proceeds in another homestead. More than six months have passed since the debtors sold their home and they have not reinvested the proceeds in another homestead. The trustee argues that the debtors’ failure to timely reinvest the proceeds has caused them to lose their exempt status.
The debtors argue that because their homestead exemption has become final, the homestead is forever exempt. They say that no post-petition change in the nature of that asset (here, the conversion of the homestead to cash) can return it to the estate. Their argument finds support in Lowe v. Yochem (In re Reed), 184 B.R. 733 (Bankr.W.D.Tex.1995). In Reed, the debtors owned a ranch when they filed their chapter 11 bankruptcy petition. They claimed the ranch as exempt under Texas law and no party objected to the exemption. Later, the debtors sold the ranch and, as part of the consideration, received a $375,000 note. The debtors then purchased a new home and pledged the $375,000 note as security for the note on their new home. Later, the court converted the debtors’ case to chapter 7. After the conversion, the obligors under the $375,000 note paid the note in full. The debtors’ attorney disbursed some of the note proceeds to the sellers of the new home, paid other expenses, and transferred the remainder of the note proceeds to the debtors. The chapter 7 trustee sued the recipients of the note proceeds, arguing that the note was proceeds of the sale of the ranch and, as such, became property of the estate six months after the debtors sold the ranch.
In Reed, Judge Leif Clark held that the note was not property of the estate under section 541(a)(6).3 Judge Clark based his conclusion on section 522(c) of the Bankruptcy Code, which provides that “[ujnless a case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose ... before the commencement of the case....” 11 U.S.C. § 522(c). Judge Clark concluded that the practical effect of section 522(c) is to remove the homestead from the bankruptcy estate. Reed, 184 B.R. at 738. And, according to Judge Clark, no change in the character of *512the exempt property can return it to the estate. Id. Having concluded that the ranch was forever exempt and thus not property of the estate, he reasoned that the note (being proceeds of the ranch) was likewise not property of the estate. Id.
Even though Judge Clark’s reasoning is persuasive, this court does not follow it here for several reasons. First, because Reed did not involve a chapter 13 case, it did not require Judge Clark to address the question of whether the note constituted property of the estate under section 1306.
Second, this court questions whether the exemption of an asset “removes” it from the estate. The language of the Bankruptcy Code does not compel the conclusion that exempt property “leaves” the estate. Section 541(a) defines property of the estate broadly. Section 541(b) then excludes many kinds of property interests from that broad definition. But, section 541(b) does not purport to exclude from the definition of property of the estate an asset that has been finally exempted.
Depending on one’s view, section 522(c) may clarify or confuse the status of property that has been exempted. That section does not define exempt property, but explains the effect of exemption. It says that property that is exempted is not liable either during or after a bankruptcy case for any pre-petition debt (with certain exceptions that do not apply here) so long as the case is completed and not dismissed. 11 U.S.C. § 522(c). One could, as Judge Clark did, take this language to mean that once property is finally exempted, it is removed from the estate, never to return. Alternatively, one could interpret section 522(c) to mean that exempt property continues to be property of the estate as long as an estate exists, but simply is not available for distribution to unsecured creditors.
The differing interpretations of section 522(c) are significant because if exempt property is removed from the estate, it is difficult to conceive of how it can re-enter the estate even if its character changes.4 But, if exempt property does not leave the estate, but is merely insulated from creditors’ claims, then one can conceive of how post-petition events, such as a change in the nature of the asset, can affect an asset’s vulnerability to claims.
This distinction is not merely academic. Several cases in this circuit have addressed debtors’ failures to timely reinvest homestead proceeds under Texas law and have concluded that their failure to do so causes the homestead proceeds to lose their exempt status. Yet, none of these cases squarely addresses Judge Clark’s analysis of section 522(c) or discusses how removed property can be returned to the estate.
The leading case regarding the impact of section 41.001(c) of the Texas Property Code on bankrupt debtors is In re Zibman, 268 F.3d 298 (5th Cir.2001). In Zib-man the debtors sold their Texas homestead and kept the cash proceeds. Two months later they filed a chapter 7 bankruptcy case and claimed the proceeds as exempt under Texas law. They did not reinvest the proceeds in a new homestead within six months of the sale. When the debtors failed to do so, the chapter 7 trustee argued that the proceeds exemption had expired under Texas law.
*513As in Reed, the bankruptcy and district courts ruled that because the debtors exempted the proceeds when they filed for bankruptcy and no party objected to the exemption, the exemption had become permanent, even though it might have expired under state law. Id. at 301, 303. But, the Fifth Circuit reversed, holding that the lower courts had effectively read out of the Texas statute the six-month limitation on the exemption of homestead proceeds. Id. at 304. The court held that because the debtors relied on section 41.001 to exempt the home, they must “take the fat with the lean.” Id. It noted that the Bankruptcy Code does not allow debtors to fragment state law in a way that allows them a benefit they would not receive outside of bankruptcy. Id. (citing In re Earnest, 42 B.R. 395, 399 (Bankr.D.Or.1984)). According to the court, the proceeds exemption was enacted to give debtors a period of time to invest in another homestead, not to indefinitely protect the proceeds themselves. Id. at 305 (citing In re England, 975 F.2d 1168, 1174-75 (5th Cir.1992)).
The Fifth Circuit reached the same result in Studensky v. Morgan (In re Morgan), 481 Fed.Appx. 183 (5th Cir.2012). There, the debtor filed a chapter 7 petition but did not claim his homestead as exempt. After filing bankruptcy, he sold his homestead and used the proceeds to pay his brother, who claimed a lien on the homestead. When the trustee learned of the payment, he contested the brother’s lien and demanded return of the proceeds. In response to the trustee’s demand, the debtor, relying on Reed, amended his exemptions to claim the proceeds as exempt under section 41.001(c). The trustee objected to the exemption, arguing that the proceeds were not exempt because more than six months had passed since the sale of the home. The bankruptcy court and district court held for the debtor, but the Fifth Circuit reversed. Id. at 184, 186-187. In doing so, the court did not overrule Reed, but distinguished it by noting that the debtor in Morgan never claimed his homestead as exempt, but instead only claimed the proceeds as exempt. Id. at 185-186. The court then followed Zibman and held that the exemption of the proceeds was subject to the time limitation under Texas law. Id. at 187.
Even though the Fifth Circuit has not expressly rejected Reed, at least one court has held that the effect of Zibman is to do just that. In Frost v. Veigelahn (In re Frost), 2012 U.S. Dist. LEXIS 103268 (W.D.Tex.2012), the debtor filed a chapter 13 case and claimed his homestead as exempt under Texas law. He later sought permission to sell the homestead and retain the proceeds. The trustee objected to the motion to the extent that the debtor purported to retain the proceeds for more than six months without using them to acquire a new homestead. The bankruptcy court ruled for the trustee, holding that the sale proceeds initially would be exempt, but would only remain so if the debtor reinvested the proceeds in a new homestead within six months. Id. at *3. In his appeal to the district court, the debtor relied on Reed, arguing that because the homestead was exempt, it could not be brought back into the estate as proceeds. The district court affirmed the bankruptcy court’s ruling. In doing so, it concluded that in Zibman, the Fifth Circuit had rejected Reed’s approach. Id. at *7-8.
In a case similar to the one before this court, a bankruptcy court also found Zib-man to be controlling. In In re Zavala, 366 B.R. 643 (Bankr.W.D.Tex.2007), the debtors filed under chapter 13, exempted their homestead, and then sold it. Eleven months after the sale, the trustee, relying on Zibman, moved to modify the debtors’ plan to require them to pay unsecured creditors with the remaining sale proceeds. The debtors argued Zibman was distin*514guishable because in Zibman the debtors sold their house before filing bankruptcy, thus creating pre-petition proceeds that entered the estate subject to a time limitation under section 41.001(c). But, the Za-valas sold their homestead after filing bankruptcy, thus entering the case with an exemption in the homestead itself, which was not subject to that limitation. The court found the distinction to be one without a difference, effectively holding that, although the homestead proceeds were initially exempt, they lost their exempt status when the debtors failed to purchase a new homestead within six months. Id. at 653.
Of the foregoing cases, only the district court in Frost specifically rejected Judge Clark’s analysis in Reed. Even there, however, the court did not explain why Reed was wrong, but merely stated that in Zib-man the Fifth Circuit rejected Reed’s approach. That rejection, if it occurred at all, necessarily derived from shifting the analysis from section 522(c) to 522(b)(3)(A). That section allows debtors to exempt “any property that is exempt under ... State or local law that is applicable on the date of the filing of the petition.... ” Id. As Zib-man notes, nothing in section 522(b) limits a state’s power to restrict the scope of its exemptions. Zibman at 302 (citing Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991)). So, according to Zibman, once a debtor elects Texas’s homestead law, he elects the entirety of that law, not just that portion that benefits him. Id. at 304.
So, while Zibman and its progeny may reject Reed’s approach, they do not address its fundamental tenet, that being that once property is finally exempted under the Bankruptcy Code, that property leaves the estate, never to return. In this court’s opinion, Zibman, by which this court is bound, must be reconciled with section 522(c) by a two-step analytical process. First, one must conclude that exempt property is not withdrawn from the estate, but remains property of the estate insulated from the claims of creditors for as long as the asset enjoys exempt status under state law. Second, one must conclude, as the court did in In re Davis, 170 F.3d 475, 481-3 (5th Cir.1999), that section 522(c) does not preempt Texas’s homestead laws. In a chapter 13 case, the effect of this construction is to place the debtor in the same position with regard to exemptions as he would have been in had he not filed for bankruptcy. The pen-dency of the bankruptcy case neither expands nor reduces his exemption rights. So, once an asset no longer enjoys exempt status under state law, that asset becomes vulnerable to claims and, hence, distributable to creditors.
Here, it has been more than six months since the debtors sold their homestead. Accordingly, the homestead proceeds were non-exempt property of the estate as of the date of the debtors’ plan modification and, as such, are necessarily part of any hypothetical liquidation analysis under the best interests test. Because the plan fails to provide for the distribution of the sale proceeds to creditors, it does not comply with section 1325(a)(4).
B. The Res Judicata Effect of the Sale Order
The debtors alternatively argue that any objection to the exemption of the proceeds should have been raised when they sought authority from this court to sell the homestead and receive the proceeds as their exempt equity. Because no party objected to the motion and the order approving the sale is now final, the debtors argue that any such objection is barred by the doctrine of res judicata.5 To prevail *515on this argument, the debtors must show that (1) the parties are identical, (2) the prior order was rendered by a court of competent jurisdiction, (3) the order was final and on the merits, and (4) the same cause of action is involved. Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051 (5th Cir.1987). The parties concede that the first three of these requirements are met, but disagree as to whether the plan modification and the order approving the sale involve the same cause of action.
To determine whether this matter involves the same cause of action as the sale order, the court must apply a transactional test. Id. at 1053. In that test the important inquiry is whether the two causes of action are based on the same “nucleus of operative facts.” Travelers Ins. Co. v. St. Jude Hosp., 37 F.3d 193, 195 (5th Cir.1994). If two causes of action arise from the same transaction, res judi-cata bars not only any claim that was adjudicated in a prior action, but any claim that could have been adjudicated. Id. In effect, the first judgment extinguishes all rights between the parties with respect to “all or any part of the transaction ... out of which the action arose.” Id.
The sale motion and order implicated several matters including (1) the debtors’ request to sell the homestead, (2) the application to apply the proceeds to certain obligations and expenses, and (3) the debtors’ claim to the exempt equity. The debtors phrased the last of these claims as follows in their sale motion:
6. Debtor(s) have claimed all the equity in the property as exempt with respect to the subject property. Debtor(s) expect to realize approximately $64,000, less closing costs and fees profit [sic] from the sale of the property. Debtor(s) propose that all of the equity in the property be distributed to the Debtor(s) from the sale proceeds with any remaining balance being paid to the unsecured creditors, (emphasis in original).
No party objected to the motion, but because the debtors and their mortgage lender disagreed on the amount owed on the mortgage, they negotiated a form of order, which the trustee approved and this court signed. The order has become final. That order provides in pertinent part:
IT IS FURTHER ORDERED, ADJUDGED and DECREED that the remaining proceeds of sale, following payment of the enumerated items in the foregoing paragraph, be disbursed to the Debtor(s) as their exempt equity in the home.
Each side now points to these provisions as conclusive proof that it should prevail. Ultimately, the question boils down to the placement of burdens. The trustee contends that it was the debtors’ burden to disclose their intent to exempt the proceeds beyond section 41.001(e)’s time limitation. The debtors argue that it was the trustee’s burden to object to their retention of the proceeds beyond the time limitation.
Although a persuasive case can be made for either side, the facts here favor the trustee. In this regard, Republic Supply Co. v. Shoaf is instructive. In Shoaf a *516chapter 11 debtor confirmed a plan that purported to release creditors’ claims against guarantors of the debtor’s obligations. Republic, a beneficiary of one such guaranty, believed that this provision was unenforceable but failed to object to the plan. Later, Republic sued Shoaf, one of the guarantors who was released under the plan. Shoaf contended that Republic’s claims were barred by res judicata. The Fifth Circuit agreed. In addressing whether Republic’s cause of action arose out of the same transaction that was the subject of the bankruptcy court’s order confirming the plan, the court ruled as follows:
The only question, under the transactional test, that we must consider is whether the cause of action that Republic now asserts arose out of the same transaction that was the subject of the bankruptcy court’s order that relieved Shoaf of liability. The bankruptcy court’s order makes it indisputably clear that it did. “[The] release shall include the release of any guarantees given to any creditor of the debtor....”
Id. at 1054.
Shoaf suggests that a key ingredient of the transactional test in circumstances such as these is the debtor’s disclosure of his intent to take an act that arguably deviates from controlling law. The clarity of the order in Shoaf is in sharp contrast to the vagueness of the order in this case. Here the order approving the sale merely ordered that the sale proceeds “be disbursed to the Debtor(s) as their exempt equity in the home.” It did not order that the equity would remain exempt for more than six months after the date of sale. Indeed, neither the motion nor the order disclosed any such intent by the debtors.
Moreover, creditors might also have been confused by that portion of the motion that said that “Debtor(s) propose that all of the equity in the property be distributed to the Debtors(s) from the sale proceeds with any remaining balance being paid to unsecured creditors.” (emphasis added). Although the court construes this language as a typographical error, it is possible that creditors could have construed it as the debtors’ intent to distribute at least part of the sales proceeds to unsecured creditors.
Under these facts, any creditor reviewing the motion to sell could have concluded that the debtors intended to retain the proceeds subject to the time limitation of section 41.001(c) or, perhaps, to abandon the exemption as to some of the proceeds. If the debtors intended to retain all of the proceeds beyond the time limitation of section 41.001(c), they should have made that intention clear in their motion and the order they negotiated with the trustee. Because they did not do so, the trustee’s objection to the plan modification cannot be said to involve the same transaction. Consequently, the trustee’s objection is not barred by res judicata.
Conclusion
For the reasons stated herein, the court finds that the debtors’ proposed plan modification does not satisfy section 1325(a)(4) and, as such, must be denied.
. The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 151 and the standing order of reference in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). This memorandum opinion constitutes the court's findings of fact and conclusions of law under Fed. R. Bankr.P. 7052.
. The absence of any evidence regarding the debtors’ use of the proceeds in the six months following the sale avoids for the time being the question of whether the debtors can gain approval of any plan modification. If the debtors have kept all of the proceeds, no such issue arises. But, if the debtors have used some or all of the proceeds, the question arises as to whether the debtors must propose a plan modification that includes all proceeds or just those available on the date of the plan modification. Compare, e.g., In re Zibman, 268 F.3d 298, 305 (5th Cir.2001) (holding that the object of the proceeds exemption statute is solely to allow the claimant to invest the proceeds in another homestead), and Hill v. Jones (In re Jones), 327 B.R. 297, 302 (Bankr. S.D.Tex.2005) (holding that the proceeds exemption is solely to allow purchase of a new home and cannot be used to make other purchases), with Lowe v. Yochem (In re Reed), 184 B.R. 733, 738 (Bankr.W.D.Tex.1995) (holding in the chapter 7 context that the debtor is free to do what he pleases with his homestead proceeds) and London v. London, 342 S.W.3d 768, 773, 775 (Tex.App. Houston-14th Dist., 2011, writ den’d) (holding that the Texas Property Code "does not contain language limiting the [proceeds] exemption to those circumstances in which the homestead claimant plans to buy another home”).
. Under section 541(a)(6), the “estate is comprised of all the following property, wherever located and by whomever held: ... (6) [p]ro-ceeds, product, offspring, rents, or profits of or from property of the estate.... ”
. One could argue that homestead proceeds re-enter the estate via section 1306(a)(1) as property "acquired” by the debtors after the commencement of the case. Of course, that may refute, but does not answer Judge Clark's conclusion that exempted property “is essen-lially removed from the bankruptcy process.” Reed, 184 B.R. at 738. Moreover, such an argument only invites the question of whether the proceeds of an exempt pre-petition asset are property that is "acquired” after the commencement of the case.
. The debtors also argue that the order confirming their original plan precludes the trustee from now objecting to the homestead ex*515emption. The debtors point to several cases in which courts have employed res judicata to deny debtors the right to modify their exemptions after plan confirmation. They argue that the same logic should bar creditors from objecting to exemptions that were claimed by the debtors as of the date of plan confirmation. The cases relied upon by the debtors are inapposite. Here, the trustee does not challenge the debtors' original homestead exemption, but argues that the same statute that gave rise to the exemption has caused it to expire. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496385/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
ROBERT L. JONES, Bankruptcy Judge.
Introduction and Definitions of Major Parties
The Court issues its findings of fact and conclusions of law in this adversary proceeding. Trial was held April 8-10, 2013 and June 11-12, 2013. Upon conclusion of the trial, the matter was taken under advisement. The Court’s findings and conclusions are based upon the record before the Court and are issued pursuant to Rule 52 of the Federal Rules of Civil Procedure, made applicable in this adversary proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
For purposes of these findings and conclusions, the Court defines certain of the major parties as follows:
• The plaintiff, Walter O’Cheskey, the Liquidating Trustee, will be referred to as the Trustee.
• Steve Sterquell, who was the president and principal of the debtor American Housing Foundation, will be referred to as Sterquell.
• The defendants Catherine D. Koehler, Maurice Schooler, Mary C. Schooler, Louise Trammell Conley, Mary C. Schooler as Trustee of the Mary C. Schooler Trust, Louise Trammell Conley as Trustee of the Louise Trammell Trust, Schooler Properties, Ltd., JRK-CDK, Ltd., LKC-CDK, Ltd., MKS-CDK, Ltd., LKC-TC, Ltd., Maurice Schooler, Custodian for August Wendt, Maurice Schooler, Custodian for Erin Wendt, Maurice School-er, Custodian for Koehler Wendt, Cristi Cocke Trammell, and Catherine Suzanne Schooler will be referred to collectively as the Koehler Related Parties.
• The defendants Catherine D. Koehler, Maurice Schooler, Mary C. Schooler, and Louise Trammell Conley will, for purposes of this proceeding, be collectively referred to as the Koehler Family Members.1
• The Mary C. Schooler Trust, the Louise Trammell (Conley) Trust, the Teresa Joan Koehler Graham Trust, and the James R. Koehler Trust will be collectively referred to as the Koehler Children’s Trusts.
• Defendant Kent Ries, the chapter 7 trustee of the bankruptcy estates of Catherine D. Koehler, Maurice and Mary Schooler, and Louise Trammell Conley, will be referred to as Kent Ries.
• Defendants Banjo, Inc., Burgess Trust # 4, Carson Burgess, Inc., Carson Herring Burgess, Dennis Dougherty, Charlotte Burgess Griffiths, Heron Land Company, Herring Bank, Jessie Herring Johnson Estate Trust # 1, Jessie Herring Johnson Estate Trust # 2, Paul King, Matt Malouf, Cornelia J. Slemp Trust, Clay Storseth, Don *520Storseth, Individually and as Trustee of the Storseth Family Trust, Robert L. Templeton, Individually and as Executor of the Estate of Frances Maddox, deceased, Louise Johnson Thomas Trust, Yaudrey Capital, LP, and Marty Rowley, as Trustee of the Sehooler/Conley Creditors Liquidation Trust will be referred to collectively as the Templeton Group.
• AHF Development, Ltd. will be referred to as AHF Development.
• Defendants Houston One Willow Park, Ltd., Houston Woodedge, Ltd., Houston Aston Brook, Ltd., Houston One Willow Chase, Ltd., and Conroe Stony Creek, Ltd. will be referred to collectively as the AHF Intermediate Entities.
I.FINDINGS OF FACT
AHF Bankruptcy
1. On April 21, 2009, certain alleged creditors of the debtor, American Housing Foundation (“AHF” or the “Debtor”), filed an involuntary petition against the Debtor pursuant to chapter 11 of the Bankruptcy Code, thereby initiating an involuntary bankruptcy case [Case No. 09-20282] (the “Involuntary Case”) against the Debtor. On June 11, 2009, the Debtor filed a voluntary petition pursuant to chapter 11 of the Bankruptcy Code, initiating a voluntary case [Case No. 09-20373] (the ‘Yoluntary Case”).
2. On July 17, 2009, the Court entered its Agreed Order Granting Motion to Consolidate Bankruptcy Cases [Docket No. 88; Case No. 09-20232], consolidating the Voluntary Case and the Involuntary Case into a single case (the “Bankruptcy Case”) pursuant to Bankruptcy Rule 1015(a).
3. On April 29, 2010, this Court entered the Order Approving Appointment of Chapter 11 Trustee [Docket No. 1104; Case No. 09-20232],
4. On December 8, 2010, this Court entered its Findings of Fact, Conclusions of Law, and Order Confirming Second Amended Joint Chapter 11 Plan Filed by the Chapter 11 Trustee and the Official Committee of Unsecured Creditors [Docket No. 1918; Case No. 09-20232] (the “Confirmation Order”), confirming the Second Amended Joint Chapter 11 Plan Filed by the Chapter 11 Trustee and the Official Committee of Unsecured Creditors [Docket No. 1909; Case No. 09-20232] (the “Plan”).
This Adversary Proceeding
5. On June 9, 2011, the Trustee filed the Liquidating Trustee’s Complaint to Avoid AHF Guaranty as Fraudulent Obligation, and to Avoid and Recover Fraudulent and Preferential Transfers, Together with Objections to Claims (the “Complaint”) [Docket No. 1, Adversary No. 11-02132],2 thereby initiating this adversary proceeding against the defendants.
6. Bank of America, Rainier 3, Joan Graham, and the Teresa Joan Koehler Graham Trust (the “Joan Graham Trust”) are no longer parties to this adversary proceeding:
• On April 23, 2012, Bank of America, as Trustee of the James R. Koehler 1997 Trust, was dismissed as a party [Docket No. 105];
• On August 13, 2012, Rainier was dismissed as a party pursuant to the terms of a settlement agreement [Docket No. 152]; and
*521• On September 20, 2012, Joan Graham and the Joan Graham Trust causes of action were severed into Adversary Proceeding No. 12-02023 (Civil No. 2:12-CV-00222-C) [Docket No. 181].
7. On February 15, 2013, the Trustee filed the Fourth Amended, Complaint (the “Amended Complaint”) [Docket No. 268] against the following defendants:
• Koehler Related Parties;
• Kent Ries;
• the Templeton Group;
• AHF Development; and
• AHF Intermediate Entities.
Bifurcation of Adversary Proceeding
8. On March 1, 2013, the Court entered its order [Docket No. 278] (the “March 1, 2013 Order”) that provided that this adversary proceeding would be bifurcated into two trials. The first trial was to address all causes of action and disputed issues as between the Trustee, the Koehler Children’s Trusts, the defendants that allegedly received transfers prior to the alleged transfers to the Koehler Children’s Trusts, and any other necessary parties. By the March 1, 2013 order, the named defendants for the first trial were designated as the following: Maurice Schooler, Custodian for August Wendt; Maurice Schooler, Custodian for Erin Wendt; Maurice Schooler, Custodian for Koehler Wendt; Mary C. Schooler, Trustee of the Mary C. Schooler Trust; Mary Catherine Schooler Trust; Louise Trammell Conley, Trustee of the Louise Trammell Conley Trust; Schooler Properties, Ltd.; JRK-CDK, Ltd.; LKC-CDK, Ltd.; MKS-CDK, Ltd.; LKC-TC, Ltd.; Cristi Cocke Trammell; Catherine Suzanne Schooler; Kent Ries, Chapter 7 Trustee for the Estates of Catherine D. Koehler, Maurice Schooler, Mary C. Schooler, and Louise Trammell Conley; Marty Rowley, as Trustee of the School-er/Conley Creditors Liquidation Trust; AHF Development, Ltd.; Houston One Willow Park, Ltd.; Houston Woodedge, Ltd.; Houston Aston Brook, Ltd.; Houston One Willow Chase, Ltd.; and Conroe Stony Creek, Ltd. The order provided that the balance of the defendants4 could participate in the first trial but the claims against them would not be taken up at the first trial. Such claims would be addressed by a second trial.
Background Facts
9. Raymond and Catherine D. Koehler were married and had six children: Mary Catherine Schooler (husband Maurice Schooler), Louise Trammell Conley, Joan Graham (husband Charles Graham), James R. Koehler (deceased 5/8/07), William R. Koehler, and John Michael Koehler.
10. Raymond Koehler died on March 15, 1986. See Defendants’ Ex. 116. His Last Will and Testament (the “Will”), dated April 18,1981, provided for the creation of six trusts — the William R. Koehler Trust, the Mary Catherine Schooler Trust, the James R. Koehler Trust, the Louise Trammell Trust, the John M. Koehler Trust, and the Teresa Joan Koehler Graham Trust (defined here collectively as the Koehler Children’s Trusts) — to which the bulk of his estate assets would pass upon his death. See Trustee’s Ex. 111. The Will states that his primary concern in establishing the trusts was to “provide for the support and maintenance of my wife *522during her life in the standard of living to which she is accustomed to at the time of my death.” Id. The trustees were to distribute to his wife, Catherine, “such amounts of the Trusts Estate of such trust as shall be necessary to so maintain her.” Id. The balance of the trust assets then pass to the beneficiaries named under the named trusts which, with the exception of the William R. Koehler Trust, is the child for which the trust is named. For the William R. Koehler Trust, the beneficiaries were the children of William R. Koehler. The Will generally provides that the trusts terminate five years after the date of the death of his wife, Catherine. On March 14, 1986, one day prior to his death, Raymond Koehler executed a codicil to his Will that changed the terms of his Will concerning the provisions for the use of the estate assets for the support of his wife Catherine Koehler. Id. The codicil states that the bulk of the estate assets pass to his “Trustees in trust during the life of my wife” for her support. It specifically provides that she shall be paid “at any time and from time to time such sums from or such part of the principal of the Trust, including the whole thereof, as my Trustees may, in their sole discretion, determine to be necessary or desirable to permit her to maintain her usual standard of living, including payment of the costs of any illness or accident which may affect her.” Id.
11.The parties here submit that a seventh trust, the Catherine D. Koehler Trust, was created by the codicil to the Will. They further submit that the bulk of Raymond Koehler’s estate assets passed to the Catherine D. Koehler Trust with the beneficiaries the same as those identified as beneficiaries under the six trusts under the Will. The beneficiaries were not to receive their respective shares until five years after Catherine Koehler’s death.
12. Certain of the six children now own interests in numerous entities and have children of their own.
The 2006 “Gifts” to AHF
13. In 2005, the Koehler Family Members, particularly Catherine Koehler and the daughters, determined that they wanted to bypass the trust provision in the Catherine Koehler Trust that provided that the assets held in such trust, consisting of stocks and other securities, would not pass to the children until five years after her death. Catherine Koehler was then in her mid-nineties.
14. By 2006, they had another issue concerning their inheritance that they wanted to address. They had inherited significant Bank of America corporation stock from their father that had a low tax basis and thus a substantial built-in taxable gain when sold. They wanted to sell the stock and use the proceeds to diversify their holdings but, in doing so, wanted to avoid the taxes realized from the sale.
15. The Koehler Family Members sought Sterquell’s advice regarding their desires, and he devised a scheme to accommodate their goals.
16. Sterquell’s scheme involved the use of the various family trusts and family-owned entities in the making of ostensible gifts to AHF.
17. The Koehler Family Members previously created and owned the following limited partnerships: Schooler Properties, Ltd.; LKC-TC, Ltd.; LKC-CDK, Ltd.; MKS-CDK, Ltd.; JKG-CDK, Ltd.; and JRK-CDK, Ltd. (the “Limited Partnerships”). For each of the Limited Partnerships, yet another entity, a family owned corporation, served as the general partner and one of the children and/or Catherine Koehler served as limited partner(s). Of note, neither William Koehler nor Mike Koehler, two of the sons of Raymond and Catherine Koehler, held an interest in any of the Limited Partnerships.
*52318. In May 2000, the Koehler Family Joint Venture, a general partnership, was created among the Limited Partnerships. See Defendants’ Ex. 68. Each Limited Partnership was a 16.67% owner in the Koehler Family Joint Venture. Id. Each of the Limited Partnerships, as partners of the Koehler Family Joint Venture, contributed 15,000 shares of Bank of America stock (“BOA Stock”) to the partnership at a stated cost of $21,600 each. Id. The purpose of the partnership was to own and manage 52,294.500 shares of the 1999 Goldman Sachs Exchange Fund. Id.
19. The Koehler Family Joint Venture made a “gift” of 52,294.500 shares of Goldman Sachs Exchange Fund to AHF by the “Gift Assignment of Shares” dated September 15, 2006. See Trustee’s Ex. 202. The value of the shares, originating from the BOA Stock, was $5,819,261.57. Id. The Koehler Family Joint Venture reported the transfer as a charitable contribution on its 2006 federal income tax return. See Trustee’s Ex. 204.5
20. In addition, the Catherine Koehler Trust executed a Gift Assignment of Assets in 2006, dated September 15, 2006, in which it gifted $4.880 million of assets from the trust to AHF (see Trustee’s Ex. 223), and reported that transfer as a charitable contribution to the IRS on its 2006 federal income tax return (see Trustee’s Ex. 224).
21. AHF sold the BOA Stock and, as an asserted § 501(c)(3) corporation, avoided paying tax on the gain realized from the sale.
22. The 2006 gifts were preceded by a series of five meetings that the Koehler family had with Sterquell. The purpose of the meetings was principally to determine how to, in effect, break the trust provisions established by the Will and codicil.
23. William Koehler was not included in any of the meetings; he and his children were estranged from the rest of the family.
24. After Raymond Koehler’s death in 1986, Mike Koehler assisted his mother with her finances. He did this until about 1995 or 1996; around this same time, Catherine Koehler stopped using her CPA who was out of Dalhart, Texas. She then started using Sterquell as both an accountant and financial advisor.
The 2007 “Repayments” of the 2006 “Gifts”
25. AHF “repaid” the 2006 “gifts,” but not to either the Catherine Koehler Trust or the Koehler Family Joint Venture, but rather to the Koehler Children’s Trusts (thereby “breaking the trust” and avoiding the five-year condition of the Catherine Koehler Trust).
26. The 2006 gifts were repaid through the following scheme:6
• On April 4, 2007, AHF formed three wholly-owned subsidiaries: AHF-RCL I, LLC, AHF-RCL II, LLC, AHF-RCL III, LLC (collectively, the “RCL Entities”). The RCL Entities had no employees, no business operations, and no assets.
• Rainier7 loaned the RCL Entities approximately $14.4 million pursuant to *524the April 17, 2007 loan agreements. The RCL Entities transferred all of those funds to the AHF Controlled Accounts.8 AHF then transferred the following amounts to the following Koehler Children’s Trusts from the AHF Controlled Accounts in exchange for a worthless 99% limited partnership interest in GOZ No. 2, Ltd. See Trustee’s Exs. 303-304.
Ostensible Seller: Amount Received:
Mary C. Schooler Trust $3,793,430
Louise Trammell Trust $2,712,500
Joan Graham Trust $3,161,788
$9,667,718
• AHF and AHF Development transferred funds into the accounts of the AHF Intermediate Entities and, on the same day, caused the AHF Intermediate Entities to transfer funds to the above identified three Koehler Children’s Trusts.
27.Alan Weiner, the Trustee’s expert, credibly testified regarding the flow of funds that began with the $14.4 million loan made by Rainier in April 2007. The loan funds were disbursed to the RCL Entities. The RCL Entities had no employees and no operations and thus no source of income. AHF guaranteed the Rainier loan. According to Weiner, within a few days after the loan disbursement, $10,921 million of the funds passed from the RCL Entities to AHF Development; $2,623 million from the RCL Entities to the AHF Intermediate Entities; and $853,000 from the RCL Entities to AHF. In addition, $2,353 million passed from AHF to the AHF Intermediate Entities, and $4.9 million passed from AHF Development to the AHF Intermediate Entities. Finally, again within the same immediate timeframe, the AHF Intermediate Entities conveyed $8,195 million and the RCL Entities conveyed $1,472 million — for a total of $9,667 million — to the Joan Graham Trust ($3,161,788), the Louise Trammell Trust ($2,712,500), and the Mary Schooler Trust ($3,793,430).9
28. These transfers of funds, at all levels, were handled by and effected by AHF employees and at the direction of Sterq-uell. The bank accounts through which the funds flowed were under the dominion and control of AHF, through Sterquell.
29. The funds transferred to the Koeh-ler Children’s Trusts from AHF, AHF Development, and the AHF Intermediate Entities accounts constitute property in which AHF possessed an interest.
30. As stated, the “repayments” were made to the Koehler Children’s Trusts— the Mary Schooler Trust, the Louise Trammell Trust, the Joan Graham Trust, and the James R. Koehler Trust. However, each of the trusts ostensibly conveyed their respective interests in an entity named GOZ No. 2, Ltd. in consideration for the “repayment.”
*525The 2008 “Gifts” to AHF
31. Apparently satisfied that the 2006 transfers were successful (the Koehlers successfully avoided tax on the sale of BOA Stock, obtained gift tax deductions, and bypassed the five-year condition of the Catherine Koehler Trust by directing funds to the Koehler Children’s Trusts), the Koehler Family Members decided to enter into more transactions with AHF in 2008.
32. In 2008, the Koehler Family Members were particularly concerned about the Bank of America stock that they still held in trust and its rapidly decreasing value as a result of the downturn of the financial markets in 2008. They wanted to liquidate the stock but do so in a manner that minimized or avoided taxes on the gain realized. They, therefore, as they had done in 2006, effected a gift of the stock to AHF, but did so principally through the Limited Partnership entities (and not through the Koehler Family Joint Venture as they did in 2006). The funds realized after the sale by AHF as a non-profit were then to somehow “come back” to the family devoid of adverse tax consequences. Their plan was to then use the tax-free funds to diversify their portfolio of investments.
33. In 2008, the Koehler Related Parties, principally by and through the Limited Partnerships, executed Gift Assignments of Stock, gifting $4.510 million of additional BOA Stock to AHF (again to obtain charitable tax deductions and to allow AHF to sell the stock and avoid tax on the gain). See Trustee’s Exs. 401, 503, 605, 705, 804, 905, 1005, 1105, and 1204.
34. The Koehler Related Parties also had executed Gift Assignments of Assets gifting $4.693 million of cash and bonds to AHF in 2008. See, e.g., the proofs of claims of LKC-TC, Ltd., Louise Trammel Trust, and Mary Schooler Trust (Trustee’s Exs. 903,1104, and 1203).
Sterquell’s Death, the AHF Bankruptcy, and Koehler Claims
35. Sterquell died in early April 2009, reportedly by suicide, and AHF was placed into bankruptcy shortly thereafter. AHF had not, at the time of the bankruptcy filing, returned (or “repaid”) the 2008 “gifts.”
36. In July 2009, the Koehler Related Parties filed, under penalty of perjury, the following proofs of claims in the aggregate amount of $10,967,359, asserting that the 2008 transfers to AHF were not gifts but rather “investments” in AHF that AHF promised to repay:10
Claimant Claim Number11 Amount
Louise Trammell (Conley) Trust 20 AHF-V $ 3,007,647
Mary Catherine Schooler Trust 12 AHF-V $ 2,875,593
LKC-TC, Ltd. 19 AHF-V $ 2,167,599
JRK-CDK, Ltd. 105 AHF-I $ 927,907
Schooler Properties, Ltd. 16 AHF-V $ 891,736
MKS-CDK, Ltd. 11 AHF-V $ 230,144
Catherine Suzanne Schooler 25 AHF-V $ 64,656
Maurice Schooler, Custodian for August Wendt 13 AHF-V $ 59,622
Maurice Schooler, Custodian for Erin Wendt 14 AHF-V $ 59,622
*526$ 59,622 Maurice Schooler, Custodian Koehler Wendt hr]
$ 192,278 Catherine D. Koehler
$ 204,736 LKC-CDK, Ltd.
$ 226,195 Cristi Cocke Trammell (withdrawn)
$10,967,359 TOTAL
37. A few weeks later, the Koehler Related Parties filed their 2008 tax returns representing to the IRS that the 2008 transfers were gifts to AHF, and charitable contribution deductions were taken for the gifts. See Trustee’s Exs. 402, 504-507, 606-609, 706-711, 805, 906-908, 1006-1008, 1106, and 1205.
38. In addition to the gift transfers of approximately $10 million made by the Koehler Family Members in each of 2006 and 2008 and the multi-layered transactions through the various trusts and entities, certain of the Koehler Related Parties issued guaranties of AHF debt to other parties. As a result of the guaranties, the Koehler Family Members have paid over $6.2 million to third parties in settlement of the guaranties. See Defendants’ Ex. 168.12
Assignment of Claims to Ries/Rowley
39. Certain Koehler Related Parties owned interests in AHF affiliates and, accordingly, were sued in state court by Templeton and other investors. On or about September 25, 2009 (after filing the claims listed above in July 2009), the following four individuals filed chapter 7 bankruptcy cases with this Court: Catherine D. Koehler (the mother); Mary Catherine Schooler (daughter) and her husband Maurice Schooler; and Louise Trammell Conley (daughter) (collectively, the “Koeh-ler Related Ch. 7 Debtors”).
40. Kent Ries was appointed chapter 7 trustee for the bankruptcy estates of these four Koehler Related Ch. 7 Debtors, and therefore controls all AHF claims filed by these four debtors in the AHF bankruptcy case.
41. On their respective bankruptcy filing dates, the Koehler Related Ch. 7 Debtors owned interests in numerous non-debt- or entities; see Findings 17 and 18.
42. Kent Ries, Catherine D. Koehler, Mary Schooler, and Louise Conley settled disputes among them concerning whether Ries, as Trustee, had authority to reach into the non-debtor entities, sell their assets, and recover the sale proceeds for the benefit of the bankruptcy estates. As part of the settlements, Ries was assigned the following claims of non-debtor Koehler Related Parties against AHF:13
Claim No.
14
Amount
Catherine Koehler 7 AHF-V $192,278
Schooler Properties, Ltd. 16 AHF-V 891,736
LKC-TC, Ltd. 19 AHF-V 2,167,599
JRK-CDK, Ltd.15 (62%) 105 AHF-I 575,302
*527MKS-CDK, Ltd. 11 AHF-V 230,144
LKC-CDK, Ltd. 10 AHF-V 204,736
$4,261,822
43. Kent Ries then contracted to pay certain of the transferors 20% of his net recovery, if any, on the claims in exchange for their cooperation in prosecuting the claims.
44. Each settlement document expressly states as follows:
“[T]here are documents reflecting that this transfer was a gift to AHF, but the claimant claims that the transfer was a loan or investment and that it was supposed to be repaid.... ”
45. Members of the Templeton Group sued the Schooler Trust (not subject of a bankruptcy proceeding) in state court, asserting that the Schooler Trust was liable as guarantor of the AHF indebtedness allegedly owed to them. On April 23, 2010, the Templeton Group and the Schooler Trust entered into a settlement agreement pursuant to which Marty Rowley, Trustee of a creditors trust established for the benefit of the Templeton Group and a few other creditors, received, among other things:
• Approximately $2.1 million of assets, and
• An assignment of the Schooler Trust claim (Claim No. 12, Case No. 09-20373) against AHF in the amount of $2,875,593.
46. Members of the Templeton Group also sued the Louise Trammell Trust (not subject of a bankruptcy proceeding), asserting the Louise Trammell Trust was also liable as guarantor of AHF indebtedness. On November 8, 2010, the Temple-ton Group and the Louise Trammell Trust entered into a settlement agreement by which Marty Rowley, Trustee of the Creditors Trust established for the benefit of the Templeton Group and a few other creditors, received, among other things:
• Approximately $1.4 million; and
• An assignment of the Louise Trammell Trust claim (Claim No. 20, Case No. 09-20373) against AHF, in the amount of $3,007,648.
47. Accordingly, Marty Rowley, as Trustee, is now the owner and holder of the following Koehler Related Parties’ claims: the Mary Schooler Trust claim (Claim No. 12, Case No. 09-20373) in the amount of $2,875,593, and the Louise Trammell Trust claim (Claim No. 20, Case No. 09-20373) in the amount of $3,007,647.
The AHF Intermediate Entities
48. Houston One Willow Chase, Ltd. (“Willow Chase”) was a Texas limited partnership formed on May 21, 2007, with MC-CDC One Willow Chase, Inc. (“MC-CDC Willow Chase”) serving as the corporate general partner. On October 24, 2006, an application was made to the Texas Secretary of State to reserve MC-CDC Willow Chase’s name, but such entity was never formed. On January 2, 2009, a Certificate of Termination of a Domestic Entity was filed with the Texas Secretary of State which terminated Willow Chase as an entity. According to Larry Bunn, the stated president of the general partner, Willow Chase and MC-CDC Willow Chase never owned any assets, never had any employees, and never conducted any business operations. He did not set-up or have control of a bank account for Willow Chase. See Trustee’s Ex. 324.
49. Houston One Willow Park, Ltd. (“Willow Park”) was a Texas limited partnership formed on May 21, 2007, with MC-CDC One Willow Park, Inc. (“MC-CDC Willow Park”) serving as the corporate general partner. On October 24, 2006, an application was made to the Texas Secretary of State to reserve MC-CDC Willow *528Park’s name, but such entity was never formed. On January 2, 2009, a Certificate of Termination of a Domestic Entity was filed with the Texas Secretary of State which terminated Willow Park as an entity. According to Larry Bunn, the stated president of the general partner, Willow Park and MC-CDC Willow Park never owned any assets, never had any employees, and never conducted any business operations. He did not set-up or have control of a bank account for Willow Park. See id.
50.Houston Aston Brook, Ltd. (“Aston Brook”) was a Texas limited partnership formed on May 21, 2007, with MC-CDC Aston Brook, Inc. (“MC-CDC Aston Brook”) serving as the corporate general partner. MC-CDC Aston Brook was formed on May 22, 2007, and MC-CDC Aston Brook changed its name on December 13, 2007 to “MC-CDC Austin GP, Inc.” Also on December 13, 2007, Aston Brook filed a Certificate of Amendment with the Texas Secretary of State to change its name to “MC-CDC Austin, Ltd.” On January 2, 2009, a Certificate of Termination of a Domestic Entity was filed with the Texas Secretary of State which terminated MC-CDC Austin, Ltd. f/k/a Aston Brook as an entity. On May 12, 2009, a Certificate of Termination of a Domestic Entity was filed terminating MC-CDC Austin GP, Inc. f/k/a MC-CDC Aston Brook. According to Larry Bunn, the stated president of the general partner, Aston Brook and MC-CDC Aston Brook never owned any assets, never had any employees, and never conducted any business operations. He did not set-up or have control of a bank account for Aston Brook. However, an account was set up for MC-CDC Aston Brook around May of 2007, but it had no activity other than client service charges which were later credited back to the account. See id.
51. Houston Woodedge, Ltd. (“Woo-dedge”) was a Texas limited partnership formed on May 21, 2007, with MC-CDC Woodedge, Inc. (“MC-CDC Woodedge”) serving as the corporate general partner. MC-CDC Woodedge was formed on May 22, 2007, and MC-CDC Woodedge changed its name on December 13, 2007 to “MC-CDC Amarillo GP, Inc.” Also on December 13, 2007, Woodedge filed a Certificate of Amendment with the Texas Secretary of State to change its name to “MC-CDC Amarillo, Ltd.” On January 2, 2009, a Certificate of Termination of a Domestic Entity was filed with the Texas Secretary of State which terminated MC-CDC Amarillo, Ltd. f/k/a Woodedge as an entity. On May 12, 2009, a Certificate of Termination of a Domestic Entity was filed terminating MC-CDC Amarillo GP, Inc. f/k/a MC-CDC Woodedge. According to Larry Bunn, the stated president of the general partner, Woodedge and MC-CDC Woo-dedge never owned any assets, never had any employees, and never conducted any business operations. He did not set-up or have control of a bank account for Woo-dedge. See id.
