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https://www.courtlistener.com/api/rest/v3/opinions/8496538/ | Chapter 13
MEMORANDUM OPINION
Robert E. Nugent, United States Chief Bankruptcy Judge.
When a chapter 13 debtor’s confirmation hearing ends with the confirmation of a plan that rejects a personal property lease, two things happen: the leased property is no longer property of the estate 1 and both the automatic and codebtor stays terminate as to the leased property.2 As with any rejection of a lease, the rejection operates as a prepetition breach.3 When the stays are terminated as to the leased property, the lessor is free to recover it. The lessor may even receive a “comfort order” from the Court to that effect.4 But the lessor may not pursue the debtor personally, at least not without securing *873relief from the automatic stay that prevents actions to collect prepetition debts against the debtor and property of the estate.5
Janone Shanee Wade’s chapter 13 plan provided for the rejection of her prepetition furniture and television lease from Easygates, LLC, dba easyhome (“Easy”). When that plan was confirmed, Easy could recover its property from her without obtaining a court order lifting the automatic stay. Before Easy recovered all of the property, the TV was stolen. Easy then sued Wade in state court for replevin, claiming the right to recover the TV, but also proceeding against her in personam to recover the value of the missing TV along with Easy’s attorney fees and costs of the action. Easy was within its rights to seek recovery of the TV, but it breached the stay when it sued Wade personally. Easy is entitled to a “comfort order” under § 362(j) that the stay is terminated with respect to the TV and the other leased items, but those parts of its replevin action that assert personal liability against Wade violate the stay, are void, and should be immediately withdrawn.
Facts
Janone Shanee Wade filed this case on May 24, 2012. With her petition, she filed a chapter 13 plan that provided, in part, that she would reject the furniture and television lease with Easy (the “Lease”). Her plan, amended in a way that did not affect the proposed Lease rejection, was confirmed at a hearing on August 8, 2012 and the confirmation order was entered on August 10, 2012.6 On September 7, Easy filed a state court limited action for replev-in.7 In that action, Easy pled that Wade had wrongfully retained the property despite Easy’s demands for the return of same and demanded an order granting it possession of the leased property. Easy also prayed for alternative relief in the form of an in personam money judgment against Wade for the value of the property not returned to it and for its reasonable attorney’s fees and costs, including the cost of its replevin bond. Not until January of 2013, did Easy file its present motion here to obtain a comfort order concerning the stay’s termination.8
On July 9, 2012, before the plan was confirmed, Wade’s house was burglarized and the TV was stolen.9 Wade testified that her home had been burglarized before and that she had lost another TV in January of 2011. She had no insurance coverage on the TV, though she does own her house. She testified that while her home mortgage lender had force-placed insurance on the dwelling, that insurance did not cover its contents. Nor had Wade purchased any coverage for the leased property from Easy. There is no insurance coverage available to make Easy whole.
After the plan was confirmed in August, Easy attempted to recover the property from Wade. This began on August 25, 2012 with Easy’s counsel sending her a 30-day demand letter to “tak[e] care of the balance due” and “for court costs and attorney’s fees up to $750.”10 These were to be paid by check or credit card to Easy’s counsel, who is also its counsel of record in *874this matter. The letter also indicated that if the property was not recovered, Easy would look to Wade personally for its value. Then, on September 7, 2012 (considerably less than 30 days after the letter’s date), Easy filed its state court petition for replevin, asserting that the total value of the leased property was $6,831.24 and demanding judgment for possession or judgment in personam for the value.11 Wade’s attorney filed an answer admitting that Easy was entitled to the return of the property, stating that the TV had been stolen, and denying that Easy was entitled to a money judgment against Wade.12 The action in state court was then stayed pending Easy’s obtaining a bankruptcy court order allowing it to proceed.
Easy filed its motion for a comfort order here on January 17, 2013.13 Wade filed her motion for sanctions against Easy and its attorney, Ms. Milby, for willful violation of the automatic stay on January 25.14 After receiving memoranda of law from both sides and from the Chapter 13 Trustee, I conducted a trial of these matters on September 24, 2013.15
Analysis
Dealing with unexpired leases in chapter 13 is not straightforward. While § 365 generally applies, it is not clear whether the debtor or the trustee may assume or reject a lease, nor is there a set time limit for assuming or rejecting a personal property lease. Section 365(d)(2) provides that the trustee may assume or reject a personal property lease in a chapter 13 case at any time before the confirmation of the plan, but also that any party to the lease may request the court to set a time certain by which to assume or reject the lease. Section 1322(b)(7) permits a plan to provide for the assumption or rejection of a lease and only a debtor may propose a chapter 13 plan.16 Section 1303 confers on the debtor the rights, powers, and duties of a trustee under § 363, including the right to use, sell, or lease estate property inside or outside of the ordinary course of business, but § 365 is not mentioned in that section. Taken together, all of this suggests that the debtor has the power to assume or reject a lease under § 365. It is clear under § 365(p)(3) that if a debtor proposes a plan that includes a rejection provision, when that plan is confirmed, the leased property leaves the estate and the stay is terminated with respect to the property. Making this case somewhat more challenging is the added facet of the missing television: when did Easy’s claim for its value arise and what is the nature of that claim in bankruptcy?
I. True Leases, Kan. Stat. Ann. § 84-1-203
Before considering the impact of § 365, we should consider whether these documents are true leases. Kan. Stat. Ann. § 84-l-203(b) (2012 Supp.) states that for a lease to be deemed a security interest, it *875must not be “subject to termination” by the lessee. Paragraph 7 of the lease forms titled “Lease-Purchase Agreement (Kansas)” states: “You [the lessee] may terminate this Agreement at any time ...”17 The leases in question are true leases because they may be cancelled at any time by the lessee surrendering or returning the property without penalty.18
II. Leases Rejected at Close of Con-ñrmation Hearing: “Comfort Orders”
Ms. Wade clearly provided for the leases’ rejection in her plan.19 Section 365(p)(3) states that if a personal property lease is not assumed in the confirmed chapter 13 plan, it is deemed rejected at the conclusion of the hearing. So, Easy’s leases were rejected as of August 8, 2012. That subsection also states that the automatic stay and codebtor stay are both terminated as to leased property at that time. Nothing prevented Easy from immediately acting to recover its leased property after August 8, 2012.
The leased property left the estate on August 8, too. Section 365(p)(l) provides that if the lease of personal property is not timely assumed by the trustee, the leased property is no longer property of the estate and the § 362(a) automatic stay is terminated. Section 362(j) provides that the lessor may request and the court shall issue an order “under subsection (c)” of § 362 confirming that the stay has terminated—the so-called “comfort order.” Section 362(c)(1) provides that the stay continues as to property “until such property is no longer property of the estate.” Easy is entitled to a comfort order stating that the stay has terminated as to the leased property.
III. In Personam Pursuit of Debtor Stayed
Easy’s attempts to secure a personal judgment against Wade for the value of the TV and for its attorney’s fees and costs violate the stay because they are clearly efforts to collect what are prepetition debts as a matter of law from Ms. Wade’s other assets, which are, and will be property of the estate until she completes her plan or her case is dismissed.
Absent Wade’s bankruptcy, Easy would be entitled to enforce the provisions of its lease that provide for her to return the leased goods upon her default and the lease’s termination.20 Kan. Stat. Ann. § 84-2a-525(2) and (3) (1996) allows recovery by self-help or with judicial assistance of the leased property.21 Likewise, both the terms of the leases and Article 2a permit recovery of past due or defaulted rents.22 But because Wade is operating under a confirmed chapter 13 plan, the rules have changed and Easy’s remedies are quite limited.
Wade’s rejection of the leases is a breach that is deemed by § 365(g) to have occurred “immediately before the date of the filing of the petition.”23 That means that any back rent or any other contractual damages sought by Easy are prepetition claims in the case. Easy asserts claims that include the attorney’s fees and costs *876associated with recovering the leased property as well as for the value of the leased property it has not recovered. Each of these claims arises from the lease contracts themselves or Article 2a — they are part of the damages enumerated as remedies for the deemed prepetition breach. Section 362(a)(1) explicitly stays any action to recover a claim against the debtor that arose before the commencement of the case and § 362(a)(6) protects the debtor from any act to collect or recover such claims. Section 362(a)(3) protects the property of the estate from any collection efforts on account of pre- or post-petition claims.
If, as Easy hinted at trial, Wade could be accused of concealing or converting the television, she would still be protected from Easy’s in personam proceedings until Easy sought and secured relief from the stay for cause. Wade’s plan provides that the property of the estate will not revest in her until she receives a discharge or the case is dismissed.24 As noted above, § 362(a)(3) stays any attempt by a creditor to take possession of estate property without regard to when the claim underlying the attempt arose. My colleague Judge Berger considered this issue in a case where a mortgage creditor sought to pursue debtors in personam for defaulted house payments after confirmation. In In re Maslak, he held that the mortgagor’s efforts to recover a money judgment against the debtors after they surrendered their home through a chapter 13 plan violated the stay and were void.25 And in In re Clark, the bankruptcy court held that because the estate’s assets had not revested in the chapter 13 debtors under their confirmed plan, as here, an IRS levy on the debtor’s post-petition wages on account of a post-petition tax debt remained stayed.26
Easy provided no case law, reported or otherwise, suggesting the contrary. It relied on a text order entered by another bankruptcy judge in the Western District of Missouri but that case is distinguishable. In In re Smith, a chapter 7 case, Easy secured an order deeming a furniture lease rejected.27 When the debtor failed to turn over the personal property, Easy sued and obtained a judgment against the debtor for post-petition damages in Jackson County Circuit Court. Then Easy garnished the chapter 7 debt- or’s wages to recover the judgment. In denying the debtor’s motion to quash the state court garnishment writ, the bankruptcy judge stated—
It appears that the garnishment was issued pursuant to a post-petition judgment entered in Jackson County Circuit Court after the Debtor failed to turn over the personal property that served as collateral for her debt to Easygates LLC d/b/a easyhome. Therefore the debt is for post-petition damages that were not discharged in this bankruptcy, and the garnishment is property and may continue....28
*877That order is not persuasive precedent here. Easy took a post-petition judgment against a chapter 7 debtor and sought to enforce that judgment against the debtor’s post-petition wages which, unlike a chapter 13 case, were not property of the estate. Assuming the post-petition judgment did not violate the stay as the bankruptcy judge apparently concluded, Easy’s collection of that judgment against non-estate property does not run afoul of § 362(a)(3). That is very different from Easy’s attempt to collect from Ms. Wade a deemed pre-petition claim from property that definitely remains in the bankruptcy estate. Smith simply doesn’t help.
While nothing prevented Easy from seeking stay relief to pursue Wade if it believed it had a tort claim against her that arose post-petition, Easy certainly may not assert that relief (any mention of which was omitted from its petition in state court) without demonstrating cause to the bankruptcy court. The in person-am action against Wade violated the stay and is void. Likewise, the actions of Easy’s attorney both in writing the 30-day demand letter on August 25, 2012 and in commencing the state court action violated the stay. Because the debtor is an individual who has been damaged by a willful stay violation, she may recover damages for the breach under § 362(k), including attorney’s fees, expenses, and, in appropriate circumstances, punitive damages.
Conclusion
Easy is entitled to an order under § 362(j) stating that the automatic stay is terminated with respect to all of the property described on the Lease, but the balance of the motion for comfort order is DENIED.
Wade’s motion for sanctions is GRANTED. Easy’s demand letter and subsequent “replevin” action that sought a money judgment against Wade violated the automatic stay and is void. Any and all pleadings in the state court case seeking in personam relief are void and of no legal effect. They should be withdrawn and the state court case dismissed immediately after Easy causes a copy of this Order to be filed in the state court case. If this is not done within 14 days of the entry of this order, Easy will be sanctioned $100 per day until the order is filed and the case dismissed.
In addition, Easy’s and its counsel’s knowing and willful stay violations are answerable with an award to Ms. Wade for damages, including her attorney’s fees and costs caused thereby. Ms. Wade’s counsel shall file and serve on Easy and its counsel a statement of Ms. Wade’s attorney’s fees and costs and Easy and its counsel shall have 21 days thereafter to object to same. Counsel for Ms. Wade may include his time incurred in preparing the statement of fees and expenses as well as any time incurred in recovering them. If Easy or its counsel object to Wade’s statement, the Court will set the matter directly to an evidentiary hearing at the next available evidentiary stacking docket.
SO ORDERED.
. 11 U.S.C. § 365(p)(l).
. 11 U.S.C. § 365(p)(3).
. 11 U.S.C. § 365(g).
. § 3620.
. §§ 362(a)(1) and (a)(3).
. Dkt. 20 and 21.
. Debtor’s Ex. 2.
. Dkt. 30. While citing § 365(p)(3) that the stay was automatically terminated with respect to the leased property due to debtor’s rejection of the lease, Easy's motion for a comfort order prayed for an order “confirming that its claim against Debtor for the missing property is a post-petition claim which may be pursued against Debtor.... ”
. Debtor’s Ex. 5.
. Debtor’s Ex. 1.
. Debtor's Ex. 2.
. Debtor's Ex. 3.
. Dkt. 30.
. Dkt. 33. Wade sought her costs and damages, including her attorney's fees.
. Easygates, L.L.C. appeared by its attorney Dana Milby and the debtor Ms. Wade appeared by her attorney David Lund. The chapter 13 trustee Laurie B. Willilams appeared by her attorney Karin N. Amyx. The parties stipulated to the admission of each other's exhibits and certain stipulations of fact made on the record. Among these stipulations, Easy acknowledged that it received timely notice of Wade’s bankruptcy, that it reviewed Wade’s chapter 13 plan, and that it made a "conscious decision” to wait until confirmation of the plan for the stay to be lifted.
. § 1321.
. Creditor’s Ex. 1 and 2.
. Because the lease is terminable by the lessee, the Court need not reach the remainder of the test in § 84-l-203(b)(l)-(4).
. Dkt. 3, Plan§ 13.
. See Creditor’s Ex. 1 and 2, ¶ 7.
. See also, § 84-2a-501(3) (2012 Supp.).
. § 84-2a-523(l)(e) and (f) (1996) and § 84-2a-528(l) (2012 Supp.); Creditor’s Ex. 1 and 2, ¶ 11.
.§ 365(g)(1).
. Dkt. 3, ¶ 16(b).
. In re Maslak, 2012 WL 5199168 (Bankr.D.Kan., Oct. 19, 2012).
. In re Clark, 207 B.R. 559, 562-64 (Bankr.S.D.Ohio 1997) (citing § 1327(b)’s effect of confirmation and § 1306’s inclusion of post-petition earnings as property of the estate).
. In that case, Easy filed a motion to deem the personal property lease rejected and order the debtor to immediately surrender the leased property. By text order noted in the ECF system, the motion was granted on April 19, 2011, without elaboration. No hearing was held on the motion. The order discharging debtor was entered March 28, 2012.
.In re Victoria Rochelle Smith, Case No. 11-40544 (Bankr.W.D.Mo.), Dkt. 60 entered October 1, 2012. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496539/ | CHAPTER 7
MEMORANDUM OPINION AND ORDER DETERMINING THE BANKRUPTCY ESTATE’S OBLIGATION FOR MANAGEMENT FEES AND EXPENSES THROUGH FEBRUARY 28, 2013
Dale L. Somers, Untied States Bankruptcy Judge.
Throughout this Chapter 7 case, Bill Fair & Co. (BFC) has managed real properties owned by Debtor. The amount owed by the estate to BFC as management fees and for expenses is a contested issue, which has been the subject of three days of trial, begun on May 22 and 23, 2013.1 and concluded on September 18, 2013.2
The controversy arises in the context of a confluence of unfortunate circumstances. Debtor owned three real properties in Douglas County, Kansas. They are known as Villa 26 Apartments, Four Wheel Drive, and the North Lawrence Real Estate. A judgment against Debtor and his daughter, Gail Youngquist, entered in Texas, was registered in Douglas County, Kansas District Court. By an Order of Sale, BFC was appointed by that court to manage the three properties and to conduct an auction sale of Villa 26 Apartments and Four Wheel Drive.
In response to the registration of the Texas judgment, the Order of Sale, and the appointment of BFC, but before the *882properties were ready for sale, Debtor, an elderly man who appears to be incapable of meaningful participation in these proceedings, filed this ease under Chapter 7 of the Bankruptcy Code pro se in Wichita, Kansas. In all likelihood, if Debtor had consulted with counsel, he would have been advised that a Chapter 7 proceeding would not be beneficial. Debtor’s daughter, Gail Youngquist, who is also subject to the Texas judgment (although she contends it was entered against her by default without jurisdiction), was a co-owner of Villa 26 Apartments. Until very recently, she also appeared pro se and did not effectively represent her interests.
The Chapter 7 Trustee, who has no experience managing large apartment complexes, obtained Court approval for the employment of BFC as manager and auctioneer for the three Douglas County properties. But BFC also had no experience managing apartment complexes, large or small, on a long-term basis. Further, BFC has no familiarity with bankruptcy proceedings and received no guidance from the Trustee. In large part because of objections to the Trustee’s proposed sale of Villa 26 Apartments, the management phase of BFC’s employment has lasted over two years, during which time the Trustee, who is located in Wichita, approximately 150 miles from Lawrence, failed to inspect the properties under management or to demand and receive payments, ac-countings, or management updates from BFC. Neither Debtor nor his daughter were capable of cooperating with BFC. After the auction sale of Villa 26 Apartments, BFC requested from the Trustee compensation for its management services and expenses under the management contracts approved by the Douglas County, Kansas District Court and by this Court.
The issue of the compensation due BFC for management fees and expenses is presented to the Court by the following pleadings: Application to Determine Accounting and Fees of Property Manager, through February 28, 2013, filed by Trustee J. Michael Morris;3 First Application for Payment of Reasonable Compensation for Services Rendered and Costs and Expenses Incurred Pursuant to 11 U.S.C. § 543(C)(2) from the Petition Date to June 8, 2011, filed by BFC;4 and Second Application for Payment of Reasonable Compensation for Services Rendered and Costs and Expenses Incurred Pursuant to 11 U.S.C. §§ 328, 330 and 331 and Federal Rule of Bankruptcy Procedure 2016, from June 9, 2011 to February 28, 2013, filed by BFC.5 Responses were filed to these pleadings. Although the Court’s consideration of the case has revealed several procedural irregularities and the Court has suggested to the parties that those matters could impact resolution of this controversy, counsel have not pursued them. Therefore, the Court will address the compensation issue only within the framework presented by the parties. In doing so, it will not make distinctions between the Trustee’s application and BFC’s applications since they address the same matters, although from different perspectives. The burden of proof is on BFC to show it is entitled to the compensation requested.6
BACKGROUND FACTS.
On February 18, 2010, the District Court of Travis County, Texas, 126th Judi*883cial District, awarded a judgment in favor of the State of Texas against Rollover Lease Operations, Inc., Gail S. Youngquist (by default), Rex A. Youngquist (on the plaintiffs motion for summary judgment following a pro se written response to the complaint), and Greggory Clinton Sander, jointly and severally, in the total amount of $848,739.00, plus interest and costs.7 On March 23, 2010, the same court appointed Peter E. Pratt, Jr., as a receiver with “the fullest authority under Texas Law to seize all non-exempt property” of the judgment defendants and to pay the proceeds to the plaintiff to satisfy the judgment.8 On September 13, 2010, the Texas judgment was filed in Douglas County, Kansas District Court, and on December 29, 2010, the Douglas County court heard the judgment creditor’s motion for sale. An Order of Sale,9 filed the following day, granted the motion and ordered that: (1) pursuant to K.S.A. 60-2140, the judgment creditor was permitted to sell as separate tracts real estate commonly known as Villa 26 Apartments and Four Wheel Drive by special execution at an auction to be conducted by BFC; (2) for its auction services, BFC would be compensated from the proceeds of the sale for the advertising and marketing expenses plus a 10% real estate commission; and (3) in order to preserve the properties and maximize their value, BFC was retained to manage Villa 26 Apartments and Four Wheel Drive, for which it “shall be paid 10% of the volume of income as a management fee.” Copies of an Absolute Real Estate Auction Agreement10 between Pratt and BFC (BFC-Pratt Auction Agreement) and a Commercial Property Management Agreement11 between Pratt and BFC (BFC-Pratt Management Agreement) had been provided to the court with the motion for sale and were approved by the court. They were “fill in the blank” form contracts provided by BFC.
Debtor Rex Veech Youngquist filed this case pro se under Chapter 7 on January 25, 2011. J. Michael Morris was appointed as the Chapter 7 Trustee. Debtor’s Schedule A, “Real Property,” filed with his voluntary petition, listed the following Douglas County, Kansas properties, with the values as shown in parentheses: Villa 26 Apartments ($2,400,000); Four Wheel Drive ($700,000); and North Lawrence Real Estate ($170,000). On March 31, 2011, the Trustee filed his Application to Employ Property Manager/Realtor/Auctioneer (Trustee’s Application to Employ),12 seeking, among other things, the Court’s approval of his retention of BFC as the manager of the three Douglas County properties. Copies of a proposed Commercial Property Management Agreement (BFC-Morris Management Agreement) and a proposed Absolute Real Estate Auction Agreement (BFC-Morris Auction Agreement) were attached to the motion. They utilized the same BFC form agreements that had been presented to the Douglas County, Kansas District Court, but with changes as discussed below. The application was granted by an Order to Employ Property Manager/Realtor/Auctioneer (Employment Order) filed on June 9, 2011.13 It provides that as property manager, BFC “will receive management fees as set out in ¶ 12 in the Commercial Property Management Agreement attached to the Application to Employ filed *884on March 31,' 2011.” The Employment Order is silent as to its effective date.
On March 22, 2011, the Trustee filed a Complaint to Sell Jointly Owned Property, seeking authority to sell the estate’s and Gail Youngquist’s interests in Villa 26 Apartments under the authority of § 363(h).14 That litigation was terminated by the entry of an order on September 24, 2012, allowing the sale of the jointly-owned property.15 On November 6, 2012, the Trustee filed a motion to sell Villa 26 Apartments.16 The sale occurred on December 13, 2012, with gross proceeds of $3,025,000,17 and fees and expenses due BFC of $289,727.50.18 This dispute about the management fees due BFC arose shortly thereafter.
BFC’S MANAGEMENT SERVICES.
Villa 26 Apartments is a 76-unit apartment complex, comprised of nine buildings. There are one-, two-, and three-bedroom units. Each unit has parking or a garage, its own appliances, and central air conditioning and heat. There is no clubhouse or pool. The complex was constructed in approximately 1988 and has been owned by the Youngquist family since that time. The Youngquist family also managed the property until BFC was engaged with the approval of the Douglas County, Kansas District Court.
Bill Fair and his wife, Kathy Fair, who operate BFC, testified at trial. BFC’s primary business is auctioning, not management, except for short-term management of properties to prepare them for sale. When BFC was appointed by the Douglas County, Kansas District Court, Bill Fair anticipated that the auction of Villa 26 Apartments and Four Wheel Drive would be held within 60 to 90 days. BFC undertook to clean up the Villa 26 Apartments property and seek tenants for vacant units. When the auction of Villa 26 Apartments was advertised, the occupancy was rate 98%. The rents collected by BFC for this property from January 1, 2011, through February 28, 2013, were $933,325.52, and the expenses, not including management fees, were $511,935.82.
The Four Wheel Drive property was valued at $700,000 in Debtor’s schedules. That property includes a residence, additional rental units, and a separate office building. Debtor and Gail Youngquist, and perhaps other family members, lived in the residence at Four Wheel Drive during this bankruptcy. The Trustee directed BFC not to charge the Youngquists rent, which reduced the income from the property. The rents collected by BFC from January 1, 2011, through February 28, 2013, were $162,419.42, and the expenses, not including management fees, were $132,868.75. The Youngquists’ occupancy of the Four Wheel Drive residence, although reducing required management services, compromised BFC’s ability to efficiently manage the property. In addition, there was significant personal property belonging to various people, including the Youngquists and former tenants, stored at Four Wheel Drive which BFC had to deal with without the benefit of the Youngquists’ historical knowledge and cooperation.
The North Lawrence Real Estate, valued at $170,000 in Debtor’s schedules, required little management. It generated rental income of $36,300.80 from January 1, 2011, through February 28, 2013. For the same period, expenses, not including *885management fees, were $5,534.25, primarily for insurance and utilities.
The management authority granted to BFC by both the BFC-Pratt Management Agreement and the BFC-Morris Management Agreement was extensive and identical. BFC, referred to as the “broker” in the agreements, was given authority to collect rents and other tenant charges and to pay from such collections “expenses to operate the Property, including but not limited to, maintenance, taxes, insurance, utilities, repairs, security, management fees, leasing fees, and expenses authorized under this agreement.”19 As to leasing, BFC was given authority to negotiate and execute leases on the owner’s behalf at market rates, for initial terms of not less than one month or more than twelve months.20
AGREEMENTS REGARDING BFC COMPENSATION
The Order of Sale entered by the Douglas County, Kansas District Court approving BFC’s retention for purposes of management and auction sale provides that BFC “shall be paid 10% of the volume of income as a management fee.”21 But the BFC-Pratt Management Agreement, approved in the Order of Sale, provides for additional compensation. The introductory portion of paragraph 12, titled “Broker’s Fees,” states, “If more than one property or unit is made part of and subject to this agreement, each of the provisions below will apply to each property or unit separately.”22 The paragraph then enumerates seven elements of compensation. The first element is “Management Fees.” As to each of the properties to which it applies,23 this element provides, “Each month Owner [Peter Pratt — Receiver] will pay Broker [BFC] the greater of $4,000.00 (minimum management fee) or (1) 10% of the gross monthly rents collected that month.” The second element is “Leasing Fees for New Tenancies” of 6% of the gross rents to be paid for each time the property is leased to a new tenant. The third element is “Renewal or Extension Fees” of 6% of the gross rents to be paid under the renewal or extension for each time a tenant renews or extends a lease, other than on a month-to-month basis. The fourth element is “Service Fees” of 10% of the total cost of each repair, maintenance, alteration, or redecoration which BFC arranges to be made to the property. The fifth element provides for BFC to retain all interest earned on any trust account it maintains under the agreement, the sixth element provides for BFC to retain all administrative fees, such as returned check and late fees, received from tenants, and the seventh element provides for BFC to be paid at the rate of $150 per hour for appearances at any legal proceedings, including tenant disputes.
When the bankruptcy was filed, Bill Fair was contacted by the Trustee and asked to continue his company’s management services. The BFC-Morris Management Agreement utilizes the same form agreement as the BFC-Pratt Management Agreement, with changes requested by the Trustee and agreed to by Bill Fair on behalf of BFC. There were no in-person negotiations of the terms. Bill Fair sent a proposed signed agreement to the Trustee, the Trustee made changes, signed the re*886vised agreement, and returned the agreement to Bill Fair. Bill Fair did not contest any of the changes and agrees BFC is bound by the agreement as changed by the Trustee, the terms of which were approved by the Court. The BFC-Morris Management Agreement applies to three properties: Villa 26 Apartments, Four Wheel Drive, and the North Lawrence Real Estate.24
For purposes of this dispute, the important differences between the BFC-Pratt Management Agreement and the BFC-Morris Management Agreement are in paragraph 12 regarding the broker’s fees. The provision in the agreement with Pratt that the broker fees would apply separately to each of the three properties under management was stricken, and the parties agreed that the management fee for all properties would be the greater of $7,000 per month or 10% of the gross rents collected that month. The management fee for new tenancies was changed to “one month’s rent to be paid from first month’s rent to be paid by tenant.” The management fee based on lease renewals or extensions was changed to “one month’s rent to be paid from the first month’s rent paid by tenant after the renewal or extension.” The service fees, the right to retain interest on trust accounts, and the fees related to legal proceedings were not changed, but the administrative fees were reduced to 50% of any administrative charges collected from tenants.
EXPERT TESTIMONY REGARDING FEES AND EXPENSES.
At trial, Greg Hanson, employed by Weigand Omega Management, testified as BFC’s expert witness as to fees and expenses for management of apartment complexes.25 He testified that typical fees would vary greatly, ranging from 4% of rents for a very large, high-end project to 8 to 10% on a smaller project, usually with some minimum. There would not be an additional component of the management fees based upon lease renewals or repairs, unless there were a major rehabilitation. In addition to the management fees, property managers are customarily compensated for on-site expenses directly related to the property, such as pay for an on-site manager, credit checks on tenants, eviction expenses, on-site office expenses, and security expenses. Other expenses, such as supervision and bookkeeping, would be included in the management fees.
THE TRUSTEE’S REQUEST FOR AN ACCOUNTING OF BFC’S FEES AND EXPENSES, AND BFC’S REQUEST FOR COMPENSATION.
Throughout the period that BFC managed the estate’s properties, BFC collected rents and other charges, and then paid expenses and its own compensation from the collected revenues. No money was distributed to Pratt before the bankruptcy case was filed or to the Trustee thereafter. The issue before the Court is to determine the management fees and expenses due BFC, deduct these and other funds due BFC26 from the income collected, and de*887termine the net amount to be paid to the estate. Much of the trial testimony was therefore devoted to the review of accounting statements prepared by BFC. During the first two days of trial, there were substantial challenges about the accuracy of the statements, but between the May and September trial dates, BFC prepared new statements of accounts, and the parties now agree that the numbers they contain are accurate.27 The details of those statements will be discussed below, and that discussion shall supplement these findings of fact.
Highly summarized, the Trustee seeks an accounting of the funds collected by BFC, and the fees and expenses properly owed to BFC through February 28, 2013. BFC’s position is that it is entitled to fees calculated in accord with the BFC-Pratt Management Agreement until June 8, 2011, and in accord with the BFC-Morris Management Agreement thereafter. The Trustee’s position is that some of the expenses for which BFC seeks compensation should be disallowed and that the allowed management fees should be reasonable fees, not those stated in the two management agreements. In a post-trial brief, the Trustee submits five alternative approaches for determining BFC’s allowable fees and expenses.28
The Court has previously granted the Trustee’s request to approve the disbursement to BFC of $289,727.50 as the commission and expenses for sale of Villa 26 Apartments under the BFC-Morris Auction Agreement. Such payment is subject to adjustment based on any amount owed to the estate by BFC under the BFC-Morris Management Agreement.29 This memorandum determines those fees and expenses through February 28, 2013.
DISCUSSION.
Under the facts of this case, an accounting of the management fees and expenses that are due to BFC involves a consideration of four discrete time periods: The prepetition period; the period between the filing of the bankruptcy and the filing of the Trustee’s application for the appointment of BFC; the period during which the application was pending; and the period after the retention of BFC by the Trustee was approved. Each is considered below.
A. Period I — December 30, 2010 (entry of Douglas County, Kansas District Court Order of Sale), to January 25, 2011 (date bankruptcy was filed).
Prepetition, BFC was a “custodian” as defined by § 101(1 1)(C),30 which provides that the term means a “trustee, receiver, or agent under applicable law, or under 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.” Under the Douglas County, Kansas District Court Order of Sale, BFC was a custodian for Debtor’s Douglas County properties, including Villa 26 Apartments and Four Wheel Drive. BFC was the agent of Peter Pratt, the receiver appointed by the Texas court, and was given charge over the properties for the purpose of enforcing the judgment lien arising from the filing of the Texas judgment against Debtor and his daughter in Douglas County, Kansas District Court.
*888Under § 543(b), when the bankruptcy was filed, BFC as custodian had a duty to account and to turn Villa 26 Apartments, Four Wheel Drive, and the North Lawrence Real Estate over to the Trustee, unless excused from such turnover under § 543(d). That subsection provides for a prepetition custodian to continue in possession, custody and control of property of the debtor if, after notice and hearing, it is determined to be in the best interests of creditors. Neither BFC nor the Trustee applied for BFC to continue as custodian. A prepetition custodian who does not remain in possession under § 543(d), such as BFC, is a superseded custodian. The compensation of a superseded custodian is governed by § 543(c)(2),31 which provides that “[t]he court, after notice and a hearing, shall — ... provide for payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian.”
Compensation for prepetition services of a superseded custodian is entitled to administrative priority under § 503(b)(3)(E).32 It provides that after notice and a hearing, there shall be allowed as administrative expenses, the “actual, necessary expenses ... incurred by — ... a custodian superseded under section 543 of this title, and compensation for the services of such custodian.” Commentators agree that § 503(b)(3)(E) grants administrative priority status to compensation for prepetition services. One commentator states, “Custodians superseded under Code § 543 are entitled to administrative priority for both their actual and necessary expenses and compensation for their services. This provision is an exception to the general rule that administrative expenses are not recoverable for prepetition claims.”33 Another commentator states, “It is clear from the statutory language however, that the custodian’s compensation is not limited to compensation for services rendered after the filing of the petition.”34
The Court finds that BFC is entitled to reasonable compensation and reimbursement of expenses for the prepetition period. The specifics of the determination of reasonable compensation under § 543(c)(2) are discussed in section D below.
B. Period II — January 25, 2011 (date bankruptcy was filed), to March 31, 2011 (date of filing of the Trustee’s Application to Employ BFC).
A superseded custodian is also entitled to reasonable compensation under § 543(c)(2) for services rendered and costs and expenses incurred, and the priority provision of § 503(b)(3)(E) applies to a superseded custodian’s postpetition “winding up” services and expenses.35 One of the unusual procedural circumstances of this case is that at the Trustee’s request and with his approval, BFC continued in possession of estate property in the capacity of a custodian for several months after the date of filing.36 Although the time period *889during which BFC continued to act as a custodian was significantly longer than that required for “winding up,” the Court finds that § 543(c)(2) governs the award of fees and expenses of BFC for this time period.
The specifics of the determination of reasonable compensation under § 543(c)(2) are discussed in section D below.
C. Period III — March 31, 2011 (date of filing of the Trustee’s Application to Employ BFC), to June 8, 2011 (day before the Employment Order).
The question with respect to the third period is whether the fees and expenses for this period should be governed by the standards applicable before the Trustee’s application to appoint BFC was filed with this Court (examined above) or those applicable after the order of appointment was filed (discussed below). Neither the Trustee’s Application to Employ nor the Employment Order addresses the effective date of the retention.
BFC argues that the Employment Order and the BFC-Morris Management Agreement were not effective until June 9, 2011. BFC cites Federal Rule of Bankruptcy Procedure 9021, which provides, “A judgment or order is effective when entered.” The Trustee does not challenge BFC’s position that the BFC-Morris Management Agreement does not become a factor until the period commencing on June 9, 2011. The BFC-Morris Management Agreement supports this construction, as it states its primary term “begins and ends as follows: Commencement Date: Order to Employ Expiration Date: Closing.”37
The Court finds that the BFC-Morris Management Agreement does not apply to the period between the filing of the Trustee’s Application to Employ and the entry of the Employment Order. For this period, the standard for the award of fees and expenses is the reasonableness standard of § 543(c)(2), the specifics of which are discussed in section D immediately below.
D. Amount of fees and expenses for Periods I, II, and III.
BFC requests the allowance of management fees of $126,859.71 for the period from January 1, 2011, through June 8, 2011. BFC’s accounting for this period itemizes “Brokerage Expense,” or BFC’s management fees, as follows:
Retainer Fee $ 80,000.00
Management Fee $ 40,000.0038
Expense 10% Fee $ 4,149.71
Admin. 50% Exp $ 465.00
Lease Extensions $ 2.245.00-
$126,859.71
*890These calculations are based upon the BFC-Pratt Management Agreement and the BFC-Pratt Auction Agreement, approved by the Douglas County, Kansas District Court. As to expenses, BFC contends it is entitled to reimbursement of $115,128.59 for service costs, advertising and promotion, answering service, bank service charges, credit checks expense, environmental inspection, insurance, legal services (related to tenant matters), miscellaneous expense, office supplies, postage and delivery, security, survey expense, telephone expense, and utilities. The Trustee contends the fees and expenses are not reasonable, and under the reasonableness standard, the fees should be 10% of the rents collected and the expenses should be as requested, except the auction-related expenses of environmental inspection and survey expense should be disallowed.
Based upon the foregoing discussion, the Court finds that it should allow BFC “reasonable compensation for services rendered and costs and expenses incurred” under § 543(c)(2) and § 503(b)(3)(E) for periods I, II, and III — from January 1, 2011, to June 8, 2011. Although the parties do not contest the applicability of § 543(c)(2), they do disagree about its meaning and application. BFC contends that reasonable compensation is determined by the terms of the BFC-Pratt Management Agreement. BFC cites In re 100 Madison Avenue39 in support. The Trustee argues that the reasonableness standard should not be interpreted to incorporate the terms of the BFC-Pratt Management Agreement, that the case relied upon by BFC does not apply, and that the Court should apply the standards for fee awards under § 330. The Court rejects both positions.
The Court agrees with the Trustee that the BFC-Pratt Management Agreement does not determine the fees and expenses that should be allowed. 400 Madison Avenue does not support BFC’s contention to the contrary. That case addresses the authority of a prepetition custodian who remained in that position after the bankruptcy filing under an agreement between the Chapter 11 debtor and a secured creditor to retain counsel and pay counsel’s bill, subject only to a determination of reasonableness.40 It does not address whether the custodian was entitled to the compensation provided for under a prepetition agreement. In the context of awarding attorney fees under § 330, the Tenth Circuit recently affirmed that the bankruptcy court “is not bound by the parties’ compensation agreement.”41 A commentator states, “Compensation schedules set forth under the law by which the custodian was appointed will be relevant but not controlling.” 42 The Court rejects BFC’s position that its compensation should be governed by the BFC-Pratt Management Agreement. The Bankruptcy Code requires the Court to determine reasonableness, not to adopt the compensation standard approved by a state court.
However, the Court rejects the Trustee’s argument that reasonable compensation under § 543(c)(2) should be construed to mean the adjusted lodestar approach adopted by the Tenth Circuit to *891calculate professional fees under § 330(a)43 for those appointed under § 327. Section 330 does not apply directly, since at no time before June 9, 2011, was BFC appointed by this Court. The Court also declines to adopt the § 330 standard by analogy. The factors which must be applied under that approach are suitable for attorneys and other professionals, particularly where time records are maintained and the value of the services provided often bears a direct correlation to the time expended. They are unsuitable for custodians, such as a property manager.
The standard for an award under § 543(c)(2), with priority as an administrative claim under § 503(b)(3)(E), is reasonableness. Subsection 543(c)(2) expressly provides for the payment of “reasonable compensation.” A commentator states, “The determination of what qualifies as ‘reasonable compensation’ under section 543(c)(2) is a question of federal law, not state law, and is determined in accordance with bankruptcy law standards.”44 Another commentator states the following about a reasonable fee for a custodian:
The factors that are considered in determining whether a custodian’s compensation is “reasonable” are similar to those used to determine if the compensation of an attorney or accountant under Code § 503(b)(4) is reasonable. These factors include: the time and labor expended by the custodian; the benefit of the custodian’s services to the debtor and the estate; the size and/or complexity of the estate; what the custodian would have received if it had been appointed as trustee for the debtor, and the quality of the custodian’s services. The amount of compensation to which the custodian would have been entitled had there been no bankruptcy can serve as a guide to the court, but the court is nevertheless required to exercise independent judgment in the determination of the reasonableness of the compensation.45
As to the reasonableness standard in § 503(b)(3)(E), one commentator states:
Nothing in section 503(b)(3)(E) sets forth a standard for awarding compensation for the custodian’s services. Courts have generally looked to a reasonableness standard. Although the statute does not include the phrases “preservation of the estate” or “benefit to the estate,” courts generally require a showing of benefit to the estate in awarding administrative expenses to a superseded custodian.46
There are no Tenth Circuit cases defining reasonableness for purposes of allowing fees and expenses to superseded custodians. After examining the authorities, the Court finds that the allowance of reasonable fees and expenses under § 543(c)(2), with priority under § 503(b)(3)(E), requires consideration of all the facts and circumstances of the case. In this case, the Court finds the relevant considerations to be: the services provided, the difficulty of the undertaking, the results obtained, the usual charges for such services if there had been no bankruptcy, and the benefit to the estate.47
*892The Court finds the requested management fees for the first five months of 2011 to be excessive and unreasonable. First, the requested allowance of an $80,000 retainer is denied. It is provided for in the BFC-Pratt Auction Agreement which states, “Owner [Pratt] agrees to pay a retainer of $80,000 for real estate marketing and Auction sale services, payable from rental income, which is fully earned regardless of whether the Property is sold.”48 As stated above, the Court is not bound by any prepetition agreement between BFC and Pratt. Further, the agreement on which BFC relies for the retainer addresses auction services, not management services.