52. Larry Bunn testified that the partnerships were originally created for the purpose of purchasing properties that could potentially qualify for low-income housing tax credits. The applications for tax credits were denied, however, and the partnerships never had any operations or assets.. He did not dispute the Trustee’s assertion that any funds that may have passed through an account that was labeled by the name of any of the partnerships were funds of AHF.
Testimony of Catherine Koehler
53. Catherine Koehler’s testimony was submitted to the Court by video deposition. She described how her husband Raymond rose from janitor at the Citizens State Bank of Dalhart when he was first *529hired in the 1930s to president and principal owner of the bank.
54. Concerning the transfers to AHF in 2006, Catherine Koehler testified that Sterquell explained to her that they would be partners in a partnership and that, as a result, the investments would generate significant tax savings. She emphasized that she expected to get her money back. When asked to explain why she signed gift assignments to effect the transfers, she simply stated that they were not gifts. She said she asked Sterquell if he had sufficient life insurance to cover the transfers because, as she explained it, they were investments. Despite this, at other parts of her testimony, she said the transfers had to be loans because the transfers were to be returned. As she poignantly explained, she and her daughters lost everything after Sterquell committed suicide. She filed bankruptcy as a result, at the age of 97.
Testimony of Joan Graham
55. Joan Graham testified that despite the clear wording of the gift assignments, it was not her intent to make a true gift to AHF. She said the funds (and/or securities) were to “come back” within thirty days. When the funds were not returned by the end of the year in 2006, she was very upset and told other family members that she may retain a lawyer to assist her in recovering the funds.
56. Though Joan Graham testified that she knew nothing about GOZ No. 2, Ltd., she was aware that GOZ No. 2, Ltd. shares were somehow used in the repayment of the 2006 transfers.
Testimony of Charlie Graham
57. Charlie Graham, Joan Graham’s husband, testified about certain somewhat peculiar incidents that he says occurred in the time frame of 1977 to 1981, all of which he contends caused him and his wife to distrust Sterquell. Charlie Graham’s recollection of unusual events that occurred almost thirty years prior to the transactions here are not relevant to the causes of action here.
Testimony of Trey Trammell
58. Trey Trammell is the son of Louise Trammell Conley and is a licensed stock broker. He testified that the “gift” concept that was part of Sterquell’s plan did not make sense and that he relayed his concerns regarding Sterquell’s proposed scheme to his mother. He did not trust Sterquell and was concerned that the deals were illegitimate. He said that gifts to a non-profit entity that were to be paid back was nonsensical. He also understood that the combination of large returns (12% on the gifts) with significant tax benefits (i.e., tax avoidance) likewise did not make sense. He told his mother that the deal was too good to be true. He shared his concerns more generally with Mary and Maurice Schooler, as well.
Testimony of Louise Conley
59. Louise Conley testified that the 2006 transfers were made for the purpose of “breaking the trust.” She said the 2006 transfers were not ever intended to be gifts; they were, according to her, investments, albeit investments without question as to liability on Sterquell’s or AHF’s part. She further testified that the transferred assets were to be returned within 30 to 90 days. The “repayments” were made to benefit Mary, Louise, Joan, and James; William and Michael were intentionally left out as part of the plan.
60. Louise Conley admitted that Trey Trammell had urged her not to participate in Sterquell’s plan.
61. Louise Conley had no knowledge of any interest in GOZ No. 2, Ltd., though she thought perhaps her trust, the Louise Trammell Trust, was a partner in GOZ No. 2, Ltd. She admitted the deals were very confusing. Neither Mary, Louise, nor *530Joan had any recollection or knowledge of ever acquiring an interest in GOZ No. 2, Ltd. and could not identify any basis for any value in such entity.
62. The Koehler Children’s Trusts ostensibly served as limited partners of AHF Development. Louise Conley testified that she knew nothing about AHF Development, however.
63. The proof of claim of the Louise Trammell Trust, as amended on December 10, 2009, asserts a claim amount of $3,007,647.99; the claim basis is “Investment.” The proof reflects “transferred investments” in 2008 in the amount of the claim. Attached to the claim is a guaranty dated January 12, 2008, signed by Sterq-uell on behalf of AHF. The guaranty states that the “Principal” is LIHTC Walden II Development, Ltd.; that the Louise Conley Trust is the investor; that the investment amount is $1,170,036.99; and that the guaranty covers the “[r]eturn of [investment within twelve ... months of investment, plus a preferential return of eighteen percent ... per annum until such amount is paid in full.” Trustee’s Ex. 1104. Louise Conley testified that she could not remember making such investment, and she provided no proof that she did.
64. The 2008 tax return for the Louise Trammell Trust was signed on September 11, 2009, and presumably then filed. It reflects a charitable donation of $764,403. Louise Conley admitted that the trust never made a charitable donation in such amount.
Testimony of Mary Schooler and Maurice Schooler
65. Mary Schooler testified that her mother, in 2005, specifically wanted to get the estate assets to the children. She also testified that she and her family knew that Joan and Charlie Graham did not trust Sterquell.
66. Mary was aware that Trey Tram-mell distrusted Sterquell. She and Maurice trusted Sterquell implicitly, however.
67. Sterquell, Hill & Goelzer, LLP prepared a Statement of Financial Condition for the Schoolers, which was dated March 30, 2007, to reflect their financial condition as of December 31, 2006. The statement provides that they had a net worth of over $11.8 million. Their largest asset was their interest in the Mary Schooler Trust, having a value of over $6.5 million. The trust in turn had as its largest asset an interest in GOZ No. 2, Ltd. valued at $3,735 million. See Defendants’ Ex. 85. Mary Schooler said she had no knowledge of GOZ No. 2, Ltd. and could provide no evidence to support the attributed value.
68. Mary Schooler testified that the 2006 gift transfers were to come back within a “reasonable period of time.”
69. Mary Schooler knew that her brother Mike, who was sophisticated with finances, did not understand Sterquell’s explanation of the 2006 plan.
70. Mike Koehler had worked with his dad in the bank for seventeen years. He ultimately became part owner of the bank and thus had his own, separate ownership of the Bank of America stock that arose upon acquisition of the bank. According to Mary Schooler, Mike did not receive any of the Raymond Koehler estate assets as a result of the 2006 transactions because he “didn’t need it.”
71. Maurice Schooler testified that the transactions constituted an investment in AHF; he understood that by an investment one hopes to make a profit as a result of the investment.
Testimony of Chip Glispin
72. Chip Glispin served as an investment manager for the Koehler Family Members beginning in 2006.
*53173. Much of the inherited wealth from Raymond Koehler consisted of Bank of America stock that he owned as a result of his successful banking career. Catherine Koehler and the Koehler Family Members wanted to effect a strategy through which they could liquidate the stock and minimize or avoid the taxes realized upon the sale of the stock. Glispin was advised of this goal. He admitted that any strategy that contemplated investments as gifts and returning of the corpus of the investment with a 12 to 18% interest factor and with no tax implications was suspect.
74. Glispin testified that Mary and Maurice Schooler totally trusted Sterquell and were adamant about following Sterq-uell’s advice.
75. Glispin credibly testified that the Koehler Family Members did not understand the details of Sterquell’s plan but did understand the “global” concepts.
76. Glispin attempted to recharacterize the nature of the deals as “assignments” of the assets to AHF with the “expectation” that the assets would be returned within 60 to 90 days. He further testified that there was no defined maturity date for the return of the assets and no defined rate of return.
77. Glispin testified that, in his opinion, the Koehler Family Members had no intention of involving themselves in a fraudulent tax scheme and that they believed the deals in both 2006 and 2008 were legitimate. He admitted, however, that his opinion did not take into account any warnings the family may have received from Trey Trammel; he claimed that he had no specific knowledge of the specific tax strategy involved or of the use of interests in GOZ No. 2, Ltd. in the transactions. He had not seen or reviewed any Kls or tax returns or any documents concerning the GOZ No. 2, Ltd. interests.
Testimony of Mike Ohm
78. Mike Ohm, a CPA in Amarillo, Texas, was retained by the Koehler Family Members to prepare tax returns for their various entities. He was retained upon the recommendation of their attorneys, Nancy Stone and Brad Korell, in May or June 2009, after Sterquell’s death, for purposes of preparing the 2008 tax returns. He worked mostly with Korell. He prepared twelve separate returns for the various Koehler Related Parties; they reflected over $10 million in charitable contributions to AHF for 2008. Ohm admitted that the charitable contributions, to be valid, had to arise from true gifts. In preparing the returns, he relied upon documents provided to him and representations made to him by Korell and Jeremy Goelzer, Sterquell’s accounting firm partner. In preparing the returns, Ohm reviewed the 2007 tax returns; he was also aware of Sterquell’s suicide and the Koeh-ler family’s claims against Sterquell’s estate for the $10+ million in investments made in 2008.
79. Ohm testified that he was never told by any of the Koehler Family Members or their attorneys, Stone and Korell, that the 2008 transfers, labeled as gifts, were not actual gifts. The returns were filed in October 2009, by which time the AHF bankruptcy had already been filed. In July 2009, three months prior to the filing of the tax returns, the Koehler Related Parties filed their proofs of claim in the bankruptcy case asserting that the transfers were “investments” that created unsecured claims against AHF. See, e.g., Trustee’s Exs. 507, 508.
80. Ohm prepared and filed returns for the following Koehler Related Parties: Louise Trammell (Conley) Trust; the Mary C. Schooler Trust; LKC-TC, Ltd.; JRK-CDK, Ltd.; Schooler Properties, Ltd.; NKS-CDK, Ltd.; Catherine Su*532zanne Schooler; Maurice Schooler, custodian for Augustine Wendt; Maurice Schooler, custodian for Erin Wendt; Maurice Schooler, custodian for Koehler Wendt; Catherine D. Koehler; LKC-CDK, Ltd.
Testimony of Ginger Nelson
81. Ginger Nelson, an attorney in Amarillo, Texas, who is board certified in estate planning and probate law, was contacted in June 2008 by Jeremy Goelzer to, as she called it, “paper” the estate plan that Sterquell had devised for the Koehler family. She testified that she understood that the goal was to make contributions from the trusts and thus realize “tax discounts” but, “in the end,” the investment was to come back. She characterized the transactions as complex and said she understood that they had passed IRS audits in prior years. She did not question the deals or attempt to substantively analyze the transactions as “papered.”
Testimony of Pam McDonald
82. Pam McDonald was a former senior vice president of AHF. She started with AHF in 1991 and served as treasurer and controller. She described the Koehler Family Members as “seed investors” at a time when AHF needed capital for its low-income housing projects. She acknowledged that they made their investments as gifts and were to receive tax benefits along with return of the so-called gifts. She said she had no understanding of this, however. She disavowed any knowledge of the purported tax benefits of GOZ No. 2, Ltd. or of the specifics discussed at the 2006 meetings that preceded the transfers.
Testimony of Jeremy Goelzer
83. Jeremy Goelzer, Sterquell’s former partner in their accounting firm, was present at some of the meetings between Sterquell and the Koehler family. He described the 2006 and 2008 transfers to AHF as investments with the expectation on the family’s part that they would realize a gain. He said the Koehler Family assumed they would get their investments back. He testified that the emphasis for the 2008 transaction was the transfer of the Bank of America stock and thus the avoidance of taxes. He said Sterquell assured the family that the financial condition of AHF was good and that, in addition, he (Sterquell) had substantial life insurance “if something happened.” Goelzer believed the transfers were investments and admitted that charitable donation deductions do not arise from investments.
Testimony of Mike Koehler
84. Mike Koehler did not participate in the family’s efforts to break the trust or participate otherwise in the 2006 or 2008 transactions. He knew he was cut-out by virtue of the 2006 transactions and when asked if he was upset about it, he said, “yes and no.”
Additional and Concluding Facts
85. Well after Sterquell’s death and after the Koehler Family Members understood that there was a serious problem in recovering their 2008 investments, they filed their claims with the Court and then filed tax returns claiming charitable donation deductions from the same “investments.” Both the proofs of claim and the tax returns were prepared and filed with the advice of counsel and accountants that had no connection with Sterquell or AHF.
86. In March 2009, Catherine Koehler obtained a legal opinion addressing her authority to make a gift of all the trust assets to AHF, and executed an affidavit (the “Koehler Affidavit”) swearing that it was her intent to make a gift of the trust assets to AHF (see Trustee’s Ex. 229).
87. Though the proofs of claim as originally filed by the Koehler Related Parties state that the basis for each of the claims made was an “investment,” certain of the *533claims were amended with the amendments stating that the claims arose from “unreturned monies owed,” or amounts owing upon “transferred investments.” The Koehler Related Parties clearly struggled with how to characterize their claims. They did not file claims based on tort theories of recovery.
88. The Koehler Family Members understood that they were investing in Sterq-uell’s enterprise but doing so by gift instruments, with the expectation that the funds would somehow come back with a significant return and with significant tax benefits. By then, given that they had basically been paid back on the 2006 transfers, they apparently took for granted that the 2008 “gifts” would likewise effectively bypass the five-year trust condition.
89. The testimony of the defendants’ expert, Eric Nemeth, is flawed. Nemeth opined that the Koehler Related Parties were not engaged in an abusive tax scheme because the transactions here did have economic substance. Such substance, according to Nemeth, arose from the taxpayers’, the Koehlers’, bankruptcies and the fact that they lost their investments. This analysis ignores the most egregious fact: that the Koehler Related Parties filed tax returns claiming charitable donation deductions on bogus gifts. He also testified that the tax savings were minimal — a no harm, no foul kind of rationale. He admitted, however, that this conclusion failed to account for the intentional avoidance of any capital gains taxes by washing the Bank of America stock through AHF. It also does not account for the failure to account for any taxes potentially owed on receipt of the 2007 “repayments.” Of note, the repayments make no legal sense as they are both “repayments” and “gifts” and “payments” for worthless GOZ No. 2, Ltd. interests.
II.
CONCLUSIONS OF LAW
1. The Court has jurisdiction over this complaint and the causes of action asserted herein under 28 U.S.C. §§ 157(a) and (b) and 1334.
2. The causes of action asserted herein are core proceedings under 28 U.S.C. § 157(b).
3. Venue of this action is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
4. This Court has the power and is authorized to provide the requested relief pursuant to §§ 105, 502(d), 510(b), 510(c), 544, 548, and 550 of the Bankruptcy Code.
(Re) Characterization of the Deals
5. Despite the complexity of the transactions and the multi-layered structure through which the transactions at issue were made, the analysis of the issues here can be simplified. For purposes of the causes of action here, the Koehler Family Members were the ultimate beneficiaries of the bulk of the wealth inherited upon Raymond Koehler’s death.
6. The Koehler Family Members acted jointly and in concert on all the transactions subject of this action. They were the beneficiaries of the trusts created that bear their names; they were the owners of the entities used as a means to effect the transactions.
7. In 2006, the Koehler Family Members, through the Catherine Koehler Trust and the Koehler Family Joint Venture, respectively, transferred approximately $10.7 million in liquid assets to AHF. The transfers were unequivocally documented as gifts under gift assignment instruments.
8. In 2007, the Koehler Children’s Trusts that were created for the benefit of Mary Schooler, Louise Trammell Conley, Joan Graham, and James Koehler received *534approximately $10,752 million, ostensibly in repayment or as a return of the sums “gifted” in 2006. Specifically, the Mary Schooler Trust received $3,793,430; the Louise Trammell Trust received $2,712,500; the Joan Graham Trust received $3,161,788; and the James Koehler Trust received $1,084,734.16 The transfers were made at the direction of Steve Sterq-uell and were run through accounts carried in the names of AHF, AHF Development, and the AHF Intermediate Entities.
9. The 2007 transfers to the Koehler Children’s Trusts were also ostensibly made in consideration for or purchase of interests in an entity named GOZ No. 2, Ltd., which interests were conveyed to the RCL Entities.
10. The 2007 transfers to the Koehler Children’s Trusts ostensibly served two mutually exclusive purposes: to return or repay the “gifts” made in 2006, and to pay for interests in GOZ No. 2, Ltd.
11. In 2008, the Koehler Family Members effected another series of transfers to AHF in two transactions: first, they transferred approximately $4,510 million of Bank of America stock to AHF; second, they transferred approximately $4,693 million in liquid assets to AHF. These transfers, like the 2006 transfers, were documented as gifts under simple gift assignments.
12. At the time the Koehler Family Members made the “gifts,” — both in 2006 and 2008 — they each obviously understood what it means to make a gift. Despite this, they testified that they were promised and thus expected to receive the following as a result of the gifts:
• a return of the gifted assets with at least a 12% return on their investment;
• extraordinary tax benefits in the form of charitable donations and, for the Bank of America stock, the avoidance of capital gains taxes arising from sale of the stock.
13. As stated, the instruments effecting the transfers were simple gift assignments. In describing the deals, the Koehler Family Members consistently referred to them as investments. On occasion, they described them as loans. They refused, however, to characterize them as gifts.
14. Though the Koehler Family Members refused to acknowledge the gift nature of the threshold transactions, they continued to so characterize them on tax returns filed after Sterquell’s death and upon consultation with other professionals. Within weeks after filing such tax returns, they filed their proofs of claim with this Court that, according to the proofs, maintained that the 2008 transfers were “investments” — but investments that gave rise to claims, not interests in an entity in which they invested.
15. The Koehler Family Members wanted to accomplish two things. They wanted to expedite the transfer of their inherited wealth and thus avoid the testamentary trust provisions established by Raymond Koehler, and they wanted to shelter their expectancy of assets from taxes, including any taxes triggered by the sale of the Bank of America stock.
16. The Koehler Family Members understood the bottom-line result of what Sterquell promised them. They understood that they put millions at stake, under the guise of gifts, and expected to receive the entire amount back and at an indefinite time, though specified to be “soon”; and at a favorable though unspecified rate of return (though they testified the return was typically 12%); with numerous, wildly beneficial tax advantages. In short, they entrusted their inherited wealth with *535Sterquell and expected to receive benefits that far exceeded what they had.
17. The triggering, threshold transactions were characterized as gifts with a major purpose being the avoidance of federal taxes. The Koehler Family Members were not making gifts; they had no dona-tive intent. They knew or should have known that they were engaged in a bogus deal. The false gifts and the tax avoidance scheme, regardless how documented, was the reality of the deals and the reality that they refused to acknowledge.
18. The Koehler Family Members had little or no understanding of the details of Sterquell’s investment scheme; they just knew what they wanted and trusted Sterq-uell to accomplish their goals. Sterquell no doubt told them that he could accomplish what they wanted and no doubt raised their expectations.
19. Against this threshold determination, the Court must characterize the nature of the claims made by the Koehler Related Parties. The Court accepts the parties’ contentions that the Koehler Family Members did not really intend to make gifts, despite what the documents clearly provide. If such were the case, they would have no claim. The Koehler Family Members said they were investments, but investments that somehow morphed into advances. They contend that, as with a loan, there was not to be any risk of liability on AHF’s part. In substance, the deals were falsely documented as a means to effect bogus transactions in furtherance of an illicit investment and tax scheme orchestrated by Sterquell.
20. The Fifth Circuit in In re Lothian Oil Inc., 650 F.3d 539 (5th Cir.2011), held that bankruptcy courts have the ability to recharacterize debt as equity.
When a creditor files a timely claim, the Code states that “the court, after notice and a hearing, shall determine the amount of such claim ... and shall allow such claim in such amount, except to the extent that — (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law....” 11 U.S.C. § 502(b). The Supreme Court has held that the “applicable law” is state law: “Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law.” Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). As a result, “there is no reason why such [state law] interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” 440 U.S. at 55, 99 S.Ct. at 918. Our analysis of “applicable law” under § 502(b) is therefore an application of state law, unless Congress has stated otherwise.
Taken together, Butner and § 502(b) support the bankruptcy courts’ authority to recharacterize claims. If a claim asserts a debt that is contrary to state law, the bankruptcy court may not allow the claim. Moreover, where the reason for such disallowance is that state law classifies the interest as equity rather than debt, then implementing state law as envisioned in Butner requires different treatment than simply disallowing the claim. The Fourth Circuit identified the inadequacy of traditional disallowance in noting that “[w]hen a bankruptcy court disallows a claim, the claim is completely discharged. By contrast, recharacteri-zation is appropriate when the claimant has some rights via-a-vis the bankrupt.” In re Dornier Aviation, Inc., 453 F.3d 225, 232 (4th Cir.2006) (internal citation omitted; emphasis in original). These rights, fixed by state law, are not irrelevant to the court’s decision to disallow a claim. To the contrary, recharacterizing the claim as an equity interest is the *536logical outcome of the reason for disallowing it as debt.
Lothian Oil, 650 F.3d at 543.
21. The Court looks to Texas state law to determine whether the Koeh-ler Family Members’ claims are investments that create, at most, equity claims or true debts that are subject to treatment as unsecured claims. See 11 U.S.C. § 502(b); see also Lothian Oil, 650 F.3d 539. In this regard, Texas courts have looked to the multi-factored tests from federal tax law cases. Lothian Oil, 650 F.3d at 544. These include a 16-factor test as set forth in Fin Hay Realty Co. v. United States, 398 F.2d 694, 696 (3d Cir.1968); a 13-factor test from Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972); and an 11-factor test from Jones v. United States, 659 F.2d 618, 622 n. 12 (5th Cir.1981).
22. As with other factor-driven tests, the Court reviews the evidence in light of all factors, “while realizing that the various factors are not of equal significance and that no one factor is controlling.” Lothian Oil, 650 F.3d at 544 (quoting Mixon, 464 F.2d at 402). Additionally, the various factors “are only aids in answering the ultimate question whether the investment, analyzed in terms of its economic reality, constitutes risk capital entirely subject to the fortunes of the corporate venture or represents a strict debtor-creditor relationship.” Fin Hay Realty, 398 F.2d at 697.
23. Factors considered are the following:
(1) the intent of the parties; (2) the identity between creditors and shareholders; (3) the extent of participation in management by the holder of the instrument; (4) the ability of the corporation to obtain funds from outside sources; (5) the ‘thinness’ of the capital structure in relation to debt; (6) the risk involved; (7) the formal indicia of the arrangement; (8) the relative position of the obligees as to other creditors regarding the payment of interest and principal; (9) the voting power of the holder of the instrument; (10) the provision of a fixed rate of interest; (11) a contingency on the obligation to repay; (12) the source of the interest payments; (13) the presence or absence of a fixed maturity date; (14) a provision for redemption by the corporation; (15) a provision for redemption at the option of the holder; and (16) the timing of the advance with reference to the organization of the corporation.
Id. at 696. Yet additional factors are the name of the instrument, if any, memorializing the deal, Mixon, 464 F.2d at 402, and the right to enforce payment of principal and interest, Jones, 659 F.2d at 622 n. 12.
24. On a more basic level, the Court notes that creditors and investors are distinguishable in the way they each view the solvency or insolvency of the enterprise with which they are dealing. In re Deep Marine Holdings, Inc., No. 10-03116, 2011 WL 160595, *5 (Bankr.S.D.Tex. Jan. 19, 2011). For example, if the enterprise prospers, a creditor expects nothing more than repayment of its fixed debt. Id. In fact, the creditors rely on the equity provided by the company’s investors. Id. at *6. Investors, however, look to share in the profits to the exclusion of creditors. Id. at *5. The flip side of this expectation is the enhanced risk of insolvency borne by investors. Id. The subordination provisions of the Bankruptcy Code, both § 510(b) (mandatory subordination of damage claims arising from purchase of a security) and the absolute priority rule set forth at § 1129(b) of the Bankruptcy Code (providing that “unsecured creditors stand ahead of investors in the receiving line and their claims must be satisfied before any investment loss is compensated,” In re SeaQuest Diving, LP, 579 F.3d 411, 420 n. 5 (5th *537Cir.2009)), are said to arise from these basic expectations and, thus, the very nature of investments compared to loans. Accordingly, the risk of the illegality in issuance of equity is properly borne solely by investors because “it would be improper to reallocate this risk to creditors who (1) never bargained for an equity position in the debtor and (2) extended credit to the debtor in reliance on the equity cushion provided by the investors.” Deep Marine, 2011 WL 160595, at *6 (quoting SeaQuest, 579 F.3d at 420).
25. The Koehler Family Members intended their “gifts” to be investments; they consistently refer to their claims in the AHF bankruptcy case as investments. They falsely claimed they were charitable donations on all tax returns; they expected to recover the amount of their investments with a return, and with an abundance of tax benefits. Their expectation was based on Sterquell’s use of the funds within his low-income housing enterprise fronted by AHF. They are charged with knowing that the deals were suspect. It can be inferred that Sterquell intended to use the funds as needed for his enterprise, which consisted of AHF, a claimed nonprofit entity sitting at the top of dozens of for-profit entities, all of which were ultimately controlled by Sterquell. The funds were therefore used within Sterquell’s discretion and were not earmarked for any specific usage. A central goal was to avoid the income taxes that result from accumulations and transfers of wealth. The Koehler Family Members did not know or understand precisely what Sterquell intended to do with the funds, but they did know they were placing the funds into Sterquell’s control by instruments clearly designated as gift assignments. Despite this, they purposely avoided inquiry with any other professional concerning the propriety and legality of the transactions.
26. As for the identity or relationship between the parties — the Koehler Family Members on one hand and Sterquell (and, by extension, AHF) on the other — the Koehler Family Members were in the role of investors with certain goals and Sterq-uell was the financial advisor/consultant there to guide them. Sterquell had served certain members of the Koehler family as an accountant and financial advisor for many years. Catherine Koehler, the Schoolers, and Louise Conley trusted him implicitly. Sterquell was charismatic and convincing. His explanations of the deals were vague, ambiguous, and confusing. The Koehler Family Members never understood what he proposed to do with their invested funds. Sterquell was the dominant person in the relationship. As a practical matter, the role of AHF, as a separate legal entity, was as a vehicle for Sterquell’s enterprise. In this regard, as stated above, Sterquell was in total control of all aspects of AHF and the entities through which Sterquell’s investment schemes were operated. The Koehler Family Members, apart from their investments, had no real control over AHF or its many affiliated entities. The Koehler Family Members no doubt followed Sterq-uell’s advice and relied upon his expertise and promises that he could realize their goals. But they also knew that they were making bogus gifts as part of their investment plan and were thus complicit with Sterquell at the threshold of the deals. Sterquell and the Koehler Family Members knew the deals were based on promises not grounded in economic reality. Gifts are not loans; charitable donations do not arise from gifts that are not true gifts. Gifts do not give rise to a repayment obligation. Tax deductions that are based on false gifts are illicit. Sterquell no doubt knew this. The deals were risky and improper. Construing the Koehler Family Members’ understanding and their *538intentions most generously, they should have appreciated the illicit nature of the deals and should have sought further professional advice before entrusting their life-changing wealth with Sterquell.
27. Another factor concerns the amount of capital the recipient had at the time of the transaction. If the recipient was capitally thin, then the transaction weighs towards an equity investment. See Jones, 659 F.2d at 622; In re AutoStyle Plastics, Inc., 269 F.3d 726, 751 (6th Cir. 2001). AHF was an asserted non-profit entity that sat at the top of the enterprise that included dozens of for-profit companies or partnerships. Many of the deals orchestrated by Sterquell were complex and legally questionable. The Court can safely assume that AHF was capitally thin. It is also important to note that the Koeh-ler Family Members’ investment funds were controlled by Sterquell (and, by association, arguably AHF) and used for whatever purpose he saw fit.
28. The “risk involved” in a transaction typically considers the presence or lack of security. Absence of security is a “strong indication that the advances were capital contributions rather than loans.” See AutoStyle Plastics, 269 F.3d at 752. There was obviously no security behind the investments/gifts here. The Koehler Family Members essentially cast caution aside and relied upon assurances from Sterquell that their investments were safe; they also considered the fact that Sterquell had life insurance to cover the investments. They relied upon Sterquell to somehow orchestrate their investments and use the funds in a way that resulted in both a large return, in the short-run, and with too-good-to-be-true tax benefits. At bottom, they relied upon the solvency of AHF and Sterquell’s entire low-income housing enterprise. As was stated in another case before this Court, “[t]he flipside of [the Koehler FamilyJ’s appetite for the basket of benefits is the extreme risk [they] bore through [their] participation.” O’Cheskey v. Templeton (In re Am. Hous. Found.), No. 10-02016, 2013 WL 1316723, *15 (Bankr.N.D.Tex. Mar. 30, 2013).
29. The arrangements’ formal indicia are relevant to the inquiry. Though the deals as a whole are incoherent, they begin with gift assignments by which the Koeh-ler Family Members ostensibly gifted their wealth away. There are no true debt instruments, collateral documents, payment terms, maturity dates, or other attributes indicative of an enforceable obligation to repay the sums invested. See Geftman v. C.I.R., 154 F.3d 61, 68 (3d Cir.1998) (citing Fin Hay, 398 F.2d at 696).
30. The Koehler Family Members’ position relative to other creditors of AHF is clearly distinguishable. They expected large returns and huge tax benefits, all under the guise of false gifts. Their benefits were to come back “soon,” but there was no fixed sum, at a fixed rate, or a fixed time. The deals do not resemble traditional loans, and they do not resemble the attributes of traditional lenders or creditors.
31. The Koehler Family Members had no voting rights or similar authority concerning AHF as a result of their investments.
32. The repayment of the investments and the source of any interest or other return on the amounts invested were to somehow come from Sterquell’s use of the funds in his low-income housing projects. In short, the source was wholly based on the legitimacy of what Sterquell pitched. Everything about the deals was vague, ambiguous, and suspect. The investments were not made at the time AHF was initially organized; they were made at a time that Sterquell needed funds for his continued operations, however.
*53933. In assessing the above factors, and upon consideration of the very nature of the investments compared to true loans, the Court concludes that the Koehler Family Members’ “investments” were indeed equity investments and must be treated as such in the AHF bankruptcy case. From the perspective of true, legitimate creditors of AHF, the inherent risks from such questionable deals should be exclusively with the ones that blindly followed Sterq-uell’s lead. Such characterization recognizes that the Koehler Family Members put-up real dollars and should have some rights vis-a-vis the bankrupt. See Lothian Oil, 650 F.3d at 543. “[It] is the logical outcome of the reason for disallowing it as debt.” Id.; see also AutoStyle Plastics, 269 F.3d at 748-49.
34. That AHF is an asserted non-profit entity does not alter the Court’s conclusion that the claims of the Koehler Related Parties must be relegated to equity claims. AHF was at the top of Sterquell’s investment enterprise.
Subordination of the Claims
35. Section 510(b) of the Bankruptcy Code mandates subordination of “damages arising from the purchase or sale” of a security of the debtor or of an affiliate of the debtor. 11 U.S.C. § 510(b). “Any discussion of section 510(b) must begin with the 1973 law review article authored by Professors John J. Slain and Homer Kripke, entitled The Interface Between Securities Regulation and Bankruptcy-Allocating the Risk of Illegal Securities Issuance Between Securityholders and the Issuer’s Creditors, 48 N.Y.U. L.Rev. 261 (1973).” SeaQuest, 579 F.3d at 420 (quoting In re Granite Partners, L.P., 208 B.R. 332, 336 (Bankr.S.D.N.Y.1997)). In enacting § 510(b), Congress generally adopted the Slain and Kripke theory of allocating the risks of insolvency and the unlawful issuance of securities. See H.R.Rep. No. 95-595, at 195 (1977); Sea-Quest, 579 F.3d at 420. Slain and Kripke’s “subordination thesis ... was premised upon the allocation of certain risks between investors and creditors.” SeaQuest, 579 F.3d at 420. According to the theory,
“[b]oth investors and creditors accept the risk of enterprise insolvency,” but to differing degrees, as reflected in the absolute priority rule. While the creditor anticipates repayment of a fixed debt, the investor anticipates a potentially unlimited share of future profits. In exchange for this “unique right to participate in the profits,” the investor risks the loss of his capital investment, which provides an “equity cushion” for the repayment of creditors’ claims. In contrast, investors alone bear the risk of illegality in the issuance of securities” because it would be improper to reallocate this risk to creditors who (1) never bargained for an equity position in the debtor and (2) extended credit to the debtor in reliance on the equity cushion provided by the investors.
Id. (citations omitted).
36. In a solvent corporation, the priorities between creditors and shareholders are not significant. Granite Partners, 208 B.R. at 337. However, “[w]hen a corporation becomes bankrupt, the temptation to lay aside the garb of a stockholder, on one pretense or another, and to assume the role of a creditor, is very strong, and all attempts of that kind should be viewed with suspicion.” Id. (quoting In re Stirling Homex Corp., 579 F.2d 206, 213 (2d Cir.1978) (quoting Newton Nat’l Bank v. Newbegin, 74 F. 135, 140 (8th Cir.1896))). Allowing an equityholder to assert an un-subordinated general unsecured claim against a debtor for damages arising from an equityholder’s investment would give the equityholder “the best of both worlds — the right to share in profits if [the debtor] succeeded and the right to repay*540ment as a creditor ... if it failed.” Liquidating Trust Comm. of the Del Biaggio Liquidating Trust v. Freeman (In re Del Biaggio), No. 12-3065 TEC, 2012 WL 5467754, at *6 (Bankr.N.D.Cal. Nov. 8, 2012) (quoting In re VF Brands, Inc., 275 B.R. 725, 728 (Bankr.D.Del.2002)).
37. Section 101(49) of the Bankruptcy Code provides that a security includes any of the types of interests listed. See 11 U.S.C. § 101(49). The use of “includes” means that the list is not exhaustive and that securities are not limited to the items listed in § 101(49). In re Locke Mill Partners, 178 B.R. 697, 701 (Bankr.M.D.N.C. 1995). In addition, the Fifth Circuit found § 101(49)(A)(xiv), which provides for “other claimfs] or interestfs] commonly known as ‘security,’ ” to be a “broad residual category.” SeaQuest, 579 F.3d at 418.
38. The claims of the Koehler Related Parties, based on contract and other related theories, arise from the purchase of the product — the bundle of rights and expectations — from Sterquell and AHF that the Court has recharacterized as equity interests. They cannot assert additional claims to “lay aside the garb” of the equity interests and assume the role of creditors. As investors in bogus deals, they must bear the associated risks. Further, these interests are the type of “other claimfs] or interestfs] commonly known as ‘security’ ” described by § 101(49)(A)(xiv). These equity interests fit into the Fifth Circuit’s “broad residual category.” In addition, the list in § 101(49) is not exclusive, and the Koehler Family Members’ interests are equity interests even if they do not match any of the labels provided. Therefore, any claims made here by the Koehler Related Parties that may be construed to go beyond the basic contract-based claims of their proofs of claim must, under § 510(b), be likewise subordinated.
Fraudulent Conveyance Charge
39. The Trustee contends that the 2007 payments were fraudulent conveyances under either § 548(a)(1) of the Bankruptcy Code as actually fraudulent or § 548(a)(2) as constructively fraudulent.
40. The 2007 payments were made as a return, at least in part, for the 2006 investments, with the tax deductions serving as additional benefits. The Trustee argues that the 2007 payments to the Koehler Children’s Trusts were fraudulent because the entire scheme was part of a Ponzi scheme, thus making all payments actually fraudulent as a matter of law. See, e.g., Janvey v. Alguire, 647 F.3d 585, 598-99 (5th Cir.2011); SEC v. Res. Dev. Int’l, LLC, 487 F.3d 295, 301 (5th Cir.2007); In re Taubman, 160 B.R. 964, 982 (Bankr. S.D.Ohio 1993); Jobin v. Ripley (In re M & L Bus. Machine Co.), 198 B.R. 800, 800 (D.Col. 1996). The Trustee also contends that they are fraudulent because the payments flow to each of the Koehler Children’s Trusts and not to the Koehler Family Joint Venture, the named party who made the investment in AHF and thus the only party that, technically, may be given credit in the form of an antecedent debt for the 2007 payments. This would therefore make such payments constructively fraudulent as not made in exchange for anything of value, either at the time of or prior to the transfer.
41. The documents and the labels under which the transactions here were effected have little meaning and frustrate legal analysis. After all, a gift obviously does not create an expectation of recourse against the gift donee. In assessing whether value was received for the 2007 payments, the Court, as it did in defining the nature of the deals, looks to the substance of the transactions.
42. The Court construes, from the substance, that the Koehler Family Members *541are both the investors in 2006 and the ultimate transferees in 2007. The question, then, is whether their investments constitute antecedent debt credited against the payments. While the Court stops short of concluding the deals here were, as the Trustee contends, part of a Ponzi scheme, it finds the analysis regarding Ponzi schemes instructive.
43.With respect to Ponzi schemes, the Eleventh Circuit in Perkins v. Haines, 661 F.3d 623, 627 (11th Cir.2011), stated as follows:
In the case of Ponzi schemes, the general rule is that a defrauded investor gives “value” to the Debtor in exchange for a return of the principal amount of the investment, but not as to any payments in excess of principal. Courts have recognized that defrauded investors have a claim for fraud against the debtor arising as of the time of the initial investment. Thus, any transfer up to the amount of the principal investment satisfies the investors’ fraud claim (an antecedent debt) and is made for “value” in the form of the investor’s surrender of his or her tort claim. Such payments are not subject to recovery by the debt- or’s trustee. Any transfers over and above the amount of the principal — i.e., for fictitious profits — are not made for “value” because they exceed the scope of the investors’ fraud claim and may be subject to recovery by a plan trustee.
Id. (internal citations omitted). The Perkins court rejected the argument made there that the general rule — that value is given by the investor up to the amount of the investment — should not apply where the investors hold only an equity interest in an insolvent debtor as opposed to a situation involving defrauded investors that hold “claims against the instrument of the fraudulent scheme either in tort law or through some sort of contractual arrangement.” Id. at 627-28. The court held that “[t]he general rule applies in a Ponzi scheme setting regardless of whether good faith investors have an equity interest in, or some other form of claim against, the legal entity constituting the instrument of the fraud.” Id. at 628-29. The Eleventh Circuit’s holding in Perkins is in accord with the general notion, as expressed by the Fifth Circuit in In re Hannover Corp., 310 F.3d 796 (5th Cir.2002), that §§ 548(a) and (c) are complementary. “The first section affords creditors a remedy for the debtor’s fraudulence or, as the case might be, mere improvidence; the second protects the transferee from his unfortunate selection of business partners.” Hannover, 310 F.3d at 802.
44. The investments made by the Koehler Family Joint Venture constitute antecedent debt for purposes of the 2007 payments to the Koehler Children’s Trusts.
Disposition
45. The Court has determined that the payments made in 2007 on the 2006 investments were, in effect, made by AHF. Regardless, the Court has likewise determined that the investments constitute antecedent debt and thus value given in return for the payments.
46. Given the Court’s recharacterization of the Koehler Related Parties’ claims and determination that they must be subordinated to general unsecured creditors, the Court need not address the balance of the issues before the Court arising in this part of the adversary proceeding.
47. The issues raised in this matter raise mixed questions of fact and law. Accordingly, where appropriate, findings of fact may be considered conclusions of law and conclusions of law may be considered findings of fact.
. Joan Graham, another of the sisters, is not included here as she and her husband, Charlie Graham, were severed from this proceeding. Her exclusion from any reference to the Koehler Family Members is not intended to necessarily mean that she was not a participant in any conduct or action attributable to the Koehler Family Members.
. Additional docket references refer to Adversary No. 11-02132, unless otherwise noted.
. Rainier American Investors I, LLC, Rainier American Investors II, LLC, and Rainier American Investors III, LLC are collectively referred to as "Rainier.”
. The balance of the defendants are as follows: Banjo, Inc.; Burgess Trust # 4; Carson Burgess, Inc.; Carson Herring Burgess; Dennis Dougherty; Charlotte Burgess Griffiths; Heron Land Company; Herring Bank; Jessie Herring Johnson Estate Trust # 1; Jessie Herring Johnson Estate Trust # 2; Paul King; Matt Malouf; Cornelia J. Slemp Trust; Clay Storseth; Don Storseth, Individually; Don Storseth, Trustee of the Storseth Family Trust; Robert L. Templeton, Individually; Robert L. Templeton, Executor of the Estate of Frances Maddox; Louise Johnson Thomas Trust; and Vaudrey Capital, LP.
.The Koehler Family Joint Venture issued Schedules K-l allocating the contribution deduction to each of the Limited Partnerships owned by Catherine D. Koehler and the four children. Those partnerships issued Schedules K1 to Catherine D. Koehler and the four children, and they claimed the charitable contribution deductions on their individual income tax returns. See Trustee’s Exs. 205-222.
. For additional evidence of the scheme, see (a) the e-mail correspondence in Trustee’s Exs. 328-329, (b) Trustee's Exs. 1800-1809, and (c) Alan Weiner's Expert Report (Trustee’s Exs. 1602).
. See supra note 3.
. AHF Controlled Accounts include bank accounts in the name of AHF, AHF Development, and the AHF Intermediate Entities, all of which were controlled by AHF and its employees.
. An additional $1,084,734.25 was transferred to the James R. Koehler Trust, but Bank of America, as trustee, returned the funds because the check was made payable to the James R. Koehler Trust when it should have been made payable to JRK-CDK, Ltd. See Trustee’s Ex. 1003.
. See Trustee’s Exs. 404-405, 508-509, 602-603, 702-703, 802-803, 902-903, 1002-1003, 1102-1104, and 1202-1203.
. AHF-I is for a claim filed in the involuntary bankruptcy proceeding (Case No. 09-20232) and AHF-V for the voluntary proceeding (Case No. 09-20373).
. The Court refers to Defendants’ Ex. 154 for a list of the guaranties.
. See Trustee's Ex. 102, 406, 510, 604, 704, 904, and 1004.
. AHF-I for a claim filed in the involuntary bankruptcy proceeding (Case No. 09-20232) and AHF-V for the voluntary proceeding (Case No. 09-20373).
.All assignments were for 100% of the claims, other than JRK-CDK, Ltd. which appears to assign 62% of the $927,907 claim to Ries.
. See supra note 9 regarding the James Koehler Trust. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496524/ | OPINION
GEORGE W. EMERSON, JR., Bankruptcy Judge.
The issue before the Panel on appeal is whether the bankruptcy court erred in determining that a district court judgment entered against Debtor David E. Barlow (“Debtor”) was nondischargeable under 11 U.S.C. § 523(a)(6). After reviewing the record, the parties’ briefs, and applicable law, the Panel concludes that the bankruptcy court properly gave the district court’s findings preclusive effect as to whether the district court judgment was the result of the Debtor’s willful and malicious injury. Accordingly, for the reasons stated in the bankruptcy court’s well-written opinion entered on September 26, 2012, HER, Inc. v. Barlow (In re Barlow), 478 B.R. 320 (Bankr.S.D.Ohio 2012), we affirm. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496526/ | Chapter 7
ORDER ON COMPLAINT OBJECTING TO DISCHARGE
Howard R. Tallman, Chief Judge, United States Bankruptcy Court
THIS MATTER comes before the Court on the complaint filed on August 29, 2011 *716by Plaintiff Blackwell Oil Company (“Blackwell”) against Debtor alleging claims for denial of discharge under 11 U.S.C. §§ 727(a)(3), (a)(4)(A), (a)(4)(D), and (a)(5).1 A two-day trial was held on January 28 and 29, 2013. At the conclusion of trial, the Court ordered the parties to submit written closing arguments, which were timely filed. The Court is now ready to rule.
I. Background.
Debtor, represented by counsel,2 filed for Chapter 7 on May 26, 2011. On Schedule A, he listed a residence at 24 Little Baldy Circle, Fairplay, Colorado (the “Residence”) valued at $475,000, encumbered by a secured debt of $391,519.91, and a commercial real property located at 379 Highway 285 in Fairplay (“Commercial Property”) valued at $350,000, encumbered by a secured debt of $366,480.20. On Schedule B, Debtor listed $54,653.80 in personal property (with $48,973 of that in an exempt IRA), including $635 in household goods and $100 in books/photos. Debtor scheduled a $500,000 disputed unsecured “trade debt” to Blackwell on Schedule F. There were no leases disclosed on Schedule G. Schedules I & J showed monthly income of $2,400 and monthly expenses of $2,380. In his statement of financial affairs, he disclosed his interest in Sunbo Corporation (“Sunbo”) from December 1986 to November 2008.
Blackwell moved for a Rule 2004 examination of Debtor on June 24, 2011. Three days later, Debtor amended his Schedule G to include two leases relating to the Commercial Property: One with his parents, Jerry and Katherine Potts (the “Potts”), and one with Thomas and Johnell Halt and their company, Haltstop (collectively “the Halts”). The meeting of creditors was held on June 30, 2011. On August 3, 2011, Debtor amended his Schedule B to add $385 worth of “pictures, prints, and vases” and also listed a coffee table, end table, Mexican plates, and “mise, items left by a former girlfriend” valued at $80. Debtor’s Rule 2004 examination was conducted on August 4, 2011. On August 29, 2011, Debtor filed an amended statement of financial affairs that showed a $5,000 increase in income for the relevant years, and listed the “coffee table, end table, Mexican plates and mise, items” under Line 14 as property held for another person, Debtor’s former girlfriend.
Blackwell then filed this adversary proceeding, alleging the following:
1. Debtor was the sole owner of the Commercial Property and also the sole officer, director and shareholder of Sunbo, which operated the “Grubb and Stuff’ gas station and convenience store in the Commercial Property. Blackwell provided fuel to Sunbo for over twenty years, until Sun-bo stopped paying Blackwell the entire amount due for fuel. In October 2006, Blackwell filed suit against Sunbo in state court. After a four-day trial held in September 2008, judgment entered in favor of *717Blackwell and against Sunbo for $344,892 on December 22, 2008.3
2. In October 2008, Sunbo sold Grubb and Stuffs furniture, fixtures, equipment, inventory, supplies and intangibles to the Halts, who had been employed by Sunbo since approximately 2006, for $30,000. (Exhibit 15). The Halts paid $10,000 upfront and agreed to pay the remainder in installments under a promissory note. The Halts also agreed to lease the property from Sunbo. The Halts have not paid the remaining $20,000 owed.
3. In August 2010, Blackwell sued Debtor, Sunbo, and the Halts in state court, alleging breach of fiduciary duty, unjust enrichment, alter ego, fraudulent transfer, civil conspiracy, and constructive trust. Trial was scheduled for June 7 to June 10, 2011. Debtor filed for bankruptcy 12 days before trial, and the state court action was stayed.4
4. Debtor listed the Residence for sale from April 2, 2009 through May 18, 2010, at a price of $1,300,000, but listed it for sale after the petition date at $599,000.
5. The true value of the Commercial Property is $700,000, not $350,000.
6. The Debtor failed to disclose leases on the Commercial Property in his original filing, and failed to list income he received under the leases.
7. The Debtor misrepresented the amount of income he earned in his statement of financial affairs and schedules.
8. At the meeting of creditors, the Debtor, when asked about an “Aztec calendar” in the Residence, stated he paid $2,000 for it, but did not disclose it in his schedules.
9. Debtor failed to produce documents requested in a subpoena.
10. At his Rule 2004 exam Debtor stated that an apartment above the Grubb and Stuff was rented out to a Jean Hackman for $720 per month, but neither the lease nor the income was disclosed on his schedules.
II.Discussion
A. Standing.
At the outset, the Court must determine whether Blackwell has standing as a creditor in this case. A “creditor” includes an “entity that has a claim against the debtor,” and a “claim” is a “right to payment.” In re Miller, 666 F.3d 1255, 1262 (10th Cir.2012). It is undisputed that the judgment obtained by Blackwell in state court is against Sunbo, not against Debtor. The second state court action brought by Blackwell against Debtor personally was stayed due to Debtor’s bankruptcy filing. Therefore, Debtor asserted during the trial that Blackwell has a right to payment from Sunbo, but not necessarily from Debtor.
Under § 101(5)(A), the term “claim” includes a “right to payment, whether or not such right is reduced to judgment, liqui*718dated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” See Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (“Congress intended by this language to adopt the broadest available definition of ‘claim.’ ”). In his written closing argument, Debtor states:
Blackwell has a judgment against Sun-bo, but no present legal right to collect any money from [Debtor], While Blackwell may have standing to assert claims under Section 727 as a claimholder under the very broad definition of 11 U.S.C. § 101(5)(A), if Blackwell were to proceed to state court and lose, [Debt- or’s] assertion that Blackwell has neither a claim nor status as a creditor would be validated.
Debtor’s own analysis shows that for purposes of this proceeding, Blackwell has standing to pursue the denial of Debtor’s discharge. Standing in this Court cannot be dependent on a claim subject to determination in state court. See In re Bailey, 375 B.R. 410 (Bankr.S.D.Ohio 2007) (the disputed nature of a debt incurred by non-debtor corporate entity did not bar creditor from seeking denial of debtor’s discharge, where debtor paid personal bills out of the corporate account and creditor had sued debtor individually in state court).
B. Causes of Action
Section 727(a) of the Bankruptcy Code provides, in part, that the Court shall grant a 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 debt- or’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; or
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account;
....; 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.
11 U.S.C. § 727(a)(2)-(5). A party objecting to a discharge need only prove one of the grounds for non-dischargeability under § 727(a) because these provisions are phrased in the disjunctive. In re Garland, 417 B.R. 805, 810-11 (10th Cir. BAP 2009). Proof of any one of the subsections is enough to justify the denial of a debtor’s discharge. Id.
1. § 727(a)(3)
To deny Debtor’s discharge under § 727(a)(3), Blackwell must show by a preponderance of the evidence that Debtor “failed to maintain and preserve adequate records and that the failure made it impossible to ascertain his financial condition and material business transactions.” Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1295 (10th Cir.1997). Section 727(a)(3) does not require a debtor to provide perfect or even complete records. “Records need not be so complete that they state in detail all or substantially all *719of the transactions taking place in the course of the business. It is enough if they sufficiently identify the transactions that intelligent inquiry can be made respecting them.” Hedges v. Bushnell, 106 F.2d 979, 982 (10th Cir.1939). In general, a higher standard of recordkeeping will be required, as a prerequisite to discharge, of Chapter 7 debtors who are sophisticated business persons. In re Luby, 438 B.R. 817, 832 (Bankr.E.D.Pa.2010). Considerations which are relevant in evaluating the adequacy of debtor’s records include the debtor’s occupation, financial structure, education, experience, sophistication, and any other circumstances that should be considered in interest of justice. In re Strbac, 235 B.R. 880, 882 (6th Cir. BAP 1999).
At trial, Debtor testified that he had a high school education and relied heavily on his bookkeepers and an accountant to maintain financial records. The parties agreed that the majority of Sunbo’s bookkeeping was done by Johnell Halt. At trial, Blackwell submitted a 14-page report from Harrison, P.C., in which Joshua G. Harrison, CPA, evaluated the “combined books and financial records of Sunbo Corporation, Dwight Potts, and the Halts both prior to and following the October 2008, asset sale.” In that report, Harrison wrote, “I note that a substantial share of Sunbo’s 2008 increasingly complex bank transactions involved Sunbo’s bookkeeper, Johnell Halt” (Exhibit 8, at 9). Mr. Harrison also testified at trial that he had obtained sufficient recorded information, including books, documents and records, from which he was able to ascertain both the Debtor’s financial condition and the business transactions of Sunbo. This directly contradicts Blackwell’s assertion that Debtor failed to produce necessary documents. See In re Phouminh, 339 B.R. 231, 241 (Bankr.D.Colo.2005) (noting that the quantum of evidence submitted by the party seeking denial of discharge undercut his allegation of a failure to maintain records).
Blackwell further contended that Debtor failed to provide specific relevant financial documents; for instance, in closing argument, Blackwell stated that Debtor had “never” provided documentation of his leases with the Potts or the Halts. However, Debtor responded that copies of the leases were already provided to Blackwell during state court litigation, and this was corroborated by the evidence. Additionally, at the trial, Debtor’s former counsel, Mr. Bruno, testified that, in connection with the state court litigation, Debtor and/or Sunbo produced more than 6,000 pages of documents that included financial records. This was corroborated by Debt- or’s Exhibit L, which was a detailed listing of documents provided to Blackwell during the state court litigation. While many of these documents related to the operation of Sunbo, they also included Debtor’s tax returns from 2004 to 2008 and Debtor’s bank statements for a Colorado East Bank account from 2007 to 2010.
Blackwell also complained that, in connection with the Rule 2004 subpoena, Debtor produced minimal or no information concerning his credit card statements, mortgage statements, and Bank of America account, and it was only through the efforts of Blackwell and the Trustee the information was eventually obtained. Nevertheless, Blackwell accepted the production of information and never sought to compel any further production of documents. At trial, Mr. Padjen testified he had participated in responding to the subpoena and in supplying all documents in the Debtor’s custody or control to Blackwell. Additionally, Mr. Bruno testified that in the course of nearly five years of litigation with Blackwell, he had produced thousands of pages of financial informa*720tion, not only from Debtor, but also from Debtor’s parents, Debtor’s accountants, and other third parties. It is true a “mountain of paper” does not necessarily fulfill a debtor’s duty under § 727(a)(3); but, in this case the documents produced not only allowed Blackwell’s expert to ascertain Debtor’s financial condition, the Trustee also testified he was sufficiently advised about the Debtor’s financial affairs. The Court, after reviewing all the evidence, concludes Blackwell did not meet its burden to show that Debtor made it impossible to ascertain his financial condition, as required for denial of discharge under § 727(a)(3).
2. § 727(a)(4)(A)
11 U.S.C. § 727(a)(4)(A) provides that “[t]he court shall grant the debt- or a discharge unless the debtor knowingly and fraudulently, in or in connection with a case made a false oath or account.” To deny Debtor’s discharge under this section, Blackwell must show by a preponderance of the evidence that Debtor “knowingly and fraudulently made an oath and that the oath relates to a material fact.” In re Brown, 108 F.3d at 1294. The elements that must be proven are: (1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case. In re DiGesualdo, 463 B.R. 503, 522 (Bankr.D.Colo.2011). “The subject matter of a false oath is ‘material,’ and thus sufficient to bar discharge, if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.” In re Garland, 417 B.R. 805, 814 (10th Cir. BAP 2009).
Blackwell alleges Debtor made a false oath or account when he filed his bankruptcy petition, as well as during his Rule 2004 exam and § 341 meeting of creditors. The allegations include statements made concerning (1) his income; (2) the value of the Commercial Property; (3) the value of the Residence; (4) the value of personal property; and (5) the leases on the Commercial Property.
(a) Income.
Blackwell notes that on his initial statement of financial affairs, filed on May 26, 2011, Debtor listed income of $13,003 in 2009, $36,616 in 2010, and $600 in 2011, for a total of $50,219.5 Blackwell contends that at the § 341 meeting,6 Debtor testified he had received all the pre-petition rent payments owed to him by the Halts, but did not disclose the payments as income, and that at the Rule 2004 exam, Debtor revealed he had received $720 per month from Jean Hackman as rent for the apartment above the Grubb and Stuff, but never disclosed this as income. In its closing argument, Blackwell argues that Debtor should have disclosed more income from the Halt lease (at least $49,000) and the Hackman lease (at least $12,000).
At trial, the attorney who filed Debtor’s schedules, Mr. Padjen, testified that he would not consider payments from the Hackman lease as income, due to the termination of the lease and the fact that there were offsetting maintenance and operating costs associated with rental of the apartment above the store. He also did *721not consider payments under the Halt lease to be income, because the payments were intended as a pass-through to assure that the first mortgage lender was timely paid, and there was no net income to Debt- or. Mr. Padjen also testified after he received Debtor’s tax returns, he amended Debtor’s schedules to correspond with the tax documents. The Court found this testimony to be credible, and finds no false oath was made regarding Debtor’s income,
(b) Commercial Property.
Debtor recognized at the time of filing he would not retain ownership of the Commercial Property, by filing a Statement of Intention to surrender it. At trial, the Trustee testified he would not have sold the Commercial Property unless he could get a price sufficient to pay all mortgages and closing costs and also allow the estate to recover money from the sale of the Commercial Property.
Mr. Padjen testified that when he met with the Debtor and his parents, they did not know the value of the Commercial Property. He asked them to provide him with additional information. Mr. Jerry Potts then testified that based on those instructions, he contacted a real estate broker, Ms. Bonnie Dallas, who informed him the value of the Commercial Property for a “quick sale” in the context of bankruptcy was around $350,000. That is the value the Debtor included in Schedule A.
The Trustee also testified the first offer he received to purchase the Commercial Property was from Blackwell and was in the “low four hundred thousands.” He also received another offer for around $400,000 from an independent developer. These offers are closer to the $350,000, estimated by the Debtor, than the $700,000 value Blackwell has asserted in this case.7 The Commercial Property eventually was sold to Blackwell for $625,000. The Court agrees with Debtor that Blackwell was willing to pay a premium for the Commercial Property because it had been providing fuel to the facility for years and that relationship was terminated as a result of the litigation. Blackwell’s decision to buy the Commercial Property at a premium does not lead the Court to conclude that Debtor purposely undervalued the Commercial Property in his petition.
(c) Residence.
Debtor scheduled his Residence with a value of $475,000. The Trustee eventually sold the Residence for $542,500 in September 2011. At trial, Blackwell made much of the fact the Residence was listed for over a million dollars in 2009, two years prior to the Debtor’s bankruptcy filing. Yet in closing argument, Blackwell admits “it is true, prior to the petition date, Debtor had not been able to sell the Residence, probably because it was priced too high, and that at some time before the petition date, Debtor cut the listing price to $599,000.” All parties testified the real estate market in Fairplay was subject to downturns during the relevant time period. Debtor testified credibly he had no experience in real estate valuation, and his testimony was supported by Mr. Padjen’s testimony that Debtor told him he had no idea what the value of the Residence was. The Court cannot either find or deduce from the evidence that the Debtor knowingly and fraudulently sought to mislead the Court or creditors in valuing the Residence. A false oath caused by mere mistake or inadvertence is not sufficient to bar a debtor’s discharge. Nor is an honest error or a mere inaccuracy. See Brown, *722108 F.3d at 1294-95, DiGesualdo, 463 B.R. at 522.
(d) Personal Property.
Blackwell asserts Debtor intentionally tried to hide an “art collection” that was eventually sold by the Trustee for $7,792 in December 2011. The items included clay plates and pottery from Mexico and some prints.8 The plates and pottery were sold at prices ranging from $16 to $310. While one of the prints ended up being sold for $2,400, the remaining prints sold for between $105 and $875. (Exhibit 30). At trial, Debtor testified some of the items in question were over 20 years old, some had belonged to a former girlfriend, and he did not think they were very valuable. Debtor also testified he was told to list the property at “garage sale” value on his Petition. Mr. Padjen testified he did not know if some art items belonged to Debtor or to Debtor’s former girlfriend, and was thus unsure how to list them on the bankruptcy schedules. Some of the items were eventually listed on Debtor’s schedules as “property held for another person.”
Debtor was questioned at length about the “art collection” during his § 341 meeting. Yet, even after the meeting, he still believed the items were of nominal value when he amended his Petition, with the assistance of counsel, to include “$385 in vases and prints.” A false statement “resulting from ignorance or carelessness does not rise to the level of ‘knowing and fraudulent’ sufficient to deny a discharge.” DiGesualdo, 463 B.R. at 522. At the time of the amendment, Debtor also knew arrangements were being made for the Trustee to sell the items to benefit the estate, and there was no reason to fabricate the value of the property. In fact, the Trustee testified he received full cooperation from Debtor and his parents in administering the property. Debtor’s parents, at then-expense, personally delivered all of the requested property directly to the Trustee. The Court, after hearing all of the parties’ testimony during trial and having had the opportunity to judge their credibility, determines that Debtor did not “knowingly and fraudulently make a false oath relating to a material fact” concerning the personal property.
(e) Leases.
Blackwell correctly notes Debtor did not list any leases in his original bankruptcy filing. However, Debtor filed an Amended Schedule G one month later, before either the meeting of creditors or Rule 2004 exam was conducted, to include both the Halt lease and the Potts lease. Mr. Padjen testified the Hackman lease was not scheduled because Ms. Hackman had passed away and the lease was no longer in effect. He also testified about his understanding that expenses of the tenancy offset any rent paid prior to her death.9
As a matter of law, “no inference of fraudulent intent can be drawn from an omission when the debtor promptly brings it to the court’s or trustee’s attention absent other evidence of fraud.” In re Brown, at 1294. Further, “[t]he fact that a debtor comes forward with omitted material of his own accord is strong evidence that there was no fraudulent intent in the omis*723sion.” Id. Here, Debtor amended his schedules to include the leases before the meeting of creditors, before the Rule 2004 exam, and before Blackwell initiated the adversary proceeding. Thus, the amendment to include the leases was not “offered only as a result of developments during the meeting of creditors, after the debtor knew the ‘cat was out of the bag’ ” as in In re Mellor, 226 B.R. 451 (D.Colo.1998) cited by Blackwell.
In conclusion, the Court finds that Blackwell did not prove all the elements required under § 727(a)(4)(A) to deny Debtor a discharge under that section. Debtor’s statements were made under oath, and some of them were not accurate; however, Blackwell did not show that Debtor knew at the time they were false or that he made them with fraudulent intent. Moreover, an objection to discharge because of a false oath or account should not apply to minor errors. See In re Dupree, 336 B.R. 498, 502 (Bankr.M.D.Fla.2005) (a court should analyze a debtor’s omissions or nondisclosures as to whether they were part of a scheme to retain assets for his own benefit at the expense of his creditors). Here, at all times Debtor intended to surrender the Residence and Commercial Property, and cooperated with the Trustee in liquidating his assets. Further, Blackwell’s purchase of the Commercial Property will likely benefit Blackwell, both in terms of the value of the property and the opportunity to produce future income.
3. 727(a)(4)(D)
This section provides that “[t]he court shall grant the debtor a discharge unless the debtor knowingly and fraudulently, in or in connection with a case 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.” The only officer of the estate in this case was the Trustee, who did not file an action against Debtor or join in this claim filed by Blackwell. At trial, the Trustee testified that he was satisfied with the information received from Debtor in his schedules, at the meeting of creditors, and through the cooperation of Debtor’s family. On cross examination the Trustee was specifically asked if he believed Debtor had withheld any recorded information relating to Debt- or’s property or financial affairs, and responded in the negative. This claim therefore is not supported by the evidence.
4. 727(a)(5)
Section 727(a)(5) provides that the Court shall grant a discharge, unless “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.” A party objecting to a debtor’s discharge under § 727(a)(5) has the burden of proving facts establishing that a loss or shrinkage of assets actually occurred. Once the objecting party meets its initial burden of proof, the burden then shifts to the debtor to explain the loss or deficiency of assets in a satisfactory manner. Cadle Co. v. Stewart (In re Stewart), 263 B.R. 608, 618 (10th Cir. BAP 2001). It is not necessary for a party objecting to discharge under § 727(a)(5) “to prove, or even allege, fraudulent acts or a corrupt motive on the part of the debtor.” Phouminh, 339 B.R. at 247.
At trial, Blackwell presented testimony and evidence, through its expert Mr. Harrison, that as much as $1.4 million10 was *724unaccounted for in Sunbo’s business during the period from 2004 to 2008. Blackwell alleged this money was pocketed by Debtor, and, but for the withdrawal of this money, Sunbo would have been profitable and able to pay its bills to Blackwell. Blackwell also asserted a dissipation in assets occurred due to the transfer of Sun-bo’s assets, shortly after a trial in the action by Blackwell against Sunbo, to the Halts for $30,000 in the Asset Purchase Agreement (Exhibit 15). Based on Mr. Harrison’s report, Blackwell contends the true value of Sunbo was between $200,000 and $300,000, and that Debtor sold Sunbo’s assets to the Halts for a fraction of their value.
In closing argument, Debtor responds that Blackwell has not shown that at a time not “too remote” to the filing of the bankruptcy, Debtor had a “substantial identifiable asset” that would have belonged to the bankruptcy estate, but did not possess that asset as of the petition date, citing Menotte v. Hahn (In re Hahn), 362 B.R. 542 (Bankr.D.Fla.2007). Debtor does not cite any authority to aid this Court in quantifying what is “remote in time,” however.11 One court has noted that a two-year time period prior to the petition date is common. In re Lindemann, 375 B.R. 450, 472 (Bankr.N.D.Ill.2007) (collecting cases). Inquiries beyond that period may be warranted. See, e.g., In re D’Agnese, 86 F.3d 732 (7th Cir.1996) (expanding the focus to nine years pre-petition). “The exact time a court should look back depends on the case; there is no hard and fast rule.” In re Olbur, 314 B.R. 732, 741 (Bankr.N.D.Ill.2004).
Debtor contends that the losses identified by Blackwell’s expert are too remote in time, because they occurred during the period from 2004 to 2008, and Debtor did not file bankruptcy until May 2011. Blackwell argues, however, that the loss is not too remote in time, because Blackwell timely brought its claims against Sunbo in state court in 2006. And, in October 2008, after a four-day trial but before judgment had entered against Sunbo, Debtor, who had a 100% interest in Sunbo, transferred all Sunbo’s assets to the Halts, for significantly less than their value. Debtor’s only explanation for selling Sunbo’s assets to the Halts in October 2008 was that he “wanted to get out of the business.” This is not credible in light of the litigation against Sunbo that had just concluded a month before. After the transfer of assets, Blackwell had to bring a second state court action against Debtor, individually, and the Halts. At that point, Blackwell’s breach of contract judgment against Sunbo had also become a commercial tort claim against the Debtor for his ill-timed and suspect transfer of Sunbo’s assets. On the eve of trial in that second action, Debtor filed for bankruptcy.
If, as Debtor alleges, Sunbo was not really worth the value Mr. Harrison estimated it to be, that was partly due to the unexplained loss of cash bleeding out of Sunbo for several years prior to the state court lawsuits and bankruptcy filing. While the drain on Sunbo’s cash and re-*725suiting losses did occur over a period of time, the transfer to the Halts occurred in October 2008, the second state court action was brought in August 2010, and the bankruptcy was filed in May 2011. Thus the time period between the transfer of assets and the bankruptcy filing is only slightly more than the typical two-year period, and, in the context of the applicable statutes of limitations for the state court litigation, is not too remote in time.
Based on Mr. Harrison’s report and testimony, Debtor substantially diminished the value of Sunbo not only to himself, but also to his creditors. Debtor commingled Sunbo’s funds with his personal funds, did not operate Sunbo as a separate corporate entity, and caused Sunbo to be thinly capitalized. All of this misuse of his corporate entity by the Debtor, and probably others, significantly reduced the value of Debtor’s 100% ownership interest in Sunbo, which is a substantial identifiable asset. According to Mr. Harrison’s report, Sunbo would have been worth between $200,000 and $300,000, but for the skimming of cash and mismanagement that occurred. As Blackwell points out in its Reply Closing Argument, Debtor “does not really dispute that more than $700,000 in unexplained cash was withdrawn from Sunbo between 2004 and 2008.” Debtor stated he did not know what happened to the money and admitted he did nothing to investigate its disappearance. The Court concludes that Blackwell met its initial burden to show that Debtor would have had an asset, namely, the true value of his 100% interest in Sunbo, at a time not too remote to his bankruptcy filing, but did not have that asset at the time of filing. Without these large cash depletions, Sunbo would have had a greater ability to meet its obligations and the Debtor’s interest in the company would have been enhanced. Even if sold, the Debtor could have commanded a higher price for the company. It follows if the transfer of Sunbo’s assets to the Halts had reflected the true value of the business, more money would have been available for the Debtor to pay his creditors as well as those of Sunbo.
The burden thus shifts to Debtor to provide a satisfactory explanation for the loss of assets. In Phouminh, this Court stated that “under the provisions of § 727(a)(5), a debtor will not be granted a discharge where it appears to the court that the debtor should have had the resources available to deal fairly with creditors, but is unable to explain the disposition or loss of those assets.” Phouminh, 339 B.R. at 248. This Court also noted that “an explanation of the Debtor’s circumstances in general terms that is merely suggestive of reasons that assets became depleted falls short of the mark.” Id. (citing Bell v. Stuerke (In re Stuerke), 61 B.R. 623, 626 (9th Cir. BAP1986)). Additionally, “the court is not concerned with whether the disposition of the assets was proper12 under the Bankruptcy Code, but rather only whether the explanation satisfactorily describes what happened to the assets.” Sonders v. Mezvinsky (In re Mezvinsky), 265 B.R. 681, 689 (Bankr.E.D.Pa.2001). “[Explanations of a generalized, vague, indefinite nature such as assets being spent on ‘living expenses,’ unsupported by documentation, are unsatisfactory. Equally unavailing is mere identification of a person with knowledge, such as an accountant or other individual who handled the financial affairs of the debtor.” Id.
*726At trial, Debtor made little, if any, effort to identify where the funds went that were routinely drawn from Sunbo’s cash register. While both he and his father testified that others had access to the register and speculated that transient employees could have been responsible for the theft, Mr. Harrison testified that the consistent pattern with which the cash was removed made it unlikely that transient employees would have been responsible. Blackwell asked Debtor a number of questions about the construction of his personal residence, and implied that some of the money missing from Sunbo may have been used for the “luxury” finishes and fixtures in the residence. Debtor did testify that he purchased some items second hand or built things himself, but he presented no documentation for any expenses he incurred building the residence. Even if the money did not actually go to the residence, however, Debtor never gave a satisfactory explanation of where it did go.
What constitutes a satisfactory explanation is a matter of discretion for the court. Mezvinsky, 265 B.R. at 689. The question is whether the court, “after hearing the ... explanation has that mental attitude which finds contentment in saying that he believes the explanation .... He no longer wonders. He is contented.” Id. This Court, after considering all the evidence and testimony in this case, still is left wondering what happened to the missing cash. The Debtor testified it probably went to pay for salaries and for vendor deliveries. Yet, no corroborating evidence, such as a bookkeeper’s testimony, adequate supporting journal entries, paid receipts, or invoices were provided. See, e.g., In re Costello, 299 B.R. 882, 901 (Bankr.N.D.Ill.2003) (“The failure to offer any documentary evidence to corroborate a debtor’s testimony as to the loss or disposition of assets will justify the denial of discharge”). Thus, the Court cannot say that Debtor has given a satisfactory explanation for the dissipation of assets.
The Court realizes that denial of discharge is a harsh penalty. DiGesauldo at 518. Nevertheless, “those who seek shelter of the bankruptcy code must provide complete, truthful and reliable information.” Job v. Calder (In re Calder), 907 F.2d 953, 956 (10th Cir.1990). The Court gives Debtor some benefit of the doubt, and if Debtor had come forward with a complete, truthful, and reliable explanation for the loss of Sunbo’s assets, and of the Debtor’s interest therein, the Court’s decision may have gone the other way. Ultimately, however, the Court cannot overlook more than $700,000 in unexplained cash losses and the suspicious timing of the asset transfer to the Halts for little equivalent value. Therefore the Court determines it must deny Debtor his discharge under § 727(a)(5).
III. Conclusion.
After reviewing the entire record in this case and the applicable law, the Court HEREBY ORDERS that Blackwell’s Complaint for denial of discharge under 11 U.S.C. § 727(a)(5) is GRANTED. Discharge of Debtor’s debts is denied.
. The complaint initially alleged an additional claim under § 727(a)(6)(A), but that claim was withdrawn in Blackwell's Reply Closing Argument (docket # 47).
. There were three attorneys involved at times with Debtor's case. Mr. Robert Padjen represented Debtor during his bankruptcy filing and prepared Debtor's original and amended schedules. Mr. Harold Bruno previously represented Debtor during state court litigation between Blackwell and Debtor's company, Sunbo Corporation. Mr. Bruno entered his appearance for Debtor in this adversary proceeding in September 2011. Mr. Bruno withdrew in October 2012 and was replaced by Mr. Forrest Morgan, who represented Debtor at trial, where both Mr. Padjen and Mr. Bruno testified as witnesses.
. In Debtor’s bankruptcy case, Blackwell filed proof of claim 2-1, in the amount of $430,830.69, on May 9, 2012. Attached to the proof of claim was a statement that “Creditor supplied petroleum products to Debtor without payment 2004-2006, see attached State Court Complaint, see amortization of judgment awarded in Case No. 2006 CV 269.” No judgment was attached. The "State Court Complaint” attached was the amended complaint filed in a second action, 2010 CV 232, wherein Blackwell sued Debtor, Sunbo, and others in state court in August 2010. The only other documents attached to the proof of claim was an amortization schedule for the $344,892 claim amount at 18% interest from December 2008. No objections have been filed to Blackwell’s proof of claim.
. No party requested relief from the bankruptcy stay to complete the state court trial.
. Debtor amended his schedules on August 29, 2011, to reflect slightly more income: $30,595 in 2009, $22,767 in 2010, and $2400 in 2011, for a total of $55,762.
. In its closing argument, Blackwell includes Debtor's testimony during the § 341 meeting even though the § 341 meeting transcript was not admitted into evidence at trial.
. That value appears to be based in part on a Park County Assessor printout, dated October 17, 2012, for $713,477 (Exhibit 35). Debtor filed for bankruptcy, however, in May 2011 and there is no evidence of the assessed value at that time.
. There also was some testimony about an "Aztec calendar” that apparently was lost by the auction company. Insurance proceeds of $500 on that item went to the estate.
. Blackwell never introduced any evidence concerning the Hackman lease other than Debtor’s testimony at his Rule 2004 exam that he received rent from her in 2010 and for part of 2011.
. Mr. Harrison did acknowledge, under cross exam, that approximately half of that amount could have been used to purchase inventory.
. In its Reply Closing Argument, Blackwell alleges that the Tenth Circuit has not specifically adopted the “remote in time" requirement, citing In re Stewart, 263 B.R. at 608. In that case, however, the Tenth Circuit Bankruptcy Appellate Panel merely stated that the party objecting to discharge has the burden of proving that a "loss or shrinkage of assets actually occurred.” It does not appear that the issues presented in that case required that Court to address the remote in time requirement. The Kansas bankruptcy court did address the requirement in In re Keck, 363 B.R. 193, 206 (Bankr.D.Kan.2007), and evaluated whether the losses in question occurred "a relatively short time” before the bankruptcy filing.
. The court is concerned with the truth of the debtor's explanation of what happened to his assets and not the wisdom of the expenditures or dispositions. See In re Bernstein, 78 B.R. 619, 623 (S.D.Fla.1987). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496528/ | MEMORANDUM OPINION
DAVID T. THUMA, Bankruptcy Judge.
In this adversary proceeding Plaintiff seeks to have Defendant’s debt declared nondischargeable under 11 U.S.C. §§ 523(a)(4) and (a)(6), and to deny his discharge under 11 U.S.C. § 727(a)(4)(A). The Court conducted a trial on November 5, 2013 and took the matter under advisement. This is a core matter. For the reasons set forth below, the Court declares the amount of $30,000 nondischargeable under § 523(a)(4).
I.FACTS
The Court finds the following facts:
1. Plaintiff does business in the oil and gas industry in various parts of the United States. Among other things, Plaintiff cleans heat exchangers used to heat or cool natural gas, which are sometimes called “fin fans.” In 2009, Plaintiffs total revenue was about $2.5 million. This figure increased to about $5 million in 2012.
2. Plaintiff employed Defendant from September 2005 until his termination in January 2009.
3. Defendant started with Plaintiff as an administrative assistant and was eventually promoted to Health and Safety *740Manager. During his tenure Defendant cleaned fin fans, scheduled fin fan cleaning by Plaintiffs cleaning crews, and helped write various safety procedures, including portions of Plaintiffs Health and Safety Manual (“Safety Manual”).
4. Defendant had access to Plaintiffs intellectual property, including health, safety and operating manuals and proprietary information regarding the techniques used by Plaintiff to build and use its specialized equipment.
5. On or about January 25, 2008, Plaintiff entered into an employment contract with Defendant (the “Employment Contract”).
6. The Employment Contract prohibited Defendant from using or removing any of Plaintiffs confidential or proprietary trade secret information. The prohibitions are broad and unambiguous. Defendant agreed he would not take or use manuals, financial information, costs, pricing information, client lists, or other confidential information.
7. The Employment Contract also prohibited Defendant from competing in the fin fan cleaning business within a 75 mile radius of San Juan County, New Mexico for one year after employment termination.
8. On December 15, 2008, Defendant disclosed to Plaintiff an employment infraction that occurred several days earlier.
9. On the same day, Defendant emailed the Safety Manual and an employee policy handbook (“Employee Handbook”) to his personal Yahoo account without Plaintiffs knowledge or consent. He wanted to retain a copy of the documents in the event he was terminated and subsequently started his own fin fan cleaning business.
10. Plaintiff terminated Defendant in January 2009.
11. Sometime thereafter, Defendant informed Plaintiffs employee, Mike Dodds, that he planned to start his own fin fan cleaning business. Mr. Dodds sent Defendant information about how Plaintiff bid on fin fan cleaning jobs.
12. After waiting a year after termination, Defendant formed Fintech, LLC (“Fintech”). He built a fin fan cleaning trailer using materials he purchased from the internet, recruited investors and financing, and began cleaning fin fans.
13. Fintech had between four and seven employees.
14. When Defendant formed Fintech, between three and five companies cleaned fin fans in the San Juan area.
15. Fintech operated in the San Juan area because Defendant had lived there for many years with his family.
16. Most customers in the oil and gas industry require industrial cleaning companies to have a written safety manual. Using Plaintiffs confidential materials, Defendant created an employee handbook and a safety manual for Fintech.
17. Defendant continued to operate Fintech through at least the end of 2010.
18. Fintech’s gross revenue in 2010 was about $120,000, $110,000 of which came from one customer, Enterprise.1 There is no evidence that Enterprise was previously Plaintiffs customer.
19. In 2011, Defendant closed Fintech and began working for MACC Services (“MACC”), another industrial cleaning company.
20. Fintech and/or MACC had gross revenue of roughly $120,000 in 2011, about *741half of which came from customers in the San Juan area.
21. In 2012, MACC had gross revenue of about $60,000 from customers in the San Juan area.
22. Between January 1, 2013 and November 5, 2013, MACC earned roughly $15,000 from customers in the San Juan area.
23. It is unclear the extent to which Fintech or MACC solicited Plaintiffs customers.
24. Between 2009 and 2013, Plaintiffs gross revenue in the four corners region,2 which includes the San Juan area, declined from roughly $970,000 to roughly $177,000.
25. On or about April 15, 2010, Plaintiff brought suit against Defendant in the United States District Court, District of New Mexico, commencing Sierra Chemicals, L.C. v. Mitchell Mosley, et al., Civil No. 10-CV-00362-BB-DJS (“District Court Action”).
26. Pursuant to the Employment Contract, the matter was referred to binding arbitration.
27. On September 20, 2011, the arbitrator entered an Interim Award (the “Interim Award”).
28. As set forth in the Interim Award, the arbitrator found and/or concluded:
a. Defendant lied during the arbitration;
b. Defendant intentionally breached the Employment Contract and knew the breach was wrong when he did it;
c. Defendant did not violate the New Mexico Uniform Trade Secrets Act; and
d. Plaintiff did not prove the requisite elements of its common law tort theories.
29. In his final award, the arbitrator awarded Plaintiff $352,997.19 in breach of contract damages, broken down as follows:
Breach of contract damages: $ 10,000.00
Punitive damages: $ 15,000.00
Sanctions (net): $ 10,636.00
Attorney fees: $244,182.30
Costs: $ 18,138.28
Arbitration fees and costs: $ 55.040.61
Total: $352.997.19
30. On December 7, 2011, the District Court entered an Order for Final Judgment in the District Court Action, granting Plaintiff a money judgment against Defendant in the amount of $352,997.19 (“District Court Judgment”).
31. Defendant filed the above-captioned bankruptcy case on December 12, 2011.
32. On September 25, 2013, Defendant filed a declaration attached to a summary judgment response which stated “I did not email or otherwise copy the employment handbook.” The declaration was untrue.
II. DISCUSSION
A. Denial of Discharge Under § 727(a)a)(A)
Plaintiff argued that Defendant’s discharge should be denied under 11 U.S.C. § 727(a)(4)(A), which provides:
*742(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 purpose behind this subsection is to enforce a debtor’s duty of disclosure and ensure that the debtor provides reliable information to those who have an interest in the administration of the estate.” Manning v. Watkins (In re Watkins), 474 B.R. 625, 635 (Bankr.N.D.Ind.2012), affirmed, 2013 WL 3989412 (N.D.Ind.2013) (citing Bensenville Community Center Union v. Bailey (In re Bailey), 147 B.R. 157, 163 (Bankr.N.D.Ill.1992)).
“To prevail under § 727(a)(4)(A), the [creditor] must show the following elements: (1) that the Debtor made a false statement under oath; (2) that the Debtor knew the statement was false; (3) that she made the statement with fraudulent intent; and (4) that the statement was material.” Rajala v. Majors (In re Majors), 2005 WL 2077497, at *3 (10th Cir. BAP 2005) (citing Kaler v. McLaren (In re McLaren), 236 B.R. 882, 894 (Bankr.D.N.D.1999)). See also Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1294 (10th Cir.1997) (creditor must demonstrate by a preponderance of the evidence that the debtor knowingly and fraudulently made an oath that relates to a material fact); Watkins, 474 B.R. at 635 (listing five factors, which are similar to the four Majors elements); Pioneer Credit Company v. Roubieu (In re Roubieu), 2005 WL 6459370, at *4 (Bankr.N.D.Ga.2005) (same); Cole Taylor Bank v. Yonkers (In re Yonkers), 219 B.R. 227, 232 (Bankr.N.D.Ill.1997) (same); MacLeod v. Arcuri (In re Arcuri), 116 B.R. 873, 880 (Bankr.S.D.N.Y.1990) (same).
“The subject matter of a false oath is ‘material,’ and thus sufficient to bar discharge, if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.” In re Garland, 417 B.R. 805, 814 (10th Cir.BAP2009) (citing Job v. Calder (In re Calder), 907 F.2d 953, 955 (10th Cir.1990)) (remaining citations omitted). See also Collier on Bankruptcy, ¶ 727.04[l][b], n. 13. “Materiality under Code § 727(a)(4)(A) means that the statement must bear a relationship to the debt- or’s financial transactions or to the bankruptcy estate, concern the disclosure of assets, or relate to the disposition of assets.” In re Leonard, 2013 WL 5427889, at *7 (Bankr.D.Kan.2013).
Section 747(a)(4)(A) cases almost invariably involve allegations that debtors failed to disclose valuable assets, undervalued assets, underreported income, or failed to disclose transfers. See e.g. In re Warren, 512 F.3d 1241 (10th Cir.2008) (failure to disclose prepayments to creditors); Gullickson v. Brown (In re Brown), 108 F.3d 1290 (10th Cir.1997) (failure to disclose automobiles); In re Calder, 907 F.2d 953 (10th Cir.1990) (failure to disclose mineral rights, bank accounts, and monthly income); Leonard, 2013 WL 5427889, at *7 (“[T] he failure to list a significant asset is the most frequently established basis for denying discharge under this section.”).
Denial of discharge is a harsh remedy to be reserved for a truly pernicious debtor. Soft Sheen Products, Inc. (In re Johnson), 98 B.R. 359, 367 (Bankr.N.D.Ill.1988) (citing In re Shebel, 54 B.R. 199, 204 (Bankr.D.Vt.1985)). The provisions denying the discharge are construed liberally in favor of the debtor and strictly against the creditor. Id. at 364.
*743Here, Plaintiff argues that Defendant’s discharge should be denied because in a September 25, 2013 affidavit Defendant stated he “did not e-mail or otherwise copy the employment handbook.” The statement contradicts Defendant’s trial testimony and a finding of the Arbitrator. The statement is relevant to Plaintiffs § 523(a)(6) claim and was made in response to Plaintiffs motion for summary judgment on that claim.
The Court holds that this statement, while apparently false, is not “material” for § 727(a)(4)(A) purposes. Not every false statement warrants denial of the discharge. Defendant’s assertion about emailing an employment handbook bears no relationship “to the debtor’s financial transactions or to the bankruptcy estate, concern the disclosure of assets, or relate to the disposition of assets.” Leonard, 2013 WL 5427889, at *7. The Court therefore declines to deny Defendant’s discharge under § 727(a)(4)(A).3
B. Dischargeability of the Judgment for Breach of Contract Under § 523(a)(6)
Debts arising from a willful and malicious injury by the debtor are excepted from the general discharge. 11 U.S.C. § 523(a)(6). To satisfy his burden under § 523(a)(6), a plaintiff must prove: (1) either he or his property sustained an injury; (2) the injury was caused by debtor; (3) debtor’s actions were “willful,” and (4) debtor’s actions were “malicious.” In re Deerman, 482 B.R. 344, 369 (Bankr.D.N.M.2012) (collecting cases). Nondis-chargeability 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).
To be willful, a debtor must have intended the act and intended the harm. Kawaaukau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (“The word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischarge-ability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.”). See also Deerman, 482 B.R. at 369 (citing Geiger). For a debtor’s actions to be malicious, they have to be intentional, wrongful, and done without justification or excuse. Deerman, 482 B.R. at 369 (citing Bombardier Capital, Inc. v. Tinkler, 311 B.R. 869, 880 (Bankr.D.Colo.2004)).
The Tenth Circuit uses a subjective standard in determining whether a defendant desired to cause injury or believed the injury was substantially certain to occur. Via Christi Regional Medical Ctr. v. Englehart (In re Englehart), 2000 WL 1275614, at *3 (10th Cir.2000) (“[T]he ‘willful and malicious injury’ exception to dischargeability in § 523(a)(6) turns on the state of mind of the debtor, who must have wished to cause injury or at least believed it was substantially certain to occur.”); Saturn Systems, Inc. v. Militare (In re Militare), 2011 WL 4625024, at *3 (Bankr.D.Colo.2011) (citing Tinkler, 311 B.R. at 878).
Under some circumstances, damages caused by an intentional breach of contract may be nondischargeable under § 523(a)(6). See Sanders v. Vaughn (In re *744Sanders), 2000 WL 328136, at *2 (10th Cir.2000); Militare, 2011 WL 4625024, at *3 (a knowing breach of contract is not necessarily excluded from “willful and malicious” injury); Texas v. Walker, 142 F.3d 813, 823-24 (5th Cir.1998), cert. denied, 525 U.S. 1102 (1999); N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496, 1501 (7th Cir.1991). However, “an intentional breach of contract, without more, is [generally] not the type of injury addressed by § 523(a)(6).” In re Musgrave, 2011 WL 312883, 11 (10th Cir. BAP 2011). “Intent to injure the creditor [or substantial certainty that injury will occur] must be present.” Id.
As the Court explained in its Memorandum Opinion entered October 15, 2013, the Arbitrator’s findings were sufficient to establish the “malicious” element of § 523(a)(6), but not to establish the “willfulness” element.4 At trial Plaintiff was required to prove, at the very least, Defendant was substantially certain that Plaintiff would be injured when he breached the Employment Contract. Plaintiff failed to carry this burden. There is no evidence that Defendant intended to injure Plaintiff, or knew that his actions were substantially certain to cause injury. Rather, the evidence shows that Defendant’s motivation was to make a living.
Defendant waited a year, as required by the Employment Contract, before starting Fintech’s operations. Further, Plaintiff is a much larger business, with annual revenues ranging from $2.5 to $5 million. In contrast, Fintech generated only $120,000 in revenue during its first year.5
Although Plaintiffs revenues in the four corners region declined by roughly $800,000 between 2009 and 2013, there is no evidence that Defendant caused any substantial portion of the decline. Instead, the uncontroverted evidence shows that Defendant generated only modest revenues in the San Juan area during that period.6
Plaintiff argues that because Defendant used Plaintiffs manuals, processes, and pricing information in Fintech’s business, Defendant necessarily intended to injure Plaintiff. Like the Arbitrator, the Court is unwilling to ascribe such a motive to Defendant. Rather, the Court finds that, like most entrepreneurs, Defendant set out to earn a livelihood rather than to harm competitors.
Further, even if Defendant knew or reasonably suspected that his breach of contract could affect Plaintiff adversely, the Court is “not automatically required ... to find ‘willful and malicious injury.’ ” Dorr, Bentley & Pecha, CPA’s P.C. v. Pasek (In re Pasek), 983 F.2d 1524, 1527 (10th Cir.1993). Improper conduct without a “culpable state of mind” is generally not enough to render a debt arising from an intentional breach of contract non-dischargeable under § 523(a)(6). Id. (affirming bankruptcy court’s determination that intentional breach of noncompetition agreement was not willful or malicious, even where defendant solicited plaintiffs clients); Musgrave, 2011 WL 312883, *12 (reversing bankruptcy court’s determination that breach of contract was willful and *745malicious where there was no evidence that defendant intended or anticipated the harm). See also Williams v. International Brotherhood of Electrical Workers (In re Williams), 337 F.3d 504, 511 (5th Cir.2003) (“[A] knowing breach of contract may be nondischargeable under Section 523(a)(6)” ... if there is “explicit evidence that a debtor’s breach was intended or substantially certain to cause the injury to the creditor.”) (emphasis added).
Based on the evidence presented at trial, the Court concludes that Defendant neither intended to harm Plaintiff nor thought his conduct would have that result. The District Court Judgment, which is based solely on breach of contract, therefore does not come within the § 523(a)(6) exception to dischargeability.
C. Dischargeability of the Debt for Embezzlement Under § 523(a) (If)
Debts arising from “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” are excepted from the general discharge.7 11 U.S.C. § 523(a)(4). Embezzlement differs from larceny in that “[e]mbezzled property is originally obtained in a lawful manner, while in larceny the property is unlawfully obtained.” Musgrave, 2011 WL 312883, at *5.