Second, the Court will not allow the requested additional elements of the management fees — the $40,000 minimum management fee, the $4,149.71 fee based on 10% of renovation expenses that BFC authorized, the $465 administrative fee, and the $2,245 for lease renewals. They are all based upon paragraph 12 of the BFC-Pratt Management Agreement. It provides as to each managed property, “Each month Owner will pay Broker the greater of $4,000 (minimum management fee) or ... 10% of the gross monthly rents collected that month.” The gross monthly rents for the Villa 26 Apartments and Four Wheel Drive properties for the period from January 1, 2011, to June 8, 2011, were $226,583.42, 10% of which is $22,658.34. The fee requested for the period in issue is $40,000, which is the greater of the two items on which the fees are to be based under the agreement. But, as explained above, when determining reasonable fees, the Court has rejected the BFC-Pratt Management Agreement as setting the standard for reasonableness.
What management fees are reasonable? Villa 26 Apartments had 76 units and its operation required continuous and significant management. However, Four Wheel Drive was smaller and required less attention. BFC’s duty was to preserve and protect the properties, and to maintain their value, not to generate income for the estate. The benefit to the estate of preserving Villa 26 Apartments as an operating rental property is obvious; Villa 26 Apartments sold for considerably more than predicted at the outset of the case. Other than complaints by Gail Youngquist, no questions have been raised about the quality of the management services provided by BFC to either Villa 26 Apartments or Four Wheel Drive. BFC has provided an accounting of its operations, which all the parties accept as an accurate report of the income and expenses. Despite the foregoing, the Court finds that the requested fees and expenses are not reasonable. Based upon the rents collected, the minimum fee of $4,000 per month, or a total of $20,000 for each property, is only slightly excessive for the services provided at Villa 26 Apartments, which generated rent of $197,808 during the five months, but far too large for the Four Wheel Drive property, where the rents collected were $28,623.50. The excessiveness of the requested fees is compounded by the request for an additional allowance of approximately $7,000 under the other elements of the payment terms of the agreement. BFC’s expert testified that management fees for similar size properties are typically 8 to 10% of gross rents, without additional fees based upon other criteria. In this case, the Court finds that a management fee of $22,000 for the period from January 1, 2011, to June 8, 2011, which is approximately 10% of the gross rents, is reason*893able and fully compensates BFC for the services it provided for the properties under management.
The Court finds that the expenses requested are reimbursable, with the exception of the charges for an environmental inspection ($950.00), a survey expense ($10,068.40), and a miscellaneous expense ($82.50) for the sale of a vehicle. There is no question that the remaining expenses were necessary to the management of the properties and were actually incurred. The Court rejects the Trustee’s challenge to the allowance of some expenses based on the contention that the expenses should be borne by BFC as part of the management services and not passed on to the property owner as separate expenses. The Court allows the charge for on-site maintenance of $13,595. This is the expense for an on-site manager assigned to Villa 26 Apartments and Four Wheel Drive, which the Court finds reasonable given the characteristics of the rental properties. The Court also allows the following expenses which the Trustee challenges: answering service ($792.84); bank service charges ($66.00); office supplies ($1,441.83); postage and delivery ($155.95); and telephone ($918.63). These are costs directly related to the operation of the two properties, not to BFC’s general overhead.
The Court therefore allows BFC the following as administrative expenses for the period from January 1, 2011, to June 8, 2011: management fees of $22,000; and expense reimbursements of $104,027.69.
E. Period IV — After June 9, 2011 (the date of the Employment Order).
The Employment Order was entered under the authority of § 327(a), which provides that a trustee, with the Court’s approval, may employ professional persons to assist the trustee in carrying out the trustee’s duties. Section 330(a)(1) provides that after notice and hearing, and subject to §§ 326, 328, and 329, the Court may award to a professional person employed under § 327 “reasonable compensation for actual, necessary services rendered” and “reimbursement for actual, necessary expenses.” Compensation awarded under § 330 is granted administrative expense status under § 503(b)(2). Section 328(a), “Limitation on compensation of professional persons,” provides:
The trustee, ... with the court’s approval, may employ or authorize the employment of a professional person under section 327 ... on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis. Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.
Section 328 governs when prior court approval has been given to a certain compensation, but subsequent events show the approved compensation was improvident; in that situation, the reasonableness standard of § 330 does not apply.49
The question as to the fourth time period is whether the BFC-Morris Management Agreement controls because it constitutes pre-approved compensation under § 328 or whether the general standards of § 330 control. Three circuits, but not the Tenth Circuit, have addressed the standard for determining whether a fee *894has been pre-approved under § 328. The Third Circuit holds that “ ‘if the order does not expressly and unambiguously state specific terms and conditions (e.g. specific hourly rates or contingency fee arrangements) that are being approved pursuant to the first sentence of section 328(a), then the terms and conditions are merely those that apply in the absence of specific agreement.’ ”50 The Ninth Circuit holds that “unless a professional’s retention application unambiguously specifies that it seeks approval under § 328, it is subject to review under § 330.”51 Most recently, the Sixth Circuit found these formulations too constrictive and adopted the following standard:
We hold that whether a court “pre-approves” a fee arrangement under § 328 should be judged by the totality of the circumstances, looking at both the application and the bankruptcy court’s order. Factors in the determination may include whether the debtor’s motion for appointment specifically requested fee pre-approval, whether the court’s order assessed the reasonableness of the fee, and whether either the order or the motion expressly invoked § 328.52
This Court likewise prefers the totality of the circumstances standard. Under this standard, the bright-line criteria of the Third and Ninth Circuits are factors to be considered, but are not determinative. The basic question is whether the Court when approving the employment also intended to approve the proposed terms and conditions, and to displace the § 330 reasonableness standard which would otherwise apply. The totality of the circumstances, including the application, the order, and the services to be provided, are relevant.
In this case, neither the application nor the order makes explicit reference to § 328. But the Trustee’s Application to Employ BFC states that “[a]s property manager, Fair will receive management fees as set out in ¶ 12 in the attached Commercial Property Management Agreement.”53 The Employment Order states, “As property manager, Fair will receive management fees as set out in ¶ 12 in the Commercial Property Management Agreement attached to the Application to Employ filed on March 31, 2011.”54 By referencing the BFC-Morris Management Agreement, the Employment Order states the terms and conditions of the employment. The professional being hired is a property manager, a category of professionals for whom the customary terms of compensation do not easily mesh with the standards of reasonable compensation under § 330. The Court finds that the Employment Order approving the employment of BFC as property manager establishes a pre-approved fee arrangement within the meaning § 328.
For the period of time after June 9, 2011, the Court therefore allows BFC fees and expenses in accord with the BFC-Morris Management Agreement. The management fees requested for the three *895properties for the period from June 9, 2011, through February 28, 2013, based upon paragraph 12 of the BFC-Morris Management Agreement, are comprised of the following elements: Management fees of $147,000 (at the rate of $7,000 per month for all the properties); expenses fee of $23,769.04 (10% of improvement expenses); administrative expenses of $7,215.75 (50% of tenant administrative charges); and lease extension fees of $82,883 (one month’s rent on lease renewals).55 There is no dispute regarding the computation of these items.
Although the Trustee argues that the fees under the BFC-Morris Management Agreement are excessive, he provides no facts and no argument evidencing that the such terms and conditions have proven to have been improvident in light of developments not capable of being anticipated at the time he negotiated the terms of the agreement with BFC. The Court therefore allows BFC management fees of $260,867.79 for the period from June 9, 2011, through February 28, 2013, as pre-approved fees under § 328.
BFC also requests the allowance of expenses for the same period in the amount of $547,017.62 for the three properties.56 The BFC-Morris Management Agreement provides that BFC may pay from collected rents and other charges “expenses to operate the Property, including but not limited to, maintenance, taxes, insurance, utilities, repairs, security, management fees, leasing fees, and expenses authorized under this agreement.”57 The Court holds that the expense allowance requested is granted, with the exception of $2,950.00 for an environmental inspection of Villa 26 Apartments, which is not an expense related to the management of the property. For the same reasons as stated above with respect to the period before the Employment Order, the Court rejects the Trustee’s objection to the charges for the on-site manager ($62,820), answering service ($6,297.49), bank service charges ($1,880.32), office supplies ($2,471.92), postage and delivery ($53), and telephone ($3,299.41).
Therefore for the period from June 9, 2011, through February 28, 2013, the Court rules that BFC is allowed management fees of $260,867.79 and expenses of $544,067.62.
CONCLUSION.
The Court allows the following fees and expenses for BFC’s services as a prepetition custodian, a superseded custodian, and a professional person employed pursuant to Court order: for the period from January 1, 2011, to June 8, 2011, management fees of $22,000 and expense reimbursement of $104,027.69; and for the period from June 9, 2011, through February 28, 2013, management fees of $260,867.79 and expense reimbursement of $544,067.62. Such fees and expenses are entitled to administrative expense priority under § 503(b)(2) and (3)(E). Given the Court’s prior ruling that BFC is entitled to $289,727.50 for the sales commission and expenses for the sale of Villa 26 Apartments,58 this ruling on the amount of management fees and expenses owed to BFC, and the accountings of BFC that reflect *896the amount of income from Debtor’s properties that has been retained by BFC, which the parties now agree are accurate, the Court believes the parties will be able to agree on the net amount due to BFC or to the estate, as the case may be.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure which make Rule 52(a) of the Federal Rules of Civil Procedure applicable to this matter.
Judgment is hereby entered allowing Bill Fair & Co. the following compensation for services as a custodian and as a Court-appointed professional: for the period from January 1, 2011, to June 8, 2011, management fees of $22,000 and expense reimbursement of $104,027.69; and for the period from June 9, 2011, through February 28, 2013, management fees of $260,867.79 and expense reimbursement of $544,067.62. Such fees and expenses are entitled to administrative expense priority under § 503(b)(2) and (3)(E). The judgment based on this ruling will become effective when it is entered on the docket for this case, as provided by Federal Rule of Bankruptcy Procedure 9021.
IT IS SO ORDERED.
SO ORDERED.
. The Trustee, J. Michael Morris, appeared by J. Michael Morris of Klenda Austerman LLC. Receiver Peter Pratt appeared by Thomas J. Lasater of Fleeson, Gooing, Coulson & Kitch, L.L.C. Bill Fair & Co. appeared by Paul D. Sinclair of Polsinelli PC. Gail Youngquist appeared pro se. Debtor did not appear.
. The appearances were the same as at the May trial with the exception that Debtor and Gail Youngquist were represented by Ira Dennis Hawver.
. Dkt. 194.
. Dkt. 232.
. Dkt. 233.
.In re Sevitski, 161 B.R. 847, 854 (Bankr.N.D.Okl.1993) (receiver seeking fees as administrative expense under §§ 543 and 503); In re Mid Region Petroleum, Inc., 1 F.3d 1130, 1132 (10th Cir.1993) (general rule for administrative expense claims under § 503).
. Exh. PP-A.
. Id.
. Exh. 30.
. Exh. 29.
. Exh. 28.
. Dkt. 46.
. Dkt. 79.
. Adv. no. 11-5073, dkt. 1.
. Adv. no. 11-5073, dkt. 72.
. Dkt. 169.
. See dkt 192.
. Dkt. 286.
. Exh. 28, ¶ 4(A)(1),(2), and (3); exh. 31, ¶ 4(A)(1),(2), and (3).
. Exh. 28, ¶ 4(B)(9); exh. 31, ¶ 4(B)(9).
. Exh. 30 at 2-3.
.Exh. 28 at 5.
. The description of the properties covered by the BFC-Pratt Management Agreement is handwritten and difficult to decipher. The Court assumes it covers all of Debtor’s Douglas County properties.
.The BFC-Morris Management Agreement, exh. 31, describes the property as four tracts, including, in addition to Villa 26 Apartments and Four Wheel Drive, the "Fish Farm” and "N. Lawrence.” But BFC’s accounts are for only three properties, Villa 26 Apartments, Four Wheel Drive, and North Lawrence Real Estate. Debtor’s schedules list three Douglas County properties. The Trustee testified at the May 22, 2013 trial that the fish farm should not have been included in his agreements with BFC since he recently discovered that the fish farm had been conveyed, apparently prepetition. The Court will therefore interpret the BFC-Morris Management Agreement as applying to three tracts.
. Exh. 46.
. The amount owed to BFC under the BFC-Morris Auction Agreement was the subject of a separate order. Dkt. 286.
. See exh. BF-J.
. Dkt. 284.
.See Dkt. 286.
. 11 U.S.C. § 101(11)(C). Future references in the text to Title 11 shall be to the section only.
. E.g., In re Sevitski, 161 B.R. 847, 854 (Bankr.N.D.Okl.1993); In re Brown and Sons, Inc., 498 B.R. 425, 434-35 (Bankr.D.Vt.2013).
. 5 Collier on Bankruptcy ¶ 543.04 at 543-13 (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th ed. 2013).
. 3 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law & Practice 3d, § 49:42 at 49-225 (Thomson Reuters 2013).
. 4 Collier on Bankruptcy ¶ 503.10[6] at 503-83.
. 5 Collier on Bankruptcy ¶ 543.04 at 543-13.
. The petition was filed on January 25, 2011. On that date, BFC became a superseded custodian. Szwak v. Earwood (In re Bodenheimer, Jones, Szwak, & Winchell L.L.P.), 592 F.3d 664, 670 (5th Cir.2009). A superseded custo*889dian’s wind-up duties are to preserve estate property, deliver estate property to the bankruptcy trustee, and to file an accounting. 11 U.S.C § 543(a). The Trustee did not file an application for the appointment of BFC as a professional until March 15, 2011, and the employment order was not entered until June 9, 2011.
. Exh. 31 at 1.
. In re 400 Madison Ave. Ltd. P’ship, 213 B.R. 888, 898 (Bankr.S.D.N.Y.1997).
. Id.
. Market Center East Retail Property, Inc., v. Lurie (In re Market Center East Retail Property, Inc.), 730 F.3d 1239, 1251 (10th Cir.2013).
. 4 Collier on Bankruptcy, ¶503.10[6] at 503-83.
. See, e.g., Market Center East Retail Property, 730 F.3d at 1249-50.
. 5 Collier on Bankruptcy, ¶ 534.04 at 543-13.
. 4 Norton Bankr.Law & Prac.3d, § 62:13 at 62-40 to 62-41.
. 4 Collier on Bankruptcy, ¶ 503.10[6] at 503-83; see also 4 Norton Bankr.Law & Prac.3d, § 62:13 at 62-40 to 62-41.
. See Bodenheimer, Jones, Szwak, & Winchell, 592 F.3d at 672-73 (holding that a benefit to the estate requirement is implied in § 503(b)(3)(E) and has historically been ap*892plied to services of prepetition liquidators and postpetition custodians).
. Exh. 29.
. Market Center East Retail Property, 730 F.3d at 1245 n. 5.
. Zolfo, Cooper & Co. v. Sunbeam-Oster Co., Inc., 50 F.3d 253, 261-62 (3rd Cir.1995) (quoting from and agreeing with In re C & P Auto Transport, Inc., 94 B.R. 682, 685 n. 4 (Bankr.E.D.Cal.1988)).
. In re Circle K Corp., 279 F.3d 669, 671 (9th Cir.2002).
. Nischwitz v. Miskovic (In re Airspect Air, Inc.), 385 F.3d 915, 922 (6th Cir.2004).
. Dkt. 46.
.Dkt. 79.
.Dkt. 232-1 at 4. The request also includes $5,121.25 for “old security deposits refunded.” The Court has not awarded any fees for this item, since it is not included in paragraph 12 of the BFC-Morris Management Agreement.
. Dkt. 232-1 at 3.
. Exh. 31 at 2.
. See dkt. 286. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496540/ | ORDER AND JUDGMENT
WENDY L. HAGENAU, Bankruptcy Judge.
This matter came before the Court for trial on August 20-22, 2013 on the Trustee’s Complaint for Avoidance of Fraudulent Conveyances under 11 U.S.C. § 544. The Court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 1334 and 157, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(0). The parties stipulated in their Joint Pre-Trial Order that this Court could enter a final judgment in this case. After consideration of the evidence and arguments of counsel, the Court hereby enters judgment against the Defendants as follows:
$2,009,399.65 MTC Development, LLC
$1,565,000.00 Sunbelt Construction Management, Inc.
$ 372,250.00 Franklin P. Trell
$ 622,000.00 Cynthia Vinson
$ 622,000.00 Vinson Holding, Inc.
$ 622,000.00 Vinson Partners, L.L.L.P.
$ 654,250.00 The Trell Family Limited Partnership
$ — 0— Project Personnel Leasing, LLC
$ 622,000.00 Dana Vinson
$-0-Shaaron Trell
Background
The parties entered into an extensive Joint Statement of Undisputed Facts [Docket No. 41] (“Undisputed Facts” or “UF”). The Court will not restate all the facts, but will summarize some of the more relevant ones for ease of understanding this Order. The Debtor, Palisades at West Paces Imaging Center (“Imaging Center” or “Debtor”) was formed in 2002, with MTC Development, LLC (“MTC”) owning 66% of the Imaging Center and Dr. William Stuart owning 34% of the Imaging Center. MTC was owned equally by Vinson Partners, L.L.L.P. (“VP”) and The Trell Family Limited Partnership (“TFLP”). VP is owned by spouses Dana and Cynthia Vinson, while TFLP is controlled by spouses Franklin and Shaaron *902Trell. The purpose of the Imaging Center was to own and operate an imaging facility on the third floor of the Palisades at West Paces building (“Building”). Physicians with offices in the Building could use the Imaging Center for their patients by “leasing” time on a MRI machine. In October 2002, the Debtor entered into a construction contract with Batson-Cook as a general contractor for demolition and build-out work on the third floor of the Building. At the time, the Debtor had applied for a loan with Merrill Lynch to fund the project. The loan did not close, however, and Batson-Cook ceased work on the project in January 2004. The Debtor then solicited funds through a private placement memorandum in mid-2004. As a result of the private placement memorandum, the Debtor raised approximately $2 million. By July 8, 2005, though, most of the investors had filed a lawsuit against the Debtor and its principals, Franklin Trell (“Mr. Trell”) and Cynthia Vinson (“Ms. Vinson”), alleging fraud and seeking a full recovery of their investment.
While the litigation was pending, the Debtor continued with its plans to open the Imaging Center. It divided the third floor into three spaces with separate waiting rooms. In 2006, it signed a contract with Toshiba for a magnetic resonance imaging machine (“MRI”) for $456,000.00. The Debtor also applied for a loan from CIT Healthcare Financing (“CIT”). The CIT loan to the Debtor closed on or about July 18, 2006, in the maximum amount of 110 percent of $3,819,850.00. CIT funded the loan in installments as follows: July 21, 2006, $1,350,000.00; August 28, 2006, $1,450,000.00; November 20, 2006, $1,019,850.00; and November 27, 2006, $18,792.68. The Toshiba machine was installed in Suite 300 of the Building in September 2006, and scans began running on the machine in November 2006.
Mr. Trell, one of Debtor’s principals, testified the Toshiba machine did not operate as anticipated, and the doctors stopped using it and refused to pay their commitment for MRI scans. Mr. Trell testified that, as a result of the Toshiba machine’s failure, the Imaging Center failed and ultimately filed bankruptcy. Notwithstanding this defense, attached to Toshiba’s undisputed proof of claim in the case, is an order of summary judgment Toshiba obtained against the Debtor. The Debtor filed bankruptcy under Chapter 7 of the Bankruptcy Code on October 19, 2009. Janet Watts was appointed the Chapter 7 Trustee (the “Trustee”). By the time of the bankruptcy filing, the Debtor was the subject of a lawsuit by Batson-Cook, the original contractor; Partitions, the subsequent contractor retained by the Debtor; Toshiba for failure to pay for the MRI machine; and CIT. The Debtor settled the litigation with the investors in March 2007, completing the payment of the settlement in the summer of 2007 in the amount of $2,083,000.00 plus attorney’s fees.
The Trustee filed this Complaint on May 2, 2011, seeking to recover a number of transfers allegedly fraudulent under 11 U.S.C. § 544 and § 548. The Trustee also alleged Mr. Trell and Ms. Vinson were the alter egos of the Debtor and therefore liable for the full amount of the claims filed in this case, including in excess of $11 million in unsecured claims and $300,000.00 in fees and administrative expenses. Through the Pre-Trial Order and again at the trial, the Trustee refined her claims and theories of recovery. The Trustee alleged, and the Defendants did not dispute, that the Debtor transferred $1,339,399.65 to MTC and $1,515,000.00 to Sunbelt Construction Management, Inc. (“Sunbelt”) from the advances made by CIT on its loan. At the conclusion of the trial, the Trustee clarified that she sought the avoidance of these transfers only and recovery of those transfers from Mr. Trell, *903his wife and TFLP, and Ms. Vinson, her husband, VP and Vinson Holding, Inc. (“VH”). The Trustee also continued to argue that Ms. Vinson and Mr. Trell were the alter egos of the Debtor and therefore hable for the full amount of all claims filed in the case, including $300,000.00 in Trustee and professional fees for a total requested judgment of $11,694,000.00.
The transfers made by the Debtor at issue in this case and the party to whom they were made is set out below. The Defendants do not dispute the Transfers. The transfers to MTC are referred to as “MTC Transfers”, and the transfers to Sunbelt are referred to as “Sunbelt Transfers”. Collectively, they are referred to as the “Transfers”.
_Date_Amount_Transferee
July 25, 2006_$ 300,000.00 MTC
July 25, 2006_$ 150,000.00 Sunbelt
July 31, 2006_$ 473,019.65 MTC
August 30,2006_$ 175,000.00 Sunbelt
September 14, 2006 $ 297,085.00 MTC
October 26, 2006_$ 100,000,00 MTC
November 8, 2006_$ 100,000,00 Sunbelt
November 9, 2006_$ 169,295.00_MTC
November 21,2006 $1,090,000.00 Sunbelt
Findings of Fact
In addition to the Undisputed Facts, the facts set out in the Background above, and the facts set out in the Section 550 analysis below, the Court makes the following Findings of Fact:
I. RELATIONSHIP AMONG DEFENDANTS AND RELATED COMPANIES
A.Vinson Entities
The Court finds the Vinsons owned and controlled VH and VP. Ms. Vinson testified that both VP and VH were used by her husband and her to pay their personal expenses. In particular, funds in the VH and VP accounts were used to buy a vacation home in Sevierville, Tennessee, which was placed in Mr. Vinson’s name, and then to furnish and remodel the home. Cash from VH and VP was distributed to Mr. Vinson, used to purchase a motorcycle, used to make payments to a Ford dealership, and used to purchase a home in Newnan, Georgia.
B. Trell Entities
Mr. and Ms. Trell were partners in TFLP. They held signatory authority over its bank accounts and controlled its transfers.
C. Sunbelt
Mr. Trell and Ms. Vinson owned and controlled Sunbelt, either directly or indirectly.
D. Related Entities
MD Medical Equipment Company, LLC (“MD Medical”) and Medical Development Group LLC (“MDG”) were both formed in April 2008, after the events which form the basis of the Complaint. Prior to their official formation, Mr. Trell and Ms. Vinson represented that MDG and MD Medical provided equipment and other services to the Debtor. Mr. Trell and Ms. Vinson were in control of MDG and MD Medical, both before and after they were officially formed.
*904E. Books and Records
Ms. Vinson was in charge of the books of the Debtor, MTC, Sunbelt, and Project Personnel Leasing LLC (“PPL”), as well as other companies she and Mr. Trell co-owned. Ms. Vinson authorized the payments from each company and the transfers between and among the companies.
II. CONSTRUCTION
A.Sunbelt
Sunbelt and the Debtor entered into an AIA contract (PL Ex. 13) dated June 1, 2002 for construction management services for the Imaging Center (“Construction Services Contract”). This Contract was entered into before Sunbelt was incorporated in July 2003. Pursuant to the terms of the Construction Services Contract, Sunbelt was to provide construction management services in two phases: a pre-construction phase for the cost of $50,000.00 and a construction phase for a cost of $125,000.00. The form contract includes a provision for payment on account of additional or optional services. However, in Section 13.3.1 of the Construction Services Contract, where the parties would fill in the cost of any such additional services, the contract is blank. No evidence was presented that the Construction Services Contract was ever amended.
On December 15, 2006, Sunbelt issued an invoice to MTC, not the Debtor, allegedly pursuant to the Construction Services Contract. (Def. Ex. HHA4 (partial) Sunbelt 12/15/06 Invoice). The invoice reflects the original amount due under the Construction Services Contract of $175,000.00, but charges for “extras” through October 15, 2006 of $132,750.00 plus reimbursables of $3,750.00. The invoice reflects that $235,000.00 had been previously paid on the Construction Services Contract. Handwritten notes on the December 15, 2006 invoice reflect the balance due was paid through a series of payments on November 21, 2006, December 19, 2006, January 2, 2007 and February 1, 2007. This December 15, 2006 invoice was submitted to CIT as part of the Debtor’s proof of the use of funds and the outstanding amounts due.
B. Batson-Cook
The Debtor entered into a construction contract with Batson-Cook as general contractor in October 2002. Batson-Cook ceased work on the project in January 2004 and work did not begin again until the Debtor entered into new contracts with Partitions.
C. Partitions
Plaintiffs Exhibit 37 is a series of contracts between Partitions and the Debtor (or MTC on the Debtor’s behalf) for construction on the three suites making up the Imaging Center. On August 16, 2006, Partitions agreed with the Debtor to construct Suite 300 for $32,935.00.
On July 6, 2006, Partitions entered into an agreement with MTC, on behalf of the Debtor, for construction on Suite 310 for an original contract sum of $288,485.00. A change order on November 15, 2006 added an additional $115,093.43 to the construction for Suite 340. This change order consists of Change Order No. 1 dated August 31, 2006 for $11,560.00; Change Order No. 2 dated August 31, 2006 in the amount of $31,283.00; and Change Order No. 3 dated November 15, 2006 in the amount of $72,250.43. An additional change order for Suite 340 is also dated November 15, 2006, adding another $31,845.60 to the construction cost of Suite 340. The Debtor’s Ledger (Pl. Ex. 11 A) (“Debtor’s Ledger”) shows the Debtor paid $145,935.00 to Partitions on September 14, 2006, which Plaintiffs Exhibit 37 shows as a credit on Suite 340. The Debt- *905or’s bank statements though show the payment was made on October 31, 2006 (PL Ex. 10A). The Court finds that, although the contract was in the name of MTC, it was an obligation of the Debtor as evidenced by the Debtor’s partial payment of the liability.
The Debtor also entered into a construction contract with Partitions on October 19, 2006 for construction on Suite S97 in the original amount of $23,880.00. A change order dated November 15, 2006 in the amount of $96,402.87 was submitted, making the total cost $120,282.87 for Suite 397.
III. CIT LOAN
CIT loaned the Debtor money beginning July 2006. CIT’s Credit Approval Memorandum (“Credit Memo”) (Def. Ex. HHA4 (Partial) CIT Credit Approval Memo) reflects CIT’s understanding that the purpose of the loan was to start up the business of the Imaging Center. In the Loan and Security Agreement (PL Ex. 20), CIT agreed to loan the Debtor a maximum of 110 percent of $3,819,850.00. In return, the Debtor pledged “Collateral” as security for the loan defined as follows:
(a) all of Debtor’s now existing or hereafter acquired or arising (a) Inventory, (b) Accounts, (c) General Intangibles, (d) Goods, (e) Chattel Paper, (f) Instruments, (g) Documents, (h) Equipment, (i) Investment Property, (j) Letter of Credit Rights, (k) Deposit Accounts, (l) other personal property and fixtures of any kind or nature, and (m) all products and Proceeds. For purposes of this Agreement and the other Loan Documents, the terms “Inventory”, “Accounts”, “General Intangibles”, “Goods”, “Chattel Paper”, “Instruments”, “Documents”, “Equipment”, “Investment Property”, “Letter of Credit Rights”, “Deposit Accounts”, and “Proceeds” shall have the meanings assigned to them under the Uniform Commercial Code.
Notwithstanding the pledge of collateral, the Credit Memo reflects CIT’s understanding it was likely to be an underse-cured creditor until the business of the Debtor was fully operational. CIT, in its collateral analysis in the Credit Memo, recognized “[t]he equipment would be a secondary form of repayment for the lease in a liquidation scenario. CIT is reliant upon the cash flow of the acquired center as the primary means of repayment, with the Assignment of the Lease Agreements considered as a peripheral enhancement.” Nevertheless, the Debtor recognized CIT as a secured creditor in its schedules.
The Debtor provided documents to CIT prior to each funding allegedly showing that CIT’s prior advances had been spent appropriately and that the Debtor had incurred expenses to support the next advance. The invoices supporting the MTC Deposited Checks (as defined below) were submitted to CIT in support of its funding.
IV. OPERATIONS
A. Lease of Space
The Debtor entered into a long-term lease for Suite 300 with Diagnostic Imaging Properties, LLC dated June 26, 2005. The principal of Diagnostic Imaging Properties, LLC was William Stuart, also part owner in the Debtor. The lease was for a 10-year term beginning July 1, 2005 and required minimum rent of $12,650.00 per month, or $150,000.00 per year.
B. Physician Agreements
The physician leases (“Physician Agreements”) which provided the revenue disclosed by the Debtor in its Statement of Financial Affairs and of which CIT took an assignment are entitled, “Lease Agreement”. (Pl. Ex. 19). Each provides that *906the doctor’s office will use the MRI machine and the Imaging Center’s services for a term of 10 years. The doctor’s office agrees to pay a minimum amount each month for the use of the MRI machine, regardless of its actual use. This usage agreement is referred to as a “lease” of time on the machine. The agreement provides for additional charges for other uses of the MRI machine. The MRI machine remained at all times in the possession and ownership of the Imaging Center. Each of the Physician Agreements was guaranteed by individual physicians. The CIT Credit Memo referenced five Physician Agreements, while Plaintiffs Exhibit 19 includes only three such agreements. The three agreements included as Plaintiffs Exhibit 19 reflect $80,000.00 per month in revenue ($960,000.00 annualized), while the CIT Credit Memo anticipated annual net revenues of $1,800,000.00.
C. Revenue
The Undisputed Facts state that the MRI machine was not installed until the fall of 2006, and there was no operating revenue for the Debtor until the MRI machine was installed. The Debtor’s Statement of Financial Affairs reflects 2007 revenue of $139,500.00, all of which was identified as “revenue from leases”. By 2008, the total revenue from leases was $84,104.27, and there was no revenue for the Debtor in 2009.
V. BALANCE SHEET FACTS
A. Cash
The Court used the cash balances on the Debtor’s bank statements (PI. Ex. 10A) in its insolvency analysis. The Court incorporates its statement of cash balances set out below as a finding of fact.
B. Leasehold Improvements
The Court relied upon the “leasehold improvements” account in the Debtor’s Ledger (PI. Ex. 11 A) in assessing the value of the Debtor’s leasehold improvements for the insolvency analysis. The beginning balance of the leasehold improvements account on January 1, 2005 was $124,285.98. The Debtor’s Ledger reflects payments for various items related to the leasehold improvements, including the payments to Partitions on Suite 340, and payments for upholstery, cabling, sculptures and the like. With the exception noted in the insolvency discussion below, the Court accepts as true the entries in the Debtor’s Ledger as to the value of the leasehold improvements and adopts those as findings of fact.
C. Dr. Stuart
The Trustee admitted as Plaintiffs Exhibit 32A-F the proofs of claim filed in the Debtor’s bankruptcy case. The Court finds, based on the Trustee’s testimony, that the claims are allowed claims and represent valid liabilities of the Debtor on the dates represented in each proof of claim. One of the claims was filed by Dr. Stuart. The Court finds the Debtor owed Dr. Stuart $864,562.00 for loans made by Dr. Stuart to the Debtor between March 2006 and May 2006 (PI. Ex. 32E). On August 30, 2006, the Debtor agreed to indemnify Dr. Stuart for any liabilities to Endover Palisades LLC for lease agreements associated with medical office space occupied by the Debtor. Ultimately, End-over Palisades LLC obtained a judgment against Dr. Stuart in the principal amount of $677,483.65 for suites occupied by the Debtor. (See Proof of Claim No. 5-1).
D. Toshiba
Another claim was filed by Toshiba. The Toshiba MRI was installed and operational, according to the Undisputed Facts, in September 2006. At that point, the Debtor was liable to Toshiba for the full *907cost of the MRI machine. Toshiba ultimately obtained a judgment against the Debtor in the amount of $450,369.59 of principal, plus interest and attorney’s fees. (See Proof of Claim No. 4-1).
E. Batson-Cook
The Undisputed Facts state that Bat-son-Cook was not fully paid and filed suit against the Debtor in January 2007. (UF No. 131). The Undisputed Facts do not state the amount Batson-Cook claimed. Plaintiffs expert stated Batson-Cook sued for $390,000.00. The Debtor listed Bat-son-Cook as a secured creditor on its Schedule D, filed on November 3, 2009 in the amount of only $61,000.00 based on a settlement agreement signed in October 2008. For purposes of this decision, the Court finds Batson-Cook was owed at least $61,000.00 at the time of each of the Transfers.
F. Related Entity Liability
The Debtor’s Ledger reflects liabilities to MTC in the amount of $168,550.00 beginning August 1, 2006. This balance was reduced to $68,555.28 on November 21, 2006, and the balance then increased in January and February 2007. The Debt- or’s Ledger reflects a payable to Mr. Trell of $32,500.00 beginning January 1, 2006 until it was paid in full on November 21, 2006.
G. Delinquent Payments
The Court finds the Debtor was delinquent on the Batson-Cook liability when work ceased in January 2004. The Debtor was current on the liabilities to Dr. Stuart until 2008 or 2009. The Debtor was not delinquent on the payment to Toshiba until after the equipment was installed in September 2006. The Debtor was delinquent on the Partitions liabilities when the certificates of payment were submitted and not paid. The first application for Suite 397 was submitted on November 15, 2006; the earliest application for payment on Suite 340 in evidence was submitted on December 8, 2006 and it was Application No. 4. (PI. Ex. 37). There is no evidence of the date of the first application for payment on Suite 300. A demand letter was sent by Partitions on February 26, 2007.
Conclusions of Law
I. FRAUDULENT CONVEYANCE
Although the Trustee’s Complaint seeks alternative recovery under 11 U.S.C. § 548, the Trustee recognizes that Section 548 does not apply to the Transfers which the Trustee is pursuing. Section 548 only applies to transfers made within two years before the date of the filing of the petition (October 19, 2009). The two-year look back period ends on October 19, 2007. All of the Transfers which the Trustee is pursuing as fraudulent occurred between July 25, 2006 and November 21, 2006, so Section 548 does not apply.
Section 544 of the Bankruptcy Code, though, does provide a basis for recovery for the Trustee. Section 544(a) of the Bankruptcy Code allows a trustee to avoid any transfer of property of the debt- or that is voidable by a hypothetical creditor that extends credit to the debtor as of the petition date and obtains either a judicial lien or an execution against the debtor. The trustee need not identify a specific creditor with that cause of action in order to recover under Section 544(a). Under Section 544(b), the trustee is authorized to avoid any transfer of an interest of the debtor in property that is voidable by a “creditor holding an unsecured claim that is allowable under Section 502 of this Title”. Thus, under Section 544(b), the trustee asserts the claim of a specific, identified creditor whose claim is allowed or allowable under Section 502. It has long been held that a transfer which is avoidable under Section 544(b) is avoidable to *908the full extent, not limited by the amount of the actual creditor’s claim. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931).
In this case, the Trustee seeks to use the Uniform Fraudulent Transfer Act (“UFTA”) as enacted by Georgia, O.C.G.A. § 18-2-70, et seq. as the basis for avoiding the Transfers. Under Georgia’s version of the UFTA, a creditor existing either before or after a conveyance may seek to avoid it as fraudulent if the transfer occurred: “(1) with actual intent to hinder, delay or defraud any creditor of the debtor, or” (2) the debtor did not receive reasonably equivalent value in exchange for the transfer and the debtor was “(A) engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) [i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.” O.C.G.A. § 18-2-74(a). On the other hand, only a creditor whose claim existed at the time of the transfer may avoid a transfer under O.C.G.A. § 18-2-75(a) or (b). There, a creditor whose claim arose before the transfer was made may avoid the transfer if the debtor did not receive reasonably equivalent value in exchange for it and the debtor was insolvent at the time or became insolvent as a result of the transfer. O.C.G.A. § 18-2-75(a). Alternatively, a creditor whose claim arose before the transfer may avoid it “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 the debtor was insolvent.” O.C.G.A. § 18-2-75(b).
In this case, the Trustee has standing under both 11 U.S.C. § 544(a) and (b) to seek the avoidance of the Transfers. The Trustee stands in the shoes of a hypothetical creditor whose claim arose on the petition date in October 2009 under 11 U.S.C. § 544(a) and can assert claims under O.C.G.A. § 18-2-74(a). Under Section 544(b), the Trustee must stand in the shoes of an identified creditor whose claim remains unpaid and is allowable under Section 502 in order to assert a claim under O.C.G.A. § 18-2-75(a) and (b). Here, the Trustee identified at least two creditors that satisfy this requirement. The Trustee may step into the shoes of CIT, which filed Proof of Claim No. 3, whose claim increased with each advance made and who was a creditor prior to the date of each Transfer. Additionally, the Trustee may step into the shoes of Dr. Stuart, who filed Proof of Claim No. 5, stating that, as of the date of the first Transfer, July 25, 2006, the Debtor owed Dr. Stuart $864,562.00.
A. Insiders
Before examining each Transfer, the Court will discuss which entities are insiders as defined by the Georgia UFTA. An “insider” is defined in O.C.G.A. § 18-2-71(7)(B) to “include” a director, an officer, a person in control of the debtor, or a relative of a director, officer or person in control of the debtor. Moreover, an insider also includes “an affiliate or an insider of an affiliate as if the affiliate were the debtor”. O.C.G.A. § 18-2-71(7)(D). This definition of insider is the same as the definition of insider under the Bankruptcy Code. An affiliate is defined in the UFTA the same way it is defined in the Bankruptcy Code to mean a “person who directly or indirectly owns, controls or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor ...” or “a corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote by the *909debtor or a person who directly or indirectly owns, controls or holds with power to vote 20 percent or more of the outstanding voting securities of the debtor ... ”. 0.C.G.A. § 18-2-71(1). Applying these definitions to the facts in the case, the following are insiders of the Debtor:
1. Ms. Vinson and Mr. Trell are insiders as the officers and persons in control of the Debtor.
2. Dana Vinson and Shaaron Trell are insiders as relatives of the officer or person in control of the Debtor, as they are the spouses of Ms. Vinson and Mr. Trell.
3. MTC is .an insider because it is a person in control of the Debtor owning over 66 percent of it and is an affiliate and insider because it directly owns 20 percent or more of the Debtor.
4. TFLP and VP are affiliates and therefore insiders because they indirectly own 20 percent or more of the Debtor through their equal interests in MTC. TFLP and VP are insiders of the Debtor because they are insiders of the Debtor’s affiliate, MTC, as persons in control of it. TFLP and VP are affiliates and therefore insiders of the Debtor because 20 percent or more of their stock is owned respectively by Mr. and Ms. Trell and Mr. and Ms. Vinson who indirectly own and control 20 percent of the Debtor.
5. Mr. and Ms. Vinson and Mr. and Ms. Trell are affiliates and therefore insiders because they indirectly own 20 percent or more of the Debtor through their ownership in TFLP and VP, which own MTC.
6. Sunbelt is an affiliate and insider because it is a corporation 20 percent of whose stock is indirectly owned or controlled by Mr. Trell and Ms. Vinson, who indirectly own and control 20 percent of the Debtor.
7.VH is an affiliate and therefore insider because 20 percent or more of its stock is owned directly by Mr. and Ms. Vinson, who indirectly own and control 20 percent of the Debtor.
In short, all of the remaining Defendants are insiders of the Debtor pursuant to O.C.G.A. § 18-2-71.1
B. Insolvency
The Trustee argues the Debtor was insolvent at the time of each Transfer. A debtor is insolvent under O.C.G.A. § 18-2-72, “if the sum of the debtor’s debts is greater than all of the debtor’s assets, at a fair valuation” or if the debtor “is generally not paying his or her debts as they become due.” O.C.G.A. § 18-2-72(a) and (b). The term “Assets” under the UFTA does not include “[property to the extent it is encumbered by a valid lien”. O.C.G.A. § 18-2-71(2). The term “Debts” under the UFTA does not “include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.” O.C.G.A. § 18-2-72(e).
In support of the Trustee’s allegation that the Debtor was insolvent, the Trustee elicited the testimony of Spence Shumway as an expert in forensic accounting and insolvency analysis. Mr. Shumway testified the Debtor was insolvent at all times and submitted his report without objection (PI. Ex. 1, hereinafter “Expert Report”) to substantiate this opinion. Mr. Shumway’s opinion of insolvency was initially based on his belief that by July 2006 the Debtor was over $10 million in debt but had no operations and no proven track record on which to base any expectation of operations. His opinion was also based on the Debtor’s statement of financial affairs filed in con*910nection with the bankruptcy case, which showed that, even in 2007, the Debtor’s income from operations was only $139,500.00. Since Mr. Trell testified the business did not begin until November 2006, any revenues in 2006 would have been minimal. Finally, Mr. Shumway based his opinion on the private placement memorandum (PI. Ex. 17, including 17A-17C), which stated that the Debtor’s assets were insignificant.
On cross examination, however, Mr. Shumway had to acknowledge the private placement memorandum was written in 2004, before the Debtor purchased the Toshiba machine and before the Debtor entered into the Physician Agreements for the use of the machine. Mr. Shumway testified he did not assign any value to the Physician Agreements and then revised his debt estimate down to $3.5 million, but noted the amount of the Debtor’s debt increased with each draw from CIT.
The Defendants made valid points impeaching Mr. Shumway’s testimony, particularly with respect to his failure to update the value of assets. It would have been helpful for Mr. Shumway to create a balance sheet for the Court, but the evidence submitted by the Trustee nevertheless shows that the Debtor was insolvent at the time of each of the Transfers.
While the definition of insolvency seems straightforward, several provisions of the UFTA and principles of interpretation from case law are important in applying the definition to the facts of this case. First, the applicable date for determining insolvency is the date of the Transfer. See In re WRT Energy Corp., 282 B.R. 343, 368 (Bankr.W.D.La.2001). Secondly, the UFTA defines a “debt” as “liability on a claim”. O.C.G.A. § 18-2-71(5). A “claim” means “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” O.C.G.A. § 18-2-71(3). “Debts ... do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.” O.C.G.A. § 18-2-72(e). An “asset”, on the other hand, means “property of a debtor”. O.C.G.A. § 18-2-71. An asset though does not include “property to the extent it is encumbered by a valid lien”. O.C.G.A. § 18-2-71(2)(A). Thus, to the extent a claim is secured by property of the debtor, the collateral is excluded from the calculation of assets and the liability is excluded from the calculation of debts.
The UFTA instructs further that the value of the debtor’s property is to be calculated “at a fair valuation”. O.C.G.A. § 18-2-72(a). This is the same phrase used in the definition of insolvency in the Bankruptcy Code. 11 U.S.C. § 101(32). The court must first determine whether the debtor’s assets should be valued on a going-concern basis or on a liquidation basis. Only then may the court conduct a fair valuation and assign a value to the debtor’s assets. See WRT, 282 B.R. at 368-69. Although the Imaging Center had not yet begun operations, this Court will use a going-concern value for the Debtor. Both the Debtor and CIT at the time it made the loan to the Debtor thought the Debtor was about to be a going concern, even though operations had not yet begun. Moreover, the Debtor was not on the verge of bankruptcy and in fact did not file bankruptcy for another three years. Further, using the going-concern valuation provides the Defendants with the maximum benefit as to the value of the Debt- or’s assets. See Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056 (3rd Cir.1992). “Fair valuation, in the context of a going concern, ‘contemplate^] an estimate of proceeds realizable within a reasonable timeframe through either collection or sale *911at regular market value.’ ” In re TOUSA, Inc., 422 B.R. 783, 858 (Bankr.S.D.Fla.2009) rev’d on other grounds, 444 B.R. 613 (S.D.Fla.2011), rev’d in part and aff'd in part on other grounds, 680 F.3d 1298 (11th Cir.2012). “Because ‘a fair valuation of assets contemplates a conversion of assets into cash during a reasonable period of time,’ the valuation ‘should be reduced by the value of the assets not readily susceptible to liquidation and the payment of debts.’ ” 422 B.R. at 859 (citation omitted ).
On the liability side of the balance sheet, the Court must evaluate the liabilities that existed as of the date of each Transfer. The Eleventh Circuit in In re Advanced Telecomm. Network, Inc., 490 F.3d 1325 (11th Cir.2007) held that in valuing contingent liabilities, the bankruptcy court is to calculate the present value of the liability by taking the expected cost of the liability times the estimated chance of it ever occurring. Id. at 1335. “Unless either the expected cost or the chances of it occurring are equal to zero (that is, the liability is costless, or the chances of it happening are negligible), the estimated value should be more than zero.” Id. See also WRT, 282 B.R. at 370.
On the asset side of the equation, the Court reviewed the testimony and exhibits for any evidence of an asset that could be converted to cash in the ordinary course of business and used to pay debts. Based on the Court’s review of the evidence, the Court identified the following asset categories: cash, leasehold improvements, furniture and office equipment, the Toshiba machine once it was installed in September 2006, a long-term lease for Suite 300 executed by the Debtor, and the Physician Agreements.
As discussed above, the Debtor and CIT entered into a Loan and Security Agreement on July 18, 2006, in which the Debtor pledged virtually all its personal property and the Physician Agreements as collateral for the loan. It is clear in the CIT Credit Memo that CIT relied on the Physician Agreements and personal property in making the loan. The Debtor scheduled CIT as an undisputed secured creditor. The Court holds that CIT held a valid security interest in all of the Debtor’s personal property, other than its bank accounts, on the dates of the Transfers. The Court has excluded the Debtor’s bank accounts from CIT’s collateral because perfection in a deposit account can only be made by a deposit control agreement executed in accordance with O.C.G.A. §§ 11-9-104, 11-9-314. No evidence of such an agreement has been presented. Since CIT was and remained undersecured, the property serving as CIT’s collateral is excluded from the definition of asset pursuant to O.C.G.A. §§ 18-2-71(2)(A) and 18-2-72(e).2
The Debtor’s assets not serving as CIT’s collateral are cash, leasehold improvements and a long-term lease. For cash, the Court used the balance in the Debtor’s bank account per the bank statements. (PI. Ex. 10A). The Court also included leasehold improvements as an asset at the amount identified in the Debtor’s Ledger (PI. Ex. 11A).3
*912Finally, the Court considered whether the long-term lease for Suite 300 executed by the Debtor could be considered an asset. As courts have noted, long-term leases are both a liability and a potential asset. In re Doctors Hosp. of Hyde Park, - B.R. -, -, 2013 WL 5524696, *86 (Bankr.N.D.Ill.2013); In re Labrum & Doak, LLP, 227 B.R. 383, 389 (Bankr.E.D.Pa.1998). The court in Doctors Hosp., agreed that long-term lease payments could be included in liabilities, but stated that then the present value of the long-term lease must also be included as an asset. The Court notes that Debt- or’s Ledger includes rent accrual and option expense of approximately $43,000.00 per month. The Debtor’s Ledger reflects the accrued amount due on August 1, 2006 was $714,895.75 and the amount due by December 31, 2006 was $348,701.45. The Debtor’s bankruptcy schedules do not identify the lease as an asset or liability. The Court has therefore decided to exclude the long-term lease as both an asset and a liability. This decision, again, gives the Defendants the benefit of the doubt, as the Court believes the long-term liability of this lease greatly exceeds any value it may have, particularly since the landlord was an insider of the Debtor.
As to liabilities, the Court has relied upon the stipulated facts of the parties and the proofs of claim which the Trustee testified that she did not dispute. The Court is excluding from its insolvency calculations the entire CIT debt of $4,759,814.64 indicated on the CIT proof of claim, (PI. Ex. 32C), even though it is clear that CIT expected to be, and was in fact, underse-cured. Because the Court does not have sufficient evidence from which to make a finding as to the precise amount of CIT’s unsecured claim, the Court is excluding all of CIT’s debt and not just the secured portion determined by the value of CIT’s Collateral. This gives the Defendants the benefit of the doubt on this issue.
In evaluating the other liabilities, the Court has fixed the amount of the Debtor’s liability to Batson-Cook at $61,000.00 based on Debtor’s Schedule D [Docket No. 10] and liability to Partitions based on its proof of claim (PI. Ex. 32B), the testimony of Dan Davis, president of Partitions, and the AIA contracts for work to be performed by Partitions. (PI. Ex. 37). The Court notes the Debtor’s Ledger reflects certain debt to MTC and to Mr. Trell personally, which the Court also reflects in the balance sheet.
The Court evaluated the Debtor’s liability to the investors who invested almost $2 million in the company in the summer and fall of 2004. By the summer of 2005, all but one of the investors had filed a lawsuit against the Debtor, seeking a return of their $1,850,000.00 investment. Ultimately, this lawsuit was settled in 2007, after the Transfers at issue took place, with payment in full to the investors plus payment of their attorneys’ fees. According to the Eleventh Circuit decision in Advanced Telecom., the Court is to evaluate the liability times the probability of liability as the parties would have seen it at the time of the Transfers in the summer and fall of 2006. 490 F.3d at 1335. Clearly, the potential liability to the Debtor was the amount of the lawsuit, $1,850,000.00. The Court has assigned a 50% probability that the Debtor would have been liable to the investors. As with other assumptions made by the Court, the Court believes it is being generous to the Defendants, given that the Debtor ultimately repaid the $1,850,000.00 investment in full plus attorney’s fees in 2007.
The Debtor’s liability to Dr. Stuart is based on his proof of claim. (PL Ex. 32E and Proof of Claim No. 5-1). The initial liability of the Debtor to Dr. Stuart was $864,562.00. The indemnification liability undertaken by the Debtor on August 30, *9132006 was a contingent liability. Like the liability to the investors, the Court must assess the potential liability times the probability of liability. The potential liability was $677,483.65 plus fees, interest and costs. Since the Debtor was a start-up venture, and knowing that the Debtor ultimately became liable for the full amount, the Court has also used a 50% probability for this debt.
The Court’s analysis as to the Debtor’s solvency under the balance sheet test on each date of a Transfer is set out in Exhibit A hereto. Based on the attached analysis, the Court concludes that the Debtor was insolvent on the date of each Transfer.
Despite the Court finding that the Debt- or was insolvent based on the balance sheet test, the Court cannot conclude the Debtor was not paying its debts as they came due. The Batson-Cook debt was past due, but the Debtor’s Ledger reflects no accounts payable to speak of, and the Debtor was paying the Dr. Stuart debt as it came due in the fall of 2006. The CIT debt had not come due at the time of the Transfers at issue. The Toshiba machine was installed and the Debtor was fully liable to Toshiba, but no evidence of payment terms was admitted. Similarly, the Court does not have sufficient evidence to conclude the Debtor was left with an unreasonably small amount of capital after each Transfer because there was no evidence presented as to the amount of capital that would be required for Debtor’s operation. Finally, the Court cannot form a conclusion as to whether the Debtor intended to incur debt beyond its ability to pay. In this situation, the Debtor was not yet operational or, by the last Transfer, had just begun operations, so there is no operational history on which to base such a finding. Clearly, CIT, in making the loan, put some stock in the Debtor’s projections which showed an ability to generate cash sufficient to pay the debts that were incurred. The Court, however, does not have the projections as evidence, nor any testimony about them from which to make that conclusion.
Nevertheless, the Court concludes the Debtor was insolvent based on the balance sheet test on the date of each Transfer.
C. Transfers to Sunbelt
The Debtor made the following Sunbelt Transfers:
July 25, 2006 $ 150,000
August 30,2006 $ 175,000
November 8, 2006 $ 100,000
November 21, 2006 $1,090,000
Sunbelt does not dispute the Sunbelt Transfers, but claims that each was in payment of the construction management fee allegedly due to Sunbelt or for reimbursement of some other expenses. Sunbelt points to its Construction Services Contract and the December 15, 2006 invoice as support for payment.
But the facts do not substantiate Sunbelt’s claims. At Section 13.3.1 of the Construction Services Contract, where the parties could fill in the cost of any additional services, the contract is blank. Since there was no agreement for the cost of “extras”, there is no basis for the increased billing. The only testimony on the increased charges was Ms. Vinson’s opinion that extra charges were justified because the construction project lasted longer than anticipated. Her testimony did not account for the fact no work occurred on the construction project for at least two years between the time Batson-Cook left in 2004 and Partitions began in August 2006. The Debtor’s Ledger under the category “construction management” reflects only two payments made to Sunbelt: on July 27, 2006 for $150,000.00 (the first Sunbelt Transfer) and on November 8, 2006 for $100,000.00 (the third Sunbelt Transfer), suggesting the Debtor did not view all the Sunbelt Transfers as payments for construction management.
*914The Trustee argues that, because the principals of Sunbelt and the principals of the Debtor are the same, there is no basis for payment of a construction management fee, and no reasonably equivalent value for any of the Sunbelt Transfers. That is not necessarily the case, as it is possible the payment for Ms. Vinson’s and Mr. Trell’s time on the construction of the Debtor’s premises was funded by making payment to Sunbelt rather than making a salary payment to Mr. Trell and Ms. Vinson directly. Both Milan Vancura, the architect on the project, and Dan Davis, the president of Partitions, testified that Ms. Vinson was the point person in all of their construction work. The Court therefore concludes that Sunbelt provided reasonably equivalent value to the Debtor in the amount of $175,000.00, as stated in the original Construction Services Contract. The Court finds no evidence to support any reasonably equivalent value in excess of the $175,000.00 contract price since there is no evidence as to what the “extras” were, the cost of the “extras”, or even a contractual basis for the extra charges. According to the Debtor’s Ledger, then, the Transfer on July 25, 2006 of $150,000.00 was for payment of the amount due under the Construction Services Contract and $25,000.00 of the $100,000.00 Transfer made on November 8, 2006 was also in payment for the Construction Services Contract. The Court has already concluded the Debtor was insolvent at the time of each of the Transfers. The Court therefore con-eludes, under 11 U.S.C. § 544 and O.C.G.A. § 18-2-75(a), that Sunbelt Transfers in the amount of $1,340,000.00 are avoided.
Alternatively, the Court finds that 100% of the Sunbelt Transfers, $1,515,000.00, are avoidable under O.C.G.A. § 18-2-75(b) and 11 U.S.C. § 544. As concluded above, Sunbelt is an insider of the Debtor. Even under Sunbelt’s version of the facts, the Sunbelt Transfers were for payment of construction management fees and other expenses and therefore were for antecedent debt. The Court has previously concluded the Debtor was insolvent on the date of each of the Sunbelt Transfers. Finally, the Court concludes Sunbelt had reasonable cause to believe the Debtor was insolvent at the time the Sunbelt Transfers were made. Sunbelt and the Debtor were controlled by the same two people, Cynthia Vinson and Franklin Trell. Both of them knew the condition of the Debtor, the liabilities owed, and the assets owned. Cynthia Vinson was in charge of the books of both companies and authorized the payments and transfers that were made. Therefore, 100% of the Sunbelt Transfers are avoided under O.C.G.A. § 18 — 2—75(b) and 11 U.S.C. § 544.
D. MTC Deposited Checks
The Trustee alleges the following three Transfers were made via a check payable from the Debtor to entities other than MTC, but in each instance the check was deposited in the MTC Account (“MTC” Deposited Checks).
July 31, 2006 $473,019.65 Payable to MDG
September 14, 2006 $297,085.00 Payable to MDG
November 9, 2006 $169,295.00 Payable to MD Medical
The Defendants do not dispute the checks were payable as set out or deposited in the MTC account.
The Court first concludes that all three Transfers are avoidable under O.C.G.A. § 18-2-75(b) and 11 U.S.C. *915§ 544. The undisputed testimony was that Mr. Trell and Ms. Vinson were not only in control of the Debtor, but also controlled MDG and MD Medical. As such, both MDG and MD Medical satisfy the definition of affiliate and therefore insider under the UFTA. The Defendants contend the MTC Deposited Checks were in payment of valid expenses. Assuming the Defendants are correct, the MTC Deposited Checks were on account of antecedent debt and thus avoidable. Finally, the Court earlier found the Debtor insolvent on the dates of each of the MTC Deposited Cheeks. As with Sunbelt, the Court concludes that MD Medical and MDG had reasonable cause to believe the Debtor was insolvent at the time of the Transfers of the MTC Deposited Checks because each was controlled by the same two people, Mr. Trell and Ms. Vinson. Consequently, each of the three MTC Deposited Checks is avoided under O.C.G.A. § 18 — 2—75(b) and 11 U.S.C. § 544.
The Court also concludes that each of the three MTC Deposited Checks is avoidable under O.C.G.A. § 18-2-75(a) and 11 U.S.C. § 544. The Court concludes the Debtor did not receive reasonably equivalent value for any of the MTC Deposited Checks. The undisputed testimony was that neither MDG nor MD Medical existed at the time the checks were written to them. Secondly, the checks were deposited into the account of MTC and not in any account for the other two entities. The Court can find no evidence that MTC then used those funds to pay any valid expenses of the Debtor. There is absolutely no evidence the Debtor received any value as a result of the MTC Deposited Checks. Finally, the Court previously found the Debtor insolvent at the time of the Transfers. Each of the MTC Deposited Checks is avoided under O.C.G.A. § 18-2-75(a) and 11 U.S.C. § 544.
Finally, the Court finds that each of the MTC Deposited Checks is avoidable under O.C.G.A. § 18-2-74(a)(l) and 11 U.S.C. § 544 because the Transfers were made by the Debtor with actual intent to hinder, delay or defraud a creditor, particularly CIT. The testimony of Ms. Vinson was that each of the invoices supporting the MTC Deposited Checks was presented to CIT as part of the support for funds previously advanced and in support of the next draw request. The UFTA, O.C.G.A. § 18 — 2—74(b), provides factors for the Court to consider in determining whether a transfer is made with actual intent to hinder, delay or defraud a creditor. First, the MTC Deposited Checks were to an insider. Secondly, the MTC Deposited Checks were not fully disclosed. To the outside world, it appeared the Debtor had purchased equipment or incurred debt to a third-party company, when instead the funds were deposited in MTC, the 66% owner of the Debtor. The true transferee was therefore concealed. Moreover, neither MDG nor MD Medical was in existence, another fact not disclosed to CIT. The Court has already found that the Debtor received no consideration for the transfer of the MTC Deposited Checks and the Debtor was insolvent at the time. Finally, the Court is left with the firm belief the MTC Deposited Checks, and any invoices which allegedly support them, were created by Ms. Vinson and Mr. Trell in order to defraud CIT into making advances for expenses not validly incurred. The Court therefore concludes the transfer of the MTC Deposited Checks is avoidable under O.C.G.A. § 18-2-74(a)(l) and 11 U.S.C. § 544.
E. Other Transfers to MTC
Finally, the Trustee alleges the following Transfers from the Debtor to MTC are avoidable (“MTC Other Transfers”):
*916July 25, 2006 $300,000
October 26, 2006 $100,000
In response, MTC claims the MTC Other Transfers were made to reimburse MTC for expenses paid by MTC on the Debtor’s behalf. Accepting MTC’s position as true, the Court nevertheless concludes the Transfers are avoidable under O.C.G.A. § 18-2-75(b) as payments on account of an antecedent debt to an insider (MTC) at a time when the Debtor was insolvent. As with the other insiders, the Court concludes MTC had reasonable cause to believe the Debtor was insolvent because of its control by Mr. Trell and Ms. Vinson. Therefore, the Court avoids the $400,000 MTC Other Transfers pursuant to O.C.G.A. § 18-2-75(b) and 11 U.S.C. § 544.
The Trustee also alleges the MTC Other Transfers should be avoided because the Debtor did not receive reasonably equivalent value. The Court concludes the Trustee has not met her burden of proof on this allegation. Even the Trustee’s expert testified that MTC spent some money on the Debtor’s behalf. The Defendants’ exhibits include numerous invoices, many of which appear to be valid expenses incurred on the Debtor’s behalf. The Court notes further that the Debtor ultimately began operations, so there is no doubt that some money was spent to obtain items for the Debtor’s operations. On the other hand, the Court is convinced that not all of the MTC Other Transfers were in exchange for reasonably equivalent value. But, based on the evidence presented, there is no way the Court can determine the amount of reasonably equivalent value received by the Debtor in exchange for the MTC Other Transfers. Therefore, the Court denies the Trustee’s claim to avoid the MTC Other Transfers pursuant to O.C.G.A. § 18-2-75(a).
II. RECOVERY OF AVOIDED TRANSFERS
The Court has determined that the Transfers are avoidable under 11 U.S.C. § 544. Now the Court must consider from whom the Trustee can recover the avoidable Transfers under 11 U.S.C. § 550. This section provides,
... to the extent that a transfer is avoided under section 544 ..., the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
11 U.S.C. § 550(a). An initial transferee is the initial recipient of the transfer provided it “exercise[s] legal control over the assets received, such that they have the right to use the assets for their own purposes, and not ... [as] a conduit for assets that were under the actual control of the debtor-transferor or the real initial transferee.” In re Pony Express Delivery Servs., Inc., 440 F.3d 1296, 1300 (11th Cir.2006). The terms “immediate” and “mediate” transferee are not defined in the Bankruptcy Code. However, “[a]s a general rule, § 550(a) imposes liability on all recipients in a chain of transfers of fraudulently-conveyed property.” In re Bauer, 318 B.R. 697, 700 (Bankr.D.Minn.2005) (citation omitted). An immediate or mediate transferee is “one who takes in a later transfer down the chain of title or possession.” In re Knippen, 355 B.R. 710, 728 (Bankr.N.D.Ill.2006) (citation omitted) aff'd Knippen v. Grochocinski, 2007 WL 1498906 (N.D.Ill.2007). The immediate transferee is the one who receives a transfer from the initial transferee and all other recipients are mediate transferees. See In *917re Appleseed’s Intermediate Holdings, LLC, 470 B.R. 289, 801 (D.Del.2012) (citation omitted).
The immediate or mediate transferee may be identified by tracing the funds from the initial transferee. Commingling funds does not prohibit tracing. See In re Int’l Admin. Servs., Inc., 408 F.3d 689 (11th Cir.2005); Gen. Elec. Capital Corp. v. Union Planters Bank, N.A., 409 F.3d 1049 (8th Cir.2005) (applying state law). “[P]roper tracing does not require dollar-for-dollar accounting.” Int’l Admin. Servs., 408 F.3d at 708 (citations omitted). See also In re Allou Distribs., Inc., 379 B.R. 5 (Bankr.E.D.N.Y.2007). The fact that funds are transferred multiple times does not prohibit the Court from tracing the funds to the ultimate transferee. “It is undeniable that equity will follow a fund through any number of transmutations, and preserve it for the owner as long as it can be identified.” Int’l Admin. Servs., 408 F.3d at 709 (citations omitted).
Bankruptcy courts have analyzed tracing in several contexts, including recovery under Section 550, and have used different approaches. See In re A’Hearn, 2012 WL 1378467 (Bankr.N.D.Iowa 2012) (using the lowest intermediate balance approach plus looking at the timing and amount of the payments); In re 1031 Tax Grp., LLC, 439 B.R. 78 (Bankr.S.D.N.Y.2010) (employing a pro rata allocation where multiple victims claimed the funds); In re Real Estate Exch. Servs., Inc., 2009 WL 6499249 (Bankr.N.D.Ga.2009) (using lowest intermediate balance approach); Gen. Elect. Capital Corp., 409 F.3d at 1049 (using the lowest intermediate balance approach); In re Mushroom Transp. Co., Inc., 227 B.R. 244 (Bankr.E.D.Pa.1998) (employing a first in, first out analysis in accordance with Pennsylvania law, but modifying the approach to assume that the tortfeasor withdrew legitimate funds before withdrawing the proceeds of transfers and that, once the proceeds of the transfers were spent, new deposits were not treated as replenishing the trust proceeds).
In conducting the tracing analysis below, this Court has employed the lowest intermediate balance approach but has additionally assumed that, if the amount and timing of the transfers are clear (i.e., the transfers into and out of a commingled account are in the same or lesser included amount and on the same day), the same funds were being transferred, even if the funds passed through commingled accounts. In keeping with the analysis of other courts, the Court also assumes that, when transferred funds are deposited into a commingled account, the non-transferred funds are used first and that, once the transferred funds are spent entirely, they are not replenished. With this background, the Court will now review liability under Section 550.
A. Initial Transferee
In this case, there is no dispute that the initial transferee of the Sunbelt Transfers is Sunbelt, and the initial transferee of the MTC Other Transfers and MTC Deposited Checks is MTC. Not only were the funds initially deposited into those respective accounts, but there was no dispute that the recipient had the authority to dispose of the funds and in fact did so. Sunbelt is therefore liable for the Sunbelt Transfers in the amount of $1,515,000.00 as the initial transferee, and MTC is liable for the MTC Other Transfers and the MTC Deposited Cheeks in the amount of $1,339,399.65 as the initial transferee.
B. Immediate and Mediate Transferees of Sunbelt Transfers
1. July 26, 2006 Transfer of $150,000
The Court concludes the immediate transferee of the $150,000.00 Transfer from the Debtor to Sunbelt is TFLP. The mediate transferee is MTC. The evidence *918shows that the $150,000.00 Transfer to Sunbelt was deposited in Sunbelt’s account on July 27, 2006, and on the same day electronically transferred from Sunbelt. (PI. Ex. 10D). The evidence also shows that $150,000.00 was received by TFLP on July 27, 2006 and transferred out the same day. (Expert Report: Ex. IV, Schedule 1, Ex. A, p. 2/42). The MTC 2006 Ledger for the period dated January 1, 2006 through December 31, 2006 (PI. Ex. 11C) (“MTC 2006 Ledger”) reflects the receipt of $150,000.00 from TFLP on July 27, 2006. The MTC bank statements are consistent. (PI. Ex. 10B).
2.August SO, 2006 Transfer of $175,000.00
The Court concludes the immediate transferee of the $175,000.00 Transfer from the Debtor to Sunbelt was VP. Undisputed Fact No. 78 is, “On September 9, 2006, Sunbelt transferred $175,000 to VP”. The Court notes the ending balance on August 30, 2006 in the Sunbelt account was $175,054.62. There were no deposits into the Sunbelt account in September 2006, so the only source for the $175,000.00 Transfer to VP was the funds from the Debtor. (PI. Ex. 10D).
3.November 8, 2006 Transfer of $100,000
The Court concludes VP is the immediate transferee of $70,000.00 of this Transfer and MTC is the immediate transferee of $30,000.00 of this Transfer. Before the $100,000.00 Transfer to Sunbelt, the Sunbelt account held only $54.62. (PL Ex. 10D). No other deposits were made to the Sunbelt account until the next Sunbelt Transfer on November 21, 2006. (Pl. Ex. 10D). On November 8, 2006, the same day as the Transfer to Sunbelt, $25,000.00 was transferred to VP. (PL Ex. 10D; Expert Report: Ex. IV, Schedule 2, Ex. J, p. 7/26). On the next day, November 9, 2006, $15,000.00 was transferred to VP. (Expert Report: Ex. IV, Schedule 2, Ex. J, p. 9/26— 10/26). On November 17, 2006, $10,000.00 was transferred to VP, and on November 21, 2006, $20,000.00 was transferred to VP. (Expert Report: Ex. IV, Schedule 2, Ex. J, pp. 11/26-14/26). The remaining $30,000.00 of the Transfer from the Debtor to Sunbelt was transferred to MTC on November 9, 2006. (PL Ex. 11C; Pl. Ex. 10D and PL Ex. 10B).
4.November 21, 2006 Transfer of $1,090,000
When this Transfer was deposited in Sunbelt’s account, only $54.62 was in the account. No other deposits were made into the Sunbelt account until February 28, 2007. (PL Ex. 10D). The Court concludes VP is the immediate and mediate transferee of $205,000.00. TFLP is the immediate and mediate transferee of $140,000.00 of this Transfer. MTC is the immediate or mediate transferee of $490,000.00. These totals are the result of the following calculations.
a. Vinson Partners as immediate transferee
VP was the immediate transferee from Sunbelt of $20,000.00 on December 6, 2006 and of $100,000.00 on February 15, 2007. (Expert Report: Ex. IV, Schedule 2, Ex. J, pp. 15/26-18/26).
b. MTC as immediate transferee and TFLP and VP as the mediate transferees thereof
Based on the evidence, the Court concludes significant funds from this Sunbelt Transfer were transferred from Sunbelt to MTC and then from MTC to TFLP or VP. Each will be reviewed below.
• On December 4, 2006, Sunbelt transferred $80,000.00 to MTC,4 which, on *919the same date, transferred $80,000.00 to TFLP. (Pl. Ex. 10B; Pl. Ex. 11C; Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 31/42-32/42).
• On December 8, 2006, Sunbelt transferred $50,000.00 to MTC. (Pl. Ex. 11C: Pl. Ex. 10D; and Pl. Ex. 10B).
• On December 11, 2006, Sunbelt transferred $25,000.00 to MTC. (Pl. Ex. 11C; Pl. Ex. 10D; Pl. Ex. 10B).
• MTC, on December 11, 2006, transferred $10,000.00 to VP. The only funds in MTC’s bank account at the time were a $16,939.97 balance of the $50,000.00 transferred on December 8, 2006, and the $25,000.00 transferred on December 11, 2006. (Expert Report: Ex. IV, Schedule 2, Ex. F, pp. 27/50-29/50).
• On December 15, 2006, Sunbelt transferred $30,000.00 to MTC and, on the same date, MTC transferred $15,000.00 of that to TFLP and $15,000.00 to VP. (Pl. Ex. 11C; Pl. Ex. 10D; Pl. Ex. 10B; and Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 33/42-34/42, and Schedule 2, Ex. F, pp. 30/50-31/50).
• On December 21, 2006, Sunbelt transferred $40,000.00 to MTC, $30,000.00 of which was immediately transferred to VP. (Pl. Ex. 11C; Pl. Ex. 10D; Pl. Ex. 10B; and Expert Report: Ex. IV, Schedule 2, Ex. F, pp. 32/50-33/50).
• On January 2, 2007, Sunbelt transferred $50,000.00 to MTC, which then transferred $15,000.00 to TFLP. (Pl. Ex. 10D; Pl. Ex. 10B; Pl. Ex. 11F (MTC Journal Jan. 1, 2007-Dec. 31, 2007 (“MTC 2007 Journal”)); and Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 35/42-36/42).
• On January 5, 2007, Sunbelt transferred $50,000.00 to MTC. (Pl. Ex. 10D; Pl. Ex. 10B).
• On January 16, 2007, Sunbelt transferred $30,000.00 to MTC, which on the same day paid $15,000.00 to TFLP and $15,000.00 to VP. (Pl. Ex. 10D; Pl. Ex. 10B; Pl. Ex. 11F; and Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 37/42-38/42 and Schedule 2, Ex. F, pp. 37/50-38/50).
• On January 18, 2007, Sunbelt transferred $55,000.00 to MTC. (Pl. Ex. 10D; Pl. Ex. 10B; and Pl. Ex. 11F).
• On January 29, 2007, Sunbelt transferred $50,000.00 to MTC. (Pl. Ex. 10D; Pl. Ex. 10B).
• On February 1, 2007, $30,000.00 was transferred by Sunbelt to MTC, and on the same day, $15,000.00 of that was transferred to TFLP and $15,000.00 to VP. (Pl. Ex. 10D; Pl. Ex. 10B; and Pl. Ex. 11F).
5. Liability for Sunbelt Transfers under Section 550
The Court concludes the sum of parts 1 through 4 above is that TFLP is liable under 11 U.S.C. § 550 to the Trustee as the immediate or mediate transferee of the Sunbelt Transfers in the amount of $290,000.00; VP is liable to the Trustee as the immediate or mediate transferee of $450,000.00 of the Sunbelt Transfers; and MTC is liable for $670,000.00 as the mediate or immediate transferee of the Sunbelt Transfers.
C. MTC Other Transfers
1. July 25, 2006 Transfer of $300,000.00
The Court concludes TFLP is the immediate transferee of $82,000.00 and VH is *920the immediate transferee of $7,000.00 of this Transfer, composed of the following transactions: The Court finds that, on the date of the Transfer from the Debtor to MTC of $300,000.00, MTC’s bank account balance was only approximately $2,858.00. (PI. Ex. 10B). On the same date the Transfer was received, Plaintiffs Exhibit 11C reflects $80,000.00 paid from MTC to TFLP and $5,000.00 paid from MTC to VH. Thereafter, on July 31, 2006, another $2,000.00 was paid from MTC to TFLP and $5,000.00 was paid from MTC to VH. (PL Ex. 11C and Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 3/42-6/42). Given that MTC began with a $2,858.00 balance, the Court has concluded $3,000.00 of the first $5,000.00 payment to VH was not from the Transfer. The remaining $5,000.00 paid to VH and $82,000.00 paid to TFLP were from the Transfer.
2. October 26, 2006 Transfer of $100,000.00
The Court concludes TFLP is the immediate transferee of $15,000.00 of this Transfer, and VP is the immediate transferee of $30,000.00 of this Transfer. On October 26, 2006, Debtor transferred $100,000.00 to MTC’s bank account, which at that time had a balance of $20,529.86. (PL Ex. 10B). On October 26, 2006, MTC transferred $30,000.00 from its account and the Court concludes MTC first used its existing balance to make this transfer. By the close of business on October 26, 2006, MTC’s bank balance was $72,910.32, all of which was proceeds of the MTC Other Transfer. No other deposits were made into the account until November 9, 2006. MTC transferred $15,000.00 directly to TFLP and $15,000.00 to VP on October 31, 2006. (Pl. Ex. 11C). The MTC 2006 Ledger reflects another $15,000.00 paid to Reese & Hopkins on November 2, 2006. (PL Ex. 11C). Plaintiffs expert found that, although the MTC 2006 Ledger reflected a transfer to Reese & Hopkins, the funds were actually deposited in the VP account. (Expert Report: Ex. IV, Schedule 2, Ex. F, pp. 17/50-19/50).
In sum, the Court concludes that, based on the transactions detailed above, TFLP is the mediate or immediate transferee of $97,000.00 of MTC Other Transfers, VP is the mediate or immediate transferee of $30,000.00 of MTC Other Transfers and VH is the mediate or immediate transferee of $7,000.00 of MTC Other Transfers.
D. MTC Deposited Checks
1. $473,019.65 on July 31, 2006
In July 2006, the Debtor wrote Check No. 1089 to MDG in the amount of $473,019.65, which was deposited into the MTC SunTrust account on July 31, 2006 when MTC’s balance was $40,098.29. (Pl. Ex. 10B; UF Nos. 65 and 66). MTC received no other deposit of funds until August 21, 2006. On July 31, 2006, MTC made two electronic transfers totaling $7,000.00. On August 1, 2006, MTC paid $6,623.00 in checks and made a $6,000,000 electronic transfer, leaving $20,475.29 of the pre-Transfer balance.
MTC then transferred $30,000.00 to VP and $30,000.00 to TFLP, both on August 1, 2006. (UF Nos. 67 and 70). The Court assumes the first Transfer of $30,000.00 to VP consisted of $20,000.00 of MTC’s pre-Transfer funds and $10,000.00 of the MTC Deposited Check Transfer. On the same date that MTC transferred $30,000.00 to TFLP, Ms. Trell signed Check No. 1058 payable to Mr. Trell from the TFLP account in the amount of $30,000.00. (UF No. 73). Also on August 1, 2006, MTC paid TFLP $177,250.00 (UF No. 70), and then Ms. Trell signed Check No. 1059 payable to Mr. Trell from the TFLP account in the same amount. (UF No. 74). On August 10, 2006, MTC paid Mr. Trell $135,000.00. (UF No. 72). MTC paid $15,000.00 to each of TFLP and VP on August 15, 2006. (UF Nos. 71 and 68). *921On August 15, 2006, Ms. Trell signed Check No. 1060 payable to Mr. Trell from the TFLP account for the same $15,000.00. (UF No. 75). MTC’s daily bank balance on August 18, 2006 was negative $10,707.13, so there is no doubt that MTC had spent 100% of the funds transferred by the Debtor by that date. (PI. Ex. 10B). The transactions described support the Court’s conclusion VP is the immediate transferee of $25,000.00, TFLP is the immediate transferee of $222,250.00, and Mr. Trell is the immediate or mediate transferee of $357,250.00.
2. $297,085.00 on September H, 2006
On the date MTC deposited a check in the amount of $297,085.00 payable to MDG, MTC’s bank balance was $12,386.56. (PI. Ex. 10B). MTC received an additional $100,000.00 deposit that day. No other deposits were received in the MTC account until October 26, 2006. The Court assumes MTC spent the non-MTC Deposited Cheeks first. By September 19, 2006, MTC’s bank balance was $289,252.02, so the Court concludes all transfers from September 19, 2006 to October 26, 2006 were of Debtor transferred funds. MTC transferred $15,000.00 to each of TFLP and VP on September 29, 2006. (Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 20/42-21/42 and Schedule 2, Ex. F, pp. 11/50-12/50; PI. Ex. 11C; and UF No. 82). On October 6, 2006, MTC transferred $50,000.00 to Sunbelt, all of which was paid to VP in two transfers of $35,000.00 on October 6, 2006 and $15,000.00 on October 20, 2006. (Expert Report: Ex. IV Schedule 2, Ex. J, pp. 5/26-6/26; PI. Ex. 10D; PI. Ex. 10B; and PL Ex. 11C). On October 16, MTC transferred $15,000.00 to Mr. Trell and $15,000.00 to VP. (PL Ex. 11C; Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 12/42-13/42 and Schedule 2, Ex. F, pp. 13/50-14/50). In sum, Mr. Trell was the immediate or mediate transferee of $15,000.00, VP was the immediate or mediate transferee of $80,000.00, Sunbelt was the immediate transferee of $50,000.00, and TFLP was the mediate or immediate transferee of $15,000.00.
3. $169,295.00 Transfer on November 9, 2006
The Court has previously found that MTC deposited a check from the Debtor in the amount of $169,295.00 made payable to MD Medical. The Court notes that, on the same date, MTC received another deposit of $30,000.00 and that the closing balance in MTC’s account on November 8, 2006, before these deposits was $27,851.16. (Pl. Ex. 10B). For purposes of this analysis, the Court assumes that MTC spent the $57,851.16 it received from other sources first. Nevertheless, by November 15, 2006, MTC’s bank balance was $125,141.57. MTC did not receive another deposit until November 22, 2006, when it received $35,000.00. Thus, all expenditures from MTC’s bank account between November 15, 2006 and November 22, 2006 were of the funds transferred by the Debtor to MTC. MTC transferred $15,000.00 to each of TFLP and VP on November 16, 2006. (PL Ex. 11C; Expert Report Ex. IV, Schedule 1, Ex. A, pp. 26/42-27/42). The Court notes that, although $35,000.00 was deposited into the MTC account on November 22, 2006, the exact same amount was withdrawn on the same day, so the Court presumes the funds in MTC’s account at the end of the month, $43,408.10, were the remaining balance from the Transfer of the Debtor’s funds. (Pl. Ex. 10B). On December 1, 2006, MTC transferred $15,000.00 to each of TFLP and VP. (PL Ex. 11C; Expert Report: Ex. IV, Schedule 1, Ex. A, pp. 29/42-30/42 and Schedule 2, Ex. F. pp. 25/50-26/50).
The Court concludes TFLP is the immediate transferee of $30,000.00 and VP is the immediate transferee of $30,000.00 of this Transfer.
*922Based on sections 1 through 3 above, the Court concludes the following are liable to the Trustee under 11 U.S.C. § 550 as the mediate or immediate transferee of the MTC Deposited Checks:
The Trell Family Limited Partnership $267,250.00
Vinson Partners, L.L.L.P. $135,000.00
Franklin P. Trell $372,250.00
Sunbelt $ 50,000.00
III. ALTER EGO
In addition to recovery under 11 U.S.C. §§ 544 and 550, the Trustee has asked the Court to determine that Mr. Trell and Ms. Vinson were the alter egos of the Debtor and therefore liable for all claims in the bankruptcy ease against the Debtor, including all administrative expenses.
To justify disregarding a corporate entity as an alter ego, the plaintiff must show the principals “disregarded the corporate entity and made it a mere instrumentality for the transactions of their own affairs; that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exists.” Baillie Lumber Co. v. Thompson, 279 Ga. 288, 290, 612 S.E.2d 296 (2005) (citations omitted). To determine whether the corporate entity has been disregarded, the courts typically look at whether the principals commingled the assets of the company with their personal assets or otherwise confused the assets, records and liabilities of the individual and the corporation. Piercing the corporate veil, or finding that a company is the alter ego of an individual, is justified where the owner treats the company and himself as one unit, Id., or where the owner uses the corporate funds for personal expenses. See Scott Bros., Inc. v. Warren, 261 Ga.App. 285, 582 S.E.2d 224 (2003) (citations omitted).