A creditor may prove embezzlement by showing: (1) his property was entrusted to the debtor; (2) the debtor appropriated the property for a use other than the use for which it was entrusted; and (3) the circumstances indicate fraud. Bd. of Trustees v. Bucci (In re Bucci), 493 F.3d 635, 644 (6th Cir.2007). See also Klemens v. Wallace (In re Wallace), 840 F.2d 762, 765 (10th Cir.1988) (embezzlement consists of “the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.”) Larceny is defined as “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.” Musgrave, 2011 WL 312883, at *5 (quoting 4 Collier on Bankruptcy ¶ 523.10[2], 523-77 (Alan N. Res-nick & Henry J. Sommer eds., 16th ed. 2009)).
A number of courts have held that under federal law, intangible property can be embezzled. See, e.g., Digital Commerce, Ltd. v. Sullivan (In re Sullivan), 305 B.R. 809, 826-27 (Bankr.W.D.Mich.2004) (debt arising from embezzlement of corporate opportunity was nondischargeable under § 523(a)(4)); Naturally ME, Inc. v. Attridge (In re Natural Feast Corp.), 2006 WL 2311115, *41 (D.Mass.2006) (debtor’s conduct constituted embezzlement for purposes of § 523(a)(4) where debtor appropriated recipes belonging to former employer); Wallner v. Liebl (In re Liebl), 434 B.R. 529, 537 (Bankr.N.D.Ill.2010) (analyzing whether debtor embezzled intellectual property and trade secrets under § 523(a)(4)); Halliburton Energy Services, Inc. v. McVay (In re McVay), 461 B.R. 735, 745 (Bankr.C.D.Ill.2012) (same). New Mexico law would likely yield the same result. See generally Muncey v. Eyeglass World, LLC, 2012-NMCA-120, 289 P.3d 1255 (analyzing whether defendant’s use of plaintiffs patient files constituted conversion).
*746Here, Defendant was given the Safety Manual and Employee Handbook as part of his job. On the day he anticipated getting fired, he emailed the manual, handbook, and other documents to his personal Yahoo account without Plaintiffs knowledge or consent. Defendant then used the documents in his new business. Defendant’s conduct constitutes embezzlement for purposes of § 523(a)(4).
It is worth noting that while “conversion of property of another can serve as grounds for nondischargeability under § 523(a)(6), not every conversion constitutes a willful and malicious injury.” Hernandez v. Musgrave (In re Musgrave), 2011 WL 312883, *11 (10th Cir. BAP 2011). Here, the circumstances under which Defendant removed the materials were fraudulent. As discussed above, however, there is no evidence that Defendant intended to harm Plaintiff. Thus, while Defendant embezzled the Safety Manual and Employee Handbook, the embezzlement does not come within § 523(a)(6).
D. Damages
Although the Arbitrator did not address embezzlement specifically, his fact findings are entitled to preclusive effect. The Arbitrator found that Defendant’s removal of the Safety Manual, Employee Handbook, and other documents caused Plaintiff $10,000 in actual damages. The Court therefore concludes that Plaintiff suffered $10,000 in actual damages as a result of Defendant’s embezzlement.8 Further, the Court finds that Plaintiff is entitled to $20,000 in punitive damages.
III. CONCLUSION
Defendant’s obligations to Plaintiffs will be declared nondischargeable under § 523(a)(4), to the extent of $30,000. This Memorandum Opinion shall constitute the Court’s findings of fact and conclusions of law under Fed.R.Bankr.P. 7052. An appropriate judgment will be entered.
. Before working for Plaintiff, Defendant worked in the oil and gas industry for a company called Enterprise. It seems likely that it is the same company.
. The "four corners” region is compromised of the southwestern corner of Colorado, the northwestern corner of New Mexico, the northeastern corner of Arizona, and the southeastern corner of Utah.
. Plaintiff’s § 727(a)(4)(A) claim was originally founded on statements Defendant allegedly made prepetition and at his § 341 meeting concerning allegedly "concealed or transferred equipment.” Plaintiff introduced no evidence at trial about these matters, instead focusing solely on the September 25 statement about the Employee Handbook. Based on this apparent last-minute shift in focus, it appears that, by the time of trial, Plaintiff had little or no evidence to support its § 727(a)(4)(A) claim.
. The other elements, i.e., an injury suffered by Plaintiff that was caused by Defendant, clearly are established.
. $110,000 of the gross revenue was from one customer' — Enterprise. There is no evidence Enterprise was Plaintiffs former customer.
.While the evidence regarding Plaintiffs losses related to the entire four corners region, the evidence regarding Defendant's revenues related to the San Juan area. It is possible that Fintech and/or MACC’s revenue in the four corners region was higher than their revenue in the San Juan area.
. As Plaintiff did not argue that Defendant held the Safety Manual and other documents pursuant to an express or technical trust, the Court will not address defalcation while acting in a fiduciary duty. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir.1996) (under Tenth Circuit law, a fiduciary relationship exists only where a debtor has been entrusted with money pursuant to "an express or technical trust.”).
. Plaintiff contends that the entire District Court Judgment amount is nondischargeable under either § 523(a)(4) or (a)(6). This argument fails. When a debt is nondischargeable under § 523(a), the accompanying interest and fees generally are nondischargeable as well. See, e.g., Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1208 (5th Cir.1996); Jennen v. Hunter (In re Hunter), 771 F.2d 1126, 1131 (8th Cir.1985). Here, however, the attorney fees and arbitration costs were awarded as contract damages (dischargeable in this case), rather than damages for embezzlement. In fact, the Arbitrator specifically found that "the requisite elements of [Plaintiff's] common law tort theories [we]re not proven on the evidence.” There is no basis for awarding attorney fees or arbitration costs to Plaintiff for proving embezzlement for the first time at trial. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496529/ | MEMORANDUM OPINION
JACK CADDELL, Bankruptcy Judge.
This case is before the Court on a complaint to determine dischargeability pursuant to 11 U.S.C. § 523(a)(2)(A) and objection discharge pursuant to 11 U.S.C. §§ 727(a)(3) and (a)(4)(A). At the conclusion of the trial in this matter held on September 16, 2013, the Court invited counsel to submit post-trial briefs regarding issues of relevant state agency law, destruction of documents, and spoilation of evidence. The issues having been fully *753briefed, the Court finds upon due consideration of the pleadings, testimony and evidence presented at trial, that plaintiffs’ claim in the amount of $39,296.26 is non-dischargeable pursuant to § 523(a)(2)(A), and that the debtor’s discharge is due to be denied pursuant to §§ 727(a)(3) and (a)(4)(A).
I.FINDINGS OF FACT
A. Prepetition
1. Heinz operates a business known as Signature Landscapes. In December of 2010, the debtor hired Justin Taylor (“Taylor”) as the general manager of Signature Landscapes to handle the day-to-day operations of the company. Heinz testified that she described the list of services offered by Signature Landscapes to Taylor when she hired him. Thereafter, the debt- or oversaw Taylor for approximately one month before turning the day-to-day operations of the business over to Taylor at which point Heinz testified that she began coming into the office a couple of hours a days, twice a week. Heinz gave Taylor the power and authority to contract on behalf of Signature Landscapes.
2. In January of 2011, the plaintiff, Bonnie Lioce, contacted Signature Landscapes to request a quote to construct a covered porch and an outdoor fireplace at her residence. Lioce search the internet for qualified companies and contacted Signature Landscapes after reviewing their website which included the following statement: “For your protection we are licensed, bonded, and insured.”1 The website advertised services including landscape design, landscape installation, outdoor living, hardscape installation, deck and arbors, drainage solutions, foundation and structural renovation, landscape lighting, water features, irrigation, and maintenance.2
3. Lioce called several companies to request quotes. When she called Southern Landscapes, Lioce testified that she first spoke with Heinz’s assistant, Cheri Temin-tel. According to Lioce, Heinz returned the call and informed her that she would send Taylor to Lioce’s residence to give the Lioces an estimate. Lioce testified that Heinz gave her Taylor’s credentials during the phone call. At trial, Heinz denied speaking with Lioce by telephone before Taylor quoted the project.
4. After meeting with Taylor, Lioce signed a contract with Signature Landscapes dated January 6, 2011 for $26,764 for the construction of a “covered structure attached to the roof line on three sides.”3 Lioce testified that Taylor assured her that Signature Landscapes would be able to obtain the required permits to build the structure and that he had experience building the type of structure Lioce wanted.
5. Lioce testified that she relied upon the statements made on Signature Landscapes’ web page — that the company was “licensed, bonded and insured” — -which gave her peace of mind. She further testified that she relied upon Taylor’s statements and assurances that Signature Landscapes could handle the job and obtain the required permits. Lioce testified that she would not have hired Signature Landscapes had she known that Signature Landscapes was not insured and could not obtain the required building permits. She was specifically concerned about the foundation work and attaching the covered porch to her home.
*7546. Lioce paid Signature Landscapes $8,900 on January 7, 2011 at the beginning of the project, and then another $7,200 on February 15, 2011.
7. Signature Landscapes did not complete the job. A few weeks after Signature Landscapes began construction, Heinz testified that she went to inspect the project after she saw large receipts coming in from the job. Heinz testified that Taylor exceeded his authority when he entered into the contract with Lioce because neither she nor anyone working for Signature Landscapes is a general contractor licensed to do the type of work required on the Lioce project. Without a general contractor’s license, Signature Landscapes could not procure the required building permits to construct the attached covered porch. Heinz fired Taylor approximately one week later and attempted to get the permits required to complete the job but was unable to do so. Heinz testified that the porch roof was structurally unsound.
8. Not only was Signature Landscapes not licensed to construct the structure attached to the Lioces’ home, it was also not insured on the date Signature Landscapes contracted to construct the covered porch and fireplace. Heinz testified that she did have general liability insurance and was licensed to install landscaping when she created the website for Signature Landscapes, however, her insurance lapsed before Signature Landscapes contracted to build the Lioces’ covered porch and outdoor fireplace.
9. The Lioces had the structure torn down because licensed contractors would not complete the job as it was left by Signature Landscapes.
10. On May 13, 2011, counsel for the Lioces sent Heinz a letter terminating the contract. On May 28, 2012, the Circuit Court of Madison County, Alabama entered a judgment against Heinz and Signature Landscapes in favor of the Lioces in the amount of $39,296.26 for breach of contract.
11. Heinz is a sophisticated business woman. She obtained a degree in accounting from the University of Alabama in 1989. In addition to owning Signature Landscapes, Heinz testified that she took steps at some point in 2012 to open an accounting practice, but never had any clients. Nevertheless, Heinz created a web page under the name Sharon S. Heinz, PA, holding herself out as a public accountant even though she is not licensed as a public accountant. She also created a Facebook page and a Linkedln account offering accounting services. Her Linked-ln account states that she is an entrepreneur, public accountant, and QuickBooks advisor. Heinz stated on her Linkedln account that she has “over 21 years experience in Accounting and running a small business;” and further states that she specializes in “[sjmall business accounting,” and “Quickbooks set up, coaching, and support.” 4 Debtor listed previous business experience as the owner of Universal Auto from 1995 to 2002, and as an accountant at Mark Holman, CPA from 1990 to 2002.
B. The Petition
12. On September 27, 2012, the sheriffs office went to Signature Landscapes to execute on the Lioces’ judgment. The following day on September 28, 2012, Sharon Heinz, d/b/a Signature Landscapes, filed a Chapter 13 petition. This is not the debtor’s first bankruptcy petition. Including the current case, the debtor has filed five bankruptcy petitions under various names. Previous filings include: case no. 89-15142-JSS-7 [Sharon Harris — Chapter *7557 discharge]; case no. 00-80951-JAC-ll [Sharon Heinz d/b/a Universal Auto — confirmed Chapter 11]; 03-84983-JAC-7 [Sharon Strickland- — Chapter 7 discharge]; and 09-81939-JAC-13 [Sharon Heinz d/b/a Signature Landscapes — dismissed for failure to make payments].
13. On October 12, 2012, the debtor filed her Chapter 13 Schedules and Statement of Financial Affairs (“SOFA”). There are numerous inaccuracies and misstatements contained in these documents:
• On Schedule B-Personal Property, Heinz listed a Compass Bank checking account with a value of $150, and a PNC checking account valued at $1,100. Heinz actually had three checking accounts; two accounts at Compass Bank and one at PNC. On the petition date, the account balances totaled approximately $4,787.74. Heinz explained the discrepancy stating that the bank statement balances did not reflect checks she had written or transactions that had not yet cleared the accounts.
• On the SOFA, question 1-Income from employment or operation of business, Heinz reported gross income of $12,980 for 2012; $17,300 for 2011; and $11,443 for 2010. The debtor’s tax returns tell a different story. Heinz reported gross business income on her tax returns of $498,003 for 2012; $231,031 for 2011; and $254,575 for 2010. At trial, Heinz testified that she interpreted question 1 to mean income to her as opposed to gross amount from operation of a business despite the fact that the question clearly reads “income from employment or operation of business.”
• Heinz responded none to question 3 in the SOFA which requires debtors to list all payments made within one year immediately preceding the commencement of the case to insiders. However, Heinz made payments to her son Joshua Harris totaling $23,573 as an employee of Signature Landscapes. She also failed to disclose payments made to her husband, Sam Whiteside, in the amount of $335 per month during the one year period preceding the petition date. The debtor listed Sam Whiteside as a secured creditor on Schedule D-Creditors Holding Secured Claims. Whiteside is secured by the debtor’s 2004 BMW 530i. Whiteside is not disclosed as the debt- or’s husband anywhere in the petition.
• Heinz failed to list business income received from the rental of U-Haul trucks. Heinz testified that the income is nominal, less than three hundred dollars a month.
• On Schedule I — Current Income of Individual Debtor(s), in response to question 7, Heinz listed $1,299 as her regular monthly income from the operation of business. Heinz completed a Business Income and Expenses statement as required in support of this calculation. Heinz did not utilize her gross business income for the 12 months prior to filing as instructed in Part A of the worksheet. On the line requesting “gross income for the 12 months prior to filing,” Heinz listed $74,410 when in fact Heinz reported gross business income on her 2012 tax return in the amount of $498,003. Heinz testified that she derived the $74,410 figure from a six month period in 2011. However, even using 2011 information, Heinz under reported her gross business income by several thousand dollars given that Heinz reported gross business income of $231,000 for the 2011 tax year. When questioned at trial as to why she used financial information from a six month period in *7562011, Heinz stated that she would have only had information for ten months during 2012 as opposed to the requested 12 month period. Debtor could not explain why she chose to use a six month period in 2011 when 2012 records were available.
• On October 23, 2012, Heinz filed a notice of voluntary conversion from Chapter 13 to Chapter 7. On the conversion date, the ledger balance on Heinz’s PNC cheeking account was approximately $18,486. Heinz did not amend her schedules to reflect this balance.
• Heinz failed to disclose her home address on the petition. Instead, she used the business address for Signature Landscapes.
C. Loss of Records
14. The debtor maintains her accounting books on electronic software called QuickBooks. This is the same software that the debtor offered to provide “setup, coaching and support” for on her Linkedln account.
15. Postpetition in late October of 2012, Heinz hired Leann Perry to reinstall the hard drive on one of two her office computers after the older computer crashed. The older computer contained the debtor’s 2009 through 2011 QuickBooks information, as well as W2 and 1099 information. Heinz testified that she backed up her office computers approximately once a month using a thumb drive. Heinz explained that the QuickBooks version on the old computer was for 2008. Heinz testified that she could not retrieve the 2009 through 2011 information from the thumb drive using the newer version of Quick-Books. Prior to trial, Heinz failed to disclose during discovery the fact that the electronic information was available on a thumb drive.
16. Plaintiffs’ requests for production required Heinz to “produce copies of all books of account and records for the past three years of any business in which you have an ownership interest.”5 Heinz responded:
Bank Records for 2012 complete have been produced. QuickBooks Profit & Loss statement has been produced. I can run any 2012 report from Quick-Books that may be needed as it pertains to my business. A computer crash caused me to lose my 2010 and 2011 QuickBooks records, although all the backup receipts and written records are available if needed in boxes. These are too voluminous to copy but will be made available upon request. The 2010 and 2011 tax returns have been produced. Heinz did not produce the thumb drive, nor even disclose its existence in response to the plaintiffs’ requests for production until the date of trial.
17. Subsequently, the paper backup documentation for the destroyed electronic information was lost or destroyed in November of 2012 when Heinz relocated her office. Heinz testified that two or three boxes of records were missing after the move. Ironically, the boxes that were lost contained the backup information for the 2009 through 2011 electronic records which had just been destroyed.
D. Procedural History
18. On October 1, 2012, Heinz filed a motion to extend the automatic stay pursuant to § 362(c)(3)(B). The motion was necessitated because the debtor had a prior Chapter 13 case, case no. 09-81936-JAC-13, pending within the preceding 1-year *757period which had been dismissed for failure to make payments.
19. On October 15, 2012, the Court entered an order denying the motion after counsel for the Lioces appeared at the hearing and objected to the extension.
20. On October 23, 2012, Heinz filed a notice of voluntary conversion to Chapter 7. On October 27, 2012, Heinz filed a second motion to extend the automatic stay. On October 29, 2012, the Court entered an order denying on the grounds that the conversion from Chapter 13 to Chapter 7 did not change the petition filing date for purposes of the debtor’s § 362 motion to extend stay.
21. On November 14, 2012, Heinz filed an adversary proceeding against Nick and Bonnie Lioce and their attorney alleging same violated the stay by failing to release levies and executions in the Circuit Court of Madison County, Alabama.
22. On November 27, 2012, the Lioces filed an emergency motion to abandon property used in the debtor’s business in which the debtor did not claim a personal exemption. On January 16, 2013, the Court entered an order granting the motion to abandon.
23. On January 24, 2013, the Lioces filed a motion to extend the deadline for filing a §§ 523 and 727 complaint. The deadline ran through January 29, 2013. On January 28, 2013, the Court entered an order granting the motion and extending the deadline for a period of 60 days.
24. On March 29, 2013, the Lioces timely filed the above styled complaint.
II. CONCLUSIONS OF LAW
A. Amended and Supplemental Pleadings
As a preliminary matter, the Court must address an issue raised in the debt- or’s post-trial brief. Heinz argues that the Court should not consider issues of fraud based on any misrepresentations made by the debtor’s agent because same were not alleged in the plaintiffs’ complaint in violation of Rule 7009(b) which requires allegations of fraud to be stated with particularity. Pursuant to Bankruptcy Rule 7015 and FED. R. CIV. P. 15(b) issues not raised in pleadings may be treated as if they were properly raised when they were tried by express or implied consent of the parties. Rule 15(b) reads as follows:
(b) For Issues Tried by Consent. When an issue not raised by the pleadings is tried by the parties’ express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move — at any time, even after judgment — to amend the pleadings to conform them to the evidence and to raise an unpleaded issue. But failure to amend does not affect the result of the trial of that issue.
Although the plaintiffs did not allege in their complaint that any of the oral misrepresentations upon which they relied were made by Heinz’s agent rather than the debtor herself, the plaintiffs did assert these allegations in plaintiffs’ brief filed in support of their motion for summary judgment filed on June 14, 2013 more than three months prior to the trial date.6 During the hearing held on the parties’ cross-motions for summary judgment held on July 8, 2013, the issue of whether or not misrepresentations were made by the debtor’s agent, and whether the debtor could be held liable for same under § 523(a)(2)(A) was raised and discussed at length. In plaintiffs’ proposed Issues to Be Tried, Proposed Findings of Fact and Conclusions of Law filed on September 11, *7582013, the plaintiffs clearly asserted that “[u]pon meeting with Heinz’s agent, the Lioces were assured that the scope of the project was within the capabilities of Signature Landscapes.”7 Further the issue of agency was addressed at length during the trial of this matter on September 16, 2013 and no objection was raised to the evidence at trial. Thus, the Court finds that the debtor has known about the evidence for at least four months prior to the trial date, made no objection, and was not prejudiced in her ability to confront the evidence presented at trial, and further raised no objections to same during trial.8
B. Adverse Inference
At the close of trial, the Court stated on the record that it was drawing an adverse inference against Heinz based on debtor’s failure to produce the thumb drive in response to plaintiffs’ Requests for Production of Documents. Spoliation of evidence is “ ‘defined as the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’ ”9 The movant has the burden of demonstrating by a preponderance of the evidence that a litigant failed to preserve evidence or destroyed it.10 Specifically, the spoliation of electronic evidence that is germane to the proof of issue at trial may support an inference that the destroyed evidence would have been unfavorable to the party destroying same.11 See Fed. R. Crv. P. 26(f) requiring planning meeting “to discuss any issues relating to preserving discoverable information,” and to address “any issues relating to disclosure or discovery of electronically stored information.” See also Fed. R. Crv. P. 34 making electronically stored information “in any medium from which information from which information can be obtained,” subject to production.
A party asserting a claim for spoilation of electronic evidence must show that: (1) the other party had an obligation to preserve the electronic evidence when it was destroyed; (2) that same was destroyed with culpable state of mind, including ordinary negligence, gross negligence, recklessness, willfulness, or intentional conduct; and (3) that the destroyed evidence was relevant and favorable to the party’s claim, such that a reasonable trier of fact could find that it would support a party’s claim.12 A litigant has a duty to preserve evidence that she knows or should know is relevant to imminent or ongoing litigation.13
In this case, the Court finds that Heinz knew or should have known that the thumb drive containing documentation from 2009 through 2011 was relevant to ongoing litigation. The missing documents include the time frame in 2011 when Taylor was employed as Heinz’s agent and during which Signature Landscapes contracted to build the Lioce project. In May of 2012, the Lioces obtained a judgment against Heinz for work performed by Signature Landscapes in 2011. In September of 2012, the sheriffs office went to Signature Landscapes to execute on the judg*759ment and Heinz filed for bankruptcy relief the following day. On October 15, 2012, the Court entered an order denying Heinz’s motion to extend the stay based upon the Lioces’ objection to same. It was immediately thereafter that the electronic information for the relevant time period was lost or destroyed on the debtor’s computer and then the backup paper documentation was subsequently lost or destroyed. Yet, the thumb drive remains. However, Heinz failed to produce the thumb drive in response to plaintiffs’ requests for production of documents and, in fact, the plaintiffs did not even know same existed until Heinz testified at trial regarding same. The Court is mindful that the debtor is a sophisticated businesswoman who has held herself out as an accountant, and as someone who offers coaching and support in QuickBooks setup.
The Court finds that the evidence compels a conclusion that the debtor’s spoliation of electronic evidence, the failure to preserve both electronically stored information as well as the backup paper documentation, and failure to produce the thumb drive was willful and intentional given the timing during imminent or ongoing litigation with the Lioces. While the Court will not impose a specific sanction against the debtor in this instance such as default judgment, the Court finds that the spoliation entitles the Lioces’ to an adverse inference in this case to the extent same impacts the debtor’s overall credibility.
C. Agency Relationship
“The standard for determining whether an agency relationship exists is whether the purported principal has control over the alleged agent. In order for an agency relationship to exist, there must be some affirmative evidence that the principal has the right to control the agent.”14 The parties’ relationship must be analyzed under relevant state law.15 Specifically, in Alabama, the “test for agency is whether the alleged principal has retained a right of control over the actions of the alleged agent.”16 “[A]n agency relationship is determined by the facts of the case and not how the particular parties characterize their relationship.”17 “The party asserting the existence of an agency has the burden of presenting sufficient evidence to prove the existence of that relationship.”18
The Court finds the plaintiffs have presented substantial evidence that Taylor was in fact Heinz’s agent as the debtor hired Taylor to run the day-to-day operations of Signature Landscapes. Heinz empowered Taylor to sign contracts on behalf of Signature Landscapes. Further, Lioce testified that she spoke with Heinz on the telephone to request a quote and the debt- or informed Lioce that she would send Taylor to the Lioces’ residence to bid on their project. Accordingly, the Court finds that Heinz exercised control over Taylor and cloaked him with authority to contract on her behalf, thus, Taylor was *760the debtor’s agent for purposes of § 523(a)(2)(A).
D. § 523(a)(2)(A)
The plaintiffs assert that the debt owed them under the judgment entered against Heinz is nondischargeable as a debt for money that was obtained by false pretenses, a false representation, or actual fraud within the meaning of § 523(a)(2)(A) which reads as follows:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
‡ % sfc
(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.
Specifically, the plaintiffs contend that through false advertisements, Heinz solicited the Lioce project. Those advertisements put forth prominently that Signature Landscapes was “licensed, bonded, and insured,” when in fact Signature Landscapes was neither insured nor licensed to perform the work for which the company bid.19 That upon meeting with Heinz’s agent the Lioces were assured that the scope of the project was within the capabilities of Signature Landscapes and that Signature Landscapes would be able to obtain the permits required to build the structure. However, by the debtor’s own testimony the project required building permits and, thus, a general contractor’s license which Signature Landscapes lacked making it impossible for Heinz to obtain the requisite permits. Nor was Signature Landscapes insured as advertized on Signature Landscapes’ website during the Lioce project.
Section 523(a)(2)(A) has generally been interpreted to require the traditional elements of common law fraud.20 “To prove that a debt is nondischargeable under § 523(a)(2)(A), a creditor must show that ‘(1) the debtor made a false representation to deceive the creditor, (2) the creditor relied on the misrepresentation, (3) the reliance was justified, and (4) the creditor sustained a loss as a result of the misrepresentation.’ ”21 Plaintiffs have the burden of proving each element of this § 523 action by a preponderance of the evidence.22
i. False representation made with intent to deceive
The Eleventh Circuit has recognized that a debt may be excepted from discharge either when the debtor personally commits actual fraud or when such actual fraud is imputed to the debtor under agency principles.23 In Hoffend v. Villa (In re Villa), 261 F.3d 1148 (11th Cir.2001), the issue before the Eleventh Circuit was whether the alleged fraud of the debtor’s employee, for which the debtor could be held liable as a controlling person under § 20(a) of the Securities Exchange Act, should be imputed to the debtor so as to render the creditor’s claim nondis-chargeable pursuant to § 523(a)(2)(A). Although the Eleventh Circuit held that the *761employee’s alleged securities fraud could not be imputed for purposes of § 523(a)(2)(A) to the debtor under the “control person” provisions of the securities law, the Eleventh Circuit recognized that the Supreme Court has held that actual fraud may be imputed to a debtor under agency principles.
In Villa, the Eleventh Circuit initially recognized the Supreme Court’s ruling in Neal v. Clark, 95 U.S. 704, 24 L.Ed. 586 (1877) in which the Court held that a debt will not fall within § 523(a)(2)(A) unless the debtor committed positive, actual fraud. Then the Villa court noted that the Supreme Court subsequently ruled in Strang v. Bradner, 114 U.S. 555, 5 S.Ct. 1038, 29 L.Ed. 248 (1885) that Neal’s positive fraud requirement can be satisfied by the fraud of an innocent debtor’s partner. The Eleventh Circuit wrote:
[Creditor] relies upon Strang v. Bradner, 114 U.S. 555, 5 S.Ct. 1038, 29 L.Ed. 248 (1885). There, the Supreme Court addressed the issue of whether two bankrupt debtors, who were vicariously hable under agency law for a debt incurred through the fraud of their co-partner, were precluded from discharging that debt in bankruptcy. See id at 561, 5 S.Ct. at 1041. Strang distinguished the holding of Neal, where the Court had interpreted fraud to mean actual or positive fraud rather than implied fraud. See Strang, 114 U.S. at 559, 5 S.Ct. at 1040 (citing Neal, 95 U.S. at 709, 24 L.Ed. 586). Strang held that Neal’s positive fraud requirement was satisfied by the fraud of the debtors’ co-partner. The question before the Court in Strang was whether the debtors, who had been unaware of their co-partner’s fraud, could nonetheless be precluded from discharging the debt in bankruptcy. See Strang, 114 U.S. at 559, 561, 5 S.Ct. at 1040-41. The Court held that the co-partner’s fraud, imputed to the debtors, precluded their discharge of the debt. See id. at 561, 5 S.Ct. at 1041. [Creditor] argues that the holding of Strang should extend to preclude Villa’s discharge of a claim based on his employees’ fraud, for which Villa may be responsible under § 20(a).24
In Villa, the creditor argued that the holding of Strang, imputing actual fraud to an innocent partner so as to render the debt nondischargeable, should be extended to situations in which the debtor is liable for the actual fraud of an employee, not under partnership or agency principles, but as a controlling person under the Securities Exchange Act. Instead, the Eleventh Circuit read Strang narrowly as only imputing liability for fraud in bankruptcy based on the common law of partnership and agency. The Eleventh Circuit stated that in reaching this conclusion, it was mindful of its obligation to construe strictly exceptions to discharge in order to give effect to the fresh start policy of the Bankruptcy Code.25
Since the Supreme Court’s holding in Strang, “the majority of courts to address the issue in a commercial or business context have held that an innocent debtor’s liability for her agent’s wrongdoing is nondischargeable under § 523(a)(2) regardless of the debtor’s knowledge or participation.”26 In Carroll *762v. Quinlivan (In re Quinlivan), the Fifth Circuit described the balance between the Bankruptcy Code’s fresh start policy and the underlying purpose of § 523(a)(2)(A) which is to protect victims of fraud. The Fifth Circuit wrote:
Holding the debtor accountable for his partner’s fraud “effectuates important state law policies regarding imputed liability.” These state law policies create incentives for the debtor to control or monitor the conduct of his agent or partner. As a result, when determining whether the exception applies, the culpability of the indebted partner is irrelevant. Even if the partner is innocent of wrongdoing and had no knowledge or reason to know of the fraud, the debt is not dischargeable under § 523(a)(2)(A).... Of course, the debt in question must be one for which the debt- or is liable to the creditor under applicable nonbankruptcy law.27
Other “courts have adopted a reckless standard, requiring that the debtor knew or should have known of the agent’s fraud in order to impute intent.”28 Heinz cites this line cases to argue that she should not be held liable for her agent’s actions. Most of the cases cited by the debtor arose in the context of a marital relationship. See Treadwell v. Glenstone Lodge (In re Treadwell), 637 F.3d 855 (8th Cir.2011) (remanding case for determination of whether married debtors were partners in travel agency); Connecticut Attorneys Title Ins. Co. v. Budnick (In re Budnick), 469 B.R. 158 (Bankr.D.Conn.2012) (finding debtor and his former wife did not have a partnership with respect to skating ring facility); Automotive Fin. Corp. v. Vasile (In re Vasile), 297 B.R. 893 (Bankr.M.D.Fla.2003) (finding any fraud on the part of debtor-husband in connection with his practice of floor-planning vehicles for a higher price than what he paid for them in order to cover repair costs would not be imputed to debtor-wife); In re Savage, 176 B.R. 614 (Bankr.M.D.Fla.1994) (credit card debt incurred by debtor’s wife through fraud did not come within discharge exception).
In the Vasile case, the bankruptcy court held that any fraud on the part of the debtor-husband in connection with his practice of floor-planning vehicles for a higher price than what he paid for them in order to cover repair costs would not be imputed to the debtor-wife. The bankruptcy court explained that fraudulent intent may not be imputed from one spouse to another simply based on the marital relationship of the parties.
The Budnick case involved a finding that the debtor and his former wife did not have a partnership relationship and that debtor’s wife did not act within the scope of her authority as an accountant and bookkeeper for an LLC for which debtor was the managing member, in embezzling funds from another employer to pay the LLC’s bills. Therefore, the debtor could not be held vicariously liable for debt arising from his wife’s unknown embezzle-ments under agency theory where the wife kept the embezzlements a secret from the debtor and the wife could not have reasonably understood that embezzlement was within the scope of her actual authority. This ease is clearly distinguishable as Heinz specifically empowered Taylor to *763contract with the Lioees on her behalf, thus, Taylor was acting within both the scope of his employment to contract and with apparent authority as he was sent by Heinz to bid on the project.
The Court does recognize that at least one bankruptcy court in the Eleventh Circuit has questioned whether the Eleventh Circuit would apply the reckless indifference standard. In the case of Agribank v. Gordon (In re Gordon), 293 B.R. 817 (Bankr.M.D.Ga.2003), the bankruptcy court found that the Eleventh Circuit did not clearly state in Villa whether an innocent debtor’s liability for her agent’s wrongdoing is nondischargeable under § 523(a)(2) regardless of the debtor’s knowledge or participation in the fraud, or whether the Eleventh Circuit would apply the reckless standard, requiring the debtor knew or should have known of the agent’s fraud in order to impute intent. Without concrete guidance, the bankruptcy court chose to apply the higher reckless indifference standard and held that “more than the mere existence of an agent-principal relationship is required to charge the agent’s fraud to the principal.”29 However, the court explained that actual participation in the fraud by the principal is not required. “If the principal either knew or should have known of the agent’s fraud, the agent’s fraud will be imputed to the debtor-principal. When the principal is recklessly indifferent to his agent’s acts, it can be inferred that the principal should have known of the fraud.”30
First, this Court notes that Gordon is another case involving a marital relationship. The debtor was a farmer and his wife worked full time as a school teacher. The bankruptcy court held that the marital relationship that existed between the parties did not itself provide a sufficient basis for imputing fraud, given that the wife was not partners in her husband’s farming operation, and that the wife had no reason to suspect that her husband of 27 years would materially misrepresent her income and assets on financial statements that he submitted to obtain farm loans.
Further, this Court is not as certain that the Eleventh Circuit would apply the reckless indifference standard, requiring that the debtor knew or should have known of the agent’s fraud in order to impute intent. The Eleventh Circuit Villa court explained that the issue in “Strang was whether the debtors, who had been unaware of their co-partner’s fraud, could nonetheless be precluded from discharging the debt in bankruptcy.”31 Although, the Villa court applied a narrow reading of Strang, Villa clearly recognized that actual fraud may be imputed to a debtor under agency principles pursuant to Strang for purposes of § 523(a)(2).
Nevertheless, under either standard the Court finds that the plaintiffs have proven by a preponderance of the evidence that Heinz knew or should have known of Taylor’s fraudulent misrepresentations. Lioce testified that she spoke with Heinz on the telephone and that Heinz informed Lioce that she would send Taylor to the Lioees’ home to give the Lioees an estimate. Lioce further testified that the debtor gave Lioce Taylor’s credentials during the phone call. After meeting with Lioce, Taylor assured Lioce that Signature Landscapes would be able to obtain the permits needed to construct the covered porch attached to the Lioees’ home and, further, that Signature Landscapes had the experi*764ence required to build the attached porch. The Court finds that it can be inferred that Taylor intended to deceive and to induce the Lioces into entering into contract with Signature Landscapes by falsely representing that Signature Landscapes was licensed, experienced, and capable of performing the work the Lioces needed. Instead, the scope of the project clearly exceeded Signature Landscapes capabilities as same required a building permit and, thus, a general contractor’s license which Signature Landscapes did not have. Nevertheless, Taylor was clearly acting within the scope of his employment to contract on behalf of Signature Landscapes and with the apparent authority bestowed upon him by Heinz.
Heinz testified that she turned the day-to-day operations of the business over to Taylor soon after she hired him. Thereafter, it appears that Heinz conducted very little oversight except to review receipts that crossed her desk the few hours a week she came into the office. Yet, Heinz knew that Taylor was contracting on behalf of Signature Landscapes as she had authorized and given him the authority to do so. Based on the forgoing, the Court finds that the debtor’s action were recklessly indifferent which is evidence that the debtor knew or should have known of Taylor’s fraudulent misrepresentations as her agent.
The Court further finds that Heinz made false representations with intent to deceive by prominently advertising that “[f]or you protection” Signature Landscapes is “licensed, bonded, and insured.” Heinz argued at trial that she is licensed to install landscaping. However, the licensing statement appears on a page of website under “Foundation and Structural Renovation.” Moreover, Heinz admitted that she was not insured on the date Signature Landscapes entered into the contract with the Lioces. Nevertheless, Heinz maintained false advertisements on Signature Landscapes’ website when in fact her insurance coverage had lapsed.
ii. Justifiable reliance
In Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), the Supreme Court determined that the applicable standard of reliance that a creditor must establish under § 523(a)(2)(A) is justifiable reliance rather than the rigid standard of reasonable rebanee. In City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 283 (11th Cir.1995), the Eleventh Circuit stated that under the justifiable reliance standard the “plaintiffs conduct must not be so utterly unreasonable, in the light of the information apparent to him, that the law may properly say that his loss is his own responsibility.” In Vann the bankruptcy court applied the reasonable reliance standard and concluded that the bank would have been better served by demanding an appraisal of certain property and should have made other inquiries of the debtor to ascertain the status of certain properties prior to closing the debtor’s loan. The Eleventh Circuit cautioned that courts should not second guess a lender’s decision to make a loan, stating:
Although the bankruptcy court, with hindsight, can see plainly that the bank would have been ‘better served by demanding an appraisal’ and by making further inquiries of the debtor .... the court should not ‘second guess a creditor’s decision to make a loan’ or ‘base its decision regarding discharge on whether it would have extended the loan.’32
In this case, Heinz argues that if the Lioces were concerned as to whether Signature Landscapes or Heinz held a *765general contractor’s license then plaintiffs could have easily Googled “Alabama General Contractors License” and then performed a license roster search under either name which would have revealed that neither held such license. However, the Eleventh Circuit has recently explained that “[¡Justifiable reliance is gauged by an individual standard of the plaintiffs own capacity and the knowledge which he has, or which may fairly be charged against him from the facts within his observation in the light of his individual case .... it is only where, under the circumstances, the facts should be apparent to one of plaintiffs knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation of his own.”33
In Sears v. United States (In re Sears), 533 Fed.Appx. 941, 2013 WL 4426516 (11th Cir.2013), the debtor, doing business as ABBA Bonding Company, issued several surety bonds for various government projects. After the debtor filed bankruptcy one of the government contractors for whom debtor was surety defaulted on his contract which triggered the debtor’s obligations under the surety agreement. Because the debtor was already in bankruptcy, the government could not collect under the debtor’s bond and was required to hire another contractor to finish the job at an additional cost of $1,055,724.10. The government filed an adversary proceeding challenging the dischargeability of this debt, arguing that the debtor induced it to accept him as surety using false pretenses, false representations, or actual fraud under § 523(a)(2)(A).
The debtor was required to submit an Affidavit of Individual Surety in which he pledged collateral to secure each bond. Each affidavit required the debtor to list the real estate pledged and attach supporting certified documents. On each affidavit the debtor listed various parcels of real estate. On some, but not all, he also attached a financial statement listing the net worth of ABBA Bonding as approximately $126 million. Debtor further indicated that there were no mortgages or liens on any of the pledged collateral. Each affidavit required the debtor to identify any bonds for which the pledged assets were pledged within the prior 3 years. Debtor responded “0.”
The government approved ten bonds at issue, but later found out that: (1) the debtor did not own many of the properties pledged as collateral; (2) did not hold clear title to one of the properties; (3) debtor had pledged properties more than once for the various bond issues; and (4) the net worth of debtor’s bonding company was substantially less than $126 million.
On the issue of reliance, the bankruptcy court reasoned that debtor’s misrepresentations were not apparent to the contracting officers reviewing the affidavits because same were completely filled out and submitted under oath. Debtor argued that the government did not justifiably rely on same because he failed to attach required supporting documents to the affidavits and same were, therefore, facially incomplete.
The Eleventh Circuit found justifiable reliance where “it was not apparent from a ‘cursory glance’ at his affidavits that they were fraudulent.”34 Even though the debtor did not attach supporting documentation, he answered every question on each of the affidavits, and the affidavits were signed and notarized. Moreover, the court *766explained that the debtor’s own failure to provide documents to support his fraudulent statements should not allow him to avoid his obligation to the party to whom he lied.
Here, the Court finds that Lioce was induced to sign the contract with Signature .Landscapes in justifiable reliance upon false and fraudulent representations by Heinz’s agent, that Signature Landscapes was licensed and capable of performing the work for which Signature Landscapes contracted and capable of obtaining the necessary building permits required to construct the addition to the Lioces’ home; and further upon the false representations contained in advertisements that Signature Landscapes was licensed and insured. Under the circumstances, the Court finds that there was nothing which served as a warning to the Lioces that they were being deceived by either Justin Taylor or by Signature Landscapes’ false advertisements; nor that they should further investigate any of the false representations made by same.
iii. Damages
“For a debt to be nondis-chargeable under § 523(a)(2)(A), a creditor must show that it ‘sustained a loss as a result of the misrepresentation.”35 Here, Heinz admitted at trial that the covered porch Signature Landscapes partially constructed was structurally unsound. Heinz further testified that she was unable to hire a general contractor to complete the project because no general contractor would complete work that had been started by an unlicensed contractor. Instead, the entire structure had to be torn down and rebuilt by a licensed contractor. Lioce testified that she would not have hired Signature Landscapes without the representations of insurance and assurances that Signature Landscapes could obtain the required building permits. Accordingly, the Court finds that the plaintiffs have proven by a preponderance of the evidence that they sustained a loss a result of the misrepresentations made by Heinz’s agent and by the misrepresentations contained in Signature Landscapes’ website.
Based on the forgoing, the Court finds that the debt to the Lioces is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A).
E. § 727(a)(3)
“A bankruptcy court will grant a debtor a discharge of a debt unless 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.”36 Section 727(a)(3) “does not contain a fraudulent intent requirement.”37
“Section § 727(a)(3) requires disclosure of all relevant records for the benefit of all creditors and the bankruptcy court.”38 The subsection ensures that the trustee and creditors will receive sufficient information to reconstruct the debtor’s fi*767nancial dealings and “confirm the debtor’s financial condition and the cause of the debtor’s financial difficulty.”39 The debtor has an affirmative duty to maintain comprehensible records from which his financial condition or business transactions can be ascertained with a fair degree of accuracy.40 The burden is not on the trustee or creditors to organize and reconstruct the debtor’s business affairs.
To justify denial of discharge under § 727(a)(3), the plaintiff must establish by a preponderance of the evidence that: (1) the debtor “either failed to keep or preserve any recorded information, or committed an act of destruction, mutilation, falsification, or concealment of any recorded information; and (2) that as a result of such failure or act, it is impossible to ascertain the financial condition and material business transactions of the debt- or.” 41
“The records which are required to determine a debtor’s financial condition differ from case to case, with a sophisticated business debtor being held to a higher standard than an unsophisticated, uneducated debtor.”42
Viewing the facts in the present case, the Court is satisfied that Heinz failed to keep adequate books and records from which her financial condition can be ascertained, and her failure to do so is not justified under the unique circumstances of this case. Heinz is a sophisticated businesswoman with a college degree in accounting. She has not only worked as an accountant, but she is also an entrepreneur who has owned at least two businesses, Universal Auto and her current business, Signature Landscapes. Moreover, Heinz recently held herself out as a public accountant on her personal web page which she created in anticipation of reviving her accounting career. Heinz also created a Facebook page and a Linkedln account offering accounting services. Her Linked-In account states that she is an entrepreneur, public accountant, and QuickBooks Advisor. Heinz stated on her Linkedln account that she has “over 21 years experience in Accounting and running a small business;” and further states that she specializes in “[s]mall business accounting,” and “Quickbooks set up, coaching, and support.”43 Nevertheless, Heinz failed to preserve accounting records from 2009 through 2011 electronically stored on Quickbooks. Moreover, a majority of the backup documentation for these years was lost around the same time that the electronic information was destroyed. Both the electronic information and paper documentation was lost or destroyed less than one month after the sheriffs office came to Signature Landscapes on September 27, 2012 to execute on the Lioces’ judgment, less than one month after Heinz filed for bankruptcy on September 28, 2012; and only days after the Lioces contested the extension of the debtor’s automatic stay in this case.
Heinz admits that the electronic information from 2009 through 2011 was destroyed after she filed bankruptcy and that *768she subsequently lost two or three boxes of financial records related to the same years. However, Heinz argues that the plaintiffs have failed to establish that it is impossible to ascertain the debtor’s financial condition as a result of the loss and destruction because the debtor has sufficient documentation to provide to the IRS were she audited for the tax years 2010, 2011, or 2012 using her bank statements. However, the Court believes that it is impossible to completely and accurately develop the full picture of Heinz financial condition during the relevant time period without the electronic or paper documentation for the relevant time periods. The Court further finds the debtor’s credibility severely lacking given the timing surrounding loss and destruction of documents in this case as same occurred after the commencement of the case and after the Lioces’ objected to the extension of the debtor’s automatic stay, and further based on debtor’s failure to disclose the existence of the thumb drive she used to backup her electronically stored information. Accordingly, the Court finds that the plaintiffs have proven by a preponderance of the evidence that Heinz failed to keep or preserve recorded information, and that as a result of such failure, it is impossible to ascertain the financial condition and material business transactions of the debtor.