A. Mr. Trell and Ms. Vinson as Alter Ego of Debtor
After review of all the evidence, the Court declines to conclude that Mr. Trell and Ms. Vinson were the alter egos of the Debtor. First, Mr. Trell and Ms. Vinson were not the only owners of the Debtor. Dr. Stuart owned 34 percent of the Debtor. While there is no doubt that money was moved from the Debtor to other companies in which Mr. Trell and Ms. Vinson were the sole owners, the evidence did not show that Mr. Trell and Ms. Vinson disregarded the corporate entity of the Debtor in doing so, or used the funds of the Debtor directly to pay personal expenses. The analysis above under 11 U.S.C. § 550 shows further that, while a substantial amount of transfers from the Debtor ultimately made their way to Mr. Trell’s and Ms. Vinson’s personal partnerships, it was by no means all of the funds transferred by the Debtor to MTC or Sunbelt. The transfers to Sunbelt and MTC avoided in this Order were certainly not all, or even a majority, of the funds received by the Debtor from CIT or other sources. Therefore, the Court denies the Trustee’s requests to determine Mr. Trell and Ms. Vinson are alter egos of the Debt- or and liable for all claims against the estate.
B. Trells and Vinsons as Alter Egos of Their Family Partnerships
The Court next considers whether to hold that Mr. and Ms. Trell are the alter egos of TFLP and Mr. and Ms. Vinson are the alter egos of VH and VP. The law with respect to alter ego is the same as discussed above, but the facts are unique in each situation.
*9231. Vinsons
Cynthia Vinson testified that VH and VP were wholly owned by her husband, Dana, and her. Neither of the Vinson family partnerships ever filed a tax return. (UF Nos. 58, 59). The Undisputed Facts show funds were moved from VP to VH regularly. (UF Nos. 69, 83, 94, 105, 110, 116, 120). Ms. Vinson testified to using funds of both the family partnerships to pay the personal expenses for her husband and herself. Ms. Vinson testified her husband had not worked in a number of years. She also testified the funds in VH and VP accounts were used to buy a vacation home in Sevierville, Tennessee, which was placed in her husband’s name, and then to furnish and remodel the home. The Undisputed Facts also show that funds from VH and VP were used to distribute cash in the amount of $163,897.62 to Mr. Vinson, to purchase a motorcycle, to make payments to a Ford dealership, and to purchase a home in Newnan, Georgia. (UF Nos. 93, 103-111, 126 and 127). Based on the evidence, the Court concludes Mr. and Ms. Vinson disregarded their family partnerships’ corporate entities, used VH and VP interchangeably, and in fact used the family partnerships as mere instrumentalities for the transaction of their own personal affairs. Therefore, the Court holds: (a) Mr. and Ms. Vinson liable for all amounts for which VP or VH is liable to the Trustee, being a total of $622,000.00; and (b) VH and VP liable for all amounts which the other owes to the Trustee, so each is liable for the total of $622,000.00.
2. Trells
The Trustee has not carried her burden of proof as to Mr. and Ms. Trell being the alter egos of TFLP. The Trustee argues without dispute that Mr. and Ms. Trell are partners in TFLP and are signatories on TFLP’s accounts. TFLP never filed any tax returns. The Undisputed Facts reflect that, on several occasions, funds which were transferred from the Debtor to MTC to TFLP were immediately transferred via personal check to Mr. Trell. On occasion, the MTC 2006 Ledger reflects a payment to Mr. Trell individually while transferring the funds to TFLP, thus showing some commingling between Mr. Trell and TFLP. Each of the personal checks was signed by Ms. Trell. Mr. Trell testified that his spouse did not work outside the home, so the funds in the TFLP account came from his efforts. Unlike Ms. Vinson’s testimony regarding VP and VH, there was no evidence as to the function and use of the TFLP funds. There was no evidence of the use of the funds generally in TFLP. There was no evidence as to other ownership interests in TFLP. The Court therefore concludes the Trustee did not prove the Trells disregarded the corporate entity of TFLP and made it a mere instrumentality for the transaction of their own affairs.
CONCLUSION
In accordance with the Findings of Fact and Conclusions of Law set out above, the Court enters judgment in the following amounts:
$2,009,399.65 MTC Development, LLC
$1,565,000.00 Sunbelt Construction Management, Inc.
$ 372,250.00 Franklin P. Trell
$ 622,000.00 Cynthia Vinson
$ 622,000.00 Vinson Holding, Inc.
$ 622,000.00 Vinson Partners, L.L.L.P.
$ 654,250.00 The Trell Family Limited Partnership
$ — 0— Project Personnel Leasing, LLC
$ 622,000.00 Dana Vinson
$-0-Shaaron Trell
*924The Trustee is only entitled to a single satisfaction on any given Transfer from the initial transferee, immediate transferee or mediate transferee.
IT IS ORDERED,
EXHIBIT A
July 25, 2006
Assets
Cash $1,000,128.60
Leasehold Improvements 308,399.98
TOTAL ASSETS $1,308,528.58
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart (864.562.00)
Partitions, Suite 340 (288.485.00)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($2,139,047.00)
Related Company Liabilities
MTC ($168,550.00)
Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($2,340,097.00)
July SI, 2006
Assets
Cash $288,242.45
Leasehold Improvements 308,399.985
TOTAL ASSETS $596,642.43
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart (864.562.00)
Partitions, Suite 340 (288.485.00)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($2,139,047.00)
Related Company Liabilities
MTC ($168,550.00)
*925Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($2,340,097.00)
August 30, 2006
Assets
Cash $1,091,124.35
Leasehold Improvements 469,598.486
TOTAL ASSETS $1,560,722.83
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart, Initial Liability (861.562.00)
Dr. Stuart, Contingent Liability (338,711.83)
Dr. Stuart Total (1,203,303.83)
Partitions, Suite 310 (288.185.00)
Partitions, Suite 310 (12.813.00)
Partitions, Suite 300 (32.935.00)
Partitions Total (364,263.00)
Contingent Liability to (925,000.00)
Investors at 50%
SUBTOTAL ($2,553,566.83)
Related Company Liabilities
MTC ($168,550.00)
Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($2,754,616.83)
September H, 2006
Assets
Cash $655,216.89
Leasehold Improvements 499,915.00 7
TOTAL ASSETS $1,155,131.89
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart, Initial Liability (861.562.00)
Dr. Stuart, Contingent Liability (338,711.83)
Dr. Stuart Total (1,203,303.83)
Partitions, Suite 310 (288.185.00)
Partitions, Suite 310 (12,813.00)
*926
Partitions, Suite 300 (32,935.00)
Partitions Total (364,263.00)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($2,553,566.83)
Related Company Liabilities
MTC ($168,550.00)
Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($2,754,616.83)
October 26, 2006
Assets
Cash $524,644.30
Leasehold Improvements 499,915.00 8
TOTAL ASSETS $1,024,559.30
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart, Initial Liability (864.562.00)
Dr. Stuart, Contingent Liability (338,741.83)
Dr. Stuart Total (1,203,303.83)
Partitions, Suite 340 (288.485.00)
Partitions, Suite 340 (42.843.00)
Partitions, Suite 300 (32.935.00)
Partitions Total (364,263.00)
Toshiba (450,369.59)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($3,003,936.42)
Related Company Liabilities
MTC ($168,550.00)
Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($3,204,986.42)
November 8, 2006
Assets
Cash $244,252.26
Leasehold Improvements 499,915.009
TOTAL ASSETS $744,167.26
*927Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart, Initial Liability (864.562.00)
Dr. Stuart, Contingent Liability (338,741.83)
Dr. Stuart Total (1,203,303.83)
Partitions, Suite 340 (288.485.00)
Partitions, Suite 340 (42.843.00)
Partitions, Suite 300 (32.935.00)
Partitions Total (364,263.00)
Toshiba (450,369.59)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($3,003,936.42)
Related Company Liabilities
MTC ($168,550.00)
Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($3,204,986.42)
November 9, 2006
Assets
Cash $74,928.94
Leasehold Improvements 499,915.0010
TOTAL ASSETS $574,843.94
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart, Initial Liability (864.562.00)
Dr. Stuart, Contingent Liability (388,741.83)
Dr. Stuart Total (1,203,303.83)
Partitions, Suite 840 (288.485.00)
Partitions, Suite 840 (42.843.00)
Partitions, Suite 300 (32.935.00)
Partitions Total (364,263.00)
Toshiba (450,369.59)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($3,003,936.42)
Related Company Liabilities
MTC ($168,550.00)
Trell (32,500.00)
SUBTOTAL ($201,050.00)
TOTAL LIABILITIES ($3,204,986.42)
*928
November 21, 2006
Assets
Cash $4,578.55
Leasehold Improvements 499,915.00 11
TOTAL ASSETS $504,493.55
Liabilities
Batson-Cook ($61,000.00)
Dr. Stuart, Initial Liability (864.562.00)
Dr. Stuart, Contingent Liability (338, 741.83)
Dr. Stuart Total (1,203,303.83)
Partitions, Suite 340 (142.550.00)
Partitions, Suite 340 (42.843.00)
Partitions, Suite 340 (72,250.43)
Partitions, Suite 340 (31,845.60)
Partitions, Suite 300 (32.935.00)
Partitions, Suite 397 (23.880.00)
Partitions, Suite 397 (96,402.87)
Partitions Total (442,706.90)
Toshiba (450,369.59)
Contingent Liability to Investors at 50% (925,000.00)
SUBTOTAL ($3,082,380.32)
TOTAL LIABILITIES ($3,082,380.32)
. The Trustee did not pursue any claims against PPL, even though it is named as a Defendant.
. The CIT Credit Approval Memo notes the loan is undersecured without cash flow from the business operations.
. The Court has assumed the leasehold improvements identified in the Debtor's Ledger are realty and not personalty and as such must be perfected as realty and not with a UCC filing. This assumption is consistent with the Debtor posting construction payments in this ledger account and with the CIT Loan and Security Agreement which never refers to interests in realty or to any real estate-based agreements. This assumption provides Defendants with the benefit of increased asset value in the insolvency analysis.
. The MTC 2006 Ledger states the transfer came from and went to TFLP on December 4, 2006. The TFLP bank statements do not support the funds coming from TFLP, only to TFLP, while the Sunbelt bank statements re-*919fleet the $80,000 withdrawal. The Court finds the funds came from Sunbelt. (See Expert Report, Ex. II, Schedule 1).
. The transfer on July 31, 2006 of $473,019.65 was a check made out to MDG and deposited in the MTC account. Debtor's Ledger books this transfer as an increase in value in leasehold improvements. Given the Court’s finding later in this opinion that the transfer was a fraudulent conveyance, the Court has not increased the value of the leasehold improvements allegedly resulting from that check.
. See Footnote 5.
. See Footnote 5.
. See Footnote 5.
. See Footnote 5.
. See Footnote 5.
. See Footnote 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496541/ | MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is a “Motion of Cara Donna Provision Co., Inc. for Orders Allowing Requests for Payment Relative to Rent Due and Rejection Damages Associated with the Upper Crust ‘Commissary’ Sublease” (the “Payment Motion”). Cara Donna Provision Co., Inc. (“CDP”) requests immediate payment or administrative priority status for (i) postpetition rents claimed to be due to CDP as lessor under its commercial lease (the “CDP Lease”) with JJB Hanson Management, Inc., one of the debtors in this substantively consolidated bankruptcy case (collectively, the “Debtor”),1 and (ii) rejection damages pursuant to § 503(b)(7).2 Resolution of the Payment Motion requires a determination of whether the CDP Lease was assumed by the Chapter 11 (now Chapter 7) trustee (the “Trustee”) and, if not, the date on which the CDP Lease was or should be deemed rejected.
I. FACTS AND TRAVEL OF THE CASE
The facts relevant to this contest are undisputed; not so the consequences which flow from them.
On October 4, 2012, The Upper Crust, LLC and several related entities filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The cases have since been substantively consolidated. On November 7, 2012, the Court ordered the appointment of a Chapter 11 trustee (the “Trustee”). And on March 6, 2013, the case was converted to one under Chapter 7.3
Prepetition, the Debtor operated a chain of pizza restaurants in the Boston and Washington, D.C. areas, and as of the petition date, the Debtor held leasehold interests in eleven unexpired leases of nonresidential real property where the restaurants were located. Among those leasehold interests was a sublease executed on December 23, 2010 between the Debtor and CDP for real property located at 55 Food Mart Road in Boston, Massachusetts (the “Premises”). The CDP Lease provided for an initial term ending on December 31, 2015 and monthly rent payments of $5,918.52 for the period of December 1, 2012 through November 30, 2013.
On November 28, 2012, the Trustee filed a motion seeking, among other relief, the authority to assume, assign, and sell by public auction the Debtor’s non-residential leases and pre-approval of certain bidding procedures (the “Sale Motion”). On December 5, 2012, this Court entered its “Order (I) Authorizing and Approving Bid Procedures to Be Employed in Connection *3with Public Auction; (II) Scheduling an Auction and Hearing to Consider Approval of the Public Auction; And (III) Approving Form and Manner of Notice of Public Auction” (the “Bid Procedures Order”). See ECF No. 196.
At a public auction conducted on December 19, 2012 (the “Auction Sale”), the Trustee procured agreements to purchase each of the Debtor’s leases, with the exception of the CDP Lease. On December 21, 2012, the Trustee filed a Notice of Intent to Abandon Property, reflecting his intention to abandon the estate’s interest in the equipment and other personal property remaining at the Premises (the “Notice of Abandonment”). On December 21, CDP’s counsel sent an email to the Trustee acknowledging his receipt of the Trustee’s Notice of Abandonment and further inquiring as to the “status of the rejection” of the Lease in light of the fact that no bids for the CDP Lease were elicited at the Auction Sale. T’ee Obj. to Payment Mot. Ex. A p. 3, June 27, 2013, ECF No. 386. On December 24, in an email sent to counsel to CDP, the Trustee stated that CDP should “consider the lease terminated as of December 31 [, 2012],” and advised CDP to contact the bank holding a security interest in the remaining personal property with regard to the property left on the Premises.4 Id. at 2.5 On December 28, 2012, following a final hearing on the Sale Motion (the “Sale Hearing”), the Court entered separate orders approving the assumption, assignment, and sale of each of the other 10 leases that were sold at auction (the “Sale Orders”). According to the Trustee, the keys to the Premises were returned to CDP no later than December 31, 2012. See T’ee Obj. 9 ¶ 34.
Almost five months later, on May 17, 2013, CDP filed its Payment Motion. Through that motion, CDP seeks: (a) the Trustee’s immediate payment or administrative expense priority for the December 2012 and January 2013 rents, totaling $11,837.04; (b) administrative expense priority status for the February 2013 and March 2013 rents totaling $11,837.04; and (c) administrative expense priority status for its rejection damages in the amount of $130,750.96.
The Trustee filed an objection to the Payment Motion (the “Objection”), conceding that CDP is entitled to payment of $5,918.52 on account of the December 2012 rent, but disputing CDP’s entitlement to either immediate payment or administrative priority status for the rents due for January through March 2013. The Trustee further requested (for the first time) that the Court either approve the rejection of the CDP Lease retroactively effective on December 31, 2012 or deem the CDP Lease rejected as a matter of law as of February 1, 2013. After a hearing on the Payment Motion and a determination that the facts were not materially in dispute, the Court took the matter under advisement.
II. POSITIONS OF THE PARTIES
The CDP argues that the Trustee should immediately pay the rent due for January 2013 for the same reason that the Trustee concedes his obligation to render payment of the December 2012 rent— namely, that absent a formal rejection of *4the CDP Lease prior to January 2018, § 365(d)(3) requires the Trustee to “timely perform all obligations ... arising from and after the order for relief under any unexpired lease of non-residential property, until the lease is assumed or rejected.” According to CDP, the CDP Lease was not effectively rejected by the Trustee’s informal communications with counsel in December 2012 or by the Trustee’s surrender of the keys to Premises. Rather, CDP argues, rejection of the CDP Lease could occur only by an order of this Court approving the Trustee’s proposed rejection.
Relying on Thinking Machs. Corp. v. Mellon Fin. Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1029 (1st Cir.1995), the Trustee counters that this Court should approve the rejection of the CDP Lease retroactively effective as of December 31, 2012 because CDP had, by that date, received clear and unequivocal notice of his intention to reject the CDP Lease. The Trustee maintains that his intention to reject the lease was made obvious by his communications with CDP counsel, the return of the keys (and thus possession of the Premises) to CDP on December 31, and the December 21 Notice of Abandonment of the personal property remaining at the Premises. Thus, the Trustee argues, with this Court’s retroactive approval of the Trustee’s rejection of the CDP Lease, CDP would not be enti-tied to immediate payment or administrative expense status for rent due in January 2013 or thereafter.
But CDP raises an additional argument regarding the estate’s liability not only for the January 2013 rent, but also for the February and March rents and damages arising from rejection of the CDP lease. CDP maintains that the CDP lease was actually assumed by the estate, an assumption effectuated by the Court’s December 5, 2012 Bid Procedures Order. According to CDP, the Court must have approved the assumption of the CDP lease when it entered the Bid Procedures Order; otherwise, the Trustee would have had no authority to “sell” (assign) the lease at the Auction Sale. Because the CDP Lease was assumed by the estate, CDP argues, the estate is obligated to pay not only the post-assumption rent in the total amount of $11,837.04, but CDP’s administrative expense for the rent due under the lease for two years after the date of rejection6 — a total of $130,750.96 — by operation of § 503(b)(7).7
In response, the Trustee maintains that the CDP Lease was never assumed and was rejected, at the latest, as of February 1, 2013 — 120 days after the petition date— by operation of § 365(d)(4)(A)(i).8 Accordingly, the Trustee argues that should the Court deny retroactive rejection of the CDP Lease, the estate is obligated, at *5most, for an additional $5,918.52 (representing the rent owed for January). In support of his position, the Trustee insists that he did not request court approval of an assumption of the CDP Lease and that, absent court approval, there could be no assumption. In response to CDP’s argument that the Bid Procedures Order necessarily approved an assumption of the CDP Lease, the Trustee argues that the Bid Procedures Order did nothing more than grant the Trustee the authority to attempt to assume and assign the leases, and that assumption and assignment of the Debtor’s leases remained subject to later approval by the Court at the Sale Hearing. And that approval was ultimately granted in the Sale Orders, but not with regard to the CDP Lease.
III. DISCUSSION
A. Was the CDP Lease Assumed?
Section 365(a) allows a trustee (or debtor-in-possession), subject to the court’s approval, to assume or reject any executory contract or unexpired lease of the debtor. 11 U.S.C. § 365(a) (emphasis supplied). While the determination of whether a particular lease should be assumed or rejected is a business decision largely within the trustee’s discretion, “only the court can approve [a] proposed assumption.” Gray v. Western Env. Servs. & Testing, Inc. (In re Dehon, Inc.), 352 B.R. 546, 560 (Bankr.D.Mass.2006). “It is well established that the doctrine of ‘implied assumption’ has little, if any, merit.” Id. (emphasis supplied).
CDP’s argument that the Bid Procedures Order effected an approval of the assumption of the CDP Lease is fundamentally flawed. Not only was there no specific request in the Sale Motion for court approval of lease assumptions prior to the final sale hearing, but nothing in the Bid Procedures Order could possibly be construed as an approval of an assumption of the CDP Lease or any other of the leases.
CDP misses the mark in its attempt to distinguish the present case from Dehon by noting that, here, the CDP Lease was specifically identified in the Sale Motion (in Dehon, the contracts at issue were not specifically identified). The Bid Procedures Order did not approve the assumption or assignment of any of the Debtor’s leases. Rather, it merely granted the Trustee the authority to solicit bids for the Debtor’s assets by way of public auction. Although the CDP Lease was identified as among those assets the Trustee wished to sell, the order makes clear that Court approval of any lease assumption and assignment would not be considered until the Sale Hearing:
The Sale Hearing shall be held before the undersigned United States Bankruptcy Judge ... at which time the Court shall (i) consider approval of the Auction of the Assets to the Successful Bidder(s) and Second Highest Bidder(s) as determined by the Trustee; (ii) consider the proposed assumption and assignment of executory contracts and unexpired leases and related cure claims
Bid Procedures Order 3 ¶ 6, Dec. 5, 2012, ECF No. 196.
While the Trustee’s Sale Motion did indeed request the Court’s authorization of the assumption and assignment of the Debtor’s leases in connection with the sale, only the Sale Orders constituted Court approval of the assumption and assignment of particular leases — and the CDP Lease was not among them. Accordingly, the Court finds and rules that the CDP Lease was not assumed, and CDP is therefore not entitled to immediate payment of or administrative expense status for any *6rent on that basis, nor is it entitled to rejection damages pursuant to § 503(b)(7).
B. When was the CDP Lease Rejected?
Pursuant to § 365(d)(4)(A)(i), a lease of nonresidential real property is deemed rejected, and the trustee must immediately surrender the property to the lessor, after the expiration of the 120-day period following the filing of a Chapter 11 case (unless a plan has been confirmed prior to that date or the court grants an extension of the deadline). 11 U.S.C. § 365(d)(4). Here, while the Trustee may have surrendered the leasehold to CDP prior to the 120-day deadline (February 1, 2013), the Trustee did not seek, and the Court did not grant, formal approval of the Trustee’s purported rejection of the CDP Lease. Accordingly, the Trustee was obligated to “perform all of the obligations of the debtor” (including the payment of rent) with respect to the CDP Lease through January. 11 U.S.C. § 365(d)(3). In an effort to avoid the estate’s obligation to pay the January rent, however, the Trustee has sought approval of the rejection of the CDP Lease retroactively effective to December 31, 2012 when the estate vacated the property and shortly after his email communication to CDP’s counsel to the effect that CDP should consider its lease with the Debtor terminated.
In Thinking Machines Corp. v. Mellon Fin. Servs. Corp. (In re Thinking Machines), 67 F.3d 1021, 1028 (1st Cir.1995), the First Circuit Court of Appeals held “that a rejection of a nonresidential lease under section 365(a) becomes legally effective only after judicial approval has been obtained” and that “court approval [is] a condition precedent to the effectiveness of a trustee’s rejection of a nonresidential lease.” Id. at 1025. But the Thinking Machines court also suggested that equitable considerations might, in some cases, allow the bankruptcy court to “abandon mechanical solutions in favor of the pliant reins of fairness,” id. at 1028, and approve a rejection retroactively. Which circumstances might, in such cases, tip the “balance of equities ... in favor of such remediation,” id., were not described. Id. at 1029 n. 9 (“Because no two cases are exactly alike, we eschew any attempt to spell out the range of circumstances that might justify the use of a bankruptcy court’s equitable powers in this fashion. That exercise is best handled on a case-by-case basis.”). But in discussing the possibility of the retroactive effectiveness of an order approving rejection of an executory contract, the Thinking Machines court never suggested that retroactivity could be applied to a period of time prior to the filing date of a motion to reject that contract. See id. at 1028 (“nothing in our holding today precludes a bankruptcy court, in an appropriate section 365(a) case, from approving a trustee’s rejection of a nonresidential lease retroactive to the motion filing date”) (emphasis supplied). And in support for its holding that court approval of rejection is a condition precedent to its effectiveness, the Thinking Machines court noted that Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) 6006 and 9014, “read together, ... require a trustee who desires to reject a lease to file a formal motion to that effect.” Id. at 1026.
In In re GCP CT School Acquisition, LLC, 429 B.R. 817, 826 (1st Cir. BAP 2010), the United States Bankruptcy Appellate Panel of the First Circuit (the “BAP”) reiterated that rejection of an executor contract could be retroactive only if the estate representative had provided formal notice of that intention. And while the BAP held that the required filing need not necessarily be titled a “motion to reject,” it also held that the rejection in that *7case could not be retroactively effective to a date preceding the trustee’s filing of the pleading which made the intention to reject clear and that emails and other out-of-court communications could not constitute sufficiently adequate notice. GCP CT, 429 B.R. at 826, 882. Here, in arguing that the rejection of the CDP Lease should be effective retroactively to December 31, 2012, the Trustee relies on just the sort of informal notice disapproved by the BAP in GCP CT.
Approving retroactive rejection of the CDP Lease based on out-of-court communications between the Trustee and CDP would not only be contrary to the First Circuit’s clear holding in Thinking Machines that rejection under § 365 “requires express approval by the court,” but “would trivialize judicial oversight of the rejection process.” Thinking Machines, 67 F.3d at 1026.9 Accordingly, the Court declines to approve the rejection of the CDP Lease retroactive to December 31, *82012. Rather, the Court finds and rules that the CDP Lease was rejected as of February 1, 2013, pursuant to § 365(d)(4)(A)(i), and the estate is therefore liable for payment of the December and January rents in accordance with § 365(d)(3).
IV. CONCLUSION
For all the foregoing reasons, the Court finds and rules that the CDP Lease was not assumed by the Trustee and was rejected effective as of February 1, 2013 pursuant to § 365(d)(4)(A)(i). Accordingly, the Trustee will be ordered to immediately pay to CDP a total of $11,837.04 — the amount representing the rents due under the CDP Lease for December 2012 and January 2013, subject to the possibility of disgorgement by CDP in the event of future administrative insolvency. See In re PYXSYS Corp., 288 B.R. 309, 316 (Bankr.D.Mass.2003). CDP’s request for payment or administrative expense priority status for the claimed February and March 2013 rents and rejection damages will be DENIED. An order in conformity with this memorandum shall issue forthwith.
.The Debtors are The Upper Crust, LLC, The Upper Crust-Back Bay, LLC (Case No. 12-18135), The Upper Crust-Fenway, LLC (Case No. 12-18136), The Upper Crust-Harvard Square, LLC (Case No. 12-18137), The Upper Crust-Hingham, LLC (Case No. 12-18138), The Upper Crust-Lexington, LLC (Case No. 12-18139), The Upper Crust-State Street, LLC (Case No. 12-18140), The Upper Crust— South End, LLC (Case No. 12-18142), The Upper Crust-Pennsylvania Avenue, LLC (Case No. 12-18143), The Upper Crust-DC, LLC (Case No. 12-18148), The Upper Crust-Wal-tham, LLC (Case No. 12-18144), The Upper Crust-Watertowr, LLC (Case No. 12-18145), The Upper Crust-Wellesley, LLC (Case No. 12-18146), and JJB Hanson Management, Inc. (Case No. 12-18147).
. See 11 U.S.C. § 101 etseq. All references to statutory sections are to the Bankruptcy Code unless otherwise specified.
. The Chapter 11 trustee was also appointed as the Chapter 7 trustee.
. According to CDP, the secured lender did not remove the property left at the Premises until later in February 2013. CDP Reply to T’ee Obj. 11 ¶ 14, July 8, 2013, ECF No. 388.
. In a later email exchange between the Trustee and CDP’s counsel addressing the Debt- or's security deposit, CDP's counsel clarifies that his statements in that email "contemplate that the [CDP Lease] was deemed rejected as of January 1st.” T’ee Obj. Ex. B p. 2.
. CDP says that the CDP Lease was rejected effective on March 6, 2013, the date the case was converted to one under Chapter 7.
. Section 503(b)(7) provides administrative expense priority "with respect to a non-residential real property lease assumed under section 365, and subsequently rejected, a sum equal to all monetary obligations due ... for the period of two years following the later of the rejection date or the date of the actual turnover of the premises.” 11 U.S.C. § 503(b)(7).
.Section 365(d)(4)(A) provides:
... an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of—
(i) the date that is 120 days after the date of the order for relief; or
(ii) the date of the entry of an order confirming a plan.
11 U.S.C. § 365(d)(4)(A).
. A survey of cases from other jurisdictions likewise reveals that, while many bankruptcy courts have ruled that they had the authority to authorize retroactive rejection of an execu-tory contract, the effective date of rejection has seldom been one prior to the date a motion to reject (or similar request) was filed with the court. See, e.g., Adelphia Bus. Solutions, Inc. v. Abnos, 482 F.3d 602 (2d Cir.2007) (rejection effective retroactive to date after motion was filed, but prior to entry of order approving the rejection); Pacific Shores Dev., LLC v. At Home Corp. (In re At Home Corp.), 392 F.3d 1064, 1066, 1075 (9th Cir.2004) (rejection effective retroactive to petition date where motion to reject filed with bankruptcy case and premises were vacated prior to filing of the bankruptcy case); In re Philadelphia Newspapers, LLC, 424 B.R. 178, 185 (Bankr.E.D.Pa.2010) (rejection effective retroactive to date motion to reject was filed); Colony Beach & Tennis Club, Inc. v. Colony Beach & Tennis Club Assoc., Inc. (In re Colony Beach & Tennis Club Assoc., Inc.), No. 8:09-cv-535-T-33, Bankr.No. 8:08-bk-16972-KRM, 2010 WL 746708, *5 (M.D.Fla. March 2, 2010); In re Cafeteria Operators, L.P., 299 B.R. 384, 394 (Bankr.N.D.Tex.2003) (rejection retroactive to date motion was filed); In re CCI Wireless, LLC, 279 B.R. 590, 595 (Bankr.D.Colo.2002) (rejection effective retroactive to date motion was filed), aff’d 297 B.R. 133, 140 (D.Colo.2003); BP Energy Co. v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.), No. 02 Civ. 6419(NRB), 2002 WL 31548723, *6 (rejection effective on date prior to entry of order approving rejection, but post-dating filing of the motion to reject); In re Amber’s Stores, Inc., 193 B.R. 819, 820-21, 827 (Bankr.N.D.Tex.1996) (rejection effective retroactive to petition date where debtor filed motion to reject on petition date, sought emergency determination, and had vacated the premises prepetition); Constant Ltd. Partnership v. Jamesway Corp. (In re Jamesway Corp.), 179 B.R. 33, 39 (S.D.N.Y.1995) (rejection effective prior to date order approving rejection entered, but to a date subsequent to the filing of motion to reject).
And those cases where retroactive rejection was set at a date earlier than the date the motion seeking approval was filed are either in the distinct minority or contain easily distinguishable fact patterns from the circumstances present in this case. See, e.g., In re New Meatco Provisions, LLC, No. 2:13-bk-22155-PC, 2013 WL 3760129, *1, *6 (Bankr.C.D.Cal. July 16, 2013) (rejection of lease effective retroactive to date debtor turned possession of premises over to landlord where motion to reject was filed approximately 2 weeks of the bankruptcy case filing, landlord had state court judgment for possession of the property, and debtor had surrendered possession of the premises shortly before filing the motion to reject); In re Manis Lumber Co., 430 B.R. 269, 271-72, 280 (Bankr.N.D.Ga.2009) (where debtor filed motion to reject 6 days after debtor vacated leased premises and 2 days after court approved sale of substantially all of the debtor’s assets, rejection of lease would be effective retroactive to date debtor vacated premises, as landlord had unequivocal notice of estate's intent to reject, had possession of the premises, and could commence the re-letting process); In re O’Neil Theatres, Inc., 257 B.R. 806 (Bankr.E.D.La.2000) (rejection of lease effective retroactive to petition date where motion to reject filed three days after bankruptcy case filed and landlord had control over and had padlocked the premises prior to the petition date). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496542/ | Memorandum of Decision and Order on Trustee’s Rule 9019 Motion
ALAN H. SHIFF, Bankruptcy Judge.
Introduction
The chapter 7 trustee1 has filed a motion under Bankruptcy Rule 9019, Fed. R. Bankr.P., for approval of a settlement of all claims against the debtor’s bankruptcy estate. The debtor, and Giannina Pradella and Milan Olich (“P & 0”), who are not creditors of the estate but claim to be creditors of Monteverde, LLC, one of the debtor’s wholly owned or controlled non-debtor entities, object. For the reasons that follow, the trustee’s motion is granted.
Background
The court provided a detailed background of this case in a prior decision. See In re Friedberg, Case No. 08-51245, 2012 WL 966940, slip op. (Bankr.D.Conn. Mar. 21, 2012) (hereafter, “P & O Claim Denial ”).2 Familiarity with that decision is assumed; however, certain of the findings will be restated as context to the conclusion reached in this controversy.
On December 12, 2008, the debtor filed for bankruptcy relief under chapter 11. According to his schedules, he claimed controlling interests in various entities, including Monteverde, LLC (“Monteverde”) and North South Development, LLC (“North South”). See P & O Claim Denial, 2012 WL 966940, at *1. Monteverde was established to hold real property in Cortlandt Manor, New York (“NY Property”). The debtor was the 100% member of Monteverde. (See Trial Tr. 27:17-20 (Nov. 9, 2011); ECF No. 1019.) North South was a limited liability company through which the debtor held real property in South Carolina (“SC Property”). (See id.) Neither Monteverde nor North South have sought bankruptcy protection. See P & O Claim Denial, 2012 WL 966940, at *1.
On July 28, 2009, P & O filed a proof of claim based on a 2005 real estate transaction in which they sold the N.Y. Property to Monteverde. See id. As part of the consideration for the sale, P & O received a $5 million note from Monteverde and North South (“Note”), which was secured solely by a mortgage on the SC Property (“Mortgage”). See id. That restriction on recourse was specifically stated in the Mortgage and incorporated into the Note. The relevant language in the Mortgage stated:
AND IT IS FURTHER AGREED THAT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS MORTGAGE OR IN THE NOTE, Mortgagee [P & O] shall satisfy any judgment obtained by *11it against Monteverde LLC or Mortgagor [ie., North South] for any amounts due under and in accordance with the terms and conditions of the Note by the exercise of the rights of Mortgagee under this Mortgage to foreclose on the Mortgage Premises as herein provided and not otherwise. No other property or assets of Mortgagor or Monteverde LLC or any member, partner, officer, director or shareholder of Mortgagor or Monteverde LLC shall be subject to levy, execution or other enforcement procedures for the satisfaction of any payments required under the Note. Mortgagee shall not bring any action to obtain a judgment against Mortgagor or Monteverde LLC or any member, partner, officer, director or shareholder of mortgagor or Monteverde LLC or any member, officer, director or shareholder of any of them for any amounts becoming due and owing under the Note except as part of a judicial proceeding to foreclose under and in accordance with this mortgage.
(ECF No. 854-2 at 29-30 (bold in original; italicized emphasis added).) The corresponding Note stated “that all of the covenants, conditions, and agreements contained in said mortgage are hereby made part of this instrument.” (ECF No. 854-2 at 22.)
On or about January 30, 2009, after Monteverde and North South defaulted on the Note, P & O commenced a foreclosure action in South Carolina (“Foreclosure Action”). The text of the foreclosure complaint alleged a basis for a deficiency judgment against both Monteverde and North South, but the relief sought was limited to a “right to a judgment against [North South] for any deficiency”. (Cf., Foreclosure Complaint at ¶ 9, p. 3, with “Prayer for Relief’ at ¶4, p. 5; ECF No. 165-2.) It is noteworthy that the summons served with Foreclosure Complaint placed Mon-teverde and the other defendants on notice that if they failed to file a responsive pleading, P & O would seek a default judgment “for the relief demanded in the Complaint”. (See Summons, Foreclosure Action, ECF No. 165-2 (Exh. A) (emphasis added).)
On April 13, 2009, Monteverde and North South filed an answer (“Foreclosure Answer”), which included affirmative defenses that P & O’s recourse was limited to the SC Property and that Monteverde was not a party to the Mortgage and not subject to any deficiency action. (See Foreclosure Answer, Third Defense, and Fourth Defense, p. 4; ECF No. 1433-1 (Exh. A.).)
The South Carolina court stayed the Foreclosure Action over concerns that it might adversely affect this bankruptcy case. See P & O Denial Decision at *2. On June 26, 2009, P & O filed a motion for relief from the automatic stay. See 11 U.S.C. § 362(d). On July 30, 2009, this court entered an order (“Stay Relief Order”), which granted P & O limited relief from stay to proceed with the Foreclosure Action. See id. The Stay Relief Order concluded: “No deficiency judgment shall be enforced without the further order of this court.” (ECF No. 194 (emphasis added).) Thus, although P & O were not prohibited from seeking and obtaining a deficiency judgment, they were barred from enforcing any such deficiency judgment without the further order of this court, which they neither sought nor received.
Thereafter, a sale of the SC Property was ordered, and it was sold for approximately $3.1 million. See id. Because the sale proceeds did not satisfy the amount claimed, P & O continued the prosecution of their Foreclosure Action to obtain a *12deficiency judgment against Monteverde and North South.
On July 22, 2010, a deficiency judgment hearing was conducted. (See Trustee’s Reply Brief at B; ECF No. 1458.) Although, as noted, Monteverde and North South had filed an answer, neither defended P & O’s Foreclosure Action. (See P & O’s Reply to Trustee’s Supplemental Brief at 7; ECF No. 1443; see also June 17, 2010 Order in Foreclosure Action (granting motion of counsel of North South and Monteverde to withdraw); ECF No. 1433-3 (Exh. Q.) On December 31, 2010, a deficiency judgment of $1.9 million entered in the Foreclosure Action against Monteverde and North South (“Deficiency Judgment”). See P & O Denial Decision at *2.
On December 3, 2010, as the Foreclosure Action was pending, the trustee, as holder of the entire equity interest of the debtor in Monteverde, filed a motion to sell the N.Y. Property free and clear of all interests with any interest to attach to the proceeds. See 11 U.S.C. § 363(f). (See Trustee’s “Motion for an Order (i) Authorizing and Approving Bidding Procedures ... (iii) Scheduling an Auction and Sale Hearing ... and (v) Granting Related Relief ...”; ECF No. 686.) P & O did not object. The court approved the bidding procedures (see ECF No. 698), the N.Y. Property was sold at a January 19, 2011 auction for $2.3 million (“Sale Proceeds”), and the sale was approved on January 24, 2011 (see ECF No. 744). The Sale Order provided:
ORDERED, that this Court has jurisdiction to determine the validity, priority and extent of any hens, claims, and interest, if any, asserted to be due and owing from the proceeds of the sale and to enforce the terms of this Order....
(Sale Order at p. 2.) The sale closed on February 15, 2011.
On a parallel track and notwithstanding this court’s Stay Relief Order, on January 31, 2011, P & O caused the Deficiency Judgment to be recorded as a lien against the N.Y. Property on the Westchester County, New York land records (“Judgment Lien”). See P & O Denial Decision at *2. On March 11, 2011, P & O demanded the payment of the net Sale Proceeds in satisfaction of the Judgment Lien. (See ECF No. 854, Exh. G.) The trustee has refused that demand.
On May 3, 2013, the trustee filed the instant motion under Bankruptcy Rule 9019, Fed. R. Bankr.P., for approval of a compromise with holders of claims against the bankruptcy estate on the distribution of the net Sale Proceeds. (“9019 Motion”; ECF No. 1359.) The court conducted a hearing on July 16, 2013, which was continued to November 6, 2013. The debtor’s former wife, Marianne Howatson, the Internal Revenue Service, the New York State Department of Taxation & Finance, Georgia Capital, the estate’s largest unsecured creditor, and Chicago Title Insurance Company3 supported the 9019 Motion. P & O and the debtor objected.
The record discloses that the debtor sometimes appears pro se and at other times is represented by one or another or both of his two attorneys. The debtor was not present at either of the 9019 Motion hearings, but rather, through counsel, sought continuances.
On October 24, 2013, the debtor requested a 180-day continuance of the November 6th hearing on the 9019 Motion and all other matters scheduled in this case and in *13the adversary proceeding challenging his discharge, Adv. Pro. No. 11-05004. (See main case, ECF No. 1494; adv. pro., ECF No. 159.) The request, as in a long series of similar requests in this and numerous other scheduled matters,4 was based on the claim that the debtor is now in Florida and cannot travel for various reasons including his health and his finances. The trustee, joined by a chorus of parties in attendance at the November 6th hearing, including the United States trustee, vehemently opposed the requested continuance. The court agreed that medical support proffered at the November 6th hearing, as well as its predecessors, was patently inadequate. The request for a continuance was denied, and the debtor’s attorney stated that he was not authorized to participate in the hearing on the 9019 Motion.
It should be observed, and as this court has repeatedly informed the debtor (both in his pro se capacity and through counsel), that as a chapter 7 debtor, his only interest in this case lies in the possibilities of being paid the exemptions he claims and being granted a discharge as provided by the Bankruptcy Code. The 9019 Motion proposes to pay the exemption claimed by the debtor, and the issue of his discharge is not effected by the 9019 Motion. Given the aggregate amount of the allowed claims in this case, it is indisputable that there is no mathematical possibility that the debtor could receive a distribution from his bankruptcy estate. His lack of standing to oppose the 9019 Motion is, therefore, apparent. See In re Heating Oil Partners, No. 3:08-cv-1976 (CSH), 2009 WL 5110838, *5, slip op. (D.Conn. Dec. 17, 2009), aff'd, 422 Fed.Appx. 15, 2011 WL 1838720 (2d Cir. May 16, 2011).
Discussion
Generally, court approval of a compromise under Rule 9019 requires the proponent to show that it is fair, equitable, and in the best interest of the estate. See In re MF Global, Inc., Case No. 11-2790(MG), 2012 WL 3242533 (Bankr.S.D.N.Y. Aug. 10, 2012). Here, that analysis must be deferred because P & O’s objection challenges the trustee’s right to distribute any fiinds from the Sale Proceeds. Thus, the first question addressed is who has a right to the Sale Proceeds.
I.
As noted, after P & O were awarded the Deficiency Judgment in the Foreclosure Action, they caused the corresponding Judgment Lien to be recorded on the Westchester County, New York land records against the N.Y. Property. So, when the trustee, as the sole equity holder of Monteverde, sold that property free and clear of interests, the Sale Proceeds were encumbered by P & O’s Judgment Lien.
P & O argue that the Sale Proceeds cannot be distributed in accordance with the 9019 Motion because the entire amount of those proceeds are subject to that Judgment Lien. The trustee argues, inter alia, that the enforcement of the Deficiency Judgment against Monteverde’s N.Y. Property was specifically prohibited not only by the Mortgage and Note, but also by this court’s Stay Relief Order. There*14fore, the entire amount of the Sale Proceeds belong to the estate, P & 0 hold no valid claim against the estate, and her 9019 Motion should be granted over P & O’s objection.
The parties agree that resolution of this controversy turns on the full faith and credit doctrine, codified by 28 U.S.C. § 1738. Simply put, if the Judgment Lien is entitled to enforcement under the full faith and credit doctrine, P & O’s objection should be sustained, and conversely, if it is not, the trustee would have an unfettered right to the Sale Proceeds.
The Full Faith and Credit Act provides that state court judgments “shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken.” 28 U.S.C. § 1738. That statute “directs a federal court to refer to the preclusion law of the State in which judgment was rendered.” Marrese v. Am. Acad, of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985); see also Resolution Trust Corp. v. Roberti (In re Roberti), 183 B.R. 991, 999 (Bankr.D.Conn.1995). Federal courts follow a two-step process when determining whether to give full faith and credit to a state court’s judgment: (1) examine the law of the state in which the decision was rendered to determine whether that state’s law would afford full faith and credit to the judgment in question; and, if so (2) decide whether a recognized exception exists which would deny full faith and credit to the state court judgment. See Marrese, 470 U.S. at 381, 105 S.Ct. 1327.
Application of the first test commonly turns on whether a challenge to a state court judgment would be barred by collateral estoppel. “South Carolina courts have adopted the general rule of collateral estoppel set forth in the Restatement [ (Second) of Judgments].” Voss v. Pujdak (In re Pujdak), 462 B.R. 560, 571 (Bankr.D.S.C.2011) (citing S.C. Prop. & Cas. Ins. Guar. Ass’n v. Wal-Mart Stores, Inc., 304 S.C. 210, 213, 403 S.E.2d 625, 627 (1991) (citing Restatement (Second) of Judgments § 27 (1982))).
Section 27 [of the Restatement] states: “when an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same of different claim.”
Id. (quoting State v. Bacote, 331 S.C. 328, 330-31, 503 S.E.2d 161, 162 (1998) (emphasis added)); see also Palm v. Gen. Painting Co., Inc., 302 S.C. 372, 374, 396 S.E.2d 361, 362 (1990).
Those elements need not be addressed, even assuming they were all satisfied, because the court concludes that had the South Carolina court been fully informed, as it should have been, that court would not have entered the Deficiency Judgment that could be recorded as the Judgement Lien. See Crosby v. Prysmian Commn’s Cables & Systems USA, LLC, 397 S.C. 101, 109 n. 5, 723 S.E.2d 813 (S.C.Ct.App.2012) (further citation omitted) (“even if all the elements for collateral estoppel are met, when unfairness or injustice results or public policy requires it, courts may refuse to apply it.”); see also Shelton v. Oscar Mayer Foods Corp., 325 S.C. 248, 252, 481 S.E.2d 706 (S.C.1997).
As noted, supra at 10-11, the underlying Note and Mortgage barred recourse against the N.Y. Property. The summons served with the Foreclosure Complaint specifically stated that in the event Monteverde (and the other defendants) failed to answer, P & O would seek a default judgment “for the relief demand*15ed [ie., against North South, not Montev-erde] in the Complaint.” (See Summons, Foreclosure Action; EOF No. 165-2 (Exh. A) (emphasis added).) Moreover, enforcement of the Deficiency Judgment without this court’s order was specifically prohibited by the Stay Relief Order.
In essence, the South Carolina court was deceived at the July 22, 2010 deficiency judgment hearing by P & O’s counsel’s failure to disclose the restrictions in the Mortgage and Note, and failure to disclose the restriction in the Stay Relief Order on P & O’s rights to enforce any deficiency judgment. See supra at 10-11. This is particularly disturbing since, as noted, supra at 11, the South Carolina court had already expressed a concern about the effect of the Foreclosure Action on this bankruptcy case. It is, therefore, doubtful that the South Carolina court, with those disclosures, would have ignored those restrictions.5
Counsel for Marianne Howatson persuasively opposed P & O’s objection at the July 16, 2003 hearing, arguing in part:
[P & O are trying] to get this court to go back and basically rewrite the 2005 transaction and give [P & O] rights they never had. And just as this court can’t do that, the South Carolina court could not do that.
[T]he pieces add up in the following way. We’ve got a 2005 deal [that] did not give [P & O] the rights they tried to assert now. We then have South Carolina foreclosure proceedings that are in absolute contravention of this eourt;s [July 30, 2009 Stay Relief 0]rder.
We then have on top of that the recording of a lien in New York that builds on the violation of the court’s [Stay Relief 0]rder, ignores the absence of any language in the [N]ote or mortgage that would have permitted the liening of that asset....
So, now eight years later [P & O] want you — they want this court to cut them a better deal than they cut for themselves. That’s not appropriate. It’s not doable.
So they take this undoable scenario [o]n their part. They combine it with an order from South Carolina, which deserves no full faith [and] credit here, because it’s in contravention of your [Stay Relief 0]rder and you jurisdiction here. They combine it with this lien that they filed [ie., the Judgment Lien filed in N.Y.] and then keep quiet about [it].
They lie low instead of bringing this issue to a head, so that the matter could be resolved before an innocent buyer takes the deed, and now years later they want to say[, “T]hank you. We’ll take the money. [”]
(Hr’g on Trustee’s 9019 Motion, Tr. 31:6-9, 32:12-20, 34:5-17 (July 16, 2013); ECF No. 1441.)
The conclusion that a South Carolina court would not give the Deficiency Judgment preclusive effect also would be warranted if this court concludes that there is a recognized exception to the application of *16the full faith and credit doctrine. See Marrese, 470 U.S. at 381, 105 S.Ct. 1327. That test is satisfied here because federal courts have an interest in protecting their jurisdiction and enforcing their orders. See, e.g., Chambers v. NASCO, Inc., 501 U.S. 32, 43-44, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); Ransmeier v. Mariani, 718 F.3d 64, 68 (2d Cir.2013); Mitchell v. Lyons Prof'l Servs., Inc., et al., 708 F.3d 463, 467 (2d Cir.2013).
The Judgment Lien would not be entitled to full faith and credit, ie., it would not be enforceable, if giving it that deference would clash with bankruptcy law and policy relating to property of the bankruptcy estate, see 28 U.S.C. §§ 157(a), 1334(e)(1), and orders that specifically define relief from the automatic stay. Put another way, the Judgment Lien resulted from P & 0 concealing essential facts from the South Carolina court. Therefore, giving full faith and credit to that judgment would be tantamount to giving P & 0 license to defy this court’s Stay Relief Order that prohibited them from enforcing any deficiency judgment against the N.Y. Property without first seeking and obtaining an order from this court authorizing that recourse. Coming to this court of equity to oppose the 9019 Motion on the basis of the Judgment Lien they have because they violated this court’s order is highly offensive to the bankruptcy process and this court.
II.
Bankruptcy Rule 9019(a) provides in relevant part: “Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr.P. 9019(a). “A court must determine that a settlement under Bankruptcy Rule 9019 is fair, equitable, and in the best interest of the estate before it may approve a settlement.” In re MF Global, Inc., Case No. 11-2790(MG), 2012 WL 3242533 (Bankr.S.D.N.Y. Aug. 10, 2012); see also Topwater Exclusive Fund III, LLC v. SageCrest II, LLC (In re SageCrest II, LLC), Nos. 3:10-cv-978 (SRU), 3:10-cv-979 (SRU), 2011 WL 134893, at *8-9 (D.Conn. Jan. 14, 2011).
As this court has previously stated:
“ ‘[I]t is not necessary for the bankruptcy court to conduct a “mini trial” on the issue.’ ” [In re NW Investors II, LLC, 06-CV-5078 (ADS), 2007 WL 2228151, *4 (E.D.N.Y.2007)-] (quoting In re WorldCom, 347 B.R. [123], 137 [ (Bankr.S.D.NY.2006) ]) (further citation omitted). Rather, the Circuit Court has repeatedly instructed that a bankruptcy court “is not to decide the numerous questions of law and fact raised by [objectors] but rather to canvass the issues and see whether the settlement ‘fall[s] below the lowest point in the range to reasonableness.’ ” In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir.1983) [ (further citations omitted) ].
In that vein and of note, one district court in this circuit held that a bankruptcy court is not required to take evidence when deciding whether to approve a settlement. Rather, the court is required to make an informed and independent judgment regarding the appropriateness of the settlement after independently examining the identified Iridium factors. See NW Investors, 2007 WL 2228151, *6 (E.D.N.Y.2007); see also In re WorldCom, Inc., 347 B.R. at 137. And, while a court “may consider a creditor’s objection to the proposed compromise, the objection is not controlling, and will not bar approval when a review of the settlement shows it does not ‘fall below the lowest point in the range of reasonableness.’ ” In re *17Drexel Burnham [Lambert Group, Inc.], 134 B.R. [499] at 506 [ (Bankr.S.D.N.Y.1991) ] (quoting In re W.T. Grant Co., 699 F.2d at 608) (further internal citations omitted). Finally, “[a] decision to either accept or reject a compromise and settlement is within the sound discretion of the Court....” Id. (citation omitted).
In re SageCrest II, LLC, Case No. 08-50754, 2010 WL 1981041, *4-5 (Bankr.D.Conn. May 18, 2010), aff'd, Topwater, 2011 WL 134893 (D.Conn.2011); see also Nisselson v. Carroll (In re Altman), 302 B.R. 424, 425-26 (Bankr.D.Conn.2003) (“[Courts need not conduct an independent investigation in formulating an opinion as to the reasonableness of a settlement; rather, they may give weight to the trustee’s informed judgment that a compromise is fair and equitable and to the competency and experience of counsel who support the settlement.”).
P & O and the debtor are the only parties who object to the 9019 Motion. Both of those objections have been considered and overruled by the conclusions stated above. There are no other objections to the 9019 Motion.
Having reviewed the relevant parts of the record and considered the arguments of counsel and the memoranda they filed, the court concludes that the proposed compromise does not “fall below the lowest point in the range to reasonableness,” In re W.T. Grant Co., 699 F.2d at 608, and it is fair, equitable, and in the best interest of the estate. Of particular significance is the support for the motion by the debtor’s former spouse, the taxing authorities, and the general consensus that, but for this compromise, there would be no distribution to holders of allowed unsecured claims.
Conclusion
Accordingly, IT IS ORDERED that the trustee’s 9019 Motion is granted.
IT IS FURTHER ORDERED that the trustee may make the distributions proposed in her amended “Exhibit A to Rule 9019 Stipulation” (EOF No. 1527), except that any distribution from the $3,361.35 “Litigation Reserve” may not be made except upon approval of a further application to the court.
. This case was filed by the debtor on December 18, 2008, under chapter 11 of the Bankruptcy Code. On April 30, 2010, Attorney Neier was appointed the chapter 11 trustee. On June 23, 2010, this case was converted to chapter 7. The debtor appealed the court’s order converting his case. On September 6, 2011, the district court vacated this court's conversion order and remanded the matter back to this court. On April 26, 2013, an order entered again converting the debtor's case to one under chapter 7; that is a final order. Since April 26, 2012, Attorney Neier has served as the chapter 7 trustee in this case.
. In the March 21, 2012 decision, the court concluded that P & O are not creditors of this estate.
. Chicago Title Insurance Company initially objected to the 9019 Motion. That objection was withdrawn at the November 6th hearing.
. See, e.g., Debtor’s pro se “Motion for Continuance for All Matters”, filed September 27, 2013 (main case ECF No. 1465; adv. Pro. ECF No. 145) (asserting living in Florida, lack of funds to travel, lack of life insurance, refusal to fly "for fear of a possible life threatening accident and his demise leaving his two boys and partner without the ability to cope with financial needs”, and failing health as bases for continuance; requesting a 180-day continuance to come to Connecticut to first take discovery and then "at a later date attend the hearing”); see also, e.g., Debtor’s pro se "Motion for Continuance of Hearing”, filed July 1, 2013 (main case ECF No. 1413).
. See also South Carolina Rules of Prof. Conduct, Rule 3.3: Candor Toward the Tribunal ("(a) A Lawyer shall not knowingly: (1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer; ... ”). Under a lawyer’s duty of candor, P & O's attorney should not have sought the Deficiency Judgment without first making a full disclosure about the restrictions on enforcement against Monteverde. Counsel should have also disclosed that pursuant to P & O's Prayer for Relief, they sought a deficiency judgment against North South only. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496543/ | Chapter 11
MEMORANDUM DECISION REMANDING ADVERSARY PROCEEDINGS
STUART M. BERNSTEIN, United States Bankruptcy Judge:
The debtor removed all or part of the above-captioned adversary proceedings to this Court. Though not a party to those actions, the debtor claims that as a party in interest, it can remove them. The Court issued an order directing the debtor to show cause why the removed proceedings should not be remanded. Having heard from the parties in interest, the Court now concludes that it lacks subject matter jurisdiction over the adversary proceedings and must remand them to state court.
BACKGROUND
Margaret Wu (“Margaret”) commenced a divorce action against Phillip Wu (“Phillip”) in New York State Supreme Court in 2009. Among his assets, Philip owns one-third of the shares of Queen Elizabeth Realty Corp. (“QERC” or the “Debtor”); his brothers, Jeffrey and Lewis, own the remaining interests. (Declaration of Jeffrey Wu Pursuant to Local Bankruptcy Rule 1007-2, dated July 23, 2013, at ¶ 5(ECF Doc. # 6.)1 QERC owns real property at 157 Hester Street in Manhattan (the “Property”), and had leased this property to New Enterprise Realty, LLC (“New Enterprise”), an entity controlled by Jeffrey. (Declaration of Dean K. Fong in Support of (i) Motion to Dismiss or Suspend the Bankruptcy Case, or in the Alternative, for Relief under Section 5iS(c) and (d) of the Bankruptcy Code from Turnover of Property; and (ii) Motion to Dismiss the Adversary Proceeding, dated Sept. 18, 2013 (“Fong Declaration”)), ¶¶ 6, 9 (ECF Doc. #34).) New Enterprise subleased the Property to Hong Kong Supermarket, Inc. (“HKS”) (also owned by Jeffrey) and Salon de Tops, Inc. (Id. at ¶¶ 8-9.)
During the course of the matrimonial litigation, the state court entered an order (the “Receiver Order”) appointing Dean K. Fong as the Receiver of all of the assets and property of Phillip. (Supplement of Queen Elizabeth Realty Corp. to: (1) Opposition to Motions of Margaret Wu and Receiver to Motion to Dismiss Chapter 11 Case; (2) Opposition to Motion of Receiver to Dismiss Adversary Proceeding; and (3) Response to Court’s Order to Show Cause Regarding Removal of State Court Proceedings, dated Sept. 18, 2013, Ex. 3, at pp. 58-60 of 105 (Case No. 13-01495; ECF Doc. # 7); id., Ex. 3, at p. 61 of 105.)2 The Receiver Order is ambiguous, but can be read to authorize the Receiver to take control of the Debtor’s property even though the Debtor was not a party to the matrimonial dispute.
Whatever the ambiguity, the Receiver took control of the Property, and the state court has issued an order to show cause why the Receiver should not immediately sell the real estate holdings of the Debtor. (Response of Queen Elizabeth Realty *20Corp. to Court’s Order to Show Cause Regarding Removal of State Court Proceedings, dated Oct. 25, 2013, at Ex. 3 (pp. 37-39 of 91) (Adv. Proc. # 13-01495 ECF Doc. # 6).) While the Receiver exercised control of the Property, New Enterprise and Salon de Tops, Inc. stipulated to pay rent to the Receiver, (Fong Declaration, Ex. 7), and the Receiver thereafter caused the marshal to evict New Enterprise for failure to pay rent. (Id., Ex. 10.) The Receiver brought a holdover action against HKS (the “Eviction Proceeding”), (id. at ¶ 33), HKS stipulated in state court to pay $25,000 in rent to the Receiver, (id., Ex. 13), the Receiver eventually recovered a $3,256,000.00 judgment and a judgment of possession against HKS, (id., Ex. 15), and subsequently obtained the issuance of a warrant of eviction on June 28, 2013. (Id., dated June 28, 2013, Ex. 15 (ECF Doc. # 34, Part 15).)
Before the warrant of eviction could be executed, the Debtor filed a voluntary chapter 11 petition on July, 17, 2013. The commencement of the case automatically stayed the Eviction Proceeding as well as any efforts by the Receiver to interfere with property of the estate. In addition, to the extent the Receiver Order appointed Fong as Receiver of the Debtor’s assets, the filing of the petition also triggered his compliance with the requirements of 11 U.S.C. § 543.
Margaret and the Receiver separately moved to dismiss the bankruptcy case. (Motion hy Receiver Dean K. Fong, Esq. (i) to Dismiss or Suspend the Bankruptcy Case, or in the Alternative, (ii) for Relief under Section 543(c) and (d) of the Bankruptcy Code from Turnover of Property, dated Sept. 18, 2013 (“Receiver’s MTD”) (ECF Doc. # 26); Motion to Dismiss Bankruptcy Case, dated Aug. 8, 2013 (“Margaret’s MTD”) (ECF Doc. #12).) The Receiver sought alternative relief under Bankruptcy Code § 543(d) requesting that he be excused from the requirement to turn over property of the estate to the debtor-in-possession and file an accounting. (Receiver’s MTD, at ¶¶ 84-85.) The Debtor naturally opposed the motions, but in an unusual twist upon the typical single asset real estate case, the Debtor’s mortgagee Shanghai Commercial Bank Ltd. also opposed the motions, wishing instead to see the bankruptcy continue and the receivership end. (Opposition of Shanghai Commercial Bank Ltd., New York Branch to (I) Margaret Wu’s Motion to Dismiss the Bankruptcy Case and (II) Receiver’s Motion to Dismiss or Suspend the Bankruptcy Case, or in the Alternative, for Relief Under Section 54.3(c) and (d) of the Bankruptcy Code from Turnover of Property, dated Oct. 24, 2013 (ECF Doc. # 38).) After hearing oral argument, the Court denied Margaret’s and the Receiver’s motions from the bench, and directed the Receiver to comply with the requirements of 11 U.S.C. § 543. (Transcript of hearing held on Oct. 31, 2013, filed Nov. 3, 2013 (“Tr. 10/31”), at 46:11-56:20 (ECF Doc. #49).)
The Court subsequently entered an order consistent with the bench decision. (Order Denying Motions of Margaret Wu and Dean K Fong as Receiver for Entry of Order (I) Dismissing the Case Pursuant to 11 U.S.C. § 1112(b), or (II) in the Alternative, Abstaining Pursuant to 11 U.S.C. § 305; or (III) Excusing Receiver’s Compliance with 11 U.S.C. § 543, dated Nov. 25, 2013 (ECF Doc. # 52).) Among other things, the order directed the Receiver to refrain from using the rental proceeds from the Property or selling the Property, prosecuting the Eviction Proceeding or collecting the money judgment against HKS. It also enjoined Margaret from prosecuting the order to show cause to sell the Property. The order did not *21otherwise affect the matrimonial action or the receivership of Philip’s property.3
The Removed Proceedings
The current motion was brought on by the Debtor’s removal of the two pending state court proceedings pursuant to 28 U.S.C. § 1452. On July 17, 2013, the Debtor removed the entire Eviction Proceeding to the District Court. (ECF Doc. # 22, Part 3.) On August 1, 2013, the Debt- or removed those claims in the matrimonial action “under which Plaintiff seeks directly to function on and liquidate property of QERC’s estate,” (ECF Doc. #21, Part 3 at ¶ 6), namely:
(i) the disposition of property of the estate; (ii) determination of claims against property of the Estate and counterclaims against those parties; (iii) the ability of QERC to use its property; (iv) confirmability of any Plan submitted by QERC; and (v) the ability of QERC to timely proceed in its attempt to reorganize under Chapter 11 of the Bankruptcy Code.
(ECF Doc. #21, Part 3 at ¶12.) The District Court referred both adversary proceedings to this Court on September 6, 2013. (ECF Doc. # 21, Part 3.) Observing that the Debtor was not a party to either removed proceeding, the Court issued an order from the bench directing the Debtor to show cause why the two proceedings should not be remanded to state court.
DISCUSSION
Section 1452(a) of the Judicial Code governs the removal of bankruptcy proceedings. It states:
A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit’s police or regulatory power, 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.
28 U.S.C. § 1452(a). In addition, 28 U.S.C. § 1441(a), the general removal statute. permits a defendant to remove a civil action.4 Although § 1452(a) limits the removal rights to a “party,” and § 1441 further limits that right to a “defendant,” the Debtor contends that as a party in interest in the chapter 11 case, see 11 U.S.C. § 1109(b), it had the authority to remove the Eviction Proceeding and certain estate-related claims pending in the matrimonial action.
We begin with the well-settled rule that the starting point for the interpretation of any statute is the plain language of the statute itself. United States v. Ron Pair Enters., Inc., 489 U.S. 235, *22241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). If the statute’s language is plain, the analysis ends unless its literal application produces an absurd result. Id. at 242, 109 S.Ct. 1026 (“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.” (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)) (internal quotation marks omitted)); accord Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000).
Only a “party” may remove a proceeding under § 1452(a). The term “party” as used in the statute is unambiguous, and refers to someone named in the complaint, Official Unsecured Creditors’ Comm. of Hearthside Baking Co. v. Cohen (In re Hearthside Baking Co.), 391 B.R. 807 (Bankr.N.D.Ill.2008), and if a defendant, served with process. Hayim v. Goetz (In re SOL, LLC), 419 B.R. 498, 503 (Bankr.S.D.Fla.2009) (“Since the Trustee admits that the Debtor was never served with process in the State Court Action, the Debtor never officially became a party to that action, and thus, its attempted removal is a nullity.”); see Myles v. United States, 416 F.3d 551, 552 (7th Cir.2005) (naming and serving a defendant is “vital” to its becoming a party). Consequently, someone who is not a party to the state court action cannot remove it under 28 U.S.C. § 1452(a), and the removal by a non-party does not vest the federal court with subject matter jurisdiction. Whitney Lane Holdings, LLC v. Don Realty, LLC, No. 08-cv-775 (GKS/RFT), 2010 WL 1257879, at *2 (N.D.N.Y. Mar. 26, 2010) (“The weight of authority instructs that a district court is without subject matter jurisdiction in a case where that court’s removal jurisdiction is invoked by a non-party.” (quoting Juliano v. Citigroup, 626 F.Supp.2d 317, 319 (E.D.N.Y.2009)) (internal quotation marks omitted)); Pereira v. Dunnington (In re 47-49 Charles St, Inc.), 211 B.R. 5, 6 (S.D.N.Y.1997) (Chin, J.) (“Fischer is not a party to any of the landlord tenant actions and, in fact, his motions to intervene in those actions were denied. Accordingly, he cannot remove the actions in his own name.”); see JRA Holding, Inc. v. McCleary, No. 95-7702, 1996 WL 80692, at *1 (2d Cir. Feb 20, 1996) (unpublished opinion) (“[R]emovaI [under 28 U.S.C. §§ 1441(a) and 1446(a) ] was improvident and without jurisdiction [because] Hidalgo was not a party to the action she sought to remove.”); Am. Home Assurance Co. v. RJR Nabisco Holdings Corp., 70 F.Supp.2d 296, 298-99 (S.D.N.Y.1999) (“[A] non-party — even one that, like Nabisco, claims to be a real party in interest — has no authority to notice removal under the statutes here utilized, 28 U.S.C. § 1441 and § 1446(a), which speak only of removal ‘by the defendant or defendants.’ ”).
It is true that some decisions have read the term “party” in § 1452(a) more broadly to include a non-party who is the real party in interest in the litigation. See Burns v. Grupo Mexico S.A. de C.V., No. 07 Civ. 3496(WHP), 2007 WL 4046762 (S.D.N.Y. Nov. 16, 2007) (collecting cases). Removal statutes, however, are narrowly construed to restrict federal court jurisdiction and preserve the independence of state governments, and any doubts are resolved against removability. Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09, 61 S.Ct. 868, 85 L.Ed. 1214 (1941); California v. Atlantic Richfield Co. (In re Methyl Tertiary Butyl (“MTBE”) Prods. Liab. Litig.), 488 F.3d 112, 124 (2d Cir.2007); Somlyo v. J. Lu-Rob Enterprises, Inc., 932 F.2d 1043, 1045-46 (2d Cir.1991); *23Am. Home, 70 F.Supp.2d at 299 n. 4 (collecting cases). Accordingly, the Court concludes that the term “party” as used in 28 U.S.C. § 1452(a) should be given its ordinary meaning and preclude non-parties from removing state court proceedings.
The above-captioned adversary proceedings are, therefore, remanded. This conclusion does not affect the restraints imposed on the Receiver and Margaret undér the Court’s November 25, 2013 order, or grant relief from the stay to interfere with or exercise control over property of the estate.
Settle order on notice.
. “ECF Doc.’’ refers to the docket in the bankruptcy case.
. Margaret was also appointed to act as receiver, but the Receiver Order was amended to make Fong the sole Receiver.
. Philip filed a chapter 13 petition in the Eastern District of Pennsylvania on August 5, 2013. Thus, notwithstanding the terms of this Court's order, his personal bankruptcy subjected the Receiver to the requirements of 11 U.S.C. § 543 regarding Philip's own property.
. Section 1441(a) states:
(a) Generally.— Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.
28 U.S.C. § 1441(a). The Debtors did not rely on § 1441(a), but § 1441(a) also applies in bankruptcy cases. Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 129, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995) ("There is no express indication in § 1452 that Congress intended that statute to be the exclusive provision governing removals and remands in bankruptcy.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496544/ | Chapter 11
MEMORANDUM OF DECISION
SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE
INTRODUCTION
Before the Court are three motions in the above-captioned Chapter 11 cases and adversary proceeding. All of the motions relate, on the one hand, to the Debtors’ desire to consummate their plan of reorganization by completing their merger with U.S. Airways and, on the other hand, the desire of the Plaintiffs in the adversary proceeding to block that event.
Turning first to the Debtors, they filed a motion on November 12, 2013, for approval of a settlement under Bankruptcy Rule 9019 between AMR Corporation (“AMR”), U.S. Airways Group, Inc. (“US Airways,” and together with AMR, the “DOJ Defendants”), the U.S. Department of Justice (the “DOJ”) and the states of Arizona, Florida, Tennessee, Michigan, Pennsylvania, Virginia and the District of Columbia (collectively the “Plaintiff States,” and together with the DOJ, the “DOJ Plaintiffs”). Publicly announced on November 12, 2013, the settlement resolves claims asserted in an antitrust action brought by the DOJ in the U.S. District Court for the District of Columbia (the “DOJ Action”) alleging that a merger between AMR and US Airways would violate Section 7 of the Clayton Antitrust Act (the “Clayton Act”). The Debtors also seek a determination that entry into the settlement will not necessitate re-solicitation of the Debtors’ second amended plan of reorganization that was previously confirmed by this Court.
On November 12, 2013, the Debtors also filed a related motion requesting that the Court permit the merger between AMR and U.S. Airways to be consummated without délay, notwithstanding the pen-dency of an adversary proceeding brought by several individuals (the “Clayton Plaintiffs”) under the private civil antitrust suit provision in Section 16 of the Clayton Act (the “Clayton Adversary”). The Debtors’ major constituencies have filed statements in support of the relief requested by the Debtors, including the Allied Pilots Association, the Association of Professional Flight Attendants, the Transport Workers Union of America, AFL-CIO and an Ad Hoc Committee of AMR Corporation Creditors. The Committee of Unsecured Creditors also supports the Debtors’ motions. The sole objection to Debtors’ motions was filed by the Clayton Plaintiffs, who filed a motion for a temporary restraining order seeking to block the merger (the “TRO Motion”). The Plaintiffs filed the TRO Motion on Thursday November 21, 2013, as their opposition to the Debtors’ motions. The Debtors and Defendants in the Clayton Adversary filed their reply brief and opposition to the TRO Motion on Saturday November 23, 2013 (the “Reply”), and the Court held a hearing on all the motions on November 25, 2013.
For the reasons explained more fully below, the Court grants the Debtors’ motions and denies the Clayton Plaintiffs’ request for a TRO.
BACKGROUND
The Debtors commenced their Chapter 11 cases on November 29, 2011. During the pendency of the cases, the Debtors explored various strategic restructuring alternatives, including a plan of reorganiza*30tion in which the Debtors would emerge as a stand-alone entity, without entering into a strategic business combination or obtaining new equity investments. The Debtors, however, ultimately determined that a merger with U.S. Airways would maximize value for the Debtors’ stakeholders.
On February 13, 2013, the Debtors entered into an agreement and plan of merger with U.S. Airways. The agreement provides that the merger is to be effectuated pursuant to the Debtors’ plan of reorganization and consummation of the merger is to take place contemporaneously with the effective date of the plan. One of the conditions to the merger is that the parties obtain necessary regulatory approval. On May 10, 2013, this Court entered an order approving the merger agreement. On June 5, 2013 the Debtors filed the Second Amended Joint Chapter 11 Plan and accompanying Disclosure Statement. The plan was predicated upon the merger.
On August 6, 2013, the Clayton Plaintiffs filed the Clayton Adversary in the Debtors’ Chapter 11 cases. The complaint filed in the Clayton Adversary alleges that the merger “may substantially lessen competition or tend to create a monopoly in any section of the country,” thereby violating Section 7 of the Clayton Act. 15 U.S.C. § 18. In their complaint, the Clayton Plaintiffs seek to enjoin the merger or to require divestiture. See Compl. at 25. The Clayton Plaintiffs also seek costs, including attorney’s fees under Section 16 of the Clayton Act. See id.
On August 13, 2013, the DOJ filed the DOJ Action alleging, among other things, that the merger would substantially lessen competition in violation of Section 7 of the Clayton Act. The DOJ Action also sought to permanently enjoin the merger. Various states joined the DOJ Action as plaintiffs. A trial in the DOJ Action was scheduled to commence on November 25, 2013.
On August 15, 2013, a hearing was held on confirmation of the Debtors’ plan. At the hearing, the Court requested additional submissions with respect to the impact of the DOJ Action on confirmation of the plan. After considering those submissions, the Court subsequently determined that confirmation was appropriate notwithstanding the existence of the DOJ Action, and, therefore, the Court overruled the objection to confirmation filed by the Clayton Plaintiffs. See Hr’g Tr., Sept. 12, 2013 (ECF No. 10205). After resolving other objections, see In re AMR Corp., 497 B.R. 690 (Bankr.S.D.N.Y.2013), the Court entered an order confirming the plan dated October 21, 2013. (ECF No. 10367). The Confirmation Order states that the sections of the Plan providing for the release of the Debtors, the discharge of claims, and plan injunctions do not apply to the claims asserted in the Clayton Adversary.
On November 12, 2013, a settlement of the DOJ Action was publicly announced. The settlement includes and is incorporated in: (a) a proposed final judgment with the DOJ Plaintiffs, (b) an Asset Preservation Order and Stipulation entered by the District Court that consents to entry of the Proposed Final Judgment following compliance with the requirements of the Antitrust Procedures and Penalties Act, (c) a supplemental stipulated order with the Plaintiff States, and (d) an agreement between U.S. Airways, AMR and the U.S. Department of Transportation.
The details of the settlement are too complicated to set forth here in detail. But as a general matter, AMR and U.S. Airways will divest their rights to 104 slots at Washington Reagan National Airport and 34 slots at New York LaGuardia Airport under the terms of the final judgment, along with accompanying gates. Additionally, AMR and U.S. Airways will divest two gates each at Boston Logan *31International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport and Miami International Airport. AMR and U.S. Airways will also divest their rights in the associated ground facilities, including ticket counters, hold-rooms, leased jet bridges and operations space.
The divestitures will be made to acquiring entities that are approved by the United States in consultation with the Plaintiff States. Prior to divestiture of any assets, it must be demonstrated to the satisfaction of the United States that the divested assets will remain viable, and the divesture of such assets will remedy the competitive harm alleged in the DOJ Action. The United States must also be satisfied that none of the terms of any agreement regarding the divestiture of assets will give AMR and U.S. Airways the ability to unreasonably raise the acquirer’s costs, to lower the acquirer’s efficiency, or otherwise to interfere in the ability of the acquirer to effectively compete. AMR and U.S. Airways may not reacquire any interest or part of the divested assets for a period of ten years.
The stipulation between AMR, U.S. Airways and the Plaintiff States, provides that the newly merged entity (referred to as New American) will maintain hubs for a period of at least three years at Charlotte Douglas International Airport, John F. Kennedy International Airport, Los Ange-les International Airport, Miami International Airport, Chicago O’Hare International Airport, Philadelphia International Airport and Phoenix Sky Harbor International Airport. Additionally New American will continue to provide daily scheduled service from one or more of its hubs to certain airports in the Plaintiff States for a period of five years.
The agreement between AMR, U.S. Airways and the Department of Transportation requires New American to continue to serve certain medium, small and non-hub airports from Washington Reagan National Airport for a period of at least five years.
The Asset Preservation Agreement provides that AMR and U.S. Airways shall take all necessary steps to ensure that the assets proposed to be divested will be maintained until the divestitures have been completed. AMR and U.S. Airways have agreed not to cause the wasting or deterioration of the assets or to cause the assets to be operated in a manner inconsistent with applicable law. AMR and U.S. Airways have also agreed not to sell, transfer, encumber or otherwise impair the viability, marketability or competitiveness of the assets.
DISCUSSION
A. The Relevant Legal Standards
Section 16 of the Clayton Act authorizes private individuals to sue for injunctive relief for a violation of Section 7 of the Clayton Act. In relevant part, Section 16 provides:
Any person shall be entitled to sue for and have injunctive relief in any court of the United States having jurisdiction against threatened loss or damage by a violation of the antitrust laws including sections 13, 14, 18, and 19 of this title, when and under the same principles for injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity under rules governing the procedures, and upon execution of a proper bond, and showing that the danger of irreparable loss or damage is immediate a preliminary injunction may issue.
15 U.S.C. § 26.
Section 7 of the Clayton Act provides for the standard against which the purported violation should be measured:
*32No person engaged in commerce or in any activity affecting commerce shall acquire the whole or any part of any of the stock .... where the effect of such acquisition may be to substantially lessen competition or tend to create a monopoly-
15 U.S.C. § 18.
Federal Rule of Bankruptcy Procedure 7065 addresses injunctive relief by incorporating Federal Rule of Civil Procedure 65 in adversary proceedings, except that a temporary restraining order or preliminary injunction may be issued on application of a debtor, trustee, or debtor in possession without compliance with Rule 65(c).1 The Rules require this Court, upon the issuance of a TRO, to set forth why it was issued, its specific terms, and the act or acts restrained or required in reasonable detail.
It is well established that “the basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies.” Sampson v. Murray, 415 U.S. 61, 88, 94 S.Ct. 987, 39 L.Ed.2d 166 (1974). The Second Circuit has described the test for injunctive relief as (1) probable success on the merits and irreparable injury or (2) sufficiently serious questions as to the merits which constitute fair grounds for litigation and the balance of the hardships tips decidedly to the party requesting relief.2 Vantico Holdings S.A. v. Apollo Mgmt., 247 F.Supp.2d 437, 451 (S.D.N.Y.2003) (citing AIM Int'l Trading, LLC v. Valcucine SpA., 188 F.Supp.2d 384, 387 (S.D.N.Y.2002)) (quoting Jackson Dairy, Inc. v. HP. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979)); Triebwasser and Katz v. AT & T, 535 F.2d 1356, 1358 (2d Cir.1976); Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 256 (2d Cir.1989); Gulf & Western Indus., Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687, 692 (2d Cir.1973). “Injunctive relief ‘is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.’ ” Air Line Pilots Ass’n v. U.A.L., 2011 WL 4543820 at *1 (E.D.N.Y. Sept. 29, 2011) (quoting Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S.Ct. 1865, 138 L.Ed.2d 162 (1997)). In the Second Circuit, all these principles have been reiterated time and time again, with the Circuit noting the broad level of discretion vested with the trial court in determining whether the extraordinary remedy of in-junctive relief is appropriate in the context of antitrust litigation. See Moore v. Consol. Edison Co. of N.Y., Inc., 409 F.3d 506, 511 (2d Cir.2005); Green Party of N.Y. v. N.Y. State Bd. of Elections, 389 F.3d 411, 418 (2d Cir.2004); Columbia Pictures Indus., Inc. v. Am. Broad. Cos., 501 F.2d 894, 897 (2d Cir.1974).
Given the overlap of these motions, the Court will address the TRO Motion first, as it sets forth the only objection to the relief requested in the Debtors’ motions. *33The Court will discuss each element of the TRO inquiry separately.
B. The Requested TRO
1. Irreparable Harm
The Court turns first to the issue of irreparable harm, which is the most important prerequisite for injunctive relief. See Faiveley Transport Malmo AB v. Wabtec Corp., 559 F.3d 110, 118 (2d Cir.2009); see also Ranger Oil Ltd. v. Petrobank Energy and Res., Ltd., 2000 WL 33115906 at *8, 2000 U.S. Dist. LEXIS 7571 at *22 (S.D.N.Y May 23, 2000). The irreparable harm requirement asks whether the alleged injury to be suffered is likely and imminent, as opposed to remote or speculative, and whether it is capable of being fully remedied by money damages. Faiveley, 559 F.3d at 118. When considering irreparable harm, “mere injuries, however substantial, in terms of time, money and energy expended in the absence of a stay are not enough. The possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm.” Sampson, 415 U.S. at 90, 94 S.Ct. 937 (citing Virginia Petroleum Jobbers Assn. v. FPC, 259 F.2d 921 (D.C.Cir.1958)).
Applying that standard here, the Court concludes that this factor weighs against the granting of a TRO for several reasons. As a threshold matter, the Clayton Plaintiffs have failed to demonstrate irreparable harm to them as individuals. The Plaintiffs describe themselves as individuals who “are and will be direct purchasers of airline tickets from defendants.” Compl. at 2. They are further identified as “passengers and travel agents who have purchased airline tickets from defendants in the past and who are expected to do so in the future.” Compl. at ¶ 5. The only other description of these individuals in the record before the hearing on these motions was a general statement made by Plaintiffs’ counsel at the hearing on September 24, 2013:
These are not just ordinary plaintiffs I want to point out, but they know about who they are. These are people who have been in the industry and know a lot about the industry.
Hr’g. Tr., Sept. 24, 2013 at 55 (ECF No. 10248).