F. § 727(a)(4)(A)
The Lioces assert that the debtor knowingly and fraudulently made numerous false oaths or accounts in or in connection with the case within the meaning of § 727(a)(4)(A). ‘“Courts will not grant a discharge if the debtor knowingly and fraudulently, in connection with the case, made a false oath or account.’ ”44 “To justify denial of discharge under § 727(a)(4)(A), the false oath must be fraudulent and material.”45 “ ‘Deliberate omissions by the debtor may also result in the denial of a discharge.’ False oaths regarding worthless assets can still bar discharge of debts.”46 “Discharge may not be denied where the untruth was the result of mistake or inadvertence. ‘Rather, the false oath must be made intentionally with regard to a matter material to the case.’ ”47
To prevail on an objection to discharge for false oath or account pursuant to § 727(a)(4)(A), the Lioces must establish that:
1. Heinz made a false statement under oath;
2. Heinz made the statement knowingly and with fraudulent intent; and
3. the statement was material to the bankruptcy case.48
First, the Court finds that the debtor made numerous false oaths in connection with the case. In particular, the Court finds that Heinz’s schedules contain the following omissions and inaccuracies: *769(1) On Schedule B-Heinz listed checking accounts totaling $1,350 when in reality the accounts held approximately $4,787.74; (2) Heinz failed to amend her schedules when she converted from Chapter 13 to Chapter 7 to disclose that the ledger balance in her PNC checking account was $18,486; (3) On Schedule I-Heinz reported regular income of $1,299 per month from the operation of business, but Heinz admitted at trial that she did not calculate this number using gross business income for the preceding 12 month period — instead, debtor used figures from 2011, however, those figures were inaccurate as well; (4) On Heinz’s SOFA, debtor substantially under reported gross income from the operation of her business for the tax years 2010 through 2012; (5) Heinz failed to disclose transfers to both her husband and son in response to question 3 in the SOFA; (6) Heinz failed to disclose the address of her current residence; and (7) Heinz failed to disclose additional income generated from the operation of a U-Haul business in connection with Signature Landscapes.
Next, the Court must decide whether Heinz made these false oaths knowingly and with fraudulent intent. “Because debtors generally will not testify as to their own misconduct,” the Eleventh Circuit has recognized that the element of intent under § 727(a)(4)(A) “is generally proven by circumstantial evidence or inferences drawn from circumstances surrounding the debtor.”49
Heinz attempts to explain away each false statement as having been merely inadvertent, however, the Eleventh Circuit has recognized that “[w]hile a single, isolated instance of nondisclosure or improper disclosure may not support a finding of fraudulent intent,” the repeated nature of such non-disclosures or improper disclosure will support a finding of fraudulent intent under the unique circumstances of a given case.50 Upon the evidence presented, it is the opinion of this Court that debtor intentionally made false oaths in connection with this case pursuant to section 727(a)(4)(A). As set out above, Heinz made numerous omissions and improper disclosures in her bankruptcy schedules regarding funds held her in checking accounts, gross income, payments to insiders, and additional business income. While none of these omissions or improper disclosures alone may have supported a finding of fraudulent intent, the Court finds that the repeated pattern of omissions and disclosures does support such finding. The Court is very mindful that this is not the debtor’s first bankruptcy filing. Indeed, the debtor has filed five petitions which have resulted in two Chapter 7 discharges, one Chapter 11 confirmation order, and one case dismissed for failure to make payments. Given the debtor’s familiarity with the bankruptcy process, the Court simply finds it difficult to believe that each of the omissions and improper disclosures were inadvertently made. Further, the Court is mindful that Heinz is a sophisticated business woman who holds a college degree in accounting. Indeed in the year leading up to filing her current petition, Heinz held herself out as a public accountant with “over 21 years experience in Accounting and running a small business;” and further stated that she specializes in “[s]mall business accounting,” and “Quickbooks set up, coaching, and support.”51 The Eleventh Circuit *770has recognized that a person’s education and sophistication is a factor to be considered when determining intent or reliance.52 Under the circumstances of this case given the numerous omissions and improper disclosures, debtor’s familiarity with the bankruptcy process, the debtor’s education as an accountant, business experience and after having the opportunity to examine the debtor’s credibility on the witness stand, the Court finds that Heinz made the false oaths and statements knowingly and with fraudulent intent.
Finally, when determining whether a false oath will bar a debtor’s discharge, the test for materiality is whether the false statement was related to the debtor’s business transactions or estate, or concerned the discovery of assets, business dealings, or existence and disposition of debtor’s property.53 In the instant case, each of the above false oaths unquestionably related to the debtors business and bankruptcy estate. Therefore, the final element of section 727(a)(4)(A) is satisfied. Accordingly, the debtor’s discharge is also due to be denied under section 727(a)(4)(A).
A separate order will be entered consistent with this opinion.
Done and Ordered.
. Plaintiffs’ Ex. 23.
. Plaintiffs' Ex. 23.
.Plaintiffs' Ex. 22B.
. Plaintiffs’ Ex. 18.
. Plaintiffs’ Ex. 1.
. ECF No. 22.
. ECFNo. 33.
. See Steger v. General Elec. Co., 318 F.3d 1066 (11th Cir.2003) (issues raised and discussed at length at pretrial were tried by express or implied consent of parties).
. United States v. Krause (In re Krause), 367 B.R. 740, 764 (Bankr.Kan.2007).
. Id.
. Id.
. Id.
. Id.
. Belmont Wine Exchange, LLC v. Nascarella (In re Nascarella), 492 B.R. 327 (Bankr.M.D.Fla.2013).
. Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314, 319 (5th Cir.2005).
. Dickinson v. City of Huntsville, 822 So.2d 411, 416 (Ala.2001); Wood v. Shell Oil Co., 495 So.2d 1034, 1036 (Ala.1986); Jackson v. Searcy, 628 So.2d 887, 889 (Ala.Civ.App.1993) ("for an agency relationship to exist, there must be a right of control by the principal over the agent”).
. Cobb v. Union Camp Corp., 786 So.2d 501 (Ala.Civ.App.2000), rev’d on other grounds, 816 So.2d 1039 (Ala.2001).
. Dickinson v. City of Huntsville, 822 So.2d 411, 416 (Ala.2001).
. The parties agreed at trial that the issue of bonding was not relevant to the Lioce project.
. Taylor v. Wood (In re Wood), 245 Fed.Appx. 916, 2007 WL 2376788, at *1 (11th Cir.2007).
. Sears v. United States, 533 Fed.Appx. 941, 945-46, 2013 WL 4426516, *3 (11th Cir.2013).
. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
. Hoffend v. Villa (In re Villa), 261 F.3d 1148, 1151 (11th Cir.2001).
. Hoffend v. Villa (In re Villa), 261 F.3d 1148, 1151 (11th Cir.2001).
. Id. at 1152.
. Agribank v. Gordon (In re Gordon), 293 B.R. 817, 822 (Bankr.M.D.Ga.2003); Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314 (5th Cir.2005)(explaining that the culpability of the indebted partner is irrelevant; even if the debtor is innocent of wrongdoing and had no knowledge or reason to know of the fraud, the debt is nondischargeable).
. Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314, 319 (5th Cir.2005) (citations omitted).
. In re Gordon, 293 B.R. at 822; Treadwell v. Glenstone Lodge (In re Treadwell), 637 F.3d 855 (8th Cir.2011) (explaining that imputation is proper only if the otherwise innocent debt- or knew or should have known of his partner’s fraud).
. Agribank v. Gordon (In re Gordon), 293 B.R. 817, 826 (Bankr.M.D.Ga.2003).
. Id.
. In re Villa, 261 F.3d at 1151 (emphasis added).
. City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 283 (11th Cir.1995).
. Sears v. United States (In re Sears), 533 Fed.Appx. at 945, 2013 WL 4426516, *3 (11th Cir.2013).
. Sears at 946.
. Sears v. United States (In re Sears), 533 Fed.Appx. 941, 947, 2013 WL 4426516, at *5 (11th Cir.2013).
. In re Rudolph, 233 Fed.Appx. 885, 888 (11th Cir.2007).
. Protos v. Silver (In re Protos), 322 Fed.Appx. 930, 2009 WL 977314, at *4 (11th Cir.2009).
. Protos v. Silver (In re Protos), 322 Fed.Appx. 930, 2009 WL 977314, at *4 (11th Cir.2009).
. Buckeye Retirement Co. v. Bishop (In re Bishop), 420 B.R. 841, 849 (Bankr.N.D.Ala.2009).
. Goldberg v. Lawrence (In re Lawrence), 227 B.R. 907 (Bankr.S.D.Fla.1998).
. Buckeye Retirement Co. v. Bishop (In re Bishop), 420 B.R. 841, 849 (Bankr.N.D.Ala.2009).
. Buckeye Retirement Co. v. Bishop (In re Bishop), 420 B.R. 841, 850 (Bankr.N.D.Ala.2009).
. Plaintiffs' Ex. 18.
. Keefe v. Rudolph (In re Rudolph), 233 Fed.Appx. 885, 889 (11th Cir.2007).
. Keefe v. Rudolph (In re Rudolph), 233 Fed.Appx. 885, 889 (11th Cir.2007) (quoting Swicegood v. Ginn, 924 F.2d 230, 232 (11th Cir.1991)).
. Keefe v. Rudolph (In re Rudolph), 233 Fed.Appx. 885, 889 (11th Cir.2007) (quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir.1984)).
. Keefe v. Rudolph (In re Rudolph), 233 Fed.Appx. 885, 889 (11th Cir.2007) (quoting In re Cutignola, 87 B.R. 702, 706 (Bankr.M.D.Fla.1988)).
. Protos v. Silver (In re Protos), 322 Fed.Appx. 930 (11th Cir.2009); Swicegood v. Ginn, 924 F.2d 230, 232 (11th Cir.1991).
. Phillips v. Epic Aviation (In re Phillips), 476 Fed.Appx. 813, 816 (11th Cir.2012).
. Protos v. Silver (In re Protos), 322 Fed.Appx. 930, 933 (11th Cir.2009).
. Plaintiffs’ Ex. 18.
. Phillips v. Aviation (In re Phillips), 476 Fed.Appx. 813 (11th Cir.2012) (finding debtor knowingly and fraudulently disregarded his interest and disclosure obligations where debtor was a sophisticated and education businessperson); AAFCOR, LLC v. Frank Spires, Spires & Assocs. (In re Shelton), 481 Fed.Appx. 520 (11th Cir.2012) (finding sophisticated lender relied on its independent investigation into debtor’s assets); Davenport v. Frontier Bank (In re Davenport), 508 Fed.Appx. 937 (11th Cir.2013) (finding bank reasonably relied on materially false financial statement given debtor's education, training and experience as a CPA).
. Chalik v. Moorefield, 748 F.2d 616 (11th Cir.1984); Phillips v. Aviation (In re Phillips), 476 Fed.Appx. 813, 819 (11th Cir.2012). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496530/ | Chapter 7
MEMORANDUM OPINION ON MOTIONS FOR TEMPORARY INJUNCTION AND MOTION TO APPROVE COMPROMISE
Michael G. Williamson, United States Bankruptcy Judge
Bankruptcy Code § 105 authorizes bankruptcy courts to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of’ the Bankruptcy Code. Here, at least three probate estates are pursuing proceedings supplementary against numerous third parties to collect over $1 billion in judgments the probate estates obtained against Trans Health Management, Inc. (“THMI”) (the Debtor’s wholly owned subsidiary) and Trans Healthcare, Inc. (“THI”) (THMI’s former parent). As part of those proceedings supplementary, the probate estates are seeking to recover hundreds of millions of dollars in assets they claim THMI fraudulently transferred to third parties. Throughout this case, the Chapter 7 Trustee has contended that THMI’s property is property of this bankruptcy estate. Recently, however, the Trustee entered into a proposed compromise with the probate estates to allow them to continue pursuing their proceedings supplementary in exchange for the probate estates agreeing that 90% of any recovery in those proceedings will flow through this bankruptcy case. This Court must now decide whether to enjoin the probate estates from pursuing their proceedings supplementary and approve the probate estates’ compromise with the Trustee.
Because the probate estates’ proceedings supplementary seek to recover property that conceivably belongs to the bankruptcy estate and could ultimately lead to inconsistent results by different courts considering the same claims, the Court concludes it is appropriate to enjoin those proceedings under § 105 and require the probate estates to litigate their claims in this Court. The fact that the probate estates — in an effort to avoid the possibility of inconsistent results — have agreed not to take any action in the proceedings supplementary until this Court first rules on the fraudulent transfer (and other) claims filed in this Court does not change the Court’s analysis. Nor does the fact that the probate estates have agreed — as part of their compromise with the Trustee — that 90% of any recovery in the proceedings supplementary (and other proceedings) would flow through this bankruptcy estate.
Accordingly, the Court — for the reasons set forth in more detail below-will enjoin the probate estates from pursuing any proceedings supplementary (or other collec*774tion efforts) involving property that is arguably property of the estate because those proceedings could conceivably have an effect on the administration of this bankruptcy estate. And the Court’s ruling on the request for injunctive relief negates the reasons the Trustee entered into the compromise with the probate estates (i.e., eliminating litigation over the scope of the automatic stay and property of the estate; allowing the Trustee to efficiently and economically pursue assets of the estate; and ensuring an equitable distribution of property of the estate). So the Court will — for the reasons set forth below- — disapprove the Trustee’s compromise with the probate estates.
Background
On December 27, 2012, the Chapter 7 Trustee filed an adversary proceeding seeking to enjoin Fundamental Long Term Care Holdings, LLC and Fundamental Administrative Services, LLC from pursing a declaratory judgment action they filed against THMI — the Debtor’s wholly owned subsidiary — in federal district court in New York.1 In their New York declaratory judgment action, the Fundamental entities sought a declaration that any fraudulent transfer or alter ego claims THMI may have against them were time barred and, in the event they were not, that they were not liable to THMI under either theory.2 According to the Trustee, THMI’s fraudulent transfer and alter ego claims (if any) potentially belong to the estate, and the Fundamental entities’ New York declaratory judgment action, in her view, was nothing more than a strategic move to keep this Court from considering and resolving the very issues the Trustee is obligated to investigate.3
The Court essentially agreed with that reasoning and granted the Trustee’s request for injunctive relief.4 The Fundamental entities later moved to dismiss the Trustee’s adversary complaint for injunc-tive relief since the Trustee had not joined the six probate estates, which had filed ■wrongful death (or negligence) claims against THMI and THI, as necessary and indispensable parties.5 Four of the probate estates had obtained judgments against THI and THMI totaling over $2 billion.6 And apparently three of the probate estates were pursuing proceedings supplementary against the Fundamental entities and other entities commonly referred to throughout this case as the “targets.” Two of the targets have removed portions of the proceedings supplementary to district court, where they remain pending. So the Fundamental entities argued that the probate estates must be included as part of the Trustee’s complaint seeking injunctive relief. The Court initially denied the Fundamental entities’ motion to dismiss based on the failure to join the probate estates (which are all creditors in this case).7
On reconsideration, however, the Court ruled in a September 12, 2018 Memorandum Opinion that any fraudulent transfer or alter ego claims — whether brought by the Trustee or the probate estates — should *775be litigated in this Court.8 The Court reasoned in its September 12 Memorandum Opinion that it would be appropriate to enjoin the probate estates from pursuing fraudulent transfer and alter ego claims outside of this Court for two reasons: First, it appears that the fraudulent transfer the probate estates were seeking to undo may concern property of the estate since the assets that were allegedly transferred belonged, at least in part, to THMI.9 And the Trustee has contended throughout this case that she has the authority to assert claims on THMI’s behalf. Second, even if the fraudulently transferred assets are not property of the estate, the probate estates’ pursuit of their fraudulent transfer claims detracts from the Trustee’s ability to administer the bankruptcy estate since the probate estates’ efforts in their proceedings supplementary could, among other things, lead to the possibility of inconsistent results.10 But since there was no adversary complaint seeking injunctive relief, the Court could not enjoin the probate estates from pursuing their proceedings supplementary.
The targets have now collectively filed three adversary proceedings seeking (i) a declaration that they are not liable under any fraudulent transfer or alter ego theory; and (ii) to enjoin the probate estates from pursuing their proceedings supplementary.11 The targets filed expedited motions for temporary injunctive relief in two of the adversary proceedings seeking to enjoin the probate estates from pursuing their alter ego and fraudulent transfer claims in state court.12 The probate estates object to entry of injunctive relief for two reasons.13
First, the probate estates argue that the targets do not have standing to seek in-junctive relief under § 105. According to the probate estates, only the Trustee or (in some cases) other creditors have the right to seek injunctive relief. They say there is no authority for the proposition that the target of a third-party avoidance action has standing to seek injunctive relief. Second, the probate estates say an injunction is unnecessary because they have addressed the concerns raised in the Court’s September 12 Memorandum Opinion.
Conclusions of Law14
Since standing is a threshold issue, the Court will address that argument first. The probate estates cite Collier on Bankruptcy for the general proposition that the “estate (or estate representative) is the entity with standing to seek an injunction under section 105.”15 The Court agrees with that as a general proposition. Putting aside the unique facts of this case, the Court would ordinarily be inclined to agree that “[sjtanding to bring an adversary proceeding to enjoin the actions of a third party rests with the debtor, debtor-in-pos*776session or the trustee, and not with the third party.”16 The argument by the probate estates, however, overlooks the plain text of § 105.
Under the plain language of § 105, this Court is authorized to enter an injunction on its own motion:
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.17
There is some authority for the proposition that the language in § 105 that a court is not precluded from entering certain orders sua sponte was added to provide a statutory basis for a bankruptcy court’s (otherwise inherent) civil contempt powers.18 But nothing in the plain language of the statute limits a court’s authority to issue orders under § 105 sua sponte to civil contempt orders. In fact, a number of courts have recognized that bankruptcy courts may issue injunctions under § 105 sua sponte.19
The only limitation on a bankruptcy court’s power to enter injunctive relief sua sponte is the requirement that the Court’s equitable powers may only be used to further the goals and provisions of the Bankruptcy Code. This Court has previously recognized in at least two instances in this ease that its powers under § 105 are not unfettered and that whatever equitable powers this Court has must be exercised within the confines of the Bankruptcy Code.20 Here, the injunctive relief sought by the targets furthers the goals and the provisions — and is within the confines — of the Bankruptcy Code.
As this Court explained in its September 12 Memorandum Opinion, the probate estates’ proceedings supplementary potentially (perhaps likely) interfere with property of the estate. At a minimum, they interfere with the Trustee’s administration of this case. It may very well be, as the probate estates contend, that the targets are seeking to enjoin them from pursing the proceedings supplementary out of their own self-interest — not any desire to pre*777serve the bankruptcy estate for the benefit of creditors. But that does not change the fact that the relief being sought is necessary to further the goals and provisions of the Bankruptcy Code. Because the relief sought is necessary to further the goals and provisions of the Bankruptcy Code, this Court may grant that relief sua sponte, and for that reason, the targets’ standing (or lack thereof) is immaterial.
There is one other preliminary issue that must be addressed before turning to the merits of the targets’ request for in-junctive relief: jurisdiction. The probate estates worry that this Court does not have jurisdiction over their proceedings supplementary (particularly to the extent those proceedings arise out of a judgment against THI) or a federal court civil rights claim they filed. The concern is one of delay. Since subject-matter jurisdiction can never be waived or conferred by agreement, the probate estates fear the targets will simply wait until after this Court resolves their federal and state court actions to raise an objection to this Court’s jurisdiction. The probate estates’ concern about this Court’s jurisdiction (understandably) confuses two issues: subject-matter jurisdiction and this Court’s authority to enter a final order or judgment.
The jurisdiction of bankruptcy courts is governed by the interplay of two statutes: 28 U.S.C. § 1334 and 28 U.S.C. § 157.21 Section 1334(b) provides that district courts shall have original — but not exclusive — jurisdiction over all civil proceedings (i) arising under title 11; (ii) arising in a title 11 case; or (iii) related to a case under title ll.22 Section 157, in turn, authorizes district courts to refer cases arising under title 11, as well as any proceedings arising in or related to a title 11 case, to the bankruptcy courts.23 All of the district courts in the United States have referred their bankruptcy jurisdiction to the bankruptcy courts. So this Court has jurisdiction over cases arising under title 11 and any proceedings arising in or related to a title 11 case.
The proceedings at issue fall within the Court’s “related to” jurisdiction. As the Eleventh Circuit Court of Appeals recently explained in In re Ryan, a proceeding is “related to” a title 11 case if it could conceivably affect the administration of the bankruptcy estate:
A dispute is “related to” a case under title 1 1 when its result “could conceivably” have an “effect on the estate being administered in bankruptcy.” The “proceeding need not necessarily be against the debtor or against the debtor’s property,” if it could affect the administration of the bankruptcy estate. “The key word in the Lemco Gypsum/Pacor test is ‘conceivable,’ which makes the jurisdictional grant extremely broad.” As the Supreme Court recognized in Celo-tex Corp., “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.”24
In Ryan, the Eleventh Circuit held that a dispute between two non-debtor entities over which of them owned certain business records relating to property sold as part of the bankruptcy estate fell within the bank*778ruptcy court’s “related to” jurisdiction because the dispute could impact the amount of money in the estate.25
Like in Ryan, the proceedings at issue here could conceivably affect the amount of money in the estate. At the heart of the probate estates’ supplementary proceedings is the claim that THMI fraudulently transferred hundreds of millions of dollars in assets to the targets. And the Trustee claims she has a right to pursue assets belonging to THMI. If THMI, in fact, fraudulently transferred assets to the targets and the Trustee is entitled to pursue those claims on THMI’s behalf, then the fraudulent transfer and alter ego claims being pursued by the probate estates could lead to hundreds of millions of dollars coming into the Debtor’s bankruptcy estate. The adversary proceedings filed by the targets likewise conceivably affect the amount of money in the estate because those proceedings seek a declaration that the targets are not liable under any fraudulent transfer, alter ego, or successor liability theories. Because the claims asserted by the probate estates and targets could conceivably affect the amount of money in the estate, there is little question this Court has jurisdiction over those claims.
The bigger question is whether the Court has the authority to fully adjudicate those claims. To some extent, 28 U.S.C. § 157 provides the answer to that question. Under § 157, bankruptcy courts are authorized to enter final judgments in core proceedings. With respect to non-core proceedings, bankruptcy courts are — absent consent of the parties — only permitted to enter proposed findings of fact and conclusions of law, which are then submitted to the district court for de novo review.26 The significance of the Supreme Court’s decision in Stern v. Marshal is that bankruptcy courts no longer have authority to enter final judgments in proceedings simply because they are designated as “core” by statute.
In Stem, the Supreme Court held that Congress exceeded Article Ill’s constitutional limitations by defining all counterclaims to a proof of claim as “core,” which effectively removed counterclaims based on common law from the jurisdiction of Article III courts. Stem left untouched bankruptcy courts’ authority to adjudicate other “core proceedings” identified in § 157(b)(2) — such as fraudulent transfer proceedings. This Court has previously explained that, in its view, nothing in Stem precludes it from entering a final judgment in fraudulent transfer cases.27 In any event, the Court need not determine at this point whether it has the constitutional authority to enter a final judgment in these proceedings because a lack of authority to enter a final judgment does not pose the same problems that lack of subject-matter jurisdiction would.
To begin with, unlike with subject-matter jurisdiction, parties can consent to the Court’s authority to enter a final judgment. The Court is aware there is now — ■ after Stem — a split among the circuits regarding a party’s ability to consent to a bankruptcy court fully adjudicating claims where it otherwise lacks the constitutional authority to do so. On the one hand, the Fifth,28 Sixth,29 and Seventh30 Circuits *779have held that parties cannot waive a bankruptcy court’s lack of constitutional authority to fully adjudicate a claim. On the other hand, the Ninth Circuit, in In re Bellingham Insurance Agency, has held that Article Ill’s guarantee of an impartial and independent federal adjudication is subject to waiver.31 The Supreme Court recently granted certiorari in Bellingham and presumably will resolve that uncertainty. Until the Supreme Court specifically rules otherwise, this Court is persuaded by Bellingham that the right to adjudication by an Article III court can be waived.
The Fifth Circuit (in In re Frazin), Sixth Circuit (in In re Waldman), and Seventh Circuit (in Wellness International Network v. Sharif) raise a compelling argument in support of the notion that Article Ill’s guarantee of adjudication by an impartial and independent court cannot be waived — namely, Article III safeguards structural principles (i.e., checks and balances and separation of powers), as well as personal rights, and it should not be left to individual litigants to protect the structural principles. But it appears that courts holding parties cannot waive a bankruptcy court’s lack of constitutional authority to enter final judgments in certain proceedings — perhaps with the exception of the Sharif Court — overlook one important point: the Supreme Court in Roell v. Withrow, although not directly passing on the constitutionality of the Federal Magistrate Statute, held that consent to proceedings before a magistrate judge (including entry of a final judgment by the magistrate judge) can be inferred from a party’s conduct during litigation.32
The Court can think of no reason why a litigant could consent to entry of a final judgment by a magistrate (Article I) judge but not by another Article I (bankruptcy) judge. The concern about safeguarding constitutional principles applies in either case. Either a party can consent to an Article I judge fully adjudicating a dispute or the party cannot. The fact that the power of a magistrate judge to fully adjudicate claims with the consent of the parties is conferred by statute does not provide a basis for distinguishing the two situations. After all, there is also statutory authority — 28 U.S.C. § 157 — for bankruptcy judges to adjudicate non-core proceedings with the consent of the parties. More important, if the concern is that individuals should not be permitted to waive the safeguard protecting principles of checks and balances and separation of powers, then Congress surely cannot waive those safeguards by statute. So the Court is comfortable — based on the Supreme Court’s decision in Roell — that the parties can consent to this Court’s authority to fully adjudicate the claims pending in the recently filed adversary proceedings.
Even if the parties could not consent, however, that does not mean a later determination that this Court lacks the constitutional authority to fully adjudicate the parties’ claims would render any ruling by the Court on the merits a nullity — as would be the case if the Court lacked subject-matter jurisdiction. If these proceedings are determined to be “non-core” proceedings, then 28 U.S.C. § 157(c)(1) specifically authorizes this Court to propose findings of fact and conclusions of *780law. And regardless of whether these proceedings are determined to be “core,” the district court — -by standing order — has directed bankruptcy courts to hear any proceeding and submit proposed findings of fact and conclusions of law where entry of a final judgment by this Court would be inconsistent with Article III.33
This Court is aware that the Seventh Circuit — in Sharif — recently held that bankruptcy courts cannot propose findings of fact and conclusions of law in cases where the proceeding is determined to be “core” but entry of a final judgment by this Court would be inconsistent with Article III. According to the Sharif Court, 28 U.S.C. § 157 only authorizes bankruptcy courts to propose findings of fact and conclusions of law in “non-core” proceedings. Under the Sharif Court’s analysis, this Court would be powerless to propose findings of facts and conclusions of law if these proceedings were later determined to be “core.”
This Court, however, believes the Sharif Court’s analysis is flawed. That analysis is premised on the idea that there is no statutory grant of authority for bankruptcy courts to propose findings of fact and conclusions of law in “core” proceedings where the court does not have constitutional authority to fully adjudicate the claims. But bankruptcy courts have been granted that authority: 28 U.S.C. § 1334 and 28 U.S.C. § 157 unquestionably grant this Court subject-matter jurisdiction over these proceedings — whether they are “core” or “non-core.” A grant of subject-matter jurisdiction, as the Supreme Court has repeatedly explained, is the power to hear cases.34
The power to “hear” cases must necessarily include the power to take any action that is otherwise not constitutionally or statutorily circumscribed. Otherwise, a grant of jurisdiction — absent additional statutory authorization to take specific acts in a case or proceeding — would be meaningless. Under the Sharif Court’s analysis, bankruptcy courts — despite having subject-matter jurisdiction — do not have any authority to take any action in “core” proceedings where entry of a final judgment by this Court would be inconsistent with Article III since there is no specific statute authorizing bankruptcy courts to do so. That cannot be the case. This Court’s subject-matter jurisdiction — conferred by 28 U.S.C. § 1334 and 28 U.S.C. § 157 — is sufficient authority for this Court (particularly in light of the district court’s standing order of reference) to propose findings of fact and conclusions of law regardless of whether these proceedings are determined to be “core.”
Having determined that this Court has jurisdiction over the adversary proceedings filed by the probate estates and targets and that any ruling on the merits will result in a final order adjudicating the parties’ claims (or, at worst, proposed findings of fact and conclusions of law to be submitted to the district court), the Court turns to the remaining arguments against entry of the requested injunction. Distilled to its essence, the probate estates’ argument is that an injunction is unnecessary because they are not seeking to ob*781tain property of the estate and there is no longer any concern of inconsistent results.
To their credit, it appears the Trustee and the probate estates have attempted to address the concerns raised by the Court in its September 12 Memorandum Opinion by entering into a proposed settlement agreement, which they have asked this Court to approve.35 Under the terms of that agreement, the probate estates are entitled to continue pursuing their proceedings supplementary in connection with their judgments against THI, as well as any independent claims they may have against THI and any third parties. The Trustee likewise retains her right to bring any avoidance (or other) actions she may have against the targets (or others). The entirety of any recovery by the Trustee on her claims naturally will flow through this estate and be distributed to creditors in this case. And almost all — 90% actually— of any recovery by the probate estates in their proceedings supplementary or on their independent claims will flow through the estate under the settlement agreement and be distributed according to the priorities established by the Bankruptcy Code.
As for the Court’s concern about inconsistent results, the probate estates say that is largely illusory now. They do acknowledge that multiple actions before multiple courts could lead to the possibility of inconsistent results, at least in theory. But they point out that nothing is scheduled to happen in the proceedings supplementary until after the trial in these proceedings, which is currently scheduled for September 22, 2014.36 In ease there is any doubt, the probate estates have offered to ask to continue any state court (or other) proceedings until after this Court rules at the conclusion of the trial in the adversary proceedings. That means this Court will rule before anything else happens in the other proceedings, and as a consequence, the probate estates say there is no danger of inconsistent results since this Court’s ruling will have preclusive (res judicata or collateral estoppel) effect.
While the Court certainly appreciates the efforts by the probate estates to address the Court’s concerns, the Court nevertheless concludes that an injunction is still necessary. The problem with the settlement agreement between the Trustee and the probate estates is that it skips one important step: it, in effect, deputizes the probate estates to recover property for the benefit of this bankruptcy estate without first determining whether the property is, in fact, property of the estate. Allowing the creditors to continue pursuing their proceedings supplementary would require the state (or other) courts to determine what constitutes property of the estate.
The problem, of course, is that this Court has exclusive jurisdiction over property of the estate and is best suited to determine whether property is, in fact, property of the estate.37 The key issue in deciding whether THMI’s property is property of the estate is whether the Debt- or and THMI should be treated as the same entity. One district court judge recently remanded an appeal of one of this Court’s prior orders in this case to make that very determination;38 another district court judge has apparently stayed her rul*782ing on a different appeal until this Court makes that determination.39 This Court does not, particularly in light of the district court’s remand order, believe it is appropriate to delegate the determination of what constitutes property of the estate to the state (or other) courts presiding over the probate estates’ proceedings supplementary.
Putting that issue aside, the Court still has concerns about the possibility of inconsistent results. The Court takes the probate estates at their word when they say there is nothing currently scheduled to take place in the proceedings supplementary before any trial in these adversary proceedings. The Court likewise takes them at their word when they say they would request a continuance or ask the other courts to coordinate their trial calendar around the trial in these adversary proceedings. And the other courts would likely grant that request. But this Court has no power to compel any court (state or federal) to stay their proceedings until this Court rules at trial. This Court only has jurisdiction over the parties. The only way to eliminate the possibility of inconsistent results, then, is to enjoin the probate estates from pursuing their proceedings supplementary. Besides, if nothing is going to happen in the proceedings supplementary until this Court holds its trial, then the probate estates are not harmed in any way by the requested injunction. Accordingly, the Court concludes it is appropriate to enter the injunctive relief requested by the targets, although it is important to clarify the scope of that relief.
Specifically, the Court understands the probate estates have filed a civil rights claim against some (maybe all) of the targets in these proceedings. Since that aetion does not involve the recovery of property of this estate, this Court has no basis for enjoining that action. It appears, however, that the probate estates’ civil rights claims may involve similar factual issues to those in these proceedings. So it is appropriate to direct the probate estates to request that the district court not schedule a trial in that action until after the trial in these proceedings. Otherwise, the probate estates are free to move forward with that claim. The probate estates are only enjoined from pursing their proceedings supplementary (or other collection efforts) that may implicate property conceivably belonging to this bankruptcy estate.
The only remaining issue with respect to the request for injunctive relief is whether the targets should be required to post a bond. The probate estates ask this Court to require the targets to post a bond or to enter some restrictions — similar to the “lock-up” restrictions this Court entered in In re Safety Harbor & Spa40— preventing the targets from dissipating their assets while these proceedings are pending. The Court understands the probate estates’ concern. But that concern does not — like it would in the typical case — arise because of the injunction. If this Court did not enter an injunction, and the probate estates were free to pursue their proceedings supplementary, they would face the same risk that the targets could dissipate their assets. Because the possibility that the targets could dissipate assets does not come about because of the injunction, the Court declines to impose any “lock-up” restrictions on the targets or require the targets to post a bond.
That leaves for consideration the Trustee’s recent compromise with the probate estates. The targets object to the *783proposed compromise principally for two reasons: First, they say the compromise is an end-run around this Court’s ruling in its September 12 Memorandum Opinion that any fraudulent transfer or alter ego claims must be litigated in this Court. Second, they say the Court does not have the authority to confer standing on the creditors to pursue any avoidance claims on behalf of the estate. The Court need not consider the targets’ first objection since it has ruled that the probate estates are enjoined from pursuing their proceedings supplementary outside of bankruptcy. So if the Court approved the compromise, the probate estates would only be free to pursue their claims in this Court. It appears, at first glance, that the only issue for consideration on the parties’ compromise is whether this Court can confer standing on the probate estates.
The targets, relying on Surf N Sun Apts., Inc. v. Dempsey,41 argue that the Bankruptcy Code does not vest bankruptcy courts with authority to grant standing to individual creditors to pursue fraudulent transfer (or avoidance) actions on behalf of the estate. According to the Surf N Sun Court, Bankruptcy Code § 548 “contains a singular grant of authority to the trustee to avoid fraudulent transfers of a debtor’s property for the benefit of all creditors,” and there is no exception to that singular grant of authority in extraordinary circumstances because a bankruptcy court cannot use its equitable powers under § 105 to contravene the plain and unambiguous terms of the Bankruptcy Code.42 The Trustee and probate estates rely on Judge Glenn’s decision in In re Jennings 43to support their claim that the Court can confer standing on the probate estates to pursue fraudulent transfer or alter ego claims on behalf of the estate.
As it turns out, the Court need not resolve that apparent conflict in the case law. Even if the Court concludes it has the authority to confer standing on the probate estates under extraordinary (or other) circumstances, it is not necessary to do so in this case. The Trustee raises three reasons for the Court to approve the compromise: (i) it eliminates litigation over application of the automatic stay and whether potential claims or causes of action are property of the estate; (ii) it allows the Trustee to collect assets of the estate and investigate the affairs of the Debtor and THMI as expeditiously as possible; and (iii) it would ensure an orderly and equitable distribution of any property of the estate. All of the reasons the Trustee offers for entering into the compromise have been resolved by the injunction this Court is entering.
Because the Court is enjoining the creditors from pursuing their proceedings supplementary outside of bankruptcy, there is no concern about the application of the automatic stay or conflicting decisions on what constitutes property of the estate. And without the settlement agreement, the Trustee can still pursue her claims economically and efficiently. The probate estates have already filed their adversary complaint, which the Trustee has intervened in.44 There is no reason why she cannot simply ride the probate estates’ coattails in that proceeding. Finally, any recovery in the adversary proceedings would necessarily be property of the estate and, therefore, subject to distribution under the Bankruptcy Code.
*784Conclusion
As counsel for one of the targets aptly put it, “the place is here, the time is now.” Ideally, all of the fraudulent transfer and alter ego claims should be heard in one forum. The bankruptcy court is suited for exactly that purpose. And that process has already begun. Moreover, one of the purposes of the bankruptcy court is to provide a centralized place for handling litigation related to the bankruptcy estate. Significantly, that is the forum the probate estates chose when filing this involuntary case. If parties want to litigate claims that conceivably affect property of the estate (such as claims over THMI’s assets), then those claims must be litigated in this Court. Accordingly, the Court will by separate order: (i) enjoin the probate estates from pursuing any proceedings supplementary or other collection efforts that could conceivably affect property of the estate; and (ii) deny the Trustee’s motion to compromise.
. That adversary proceeding is styled Scharrer v. Zack, et al., Adv. No. 8:11-ap-01198-MGW.
. Adv. No. 11-ap-01198, Adv. Doc. No. 1, Ex. 1.
. Adv. No. 11-ap-01198, Adv. Doc. No. 3 at ¶¶ 14, 34 & 41.
. Adv. No. 11-ap-01198, Adv. Doc. No. 20.
. Adv. No. 11-ap-01198, Adv. Doc. No. 25 at 13-16.
. Three of the judgments were entered pre-petition; the fourth judgment was entered post-petition.
. Adv. No. 11-ap-01198, Adv. Doc. No. 55.
. In re Fundamental Long Term, Inc., 500 B.R. 147 (Bankr.M.D.Fla.2013).
. Id. at 155-57.
. Id. at 156-59.
. This proceeding is one of the three filed by the targets. The remaining two adversary proceedings filed by the targets are styled: Fundamental Long Term Care Holdings, LLC, et al. v. Fundamental Long Term Care, Inc., et al., Adv. No. 8:13-ap-00929-MGW; and Ventas, Inc., et al. v. Estate of Juanita Amelia Jackson, et al., Adv. No. 8:13-ap-00958-MGW.
. Adv. Doc. No. 4; Adv. No. 13-ap-00929, Adv. Doc. No. 3.
. Adv. Doc. No. 20.
. This Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(b).
. Adv. Doc. No. 20 at ¶ 3 (citing 2 Collier on Bankruptcy, ¶ 105.03 at 105-36 (Alan N. Res-nick & Henry J. Sommers eds., 16th ed.)).
. In re Venegas Munoz, 73 B.R. 283, 285 (Bankr.D.P.R.1987).
. 11U.S.C. § 105(a) (emphasis added).
. 2 Collier on Bankruptcy, ¶ 105.02[1][c] at 105-10 (citing In re Matthews, 184 B.R. 594 (Bankr.S.D.Ala.1995); In re Duggan, 133 B.R. 671 (Bankr.D.Mass.1991); In re Stephen W. Grosse, P.C., 84 B.R. 377, 386 (Bankr.E.D.Pa.1988); In re Miller, 81 B.R. 669, 676-78 (Bankr.M.D.Fla.1988)).
. In re Ashford Hotels, Ltd., 235 B.R. 734, 740 (S.D.N.Y.1999) (explaining that the provision in § 105 authorizing bankruptcy courts to act sua sponte is an “omnibus provision phrased in such general terms as to be the basis for a broad exercise of power in the administration of a bankruptcy case”) (quoting In re Charles & Lillian Brown's Hotel, Inc., 93 B.R. 49, 54 (Bankr.S.D.N.Y.1988)); see also Vrabel v. Bronitsky (In re Vrabel), 2005 WL 6960238 (9th Cir. BAP 2005) (explaining that the bankruptcy court had authority on its own motion to enjoin a debtor’s spouse from filing for bankruptcy for 180 days, although the appellate court reversed the bar order because the debtor’s spouse had not been afforded due process); In re Obmann, 2011 WL 7145760, at *4-5 (9th Cir. BAP 2011) (recognizing that a bankruptcy court may issue injunctive relief on its own motion but reversing entry of the bankruptcy court order because it awarded a remedy not contemplated by the Bankruptcy Code).
. In re Fundamental Long Term Care, Inc., 500 B.R. 147, 155-56 (Bankr.M.D.Fla.2013); In re Fundamental Long Term Care, Inc., 2012 WL 4815321, at *8 n. 56 (Bankr.M.D.Fla. Oct. 9, 2012) (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988)).
. 28 U.S.C. §§ 157 & 1334(b).
. 28 U.S.C. § 1334(b).
. 28 U.S.C. § 157(a).
.Winchester Global Trust Co. v. Entrust NPL, Corp. (In re Ryan), 276 Fed.Appx. 963, 967 (11th Cir.2008) (citations and internal quotation marks omitted).
. Id.
. 28 U.S.C. § 157(c)(1) — (2).
. In re Safety Harbor Resort & Spa, 456 B.R. 703, 715-16 (Bankr.M.D.FIa.2011).
. Frazin v. Haynes & Boone, LLP (In re Frazin), 732 F.3d 313, 319-20 (5th Cir.2013).
. Waldman v. Stone, 698 F.3d 910, 917-18 (6th Cir.2012).
. Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 768-70 (7th Cir.2013).
. Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 567 (9th Cir.2012).
.Roell v. Withrow, 538 U.S. 580, 583, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003). The Seventh Circuit did cite Roell in its Sharif decision, albeit without much discussion.
. In re Standing Order of Reference Cases Arising Under Title 11, United States Code, Case No. 6:12-mc-26-ORL22, Doc. No. 1.
. Morrison v. Nat’l Australia Bank, Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010); Union Pac. R.R. Co. v. Brotherhood of Locomotive Engineers & Trainmen, 558 U.S. 67, 130 S.Ct. 584, 175 L.Ed.2d 428 (2009); Carlsbad Tech., Inc. v. HIF Bio, Inc., 556 U.S. 635, 129 S.Ct. 1862, 173 L.Ed.2d 843 (2009).
. Doc. No. 1217.
. Adv. Doc. No. 26 at ¶ 4(j).
. 28 U.S.C. § 1334(e); 11 U.S.C. § 541; In re Cox, 433 B.R. 911, 920 (Bankr.N.D.Ga.2010).
.The district court's remand order was filed in the main case. Doc. No. 1123.
. Grochal v. Scharrer, Case No. 8:12-cv-02858-MSS, Doc. No. 18.
. In re Safety Harbor Resort & Spa, 456 B.R. 703, 706-07 (Bankr.M.D.Fla.2011).
. 253 B.R. 490, 491 (M.D.Fla.1999).
. Id. at 492-94.
. 378 B.R. 687 (Bankr.M.D.Fla.2006).
. Adv. No. 8:13-ap-00893, Adv. Doc. No. 16. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496533/ | ORDER
BARBARA ELLIS-MONRO, Bankruptcy Judge.
A trial was held in this adversary proceeding on September 23, 2013 (the “Trial”). Present at trial were Plaintiffs managing member, Joe Voyles, and Lisa McCrimmon, Ed McCrimmon, and Leon Jones, as Plaintiffs counsel. Also present were Defendant, Richard Franck, and his counsel, William Mitchell. Plaintiff Flyboy Aviation Properties, LLC (“Flyboy” or “Debtor”) alleges in its Complaint that Defendant, Richard Franck (“Franck”), trespassed on Debtor’s property, causing interference with business operations and lost revenue. Franck responded and counterclaimed, arguing that he has an easement to use the airport, and seeking such a declaration from the Court.
In an order entered September 10, 2013, the Court bifurcated the issues raised in the complaint, such that the only matter heard at Trial is “what interest, if any, Defendant has in Debtor’s property, and the nature of that interest. The issues of trespass, damages, and fees will be tried at a later date.” [Doc. No. 35].
After carefully considering the pleadings, the evidence presented and the appli*814cable authorities, the Court enters the following findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
I. JURISDICTION
Bankruptcy courts are courts of limited jurisdiction whose jurisdiction is “derivative of and dependent upon” the three categories of proceedings set forth in 28 U.S.C. § 1334. See In re Toledo, 170 F.3d 1340, 1344 (11th Cir.1999). The matter presently before the Court concerns the Debtor’s largest, and possibly only asset, an interest asserted against that property as well as damage claims. The property at issue herein is property of the Debtor’s bankruptcy estate and subject to the Court’s exclusive jurisdiction under 28 U.S.C. § 1334(e). See In re Finney, 2008 WL 7874260 at *4-5, 2008 Bankr.LEXIS 3767 at *13 (Bankr.N.D.Ga.2008). Debtor states in its “Response to Defendant’s Motion to Remand” [Doc. No. 13] that the claims in this proceeding constitute core matters pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (K), and (O), and expressly consents to entry of a final order by this Court. In his “Brief in Support of Defendant’s Motion to Remand Case to Superior Court of Forsyth County” [Doc. No. 9], Defendant agrees that this proceeding is a core matter. Thus, the Court will enter a final order in this proceeding. To the extent the matters herein are non-core, given the agreement of the parties, the Court will enter a final order in this proceeding. See Seascape at Wrightsville Beach, LLC v. Mercer’s Enters., Inc. (In re Mercer’s Enters., Inc.), 387 B.R. 681, 685-686 (Bankr.E.D.N.C.2008).