Despite these allegations, however, there are no affidavits or declarations from any of the Plaintiffs. The Court has no evidence whatsoever regarding who the Plaintiffs are, what the nature of their interest in the airline industry is, or how they will be individually harmed by the proposed merger.3 In failing to provide such evidence, the Plaintiffs ignore a key requirement for the relief they seek. As the Supreme Court has explained, a plaintiff seeking an injunction under Section 16 of the Clayton Act must show a threat of “antitrust injury” to fulfill the standing requirement. Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 113, 107 S.Ct. 484, 93 L.Ed.2d 427 (1986) (cited in Moore Corp. v. Wallace Computer Servs., 907 F.Supp. 1545, 1565 (D.Del.1995)). In this case, therefore, the Court need only “consider those injuries plaintiffs advance that are personal to them... and cannot consider any injuries that plaintiffs allege would be suffered by the general air carri*34er flying public as a whole.” Malaney v. UAL Corp., 2010 WL 3790296 at *13, 2010 U.S. Dist. LEXIS 106049 at *46 (N.D.Cal. Sept. 27, 2010) (emphasis added) (citing United States v. Borden Co., 347 U.S. 514, 518, 74 S.Ct. 703, 98 L.Ed. 903 (1954)), aff'd 434 Fed.Appx. 620 (9th Cir.2011); see also Levitch v. Columbia Broad. Sys., Inc., 495 F.Supp. 649, 669 (S.D.N.Y.1980).4
The court in Malaney addressed this issue in an antitrust case filed by the same counsel representing the Plaintiffs here. See Malaney, 2010 WL 3790296 at *12-13, 2010 U.S. Dist. LEXIS 106049 at *45-46. In Malaney, the plaintiffs sought to enjoin the airline merger of Continental and United. The plaintiffs provided evidence by affidavit and at an evidentiary hearing. The evidence included information about how and to what extent the individual plaintiffs purchased airline tickets, which airports they used, and their use of frequent flyer reward programs. But even armed with this evidence, the court in Malaney was not satisfied that the particular plaintiffs, given their posture in the market, would suffer the type of immediate irreparable injury sufficient to justify injunctive relief. Id. at *13-14, 2010 U.S. Dist. LEXIS 106049 at *48. Notwithstanding the Malaney plaintiffs’ allegation that the merger would adversely affect any consumer participating in the airline market, the court found that the plaintiffs still needed to establish how those effects were personal to them. Having failed to do so, the court rejected the request for injunc-tive relief.5
By contrast here, no evidence of individual harm has been provided by the Clayton Plaintiffs, thus leaving the Court in the dark as to the immediate and irreparable harm the merger might cause to these individuals. See Air Line Pilots Ass’n v. United Air Lines, Inc., 2011 WL 4543820 at *2 (E.D.N.Y. Sept. 29, 2011) (stating that to obtain injunctive relief, plaintiffs need to show they would “personally suffer actual and imminent injury”).6 While the standard for such evidence is more relaxed in a TRO hearing than a hearing on the merits, it is problematic to simply present no evidence on such a crucial point. Cf. University of Texas v. Camenisch, 451 U.S. 390, 395, 101 S.Ct. 1830, 68 L.Ed.2d 175 (1981) (“The purpose of a preliminary injunction is merely to preserve the rela*35tive positions of the parties until a trial on the merits can be held. Given this limited purpose, and given the haste that is often necessary if those positions are to be preserved, a preliminary injunction is customarily granted on the basis of procedures that are less formal and evidence that is less complete than in a trial on the merits”). The Plaintiffs’ failure on this score is particularly puzzling given the Court’s prior comments to the Plaintiffs on this topic. See, Hr’g Tr., Aug. 15, 2013, at 55:9-20 (ECF No. 9903) (noting that a request for injunctive relief is “traditionally accompanied by declarations ... It is highly unusual ... and perhaps completely unprecedented for a successful application of that type to be without such things because that’s what the law requires.”).7
In the place of the requisite evidence, the TRO Motion contains a number of sweeping and conclusory allegations about the harm to these individual plaintiffs. Even assuming that such statements had evidentiary support — and they do not— they would be insufficient to satisfy the irreparable harm element for purposes of the TRO motion. For example, the TRO Motion states in conclusory fashion that “plaintiffs can demonstrate irreparable harm by reason of capacity reductions, elimination of the Advantage Fare, loss of benefits from AMR as a standalone company-” See TRO Motion at 21. The Motion goes on to make other similarly broad allegations, including that “[cjreat-ing the world’s largest airlines ... would adversely affect millions of consumers and a TRO will serve the public interest.” Id. at 18; see also id. at 20 (“There is no adequate remedy at law given the national market and the number of sub-market city or airport-pairs involved and the fact that the rise in prices will be diffused over a broad segment of the flying public, flights will become unavailable or less frequent, and amenities and services will be cut.”). But once again, there is nothing said of the harm to the individual Plaintiffs.
The only evidence submitted in support of the TRO Motion is a single declaration from Plaintiffs’ expert, Mr. Darren Bush, together with a variety of documents. These also fail to establish irreparable harm. It is unclear whether Mr. Bush was tasked with addressing the question of irreparable harm to the Clayton Plaintiffs as his affidavit states:
I have been asked to render an opinion regarding the probability that Carolyn Fjord and the other Private Plaintiffs in this matter are likely to succeed on the merits....
Affidavit of Darren Bush (“Bush Aff.”), at 2 (ECF No. 57-3).
In any event, Mr. Bush’s testimony is insufficient to establish irreparable harm to justify the requested injunctive relief. He fails to address the specific harm, in economic terms or otherwise, that these specific Plaintiffs would suffer should the *36merger go forward. Instead he reiterates the broader allegations found in the Complaint and TRO Motion, as well as those contained in the Amended DOJ Complaint. Like the allegations in the TRO Motion itself, his testimony on these broader allegations is largely conclusory with Mr. Bush presenting little analysis of his own, instead citing to allegations made by the Government in the DOJ Action or in various reports.
In addition, the Plaintiffs also fail to establish irreparable harm justifying the blocking of the merger for another independent reason: they have the alternative remedy of divestiture available if they prevail on the merits of their lawsuit. As the Supreme Court has explained: “Section 16 [of the Clayton Act], construed to authorize a private divestiture remedy when appropriate, in light of equitable principles, fits well in a statutory scheme that favors private enforcement, subjects mergers to searching scrutiny, and regards divestiture as the remedy best suited the redress the ills of an anticompetitive merger.” California v. American Stores Co. 495 U.S. 271, 274, 110 S.Ct. 1853, 109 L.Ed.2d 240 (1990). The Defendants explicitly concede the availability of the divestiture remedy. See Reply at 23 ¶¶ 62, 63 (Adv. Pro. ECF No. 64) (noting that “there are ample post-consummation remedies available” if Plaintiffs succeed at trial, and that “[p]artial divestiture is well-established in the law as a means of curing the potential Section 7 problems raised by a merger, particularly where there are significant efficiencies and business justifications (as there are there) for the overall transaction”) (citations omitted). The Plaintiffs have not alleged, much less established, that divestiture is unavailable or somehow inadequate if they prevailed on the merits of their lawsuit.8
Indeed, Plaintiffs have not established that an award of money damages would be inadequate for at least some of the alleged anticompetitive harms, including the alleged increase in airline ticket and fee prices that Plaintiffs contend will result from the merger. See Compl. ¶ 165; see Taleff v. Southwest Airlines Co., 828 F.Supp.2d 1118, 1125 (N.D.Cal.2011) (rejecting request for injunction where plaintiff represented by Alioto law firm alleged damages from Southwest-AirTran airline merger in form of higher ticket prices and diminished services and finding that plaintiffs had not demonstrated that monetary damages would be inadequate); Blue Shield of Va. v. McCready, 457 U.S. 465, 482-83, 102 S.Ct. 2540, 73 L.Ed.2d 149 (1982) (noting that Clayton Act provides for damages for private antitrust plaintiffs as a form of redress for an increase in prices arising from unlawful anti-competitive behavior).
Finally, the Court notes that the Plaintiffs’ claim of irreparable harm is undercut by their delay in seeking injunctive relief and by their general delay in bringing these issues to this Court. The Clayton Adversary was filed in early August, merely a few days before the start of the hearing on confirmation. But that was months after this merger was approved by this *37Court without any objection. And when Plaintiffs finally decided to act regarding the merger, they failed to seek injunctive relief by motion at the same time they filed the Complaint.9
Moreover, the Court and the parties explicitly discussed the posture of the Clayton Adversary in the event of the settlement of the DOJ Action, with each side reserving its rights to seek relief. See generally Hr’g. Tr. September 24, 2013, at 32, 62, 65, 67 (ECF No. 10248);10 see also Order of Oct. 15, 2013, at ¶¶ 7, 12 (Adv. Proc. ECF No. 44).11 When the settlement finally happened, the Debtors immediately exercised their rights by filing these two motions with the Court. By contrast, the Plaintiffs waited nine days to act. While the Court can understand why a delay of nine days might be understandable in certain circumstances, there is no legitimate reason here. There is nothing about the Plaintiffs’ eventual submission that justifies such a delay. Indeed, the vast majority of the documents relied upon in the TRO Motion predate the settlement of the DOJ Action by many months. See American Antitrust Institute study published on August 8, 2012, Exh. B to Decl. of Gil Messina (Adv. Pro. ECF No. 58-2); MIT study published in May 2013 Exh. C to Deck of Gil Messina (Adv. Pro. ECF No. 58-3); GAO Report, published June 19, 2013, Errata Exh. A to Deck of Gil Messina (Adv. Pro. ECF No. 59). See also Plaintiffs Original Complaint, Exh. 1 to Bush Aff. (Adv. Proc. ECF No. 57-4); DOJ Amended Complaint, Exh. 2 to Bush Aff. (Adv. Pro. ECF No. 57-5). Moreover, there is little in-depth analysis provided in the TRO Motion or Mr. Bush’s testimony on new developments such as why the settlement is insufficient or how it impacts Plaintiffs’ claims.
For all these reasons, the Court finds that Plaintiffs have utterly failed to establish irreparable harm, a deficiency that standing alone dooms their request for injunctive relief.
2. Probability Of Success On The Merits
In any event, the Plaintiffs also do not justify an injunction based on their likelihood of success on the merits. To establish a Section 7 violation, Plaintiffs must show that the Merger is reasonably likely to cause anticompetitive effects. United States v. Oracle Corp., 331 F.Supp.2d 1098, 1109-10 (N.D.Cal.2004). Section 7 deals in probabilities, not “ephemeral possibilities.” United States v. Marine Bancorporation, 418 U.S. 602, 622-623, 94 S.Ct. 2856, 41 L.Ed.2d 978 (1974) (citing Brown Shoe Co. v. United States, 370 U.S. 294, 317, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962)). Ultimately, to prevail on a Section 7 claim, plaintiffs must show a loss of competition that is “suffi-. ciently probable and imminent.” Marine *38Bancorporation, 418 U.S. at 623 n. 22, 94 S.Ct. 2856 (citing United States v. Continental Can Co., 378 U.S. 441, 458, 84 S.Ct. 1738, 12 L.Ed.2d 953 (1964)). Merger review often relies on an analysis of competitive effects in light of economic factors. See Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1386 (7th Cir.1986).
Substantial competitive harm is likely to result if a merger creates or enhances “market power,” a term that has specific meaning in antitrust law. Id. Merger analysis begins with defining the relevant market. See id.; see also Pepsi-Co, Inc. v. Coca-Cola Co., 315 F.3d 101, 105 (2d Cir.2002); United States v. H & R Block, 833 F.Supp.2d 36, 50 (D.D.C.2011). A relevant market has two components: the relevant product market and the relevant geographic market. See PepsiCo, 315 F.3d at 105; Brown Shoe, 370 U.S. at 324, 82 S.Ct. 1502. The relevant geographic market identifies the geographic area in which the defendants compete in marketing their products or services. It is the area to which consumers can practically turn for alternative sources of the product and in which the antitrust defendants face competition. California v. Sutter Health Sys., 130 F.Supp.2d 1109, 1120 (N.D.Cal.2001). The relevant product market, a term specific to antitrust analysis, is “determined by the reasonable interchangeability of use [by consumers] or the cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe, 370 U.S. at 325, 82 S.Ct. 1502; see also Chapman v. New York State Div. for Youth, 546 F.3d 230, 237-38 (2d Cir.2008). Essentially, to be part of the same relevant product market, products must be viable substitutes. United States v. Syufy Enters., 712 F.Supp. 1386, 1399 (N.D.Cal.1989); see also Chapman, 546 F.3d at 238 (products must be “roughly equivalent”); In re Wireless Tel. Svcs. Antitrust Litig., 2003 WL 21912603 at *9, 2003 U.S. Dist. LEXIS 13886 (S.D.N.Y. Aug. 12, 2003) at *27-28 (products must be “acceptable substitutes”).
Once the relevant market is determined, courts then consider the transaction’s possible anticompetitive effects in that market. “By showing that a transaction will lead to undue concentration in the market for a particular product in a particular geographic area, the government establishes a presumption that the transaction will substantially lessen competition.” United States v. Baker Hughes, 908 F.2d 981, 982 (D.C.Cir.1990); United States v. Citizens & Southern Nat’l Bank, 422 U.S. 86, 120, 95 S.Ct. 2099, 45 L.Ed.2d 41 (1975). An antitrust defendant may rebut that presumption by showing that the market-share statistics do not accurately demonstrate the merger’s probable effects on competition in the relevant market. Id. Although market share and the overall concentration level of the industry are relevant in an antitrust review, these factors are “not conclusive indicators of anticompetitive effects.” United States v. Gen. Dynamics Corp., 415 U.S. 486, 498, 94 S.Ct. 1186, 39 L.Ed.2d 530 (1974). “Evidence of market concentration simply provides a convenient starting point for a broader inquiry into future competitiveness....” Baker Hughes, 908 F.2d at 984. A transaction must “be functionally viewed, in the context of its particular industry.” Brown Shoe, 370 U.S. at 321-22, 82 S.Ct. 1502. A court may consider a host of factors including whether the industry was fragmented or concentrated, whether it was dominated by a few leaders or consistently distributed among participating companies, and whether new competition readily enters the market or faces barriers. Id.; see also Baker Hughes, 908 F.2d at 985. A court may consider the market’s structure, history, and probable *39future. Continental Can, 378 U.S. at 458, 84 S.Ct. 1738.12
While a final adjudication on the merits still remains, the evidence before the Court is insufficient to justify the requested relief, particularly when compared to the more fulsome record made by the Defendants. Several of the deficiencies in Plaintiffs’ submission are worthy of mention.
First, Plaintiffs’ submission is largely conclusory, relying upon the work of others while presenting little independent analysis. It is well established that an expert’s opinion is entitled to less weight under such circumstances. Arista Records LLC v. Usenet.com, Inc., 608 F.Supp.2d 409, 434-35 (S.D.N.Y.2009) (“An expert who simply regurgitates what a party has told him provides no assistance to the trier of fact through the application of specialized knowledge.”); see United States v. Scop, 846 F.2d 135, 139 (2d Cir.1988), rev’d in part on reh’g on other grounds, 856 F.2d 5 (2d Cir.1988) (“Rule 704 [of the Federal Rules of Evidence] was not intended to allow experts to offer opinions embodying legal conclusions.”). Mr. Bush, the Plaintiffs’ sole expert, relies heavily on the allegations in the complaint filed in the DOJ Action.13 In addition, Mr. Bush refers to a 2012 report issued by the American Antitrust Institute and Business Travel Coalition (the “AAI Report”) and testimony from the United States Government Accountability Office before the United States Senate on June 21, 2013 (the “GAO Report”). Mr. Bush offers little in the way of original opinions and analysis.
One example of this problem lies in the discussion of market share. Merger concentration is typically measured by the Herfindahl-Hirschman Index (“HHI”).14 Pursuant to the Government’s Merger Guidelines, a market is considered highly concentrated if the HHI is greater than 2,500. Any increase of more than 200 points is considered to be a significant increase in concentration. In addressing this issue, Mr. Bush simply quotes the DOJ Complaint, stating that over 1,000 city-pair markets would have a post-merger HHI over 2,500 and an HHI increase of over 200. Bush does not elaborate on this point, offering no original opinion or analysis.15
*40By relying so heavily on others’ conclusions, the Plaintiffs also fail to sufficiently address the merger in the context of the DOJ Settlement (the “New Merger”), which is the transaction now before the Court. FTC v. Libbey, Inc., 211 F.Supp.2d 34, 46 (D.D.C.2002) (where parties to merger agreement have amended the agreement to alleviate government’s antitrust concerns, a court must evaluate the new agreement in deciding whether to issue an injunction). Mr. Bush and the Plaintiffs rely most heavily upon documents that predate the November 2013 DOJ Settlement. While the DOJ Complaint, the 2012 AAI Report, and the GAO Report from June 2013 contemplate a merger between American and U.S. Airways, none of those documents addresses the New Merger.
In addition to the lack of evidence, the Defendants raise several additional issues about the Plaintiffs’ arguments. For example, Plaintiffs assert that there are two markets — a national market based on competition between systems and other sub-markets consisting of “certain city-pairs.” While the Defendants accept that city-pairs are the properly defined market, see Reply at 37 n. 10 (Adv. Pro. ECF No. 64), neither Mr. Bush’s report nor the Plaintiffs’ pleadings identify which city-pairs are at issue in light of the New Merger. In the same vein, the Defendants raise questions about the Plaintiffs’ theory about a national market for airline travel. A product market contemplates products that are viable substitutes for each other. Plaintiffs’ theory of a national market would require a conclusion that all flights compete with each other. For example, a flight from Los Angeles to New York would compete with a flight from Detroit to Seattle. Plaintiffs have not explained why that would be true here as Mr. Bush does not present any analysis to support such a conclusion.16 And Defendants have raised a legitimate question regarding why, even if a national market existed, such a market would not be deemed “highly concentrated” using the prevailing industry standards.17
*41The Court has a similar reaction when considering the Plaintiffs’ analysis on a variety of other issues, including allegations regarding the loss of the U.S. Airways Advantage Fare program, higher future fares due to coordinated interaction or tacit collusion among airline carriers, and reduction in capacity and service. In each instance, Mr. Bush takes only a few paragraphs to summarily conclude that each of these harms is likely to happen, but Defendants raise significant questions on each of these points using detailed expert analysis. While the Court is mindful once again that it is not called upon now to resolve these issues on the merits, the Court concludes for purposes of the requested TRO that Plaintiffs’ analysis of the merits falls short of that necessary to justify injunctive relief.18
3. Balance Of Hardships/Public Interest
The Court also finds that the Plaintiffs have failed to demonstrate that the balance of hardships and public interest tip in their favor. Weighing Plaintiffs’ failure to show irreparable harm against the harm defendants would suffer as a consequence of a TRO, the Court concludes that the balance of hardships tips against the granting of an injunction.
The Defendants provided the Court with voluminous declarations from various advisers, consultants, and executive management members attesting to the harm that would be suffered by the Defendants (and other parties) by virtue of a temporary restraining order. Declarations were provided from: 1) Beverly Goulet, the SVP and Chief Integration Officer of AMR; 2) Gregg Polle, a managing director of Moelis and Company that serves as the investment advisor to the Creditor’s Committee; and 3) Stephen Johnson, the Executive Vice President of Corporate and Government Affairs at U.S. Airways. See Goulet Decl. (Adv. Pro. ECF No. 61); Polle Decl. (Adv. Pro. ECF No. 62); Johnson Decl. (Adv. Pro. ECF No. 63)). As explained by these witnesses, the delay of consummating the Merger would cause significant economic harm to the Debtors in a variety of ways including: a decline in stock prices with a 10% decline in price equating to a $400 million dollar decline in shareholder value, Polle Decl. at ¶ 14; a loss of the sunk costs invested in the planning, negotiation and financing of the Merger, Polle Decl. at ¶ 17; and a negative impact on the value of potential recoveries for the Defendants’ economic stakeholders. Goulet Decl. at 4, 5; Polle Decl. at ¶ 10.19
As these witnesses explain, delaying or enjoining the merger is also very likely to have a significant negative impact on the employees at both AMR and U.S. Airways. See Goulet Decl. at 4 (“further delay in implementing the Merger ... would only serve to exacerbate this anxiety and uncertainty and adversely impact employee morale, with the potential negative impact on performance, customer service, and the risk of losing critical employees.”); see also Johnson Decl. at 8 (“uncertainty asso-*42dated with delay will inevitably mean the loss of valued employees.”).
For their part, the Plaintiffs contend that the Defendants will not suffer any harm from an injunction. TRO Motion at 21 (“Defendants, on the other hand, will suffer little or no prejudice, given that they should await Tunney Act approval rather than run the risk of merging before the public has commented and the district court has ruled on the settlement. Further, Defendants do not expect to receive their operating certificate that will enable them to operate as a single entity for at least a year. Lastly, Defendants assumed — and prepared for — a trial with the DOJ in which they did not expect to receive a final judgment ... until approximately mid-January 2014”). But that Court rejects Plaintiffs’ argument given the evidence of harm described above. Moreover, Plaintiffs’ argument is based upon the faulty assumption that the Tunney bars consummation of the merger and thus an injunction will not cause any additional delay.20 But as Defendants explain, “[njothing in the Tunney Act” prevents consummation of the merger. See Edstrom v. Anheuser-Busch InBev SA/NV, 2013 WL 5124149 at *7, 2013 U.S. Dist. LEXIS 131386 at *24-25 (N.D.Cal. Sept. 13, 2013) (rejecting notion that Tunney Act bars consummation of merger absent grant of injunction); see also United States v. SBC Commc’ns, Inc., 489 F.Supp.2d 1, 8 (D.D.C.2007).21
Finally, the Court notes that Plaintiffs have made no offer to post an appropriate bond, a requirement clearly set out in Rule 65. See, e.g., Ginsberg v. Inbev SA/NV, 2008 WL 4965859 at *5, 2008 U.S. Dist. LEXIS 93636 at *17 (E.D.Mo. Nov. 18, 2008) (district court balanced potential harm to defendants against the fact that the Alioto Firm “neither posted, nor offered to post, any type of bond to support their claims.”). See also 15 U.S.C. § 26 (providing for injunctive relief in an antitrust case upon execution of a proper bond).
C. The Motion Under Rule 9019
Having dispensed with the Clayton Plaintiffs’ request for a TRO, the Court turns to the Debtors’ motions, the first of which seeks approval under Bankruptcy Rule 9019 of the settlement in the DOJ Action.
Federal Rule of Bankruptcy Procedure 9019(a) proves that “[o]n motion by the [debtor in possession] and after notice and a hearing, the court may approve a compromise or settlement.” In approving a settlement, a court must “review the reasonableness of the proposed settlement [and] ... make an informed judgment as to whether the settlement is fair and equitable and in the best interests of the estate.” In re WorldCom, Inc., 347 B.R. 123, 137 (Bankr.S.D.N.Y.2006); see also Air Line Pilots Ass’n, Int’l v. Am. Nat’l Bank & Trust Co. (In re Ionosphere Clubs, Inc.), 156 B.R. 414, 426 (S.D.N.Y.1993). The Court, however, need not “conduct a ‘mini trial’ on the issue. The Court need only ‘canvass the issues’ to determine if the ‘settlement falls below the lowest point in the range of reasonableness.’ ” WorldCom, 347 B.R. at 137 (quoting In re Tel*43tronics Serv., Inc., 762 F.2d 185, 189 (2d Cir.1985)).
The factors to consider in approving a settlement include: (1) the balance between the litigation’s possibility of success and the settlement’s future benefits; (2) the likelihood of complex and protracted litigation, with its attendant expense, inconvenience, and delay, including the difficulty in collecting on the judgment; (3) the paramount interests of the creditors, including each affected class’s relative benefits and the degree to which creditors either do not object to or affirmatively support the proposed settlement; (4) whether other parties in interest support the settlement; (5) the competency and experience of counsel supporting the settlement; (6) the nature and breadth of releases to be obtained by officers and directors; and (7) the extent to which the settlement is the product of arm’s length bargaining. In re Iridium Operating LLC, 478 F.3d 452, 462 (2d Cir.2007).
“Settlements or compromises are favored in bankruptcy and, in fact, encouraged ... ‘In administering reorganization proceedings in an economical and practical manner it will often be wise to arrange the settlement of claims as to which there are substantial and reasonable doubts.’ ” In re Adelphia Communs. Corp., 368 B.R. 140, 226 (Bankr.S.D.N.Y.2007) (quoting Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)). “The decision whether to accept or reject a compromise lies within the sound discretion of the court.” Adelphia, 368 B.R. at 226. And “[w]hile the bankruptcy court may consider the objections lodged by parties in interest, such objections are not controlling. Similarly, although weight should be given to the opinions of counsel for the debtors and any creditors’ committees on the reasonableness of the proposed settlement, the bankruptcy court must still make informed and independent judgment. The Court must consider whether the proposed compromise is fair and equitable by appraising itself of all the factors relevant to an ‘assessment of the wisdom of the proposed compromise.’ ” WorldCom, 347 B.R. at 137 (quoting TMT Trailer, 390 U.S. at 424, 88 S.Ct. 1157).
Applying these standards to the present motion, the Court finds that the settlement easily satisfies the requirements for approval under Rule 9019, as well as the immediate consummation of the merger. The balance between the litigation’s possibility of success and the settlement’s future benefits weighs heavily in favor of approving the settlement. The issues raised in the DOJ Action are complex and the risks that would accompany the Debtors’ failure to prevail in the DOJ Action are substantial considering the history and position of these Chapter 11 cases. Such risks include: (1) the abandonment of the merger and the substantial value it creates, (2) the continued administration of the Debtors’ cases while another plan of reorganization is formulated and pursued, at a huge expense to the estate and its creditors, and (iii) the delay in making distributions to the Debtors’ creditors and shareholders.
The Debtors’ management and the AMR Board of Directors, in conjunction with the Debtors’ and Committee’s professionals, have analyzed and vetted the terms of the settlement and the effect that the divestiture will have. They have concluded — and the Court concurs — that the benefits to be derived from the settlement far outweigh the continued pursuit of the DOJ Action and the risk and uncertainty associated therewith. Such benefits include the ability of the Debtors to promptly consummate the merger so that the value of the merger can be realized by the Debtors’ creditors, employees and the AMR shareholders. *44Furthermore, as discussed in detail below, the economics of the settlement do not materially or adversely change or alter the distributions under the Plan.
Rejection of the settlement will unquestionably result in complex, protracted and costly litigation in the form of the DOJ Action. As the Debtors note, upon the commencement of the DOJ Action back in August, the parties were fully engaged in discovery and trial preparation. This included the cumulative production by the parties of over 2 million documents and the deposition of 28 individuals. The parties also have held weekly meetings with a special master appointed by the District Court to discuss discovery progress. Trial in the DOJ Action was set to commence on November 25, 2013, and would surely move forward were the settlement to be rejected.
The paramount interests of the creditors clearly weigh in favor of approving the settlement, and thereby the merger. As described above, numerous witnesses attest that a delay in consummation of the merger would cause great harm to the Debtors and their business enterprise, as well as the Debtors’ employees, creditors and equity interest holders. See generally Goulet Decl; Polle Decl; Johnson Deck
Both creditors and equity holders will receive a recovery under the Debtors’ confirmed plan. See Polle Decl. ¶ 13. General unsecured creditors are projected to receive a full recovery (including interest), while American’s employees would receive an equity stake in New American valued at more than $2 billion and holders of American’s equity would receive New American stock valued at more than $4 billion. See Johnson Decl. ¶ 11; Polle Decl. ¶ 16. Creditors are being paid through stock in the newly merged entity. Specifically, 72% of the equity of New American will be distributed to the Debtors’ stakeholders. See Polle Decl. ¶ 16. Since the announcement of the merger, AMR’s share value has risen more than 900%. See Polle Decl. ¶ 12. A delay in the merger may have a negative impact on AMR’s share price as well as the share price of U.S. Airways, which is being used as the reference security prior to the effective date of the plan. Even a 10% decline in share price could represent nearly a $400 million decline in shareholder value. See Polle Decl. ¶ 14.
Furthermore, a delay in the merger would subject these economic stakeholders to the market risk associated with the securities they are to receive under the Plan, including the risk that outside events will affect the airlines or the airline industry as a whole. See Goulet Decl. ¶ 5; Polle Decl. ¶ 16. A delay in the merger will also delay a realization of the benefits flowing from the synergies resulting from a combination of the business of the Debtors and U.S. Airways, which are projected at $1 billion by 2015. See Goulet Deck ¶ 5; Polle Deck ¶ 18; Johnson Deck ¶¶ 10 and 14. These synergies include savings derived from the combination of headquarters, airport locations and other facilities, the elimination of duplicate systems, improvements in purchasing, reductions in advertising costs and rationalization in headcount. See Polle Deck ¶ 18. Delay in the merger would lead to millions of dollars per week in lost savings, which would in turn cause a direct detriment to the Debtors’ economic stakeholders who, as noted above, will be the future stockholders of New American. See Goulet Deck ¶ 5; Polle Deck ¶ 18.
The delay will also harm the Debtors’ employees through a loss of increased compensation, which is estimated to amount to approximately $400 million annually, or nearly $1.1 million lost for every day of delay. See Johnson Decl ¶ 14. A delay in the merger would also lead to a delay in the more than $2 billion equity stake for the employees promised by the *45merger, as well as an exacerbation in the anxiety and uncertainty that has resulted from the merger itself. See Goulet Decl. ¶ 5; Johnson Decl. ¶¶ 13-14. Further delay could adversely impact employee morale, which could in turn have a negative impact on performance, customer service and the loss of key personnel. See Goulet Decl. ¶ 5; Johnson Decl. ¶ 14.
And finally, a delay in the merger, with its corresponding delay in the consummation of the plan, will harm the estate itself through the continued accrual of administrative costs and a negative impact on the Debtors’ ability to re-establish normal business relationships with their vendors, suppliers and business partners. See Goulet Decl. ¶ 5.
Both the Debtors’ creditors and other parties in interest overwhelmingly support the settlement. As noted above, the Debtors’ major constituencies have voiced support for the settlement, including the Committee of Unsecured Creditors, Allied Pilots Association, the Association of Professional Flight Attendants, the Transport Workers Union of America, AFL-CIO and an Ad Hoc Committee of AMR Corporation Creditors. The only objection to the settlement is from the Clayton Plaintiffs, who are neither creditors nor equity holders of the Debtors and who currently have no economic interest in the administration of the Debtors’ estates.
Additionally, counsel supporting the settlement — including both Debtors’ counsel and counsel for the creditors’ committee— have demonstrated competence and experience throughout the pendency of these Chapter 11 cases. The Debtors’ professionals include attorneys with extensive experience in antitrust litigation and who are familiar with the legal and factual issues involved in the DOJ Action and the claims and defenses asserted therein. The Court has no doubts regarding the ability of the professionals in these cases to reach a settlement that is the best result for the Debtors’ estate and creditors. Finally, the settlement is clearly the result of arms’ length bargaining between the parties. The parties in the DOJ Action were fully engaged in discovery and trial preparation. At the same time, they were engaged in ongoing discussions to resolve the DOJ Action on a consensual basis. Over the last several weeks, those discussions intensified and culminated in the settlement, the result of protracted and good-faith negotiations. See Johnson Decl. ¶ 7.
For all these reasons, the Court finds that the settlement is fair and equitable and in the best interests of the estate and falls well above the lowest point in the range of reasonableness.
In the 9019 motion, the Debtors also seek a ruling that the settlement will not materially and adversely affect the creditors and equity holder such as to require re-solicitation of the plan. Such a request is contemplated by paragraph 36 of the Confirmation Order, which provides in relevant part:
In the event that the Debtors and U.S. Airways reach settlement in the DOJ Action, the Debtors shall file a motion with the Court seeking approval of the Debtors’ execution of and entry into such settlement. In addition to determining whether to approve any such settlement under Bankruptcy Rule 9019(a), the Court shall determine whether the settlement would materially and adversely affect the treatment of holders of Claims and AMR Equity Interests under the Plan such that the Comt should require the re-solicitation of such holders’ previous acceptances or rejections of the Plan.
The Court finds that the settlement will not materially and adversely affect the treatment of the Debtors’ claim holders and AMR Equity Interests and re-solicitation of the plan is therefore unnec*46essary. The settlement will not alter the treatment of holders of Claims and AMR Equity Interests under the plan. The settlement also maintains the relative priority and distribution scheme to holders of Claims and AMR Equity Interests under the plan. Additionally, the economic impact of the Settlement on the global business of New American will not adversely affect distributions under the plan.
Distribution value under the plan is based on the price of a reference security, which subsequent to the effective date of the plan will be the common stock of New American. The plan includes a reference mechanic where, at certain measurement periods, additional distributions will be made to holders of AMR Equity Interests when the volume-weighted average price of the reference security trades above a price referred to as the value hurdle price. See Plan § 1.247. The value hurdle price indicates both the price at which additional value will waterfall down to holders of AMR Equity Interests, as well as the price at which all holders of allowed claims will receive a full recovery. See Declaration of Homer Parkhill, dated November 22, 2013, ¶ 15. The Debtors currently calculate, when making certain assumptions, that the value hurdle price is approximately $16.64. Id. at ¶ Í6.
The trading market price of U.S. Airways common stock is currently the best indicator of the value of New American Common Stock. Id. at ¶ 11. Thus, the way in which the plan is structured would indicate that the treatment of holders of Claims and AMR Equity Interests under the plan is not materially and adversely affected by the settlement unless the trading price for U.S. Airways common stock falls below the value hurdle price of $16.64. Indeed, the Court need not even begin such an analysis until the stock falls below the value hurdle price. On August 7, 2013 the volume weighted average price of U.S. Airways common stock was $19.11 per share. See Parkhill Decl. ¶ 12. As of November 21, 2013, that price has increased to $24.12 per share. Id. Based upon this trading market price of U.S. Airways common stock, the aggregate implied value to be distributed under the plan to holders of allowed claims, AMR equity interests and recipients of employee equity awards has increased by approximately $2.7 billion since August 7, 2013, six days to the commencement of the DOJ Action on August 13, 2013. See Parkhill Decl. ¶ 22. Additionally, the trading value of AMR common stock has increased during that time period from $5.85 on August 7, 2013 to $12.00 on November 21, 2013. Id. at ¶ 23.
For these reasons, the Court finds that the settlement does not materially and adversely affect the treatment of holders of Claims and AMR Equity Interests under the Plan such that the Court should require the re-solicitation of such holders’ previous acceptances or rejections of the Plan.22
D. Motion for Entry of an Order Regarding Consummation of the Merger
Consistent with the Court’s rulings above, the Court will also grant the Debtors’ motion to permit the merger to be consummated without delay, despite the pendency of the Clayton Adversary. This request is consistent with the scheduling order entered in the Clayton Adversary, which states that “in the event of any resolution of the DOJ Action in favor of *47Defendants ... Defendants reserve all rights to seek to consummate the merger that is the subject of the DOJ Action by filing a motion with the Bankruptcy Court on an expedited basis.” Scheduling Order ¶ 12. For the reasons set forth above, the Court finds that the benefits to allowing the merger to proceed are numerous, the most important being the consummation of the plan and the resulting distribution to the creditors and stockholders with an economic stake in these cases.
CONCLUSION
For all the reasons set forth above, the Court denies the Plaintiffs’ request for a temporary restraining order and grants the Debtors’ motions seeking approval of the settlement in the DOJ Action and consummation of the merger.
. Rule 65(c) provides for the posting of security to cover losses incurred by any party found to have been wrongfully restrained or enjoined.
. Defendants note a nuance in how courts in this Circuit have articulated the standard for injunctive relief. Reply at 17, n. 7 (Adv. Pro. ECF No. 64). See N.Y. Progress & Prot. PAC v. Walsh, 733 F.3d 483, 486 (2nd Cir.2013) (citing Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008)) (stating that four elements all must be satisfied: irreparable harm, likelihood of success on the merits, balance of equities tips in the moving party's favor, and injunctive relief is in the public interest). The Court notes that all the formulations include irreparable harm and a review of the merits. The Court’s result today would be the same regardless of which formulation of the test is used.
. In responding to the Court's question about evidence at the hearing, Plaintiffs’ counsel referred to information in the Plaintiffs’ answers to interrogatories. Of course, such discovery is not filed with the Court as a matter of course and only makes its way into the record if it is submitted by a party. It was not submitted to the Court by the Plaintiffs here.
.As the Second Circuit explained in Daniel v. Am. Bd. of Emergency Med., 428 F.3d 408 (2d Cir.2005),
Congress did not intend the antitrust laws to provide a remedy in damages for all injuries that might conceivably be traced to an antitrust violation.” Associated Gen. Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 534, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983). Just as in common-law tort and contract litigation, concepts such as “foreseeability and proximate cause, directness of injury, certainty of damages, and privity of contract” circumscribe a party’s right to recovery, so in antitrust actions "the plaintiff's harm, the alleged wrongdoing by the defendants, and the relationship between them,” can limit the right to sue ... The same logic applies to claims for injunctive relief under Section 16 of the Clayton Act.
Id. at 436; see also National Auto Brokers Corp. v. General Motors Corp., 60 F.R.D. 476, 492 (S.D.N.Y.1973) (to obtain injunctive relief, a plaintiff must demonstrate that "he is threatened with loss or damage ... 'of a sort personal to the plaintiff.' ") (quoting United States v. Borden Co., 347 U.S. 514, 518, 74 S.Ct. 703, 98 L.Ed. 903, (1954)).
. Notably, the alleged injury in that case is similar, if not identical to the injuries alleged in this case.
. At the hearing, the Plaintiffs sought to excuse their failure to provide evidence for a variety of reasons. But the Court is unpersuaded. The Court is particularly skeptical of Plaintiffs' position because they have had access in the DOJ Action to millions of pages of documents, as well as numerous deposition transcripts.
. At the hearing, the Clayton Plaintiffs requested to supplement their submission with additional documents. But the Court denied that request given all the circumstances in this case, including that the Plaintiffs waited until noon on Thursday November 23, 2013, to file their TRO Motion that they requested be heard on Monday, November 26, 2013. Cf. SEC v. Frank, 388 F.2d 486, 490 (2d Cir.1968) (“One standard with respect to the taking of evidence derivable from this framework is that where interlocutory relief is truly needed, Rule 65 demands such but only such thoroughness as a burdened federal judiciary can reasonably be expected to attain within twenty days.”); Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 256 (2d Cir.1989) (“There is no hard and fast rule in this circuit that oral testimony must be taken on a motion for a preliminary injunction or that the court can in no circumstances dispose of the motion on the papers before it.”) (quoting Redac Project 6426, Inc. v. Allstate Insurance Co., 402 F.2d 789, 790 (2d Cir.1968)).
. Indeed, courts in the Southern District of New York have recognized divestiture as an appropriate remedy for violations of the Clayton Act. See Julius Nasso Concrete Corp. v. DIC Concrete Corp., 467 F.Supp. 1016, 1025 (S.D.N.Y.1979) ("Carving out an exception for divestiture from the general grant of power to fashion equitable remedies is contrary to the general purpose behind section 7 and this Court agrees that there is not sufficient reason to do so absent express Congressional mandate.”); Fuchs Sugars and Syrups, Inc., v. Amstar Corp. 402 F.Supp. 636, 640 (S.D.N.Y.1975) (concluding that divestiture is a potential remedy for private parties injured by violations of the Clayton Act); see also Cia. Petrolera Caribe, Inc. v. Arco Caribbean, Inc., 754 F.2d 404, 417 (1st Cir.1985).
. Mr. Alioto actually filed a lawsuit in the Northern District of California challenging the merger in early July — without seeking a lifting of the bankruptcy stay — but then waited more than a month to file the Clayton Adversary.
. Indeed, counsel for U.S. Airways stated that if the DOJ action ended and the Clayton Plaintiffs "want to come in the next day and say that even though she's cleared the merger that you should stop it, they get that opportunity.” Id. at 32.
.The scheduling order in the Clayton Adversary provides that " Notwithstanding anything contained herein to the contrary, in the event of any resolution of the DOJ Action in favor of the Defendants, (a) Defendants reserve all of their rights to seek to consummate the merger ... and (b) Plaintiffs reserve all of their rights to seek in this Court appropriate relief enjoining consummation of such merger, pending disposition of the Adversary Proceeding.” Id. at ¶ 12.
. Based on Supreme Court decisions from the 1960s such as Brown Shoe, the Plaintiffs advocate a very stringent rule that market share alone can establish a successful Section 7 antitrust claim. Defendants disagree, presenting a more comprehensive review of the subject that includes more recent case law. As the Court is not ruling on the ultimate merits of the Section 7 claim here, the Court is not making any final determination now of the nuances of the standard to be applied on the merits. But a quick review of the relevant antitrust case law suggests that antitrust law has evolved since the 1960s to encompass a more flexible, industry-specific analysis. For purposes of the TRO request at issue, therefore, the Court uses the standard described above as a reference point to discuss the merits of Plaintiffs’ case.
. There was no trial or decision on the merits in the DOJ case. Therefore, the allegations in the DOJ Complaint have not been proved true or false and remain merely allegations.