II. FINDINGS OF FACT
A. Procedural Posture
This case was commenced in the Superi- or Court of Forsyth County as Flyboy v. Franck, No. 08-CV-0509, on March 5, 2008 (the “State Court Action”). [Doc. No. 1, Ex. 1]. Debtor is the owner of certain real property at 3747 Mathis Airport Drive, Suwanee, Georgia, out of which the Debtor runs a small private airport (the “Airport”). [Doc. No. 1, Ex. 2], Defendant Franck owns property in the neighborhood adjacent to the Airport, known as Mathis Airpark Subdivision (the “Subdivision”). The State Court Action arises out of Franck’s alleged trespass on Airport property, for which Flyboy sought an injunction. Franck counterclaimed, asserting an easement for use of the Airport property, seeking damages for restricting his use of the Airport, and recording a notice of lis pendens against the Airport. [Doc. No. 1, Ex. 6]. Flyboy filed its Chapter 11 bankruptcy petition on March 15, 2013 and removed the State Court Action to this Court as an Adversary Proceeding on March 20, 2013, pursuant to 28 U.S.C. § 1452(a).
Defendant’s “Motion to Remand” [Doc. No. 8] the Complaint back to the Superior Court of Forsyth County was denied [Doc. No. 18], and a hearing was held in the main case on Debtor’s Motion For Authorization To Sell Real Properties Free And Clear Of Liens, Claims, Encumbrances, and Interests (the “§ 363 Hearing” and the “Sale Motion,” respectively). [Main Case Doc. No. 46, 47]. By the Sale Motion, Debtor seeks to sell approximately sixteen acres of land comprised of the fourteen acre Airport and two acres of adjacent property located in the Subdivision (collectively, the “Airport Property”). After the conclusion of the presentation of evidence, the Court announced it would not rule on the Sale Motion without first determining what rights, if any, Franck has to use the Airport and/or the Airport Property. The evidence presented at the *815§ 363 Hearing was included, with consent of the parties, in the record on the Trial.
B. Facts
In the early 1980’s L.G. Mathis and Patrick McLaughlin began selling off lots in the Subdivision. [Franck Exhibits 10-14, Franck Exhibits are hereinafter referred to as “Ex. F-”]. A plat for the Subdivision was created in 1983 but was not recorded until 1995 or 1996. [Flyboy Exhibit 5, Flyboy Exhibits are hereinafter referred to as “Ex. FB -”]. Louis A. Musgrove, Jr. (“Musgrove”), was the predecessor in interest to Defendant, having purchased approximately 4.1 acres of land in the Subdivision in 1984 from L.G. Mathis and Patrick McLaughlin. [Ex. F 15; Ex. FB 1], Musgrove testified that before he purchased his property, he saw a plat map of the Subdivision which included the Airport. Musgrove testified that this plat was part of his incentive for purchasing property in the Subdivision. However, no plat was referred to in Musgrove’s deed and none was recorded at the time Mus-grove purchased his property.
In or around February, 1990, Musgrove completed construction of a hangar home, a building comprised of a top floor apartment and a hangar below. Musgrove accessed the Airport using Mathis Airpark Road, the road in front of his property, and the taxiway between the road and the Airport from at least 1989 through and including 2002 when he moved from the Subdivision. Musgrove used the taxiways, airport taxiways and runway on a regular basis during the time he owned property in the Subdivision without asking permission from the owner, C.J. Mathis. He also accessed the office at the Airport regularly to pay for gasoline purchases and for “hanging out for hangar flying” with other aviators. Musgrove had spent time at the office for these purposes since 1978. In addition, Musgrove jogged and walked on the Airport property while he lived in the Subdivision without seeking permission from C.J. Mathis. The Airport was a public Airport from the early 1960’s until 2001 when C.J. Mathis filed an application to convert the airport to a private airport. Musgrove testified that as a public airport, “pretty much anyone who wanted could come and go” from the Airport. In 2002, Musgrove rented the hangar home to Mr. Berndsen (“Berndsen”), who used the hangar to store an airplane and a disassembled project plane. Musgrove testified that he believed Berndsen used Mathis Airport Road and the taxiway between the road and the Airport from 2002 until Mus-grove sold his property to Defendant in March, 2004.
When Musgrove purchased his property in 1984, he received a document at closing titled “Addendum To Settlement Statement” (the “Addendum”), which states:
As part of the consideration of this purchase and sale, Sellers agree that Purchasers shall be allowed to join taxiways to airport taxiways of Mathis Airport and to have use of landing strip as long as Mathis Airport shall continue as an airport; however this shall not restrict Sellers’ right to sell said airport property as an airport or for other uses.
Purchasers agree that they will not operate an aircraft repair service on the subject property so long as an aircraft repair service is maintained at Mathis Airport.
This agreement shall survive the closing of this transaction.
[Ex. FB 2; Ex. F 17]. Musgrove believes he had an easement to use the taxiways (the private subdivision roads) and the Airport taxiways and runways based upon the easement granted in the Addendum, but did not consider his activities at the Airport office or walking/jogging on Airport *816property to be part of his easement. Mus-grove stated that he was exercising his rights in accordance with the Addendum when he taxied, landed and took off from the Airport.
Mr. and Mrs. McCrimmon moved into the Subdivision in 1992. The McCrim-mons purchased their property from a Mr. McGrath who had purchased property in the Subdivision in or about 1980. Mrs. McCrimmon testified that in 1992 there were planes using Mathis Airpark Road to taxi to the Airport. The McCrimmons received an easement from C.J. Mathis in 1992 when they purchased their property in the Subdivision. They subsequently received an easement from Debtor as well, and both easements were recorded. [Ex. F 5]. Walter and Alice Propheter, residents of the Subdivision since 1983, testified that residents, including Musgrove and Franck, regularly taxied on Mathis Air Park Road and onto the taxiways and runway at the Airport and that Mrs. Pro-pheter regularly walked on the taxiways.
In 1997, certain homeowners, including Musgrove, performed maintenance on Mathis Airpark Road by having a portion of the road/taxiway paved. The residents also cleared brash adjacent to the taxiway. Mr. Propheter and Mr. McCrimmon testified that the residents paid for paving work to be done in 1997 and Mr. McCrim-mon stated that all but two residents contributed funds for the road paving project. Mrs. Propheter testified that she saw neighbors doing cleanup work close to the Airport and a tractor parked between Mathis Airport Road and the Airport taxiway. Mrs. McCrimmon testified that the neighbors maintained Mathis Air Park Road and the sixty (60) foot right of way easement but not any of the runway. Mr. McCrimmon and Musgrove testified that neighbors did not do any work on Airport property. In contrast, Mr. Propheter testified that in 1999 brush was removed from the Airport property on or near the runway. Mr. Propheter did not participate in the clean up but testified that he saw the work being done.
In addition to the Addendum, sometime between 1989 and 1991, Musgrove signed a document entitled “Declaration of Covenants, Conditions Restrictions and Easements For Mathis Airport Subdivision” (the “Declarations”). [Ex. F 32], Other signatories to the Declarations included the developers of the Subdivision, L.G. Mathis and Patrick McLaughlin, and C.J. Mathis. It appears that not all of the residents of the Subdivision executed the Declarations because the McCrimmons’ predecessor in title, McGrath, did not sign the Declarations.
Musgrove understood that the Declarations were “never filed and made enforceable.” The Declarations reference two Exhibits that are not attached to the document and were never prepared. There were later versions of the Declarations that were generally acceptable to the residences of the Subdivision, but McLaughlin refused to sign a subsequent version of the Declarations. After the revised Declarations were drafted and were not signed by McLaughlin, McLaughlin fenced off part of a Subdivision road which prevented a resident from taxing his airplane to the Airport. This led to litigation that lasted twelve years to determine the residents’ ability to use the roads within the Subdivision including Mathis Airpark Road. [Ex. FB 18].
In November, 2007, McLaughlin and L.G. Mathis deeded the private roads in the Subdivision to Mathis Airpark Residence’s Association, Inc. (“MARA”). [Ex. FB 5; Ex. F 19]. The litigation over Mathis Air Park Road ended with the entry of a consent order on November 28, 2007, that provided in part,
*817Each owner of property and their successor in title bordering i.e. sharing a common boundary line with Air Park Road, also known as Mathis Air Park Road.... shall own fee simple title to the center of said Air Park Road which is adjacent and contiguous to said owner’s property... .Each owner of such property and their successor in title shall have easement for ingress and egress to such owners’ property, as necessary, over other such owners’ property and interest in said road....
[Ex. F 29]. Franck started MARA in 2007, approximately 21 days prior to MARA receiving the quit claim deed for the roads. Mrs. Propheter testified that currently the home owner’s association does maintenance on the road and mail boxes and that “everyone has the opportunity to join the association.”
Franck purchased the Musgrove property on March 30, 2004. [Ex. FB 1; Ex. F 16]. At that time, C.J. Mathis owned the Airport. [Ex. F 11, 12], Franck did not buy his property based on a recorded plat. He saw a plat prior to purchasing his property but could not identify the 1983 plat. For approximately a year and a half after the purchase, Franck continued to rent the hangar home to Berndsen. Berndsen had a plane and continued to access the Airport after Franck’s purchase of the Musgrove property. In 2005, Berndsen paid to use the Airport while he lived in the hangar home. [Ex. FB 89]. From 2004 to 2008, Franck had access to the Airport for the use of his plane, walking and biking; Franck never asked to use the Airport Property and was never questioned about his activities. However, since March, 2008 he has been blocked from using the Airport by Debtor.
After buying the Musgrove property, Franck purchased an additional piece of land that was annexed to the Musgrove property. [Ex. FB 3]. The combined parcel was subdivided and in May, 2005, Franck sold two of the four parcels to his brother, including tract # 4, which fronts Mathis Air Park Road. [Ex. F. 12, 13; FB 7, 9]. It is not clear what amount Franck was paid for these transfers. Franck built a house on his property around 2005-2006, and resided there until April of 2012. He then rented the house from April, 2012 through May, 2013. Franck currently lives in North Carolina. After selling the front tract of the combined property to his brother, Franck and his brother constructed a 60'x70' hangar on tract # 4. [Ex. FB 13].
Flyboy purchased the Airport Property on June 11, 2004. [Ex. F 23]. Franck asserts an easement to use the taxiways located on the Airport Property, the Airport runways and Mathis Airpark Road. Franck asserts that his easement arises either from prescription, necessity, implication, or express grant. Each of these theories is addressed below.
III. CONCLUSIONS OF LAW
Georgia law governs the determination of Franck’s interest in taxiways and runways on Debtor’s property. O.C.G.A. § 44-9-1 outlines the methods by which one can gain the right to access another’s property:
The right of private way over another’s land may arise from an express grant, from prescription by seven years’ uninterrupted use ... by implication of law when the right is necessary to the enjoyment of lands granted by the same owner.
O.C.G.A. § 44-9-1. In his various pleadings, Franck asserts numerous theories pursuant to which he gained the right to use Airport Property: easement by prescription, easement by necessity, an ex*818press grant, adverse possession, or by implication of a contract creating covenants, conditions, and restrictions on subdivision properties.1 For the reasons set forth below, the evidence presented establishes that Franck has an express easement as set forth in the Addendum.
A. Prescriptive Easement
Georgia law states with regard to prescriptive easements, “[wjhenever a private way has been in constant and uninterrupted use for seven or more years and no legal steps have been taken to abolish it, it shall not be lawful for anyone to interfere with that private way.” O.C.G.A. § 44-9-54. Georgia courts have developed and continually applied “four well known requirements” to determine if a party has obtained a prescriptive easement: “(1) that uninterrupted use of the crossing had continued for seven years or more; (2) that the width of the crossing did not exceed twenty feet; (3) that the width did not deviate from the number of feet originally appropriated; and (4) that [the prescriber] kept the crossing open and in repair for seven uninterrupted years.” Jackson v. Norfolk S. R.R., 255 Ga.App. 695, 695, 566 S.E.2d 415 (2002); McGregor v. River Pond Farm, LLC, 312 Ga.App. 652, 654, 719 S.E.2d 546 (2011). The acquisition and granting of prescriptive rights is viewed as a “harsh result for the burdened landowner,” so much so that the elements of the statute and common law requirements are strictly construed and claimant must establish all elements to prevail. Moody v. Degges, 258 Ga.App. 135, 137, 573 S.E.2d 93 (2002).
(i) Use for Seven Years
In order to establish a prescriptive easement, Franck must prove that adverse use has occurred for seven years or more. While Franck has not owned property in the Subdivision for long enough to satisfy that requirement, the time period required to establish a prescriptive easement can be tacked. “The only requirements are that the successive users have privity of title and that the use by the predecessor in title must have been adverse and must have met all the requirements for establishing a prescriptive easement.” Trammell v. Whetstone, 250 Ga.App. 503, 508, 552 S.E.2d 485 (2001). It is undisputed that Musgrove sold his property to Franck, establishing privity of title.
O.C.G.A. § 44-5-161 states that “[pjermissive possession cannot be the foundation of a prescription until an adverse claim and actual notice to the other party.” Indeed, “[w]hen the use of a private way originates by permission of the owner, prescription does not begin to run until the user notifies the owner, by repairs or otherwise, that he has changed his position from that of a mere licensee to that of a prescriber.” McGregor, 312 Ga.App. at 655-56, 719 S.E.2d 546; see also Norfolk S. Ry. Co. v. Dempsey, 267 Ga. 241, 242, 476 S.E.2d 577 (1996). Further*819more, Georgia Courts have found that, “[t]he fact that the prescriber never asked for permission and the property owner never objected to the activities is inadequate to establish a prescriptive easement.” McGregor, 312 Ga.App. at 656, 719 S.E.2d 546 (citing Douglas v. Knox, 232 Ga.App. 551, 552-53, 502 S.E.2d 490 (1998) (owner’s knowledge of and acquiescence in use of private way is insufficient to establish prescription)); see also Eileen B. White & Assoc. v. Gunnells, 263 Ga. 360, 362, 434 S.E.2d 477 (1993) (“owner’s acquiescence in the mere use of his road establishes, at most, a revocable license”). Georgia requires notice of “an adverse use, under claim of right, as distinguished from a mere permissive use.” Lopez v. Walker, 250 Ga.App. 706, 708, 551 S.E.2d 745 (2001) (citation omitted; emphasis in original). An adverse use is one that is distinct from permissive, in the common sense of the word, and is inconsistent with the notion of the true owner’s title. Hasty v. Wilson, 223 Ga. 739, 743, 158 S.E.2d 915 (1967).
Testimony at both the § 363 Hearing and the Trial was that there were no barriers between the Airport and those who wished to use it. Franck himself stated that he had no issues using the Airport before Flyboy installed a gate in 2008. The mere fact that C.J. Mathis, the owner of the Airport, did not expressly give Franck permission does not mean that Franck’s use was adverse. C.J. Mathis acquiesced to the use, and at the same time, neither Musgrove nor Franck gave Mathis notice that he intended his status to be anything other than as a licensee, or exercising rights pursuant to Musgrove’s express easement. Musgrove testified that he had an easement, and thus understood he had permission to use the Airport. Consequently, any use by Mus-grove was permissive pursuant to the Addendum. Further, Berndsen’s use was permissive as shown by the payments to Debtor. It was not until Flyboy revoked its permission that problems ensued, and since then, Franck has not been able to use the Airport.
(ii) Open and in Repair; Notice
Because the time period for the adverse claim of right to the taxiways and runway can only begin once the owner of the property has notice, the claimant must demonstrate that the owner of the Airport had notice of Musgrove’s attempt to gain a prescriptive easement. A claimant attempting to gain a prescriptive easement must show that they openly repaired the property, or otherwise gave notice of an adverse claim. Thompson v. McDougal, 248 Ga.App. 270, 271, 546 S.E.2d 44 (2001) (citing Eileen B. White & Assoc., 263 Ga. at 360-61, 434 S.E.2d 477). “The gist of the requirement as to repairs is not so much the repairs as the notice which is given by the repairs.” Norfolk S. Ry. Co., 267 Ga. at 242, 476 S.E.2d 577 (citing First Christian Church v. Realty Inv. Co., 180 Ga. 35, 178 S.E. 303 (1934)). However, “when performed with permission of the landowner, even repairs to a road are insufficient, standing alone, to provide notice of adverse use.... This is so because the repairs must provide notice of adverse use; and repairs by permission are not adverse and therefore not prescriptive.” McGregor at 655-56, 719 S.E.2d 546. Further, the repairs must be sufficient to establish that the claimant is exercising his claim contrary to the rights of the owner. See Moody at 139, 573 S.E.2d 93 (stating that mowing grass did not constitute sufficient notice of adversity as required for gaining prescriptive title); see also First Christian Church, 180 Ga. at 36, 178 S.E. 303 (finding that regularly sweeping a driveway, and on one occasion, removing a tree limb were not of such consequence that they *820could be construed as “substantial notice or repair”).
Franck’s testimony at the § 363 Hearing was that he had once volunteered to help with a “fair” of sorts to attract new Airport club members and business, and that he “pointed out” Airport code violations to County officials. [Ex. FB 22, 36]. Additionally, the evidence established that over 30 years the residents only performed repairs to Mathis Airpark Road and trimmed some brush that was not on the Airport property on two or three occasions. The only testimony that neighbors performed maintenance on the Airport Property came from Mr. Propheter, and was contradicted by the testimony of Mrs. Propheter, Mrs. and Mr. McCrimmon and Musgrove. Even if Mr. Propheter was correct that neighbors, on one occasion, cleared brush from the runway, this activity is not sufficient to provide notice.2 Thus, there was not sufficient evidence to establish that any repairs or maintenance were substantial enough to serve as notice to the Airport owner of an adverse claim.
(iii) Width of Easement
The third requirement to establish prescription is that the easement may not be wider than twenty (20) feet. The only evidence regarding the width of the Airport taxiways and Mathis Airpark Road came from certain plat maps that indicate that Mathis Airpark Road is sixty (60) feet wide, and testimony that the wingspan of an airplane used by Musgrove ranged from thirty-six to thirty-eight feet. [Ex. FB 5; F 21, 24]. There was no evidence presented on the width of the taxiway on the Airport property or the width of the Airport runway. Thus, the third element has not been proven.
(iv) No Deviation of Easement
The final requirement to gain a prescriptive way is to prove that the width of the easement has not deviated during the time of appropriation. There was no evidence presented that addressed this necessary element. Franck’s claim to a prescriptive easement fails because there is no evidence of notice of adversity, no evidence of seven years use after such notice of adversity and no evidence of the width of the taxiways and runways.
B. Easement by Necessity3
Defendant next argues that he has an easement by necessity, because the Airport property and the Subdivision property were once an entire parcel, which was divided into separate parcels and sold over time. [Ex. F 10-14]. Georgia law states that a right of private way by necessity can be acquired “by implication of law when the right is necessary to the enjoyment of lands granted by the same owner.” O.C.G.A. § 44-9-1. Georgia law recognizes an easement by necessity,
when the common owner sells the dominant estate first and retains the servient estate. The common owner is impliedly *821deemed to have granted an easement to pass over the servient estate. However, if the common owner sells the servient estate first ..., he has deeded everything within his power to deed and retains no easement in the servient estate. Therefore, when the common grantor subsequently deeds the dominant estate to a third party, the third party can obtain no higher interest than that of the grantor and receives no easement over the servient estate.
Burnette v. Caplan, 287 Ga.App. 142, 650 S.E.2d 798 (2007); OCGA § 44-9-1. See also Boyer v. Whiddon, 264 Ga.App. 137, 589 S.E.2d 709 (2003). Thus, Georgia law recognizes easements by necessity when a party “had no ingress to or egress from its own land except by way of the [easement].” Farris Const. Co., Inc. v. 3032 Briarcliff Rd. Assoc. Ltd., 247 Ga. 578, 277 S.E.2d 673 (1981). It is necessary to show that it is not a matter of convenience, but necessity, such that the owner of the dominant parcel has no way to reach his property but by traversing the servient parcel. Id.; see also Calhoun v. Ozburn, 186 Ga. 569, 571, 198 S.E. 706 (1938) (“[w]here a grantor conveyed land without providing means of egress and ingress, and the situation of the land was such as made it otherwise inaccessible, there was an implication that he had unintentionally omitted to convey a means of access. This necessary implication entitled the landlocked grantee to a way out to whatever public or private road furnished access to the premises”). Georgia courts have interpreted O.C.G.A. § 44-9^40 to provide for condemnation proceedings to establish private ways for landlocked parcels, to exclude the granting of a private way to property owners who have any other reasonable means of access to their property. See generally Blount v. Chambers, 257 Ga.App. 663, 572 S.E.2d 32 (2002) (finding that property owners were not entitled to condemnation of a private right of way when they had two alternative routes to access the land, even though their access to these routes were not legally enforceable and could terminate at some time in the future.).
Franck relies on the case of Hynes v. City of Lakeland, 451 So.2d 505 (Fla.Dist.Ct.App.1984), for the proposition that easements by necessity should apply to the necessary ingress and egress for airplanes. [Doc. No. 38]. The Appellant in Hynes leased the ground upon which an airplane hangar owned by Appellant was situated. The hangar was located on public airport property. The lease provided for the use of “ramps, runways, taxiways, and other facilities provided for aircraft and the public.” Hynes, 451 So.2d at 508. The Appellant’s property was “landlocked,” because use of roads and taxiways on airport property was the only way Appellant could access the leased property.
Although the Court believes that a Georgia court may agree with providing a way of necessity for airplanes given the holding in Pierce v. Wise, 282 Ga.App. 709, 639 S.E.2d 348 (2006), where the Court of Appeals acknowledged that transportation has changed over time and that this could require ingress and egress by means other than water, Hynes is clearly distinguishable from the situation here. In reversing the trial court’s grant of summary judgment, the Hynes court focused on the origins of easements by necessity and the policy of preventing the idleness of real property. The Court noted that most leases contemplate a specific use and that use of the property at issue was “intended to be used for aircraft storage, maintenance, flying instruction, and flying services.” Hynes, 451 So.2d. at 512. The policy of promoting the use of land was very important to the Court’s decision because without such an easement the uses contemplated by the lease would be frustrated and *822the land potentially rendered unusable. The Court concluded by encouraging the trial court, on remand, to consider “whether a refusal to recognize a ‘way of necessity’ renders the shut-in property (hangar #3) incapable of being beneficially used and enjoyed as contemplated by the.... lease.” Hynes, 451 So.2d. at 512.
A further important distinction between Hynes and the issue presented here is that the Florida statute construed in Hynes looks to “beneficial use or enjoyment” of the landlocked parcel, while the controlling Georgia statute and case law does not impose such a qualification on the necessity for the easement sought. Georgia law governing easements by necessity is strictly construed, and looks solely to the necessity of accessing such a landlocked parcel, and to the order in which such parcels are sold. See Moore v. Dooley, 240 Ga. 472, 473, 241 S.E.2d 232 (1978) (citing Wyatt v. Hendrix, 146 Ga. 143, 144, 90 S.E. 957 (1916)); Dovetail Props., Inc. v. Herron et al., 287 Ga.App. 808, 652 S.E.2d 856 (2007) (finding that “when an owner owns two adjacent parcels, sells one, and land locks the remaining parcel he or she owns, a private way of necessity cannot be obtained”).
The facts presented at trial do not comport with the Georgia requirements for an easement by necessity because Franck has ingress and egress to his property by use of driveways and roads not owned by Flyboy. There was no evidence presented that Franck’s property is incapable of being used and enjoyed without access to Flyboy’s property. Indeed Franck subdivided his property and built a “subdivision” house [Ex. FB 15] on one of his remaining two parcels. Clearly the land is not idle or unusable. As such, Franck’s argument of easement by necessity fails.
C. Easement from Covenants, Conditions, and Restrictions
Franck argues next that the Declarations signed by numerous Subdivision residents grants an easement to Franck’s predecessor in title, and then to Franck, to use the Airport and taxiways. [Ex. F 32], The Declarations were not signed by all owners of lots in the Subdivision as evidenced by the lack of signatures from the McCrimmon’s predecessor in title, and did not include exhibits A and B, referenced in the Declarations. Testimony at Trial was that the Declarations were the earlier of numerous drafts of an agreement that aimed to form a homeowners association that could take possession of and maintain the private Subdivision roads, in exchange for an easement that each lot owner could use to access the Airport. Musgrove, Franck’s predecessor, signed the Declarations, but testified that he did not think the document became enforceable because it was not recorded. The Declarations fail to create an enforceable easement as discussed below.
1. The Declarations Do Not Comply with the Statute of Frauds
Georgia law states that contracts which pertain to “the sale of lands, or any interest in, or concerning lands” must be in writing and signed. O.C.G.A. § 13-5-30. Because the Declarations provided for conveyance of the private roads and an easement, interests in land, it is subject to the Statute of Frauds. “To satisfy the Statute of Frauds, a contract for the sale of property must state a clear and definite description of the property.” White v. Plumbing Distribs., Inc., 262 Ga.App. 228, 230, 585 S.E.2d 135 (2003). The description need not be perfect, but must give adequate notice and a definite description of the land being transferred. To comply with Georgia law, such a de*823scription must “disclose[] with sufficient certainty what the intention of the grantor was with respect to the quantity and location of the land.... so that the identification is practicable.” Id. citing Swan Kang, Inc. v. Kang, 243 Ga.App. 684, 688, 534 S.E.2d 145 (2000), see also Plantation Land Co. v. Bradshaw, 232 Ga. 435, 440, 207 S.E.2d 49 (1974).
Parol evidence is admissible to show “precise locations and boundaries” of such land or clarify a vague description. White, 262 Ga.App. at 230, 585 S.E.2d 135; See also McClung v. Atlanta Real Estate Acquisitions, LLC, 282 Ga.App. 759, 762, 639 S.E.2d 331 (2006) (“if a contract contains even a vague description of the property’s location, that description will open the door to extrinsic evidence.... There must, however, be some indication within the contract itself of the location of the property”). In contrast, indefinite descriptions that make no mention of “size, shape, or location” are necessarily vague and fail to comply with the Statute of Frauds. Plantation, 232 Ga. at 440, 207 S.E.2d 49, see also Gold Creek SL, LLC v. City of Dawsonville, 290 Ga.App. 807, 660 S.E.2d 858 (2008). “The legal sufficiency of such a description is a question of law, to be decided by the court.” McClung, 282 Ga.App. at 762, 639 S.E.2d 331 (citing Field v. Mednikow, 279 Ga.App. 380, 383, 631 S.E.2d 395 (2006)).
In White v. Plumbing Distribs., Inc., the Plaintiff sought a declaration that a sales agreement to purchase an undeveloped tract of land was unenforceable because it lacked a sufficient description of the property, rendering the contract void under the Statute of Frauds. White, 262 Ga.App. at 228, 585 S.E.2d 135. The property in question was a nine acre parcel contained within a larger parcel subject to a “master plan” prepared by Defendant. Id. at 229, 585 S.E.2d 135. The master plan used physical features of the property that were depicted topographically as identifying information. Sketches overlaid on the master plan represented a parkway and commercial building locations. The sales contract identified the acreage and county in which the land was located and nearby highways, but referenced an attached “Exhibit A” for a further identification of the property, and an “Exhibit B” for more particular descriptions. While Exhibit A, a copy of the master plan, was attached to the sales agreement, Exhibit B, the legal description, was not a part of the agreement at the time it was executed.
The White court found that even if it was assumed that the property in question, the surrounding property, and the commercial properties identified in the master plan shared a common boundary, the master plan in Exhibit A was “devoid of any indicia upon which the parties might determine the metes and bounds of the [property insofar as these would be internal.” White, 262 Ga.App. at 230, 585 S.E.2d 135. Furthermore, this meant parties “were left with unfettered discretion to make judgment calls” as to the exact location of the internal boundary of the property, which would necessarily be based on a survey obtained after the execution of the sales contract. Id. As such, the agreement was void and unenforceable and could not be rehabilitated by parol evidence, because no document existed at the time the agreement was executed that could establish the location and boundaries of the property. Id.
The Declarations identify the original parcel of Subdivision land based on land lot numbers in the specific district of For-syth County, which is “more particularly described on that certain plat, copy of which is attached hereto marked ‘Exhibit A.’ ” [Ex. F 32], The Declarations also state those who signed the document had *824purchased lots in the “Mathis Airport Subdivision,” and are referred to as “Lot Owners” and that “the description of each Lot Owner’s separate property being as set forth on ‘Exhibit B.’ ” [Ex. F 32], However, no exhibits were attached to the Declarations and it is undisputed that neither Exhibit A nor B were in existence at the time the Declarations were executed. See Deposition of Larry Bryant, pg. 19, lines 2-5. Thus, even if these documents were prepared later, they would not provide a basis for determining the location of the property that was intended to be governed by the Declarations. The descriptions contemplated by Exhibits “A” and “B” did not exist, and there are no other keys in the Declarations to identify the Lot Owner’s properties4. The reference to the “Lot Owner’s separate property” is so vague and indefinite that it fails to disclose which parcels of land were intended to be included under the agreement by the drafter and signers, and as such, parol evidence is inadmissible to clarify what was meant by “Lot Owner’s separate property.” Because neither the plat nor the description of the Lot Owner’s property was included in the Declarations the Court cannot determine the location or size of the dominant or servient estates and thus, the Declarations are too vague to be enforced.
2. The Declarations do not Constitute a Valid Contract
Georgia law states that the essentials of a contract are as follows: (i) the parties must be able to contract; (ii) consideration; (iii) the parties must assent to the terms of the contract; and (iv) there must be a legal and operable subject matter. O.C.G.A. § 13-3-1. While there is no dispute as to the parties’ ability to contract or the legality of the subject matter, the Court cannot find that there was assent to the Declarations.
Debtor argues that the contract failed because there was a lack of consideration. The Court does not agree. “All that is required by the law for a contract to have the element of consideration is that the contract furnish a key by which the consideration may be ascertained.” 7 Ga. Jur. Contracts § 1:30 (citing Newell Recycling of Atlanta, Inc. v. Jordan Jones & Goulding, Inc., 317 Ga.App. 464, 731 S.E.2d 361 (2012)). The Declarations state that the Lot Owners were to form a Home Owner’s Association (the “HOA”), to which the Airport Owner’s could deed the private subdivision roads. The Declarations also state that the HOA would maintain the roads, and that an easement to use the Subdivision roads and Airport taxiways and runways would be granted to the Lot Owners. The grant of ownership of the roads and easement in exchange for agreed-upon maintenance of the roads is clearly the consideration upon which the contract is based. Thus, the contract does not fail for lack of consideration.
Even though there was consideration, the contract is still unenforceable because there was no meeting of the minds. “It is well settled that an agreement between two parties will occur only when the minds of the parties meet at the same time, upon the same subject-matter, and in the same sense.” Cox Broad. Corp. v. Nat’l Collegiate Athletic Ass’n, 250 Ga. 391, 395, 297 S.E.2d 733 (1982). Furthermore, “[w]hen parties to a contract.... know that they have different intents with respect to certain language before they *825enter into the contract, there can be no meeting of the minds upon the same subject matter and in the same sense and no agreement on that issue.” Id. at 737-738.
The undisputed testimony at Trial was that the Declarations were not the final form of the document; not all Lot Owners executed the Declarations and the document was never finalized or recorded. The subsequent drafts were not amendments to the document admitted at trial, but simply later drafts, demonstrating that not all parties agreed upon the previous terms. The HOA was not formed subsequent to the signing of the Declaration, and the private roads were not deeded to the residents as was evidenced by the later litigation on the very roads that were supposed to be the subject of the Declarations. While there was testimony that residents did perform maintenance on Mathis Airpark Road, they did so under their own volition, not pursuant to the Declarations. Accordingly, there was no contract formed because there was no assent to the terms of the proposed agreement.
D. Express Grant
Musgrove received the Addendum from L.G. Mathis in 1984 and Franck received the Addendum at the closing of his purchase of Musgrove’s property in 2004. On that basis, Franck argues that he has the same rights as Musgrove under the Addendum.
The Addendum created an appurtenant easement because it was “created to benefit the possessor of the land in his use of the land,” as opposed to an easement in gross, which is “a mere personal right in the land of another” Church of the Nativity, Inc. v. Whitener, 249 Ga.App. 45, 48, 547 S.E.2d 587 (2001) (citing Yaali, Ltd. v. Barnes & Noble, Inc., 269 Ga. 695, 697, 506 S.E.2d 116 (1998); and Stovall v. Coggins Granite Co., 116 Ga. 376, 378, 42 S.E. 723 (1902)). The easement is appurtenant and “runs with the land,” because it was executed to benefit the owner of the Musgrove property.5
The rules of contract construction and interpretation apply to express easements. National Hills Exchange, LLC v. Thompson, 319 Ga.App. 777, 778, 736 S.E.2d 480 (2013). In interpreting an easement, courts are directed to look at, “the whole deed, the contract, the subject-matter, the object, the purpose, the nature of restrictions or limitations, the attendant facts and circumstances of the parties at the time of making the deed, and the consideration involved.” Khamis Enters., Inc. v. Boone, 224 Ga.App. 348, 349, 480 S.E.2d 364 (1997). As is the case for contracts, parole evidence is not admissible unless an ambiguity exists on the face of the document. Once executed, an “[e]asement[ ] may only be terminated by operation of law or by the express terms of the deed granting the easement.” 1 Pindar’s Ga. Real Estate Law & Procedure § 8:28 (7th ed.), Khamis Enters., Inc., 224 Ga.App. at 348, 480 S.E.2d 364, see also Eagle Glen Unit Owners Ass’n, Inc. v. Lee, 237 Ga.App. 240, 514 S.E.2d 40 (1999).
Debtor argues that the Addendum is not effective because it states “[t]his agreement shall survive the closing of this transaction,” and that this language refers only to the Mathis/Musgrove closing. Because an appurtenant easement is transferred when the dominant estate is sold, even if the easement is not expressly mentioned in the conveyance, the Court does not agree with Debtor’s argument. See Church of *826the Nativity, Inc., 249 Ga.App. at 47, 547 S.E.2d 587 (citing O’Barr v. Duncan, 187 Ga. 642(2), 2 S.E.2d 82 (1939)); see also Eagle Glen Unit Owners Ass’n, Inc. v. Lee, 237 Ga.App. 240, 514 S.E.2d 40 (1999). Thus, the Addendum easement is a binding instrument through which Franck received an easement to use the Airport Property.
The Addendum is not unlimited, rather it states that the owner of the Mus-grove property has access to the Airport and use of the easement, “as long as Mathis Airport shall continue as an airport; however this shall not restrict Sellers’ right to sell said airport property as an airport or for other use.” [Ex. FB 2; F 17]. Although Georgia law does not favor the termination of easements, courts look to the intent of the parties and the plain language of the easement in determining its application. The language of the easement is clear that the grantor did not intend for the easement to continue in perpetuity, rather the grantor retained the ability to sell the Airport and to change the use of the Airport property. The language of the easement is clear that the easement will terminate if the Airport property is no longer used as an airport. Thus, once the Airport is sold for another use, Franck’s easement is extinguished by its express terms. See Weaver v. Henry, 222 Ga.App. 103, 473 S.E.2d 495 (1996); see also Kiser, 237 Ga. at 386-387, 228 S.E.2d 795 (explaining that a later deed which granted an original easement without the limiting language “could not free the easement from any conditions attached to the grant to it”).
Although Franck received the Addendum from Musgrove in 2004, it is undisputed that he did not record the Addendum until 2005, after Debtor purchased the Airport. [Ex. FB 2, Ex. F 17, Ex. F 23]. Franck argues that Flyboy had notice or should have had notice of his easement, such that it is bound by the Addendum. Thus, the Court must next consider whether Flyboy is subject to or took free of the easement because the Addendum was not recorded prior to Debtor’s purchase.
E. Notice of Express Easement
O.C.G.A. § 23-1-17 states that “[n]otice sufficient to excite attention and put a party on inquiry shall be notice of everything to which it afterwards found that such inquiry might have led. Ignorance of a fact due to negligence shall be equivalent to knowledge in fixing the rights of the parties.” Deljoo v. SunTrust Mortg., Inc., 284 Ga. 438, 668 S.E.2d 245 (2008). With respect to notice of easements, “[l]and previously burdened with an easement is not freed by a subsequent conveyance of the land unless the purchaser takes without notice of the easement and is a purchaser for value. Where the existence of physical facts is such as to give notice of the existence of an easement, a subsequent purchaser for value will be subjected to the easement.” Webster v. Snapping Shoals Elec. Membership Corp., 176 Ga.App. 265, 266-67, 335 S.E.2d 637 (1985) (citing Mathis v. Holcomb, 215 Ga. 488, 489-490, 111 S.E.2d 50 (1959); see also Hopkins v. Virginia Highland Assocs., L.P., 247 Ga.App. 243, 541 S.E.2d 386 (2000)). A question of fact arises when a court must decide, “[w]hether a purchaser of land.... had notice thereof at the time of purchase, or had notice of facts sufficient to put a reasonable man on inquiry” of an existing easement. Webster, 176 Ga.App. at 267, 335 S.E.2d 637, citing Rome Gas-Light Co. v. Meyerhardt, 61 Ga. 287(1) (1878). However, “when the easement being enjoyed is open and observable to any reasonably prudent person, the question of notice is not one of fact but one of law.” Webster, 176 Ga.App. *827at 267, 335 S.E.2d 637 (citing Joel v. Publix-Lucas Theater, 193 Ga. 531, 542, 19 S.E.2d 730 (1942)).
Whether a bona fide purchaser has notice of an unrecorded easement will depend upon the degree of obviousness of the physical features of the property subject to the easement. Some features such as the existence of utility poles are so obviously a physical fact of the existence of an easement that a purchaser will be charged with notice as a matter of law. Webster, 176 Ga.App. at 267, 335 S.E.2d 637. Similarly, the existence of roads generally provides notice of an easement. See, e.g.: Mize v. McGarity, 293 Ga.App. 714, 718-19, 667 S.E.2d 695 (2008) (a clearly labeled mailbox at the end of the driveway for the owners of each of three lots, a locked gate and a road provided notice of an easement); Reece v. Smith, 265 Ga.App. 497, 499, 594 S.E.2d 654 (2004) (finding that the existence of a an old road stretching across a property, even though “eroded in places because of reduced use and maintenance” with “continued occasional use ... remained a visible physical features across the property at issue” was ample evidence of an easement). More obscure features may provide notice as well. See Hopkins, 247 Ga.App. at 246, 541 S.E.2d 386 (an unusual box on property labeled “Sanitary Sewer Clean Out” created a question of fact regarding notice).
In contrast, a feature that at one time was obvious, but over time has become obscure does not constitute notice of an easement. Parrott v. Fairmont Dev., Inc., 256 Ga.App. 253, 568 S.E.2d 148 (2002). In Parrott, Plaintiff purchased a shopping center serviced by a water line that ran across the property purchased by Defendant. The water line included a portion of a six inch PVC pipe, which protruded from the ground. By the time Defendant purchased the property, it was like a “jungle,” such that neither the surveyor nor the engineer who inspected the property saw the pipe. In addition, upon inquiry by the engineer, city officials said there was no easement. Thus, inspection and due diligence did not reveal the pipe or the waterline easement. Because no “open and visible indications” of such an easement were present and due diligence did not uncover the waterline, Defendant took free of Plaintiffs asserted easement.
It is undisputed that Franck did not record the Addendum until after Debtor purchased the Airport Property. However, lack of recordation is not the sole test to determine if Flyboy bought the property subject to the easement. Flyboy will be subject to the easement if there was visible evidence on the land itself that provided notice.
At the time Flyboy purchased the Airport, there was a taxiway between Mathis Air Park Road and the Airport and hangars on three adjacent properties. [Ex. F 3, 4], Specifically, there was a hangar-home on Franck’s property, the McCrim-mon’s hangar and one large hangar and 3 T-hangars on what was referred to as the Durham property. [Ex. F I], In addition, Debtor’s principal admitted that he had heard the Subdivision called Mathis Air-park Subdivision and had seen planes taxi on Mathis Airpark Road. While an inspection of the real estate records would not have revealed Franck’s express easement, an inspection of the property revealed three lots that contained structures for housing planes and the taxiway between the Subdivision and the Airport. When these features are considered along with Debtor’s knowledge that planes were taxied on Mathis Air Park Road and that the area was known as an Airpark there were sufficient visible indications to provide notice to Flyboy of the Addendum easement. These physical features and knowledge *828were sufficient to require inquiry by Debt- or. Debtor’s principal testified that he did not ask C.J. Mathis about easements and Debtor’s investigation was limited to a title search. Given the obvious features of the land and the Debtor’s knowledge this inquiry was not sufficient and Debtor took the Airport Property subject to the Mus-grove-Franck easement.
IV. CONCLUSION
Franck seeks to expand the easement granted in the Addendum though various theories all of which fail. Franck received an express easement from Musgrove that allows use of the Airport Property until such time as the Airport is no longer used as an airport. The grantor’s intent in the Addendum is clear, to reserve for himself the ability to sell the property and/or change the use of the Airport and terminate the Addendum easement. Because of the obvious physical characteristics of the taxiway and adjacent properties, Debtor was on notice and is bound by the Addendum, notwithstanding the lack of recordation of the Addendum prior to Debtor’s purchase of the Airport.
. Defendant argues in his reply brief that he alternatively may have acquired an easement by adverse possession. O.C.G.A. § 44-5-161 states, "(a) In order for possession to be the foundation of prescriptive title, it: (1) Must be in the right of the possessor and not of another; (2) Must not have originated in fraud [ ]; (3) Must be public, continuous, exclusive, uninterrupted, and peaceable; and (4) Must be accompanied by a claim of right, (b) Permissive possession cannot be the foundation of a prescription until an adverse claim and actual notice to the other party.” Further, O.C.G.A. § 44-5-163 states that a period of 20 years of adverse possession will confer good title. Franck did not argue this theory at trial, but an assertion of adverse possession fails for various reasons: there was no testimony that Franck gave notice of his claim of adverse possession, and testimony was that numerous planes used the airport, negating a finding of exclusivity.
. Nor would it be sufficient to convert a license to an easement since there was no evidence of funds spent on Airport property. See Lowe’s Home Ctrs., Inc. v. Garrison Ridge Shopping Ctr. Marietta, GA., L.P., 283 Ga.App. 854, 643 S.E.2d 288 (2007) (finding that a licensee must expend funds on the servient estate to convert license to easement), see also Decker Car Wash, Inc. v. BP Prods. N. Am., Inc., 286 Ga.App. 263, 267, 649 S.E.2d 317 (2007).
. In his Motion for Summary Judgment, Franck alternatively argues that he has an easement by implication. [Doc. No. 1, Ex. 54], In Georgia, an implied easement is classified as an easement by necessity, and arises "[w]here a landowner sells part of his land which is accessible only across the remaining land.” 1 Pindar's Ga. Real Estate Law & Procedure § 8:20 (7th ed.).
. If the plat and/or the description of the lot owner's properties were in existence at the time the Declarations were executed, the reference in the Declarations could have allowed incorporation of the descriptions into the document. See Chicago Title Ins. v. Investguard, Ltd., 215 Ga.App. 121, 449 S.E.2d 681 (1994).
. See Kiser v. Warner Robins Air Park Estates, Inc., 237 Ga. 385, 228 S.E.2d 795 (1976) (explaining that an easement can only be used in connection with the estate to which it is appurtenant). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496534/ | ORDER GRANTING MOTION FOR AUTHORIZATION TO SELL REAL PROPERTIES FREE AND CLEAR OF LIENS, CLAIMS, ENCUMBRANCES AND INTERESTS
BARBARA ELLIS-MONRO, Bankruptcy Judge.
This matter came before the Court for consideration of Debtor’s “Motion for Authorization to Sell Real Properties Free and Clear of Liens, Claims, Encumbrances, and Interests” (the “Motion”), [Doc. No. 46], the objections to sale by Richard Franck, Oliver Walter Propheter, Ken Franck, and Mathis Airpark Residences Association (“MARA”), and Debt- or’s responses thereto. [Doc. No. 50, 60, 71, 72, 76, 77, 81, 82, 83]. The Court held hearings on August 15 and 16, 2013, to consider the objection of Richard Franck, and on October 15, 2013 (collectively, the “Hearing”), to consider the additional objections filed by Ken Franck, Oliver Walter Propheter and MARA. A trial was also held in the related adversary proceeding on September 23, 2013, captioned Flyboy Aviation Properties, LLC v. Franck, Adv. Pro. No. 13-5111 (the “Adversary”), to determine what interest, if any, Richard Franck has in Debtor’s property.
Present at the Hearing were Plaintiffs managing member, Joe Voyles and counsel for the Debtor, Edward McCrimmon, Lisa McCrimmon, Leon Jones and Leslie Pi-neyro. Also present were objecting parties Ken Franck, Richard Franck (individually and as president of MARA), Oliver Walter Propheter, and their counsel, William Mitchell. After carefully considering the pleadings, the evidence presented and the applicable authorities, the Court enters the following findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
1. Background
Debtor proposes to sell two pieces of real property: a 14.07 acre parcel located at 3747 Mathis Airport Drive, comprised of Mathis Airport (the “Airport”), and a 1.99 acre parcel adjacent to the Airport on which there are several airplane hangars, (the “Subdivision Property” with the Airport, the “Property”). [Ex. D^4, 5].1 The proposed buyer, JEH Homes, LLC (“JEH Homes”), has offered the Debtor $90,000 per acre for the Property for a total purchase price of $1,446,147. JEH Homes proposes to turn the Property into a planned residential subdivision, razing the Airport and its facilities. The purchase price is the best offer Debtor has received in the last three and one-half years, although it is not sufficient to pay the two mortgages on the Property.2 Debtor be*832lieves the offer represents the best price available for the sale of the Property and is in the best interest of the estate and its creditors.
Through the Motion, Debtor seeks entry of an order authorizing the sale of the Property free and clear of all liens, claims, encumbrances, and interests, and to disburse the sales proceeds as follows: 6% sales commission to Debtor’s Broker, customary closing costs, and then all net proceeds less a $35,000 “carve-out” for the bankruptcy estate, to Gwinnett Community Bank to the extent of its secured claim and the remainder, to the estate of Claudy Mathis. [Doc. No. 75]. Each of the individuals who have objected to the sale (the “Individual Objectors”), assert that they hold easements to use the Airport taxiways and runways and, argue that Debtor cannot sell the Property free of their interests. MARA objects to the sale to the extent that JEH Homes would use Mathis Air Park Road, the private road through the Subdivision3, without permission, burdening the residents of the Subdivision and trespassing on private property. [Doc. No. 77],
The parties agreed that all evidence submitted at each of the August 15 and 16 hearing, and the September 23 trial would be included in the record for the final hearing on the Motion held on October 15. The parties presented additional testimony and documentary evidence at the October 15 hearing.
This Court has jurisdiction to consider the Motion and the relief requested therein pursuant to 28 U.S.C. §§ 157 and 1334 and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (N). Venue is proper pursuant to 28 U.S.C. § 1409(a).
II. Facts
L.G. Mathis owned, in whole or in part, Mathis Airport until 1990 when he sold his remaining one-half interest to his brother C.J. Mathis. [Ex. F-ll, F-12]. During the early 1980’s, L.G. Mathis and Patrick McLaughlin began selling off lots in the Subdivision adjacent to the Airport. [Ex. F-16, 26; 0-8]. As more fully set forth in the Trial Order, Oliver Walter Propheter (“Propheter”) purchased property in the Subdivision in 1983, Richard Franck purchased property in the Subdivision in 2004 and 2005, Ken Franck bought property from Richard in 2005, and Debtor purchased a Subdivision lot and the Airport in 2004. [Ex. D-4; Ex. F-16, 23; FB-3, 7, 9].
In November, 2007, McLaughlin and L.G. Mathis deeded the private roads in the Subdivision to MARA. [Ex. FB-5; Ex. F-19]. MARA was incorporated approximately 21 days prior to receiving the quit claim deed (the “Quit Claim”) for the roads and was created for that purpose. See also, Trial Order at 7-8. At the time MARA accepted the Quit Claim there were two lis pendens regarding the litigation over the use of the Subdivision roads (the “Road Litigation”) of record. [Ex. D-8, 9]. MARA, through its President, Richard Franck, had actual knowledge of the Road Litigation at the time the Quit Claim was delivered. After twelve years of litigation in the Road Litigation and four days after MARA accepted the Quit Claim, a consent order was entered by the Superior Court of Forsyth County on November 28, 2007 (the “State Court Order”). [Ex. D-10; Ex. F-29] There is a county road, Mathis Airport Drive, which provides the general public access to the Airport. *833Mathis Air Park Road begins on Mathis Airport Drive and ends in a cul-de-sac in the Subdivision. Mathis Air Park Road remains private. [Ex. 0-1; D-10, 12; F-29].
As discussed in the Trial Order, Richard Franck purchased property from Mus-grove and then purchased an additional half acre parcel of property from the executor of the Wilson estate. [Ex. 0-3; FB-3]. See Trial Order at 8. The half acre parcel was owned by “Pappy” Tate and then sold to Mr. Wilson, predecessor in title to Richard Franck and then, Ken Franck. [Ex. 0-2, 3], This parcel was combined with the Musgrove property and then subdivided into four lots. [Ex. FB-12], Lot # 4, which is now owned by Ken Franck, is made up of Musgrove property and the Wilson property and has a boundary on Mathis Air Park Road. [Ex 0-4; FB-7,12],
Exhibit 0-5, is a document titled “Addendum to Settlement Statement,” (the ‘Wilson Addendum”), which states:
As part of consideration of this purchase and sale, Seller agrees that Purchaser shall be allowed to join taxiways to airport taxiways of Mathis Airport and to have use of landing strip; and Purchaser agrees that they will not operate an aircraft repair service on subject property so long as an aircraft repair service is maintained at Mathis Airport.
[Ex. 0-5]. Richard Franck testified that he received a copy of the Wilson Addendum from Wilson’s son when he purchased the property, and that he recognized the signature of Patrick McLaughlin. The Wilson Addendum is signed by Patrick McLaughlin, and is signed by one witness and a notary. There are blanks for the signatures of L.G. Mathis and Tom and Pat Wilson as well as for additional witnesses, to sign, however the only signatory to the document is Patrick McLaughlin. The document is not dated, but does contain the following: “[a]s to Patrick E. McLaughlin, Sr., Signed, sealed and delivered in the presence of: this 23 day of August, 1983.” The Wilson Addendum identifies McLaughlin and Mathis as Sellers and Tom and Pat Wilson as Purchaser. The deed from Tate to Wilson conveying the property that became part of Lot # 4 is dated July 20,1998. [Ex. 0-2],
Propheter testified that he received an easement from L.G. Mathis and Patrick McLaughlin when he purchased his property in the Subdivision in 1983. Propheter relies upon the sales contract for the purchase of his property in the Subdivision (the “Sales Contract”) in asserting this easement. [Ex. 0-8]. Mrs. Propheter stated that she was in charge of maintaining the couples’ important documents which includes the Sales Contract, and that, the Sales Contract was maintained in a file at the Propheters’ home. [Ex. 0-8].
The Propheters are not pilots, have never owned a plane, do not have a hangar on their property and have never used the Airport property for flying. Since at least 1994, the Propheters have walked on the Airport property and used the Airport taxiways and runways for other recreational purposes. Mrs. Propheter is interested in taking flying lessons and Mr. Propheter has always had an intent to build a kit plane wanted to build one when he retires. The Propheter property has a ten foot driveway entrance and several large hardwood trees along the driveway. [Ex. D-13, 14,15]. The Propheter property would have to be physically altered by cutting down trees and perhaps reconfiguring the house and garage on the property in order to taxi a plane from the property to Mathis Air Park Road.
Debtor has sought to sell the Property for three and one-half years and has engaged a commercial broker on two occa*834sions in that effort. Based on that experience, Debtor has concluded it is not feasible to sell the Property as an airport. Several witnesses testified that the area has changed substantially within the last twenty years and that numerous large housing developments have been built nearby. Debtor has no relationship with JEH Homes and the contract to sell the property (the “Contract”) was negotiated at arms-length.
III. Conclusions of Law
Section 363(b)(1) of the Bankruptcy Code provides for sales of property outside the ordinary course while section 363(f) provides the basis for selling property free and clear of interests other than the estates’. Section 363(f) provides as follows:
(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
11 U.S.C. § 363(f). In order to satisfy the requirements of section 363(f), only one subsection must be satisfied. See 3 Collier on Bankruptcy ¶ 363.06, p. 363^46 (16th ed. 2013); In re Levitt & Sons, LLC, 384 B.R. 630, 647 (Bankr.S.D.Fla.2008); In re Gulf States Steel, Inc. of Ala., 285 B.R. 497, 506 (Bankr.N.D.Ala.2002) (citing In re WBQ Partnership, 189 B.R. 97 (Bankr.E.D.Va.1995)); see generally Reiter v. Sonotone Corp., 442 U.S. 330, 338-39, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979). Debtor seeks approval of the proposed sale free and clear of liens, claims, encumbrances and interests based upon subsections (3) and (5) with respect to the claims of Gwin-nett Community Bank, who asserts a first priority lien on the Airport Property and the estate of Claudy John Mathis, who asserts a second and fourth priority lien on the Airport Property.4 Gwinnett Community Bank consented to the proposed sale and, because the value of the liens, as determined by section 506 of the Bankruptcy Code, is being paid, section 363(f)(3) provides authority for the Debtor to sell the Property. See 3 Collier on Bankruptcy ¶ 363.06[4], p. 363-53 (16th ed. 2013); Levitt, 384 B.R. at 648 (citing In re Collins, 180 B.R. 447 (Bankr.E.D.Va.1995)).
With respect to the Individual Objectors, Debtor relies on subsection (4) of section 363(f) to argue that because the easement claims are the subject of a bona fide dispute Debtor can sell the Property free and clear of the asserted interests. More specifically, Debtor disputes that the Individual Objectors hold easements and also disputes that the Debtor is bound by them, if they exist, because Debtor asserts that it is a bona fide purchaser for value that took without notice of the asserted interests and thus took free of them.
The Individual Objectors assert that their rights are not subject to a bona fide dispute and that the Debtor cannot sell free of their interests. The Individual Objectors rely on Silverman v. Ankari (In *835re Oyster Bay Cove, Ltd.), 196 B.R. 251 (E.D.N.Y.1996), to assert that section 363(f) does not authorize sale free of an easement. In Oyster Bay, the Court noted that,
the order to sell “free and clear” has no affect on the dedication of the road and the storm drain, which are easements that run with the land. Clearly, 11 U.S.C.A. § 363(f) and Bankruptcy Rule 6004, which refer to the sale of land “free and clear” from these “interests,” are not intended to sever easements and other nonmonetary property interests that are created by substantive State law. Indeed, absent the consent of the owner of the easement or the easement being in bona fide dispute, the Bankruptcy Code does not even allow the Bankruptcy Court to authorize a sale of the property “free and clear” of an easement.
Oyster Bay, 196 B.R. at 255-56 (emphasis added). So it is possible to argue, as Debtor does, that if an easement is subject to a bona fide dispute then section 363(f)(4) provides authority to sell free of that interest. Notwithstanding, the Court advised the parties at the conclusion of the August 15-16, 2013, hearing that it would not rule on Richard Franck’s Objection prior to determining “what interest, if any, Richard Franck has in Debtor’s property.” [Case No. 13-05111, Doc. No. 10, 14]. Thus, the Court tried this issue on September 23, 2013, and entered the Trial Order in which the Court determined that Richard Franck did not have a prescriptive easement, an easement by necessity or implication or an easement created in the Declarations, but that Richard Franck did receive an express easement from Musgrove. This easement is not perpetual but is limited by its terms to the period in which the Airport is used as an airport. Consequently, Richard Franck’s interest in Debtor’s property does not impose a restriction on the possible sale of the Airport for use as something other than an Airport. See Trial Order.
Ken Franck and Propheter assert the same legal theories as Richard Franck in their objections to the sale.5 The Court will now address each of these objections as well as the MARA objection.
A. Ken Franck Objection
To the extent Ken Franck asserts an easement based upon his ownership of a portion of the former Musgrove property, his rights are the same as Richard Franck’s. As detailed in the Trial Order, the Musgrove easement is not perpetual, but is limited to the time when the Airport is used as an airport and the owner of the Airport is free to sell the property even if that sale results in a change in use of the property. Ken Franck’s arguments in favor of an easement by necessity or implication, an easement by virtue of the Declarations, or prescription6 fail as set forth in the Trial Order.
*836Ken Franck testified that, in addition to receiving an easement from his brother (on the prior Musgrove property), he received an express easement from Mr. Wilson, the predecessor in title to the half acre parcel. Ken Franck makes this argument in reliance on the Wilson Addendum. Consideration of the Wilson Addendum requires that the Court consider the general rules of contract construction and interpretation which apply to express easements. National Hills Exchange, LLC v. Thompson, 319 Ga.App. 777, 778, 736 S.E.2d 480 (2013). Thus, for the Wilson Addendum to constitute a contract, (i) the parties must have been able to contract; (ii) there must have been consideration; (iii) the parties must have assented to the terms of the contract; and (iv) there must be a legal and operable subject matter. See Trial Order at 20; O.C.G.A. § 13-3-1. “It is well settled that an agreement between two parties will occur only when the minds of the parties meet at the same time, upon the same subject-matter, and in the same sense.” Cox Broad. Corp. v. Nat’l Collegiate Athletic Ass’n, 250 Ga. 391, 395, 297 S.E.2d 733 (1982).
Much like the Declarations discussed in the Trial Order, the fact that all parties to the Wilson Addendum, especially those it is charged against, did not sign the document indicates that the parties did not assent to its terms or intend to convey the interest contemplated therein. See Trial Order at 21. Further, it is unclear how the Wilson Addendum relates to the sale of property from Tate to Wilson because the date McLaughlin signed the Wilson Addendum predates the conveyance from Tate to Wilson by almost 5 years. At the Hearing, Debtor objected to the authenticity of the Wilson Addendum. The Court overruled the objection because Richard Franck identified McLaughlin’s signature and indicated that he received the document (a copy) from the executor of Wilson’s estate. However, the document is not entitled to any evidentiary weight given the unexplained relationship to the sale to Wilson and lack of execution.
Furthermore, because an easement is an interest in land, it must comply with the Statute of Frauds and be “drawn and executed with the same formalities as a deed to real estate.” Lovell v. Anderson, 242 Ga.App. 537, 539, 530 S.E.2d 233 (2000); Dyer v. Dyer, 275 Ga. 339, 341, 566 S.E.2d 665 (2002); Barton v. Gammell, 143 Ga.App. 291, 293, 238 S.E.2d 445 (1977) (“an easement created by agreement constitutes an interest in land requiring a writing within the Statute of Frauds, and subject to the rules governing the construction of deeds”). This means that in addition to having a legal description sufficient to identify the land to which the easement pertains, and signatures of the party against which the grant is charged, an easement must be in a recordable form in compliance with deed laws. Id.; see also Central of Ga. R. Co. v. DEC Assoc., Inc., 231 Ga.App. 787, 790, 501 S.E.2d 6 (1998); O.C.G.A. § 13-5-30.; 1 Pindar’s Ga. Real Estate Law & Procedure § 8:17 (7th ed.). For a deed to be enforceable in Georgia it must be an “original document, in writing, signed by the maker, and attested by at least two witnesses.” O.C.G.A. § 44-5-30. Therefore, even if the easement did not fail because no contract was formed, it fails because it is not signed by both makers of the document, and is not attested by a second witness. As a result, the Wilson Addendum did not create an easement interest in the Airport Property. Thus, Ken Franck has no easement associated with the Wilson portion of Lot # 4, and his easement related to the Musgrove property terminates by its terms when the Airport is no longer used *837as an airport. Consequently, his objection to the proposed sale is overruled.
B. Propheter’s Objection
Propheter relies on the Sales Contract and the “Special Stipulations” contained therein to argue that he has an unlimited perpetual easement to use the Airport Property. [Ex. 08]. The sixth special stipulation states, “[s]eller agrees that purchaser shall be allowed to join taxiways to airport taxiways of Mathis Airport and to have use of landing strip.” The stipulation is one in a numbered list, signed by the sellers, L.G. Mathis and Patrick McLaughlin, and Propheter, as purchaser.
As discussed above, a deed to an interest in land must be an “original document, in writing, signed by the maker, and attested by at least two witnesses.” O.C.G.A. § 44-5-30. Notwithstanding, no “magic words” are necessary to convey an easement, the Court instead looks to the intent of the parties. Barton, 143 Ga.App. at 294, 238 S.E.2d 445; Dept. of Transp. v. Knight, 238 Ga. 225, 228, 232 S.E.2d 72 (1977); see also G.W. Featherston Min. Co. v. Young, 118 Ga. 564, 45 S.E. 414 (1903); Kiser v. Warner Robins Air Park Estates, Inc., 237 Ga. 385, 386, 228 S.E.2d 795 (1976).
The Special Stipulations which purport to create and convey an easement fail to do so because the document does not comply with O.C.G.A. § 44-5-30. [Ex. 0-8]. While the contract is in writing, signed by both the sellers and the purchaser of the property, and gives a “key” to identifying the property in question as required under the Statute of Frauds, it was not witnessed by two other individuals. See Trial Order pg. 17; O.C.G.A. § 13-5-30; White v. Plumbing Distribs., Inc., 262 Ga.App. 228, 230, 585 S.E.2d 135 (2003).7 Unlike the Addendum discussed in the Trial Order, there are no lines or space provided in the Special Stipulations for attesting witnesses or notaries. [Ex. F-17, 32]. Arguably, the lack of space for attesting witnesses indicates that the grantors did not intend for the Special Stipulations to constitute a recordable instrument for an interest in land. Because the document was not in recordable form, a transfer of an interest in land was not perfected. See Lovell v. Anderson, 242 Ga.App. 537, 539, 530 S.E.2d 233 (2000); Blue Ridge Apartment Co. v. Telfair Stockton & Co., 205 Ga. 552, 559, 54 S.E.2d 608 (1949) (“In order that a deed may be properly entered of record it must be executed in the presence of at least two witnesses, but as between the parties it is binding without witnesses”). What remains is an executed contract between McLaughlin, Mathis, and Propheter, which survives the closing, and is chargeable against the grantors, but not against subsequent purchasers. Hoover v. Mobley, 198 Ga. 68, 31 S.E.2d 9 (1944) (“In the absence of any witness whatever, a deed signed by the grantor is binding between the parties thereto”).
Further, even if the Special Stipulations conveyed an easement, because Propheter’s recorded warranty deed does not reference an easement and the Sales Contract was not recorded, there is no evidence in the deed record of the Special Stipulations. Thus, unless Flyboy received notice of the asserted easement through physical features of the Propheter property, Flyboy would not be subject to the asserted easement. See Webster v. Snapping Shoals Elec. Membership Corp., 176 Ga.App. 265, 266-67, 335 S.E.2d 637 *838(1985) (citing Mathis v. Holcomb, 215 Ga. 488, 489-490, 111 S.E.2d 50 (1959)); see also Trial Order at 24-26.
The evidence showed that at the time of Flyboy’s purchase, there was no hangar on the Propheter property and that the driveway was and is lined with large hardwood trees so that it is not possible to taxi a plane on the driveway. [Ex. D-13, 14, 15; Ex. 0-1; Ex. F-2, 3]. In addition, the Propheter house and garage are situated on the lot in such a way that a plane could not be taxied to the back of the property. In contrast to the physical evidence of use of the Airport on the former Musgrove property, there were no physical features of the Propheter property to put Flyboy on notice that Propheter asserted an easement to use the Airport Property. See Mize v. McGarity, 293 Ga.App. 714, 667 S.E.2d 695 (2008); Parrott v. Fairmont Dev., Inc., 256 Ga.App. 253, 568 S.E.2d 148 (2002).8 Accordingly, even if the Special Stipulations were sufficient to create an easement (which they were not), Flyboy took free of the asserted interest because the Special Stipulations were not recorded when Flyboy purchased the Airport for value and there were no physical features of the Propheter property that created a duty to inquire beyond the deed records. O.C.G.A. § 23-1-17; Parrott, 256 Ga.App. at 255, 568 S.E.2d 148 (2002) (citing Hopkins v. Virginia Highland Assocs., L.P., 247 Ga.App. 243, 541 S.E.2d 386 (2000)).
In his objection, Propheter also claimed an easement under the theory of easement by prescription, easement by necessity, and under the Declarations. See Trial Order. While the use of the Airport property occurred for the requisite time, there was no evidence whatsoever of any notice of adversity to the owners of the Airport. Testimony was that the Pro-pheters never asked permission to use the Airport property because they assumed they had a right to do so under their purported easement. Propheter testified that he paid for paving the “neck” of Mathis Air Park Road and assisted with road maintenance. Notwithstanding, as was the case for Musgrove, the record is completely devoid of any notice of an adverse claim, or evidence of the width of the easement or any deviation in the amount appropriated. See Trial Order at pgs. 12-14. As to necessity, it is undisputed that the Propheters have ingress and egress from their property. Finally, the Declarations, as discussed in the Trial Order, do not convey any interest to Lot Owners. Thus, the Propheter claim to an easement fails and the Propheter objection is overruled.
C. MARA’s Objection
MARA objects to the proposed sale “with an implied ownership or easement *839over the Private Road by the airport because it is neither fair nor equitable.” [Doc. No. 77]. MARA argues that the Airport portion of the Property has no rights to use Mathis Air Park Road such that the planned development of a “play field” on the Subdivision Property would require use of the private road which would amount to a “taking without due process of law.” Id. MARA further asserts that JEH Homes believes that the Airport property is entitled to use Mathis Air Park Road and that such use would be dangerous, as it frequently serves to taxi aircraft. MARA seeks a determination regarding ownership of Mathis Air Park Road. At the Hearing, MARA’s counsel argued that, by virtue of the Quit Claim, MARA owns Mathis Air Park Road such that Debtor cannot not sell any interest in it.
In support of its objection, MARA makes several arguments regarding the proceedings in the Road Litigation prior to entry of the State Court Order and relies on a brief filed by plaintiffs in that action and the Georgia Court of Appeals opinion in Durham et al. v. Mathis, 258 Ga.App. 749, 575 S.E.2d 6 (2002). Most of that opinion addresses a gravel road between what has been referred to as the McLaughlin and Durham lots and is not relevant to Debtor’s rights to, or in, Mathis Air Park Road. With respect to Mathis Air Park Road, the Court of Appeals held that the trial court’s summary judgment order holding that, (i) Mathis Air Park Road was a public road, and (ii) all property owners whose lots “fronts on” Mathis Air Park Road owned to the center of the road were not supported by undisputed facts in the record such that those two rulings were reversed and remanded for trial. Id. at 754, 575 S.E.2d 6. Thus, the Court of Appeals did not address the issue of an alleged taking. The State Court Order was entered by the Superior Court subsequent to the Durham v. Mathis decision.
A properly filed lis pendens puts the world on constructive notice of a pending suit, such that a prospective purchaser is subject to the court’s final determination of the issues presented. O.C.G.A. § 44-14-610; Baxter v. Bayview Loan Servicing, LLC, 301 Ga.App. 577, 584, 688 S.E.2d 363 (2009) (“[o]ne who purchases the property with notice of the lis pendens [] is then bound to the outcome of the pending litigation, even though they were not otherwise a party to it”); see also Boca Petroco, Inc. v. Petroleum Realty II, LLC, 292 Ga.App. 833, 835, 666 S.E.2d 12 (2008) (“[t]he doctrine imputed to all third parties [gives] constructive notice of the litigation and of the claims against property being asserted in the pleadings and [binds] third parties to the outcome”); see also Tinsley v. Rice, 105 Ga. 285, 31 S.E. 174 (1898). Furthermore, a lis pendens serves to give notice of the court’s “jurisdiction, power, or control [acquired] over property involved in a suit, pending the continuance of the action, and until the final judgment therein.” Coleman v. Law, 170 Ga. 906, 154 S.E. 445, 448 (1930); see also Boca Petroco at 837, 666 S.E.2d 12 (stating that, “[the] object [of] the keeping of the subject, or res, within the power of the court until the judgment or decrees shall be entered, and thus to make it possible to give effect to [its] judgments and decrees.”)
It is undisputed that MARA had actual and constructive notice of the Road Litigation and the claims asserted therein by virtue of the two lis pendens filed and its president’s actual knowledge of the Road Litigation. [Ex. F-18, D-8, D-9]. MARA accepted the Quit Claim three days prior to the parties entering into the consent order ending the Road Litigation. [Ex. F19, FB-5, F-29, D-10]. The State Court *840was aware of the Quit Claim and proceeded with trial notwithstanding MARA’s receipt of the Quit Claim. [Ex. FB-84]. Only after two days of trial did the parties to the Road Litigation enter into a consent order. This consent order was then entered by the Superior Court and became the judgment of that Court. MARA has not appealed or otherwise challenged the State Court Order. See O.C.G.A. § 9-11-60(f). Thus, the State Court Order is controlling because two lis pendens were properly filed at the time of the Quit Claim such that any transfer or purchase of the property, which was the subject of the Road Litigation, during the pendency of that case is subject to the State Court Order. The State Court affirmatively determined the parties’ rights in the State Court Order, and this Court will not review the State Court Order.9 Consequently, this Court will not make a determination of ownership of or rights to use Mathis Air Park Road vis a vis the Airport property (as distinct from the Subdivision Property)10 beyond that set forth in the State Court Order.
Further, a determination beyond the State Court Order is not necessary to rule on the Motion because the Debtor can only sell whatever interest it has; it cannot sell more. See In re Southwest Florida Heart Group, PA 342 B.R. 639, 644 (Bankr.M.D.Fla.2006) (citing, Connolly v. Nuthatch Assoc. (In re Manning), 831 F.2d 205, 207 (10th Cir.1987) (stating that “it is self-evident that the Trustee can only sell property of the estate”)); In re Proveaux, 2008 WL 8874286, 2008 Bankr.LEXIS 1327 (Bankr.D.S.C.2008); see also In re Brubaker, 443 B.R. 176, 181 (Bankr.M.D.Fla.2011) (“An elementary rule of bankruptcy.... is that the [ ] trustee succeeds only to the title and rights in the property that the debtor possessed”) (citing In re Raborn, 470 F.3d 1319, 1323 (11th Cir.2006)).
Finally, MARA objects to the proposed sale because of the potential use of Mathis Ail’ Park Road by JEH Homes. The potential use of Mathis Air Park Road by JEH Homes or residents of yet to be constructed homes does not provide a basis for the Court to sustain MARA’s objection, because such a ruling would amount to an advisory opinion. See Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, *841300 U.S. 227, 57 S.Ct. 461, 81 L.Ed. 617 (1937) (exercise of judicial power is limited to cases and controversies.... a justicea-ble controversy is ... distinguished from a difference or dispute of hypothetical or abstract character). The Eleventh Circuit discussed this principle in Hendrix v. Poo-nai, stating that “an abstract question ‘based on the possibility of a factual situation that may never develop’ ” is not a true controversy, for which a ruling would amount to an advisory opinion. Hendrix v. Poonai, 662 F.2d 719 (11th Cir.1981). At this point, all of the facts alleged are hypothetical. The property has not been sold. Redevelopment has not yet occurred. As a result, there is no particularized concrete injury occurring for the Court to review, and any opinion would amount to an impermissible advisory opinion. Since there is no relief that can be afforded MARA on its objection, it is overruled. Accordingly, it is now therefore,
ORDERED as follows:
1. The Motion [Doc. No. 46] is GRANTED to the extent set forth in this Order.
2. All objections not resolved or withdrawn are, for the reasons set forth herein, and in the Trial Order, overruled on the merits.
3. Adequate and sufficient notice of the Motion and the Hearing has been provided in accordance with § 102 of the Bankruptcy Code, Fed. R. Bankr.P.2002 and 9014, and no further notice of the Motion, the Hearing or entry of this Order is required.
4. The sale of the Property as provided in this Order reflects the exercise of the Debtor’s sound business judgment and is in the best interest of the bankruptcy estate, Debtor and creditors.
5. Pursuant to §§ 105(a) and 363(f) of the Bankruptcy Code, upon the closing of the sale contemplated in the Motion, the Property shall be transferred to JEH Homes, free and clear of all Liens, Claims, Encumbrances, and Interests, with all such Liens, Claims, Encumbrances, and Interests to attach to the proceeds of the sale, with the same validity, enforceability, priority, force, and effect that they now have against the Property, subject to the rights, claims, defenses, and objections, if any, of Debtor and all interested parties with respect to such liens and claims.
6. On and after the closing of the proposed sale to JEH Homes, each of Debt- or’s creditors is authorized and directed to execute such reasonable documents and take all other actions as may reasonably be necessary to release Liens or Claims, if any, against the Property, as such Liens or Claims may have been recorded or may otherwise exist.
7. In the absence of a stay pending appeal, in the event that JEH Homes and Debtor elect to consummate the sale at any time after the entry of this Order then, with respect to the sale of the Property as authorized here, JEH Homes, as a purchaser in good faith within the meaning of § 363(m) of the Bankruptcy Code, shall be entitled to the protections of § 363(m) of the Bankruptcy Code if this Order or any authorization contained herein is reversed or modified on appeal.
8. The terms and provisions of the Contract, together with the terms and provisions of this Order, shall be binding in all respects upon, and shall inure to the benefit of, Debtor, its estate and creditors, JEH Homes, and their respective successors and assigns, and this Order shall be binding in all respects upon any affiliated third parties, and all persons asserting a Lien against, Claims or Interests in Debt- or’s estate or the Property. The sale of the Property, if consummated, shall be enforceable against and binding upon, and not subject to rejecting or avoidance by, *842Debtor, or any chapter 7 or chapter 11 trustee of Debtor and its estate.
9. Any findings or conclusions read into the record by the Court at the Hearing that are not expressly set forth in this Order are hereby fully incorporated as if the same were set forth herein.
10. The fourteen (14) day stay period provided for in Bankruptcy Rule 6004(h) shall not be in effect with respect to the sale contemplated in the Motion and, thus, this Order shall be effective and enforceable immediately upon entry. Any party objecting to this Order must exercise due diligence in filing an appeal and pursuing a stay or risk its appeal being foreclosed as moot in the event JEH Homes and Debtor elect to close prior to this Order becoming a final order.
11. This Court’s findings of fact and conclusions of law satisfy the requirements of Fed.R.Civ.P. 52 applicable herein by reason of Bankruptcy Rule 9014.
12. Debtor is directed to hold all proceeds of the sale contemplated in the Motion in escrow until any Motion for Adequate Protection asserted pursuant to 11 U.S.C. § 363(e) has been ruled upon.
. Franck Exhibits are hereinafter referred to as “Ex. F-,” Flyboy Exhibits are hereinafter referred to as “Ex. FB-”, Debtor Exhibits are hereinafter referred to as "Ex. D-,” and Individual Objector's Exhibits are hereinafter referred to as "Ex. O-."
. Gwinnett Community Bank asserts a first lien on the property in the amount of $1,604,620.92, while the estate of Claudy John Mathis asserts a second and fourth priority lien in the amount of $1,119,681.70. See Proofs of claim 2, 4 and 5, Doc. No. 55.
. Defined terms not otherwise defined herein shall have the meaning set forth in the October 11, 2013, Order entered in adversary proceeding number 13-5111, Flyboy Aviation Properties, LLC v. Franck (hereinafter, the "Trial Order”).
. The Court has made no determination of the extent, validity or priority of the liens of Gwinnett Community Bank or the Estate of C.J. Mathis.
. Each of their objections state: "Richard Franck has laid out the background, arguments and conclusions of his easement claim and opposition to Debtor's Motion to Sell in his Claimant Franck’s Brief in Opposition to Debtor's Motion for Authorization to Sell Properties Free and Clear ... rather than regurgitate that information, [movant] hereby incorporates Richard Franck's Brief, and all supporting documents, and other evidence/testimony that is presented in the ongoing hearings.” See, Doc. 71, 72. These objections were filed September 23, 2013, after additional notice of the proposed sale was provided in accordance with the Court’s direction at the August 15-16 hearing.
. There was no evidence whatsoever that Ken Franck provided notice of an adverse claim through repairs or otherwise. See Trial Order atpgs. 12-13.
. This is in contrast to the Addendum which was executed by the grantor and grantees and two witnesses.
. In Debtor’s "Supplemental Hearing Brief in Opposition to Objection by Walter Prophet-er,” it argues that to the extent Propheter has an easement, it has been abandoned by non-use, to which Propheter vigorously objected to at the Hearing. [Doc. No. 81]. Georgia law "does not favor the extinguishment of easements, and an easement acquired by grant is not extinguished by mere nonuse; there must be clear, unequivocal, and decisive evidence of an intent to abandon the easement.” Whipple v. Hatcher, 283 Ga. 309, 658 S.E.2d 585 (2008); hut see O.C.G.A. § 44-9-6; and Central of Ga. R. Co. v. DEC Assoc., Inc., 231 Ga.App. 787, 789-90, 501 S.E.2d 6 (1998) (finding that if an easement had existed in the case, it would have been abandoned by "compelling evidence,” as "there was no evidence of use at any time” over twenty-five years). Considering there was evidence that the Pro-pheters used the Airport Property for recreational purposes, the Court cannot agree that mere non-use of the Airport Property as an airport would amount to an abandonment if Propheter had an easement.
. The Rooker-Feldman doctrine does not apply in this case because MARA was not a party to the Road Litigation, however, because the State Court determined certain ownership interests in Mathis Air Park Road, the spirit of that doctrine would be violated by this Court’s review of the State Court Order such that the Court, if it were necessary to resolution of the Motion, which it is not, would abstain from construing the State Court Order. See, Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005); In re Glass, 240 B.R. 782, 786 (Bankr.M.D.Fla.1999) (noting that Rooker-Feldman does not bar a federal suit brought by an individual who was not a party to the state court action).
. The State Court Order states in part: "Each owner of property and their successor in title bordering i.e. sharing a common boundary line with Air Park Road, also known as Mathis Air Park Road.... shall own fee simple title to the center of said Air Park Road which is adjacent and contiguous to said owner's property.... Each owner of such property and their successor in title shall have easement for ingress and egress to such owners’ property, as necessary, over other such owners' property and interest in said road...." [Ex. D-10; Ex. F-29]. Debtor owns a lot that borders Mathis Air Park Road. [Ex. O-l, F-23], Thus, it would appear that Debtor has rights in that portion of Mathis Air Park Road that borders the parcels in the Subdivision. Although it is not entirely clear, it appears that MARA concedes this in its objection while disputing that Debtor has any rights to Mathis Air Park Road associated with the Airport property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496535/ | MEMORANDUM OPINION
BRUCE W. BLACK, Bankruptcy Judge.
This adversary proceeding is before the court for ruling after trial on a fraudulent transfer action pursuant to 11 U.S.C. § 548. Plaintiffs Keith and Dawn Smith, the Debtors in the underlying chapter 13 bankruptcy case, filed this adversary action against the Defendants, SIPI, LLC (“SIPI”) and Midwest Capital Investments, LLC (“Midwest”), seeking to avoid the transfer of their former residence as a fraudulent transfer. For the following reasons, the Debtors may avoid the transfer of the property as a fraudulent transfer under section 548(a)(1)(B) and are entitled to recover the amount of their homestead exemption, $15,000.
BACKGROUND
Most of the facts are not disputed. The Debtors resided at 720 Fox Street, Joliet, Illinois, (“property”), the subject property of this adversary proceeding, from about 1998 to May 31, 2009. On March 25, 2004, Dawn Smith became the holder of record title when she inherited the property from her great-grandfather. At the time that Dawn inherited the property, it was encumbered by a tax lien for the non-payment of real estate taxes for the year 2000. On November 2, 2001, SIPI purchased the delinquent taxes for $4,046.26 and was issued a certificate pursuant to Illinois statutory law1. SIPI paid a total of $5,090.12 for the Fox Street property, including costs. The Debtors failed to redeem the delinquent taxes or pay the subsequent real estate taxes owing on the property. As a result, SIPI applied for and obtained *845a tax deed on April 15, 2005, which was recorded with the Will County Recorder of Deeds on May 19, 2005. SIPI subsequently sold the property to Midwest for $50,000 on August 10, 2005. SIPI executed a warranty deed in favor of Midwest, which was recorded on August 17, 2005. Midwest is the current holder of record title to the property.
On April 13, 2007, the Debtors filed a voluntary petition under chapter 13 of the Bankruptcy Code2 and simultaneously filed an adversary action against SIPI and Midwest to avoid the tax sale of the property as a fraudulent transfer pursuant to 11 U.S.C. § 548.3 In Schedule A, the Debtors listed the property with a value of $90,000 at the time of the bankruptcy filing and listed a homestead exemption in the amount of $15,000.
The District Court affirmed this court’s order granting dismissal for failure to state a claim, finding that the complained of transfer was perfected upon the expiration of the redemption period on November 1, 2004, and not the issuance and recording of the tax deed on April 15, 2005. The Debtors then appealed to the Seventh Circuit Court of Appeals which reversed and remanded to this court for further proceedings. The appellate court found that the transfer was made when it was perfected under section 548(d)(1) upon the issuance of the tax deed on April 15, 2005, thus falling within the two-year “look back” period of § 548.
JURISDICTION
The court has jurisdiction over this matter pursuant to section 1334 of Title 28 of the United States Code, and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under section 157(b)(2)(H) of Title 28.
DISCUSSION
The following constitutes the court’s findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
A. Fraudulent Conveyance — Section 548(a)(1)(B)
Under section 548(a)(1)(B) of the Bankruptcy Code, a trustee may avoid a transfer of an interest of the debtor in property within two years before the petition date if the debtor received less than a reasonably equivalent value in exchange for such transfer and was insolvent on the date that such transfer was made, or became insolvent as a result of such transfer. 11 U.S.C. § 548(a)(1).
While the parties dispute whether the Debtors were insolvent at the time of the transfer, this issue can be disposed of with ease. Under the Code, if the debtor’s debts outweigh the debtor’s assets when fairly valued, the debtor is considered insolvent. 11 U.S.C. § 101(32). The court is persuaded by Mr. Smith’s uncontrovert-ed testimony at trial as to the nature of the Smiths’ indebtedness, as well as the *846bankruptcy schedules reflecting such indebtedness. While the Debtors’ bankruptcy schedules provide a clear picture of their financial condition on the date of the filing of their bankruptcy petition, the court does not have a similar financial snapshot of their financial condition at the time of the transfer in 2005. In this regard, however, the deposition testimony of Ms. Smith4 with respect to the Debtors’ assets and liabilities establishes that if the Debtors were not insolvent at the time of the transfer, at the very least, they were rendered insolvent by the transfer. Ms. Smith testified that the Debtors never had money to pay the full amount of various large bills — -including electric and gas- — • and paid whatever they needed to in order to have electricity and gas service in their home. The Debtors also did not have money to pay any real estate taxes on their home from 2002 through 2009. Of the various debts listed on Schedule F, Ms. Smith testified that “probably most” of those debts existed in 2005. (Smith Deposition, Defendant’s Exhibit 16, pg. 53, lines 2-5). The home was the Debtors’ only asset worth any significant value, as the other assets owned by the Debtors were of minimal value. Ms. Smith’s deposition testimony is credible and uncontradicted. Thus, the court finds that at the Debtors were rendered insolvent by the transfer.
The critical issue in dispute is whether the Debtors received less than reasonably equivalent value for transfer of their home. The Defendants rely on the Supreme Court decision, BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), in support of their position that reasonably equivalent value was received for the transfer as a matter of law because SIPI complied with the Illinois law in obtaining a tax deed to the property. In BFP, the Supreme Court addressed the question of reasonably equivalent value under section 548 of the Code in the context of a mortgage foreclosure. The Supreme Court rejected fair market value as the benchmark for measuring reasonably equivalent under section 548 because “market value, as it is commonly understood, has no applicability in the forced-sale context....” Id. at 537, 114 S.Ct. 1757. The Court concluded that “a fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.” Id. at 545, 114 S.Ct. at 1765. The BFP Court explicitly emphasized, however, that its opinion only covered mortgage foreclosures of real estate and stated that “[t]he considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.” Id. at 537 n. 3, 114 S.Ct. 1757.
The Defendants contend that BFP’s holding extends to transfers of title as a result of tax sale proceedings because, like mortgage foreclosure sales, tax sales are “forced sales” to which market value is not applicable. The court disagrees.
Courts have generally held that BFP does not apply in the tax forfeiture context, particularly where competitive bidding is not a component of a tax sale statute. See Williams v. City of Milwaukee (In re Williams), 473 B.R. 307, 320 (Bankr.E.D.Wis.2012), aff'd in part, City of Milwaukee v. Gillespie, 487 B.R. 916 (E.D.Wis.2013); Berley Associates, Ltd. v. Eckert (In re Berley Associates, Ltd.), 492 B.R. 433, 440 (Bankr.D.N.J.2013); Balaber-Strauss v. Town of Harrison (In re Murphy), 331 B.R. 107, 118 (Bankr.S.D.N.Y.2005) (citing cases).
*847This court concurs with the approach taken in a recent decision by a district court in this Circuit, City of Milwaukee v. Gillespie, in which the court held that “a judgment of foreclosure, based solely upon delinquent taxes in a non-sale foreclosure proceeding, does not necessarily provide a property owner ‘reasonably equivalent value’ for real estate without a public sale offering.” 487 B.R. at 920. The Gillespie court explained that “if property is seized without a sale or competitive bidding, it cannot be presumed as a matter of law that ‘reasonably equivalent value’ was received by a debtor transferor because market forces were completely absent.” Id. Thus, “reasonably equivalent value” cannot be deemed to be received as a matter of law simply because the party that obtains a deed to real property through a state’s tax sale procedure complies with state law. Id.
The Defendants’ reliance on BFP is further hampered by the fact that the Illinois real estate tax sale process is not analogous to the Illinois mortgage foreclosure sale process. Unlike at a mortgage foreclosure sale, a debtor’s interest in the property is not sold at a tax sale; rather, only the delinquent taxes are purchased by the winning bidder, not the title to the property. The court in McKeever v. McClandon (In re McKeever), described the Illinois tax sale process as follows:
“[T]he only purpose of a tax sale is for the taxing authority to obtain payment of its delinquent taxes at the lowest cost of redemption. There is no correlation between the sale price and the value of the property. Therefore, it will be a rare case where the taxes paid at a tax sale will approximate the actual value of the property.”
166 B.R. 648, 650-51 (Bankr.N.D.Ill.1994) (emphasis added).
As a result of the Illinois tax sale statute, competitive bidding was not present at the time of the transfer to ensure that market forces were acting efficiently to create a fair value for the property transferred. This court views the absence of competitive bidding and other procedures that ensure that a fair value is received for the transferred property as a significant bar to adjudicating “reasonably equivalent value” in a tax sale context. In light of the foregoing, the court finds that BFP does not bar recovery by the Debtors under section 548(a)(1)(B) of the Code because the price received at the tax sale does not necessarily reflect a reasonably equivalent value for the underlying property. See City of Milwaukee v. Gillespie, 487 B.R. at 920.
While Illinois law permits purchasers at tax sales to receive large profits— and sometimes exorbitant profits — under bankruptcy law such transactions are subject to attack under section 528(a)(1)(B). Having concluded that a tax sale procedure which does not include some competitive sale process is not sufficient by itself, as a matter of law, to establish “reasonably equivalent value” for purposes of section 548(a)(1)(B), the court next examines whether the Debtors have in fact received reasonably equivalent value in exchange for the transfer of their interest in their home.
At the trial, the Debtors called an appraiser who was the only expert testifying on the issue of the market value of the home at the time of the transfer to SIPI. The Debtors’ appraiser testified that the fair market value of the property was around $110,000 at the time of the transfer to SIPI. The appraiser’s testimony was credible and uncontradicted. However, as discussed below, the court need not determine the reasonable market value of the property as long as it is over the value of the Debtors’ exemption amount. Midwest paid $50,000 to SIPI for the property. *848The court can determine that the value of the property is somewhere between the $50,000 that Midwest paid to SIPI and the $110,000 value as assessed by the appraiser. Therefore, it is clear that the value of the property was over the Debtors’ exemption amount of $15,000.
In this case, at the time of the transfer, there was much more value in the Debtors’ home than the tax liability satisfied by SIPI. The Debtors lost the equity in their home in exchange for the release of their obligation to pay delinquent taxes in the amount of only $4,046.26. The Debtors’ equity value may be calculated by subtracting existing liens from the fair market value. The only liens on their home were $4,046.26 for the delinquent taxes. The court has determined that the value was between $50,000 and $110,000. Therefore, the Debtors gave up their equity of between $45,953.76 and $105,953.74 in exchange for the release of an obligation of $4,046.26. The value of what they received is from 3.8% to 8.8% of what they lost. They clearly received less than reasonably equivalent value, and the transfer, to the extent of their exemption, may be avoided.
This holding in no way invalidates the Illinois tax sale law. The court is not persuaded by the Defendants’ argument that avoidance of the transfer will impede the sale of tax certificates by clouding title to acquired properties. Other courts have been faced with similar arguments from tax deed purchasers but did not find them persuasive. In In re Murphy, for example, the court observed that “[although the result here impinges on a state regulatory scheme, it does so only to the extent that the scheme conflicts with the clear dictates of the Bankruptcy Code. The state’s interest in enforcing its unpaid tax obligations is recognized by the Bankruptcy Code and, in fact, given higher priority than other creditors’ interests.” In re Murphy, 331 B.R. at 122. Moreover, depending on the amount the property owner owes in unpaid real estate taxes and the value of the property, some transfers that result from tax lien sales may be for “reasonably equivalent value.” See City of Milwaukee v. Gillespie, 487 B.R. at 921. The Defendants ascribe far too much weight to the impact of this decision on the vitality of the tax sale certificate industry in Illinois. The court is skeptical that investors such as SIPI will forego the opportunity to obtain a substantial return on their investment merely because of a remote possibility that the property transfer would later be avoided in the debtor’s bankruptcy case. See Berley Associates, Ltd. v. Eckert (In re Berley Associates, Ltd.), 492 B.R. 433, 443 (Bankr.D.N.J.2013).