. HHI is an index used to measure concentration in a market, which is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. See United States Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, § 5.3 (August 19, 2010) available at www.justice.gov/ atr/public/guidelines/hmg-2010.html# 5 (the “Merger Guidelines”). The DOJ uses HHI numbers to determine thresholds for when an industry is considered highly concentrated or when potential mergers require investigation. Id.
. The HHI issue highlights the difficulties of relying too heavily upon other parties for one’s analysis. While the DOJ Complaint in*40cludes this information, the Court is mindful that the DOJ has, in fact, decided to settle its lawsuit. So one must assume that the anti-competitive concerns raised by this HHI information have, in the opinion of the DOJ, been satisfactorily addressed by the terms of the settlement of the DOJ Action. As Defendants’ counsel pointed out at argument, the DOJ has specifically concluded that the settlement of the Government’s antitrust case, complete with its contemplated divestitures, yields better results for the public than blocking the merger as originally proposed. See Remarks as Prepared for Delivery by Assistant Attorney General Bill Baer at the Conference Call Regarding the Justice Department’s Proposed Settlement with U.S. Airways and American Airlines (November 12, 2013) http://www.justice.gov/atr/public/press_ releases/2013/301626.htm ("this settlement ... provides more competition than exists today in this industry”); see also Jack Nicas, Big Airline Merger Is Cleared to Fly, THE WALL STREET JOURNAL (Nov. 12, 2013) http://online.wsj.com/news/articles/SB 1000142405270230464410457919380 4169829002 ("Bill Baer, the department's antitrust chief, said the settlement was better for competition than if the government had won a court injunction against the merger, because the concessions will allow low-cost carriers to expand at major airports.”). Without some independent analysis, it is difficult for the Court to draw conclusions from the statements and analysis of the Government upon which the Plaintiffs heavily rely, including the DOJ Complaint and the GAO Report.
. One court has, in fact, rejected the Plaintiffs' theory that a national market exists for airline travel. See Malaney v. UAL Corp., 434 Fed.Appx. 620, 621-22 (9th Cir.2011), affirming 2010 WL 3790296, 2010 Dist. LEXIS 106049.
. Defendants’ expert calculated that the post-merger system-wide HHI will be 1768, which is below the Merger Guidelines threshold for highly concentrated markets. Declaration of Janusz Ordover ¶ 71 (ECF No. 67).
. At the hearing, Defendants’ counsel focused his discussion of the likelihood of success on the role of low cost carriers (“LCCs”) in the airline industry, a topic frequently discussed during the lengthy trial before the Court on the rejection of collective bargaining agreements under Section 1113. Counsel stated that the existence of LCCs plays a significant role in, among other things, competitive pricing in the industry and that the settlement furthers the ability of LCCs to flourish by allowing them access to key airports where they previously were hampered by slot and gate restrictions. Once again, the Plaintiffs have presented little analysis on that issue.
. A more fulsome analysis of the calculations involved in quantifying the risk from delaying the merger is contained in paragraphs 12, 15 and 16 of the Polle Declaration.
. See TRO Motion at 14 ("Under the Tunney Act, the settlement is subject to public comment for a period of 60 days, and the district court retains jurisdiction to ultimately approve or disapprove the merger.”).
. Indeed, the Court noted at the hearing that the Plaintiffs should seek redress from the United States District Court for the District of Columbia to the extent the Plaintiffs claim there is anything about the DOJ Action that prevents consummation of the Merger.
. To the extent that approval of the settlement is covered under Section 1127(b) of the Bankruptcy Code, the Court finds that the circumstances are warranted and this confirmed plan, when considered in light of the settlement, would satisfy Section 1129 of the Bankruptcy Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496545/ | OPINION
MARY D. FRANCE, Bankruptcy, Judge.
Magnolia Portfolio, LLC (“Magnolia”) filed a motion for relief from the automatic stay (the “Relief Motion”) to exercise its state law rights against real and personal property owned by Stanley and Susan Dye (“Debtors”). Magnolia also requested the Court to appoint a Chapter 11 trustee, but only as to the operation of Debtors’ businesses and commercial properties. At the hearing on the appointment of a Chapter 11 trustee, the Court declined to appoint a trustee with limited jurisdiction, but agreed to consider whether cause existed under 11 U.S.C. § 1112(b)(1) to convert the case to Chapter 7 (the “Conversion Motion”). For the reasons set forth below, relief from the stay will be granted in part. The case will not be converted to Chapter 7 pending Debtors’ filing of an amended disclosure statement and plan of reorganization on or before January 1, 2014, which addresses the current status of Debtors’ assets and liabilities. If Debtors fail to file an amended disclosure statement and plan by January 1, 2014 or are unable to confirm a plan on or before April 1, 2014, the case will be converted to Chapter 7.
I. Procedural History
Debtors filed a voluntary petition under Chapter 11 on February 2, 2012. In their schedules, Debtors listed the following assets that are relevant to Magnolia’s Relief Motion:
810 North Hanover Street, Carlisle, PA 170131;
1107 Petersburg Road, Boiling Springs, *50PA 170072;
3B-37 W. North Street, Carlisle, PA • 17013;
801 Sand Bank Road, Mt. Holly Springs, PA 17065;
269 Red Tank Road, Boiling Springs, PA 17007;
29 W. North Street, Carlisle, PA 17013;
90 Salem Church Road, Mechanicsburg, PA 17056;
155 Salem Church Road, Mechanics-burg, PA 170563;
1998 International (VIN 1HTSCAAM9WH566338);
1991 International (VIN 1HTSDZ7N2MH317100); and
1998 Peterbilt (VIN 3BPNHD7X4WF467604).
On July 5, 2013, Magnolia filed the motion now before me asserting that prior to filing their Chapter 11 petition, Debtors had defaulted on seven loans originated by Orrstown Bank (“Orrstown”) and transferred to Magnolia after the petition was filed. Magnolia asserts that each loan is secured by specific property and that all loans are cross collateralized by the above-listed assets (the “Collateral”). Magnolia alleges that after the petition was filed Debtors failed to make loan payments when they were due, failed to pay property taxes, and failed to maintain casualty insurance on the properties. Magnolia also asserts that relief should be granted because Debtors have allowed the Collateral to deteriorate and have no equity in the properties. Further, Magnolia argues that Debtors’ business projections demonstrate that they are unable to generate sufficient income to cover debt service. Therefore, Magnolia argues, the properties are unnecessary for an effective reorganization. Accordingly, Magnolia seeks relief from the stay as to the remaining Collateral subject to the automatic stay.
Alternatively, Magnolia argues that cause exists to convert the case to Chapter 7. In support of its request for conversion, Magnolia asserts that the Collateral has decreased in value since the filing of the petition, that Debtors have grossly mismanaged estate assets, and that there is inadequate net income from operations to fund a plan. Magnolia also cites Debtors’ failure to comply with the Court’s May 28, 2013 order directing Debtors to cease operation of the drag strip on the Petersburg Road property.4
Debtors filed an Answer to Magnolia’s Relief Motion on July 19, 2013 averring that they have proposed a confirmable plan of reorganization through which Magnolia’s claims will be satisfied in full.5 *51They dispute that cause exists to convert the case, citing to their compliance with reporting requirements and the sale of the Salem Church Road properties which enabled their largest secured creditor — Mid Penn Bank — to be paid in full. Debtors argue that they are making “regular monthly payments” to Magnolia and that Debtors’ septic business is generating sufficient profits to fund payments to Magnolia. A hearing was held on both the Relief Motion and the Conversion Motion on August 6 and 27, 2013. The parties have filed briefs, and the matter is ready for decision.6
II. Factual Findings
Debtors are a married couple who, at the time of the filing of their bankruptcy petition, managed various residential and commercial properties, including three trailer parks, a drag strip, a car wash, and several apartments. Debtor Stanley Dye also operates a septic service, and Debtor Susan Dye is employed in her father’s business.
Between July 2007 and March 2011, Debtors entered into a series of commercial loans with Orrstown secured by the Collateral. The balance due on these loans as of the petition date was $1,738,497.88. Four of the properties comprising the Collateral were sold or are in the process of being sold. None of the sales produced sufficient proceeds to satisfy, even in part, the loans now held by Magnolia.
A. The Collateral
In the motion now before me, Magnolia seeks relief from the stay to pursue its state law remedies against the following real properties:
33-37 W. North Street, Carlisle, PA 17013 (“33-37 W. North Street”);
801 Sand Bank Road, Mt. Holly Springs, PA 17065 (“Sand Bank Road”);
269 Red Tank Road, Boiling Springs, PA 17007 (“Red Tank Road”); and
29 W. North Street, Carlisle, PA 17013 (“29 W. North Street”).7
These properties serve as collateral for one or more of the seven loans now held by Magnolia. The loan documents require Debtors to make timely monthly payments, to maintain appropriate insurance on the properties, and to pay timely all real estate taxes. The mortgage securing each loan, except one, includes a cross-collateralization provision, which states as follows: “[i]n addition to the Note, this *52Mortgage secures all obligations, debts and liabilities, plus interest thereon, of either Grantor or Borrower to Lender, or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, [and] whether due or not due.... ” See, e.g., Exhibit M-13.8
The first of the four properties that remain subject to the automatic stay is actually two adjacent properties on W. North Street in Carlisle — 33 W. North Street and 35-37 W. North Street. The property at 33 W. North Street is a 2.5 story two-family dwelling consisting of a single two-bedroom unit and a one-bedroom unit. Both units were occupied at the time the property was appraised in November 2011. The property at 35 W. North Street is a three-story brick row house attached to a furniture refinishing shop at 37 W. North Street. The row house has been converted into two apartments, with both units occupied as of August 2013. The furniture refinishing shop is no longer in operation, but empty drums, canisters, and other containers have been abandoned in the shop along with other refuse. As of November 2011, 33-37 W. North Street was valued at $210,000.
Sand Bank Road is a manufactured home park with 26 rented pads. The property was appraised at $540,000 in November 2011 and serves as collateral for three loans held by Magnolia.
Red Tank Road is a single manufactured home on a 1.23 acre parcel with an appraised value of $65,000 as of November 2011. The loan secured by Red Tank Road is also secured by 29 W. North Street, a single-family dwelling that was not habitable at the time of the hearing. Debtors were in the process of demolishing the interior of the property and converting it into two apartments, but they failed to obtain the required local permits before commencing demolition. In their schedules, Debtors report the value of this property to be $83,000, which was not disputed by Magnolia.
Subsequent to the hearings in this matter, Debtors submitted proof of payment of all post-petition taxes assessed against Sand Bank Road, Red Tank Road, 33-37 W. North Street, and 29 W. North Street. They also provided proof of insurance for all properties except Red Tank Road.
B. The Loans
Magnolia holds seven claims against Debtors derived from the seven loans originated by Orrstown. On April 4, 2012, Orrstown filed a proof of claim for each of the seven loans, which were transferred to Magnolia in February 2013. At the hearing, each party put on evidence regarding the status of post petition payments on each of the obligations. Debtors claimed to be substantially current on all loans while Magnolia argued that Debtors were delinquent on most loans and that all obligations were cross collateralized. The Court’s review of the testimony and exhibits, as well as the claims filed of record, revealed a more complex situation than advanced by either party.
Both parties referred to each loan in the trial exhibits by the last four digits of the number assigned by Magnolia when it acquired the loans from Orrstown. Therefore, the same point of reference will be *53used when examining the status of each loan as set forth below.
• Loan 4231, in the amount of $485,000, was originated on August 20, 2007 Exhibit M-31 provides that the balance due on the loan as of July 31, 2013 was $372,966.88. This loan is secured by liens on Sand Bank Road and 810 N. Hanover Street.
• Loan 4232, in the amount of $400,000, was originated on October 8, 2009. Exhibit M-31 provides that the balance due on the loan as of July 31, 2013 was $491,694.22. This loan is secured by Sand Bank Road.
• Loan 4233, in the amount of $500,000, was originated on November 15, 2007. Exhibit M-31 provides that the balance due on the loan as of July 31, 2013 was $494,811.30. This loan is secured by the drag strip and previously was secured by the Salem Church Road properties.
• Loan 4234, in the amount of $160,000, was originated on July 16, 2007. Exhibit M-31 provides that the balance due on the loan as of July 31, 2013 was $139,300.33. This loan is secured by 33-37 W. North Street.
• Loan 4235, in the amount of $50,000, was originated on March 18, 2011. Exhibit M-31 provides that the balance due on the loan as of July 31, 2013 was $36,490.28. This loan is secured by junior liens on 810 N. Hanover Street, Sand Bank Road, and the drag strip. The loan previously was secured by 90 Salem Church Road.
• Loan 4236, in the amount of $83,000, was originated on March 16, 2009. Exhibit M-31 provides that the balance due on the loan as of July 31, 2013 was $67,020.52. This loan is secured by 29 W. North Street and Red Tank Road. The mortgage instrument for this loan does not include a cross collateralization provision.
• Loan 4237, in the amount of $200,000, was originated on August 21, 2008. Exhibit M-31 provides that the balance due on this claim as of July 31, 2013 was $194,991.45. This loan is secured by 810 N. Hanover and the drag strip.
All loans are subject to a variable interest rate, but Debtors adopted a practice of making payments in a flat amount. Often these payments were less than the amount required under the applicable note. Further, when Debtors submitted late payments, they failed to add in late charges, which perpetuated the delinquent status of the loans. Therefore, not all payments characterized by Debtors as “timely” were applied to reduce principal and interest for the month they were submitted. After reviewing the exhibits of each party, the Court draws the following conclusions as to the payment status of each loan:
• The documentation submitted by Debtors for Loan 4231 supports their position that payments on the loan were made each month after the petition was filed. Magnolia’s records, however, report that the amount of the monthly payment increased from $3200 per month in November 2012 to $3281.94 beginning December 2012. Debtors recognized this change because they submitted a payment of $3281.94 on March 28, 2013, but they returned to making monthly payments of $3200 the following month. Therefore, at the time of the hearing Debtors were in arrears on Loan 4231.
• Loan 4232 is in default. According to Magnolia’s records, Debtors have made no payments on this account since the filing of the petition. The records Debtors submitted in evidence *54at the hearing did not address this loan.
• Debtors admit that nine payments were missed on Loan 4233. Further, the payments submitted were not for the full amount due. Beginning December 2012, the monthly loan payment was $4558.09. Debtors made payments for March through July 2013 in the amount of $3200. Therefore, this loan is in default.
• Debtors made monthly payments for each month since the filing of the petition for Loan 4234. For the period February 2012 through July 2012, Debtors paid between $1350 per month and $1375 per month. During this period the monthly amount due under the note was $1350.26. Beginning August 16, 2012, the monthly amount under the note increased to $1458.35. Magnolia’s records, however, state that the monthly amount due beginning November 2012 was $1136.79. It is impossible to determine whether Debtors have defaulted on the loan because the correct payment amounts for the entire post-petition period are not clearly established in the record.
• Debtors admit that they missed two payments on Loan 4285 in 2012. Further, most timely payments were less than the amount due. Therefore, this loan is in default.
• Magnolia’s records indicate that while Debtors’ payments were chronically late on Loan 4236, they are current because Debtors remitted $800 each month while payments specified in the note for the relevant period were $757.99. Magnolia’s records reflect that these overpayments were credited to prepaid principal.
• Magnolia’s récords indicate that Debtors are current on Loan 4237. Over-payments routinely were applied to prepaid principal.
III. Discussion
A Magnolia’s request for relief from the automatic stay
Section 362(a) of the Bankruptcy Code imposes a broad injunction against actions to “obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). Under § 362(d)(1), relief from the automatic stay may be granted for cause, including a lack of adequate protection of a creditor’s interest in property of the estate. Relief also may be granted if a debtor has no equity in the property and the property is not necessary to an effective reorganization. 11 U.S.C. § 362(d)(2). The party requesting relief from the stay has the burden of proof on the issue of a debtor’s equity in the property, and the party opposing the relief has the burden of proof on all other issues, including whether the property is necessary to an effective reorganization. 11 U.S.C. § 362(g). See Nazareth Nat. Bank v. Trina-Dee, Inc., 731 F.2d 170, 171 (3d Cir.1984).
1. The adequate protection requirement of 11 U.S.C. § 362(d)(1)
Magnolia asserts that it should be granted relief because its interests in the listed properties are not adequately protected. Adequate protection comes in a variety of forms, including periodic payments, additional or replacement liens, and other relief that provides the “indubitable equivalent” of the secured creditor’s interest in the property. R.T.C. v. Swedeland Dev. Grp, Inc. (In re Swedeland Dev. Grp., Inc.), 16 F.3d 552, 564 (3d Cir.1994); 11 U.S.C. § 361. Typically, adequate protection is provided to a creditor through periodic payments, but an “equity cushion” alone may suffice. In re AMR Corp., 490 *55B.R. 470, 478 (S.D.N.Y.2013); In re Liona Corp., 68 B.R. 761, 767 (Bankr.E.D.Pa.1987).9
Magnolia asserts that it is not adequately protected because all post-petition payments on the cross collateralized loans have not been made, and even those made often were delinquent. Debtors assert that the payments missed are insignificant, that some loans were overpaid, and that all arrearages will be paid in the plan through periodic payments generated by the operation of Debtors’ businesses. As summarized above, the Court has concluded that Loans 4231, 4232, 4233, and 4235 are in default and that Loans 4236 and 4237 are current. Magnolia’s entitlement to relief is affected by the extent to which the loans are cross collateralized. Therefore, this issue will be addressed next.
2. The effect of the cross collateralization
Six of the seven loans extended by Orrs-town include provisions for cross collater-alization in the related mortgages. This provision enables a lender to secure future advances with existing collateral. See Potomac Coal Co. v. $81,961.13 in Hands of Escrow Agent, 451 Pa.Super. 289, 296, 679 A.2d 800, 803 (1996). These provisions are also referred to as “future advances” or “dragnet clauses.” Walsh v. Mfrs and Traders Trust Co. (In re Burkett), 295 B.R. 776, 784 (Bankr.W.D.Pa.2003).
Dragnet clauses are enforceable in Pennsylvania if later advances are related to the purposes of the original loan agreement. Potomac Coal Co., 679 A.2d at 804. The Pennsylvania Superior Court has observed that dragnet clauses are disfavored when used in the context of a real estate transaction because they “cloud title.” Id. at 803. But they are recognized as valid and enforceable if the “relatedness rule” is observed. See In re Gibson, 249 B.R. 645 (Bankr.E.D.Pa.2000); In re Marques, No. 05-31854DWS, 2008 WL 4286998, *5 (Bankr.E.D.Pa. Sept. 16, 2008). Future advances must be “of the same class as the primary obligation ... and so related to it that the consent of the Debtor to its inclusion may be inferred.” Marques at *5 (citing Potomac Coal Co., 679 A.2d at 804).10 Here, Debtors have not challenged the effectiveness of the cross collateralization provisions in the mortgages. To the contrary, Magnolia’s representation that all the loans were cross collat-eralized was not disputed even though the documents for Loan 4236 attached to Proof of Claim # 10 do not support this assertion. Keeping in mind that dragnet clauses are disfavored under Pennsylvania law, the Court finds that the collateral securing Loan 4236 — 29 W. North Street and Red Tank Road — do not collateralize the remaining loans now held by Magnolia. Therefore, for the purposes of this Opinion, I conclude that only the collateral for the six remaining loans serve as collateral all six loans.
3. Lack of adequate protection— § 362(d)(1)
After Magnolia filed the Relief Motion, some of these the deficiencies cited in support of granting relief were cured. All *56taxes have been paid and proof of insurance on all properties except Red Tank Road have been provided. However, post petition payments for four loans are delinquent. Although Loan 4284 is not in default, the 33-37 W. North Street properties collateralize other loans that are in default. Therefore, if Debtors’ are not able to provide Magnolia with adequate protection, it is entitled to relief from stay to exercise its state law remedies against the properties that secure the cross collat-eralized loans and remain subject to the stay — Sand Bank Road and 33-37 W. North Street.
The same considerations, however, do not apply to Red Tank Road and 29 W. North Street. The mortgages on Red Tank Road and 29 W. North Street do not serve as collateral for the other Magnolia loans. Debtors’ performance as to Loan 4236 must be considered independently. Debtors have supplied adequate protection on this loan through regular monthly payments. In addition, Loan 4236 is protected by a substantial equity cushion in the two properties. The balance due on the loan as of July 13, 2013 was $67,020.52, and Red Tank Road and 29 W. North Street have a combined value of $148,000. Concededly, Debtors did not fully performed their obligations under the note. Specifically, they failed to provide documentation that Red Tank Road is insured. Irrespective of this default, Magnolia’s interests are adequately protected because the value of 29 W. North Street is sufficient alone to collateralized the loan.11 Accordingly, Magnolia is not entitled to relief from the stay to pursue state law remedies on these two properties.
Magnolia’s interest in the properties securing the six cross collateralized loans must be considered together. Four of the loans are in default, thus the value of all properties serving as collateral for the six loans may provide a source of adequate protection. The assets securing the six cross collateralized loans — 810 N. Hanover, the drag strip, Sand Bank Road, and 33-37 W. North Street — have a combined value of $1,475,000. The outstanding amount due for the cross collateralized loans as of 2013 was $1,730,254.46. Accordingly, Debtors do not have equity in the properties available to offer as adequate protection for the cross collateralized loans.
Although Debtors lack an equity cushion to offer as adequate protection for the cross collateralized loans, they argue that the projected plan payments will enable Debtors to pay Magnolia in full. In their plan, Debtors proposes to consolidate all remaining loan obligations (both pre and post petition amounts) into one loan with a single monthly payment amortized over twenty years at contractual rates of interest. The Court finds that these proposed payments fail to adequately protect Magnolia’s interests. On the record before the Court, it is impossible to find that the consolidated loan payments proposed in the plan will provide adequate protection when the projected payment amounts are not described. It is unlikely that payment provision included in the proposed plan filed in 2012 have any value at this time when developments in the case have demonstrated that assets either were overvalued when the petition was filed or have declined in value significantly since the filing. There are fewer income producing assets available now to generate the funds *57necessary to satisfy the claims of secured creditors, such as Magnolia, than existed when the case was filed.
Further, Debtors’ projections of future income and expenses do not provide adequate support for the assertion that Debtors can generate sufficient net income to retire Magnolia’s debt in twenty years, or even make regular payments on the consolidated debt. At the hearing, Debtors submitted projections for 2014 describing anticipated income and operating expenses for their various businesses. The projections, however, did not include the payment of debt service on the consolidated loans. Even if this deficiency did not exist, projections of net income for each business seem to have been “pulled out of a hat” are not related to past performance or otherwise supported in the record. Debtors predict that they will have net income from operations for 2014 of $181,435. This is a remarkable number considering Debtors had net income of only $21,246 for the seven-month period January 2013 through July 2013. Accordingly, the Court finds that Debtors have failed to demonstrate that the interests of Magnolia are adequately protected through payments in the proposed plan.
A Lack of equity in property not necessary to an effective reorganization— § 362(d)(2)
Relief from the automatic stay also must be granted if a debtor does not have equity in the property subject to the creditor’s lien and the property is not necessary to an effective reorganization. 11 U.S.C. § 362(d)(2). To determine whether a debtor lacks equity in a property, the court “focuses on a comparison between the total liens against the property and the property’s current value.” In re Indian Palms Assoc., Ltd., 61 F.3d 197, 206 (3d Cir.1995) (citations omitted). After this calculation is made, even if a debtor lacks equity in the property, he has the opportunity to avoid modification of the stay by demonstrating that the property is necessary for an effective reorganization. In re Ripley, 412 B.R. 690, 698 (Bankr.E.D.Pa.2008). See also In re Epic Capital Corp., 290 B.R. 514, 520 (Bankr.D.Del.2003) (party opposing relief bears burden to prove that collateral is necessary for an effective reorganization). “What this requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it; but that the property is essential for an effective reorganization that is in prospect. This means ... that there must be ‘a reasonable possibility of a successful reorganization within a reasonable time.’ ” United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs, Ltd., 484 U.S. 365, 375-76, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (emphasis in original) (quoting United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363, 370-71 and nn. 12 & 13 (5th Cir.1987)). The Third Circuit has further expounded on the Supreme Court’s guidance in Timbers, holding that a debtor must show that “a proposed or contemplated plan is not patently unconfirmable and has a realistic chance of being confirmed.” John Hancock Mutual Life Ins. Co. v. Route 37 Business Park Assoc., 987 F.2d 154, 157 (3d Cir.1993).
As described above, Debtors do not have equity in the remaining properties. Therefore, relief from the stay must be granted unless Debtors have met their burden to prove that the collateral is necessary for an effective reorganization. Debtors have failed to show that it can confirm its proposed plan. Following the filing of their initial disclosure statement and plan, Debtors have filed two amended disclosure statements that have yet to be approved by the Court. The pending plan fails to take into consideration the loss of estate assets since the plan was filed and, *58at this point, can not be confirmed. Debtors have failed to establish that their proposed plan has a realistic chance of being confirmed and, thus, Sand Bank Road and 33-37 W. North Street are not necessary for an effective reorganization.
IV. Conclusion
For the reasons set forth above, Magnolia has met its burden to prove that Debtor lacks equity in the real properties at issue while Debtors have failed to prove that they have provided Magnolia with adequate protection, that they have equity in the properties or that the properties are necessary for an effective reorganization. An order will be entered granting Magnolia relief from the automatic stay to pursue its state court rights against the properties securing Loans 4231, 4232, 4233, 4234, 4235, and 4237 for which relief has not previously been granted, namely, 33-37 W. North Street and Sand Bank Road. The motion for relief will be denied as to the properties securing Loan 4236, namely Red Tank Road and 29 W. North Street.
An appropriate order follows.
. On May 28, 2013, Magnolia was granted relief from the stay to pursue its state law rights against the Hanover Street property.
. Quarter Aces Drag-O-Way, Inc. operates a drag racing strip on the Petersburg Road property. Stanley Dye is the President of Quarter Aces Drag-O-Way. On May 28, 2013, Magnolia was granted relief from the stay to pursue its state law rights against the property. On August 21, 2013, Debtor filed a motion to reimpose the stay, which was withdrawn in open court on August 27, 2013.
. On February 12, 2013, Mid Penn Bank was granted relief from the stay to pursue its state law remedies against the Salem Church Road properties. Magnolia was granted relief from the stay as to these properties on August 8, 2013. On August 28, 2013, an Order was entered authorizing Debtors to sell both Salem Church Road properties to Ward Realty Ventures free and clear of liens. Magnolia received no payment on its claims from these sales.
. At the time the May 28 Order was entered, the Court had not been apprised that a corporation owned by Debtor Stanley Dye, Quarter Aces Drag-O-Way, Inc., rather than Debtors, were operating the drag strip.
. Debtors filed a Small Business Disclosure Statement and a Plan of Reorganization on November 26, 2012. Three objections filed to the Disclosure Statement were sustained after hearing on January 29, 2013. An Amended *51Disclosure Statement was filed on April 9, 2013. Objections were again filed and an order denying approval of the disclosure statement was entered on May 29, 2013. A Second Amended Disclosure Statement was filed on July 11, 2013, which also was disapproved by the Court. Following the hearings in this matter, Debtors filed a Third Amended Disclosure Statement, but no amended plan has been filed since the original plan. Although it has not been raised by any party in interest, Debtors have failed to confirm their plan within 45 days after the date the plan was filed as provided in 11 U.S.C. § 1121(e)(3) and § 1129(e).
. I have jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A),(B) and (O). This Opinion constitutes findings of fact and conclusions of law made under Fed. R. Bankr.P. 7052, which is applicable to contested matters pursuant to Fed. R. Bank. P. 9014.
. When Magnolia filed its Motion, it also sought relief from the stay to pursue state law remedies to obtain possession of certain vehicles that constituted its collateral. No testimony, however, was provided regarding the vehicles by either party, and the parties did not discuss the relief from the stay as to the vehicles in their briefs. Therefore, the Court concludes that Magnolia no longer seeks relief from the stay as to the three vehicles included as part of the Collateral.
. Although the parties stipulated that each mortgage secured all outstanding liabilities, the mortgage executed in connection with Magnolia Loan # 104236-001, which was admitted as Movant’s Exhibit 12 and is attached to Proof of Claim #10 filed by Orrstown, does not provide for cross collateralization.
. An "equity cushion" is defined as the value of the property above the amount owed to the moving secured creditor and all liens with priority over the movant’s lien. Nantucket Inv. II v. Cal. Fed. Bank (In re Indian Palms Assoc), 61 F.3d 197, 197, 207-08 (3d Cir.1995) (citing Pistole v. Mellor (In re Mellor), 734 F.2d 1396, 1400 n. 2 (9th Cir.1984)).
. The relatedness rule has been abrogated for transactions subject to the Uniform Commercial Code ("UCC”). See 13 Pa. C.S.A. § 9204, comment 5 ("collateral may secured future as well as past or present advances, if the security agreement so provides.... ”).
. This finding is not intended to suggest that it is acceptable for Debtors not to insure Red Tank Road. To comply with their fiduciary duties to the estate, insurance on the property should be obtained. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496546/ | OPINION
ERIC L. FRANK, Chief Judge.
I. INTRODUCTION
Plaintiff David Cutler Industries, Ltd. (“DCI”), the chapter 11 liquidating debtor herein, seeks to avoid $155,313.84 in pre-petition transfers it made to Defendants Bank of America and Marix Servicing, LLC.1 DCI made the transfers were made on account of a loan owed by its then-president, Darryl Cutler and secured by a mortgage on his personal residence. In its Amended Complaint, DCI asserts that the transfers are avoidable pursuant to the actual and constructive fraud provisions of the Bankruptcy Code, 11 U.S.C. §§ 544(b), 548(a), and 550, and the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa.C.S. §§ 5104 and 5105.
Based on the evidence presented during the two (2) day trial of this adversary proceeding, I conclude that DCI has proven that all of the transfers to BOA at issue were constructively fraudulent under PUFTA § 5104(a)(2)® and § 5105. Accordingly, judgment will be entered in favor of DCI and against BOA and Marix Servicing, LLC in the amount of $155,313.84.2
II. JURISDICTION
This court unquestionably has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and the Standing Orders of the District Court dated July 25, 1984 and November 8, 1990. However, since the United States Supreme Court’s decision in Stern v. Marshall, — U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), courts in this Circuit are divided on the question whether a bankruptcy court may enter a final order in an adversary proceeding brought pursuant to 11 U.S.C. §§ 544 and 548. Compare In re Int’l Auction & Appraisal Services, LLC, 493 B.R. 460, 463-65 (Bankr.M.D.Pa.2013), with In re DBSI, Inc., 467 B.R. 767, 772-73 (Bankr.D.Del.2012). If the bankruptcy court lacks the authority to enter a final judgment, it is also unclear whether the parties may consent to the entry of a final judgment by the bankruptcy court or waive the right to an Article III tribunal. Compare In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir.2012), cert. granted sub nom., Exec. Benefits Ins. Agency v. Arkison, — U.S. -, 133 S.Ct. 2880, 186 L.Ed.2d 908 (2013), with Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 771-73 (7th Cir.2013); Waldman v. Stone, 698 F.3d 910, 917-18 (6th Cir.2012).
DCI and BOA have agreed that the fraudulent transfer claims in the Amended Complaint are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(H). (See Pretrial Statements, Doc’s. #47, 48). BOA’s *62agreement on that point may constitute consent to the entry of a final order. See In re Wash. Coast I, LLC, 485 B.R. 393, 408-09 (9th Cir. BAP 2012). However, in the event that it is determined that the bankruptcy court lacks' the authority to enter a final judgment in this proceeding, this Opinion should be treated as proposed findings of fact and conclusions of law. See In re Scheffler, 471 B.R. 464 (Bankr.E.D.Pa.2012); see also In re Universal Mktg., Inc., 459 B.R. 573, 576-77 (Bankr.E.D.Pa.2011) (even if bankruptcy court lacks constitutional authority to enter final judgment in matter designated by Congress as “core,” court nonetheless has subject matter jurisdiction and may enter proposed findings of fact and conclusions of law). Contra Wellness Int'l Network, 727 F.3d at 776-77 (if bankruptcy court lacks constitutional authority to enter final judgment in matter designated by Congress as “core,” there is no statutory authority for bankruptcy court to enter proposed findings of fact and conclusions of law).
III. PROCEDURAL HISTORY
DCI filed its voluntary chapter 11 bankruptcy petition on November 16, 2009. By order dated May 2, 2012, the court confirmed the Joint Chapter 11 Liquidating Plan filed by DCI and the Official Committee of Unsecured Creditors (“the Confirmed Plan”). Pursuant to § 6.3 of the Confirmed Plan, the post-confirmation Debtor, acting through a Plan Administrator, is serving as the disbursing agent. Section 7.4 of the Confirmed Plan provides expressly for the preservation of the Debt- or’s avoidance actions under chapter 5 of the Bankruptcy Code.
On October 11, 2011, prior to confirmation, DCI commenced this adversary proceeding by filing a complaint pursuant to 11 U.S.C. §§ 544(b), 548(a)(1)(A), 548(a)(1)(B), 550, and 551, and 12 Pa.C.S. §§ 5104(a)(1), 5104(a)(2), and 5105. DCI later amended its complaint (“the Amended Complaint”). (Doc. # 3). On December 6, 2011, BOA answered the Amended Complaint, (Doc. # 5), and asserted a Third Party Complaint against Darryl Cutler and Amy Cutler alleging that the Cutlers were jointly liable to DCI for indemnification and contribution on the mortgage, (Doc. # 6). Subsequently, the Third Party Complaint was dismissed for lack of subject matter jurisdiction. {See Doc. # 15). BOA filed an amended answer on February 21, 2012. (Doc. # 18).
On June 21, 2012, BOA filed a motion for summary judgment. (Doc. # 22). After briefing, the court denied the motion on the ground that material facts were in dispute. {See Doc. # 41).
Trial of this matter was held on December 7 and 10, 2012. The parties submitted stipulated facts (“the Stipulated Facts”) (Doc. # 57), and supplemented the Stipulated Facts with testimonial and documentary evidence.3 This evidence included the testimony of and several expert reports prepared by Ira M. Feldman (“Feldman”). Post-trial briefing was completed on March 21, 2013.
IV. FINDINGS OF FACT
I make the following findings of fact based upon the Stipulated Facts and the documentary and testimonial evidence presented at trial.
DCI’s Stock
DCI is a Pennsylvania corporation that purchased and resold waste paper and paper rolls. At the outset, David Cutler *63(“David”) was the President and sole shareholder of DCI. His son, Darryl Cutler (“Darryl”), began working for DCI in the mid-1980’s as a salesman. Later, Darryl assumed the role of President in 1992 or 1993, while David remained the sole director of DCI. (Stipulated Facts ¶ 9). Michael Flitter (“Flitter”) served as DCI’s corporate accountant/comptroller from 1990 until 2009. (2 N.T. 61).
Darryl became a shareholder when DCI reorganized its capital structure in 1987. (1 N.T. 168-69). In that restructuring, David redeemed some or all of the nonvoting stock of DCI in exchange for a $3.7 million promissory note (“the Note”). (More on the promissory note in a moment). Through some mechanism that was not fully explained, some or all of the nonvoting stock was gifted to a trust for Darryl’s benefit (“the Darryl Trust”). (Stipulated Facts ¶ 9; 1 N.T. 169).4 David retained the voting stock of DCI until his death in September 2004, at which time it passed to his decedent’s estate (“the David Estate”). Jonathan Gayl (“Gayl”) and Hannah Cutler (“Hanna”) were named the David Estate’s executors. (Id,.).
In his will, David bequeathed the voting stock to the Darryl Trust, provided that the Trust pay the David Estate fair market value for the stock. (Stipulated Facts ¶ 9). Despite negotiations, the Darryl Trust (i.e., Darryl) and the David Estate (ie., Gayl and Hannah) could not reach an agreement on the voting stock’s fair market value. As a result, after David’s death, transfer of the stock to the Daryl Trust did not occur, (id.), and it appears that the David Estate remained in control of the stock. Meanwhile, Darryl continued to run DCI in his capacity as its President.
In May 2009, the David Estate called a shareholders meeting and elected Gayl and Hannah as DCI’s directors. (-See Ex. 508). In June 2009, the Board of Directors of DCI, limited Darryl’s total compensation to $250,000.00 per year and revoked his authority to control DCI’s financial accounts, including check writing. (See Ex. 509).
On August 11, 2009, the Board elected Gayl as President and Treasurer, and Hannah as Vice-President and Secretary. (See Ex. 512). On August 12, 2009, Darryl resigned from DCI. (See Ex. 513). The chapter 11 bankruptcy case was filed slightly more than three (3) months later.
The Promissory Note
In connection with the redemption of David’s stock as part of the February 1987 “recapitalization,” see n. 4, supra, DCI issued a $3.7 million promissory note payable to David with a March 1,1993 maturity date (“the Note”). (See Ex. 305.23; 1 N.T. 168-69). The Note obligated DCI to tender interest-only payments for the first year and then commence principal and interest payments on June 1, 1988. The Note also provided that it is governed by Pennsylvania law. (See id.).
David, signing in his capacity as President and Secretary, executed the Note on DCI’s behalf. The Note is stamped with DCI’s corporate seal directly above the notation: “[Corporate Seal]” and directly to the left of David’s signatures. (See id.).
In October 1991, the Note was modified, inter alia, to extend the maturity date until September 30, 1994. (See Ex. 305.24). David signed the modification as President. The Note modification was not imprinted with DCI’s corporate seal.
*64DCI paid regular interest payments pursuant to the Note from 1987 through September 2004. (1 N.T. 188). Prior to 2004, only one (1) principal payment was made on the Note. DCI continued to carry the Note on its corporate books through the chapter 11 bankruptcy filing in November 2009. (Id. at 78). The Note was the subject of a subordination agreement among Bryn Mawr Trust Company (“BMT”), David, and DCI. (Id. at 179). DCI reaffirmed the subordination agreement in a modification to its loan agreement with BMT in April 2008. (See Ex. 305.20B, ¶ 9(f)).
The BOA Mortgage
In 2002, Darryl and his wife, Amy Cutler (collectively “the Cutlers”) became obligated to BOA, on a home loan secured by a first mortgage (“the Mortgage”) on their residence in Bryn Mawr, Pennsylvania (the “Residence”). (Stipulated Facts ¶ 8). DCI was not obligated on the Mortgage to the Cutlers; nor did it guarantee the Mortgage. (Id. at ¶ 3).
Beginning in June 2007, DCI began making payments on the Mortgage from its corporate operating accounts directly to BOA. (Id. at ¶ 4). BOA and its servicing company accepted the payments from DCI on behalf of Darryl and credited the monthly payments against the Cutlers’ loan obligation on the Residence. (Id. at ¶ 5). From June 2007 to August 2009, DCI made payments aggregating $155,313.84 to BOA (“the Transfers”) on behalf of the Cutlers for the repayment of the Mortgage. (Id. at ¶ 6). Throughout this time frame, Darryl was DCI’s President. (Id. at ¶ 8).
In its corporate books, DCI reported the Transfers as a business expense against revenue. (2 N.T. 65). DCI did not withhold employment taxes on the Transfers (Stipulated Facts ¶ 11), or report the Transfers on Darryl’s W-2 Statement or a Form 1099. (2 N.T. 99).
jDarryl’s Compensation
In January 1987, DCI entered into an employment agreement (“the Employment Agreement”) with Darryl. (See Ex. 501 at 3). The Employment Agreement provided that Darryl would receive a base salary for the first nine (9) months, and an annual bonus computed based on a percentage of any increase in DCI’s net operating profits from its roll business. (Id.). However, the base salary was not specified in the Employment Agreement. After the initial nine (9) months, Darryl’s base salary would be adjusted based on a percentage connected to either CPI or DCI’s operating profit. (See id.). The Employment Agreement did not mention any DCI obligation to make payments to third-parties for Darryl’s personal obligations.5
For tax years 2005 though 2009, Darryl reported approximately $125,000.00 per year as wage income on his federal income tax returns. (See Ex’s. D-12 — D-16). During this time, Darryl was the CEO and determined what DCI would pay him. (2 N.T. 142).
In the same period, aside from his salary, Darryl drew between $430,000.00 and $765,000.00 per year from the company. (See Ex. 303). Flitter reviewed DCI’s monthly bank statements and tracked draws made to or on Darryl’s behalf. (2 N.T. 67). He then determined how these draws were categorized in DCI’s corporate books and records. Flitter generally recorded large advances or expenses to the *65“Loans and Exchange Account” (“the L & E Account”). (Id. at 131). These loans or advances were not treated as income to Darryl and were not recorded as an expense of DCI. (Id. at 105). Darryl was not charged interest and DCI did not report imputed interest on the L & E Account. (Id. at 97). The Transfers were categorized as “commissions” to Darryl. (Id. at 64-65). Also, Darryl reported the Transfers as income on his personal federal income tax returns. (Stipulated Facts ¶ 12).