B. Recovery of Fraudulent Transfer
Section 550 of the Code governs the liability of a transferee of an avoided transfer. Under section 550(a)(1), a fraudulent transfer can be recovered from the “initial transferee.” 11 U.S.C. § 550(a)(1). Here, SIPI, as the tax purchaser and the party that first obtained a deed to the Debtor’s home, is the initial transferee. See Butler v. Lejcar (In re Butler), 171 B.R. 321, 327 (Bankr.N.D.Ill.1994). The less straightforward issue is whether the Debtors can recover from Midwest as the “immediate or mediate” transferee of the initial transferee (SIPI) under section 550(a)(2).
Midwest admits that it was a subsequent transferee of SIPI but asserts section 550(b)(1) as a defense. Section 550(b)(1) shields from liability subsequent transferees who take a transfer for value, in good faith, and without knowledge of its voidability. 11 U.S.C. § 550(b)(1). Because section 550(b)(1) is an affirmative defense, the burden of proof is on Mid*849west. In re Commercial Loan Corp., 04 B 18946, 2010 WL 1730860, at *7 (Bankr.N.D.Ill. Apr. 29, 2010).
The evidence at trial demonstrated that Midwest had no knowledge of the voidability of the tax deed transfer to SIPI and that Midwest took title for value and in good faith. The fact that Midwest was aware that SIPI obtained the property through a tax deed proceeding is insufficient grounds for a recovery from Midwest as a subsequent transferee.
The court concludes that the Debtors are entitled to a recovery from SIPI, but not from Midwest, as Midwest has successfully asserted a defense under section 550(b)(1).
C. Debtors’ Remedy
Section 522(h) of the Code permits a debtor to seek avoidance of a transfer under section 548 if the trustee has not attempted to do so. 11 U.S.C. § 552(h). The parties have offered no evidence concerning any actions taken by the trustee to avoid the tax sale, and the court’s docket does not disclose any such attempts. Because the Debtors have shown that a trustee could have set aside the transfer under section 548 of the Code, they are entitled under section 522(h) to avoid the transfer to the extent of their homestead exemption. The Debtors’ claimed homestead exemption reflected on their schedules is $15,000 pursuant to 735 ILCS 5/12-901. Therefore, under section 522(h), the Debtors are entitled to the value of their homestead exemption of $15,000. See McKeever, 166 B.R. at 656.
Limiting the Debtors’ recovery to the homestead exemption amount comports with the language of section 522(h) and also makes practical sense. The rights of SIPI to preserve its windfall must be subordinate to the fundamental right of the Debtors to achieve a fresh start. See Pruitt v. Gramatan Investors Corp (In re Pruitt), 72 B.R. 436, 446 (Bankr.E.D.N.Y.1987).
Judgment in the amount of $15,000 will be entered against SIPI in favor of the Debtors. Section 550 allows the court to order the return of either the property itself or the value of the property to the extent that the transfer is avoided. Because Midwest is in possession of the property, which is valued in excess of the aggregate of the Debtors’ exemptions, the court finds that the interests of the parties are best preserved by entering judgment in the amount of the exemptions rather than by conducting a judicial sale.
CONCLUSION
Based on the foregoing, the Debtors may avoid the transfer of their former residence pursuant to a tax sale as a fraudulent transfer under section 548(a)(1)(B) to the extent of their homestead exemptions in the amount of $15,000. Judgment for costs is awarded to the Debtors under Rule 7054.
This Memorandum Opinion will serve as findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. A separate judgment reflecting the decision herein will be entered pursuant to Federal Rule of Bankruptcy Procedure 9021.
. See 35 ILCS 200/21-205-35 ILCS 200/21-250.
. 11 U.S.C. § 101 if. Any reference to "section” or "the Code” is a reference to the Bankruptcy Code unless another reference is stated.
. SIPI and Midwest have contested the standing of both Debtors to this proceeding, alleging that at least one Debtor does not have an interest in the property. Dawn Smith inherited the property and became the sole holder of record title in 2004. Keith Smith was dismissed from this proceeding for lack of standing on April 5, 2012, but was added as a party before trial due to the fact that a Judgment for Dissolution of Marriage entered by default granted Keith exclusive rights to the property. The Debtors have agreed to determine entitlement to any recovery in state court. As such, this court will not make any determination on the split of the recovery.
. Admitted into evidence without objection. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496536/ | MEMORANDUM OPINION ON DEBTOR’S OBJECTION TO PROOF OF CLAIM NO. 9
JACK B. SCHMETTERER, Bankruptcy Judge.
The Debtor filed for bankruptcy relief under chapter 11. The claims bar date was designated as March 11, 2013, but the Creditor, SunTrust Mortgage, Inc. (“Sun-Trust Mortgage”) filed its Proof of Claim No. 9 late on May 28, 2013, asserting security consisting of a mortgage on property located at 6458 Lake Burden View Drive, Windermere, Florida (“the 6458 Property”). Debtor filed his Objection to Claim No. 9 (Docket No. 133) and parties were ordered to file briefs on the issues presented.
Debtor objects to Proof of Claim No. 9 because (1) SunTrust Mortgage failed to file its proof of claim by the claims bar date, (2) the claim is unenforceable because of the Debtor’s earlier chapter 7 discharge, (3) the mortgage was purportedly rescinded by Debtor’s notice under the Truth in Lending Act and Regulation Z (“TILA”), (4) lack of standing by Sun-Trust Mortgage, and (5) because the amount claimed is wrong. In his Reply Brief, Debtor claimed that the “sole issue” was whether SunTrust Mortgage had timely filed its proof of claim. (Docket No. 180 at 1.) Supplemental briefing was ordered. (Docket No. 211.) In Debtor’s supplemental brief, Debtor’s counsel opined that the “sole issue” language meant that timeliness was a threshold issue. (Docket No. 240 at 1-2.)
For reasons stated below, at claimant’s request, SunTrust Bank is substituted for SunTrust Mortgage under Bankruptcy Rules 9014 and 7017, SunTrust Bank’s Proof of Claim No. 9 will be reduced to the value of the collateral, and value of the collateral will be determined based on evidence to be presented at or before a plan confirmation hearing.
Undisputed Facts
Neither party in any brief requested an opportunity or need to offer evidence, and it appears that all relevant facts are undisputed.
On September 8, 2006, Jesus Batista— joined by Maritza De Jesus, the Debtor’s nonfiling spouse — executed a mortgage against the 6458 Property in favor of Sun-Trust Mortgage. (Docket No. 133 Exh. 1 at 8.) The Debtor subsequently obtained a Chapter 7 discharge in a bankruptcy case number 08-08519 filed in the Middle District of Florida on January 19, 2009. (Docket No. 133 Exh. 2.)
On August 28, 2009, the Debtor sent a letter to SunTrust Mortgage purporting to rescind the mortgage on the 6458 Property under the TILA. (Docket No. 174 Exh. 4.) Around January 2011, SunTrust Mortgage instituted a foreclosure action against the Debtor, which resulted in a settlement which was entered on July 31, 2012. (Docket No. 174 Exh. 5.)
On December 7, 2012, the Debtor filed a petition under chapter 11 of the Bankruptcy Code. The mortgage for the 6458 Property was originally scheduled as undisputed. The claims bar date was designated as March 11, 2013. On March 25, 2013, the Debtor filed his proposed Plan of Reorganization. (Docket No. 62.) The plan would later be amended (Docket No. 144) twice (Docket No. 159) and was eventually withdrawn on September 20, 2013. (Docket No. 234.) On May 20, 2013, SunTrust Bank filed an election to treat its entire claim as secured pursuant to § 1111(b)(2). On May 28, 2013, SunTrust Mortgage filed Proof of Claim No. 9 asserting its ownership of the mortgage on the 6458 Property. (Docket No. 216 Exh. A3.) On June 17, *8532013, Debtor filed an Amended Schedule D, changing the mortgage claim as to the 6458 property to a “disputed” claim by SunTrust Bank. (Docket No. 126.)
Other undisputed facts appear in the Discussion below.
Discussion
A. Jurisdiction
Jurisdiction lies over the objection to proof of claim under 28 U.S.C. § 1334. It is referred here by Internal Procedure 15(a) of the District Court for the Northern District of Illinois. This matter concerns an objection to a proof of claim, and is therefore a core proceeding under 28 U.S.C. § 157(b)(2)(B). An objection to proof of claim “stems from the bankruptcy itself,” and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).
B. Timeliness of Proof of Claim No. 9
As a threshold matter, Batista-Sa-nechez asserts that SunTrust Mortgage’s proof of claim is invalid because it was filed late. (Docket No. 180 at 1.) By order on January 7, 2013, a claims bar date was fixed as March 11, 2013. (Docket No. 28.) SunTrust Mortgage did not file its Proof of Claim No. 9 until May 28th. (Docket No. 216 Exh. A3.) SunTrust Mortgage argues that its proof of claim was timely because Batista-Sanechez originally scheduled the claim of SunTrust Bank for $2,087,581.22 as not disputed, contingent, or unliquidat-ed, and thus its claim was deemed to be filed pursuant to § 1111(a). However, SunTrust Mortgage and SunTrust Bank are separate entities.
SunTrust Mortgage argues that this should not matter because SunTrust Mortgage is a real party in interest in filing the proof of claim. (Docket No. 216 at 2.) But regardless of whether SunTrust Mortgage is a real party in interest, Batista-Sane-chez never scheduled a claim belonging to SunTrust Mortgage. Instead, he scheduled a claim belonging to SunTrust Bank.
SunTrust Mortgage requests in its brief that SunTrust Bank be substituted as the real party in interest pursuant to Federal Rule of Civil Procedure 17(a)(3), as applied in Bankruptcy through Rule 7017. Fed. R. Bankr.P. Rule 17(a)(3) provides: “The court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action. After ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the real party in interest.” Rule 7017 may apply in a contested matter, because Rule 9014(c) (Fed. R. Bankr. P.) gives authority to direct that any rule that applies to adversary proceedings may be applied to contested matters. An objection to the allowance of a claim is a contested matter, subject to Rule 9014. Thus, Rule 7017 may be applied to an objection to claims allowance.
There is little question that under Rule 7017, SunTrust Bank is a real party in interest. Here, it appears that Batista-Sanechez executed a mortgage on the 6458 Property in favor of SunTrust Mortgage on Sept 8, 2008 (Docket No. 174 Exh. B at 9), the Mortgage was later assigned to SunTrust Bank on Dec. 11, 2011. (Id. at 22.) In the Florida mortgage foreclosure case, SunTrust Bank was adjudged to be owed the same $2,087,581.22. (Docket No. 216 Exh. A2.) In any case, even before the claim was filed, SunTrust Bank already had a claim for the same debt because it is deemed to have filed a proof of claim pursuant to § 1111(a), which provides that, “A proof of claim or interest is deemed filed under section 501 of this title for any claim or interest that appears in the schedules filed *854under section 521(a)(1) or 1106(a)(2) of this title, except a claim or interest that is scheduled as disputed, contingent, or un-liquidated.” As earlier noted, Debtor originally scheduled the secured claim of SunTrust Bank as not disputed, contingent, or unliquidated.
Debtor argues that SunTrust’s claim should not be deemed filed under § 1111(a) because Debtor later amended its Schedule D to list SunTrust’s claim against the 6458 Property as “disputed.” This argument is without merit. A creditor may rely on wording of a notice of claims filing deadline when that notice excepts certain creditors from the requirement to file a proof of claim. In re Candy Braz, Inc., 98 B.R. 375, 380 (Bankr.N.D.Ill.1988). Here, the Notice to Creditors (Docket No. 29) included a footnote that provided that “Under 11 U.S.C. § 1111(a), a claim may be deemed filed if it appears in the debtor’s schedules of debt, unless scheduled as disputed, contingent, or un-liquidated.” Candy Braz at 380. As was the case in Candy Braz, “[t]he notice used in this case would lead claimants whose claims were not scheduled as disputed, contingent, or unliquidated to reasonably conclude that they need not file proofs of claim as their claims would be deemed allowed under section 1111(a).” Id. Subsequent filing of an Amended Schedule D cannot have retroactive effect of denying a creditor of a right that has accrued.
Therefore, SunTrust Bank may be substituted for SunTrust Mortgage and the SunTrust Bank is deemed to be the claimant. In the following discussion, “Sun-Trust” shall refer to SunTrust Bank, even though the briefing refers to SunTrust Mortgage.
C. The Effect of Batista-Sanechez’s Prior Discharge
Bankruptcy Code Section 502(b)(1) disallows a claim against the Debtor to the extent that “such claim is unenforceable against the debtor and property of the debtor.” That provision thereby prohibits a creditor holding nonrecourse claims (which is the case here since debtor’s debt was discharged in his chapter seven bankruptcy) from asserting claims against an individual Chapter 11 Debtor beyond the value of its collateral. In re Bloomingdale Partners, 155 B.R. 961, 969 (Bankr.N.D.Ill.1993).
It does not matter that SunTrust has purported to file an § 1111(b)(2) election. Such an election can only be made by “the class of which such claim is a part.” § llll(b)(l)(A)(i). Classes of creditors exist when creditors have been classified in a plan. In the claims allowance context, a claim is not necessarily part of any class, especially when (as here) no plan is presently on file. Whether an § 1111(b)(2) election has been made, or its possible legal effects, are therefore irrelevant in the resolution of this motion.
As a result, SunTrust’s claim should only be allowed to the extent of the value of its collateral. As scheduled by the debt- or, the collateral is valued at $720,000. SunTrust has provided an appraisal, valuing the property at $960,000. (Docket No. 216 Exh. D at 2.) The exact value of the property need not be determined until a plan, once filed, is set for confirmation hearing.
D. The Effect of Batrsta-Sanechez’s “Recision” of the Loan Agreement
Batista-Sanechez further argues that SunTrust’s claim is unenforceable because the subject mortgage was rescinded under TILA, 15 U.S.C. § 1635, Regulation Z § 226.23. (Docket No. 133 at 4) SunTrust responds that the assertion of a purported TILA recision is barred by res judicata and the Rooker-Feldman doctrine. (Docket No. 174 at 3.)
*855SunTrust argues that denying the proof of claim would be a “de-facto reversal of the State Court Summary Judgment of Foreclosure ...” that was entered by a Florida court. (Docket No. 216 at 4.) Regarding the proper scope of the Rooker-Feldman doctrine, the Seventh Circuit has held:
The Rooker-Feldman doctrine asks: is the federal plaintiff seeking to set aside a state judgment, or does he present some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party? If the former, then the district court lacks jurisdiction; if the latter, then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion.
GASH Associates v. Vill. of Rosemont, Ill., 995 F.2d 726, 728 (7th Cir.1993). Here, the’ allowance or disallowance of a proof of claim would not affirm or set aside a state court judgment. Rather, allowance or dis-allowance of a proof of claim only affects how that state court judgment is treated in the bankruptcy case. Indeed, many actions by a bankruptcy court, even as basic as the grant of a discharge, might have the effect of overturning a state court judgment but are not barred by Rooker-Feld-man. Thus, Rooker-Feldman does not apply.
Rather, the proper analysis is under res judicata. Under the Full Faith and Credit Statute, a federal court gives the state court judgment the same effect the as the rendering state would. 28 U.S.C. § 1738; See GASH Associates v. Vill. of Rosemont, Ill., 995 F.2d 726, 728 (7th Cir.1993). Here, Batista-Sanechez is objecting to a proof of claim under § 502(b)(1) of the Bankruptcy Code. The question of whether the purported TILA recision was effective might have been a legal conclusion that the state court could have reached in a ease in which he was a party. Under Florida preclusion law, res judicata requires “(1) identity of the thing sued for; (2) identity of the cause of action; (3) identity of persons and parties to the action; and (4) identity of the quality of the persons for or against whom the claim is made.” Topps v. State, 865 So.2d 1253, 1255 (Fla.2004). “Courts properly look not only to the claims actually litigated in the first suit, but also to every other matter which the parties might have litigated and had determined, within the issues as [framed] by the pleadings or as incident to or essentially connected with the subject matter of the first litigation.” AMEC Civil, LLC v. State, Dep’t of Transp., 41 So.3d 235, 239 (Fla.Dist.Ct.App.2010) (quotations omitted, alteration in the original). In addition, the prior ruling must be on the merits. Topps, 865 So.2d at 1255. “The determining factor in deciding whether the cause of action is the same is whether the facts or evidence necessary to maintain the suit are the same in both actions.” Albrecht v. State, 444 So.2d 8, 12 (Fla.1984). In order to determine if there is identity of cause of action, “a court looks not only at the causes of action actually raised in the first suit, but also at ‘ “every other matter which the parties might have litigated and had determined Zikofsky v. Mktg. 10, Inc., 904 So.2d 520, 523 (Fla.Dist.Ct.App.2005). Here, there is identity of the thing sued for because Batista-Sanechez is asserting the same TILA recision claim about the same loan, which would be decided on the same facts or evidence.
“Identity of the persons and parties to the action” is satisfied even when a successor in interest sues instead of the original party in the action. Gomez-Ortega v. Dorten, Inc., 670 So.2d 1107, 1108 (Fla.Dist.Ct.App.1996) (applying res judicata when secondary purchas*856ers brought suit instead of the original party). An assignee “is entitled to all the beneficial interests, rights and remedies of the assignor.” Rhyne v. Miami-Dade Water & Sewer Auth., 402 So.2d 54, 55 (Fla.Dist.Ct.App.1981).
Identity of the “quality of persons” means that the party “must not only appear as a party in both cases, but must appear in both in the same capacity or character.” McGregor v. Provident Trust Co. of Philadelphia, 119 Fla. 718, 733, 162 So. 323 (1935). Here, Batista-Sanechez appears as debtor in possession of his bankruptcy estate. As debtor in possession, he succeeds to any cause of action that he personally owned prior to the bankruptcy. § 1107(a), § 323(a), § 541(a)(1).
Under Florida law, “a voluntary dismissal with prejudice operates as an adjudication on the merits, barring a subsequent action on the same claim.” Capital Bank v. Needle, 596 So.2d 1134, 1136 (Fla.Dist.Ct.App.1992). Here, the state foreclosure case, 09-CA-023865, record supplied by the parties shows:
1. A counterclaim by Batista-Sanechez against SunTrust Bank alleging a violation of TILA and Regulation Z because of an “over-escrow” for county taxes of $25,783.29, a $650 appraisal fee, and another $80 fee. (Docket No. 216 Exh. Cl at 5.)
2. A Stipulation and Settlement Agreement stating that “Any counterclaims asserted by [Batista-Sa-nechez] in connection with this litigation shall be dismissed with prejudice upon the execution of this Agreement.” (Docket No. 174 Exh. E at 2.)
3. A Motion to Enforce Settlement Agreement and for Attorneys Fees and Costs by SunTrust Bank asking for an order ratifying that Batista-Sanechez’s “counterclaim was to be dismissed with prejudice upon the execution of the Agreement,” with the stipulation attached as an exhibit. (Id. Exh. F at 4.)
4.An Order on Plaintiffs Motion to Enforce Settlement Agreement and for Attorney’s Fees and Cots [sic], which provides that Batista-Sane-chez’s “Counterclaim is hereby DISMISSED with prejudice” (Id. at 2.)
Batista-Sanechez’s TILA defense asserted to Claim No. 9 here is based on the same assertion of “over-escrow” of $25,783.29 that was the basis of a counterclaim in the state foreclosure proceeding. (Docket No. 214, Exh. A at 1.) That counterclaim was voluntarily dismissed with prejudice, which under Florida state law has res judicata effect. Therefore, Debtor is barred by res judicata from raising the issue again in here in opposition to Claim No. 9.
E. SunTrust Mortgage’s Standing
Batista-Sanechez also argues that Sun-trust Mortgage does not have standing to assert a proof of claim against the estate. That argument is moot because of the substitution of SunTrust Bank for Sun-Trust Mortgage, supra.
F. Asserted Amount Error
Batista-Sanechez further argues that SunTrust’s proof of claim is overstated by $30,000. The discrepancy is between $2,087,581.22, the amount scheduled, and $2,117,699.09, the amount on SunTrust’s Proof of Claim. However, this dispute regards the amount of the debt Batista-Sanechez owes to SunTrust, not the value of the property. This argument is moot because the claim will be reduced to the value of the property, supra. Also, Debtor did not seek to offer evidence disputing the claim amount. A claim is deemed valid as *857to the amount claimed unless evidence contradicts that claim. Rule 3001(f).
Conclusion
For reasons discussed above, SunTrust Bank will by separate order be substituted for SunTrust Mortgage as claimant. The amount to be allowed on SunTrust Bank’s Proof of Claim No. 9 will be value of the collateral, to be determined by future hearing.
ORDER ON DEBTOR’S OBJECTION TO PROOF OF CLAIM NO. 9
For the reasons stated in the Memorandum Opinion on Debtor’s Objection to Proof of Claim No. 9, it is hereby ORDERED that:
1. SunTrust Bank is substituted for SunTrust Mortgage Inc. in Proof of Claim No. 9.
2. SunTrust Bank’s Proof of Claim No. 9 is allowed up to the value of the collateral, which is to be determined from evidence to be presented at a date to be set. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496537/ | MEMORANDUM DECISION
THOMAS B. DONOVAN, Bankruptcy Judge.
This memorandum addresses Plaintiffs Motion for Summary Judgment (sometimes, Motion) brought in the above-captioned adversary proceeding pursuant to Federal Rule of Civil Procedure 56 as made applicable by Federal Rule of Bankruptcy Procedure 7056. The Motion is based on a judgment awarded to Plaintiff by the Superior Court of the State of Washington. The superior court judgment was based on an arbitrator’s detailed findings and conclusions. The relevant history leading up to the superior court judgment is set forth below.
Plaintiff Kendra Vorhies Flores (Flores) sued Defendant Justin Thomas Chlarson (Chlarson) in the superior court in August 2011. Flores’ complaint alleged, among other things, conversion, outrage, and malicious injury to an animal based on allegations of Chlarson’s involvement in the death of Flores’s cat. Chlarson filed an answer to the superior court complaint. The matter was sent to arbitration, both parties participated and testified, and on April 19, 2012, the arbitrator rendered written findings and conclusions. On April 20, 2012, the superior court entered judgment in Flores’ favor based on the arbitrator’s findings and conclusions and awarded Flores $25,460.00.1
On August 1, 2012, Chlarson filed a voluntary chapter 7 petition in this court. Flores timely filed this adversary proceeding on September 26, 2012, seeking nondis-chargeability of her $26,460 superior court judgment pursuant to 11 U.S.C. 523(a)(6).2 Flores’ adversary complaint asserted that there was no appeal from the superior court judgment and that Chlarson’s right to appeal expired on May 20, 2012. Thus, it appears that the April 20, 2012, superior court judgment is final.
Chlarson did not file an answer or motion in response to Flores’ adversary *859complaint. Attorney Thomas Allison, Chlarson’s bankruptcy attorney, entered an appearance for Chlarson in connection with the first adversary status conference hearing on January 3, 2013, by signing a joint Status Conference Report on Chlar-son’s behalf and appearing for Chlarson at a status conference hearing on January 3, 2013. Chlarson’s attorney later signed a Pretrial Stipulation filed on July 18, 2013, in the adversary. The parties’ Pretrial Stipulation acknowledged that no issues of fact remained to be litigated. On September 4, 2013, Flores filed her Motion for Summary Judgment. Chlarson and his attorney were both properly served with Flores’ Motion for Summary Judgment. Chlarson did not oppose Flores’ Motion.3 Chlarson’s attorney did not appear at the October 17, 2013 hearing on the motion. Based on the record and evidence before the court,4 the court grants the Motion and renders this court’s findings of fact and conclusions of law, as follows:
Summary judgment is appropriate here because “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. The arbitrator’s findings and conclusions are entitled to preclusive effect in this adversary;5 they establish the elements necessary to support a judgment pursuant to § 523(a)(6) and no issues of material fact remain to be litigated. Grogan v. Garner, 498 U.S. 279, 284, 111 5.Ct. 654, 661, 112 L.Ed.2d 755 (1991) (finding that collateral estoppel principles apply in exception to discharge proceedings). Section 523(a)(6) states in relevant part, “(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... (6) for willful and malicious injury by the debtor to another entity or to the property of another entity.”
The uncontroverted and undisputed facts6 of the arbitration decision establish both a willful and malicious injury. The arbitrator’s detailed findings of fact were meticulous. Testimony was provided by Dr. Trish Roisum, DVM, which established blunt force trauma as the cat’s cause of death resulting from broken ribs and severe injury to the diaphragm and thoracic wall. Dr. Roisum opined that the cause of these injuries was likely a kick; the injuries were consistent with a fast firm object that came into contact with the cat’s lateral chest causing the ribs to fracture in two places and the diaphragm to tear. Dr. Roisum did not believe the injuries were caused by the cat falling off a bed or from a dog attack. In fact, Dr. Roisum’s testimony refuted Chlarson’s testimony that the latter two scenarios, or others asserted by Chlarson, could have been the cause of the cat’s injuries.
The arbitrator also noted that Chlarson was the only individual alone with the cat *860during the time the cat suffered its fatal injuries, the cat was an indoor cat, and the injuries occurred while the cat was inside the house with Chlarson. The arbitrator rejected Chlarson’s argument that Flores may have caused the cat’s injuries because Chlarson was the only person present with the cat when its injuries occurred.
Chlarson also admitted to sending Flores a text message threatening injury to the cat just before the cat was fatally injured. The arbitrator noted that the timing of Chlarson’s message, Chlarson’s admission that he shooed the cat off the bed and couch, and the testimony of the parties’ marital difficulties, provided the requisite motive and explanation as to why it was more probable than not that Chlar-son caused the cat’s injuries.
Animal control officers Quinn and Berg provided testimony about their investigation into the cat’s death. The arbitrator carefully analyzed their reports with respect to what occurred with the cat. Chlarson admitted to the officers that he was very angry with the cat and had shooed the cat off the bed. Chlarson admitted that he and Flores were the only individuals present at any time with the cat. The investigating officers rejected Chlarson’s explanations of what could have caused the cat’s injuries because those explanations were not consistent with the injuries the cat sustained.
The arbitrator rejected Chlarson’s testimony that he merely shooed the cat off the bed. Weighing the evidence presented, the arbitrator determined that Chlarson likely scooped the cat off the bed with such strength and velocity that the cat struck a hard-edged object that caused the fatal injury. The arbitrator concluded that “based upon all the admissible evidence as a whole, there is a finding that the injury and death of the cat was directly due to an act by the defendant, Mr. Chlarson.”
After considering the possible inferences from the evidence before him, the arbitrator added:
... The amount of force applied to generate this severe injury to the cat and the volitional nature of the act itself of scooping or tossing the cat leads to the conclusion that such was a[n] intentional act by defendant as defined in legal terms. I conclude that such an act by defendant was intentional as opposed to pure negligence.
Based upon the preponderance of the evidence, I find for the plaintiff with regard to the causes of action for conversion, for outrage, and for malicious injury to an animal. Conversion was due to the willful deprivation of the chattel by the act of defendant. Outrage [was] due to the intentional and reckless act of the defendant. I also find that plaintiff has met her burden to show that such intentional act amounted to malicious injury to an animal due to the legally intentional act and evidence that the defendant was aware of plaintiffs long standing ownership and relationship to the cat, his threat in the text message, and his frustration with regard to plaintiffs reluctance to end [their] marriage [to each other].
The arbitrator carefully explained and then awarded damages for the intrinsic value of the cat in the amount of $15,000 and $10,000 for emotional damages. Attorney’s fees and statutory costs also were awarded. The judgment includes accruing interest.
The arbitrator’s recitation of the evidence, the legal issues and his award are thorough, clear, logical and appear to bring the superior court judgment within the requirements for nondischargeability in bankruptcy pursuant to § 523(a)(6). These findings of fact and conclusions of law are sufficient under the Ninth Circuit *861standards for nondischargeability pursuant to § 523(a)(6). Under § 523(a)(6), this means that for nondischargeability debt- or’s actions equated with “willful and malicious” injury.
The first question under § 523(a)(6) is whether there is “willful” injury, which must entail a deliberate or intentional injury. Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). In the Ninth Circuit, the intent required to be considered “willful” is either the subjective intent of the actor to cause harm or the subjective knowledge of the actor that harm is substantially certain to occur. Carrillo v. Su (In re Su), 290 F.3d 1140, 1144-45 (9th Cir.2002).
Chlarson’s intentional and deliberate act as established in the arbitration decision was an intentional act as defined by Geiger and Su. The decision concluded that Chlar-son did not engage in a negligent act. Rather, the arbitrator concluded, “The amount of force applied to generate this severe injury to the cat and the volitional nature of the act itself of scooping or tossing the cat leads to the conclusion that such was an intentional act....” This constitutes a willful injury as defined by § 523(a)(6); it is fair to infer from the arbitrator’s decision that Chlarson had the subjective intent to cause harm to the cat and Flores and/or the subjective knowledge that harm was substantially certain to occur based on his intentional actions in shooing or tossing the cat with a significant amount of force.
The second step in the 523(a)(6) inquiry is whether Debtor’s conduct was “malicious.” The relevant test for finding “malicious” conduct is whether the evidence establishes: “(1) a wrongful act; (2) done intentionally; (3) which necessarily causes injury; and (4) is done without just cause and excuse.” Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106 (9th Cir.2005). The Supreme Court has stated that when a wrongful act is voluntarily committed, with knowledge that the act is wrongful and will necessarily cause injury, it constitutes a willful and malicious injury within the meaning of § 523(a)(6). See Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1208 (9th Cir.2001).
The elements for malicious injury under § 523(a)(6) also were established in the arbitration decision. The evidence persuaded the arbitrator that Chlarson committed wrongful acts of conversion, outrage and malicious injury to an animal. In committing these wrongful acts, the arbitrator found that Chlarson committed “intentional aet[s],” which “amounted to malicious injury” to the cat. The arbitrator’s decision supports a conclusion here that this malicious injury was done without justification or excuse. The arbitrator rejected Chlarson’s exculpatory testimony with respect to his actions. The arbitrator’s decision also carefully establishes the maliciousness of the injuries and damages suffered by Flores. Thus, the Ninth Circuit standards for a malicious injury are satisfied.
Based on the foregoing analysis, this court concludes that summary judgment is warranted because the arbitration decision, as confirmed in the superior court judgment, obviates the need for any further litigation of the matter. As discussed, (1) the issues of willful and malicious injury in this adversary proceeding are identical to those litigated in the superior court, (2) they were actually litigated and necessarily decided there, (3) the parties are the same, and (4) the superior court judgment is final.7 Moreover, giving *862preclusive effect to the superior court judgment is fair and furthers the public policies underlying the doctrine, including judicial economy and conservation of the court’s time and resources.
Chlarson’s debt is nondischargeable pursuant to § 523(a)(6).
pp jg go ORDERED,
APPENDIX A
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*863[[Image here]]
Arbitration Decision March 16,2012
He: Yorhies vs Chlarson Thurston Case No 11-2-01832-3
I apologize for taking the entire 14 days to render my opinion. I took additional time to mull over the evidence presented and to consider all legal 'arguments carefully.
The burden of proof in a civil matter is preponderance of the evidence. Essentially this requires proving a matter by greater than fifty percent (50%) probability, which is defined as more likely titan not likely. This is plaintiffs burden and if met, defendant is required to present sufficient evidence to controvert plaintiff’s evidence.
After careful consideration, I find tor the Plaintiff.
Most arbitration opinions are bare and the arbitrator simply writes an award amount without any explanation. 1 find that this case warrants a written analysis so that the parties can understand how the decision was made.
My derision was based upon the evidence presented as a whole. However, I will discuss factors that I found relevant.
Fact Issues
1) The guilty plea
I gave some weight to this, however, I understand that there are some instances where an innocent individual may choose to plead guilty to a misdemeanor in order to avoid the possibility of a felony conviction that might carry more severe consequences or perhaps end defendant’s military career. I certainly did not find this dispositive.
2) Declaration of Dr. Trish Hoisum, DVM
The veterinarian made it clear with a high level of confidence beyond reasonable medical certainty that the injury to the cat was caused by blunt trauma force. The doctor describes the injuries as broken riba and severe injury to the diaphragm and thoracic wall. She gives her opinion that this is consistent with a fast firm object that came into contact with the cat’s lateral *864chest causing the ribs to fracture in two places and the diaphragm to tear. The doctor states that this could be caused by a kick. Dr. Roisum states that theBe injuries were not a result of a fall off the bed or a bite from a French bulldog. She gives her opinion that the injuries were due to an attack.
Neither the defendants testimony that the cat might have been injured by a fall off the bed or by rough playing with their French bulldog, nor his statements to the Animal Control Officers that the cat “could have tried to squeeze through too small of a space or something”, or that “some animals are bom like that” are sufficient to controvert this evidence.
3) Defendant dnd Plaintiff were the only individuals with care and control of the cat
It is undisputed that the cat was an indoor cat and therefore the injuries must have occurred in the home, Mr. Chlarson was the only parson present and alone with the cat during the most probable timeframe that the cat suffered the injuries, Ms. Vorhies was present with Mr, Chlarson later in the day on Friday when, the symptoms of the cat’s distress were first noticed. I do not accept a res ipsa loquitur legal argument with regard to this evidence. However, tins evidence does isolate the causes of injuries to the cat to an event during that timeframe and in the home occupied by only the Defendant and the Plaintiff, Mr. Chlarson’s mention that one explanation is that Ms. Vorhies might have caused the iqjuiy is not persuasive in light of the other evidence presented as analyzed below.
4) Defendant’s text message
The text message and the contents therein was presented by way of testimony of the plaintiff and plaintiffs mother. Mr. Chlarson admitted both the fact that' he sent the text message and the content of the message. I found that the contents of the text message, “If your f*,,*ing cat gets on my bed again, I swear ..shows an unusual degree of anger and threat directed towards the cat and to Ms. Vorhies. The timing of the message by Defendant’s own admission occurred just a few seconds after he admits shooing the cat off the bed. There was testimony by Mr. Chlarson that he previously ¡.shooed the cat off the bed 16-20 times before and 10 times off the couch. The difference in this instance is the threat and anger in the text message that occurred just subsequent to this event. This coupled with evidence with regard to the marriage difficulties provides both motive and explanation as to why this injury to the cat occurred on a more probable that not basis due to plaintiff’s actions. I found this fact important as to whether the injury to:;the cat was a legally intentional act or legally negligent act. How this evidence applies to the arbitration award and to legal arguments regarding the cause of action is addressed below.
*8655) Report and declaration of Animal Control Officers Quinn and Berg
I gave weight to the interview of Mr. Chlarson by the investigating officer with regard to defendants statements to the officers and the discrepancies therein.. I gave weight to the observations of Mr. Chlarson’s demeanor by both officers during his interview and no consideration to their conclusion that they felt he was not telling the truth. With regard to ¡bis statements to the officers, Mr. Chlarson admits that it was on Friday that Ms. Vorhies told him that she noticed something wrong with the cat. Both plaintiff and defendant were at home at that time. Therefore the injury to the cat occurred on Friday. He admitted to being angry at the cat in the past for throwing up and him stepping in it. Mr. Chlarson admitted to the Animal Control Officer that he told Mr. Vorhies that “at first the puppy hurt the cat” and stated that he did not state that he “toBsed the cat off the bed", but that he said he “shooed the cat off the bed". Mr. Chlarson admitted that only the two of them were present at any time with the cat. He gave several other possible explanations regarding the cat’s injuries which were insufficient to explain the injuries to the cat and which are controverted by Dr. Roisum’s opinion. I could not consider statements made by the other witnesses interviewed by the Animal Control Officer, as those statements were not presented in person or by declaration with the exception of Ms. Georgia Vorhies, mother of Plaintiff. Mort of that information was redundant and it is admitted by both parties that there was a great deal of stress in the household due to Mr. Chlarson wanting to separate from. Me. Vorhies; his wishes to obtain a divorce; and his frustration due to Ms. Vorhie’s reluctance tb' leave the marriage and the residence. I understand that this .evidence was presented by Plaintiff in order to demonstrate a motive for the alleged act directed towards the cat in a moment of anger.
6) Defendant’s testimony that he shooed the cat off the bed and that his statement that he did not kick the cat.
Dr. Roisum opines that the injuries to the cat could have been inflicted by a kick. She describes the injury happening when a fast, firm object came into contact with the cat’s lateral chest causing the rib3 to fracture and the diaphragm to tear. She goes on to make it dear that such injuries do not occur by falling or by accidental household activity or by a small French bulldog. As stated'earlier, this defeats Mr. Chlarson’s other explanations. Mr. Chlarson states that he did not kick the cat. This may be true, but from consideration, of all of the evidence, tins statement seems to be a technical truth, hut hot the whole truth. Assuming that Mr. Chlarson did not kick the cat with his foot, he does admit to shooing the cat off the bed and admits to sending the angry text message immediately following.
The defendant’s allegation, that he simply “shooed the cat off the bed" is not consistent with the preponderance of the evidence. There is much more evidence presented than just “her word versus his word” as to what occurred. *866Based upon all the evidence the most likely explanation is that Defendant, in anger and frustration scooped the cat off the bed with such strength and velocity that he tossed the cat and that the cat struck a hard-edged object, most likely furniture such as the edge of a dresser or chest of drawers causing the injury, Mr. Chlarson may not have meant to have the cat strike the furniture or meant to cause such severe injuries to the cat. The other moat likely explanation based upon the preponderance of the evidence points to a direct attack upon the cat by Defendant.
Either way, based upon all the admissible evidence as a whole, there is a finding that the injury and death of the cat was directly due to an act by the defendant, Mr. Chlarson.
Legal Analysis
There are some scenarios in which it could have been concluded that the cat could have been injured due to defendant’s negligence. However, the facts as presented above do not support this conclusion. The amount of force applied to generate this severe injury to the cat and the volitional nature of the act itself of scooping or tossing the cat leads to the conclusion that such was a intentional act by defendant as defined in legal terms.
1 conclude that such act by defendant was intentional as opposed to pure negligence.
Based upon the preponderance of the evidence, I find for the plaintiff with regard to the causes of action for conversion, for outrage, and for malicious injury to an animal. Conversion was due to the willful deprivation of the chattel by the act of defendant. Outrage due to the intentional and reckless act of the defendant. I also find that plaintiff has met her burden to show that such intentional act amounted to malicious injury to an animal due to the legally intentional act and evidence that the defendant was aware of plaintiffs long standing ownership and relationship to the cat, his threat in the text message, and his frustration with regard to plaintiff’s reluctance to end the marriage, I find that the damages under any of the theories of recovery are aB follows:
Damages
Intrinsic Value of cat
With regard to the intrinsic value of the cat, I award $15,000. I am persuaded that the intrinsic value is.not market value as there is none. I reject that I am limited to the market value based upon the costs of $64.00 for adopting another cat. The value should he the intrinsic value to the owner. I want to make it dear that no amount of this award is punitive in nature. Nor is any of the value based upon “unusual sentimental value”. While juries may make this error, be assured that this arbitrator did not. I am aware that *867to an animal owner, such amount may seem very small but the law does not allow for “mawkishly emotional evaluation” with regard to measuring damages. To an individual who is not the owner, the value may seem high. If an animal were newly acquired, while the owner might be “attached” to the oat, the intrinsic value would be low in such case. If an animal were in the last stages of life, the owner might again be highly bonded to such animal, but such intrinsic value might be lower than during the point of ownership when the animal has been owned for a considerable time with considerable time left for ownership based upon the animal’s life expectancy. The evidence shows that Plaintiff owned the cat for ten years and that there was no indication that the cat was ill or that there was a shortened life expectancy limiting the value of this animal. Addition al evidence considered was the willingness of the Plaintiff to incur high medical expenses for the surgery and seeking medical care in an attempt to save the life of the cat.
Emotional damages of Plaintiff
With regard to emotional damages, I award $10,000. I have separated out the issue with regard to the value of the cat to the owner and assessed damages based upon the emotional distress to the plaintiff related only to the injuries and resultant death of the cat. Part of the emotional damages Is based upon the initial emotional damage caused by witnessing the injuries and resultant suffering of the animal. A portion of the damages is assessed for the grief associated with the death of the cat. A portion of the damages is assessed for the continued emotional distress experienced by the plaintiff, not allowing the plaintiff to consider another companion cat. A portion of the damages is assessed for plaintiff’s emotional feelings of guilt for not protecting the cat from the injury by staying in the marriage.
Loss of Use
I do not award any loss of use based upon a daily value of the loss of the cat to the owner as requested by the Plaintiff, I am not persuaded -that I can determine fairly a daily loss of use, as I do not find that such animal has a replacement value during the interim that I can separate out from the value assessed in the intrinsic value. Since the replacement value of the animal is not easily ascertained, it would be difficult for the defendant to have paid that value in order to stop the assessment of a daily loss of use of such animal. Although that difficulty alone would not normally prohibit a loss of use claim, I find that awarding a daily loss value in this particular case would trivialize the value of tins animal to the owner. More simply put, such loss of use value has been considered to be a portion of the intrinsic value as I have assessed a total value of the cat based upon consideration of both past, present and future value to the owner.
Total award is $25,000.00. I award statutory costs and attorney’s feeB to the Plaintiff as the prevailing party.
Dated this 16* day of March, 2012
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*868[[Image here]]
*869[[Image here]]
*870NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify)'. MEMORANDUM DECISION was entered on the date indicated as “Entered” on the first page of this judgment or order and will be served in the manner stated below:
1. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF1 B Pursuant to controlling General Orders and LBRs, the foregoing document was served on the following persons by the court via NEF and hyperlink to the judgment or order. As of (date) 10/25/13. the following persons are currently or» the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive NEF transmission at the email addresses stated below.
Heide Kurtz (TR) trustee@hkurtzco.com, ca45@ecfcbis.com
Tina M Locklear on behalf of Plaintiff Kendra Vorhies Flores tina@lockiearlaw.com
United States Trustee (LA) ustpregion 16.la.ecf@usdoj .gov
□ Service information continued on attached page
2. SERVED BY THE COURT VIA UNITED STATES MAIL: A copy of this notice and a true copy of this judgment or order was sent by United States mail, first class, postage prepaid, to the following persons and/or entities at the addresses indicated below:
Debtor/Ddfendant Justin Thomas Chlarson 12531 Countryside St El Monte, CA 91732
Debtor/Defendant Justin Thomas Chlarson 223 Burnham Loop Fort Leavenworth, KS 66027
Attorney for Debtor/Defendant Thomas Allison Law Offices of Thomas D Allison 336 1/2 S Glendora Ave Ste K West Covina, CA 91790
□ Service information continued on attached page
3. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or order which bears an “Entered" stamp, the party lodging the judgment or order will serve a complete copy bearing an “Entered” stamp by United States mail, overnight mail, facsimile transmission or email and file a proof of service of the entered order on the following persons and/or entities at the addresses, facsimile transmission numbers, and/or email addresses stated below:
□ Service information continued on attached page
This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Centra! District of California.
. The complete arbitrator's decision is attached as Appendix A. The Judgment Summary and Order Granting Judgment on Award is attached as Appendix B.
. All such references are to Title 11 of the United States Code unless otherwise indicated.
. Under the court's local rule 9013-1 (h) Chlarson's failure to oppose the Motion is deemed to be his consent to the court granting the relief requested therein.
. The court takes judicial notice of the arbitrator’s written decision and the judgment from the superior court. Judicial notice is appropriate for records and “reports of administrative bodies.” See United States ex rel. Robinson v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir.1992).
. Pursuant to 28 U.S.C. § 1738, as a matter of full faith and credit, federal courts are required to apply the pertinent state's collateral estoppel principles. Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995).
. Chlarson pled guilty to misdemeanor charges against him based on his involvement with the death of Flores’s cat, but the arbitrator gave only minimal weight to this fact based on his assessment of the mitigating effects of a plea agreement entered into by Chlarson.
. Under Washington law, for collateral estop-pel to apply, the party seeking application of the doctrine must establish that (1) the issue decided in the earlier proceeding was identi*862cal to the issue presented in the later proceeding, (2) the earlier proceeding ended in a judgment on the merits, (3) the party against whom collateral estoppel is asserted was a party to, or in privity with a party to, the earlier proceeding, and (4) application of collateral estoppel does not work an injustice on the party against whom it is applied. Christensen v. Grant Cnty. Hosp. Dist. No. 1, 152 Wash.2d 299, 307, 96 P.3d 957 (2004) | 01-04-2023 | 11-22-2022 |
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