Financial Condition of DCI
Flitter admitted that DCI’s stated financial information on its balance sheet was incorrect for an extended period of time. (2 N.T. 88-89). Accounts payable were understated by more than $1 million and had been since 1990. (Id. at 179). Flitter made no attempt to correct the corporate records. (Id. at 128).
At some point, Flitter also began compiling dual financial statements for DCI. (Id. at 81-82). One set was used internally by DCI and one set was given to BMT. (Id. at 85-88).
Debra Farina (“Farina”) started her employment with DCI in 1992 as a part-time clerk and became a full-time office manager in 2002. Farina handled DCI’s accounts payables and receivables. (Id. at 19-21). Darryl instructed Farina which creditors and bills, if any, would be paid. (Id. at 21, 26). DCI’s bills were frequently paid late or not until the creditor exerted pressure on DCI’s staff to be paid. (Id. at 21).6 DCI received shutoff notices from utility and telephone companies and late notices on its lease of office equipment. (Id. at 23, 39-40).7 As a result, DCI had procedures in place to allow Farina to use a company credit card for emergencies. Towards the end of Darryl’s tenure as President, Farina testified that nothing was being paid. Darryl admitted that DCI paid its bills late, conceding that “[t]hey were late, but we never lost an account due to non-payment.” (Id. at 148).
Between 2005 to 2009, Darryl made loans to DCI totaling $5.7 million.8 (Id. at 148-49).
From 2005 through 2009, after adjustments, DCI showed negative equity of approximately $2.1 million to $8.7 million each year. (See Ex. 301; 1 N.T. 26-27). Based on average industry data, DCI should have been operating with an equity level of approximately $4 million. (See Ex. 302; 1 N.T. 29-30).
In 2005, compared to industry averages of 7.7% of cash assets per total assets, (computed by the RMA),9 DCI had approx*66imately 2% of its assets in cash. (See Ex. 302; 1 N.T. 31). In 2008, DCI had approximately 0.4% of its assets in cash; industry average was 5.6%. (See Ex. 302; 1 N.T. 32). In 2008, its inventory was 5.8% of total assets; the RMA average was 22.7%. (See id.). Comparable companies in DCI’s industry would average 36% of its assets based on equity, but DCI had zero equity from 2005 though 2009. (1 N.T. 31).
Y. DISCUSSION
A. Statutory Framework
DCI argues that the Transfers to BOA constitute fraudulent transfers under 11 U.S.C. § 544(b)(1) of the Bankruptcy Code. Section 544(b)(1) provides that “the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502.... ” Section 544(b) allows DCI to step into the shoes of an actual creditor who existed at the commencement of the bankruptcy case, and avoid the fraudulent transfers pursuant to state law. See also 11 U.S.C. § 1107 (chapter 11 debtor in possession may exercise the powers of a trustee).
DCI invokes both §§ 5104(a)(2) and 5105 of PUFTA, 12 Pa.C.S. § 5104, 5105.
Section 5104(a) provides:
General rule. — A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
(emphasis added).
Section 5105 provides:
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.
(emphasis added).10
There is no dispute that the Transfers were of an interest in DCI’s property. *67The parties also agree that the Transfers occurred within four (4) years prior to DCI’s November 19, 2009 bankruptcy petition and that DCI had unsecured creditors at the time of the petition who would have been able avoid the Transfers (if they are avoidable under PUFTA). Therefore, if DCI can satisfy the remaining requirements of the constructive fraud provisions, all the Transfers will be avoidable.
B. The Parties’ Contentions
BOA asserts an affirmative defense based on the doctrine of in pari delicto. As will be amplified below, BOA contends that the David Estate, as DCI’s controlling shareholder, bears the ultimate culpability for any loss DCI suffered as a result of the Transfers and is therefore, barred from recovery in this proceeding.
Alternatively, BOA argues that DCI received reasonably equivalent value in the services provided by its then-President, Darryl. In effect, BOA expands the Transfer transactions, viewing them as though each Transfers had been paid first to Darryl as part of a reasonable compensation package, after which he forwarded the payments to BOA in satisfaction of his BOA Mortgage obligation. BOA also argues DCI failed to establish an essential element of its claim under PUFTA § 5105, i.e., that DCI was insolvent when the Transfers were made or was rendered insolvent by the Transfers.
DCI denies that the in pari delicto doctrine is applicable. DCI also argues that it has: (1) proven the two critical elements under PUFTA § 5105 (lack of reasonably equivalent value for the Transfers and insolvency), and (2) proven its claim under § 5104(a)(2)(i) (requiring proof that DCI did not receive reasonably equivalent value and that DCI was unreasonably undercapi-talized at the time of the Transfers).
C. In Pari Delicto
In its post-trial submission, BOA devotes considerable effort arguing that it is entitled to judgment in its favor based upon the doctrine of in pari delicto. As explained below, I conclude that this defense is not available to BOA.
1.
The in pari delicto doctrine is an equitable doctrine that can serve as an affirmative defense against claims that are brought against a defendant. The doctrine instructs that “a party is barred from recovering damages if his losses are substantially caused by activities the law for*68bade him to engage in.” American Trade Partners, L.P. v. A-1 Int’l Importing Enters., Ltd., 770 F.Supp. 273, 276 (E.D.Pa.1991). Restated slightly, “a plaintiff may not assert a claim against a defendant if the plaintiff bears fault for the claim.” Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 354 (3d Cir.2001) (citing Feld and Sons, Inc. v. Pechner, Dorfman, Wolfee, Rounick & Cabot, 312 Pa.Super. 125, 458 A.2d 545, 548-49 (1983)).
The doctrine serves at least two purposes: (1) relieving the courts of the task of mediating disputes among wrongdoers and (2) deterring illegal conduct. Official Comm. of Unsecured Creditors of Allegheny Health Educ. and Research Found. v. PricewaterhouseCoopers, LLP, 605 Pa. 269, 989 A.2d 313, 329 (2010) (“Allegheny Health ”).11
In Allegheny Health, the Pennsylvania Supreme Court provided substantial guidance regarding the scope of in pari delicto in Pennsylvania, in a lengthy, complex opinion, issued after accepting the certification of two (2) questions posed by the Third Circuit Court of Appeals.12 Among the principles stated in Allegheny Health are:
• The doctrine is related to the “clean hands” maxim applicable in equity cases, but “has surmounted its moorings in strict equity jurisprudence and transitioned into a defense in actions at law.” 989 A.2d at 328.
• Its application is “integrally dependant on the setting” in which it is invoked and the inquiry into its applicability “takes on another dimension when addressing statutory causes of action, since the specific legislative objectives of the enactment controlling the parties’ legal rights must be considered.” Id. at 328 n. 16, 329 n. 18.13
• The defense “requires the plaintiff be an active, voluntary participant in the wrongful conduct or transaction(s) for which it seeks redress, and bear ‘substantially equal [or greater] responsibility for the underlying illegality’ as compared to the defendant.” Id. at 329 (quoting McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750, 757 (3d Cir.1990)).14
The frequent starting point in evaluating the in pari delicto doctrine in cases involving corporate entities is the concept of “imputation,” i.e., determining whether the wrongful conduct of a corporate officer should be imputed to the corporation. See id. at 330 n. 20 (“where corporate plaintiffs are involved, the subject of imputation is a key focus”). Imputation is a question of state law. See Official Comm. of Unsecured Creditors of Allegheny Health, Educ. & Research Found. v. PriceWater-*69houseCoopers, LLP, 2007 WL 141059, at *8 (W.D.Pa. Jan. 17, 2007).15
In Allegheny Health, the Court began its analysis of imputation with the principle that “principals generally are responsible for the acts of agents committed within the scope of their authority.” 989 A.2d at 333. Imputation “is founded on the duty of the agent to communicate all material information to his principal, and the assumption that he has done so.” Id. at 333 n. 28 (citing Byrne v. Dennis, 303 Pa. 72, 154 A. 123, 125 (1931)). This policy creates incentives to the principal to select its agents carefully; it also serves to protect those who transact business with a corporation through its agents. Allegheny Health, 989 A.2d at 333.
A frequent issue that arises in evaluating imputation is the applicability (or nonapplicability) of the “adverse interest” exception to the general rule of imputation. The adverse interest exception provides that a corporate agent’s conduct will not be imputed to the corporation if the officer acted in his own interest and to the corporation’s detriment. Id.; see Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 359 (3d Cir.2001); see also Restatement (Third) of Agency § 5.03.
To further complicate the analysis, there is an exception to the “the sole actor” exception, “where the principal and agent are one and the same.” In re Mediators, Inc., 105 F.3d 822, 827 (2d Cir.1997). If the agent who committed the wrongful act was the sole shareholder of the corporation or dominated the corporation, the conduct is imputed to the corporation. See, e.g., id. The rationale for this rule is that if the sole agent has no one to whom he can impart his knowledge, or from whom he can conceal it, the corporation must bear the responsibility for allowing an agent to act without accountability. Lafferty, 267 F.3d at 359.
2.
In this proceeding, BOA contends, in essence, that any loss DCI may have suffered was caused by its controlling shareholder (the David Estate, acting through the executors) — the same party that is the largest creditor in this case and that stands to gain the most from a recovery in this adversary proceeding.
More specifically, BOA contends that, to the extent that the Transfers were fraudulent transfers, they resulted from the David Estate’s breach of its own fiduciary duties to creditors of the insolvent company.16 According to BOA, even if Darryl caused the Transfers to be made for his own benefit and to the detriment of DCI, the David Estate bears ultimate responsibility for the Transfers because the David Estate was the controlling shareholder, it was aware that Darryl was taking excessive draws from DCI, and it took no action for several years to protect DCI and its creditors from Darryl’s conduct.
DCI, whose management consists of the same persons who had the power and authority to stop or mitigate compensation concerns but failed to do so in order to protect their own self-interests (ie., that of the [DavidjEstate) now get righteously indignant about what they themselves tolerated and allowed. But for the malfeasance of DCI’s present man*70agement, there would be no problem, no alleged fraudulent conveyances. DCI made what could be recoverable transfers only because they allowed it. They committed the errors; they breached the legal duties owed to the creditors of DCI. They cannot now suggest that they were wrong, but not assert a claim against themselves for their own failings. They cannot demand nor recover from innocent payees ransom for what they NOW assert are misdeeds — their misdeeds
(BOA Supp. Mem. at 4 (unpaginated)) (footnote omitted).
Recasting this argument in terms of common law torts, it appears that BOA is arguing that even if Darryl wrongfully diverted DCI assets to pay his personal loan, the controlling shareholders’ misconduct was a supervening cause of DCI’s loss and that it should not recover due its own contributory negligence.17
3.
Without deciding whether the David Estate’s failure, as controlling shareholder, to intervene in DCI’s operations, would support BOA’s in pari delicto defense in the factual circumstances presented here, I conclude, on other grounds, as a matter of law, that BOA may not invoke the defense. I reach this result based on binding precedent: In re The Personal and Business Ins. Agency, 334 F.3d 239 (3d Cir.2003).
Personal and Business Ins. Agency is best understood in relation to the Court of Appeals’ earlier decision in Lafferty. In Lafferty, the Creditors’ Committee brought claims against various parties alleging they conspired with the debtor’s management to issue debt securities, thereby deepening the debtor’s insolvency and injuring the debtor. The Lafferty Committee asserted state law claims of the debtor corporation that passed into the bankruptcy estate upon the filing of the bankruptcy case. See 11 U.S.C. § 541(a). The Committee, acting on behalf of the bankruptcy estate in lieu of the bankruptcy trustee succeeded to these claims. See Lafferty, 267 F.3d at 356.
Bankruptcy trustees are authorized to “commence and prosecute any action or proceeding on behalf of the estate before a tribunal.” Fed. R. Bankr.P. 6009. “Such actions fall into two categories: (1) those brought by the trustee as successor to the debtor’s interest included in the estate under Section 541, and (2) those brought under one or more of the trustee’s avoiding powers.” Lafferty, 267 F.3d at 356.
With respect to the first category of trustee actions, § 541(a) provides, inter alia, that the bankruptcy estate is comprised of “all legal or equitable interests of the debtor as of the commencement of the case.” 11 U.S.C. § 541(a) (emphasis added). The Lafferty court concluded that § 541(a)’s plain language “directs courts to evaluate defenses as they existed at the commencement of the bankruptcy.” 267 F.3d at 356. Therefore, the Committee’s status as an innocent successor did not bar the defendants from asserting defenses *71that could have been raised against the debtor (including the in pari delicto defense).
Lajferty instructs that in any action brought by a bankruptcy trustee rooted in 11 U.S.C. § 541(a), the post-petition replacement of management or equity with a bankruptcy trustee does not preclude the defendants from raising the in pari delicto defense; rather, the trustee stands in the shoes of the debtor and is “subject to the same defenses as could have been asserted by the defendant had the action been instituted by the debtor.” Id. (citing Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1154 (3d Cir.1989)).
There is, however, a difference between a claim asserted by a bankruptcy trustee as the successor to the debtor under 11 U.S.C. § 541(a) and the second category of trustee actions: claims asserted pursuant to the trustee’s avoidance powers, 11 U.S.C. §§ 544, 547, 548, 549.18 That difference is critical in evaluating the availability of BOA’s asserted in pari delicto defense.
In Personal and Business Ins. Agency, the Court of Appeals held that the holding in Lafferty — that post-petition events (such as the replacement of management with an “innocent” trustee) has no impact on the defenses available against claims asserted by the trustee — is limited to causes of action derived from 11 U.S.C. § 541(a) and does not apply to actions brought under 11 U.S.C. § 548. See Personal and Business Ins. Agency, 334 F.3d at 245-46. The court reasoned that: (1) as a policy matter, the in pari delicto defense “loses its sting” when applied to a successor plaintiff “representing the interests of innocent creditors” and (2) “[tjhere is no limiting language in § 548 similar to that in § 541, and without that language there is no reason not to follow the better rule.” Id. at 246.
The holding in Personal and Business Ins. Agency has been extended to the trustee’s avoidance powers under § 544(b). See Kaliner v. MDC Sys. Corp., LLC, 2011 WL 203872 (E.D.Pa. Jan. 20, 2011); In re Norvergence, Inc., 405 B.R. 709, 741-42 (Bankr.D.N.J.2009); see generally In re Student Fin. Corp., 335 B.R. 539, 554-555 (D.Del.2005) (because § 510 lacks limiting language of § 541(a), in pari delicto is no defense to equitable subordination claim).
These decisions are correctly decided. As the Bankruptcy Appellate Panel for the Sixth Circuit has explained:
[In exercising the Bankruptcy Code’s avoidance powers, a] trustee not only stands in the shoes of a debtor, but is accorded this footwear unsoiled by the debtor’s previous steps. In addition, a trustee can further choose the footwear of any creditor holding an allowable unsecured claim under applicable law. .... Additionally, courts have consistently recognized that the Trustee may pursue fraudulent or preferential transfers despite the fact that the debtor was a knowing and willing participant to *72such conveyances. The distinction recognized repeatedly by the courts is that although privity may bar a trustee’s actions if the prior judgment involved a personal cause of action of the debtor, privity does not bar causes of action brought by the trustee as a representative of creditors.
In re Fordu, 209 B.R. 854, 863 (6th Cir. BAP 1997) (quotations and citations omitted); see also In re Vaughan Co., Realtors, 2013 WL 960143, at *5-6 (Bankr.D.N.M. Mar. 11, 2013); In re Pearlman 472 B.R. 115, 122-23 (Bankr.M.D.Fla.2012); In re Fabian, 458 B.R. 235, 261-62 (Bankr.D.Md.2011).19
In this adversary proceeding, DCI is not acting for the benefit of its equity owners in bringing the § 544(b) claim against BOA; rather, DCI is acting on behalf of the bankruptcy estate pursuant to its statutory authority as liquidating trustee (successor to the debtor in possession). See 11 U.S.C. § 1107(a); see also MDC Sys., 2011 WL 203872, at *6 (trustee’s fraudulent transfer “claims are not personal to any specific creditor; rather, they are general claims that will benefit the entire estate”).20 Consequently, DCI’s § 544(b) claim falls squarely within the principles set out in the cases cited above. Based on these authorities, BOA’s in pari delicto defense fails as a matter of law.
D. Reasonably Equivalent Value
Next, I consider BOA’s argument that DCI received reasonably equivalent value for the Transfers made on account of Darryl’s Mortgage.
*73l.
The Third Circuit Court of Appeals instructs that a two-step process is employed to determine whether a debtor received reasonably equivalent value in the form of indirect economic benefits in a particular transaction: (1) whether any value is received, and (2) whether that value was reasonably equivalent to the transfer made. In re R.M.L., 92 F.3d 139, 152 (3d Cir.1996); see also Fid. Bond & Mortg., 340 B.R. 266, 287 (Bankr.E.D.Pa.2006), aff'd, 371 B.R. 708 (E.D.Pa.2007). Because the purpose of PUFTA is to protect creditors, the court determines whether value was received from the vantage of the creditor. Fid. Bond & Mortg., 340 B.R. at 286. The inquiry is “what did the debtor give up and what did it receive that could benefit creditors.” Id. (citing In re Joy Recovery Tech. Corp., 286 B.R. 54, 75 (Bankr.N.D.Ill.2002)).
In this determination, “value ... include[s] any benefit ... whether direct or indirect.” In re Fruehauf Trailer Corp., 444 F.3d 203, 212 (3d Cir.2006) (citation omitted); Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646-47 (3d Cir.1991). The “touchstone” in the determination is whether the parties exchanged comparable “realizable commercial value.” Mellon Bank, 945 F.2d at 647. Thus, if a debtor’s “realizable going concern value after the transaction is equal to or exceeds its going concern value before the transaction, reasonably equivalent value has been received.” Id.
Courts look to the totality of the circumstances, considering such factors as “fair market value compared to the actual price paid, the arm’s-length nature of the transaction, and the good faith of the transferee.” Fid. Bond & Mortg., 340 B.R. at 287 (citing R.M.L., 92 F.3d at 145, 153). If a court concludes that the benefits the debtor received “are minimal and certainly not equivalent to the value of a substantial outlay of assets,” a plaintiff need not prove the exact value conferred because the “amount” of value is then rendered irrelevant. Fruehauf Trailer Corp., 444 F.3d at 214.
The party challenging the transfer bears the burden of proving all of the elements of a constructive fraudulent transfer claim under PUFTA § 5104(a)(2) and 5105. Fid. Bond & Mortg. Co., 371 B.R. at 716-22; accord Titus v. Shearer, 498 B.R. 508, 515-17 (W.D.Pa.2013); In re C.F. Foods, L.P., 280 B.R. 103, 112-15 (Bankr.E.D.Pa.2002); cf. In re Spitko, 2007 WL 1720242, at *4, *15-16 (Bankr.E.D.Pa. June 11, 2007) (stating that the allocation of evidentiary burdens under PUFTA “is not clear,” and finding it unnecessary to decide the question).
2.
The first step in the analysis is to determine whether DCI received any value — direct or indirect — from its payment to BOA. In this proceeding, the parties agree that BOA and DCI had no contractual relationship. BOA was not a creditor of DCI and DCI did not guarantee the Mortgage. Further, BOA concedes that it did not give value directly to DCI in exchange for the Mortgage payments.
BOA posits that DCI received reasonably equivalent value in the form of services from Darryl in exchange for the Mortgage payments that DCI paid to BOA. In other words, BOA contends that DCI realized a benefit “through the dimin-ishment of what DCI might have otherwise have paid Darryl as direct compensation.” (DCI’s Post-Trial Memorandum 20).
The issue is whether the Mortgage payments were part of Darryl’s compensation as DCI’s President and therefore, made for or on account of an antecedent debt *74(thereby indirectly conferring value on DCI).
3
The specific parameters of Darryl’s compensation during his tenure at DCI, particularly during 2005 through 2009, were not well-documented and the testimonial evidence presented at trial did little to clarify matters. Nonetheless, the record is sufficient to support the conclusion that the Transfers to BOA in payment of the Mortgage were not part of Darryl’s compensation as DCI’s President.
Darryl entered into the Employment Agreement with DCI in 1987, but the Agreement did not quantify a base salary amount.21
Notwithstanding the infirmities of the written Employment Agreement and amendment, Darryl’s tax returns and corresponding W-2 Statements establish that he received a static salary. (Exs. D-12D-16). DCI’s expert, Feldman, confirmed that Darryl was receiving $125,000.00 per annum as salary. The difficulty in determining the level of compensation to which Darryl was entitled arises from the fact that as DCI’s President, Darryl, was wholly in control of determining his salary after 2004 and authorized many payments for his personal benefit from DCI’s operating accounts. The question is whether any of these payments comprised part of his salary.
Flitter testified that he periodically reviewed of DCI’s monthly bank statements and identified payments that were made to or for Darryl’s benefit. Once these payments were identified, he determined how the payments were to be categorized on DCI’s books. The payments were accounted for by including them in the L & E Account (representing non-interest advances or loans from DCI to Darryl) or tracking them as commissions.
One factor that Flitter took into account when deciding where to record the payments was the size of the payments. Flit-ter explained that large advances were tracked in the L & E Account. Although Daryl reported the advances as income on his federal income tax returns, DCI did not provide Daryl with either a W-2 Statement or a Form 1099 on account of the L & E Account and commissions, as would be customary for remuneration for services performed. See In re Innovative Communic’n Corp., 2011 WL 3439291, *19 (Bankr.D.V.I. Aug. 5, 2011) (had the company considered payments to third-parties as compensation finding that, company would have issued a W-2 Statement or Form 1099 to its president and CEO).
I infer from the fact that Flitter, the corporate accountant, decided how to record the outlays of cash, that no set agreement was in place providing for payments to third parties on Daryl’s behalf as part of his employment compensation. Further, the Employment Agreement itself does not contain a provision for DCI’s payment of Daryl’s Mortgage payments as part of his compensation. See In re Circuit Alliance, Inc., 228 B.R. 225, 231 (Bankr.D.Minn.1998) (holding that transfers were fraudulent where managing agent was using corporate checking account as his own and was not authorized to draw upon corporate revenues for his personal obligations).
The expert report also establishes that Darryl drew between $430,000.00 and $765,000.00 per year from DCI. Flitter acknowledged at trial that the commissions *75were not tied to any formula pursuant to a contract,22 but rather they were outlays of cash to or for Darryl’s benefit. See Circuit Alliance, 228 B.R. at 281 (finding managing agent failed to sustain burden to show value where payments from corporation were not authorized for his personal expenses); see also In re Prime Mortg. Fin'l, Inc., 2011 WL 4572006, at *4-5 (1st Cir. Feb. 14, 2011) (holding bankruptcy court did not err in finding lack of reasonably equivalent value to debtor when principal was hot entitled to additional compensation for payment of lease); In re Supplement Spot, LLC, 409 B.R. 187 (Bankr.S.D.Tex.2009) (finding no value to debtor where debtor made payments on properties not used to benefit debtor’s business).
Based upon these facts, I find that the Transfers to BOA were not rooted in any legal obligation DCI owed Darryl. The payments for Darryl’s benefit are more accurately characterized as distributions to Darryl on account of his equity interest in DCI, rather than officer compensation. As such, the distributions were treated correctly by Flitter and Darryl as income to Darryl. However, the fact that the distributions are taxable income to Darryl does not make them payments on account of a DCI liability. Generally, payment of dividends are not the payment of a corporate liability. See In re Agricultural Research and Technology Group, Inc., 916 F.2d 528, 540 (9th Cir.1990) (in context of a partnership distribution). In the absence of any DCI obligation to Darryl and corresponding reduction in liability after making the payments, the distributions to Darryl in the form of third party payments to BOA do not represent a transfer for any value given to DCI. See In re Brentwood Lexford Partners, LLC, 292 B.R. 255, 267 (Bankr.N.D.Tex.2003) (LLC did not receive reasonably equivalent value where payments made to the equity holders were dividends made on account of their equity interest, not on account of services rendered and a contractual right to payment). It follows that DCI did not receive reasonably equivalent value in return for the Transfers.
E. Insolvency Under PUFTA § 5105
1.
Insolvency is defined under PUF-TA as follows:
A debtor is insolvent if, at fair valuations, the sum of the debtor’s debts is greater than all of the debtor’s assets.
12 Pa.C.S. § 5102(a).23 This definition is derived from the Bankruptcy Code 11 U.S.C. § 101(32) and is a “balance sheet test” in which the inquiry is whether, at fair valuations, “debts exceed assets.” 12 Pa.C.S. 5102, Committee Comment (1); In re Am. Rehab & Physical Therapy, Inc., 2006 WL 1997431, at *8 (Bankr.E.D.Pa.2006).
*76Feldman, DCI’s expert, opined that DCI was insolvent between 2005 through 2009, with a negative equity in excess of $2 million for each of those years. (See Ex. 301; 1 N.T. 24). He derived this information from the balance sheets that were remitted with the corporate tax returns. (1 N.T. 24). There was no contrary evidence introduced.
BOA nevertheless requests that Feld-man’s opinion be disregarded. BOA argues that the expert report is inaccurate because it is based on a faulty premise: that DCI’s obligation to the David Estate attributable to the $8.7 million Note was a valid, enforceable obligation. BOA contends that the Note DCI carried on its books was not legally unenforceable and should not be considered in a evaluating insolvency under PUFTA. As a result, according to BOA, DCI did not prove that it was insolvent when the Transfers were made.
2.
BOA’s attack on the expert’s opinion is based on the proposition that the statute of limitations had expired, making the Note unenforceable. BOA posits that the Note was subject to the four (4) year statute of limitations under Pennsylvania law. See 42 Pa.C.S. § 5525(a). BOA suggests that DCI defaulted when the Note matured in 1994 and that the limitations period had expired more than ten (10) years before the Transfers.
In response, DCI invokes the acknowledgment doctrine and argues that the statute of limitations had not expired prior to the Transfers.24
Under the acknowledgment doctrine, a statute of limitations may be tolled or its bar removed by a promise to pay the debt. Makozy v. Makozy, 874 A.2d 1160, (Pa.Super.Ct.2005). As the Pennsylvania Superior Court has explained:
A clear, distinct and unequivocal ac-knowledgement of a debt as an existing obligation, such as is consistent with a promise to pay, is sufficient to toll the statute. There must, however, be no uncertainty either in the acknowledgment or in the identification of the debt; and the acknowledgment must be plainly referable to the very debt upon which the action is based; and also must be consistent with a promise to pay on demand and not accompanied by other expressions indicating a mere willingness *77to pay at a future time. A simple declaration of an intention to discharge an obligation is not the equivalent of a promise to pay, but is more in the nature of a desire to do so, from which there is no implication of a promise.
Huntingdon Fin. Corp. v. Newtown Artesian Water Co., 442 Pa.Super. 406, 659 A.2d 1052, 1054 (.1995) (quoting In re Maniatakis’ Estate, 258 Pa. 11, 101 A. 920, 921 (1917)).
In this proceeding, several factors lead me to conclude that the limitations period had not expired and that the Note was enforceable at the time of the Transfers.
First, the evidence was undisputed that interest on the Note was paid until late 2004. Payment on a debt obligation is an affirmative acknowledgment of the debt. United States v. Hemmons, 774 F.Supp. 346, 351 (E.D.Pa.1991) (“Under Pennsylvania law ... a loan payment serves as an acknowledgement of the total outstanding debt, the statute of limitations re-commences running with each payment.”); Newtown Artesian Water, 659 A.2d at 1053 (“There can be no more clear and unequivocal acknowledgement of debt than actual payment”).
Second, DCI acknowledged the Note in writing in at least two (2) instances. The parties entered into a subordination agreement with BMT that subordinated the payment of the Note in favor of the BMT loans. DCI affirmed the subordination agreement, and the Note, in its second loan modification with BMT in 2008.
Third, DCI acknowledged the continuing viability of the Note by carrying the indebtedness on its corporate books each year through and including DCI’s bankruptcy filing.
Based on this evidence, even if the Note was subject to a four (4) year statute of limitations, I conclude that the debt was revived by the acknowledgment doctrine and remained enforceable throughout the period, June 2007 to August 2009, during which the Debtor made payments to BOA on account of Darryl’s personal Mortgage. Therefore, it was proper for Feldman to factor in the Note in his analysis of DCI’s financial condition in this time period.
F. Remaining Assets Being Unreasonably Small Under PUFTA § 5104(a)(2)(i)
As an alternative ground, I find that DCI established that, at the time of the Transfers, its assets were “unreasonably small” within the meaning of PUFTA § 5104(a)(2)©.
In addition to determining that DCI’s negative equity ranged from $2.1 million to $8.7 million from 2005 to 2009, Feldman also examined DCI’s “financial ratios” and compared them to industry data derived from RMA. (1 N.T. 28). Feldman concluded that DCI did not have any return on equity and the debt to assets ratio was over 100%. (1 N.T. 28). Feldman concluded that DCI’s current and quick ratios were substantially low (1 N.T. 28), indicating that DCI had a liquidity problem and was thinly capitalized because
it was heavily ladened with debt and no equity to support the asset composition. And ... from a receivable standpoint, the accounts receivable turnover was well below industry standards, probably because a lot of the receivables that were being carried on the books of the company were significantly old and would not be collectable.
(1 N.T. 29). Feldman’s written report elaborated:
Due to the balances of the receivables, payables and cash, any price decrease would have a significant negative consequence to the company due to its lack of *78cash. Given the high receivable and inventory turnovers, the company’s typical cash balances, which were only a fraction of one month’s overhead made it extremely vulnerable in the event of an economic turndown.
(Ex. 301, at 4).
I credit Feldman’s opinion and find that, at the time of the Transfers, DCI’s “remaining assets ... were unreasonably small in relation to the business.... ” 12 Pa.C.S. § 5104(a)(2)(i).
G.Avoidance of the Transfers
Having found that the Transfers was not made for reasonably equivalent value at a time that DCI was insolvent, I conclude that the Transfers are avoidable under 11 U.S.C. § 544(b) and PUFTA § 5105. In the alternative, having found that the Transfers was not made for reasonably equivalent value at a time that DCI was engaged in a business for which the remaining assets were unreasonably small, I conclude that the Transfers are avoidable under 11 U.S.C. § 544(b) and PUFTA § 5104(a)(2).
H.11 U.S.C. § 550
Section 550(a) of the Bankruptcy Code provides, in pertinent part, that if a transfer is avoided pursuant to 11 U.S.C. § 544(b), “the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property from ... the initial transferee.” 11 U.S.C. § 550(a). Section 550(a) is a “recovery provision” that gives rise to a “secondary cause of action” after the trustee has established an entitlement to avoid a transfer under one of the other Code avoidance provisions. In re Resource, Recycling & Remediation, Inc., 314 B.R. 62, 69 (Bankr.W.D.Pa.2004).
In this proceeding, it is indisputable that BOA was the initial transferee of the Transfers that I have determined are avoidable under § 544(b). The record establishes that the total value of the Transfers was $155,313.84.
Section 550(a) provides two (2) alternative remedies. The bankruptcy court can either award the trustee (1) the actual property, or (2) the value of the property. E.g., In re Taylor, 599 F.3d 880, 890 (9th Cir.2010). The bankruptcy court has discretion in fashioning the remedy. See, e.g., In re Berley Associates, Ltd., 492 B.R. 433, 443 (Bankr.D.N.J.2013). In exercising that discretion, it should consider that § 550(a) is “intended to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.” In re Fine Diamonds, LLC, 501 B.R. 159, 182, 2013 WL 5614231, at *16 (Bankr.S.D.N.Y.2013).
Here, DCI seeks to recover that value in the form of a money judgment. Because the property transfer that has been avoided was the payment of money, I find that the entry of a money judgment in favor of DCI to be an appropriate means of restoring the estate to the position it was in prior to the Transfers. See In re Oberdick, 490 B.R. 687, 710 (Bankr.W.D.Pa.2013); In re Rhodes, Inc., 2008 WL 7880903, at *2 (Bankr.N.D.Ga. Oct. 28, 2008); In re Rae, 2008 WL 190377, at *8 (Bankr.D.Minn. Jan.18, 2008); see also Hagan v. Freedom Fid. Mgt., Inc., 2011 WL 8491076, at *1 (W.D.Mich. Sept. 20, 2011); Fine Diamonds, 501 B.R. at 182-83.
I.Prejudgment Interest
DCI requests that the court award prejudgment interest.
In In re Hechinger Inv. Co. of Delaware, Inc., 489 F.3d 568, 579 (3d Cir.2007), the Court of Appeals observed that, although there is no reference to prejudgment interest in the Bankruptcy Code, the concept is inherent in the § 550(a) remedy *79of awarding the trustee the “value” of the property transferred. The court held that the award of prejudgment interest is “within the discretion of the bankruptcy court,” but that “prejudgment interest should be awarded unless there is a sound reason not to do so.” Id. at 579-80 (internal quotations and citations omitted).25
Although Hechinger was a preference case under 11 U.S.C. § 547, its holding equally applies to transfers avoided as fraudulent under § 544 or § 548. This is because the presumption in favor of prejudgment interest is rooted in 11 U.S.C. § 550(a), a provision that is equally applicable to transfers avoided under § 548 and § 544(b). See, e.g., Donell v. Kowell, 583 F.3d 762, 772 (9th Cir.2008); Matter of Tex. Gen. Petroleum Corp., 52 F.3d 1330, 1339-40 (5th Cir.1995); In re Inv. Bankers, Inc., 4 F.3d 1556, 1566 (10th Cir.1993).26
In this proceeding, BOA has not articulated any grounds for the denial of prejudgment interest as inequitable or as otherwise inappropriate. I perceive no reason to depart from the presumption in favor of awarding prejudgment interest. See In re Philadelphia Newspapers, LLC, 468 B.R. 712, 727 (Bankr.E.D.Pa.2012); cf. In re Bellanca Aircraft Corp. 850 F.2d 1275, 1281 (8th Cir.1988) (affirming bankruptcy court’s discretionary denial of request for prejudgment interest where the preference payment was not ascertainable without a judicial determination); In re Interstate Bakeries Corp., 499 B.R. 376 (Bankr.W.D.Mo.2013) (denying prejudgment interest as inequitable because value of avoidable transfer was not clear prior to trial, making it impossible for the defendant to determine how much it might owe and because trustee’s tactical decisions delayed the adjudication).27
This leaves two (2) final questions.
*80(1) When does interest start to run: date of transfer, date of demand for repayment, date of filing of transfer avoidance complaint?
(2) What interest rate should be applied?
These questions are left to the court’s discretion.
In this proceeding, I need not choose between the date of demand and the date of the filing of the complaint. DCI has limited its request to prejudgment interest from the date of the filing of the original complaint. (See DCI Post-Trial Mem. at 26) ,28
The last task is to set the appropriate interest rate.
On this question, courts take various approaches. The initial divide is between those courts that apply state law and those courts that apply federal law. Compare In re Maui Indu. Loan & Fin. Co., Inc., 2013 WL 2897792, at *10 (D.Haw. June 13, 2013) (state law); In re Advanced Modular Power Sys., Inc., 413 B.R. 643, 684 (Bankr.S.D.Tex.2009) (same), with In re Rivas, 2012 WL 1156406, at *6 (Bankr.E.D.Tenn. Apr. 6, 2012) (federal law); Living Hope, 450 B.R. at 158 (same). Consistent with my conclusion that the award of prejudgment interest is a remedy provided by a federal bankruptcy cause of action, i.e., 11 U.S.C. § 550(a), I hold that the appropriate interest rate is determined by federal law. See n. 25, supra.
In one case in this bankruptcy district, the court applied the federal statutory postjudgment interest rate, see 28 U.S.C. § 1961,29 to calculate the pre-judgment interest. Great-Point Intermodal, 334 B.R. at 364; accord In re Int’l Mgt. Associates, LLC, 495 B.R. 96, 106 n. 8 (Bankr.N.D.Ga. *812013); In re Rivas, 2012 WL 1156406, at *6 (Bankr.E.D.Tenn. Apr. 6, 2012). In In re 1031 Tax Group, LLC, 439 B.R. 84, 87-89 (Bankr.S.D.N.Y.2010), however, the court pointed out that courts have exercised their discretion on this issue and employed various other interest rates, including: (a) statutory rates under state law, (b) IRS underpayment rates; and (c) the bank “prime” loan rate. In 1031 Tax Group, based on “the facts and circumstances in this case,” the court employed the prime rate. Id. at 89.
In the circumstances presented here, involving transfers that I have found to be constructively fraudulent, and DCI’s consent to limit the time frame to the filing of the complaint, I find it appropriate to follow Great-Point Intermodal and apply the interest rate set by 28 U.S.C. § 1961.
Consequently, DCI is entitled to prejudgment interest under 28 U.S.C. § 1961 commencing on October 11, 2011.
VI. CONCLUSION
For the reasons stated above, I have found that: (1) the Transfers totaling $155,313.84 are avoidable as constructive fraudulent transfers pursuant to 11 U.S.C. § 544(b) and 12 Pa.C.S. §§ 5104(a)(2)(i) and 5105; and (2) DCI is entitled to the entry of a money judgment in its favor in the amount of $155,313.84, plus prejudgment interest from October 11, 2011. An appropriate order follows.
ORDER
AND NOW, after trial in the above adversary proceeding and for the reasons stated in the accompanying Opinion,
It is hereby ORDERED and DETERMINED that:
1. The Transfers from the Plaintiff to the Defendants (as defined in the Opinion) totaling $155,313.84 are AVOIDED as constructive fraudulent transfers pursuant to 11 U.S.C. § 544(b) and 12 Pa.C.S. §§ 5104(a)(2)© and 5105.
2. JUDGMENT is ENTERED in favor of the Plaintiff David Cutler Industries, Ltd. and against Defendants Bank of America and Marix Servicing, LLC in the amount of $155,313.84, plus prejudgment interest pursuant to 28 U.S.C. § 1961 commencing on October 11, 2011.
. The parties stipulated that the transfers were made from DCI to Bank of America or its servicing company, Marix Serving, LLC. For ease of reference in this Opinion, I will refer to both defendants as “BOA.”
. Because DCI obtains all of the relief it is seeking by virtue of its success on the two (2) claims identified in the text above, it is unnecessary to decide the merits of DCI’s claims under PUFTA § 5104(a)(1) and 11 U.S.C. § 548(a) and I will not further analyze those claims in this Opinion.
. The transcript from the first day of trial will be cited as "1 N.T.” and from the second day of trial as “2 N.T.”
. The mechanics are not clear. In his testimony, Gayl referred to David conducting a ‘‘recapitalization” in which he redeemed 99.9% of his stock "so that he could then make a gift of a portion of the remaining stock to Darryl’s trust without it being a taxable." (1 N.T. at 169).
. The evidentiary record is unclear whether the base salary or bonus formulas in the Employment Agreement were strictly followed. (See 1 N.T. 128-29). It is equally unclear whether the Employment Agreement was still in effect at the time of the Transfers in 2007 though 2009.
. Farina testified: “I would tell [Darryl] ... that these people called.... It was almost like it was a joke, like if someone calls three or four times and pestered more, they might get paid.” (2 N.T. 30).
. Similarly, another former employee, Howard Chinn, testified that he encountered difficulty in the performance of his sales duties because DCI did not pay vendors. According to Chinn, because DCI did not have paper product, he was inhibited from turning over and reselling the product. Chinn also stated that the cellular telephones that DCI’s sales team used for business were disconnected several times because DCI failed to pay its service provider.
. Darryl explained that whenever DCI needed cash, he would write a check from his personal account and deposit it into DCI's operating account. (2 N.T. 150-151). According to Darryl, after comparing the payments he received from DCI (including salary) to the loans he paid to DCI, he received a net gain of $152,000.00. (Id. at 149-50). Darryl qualified his calculations by stating that he did not consider the L & E Account in his computation.
. “RMA” refers to the Risk Management Associates Annual Statement Studies. The Debtor’s expert testified that the RMA is a nationally recognized publication that breaks down financial information by industry, based *66upon asset value as well as sale value. (1 N.T. at 28).
. DCI also asserts that the Transfers are constructively fraudulent pursuant to § 548(a)(1)(B) of the Bankruptcy Code, which provides that the trustee may avoid a transfer made within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(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 *67incurred, 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;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
The constructive fraud provisions of PUFTA and the Bankruptcy Code are very similar. One difference is that PUFTA distinguishes between transfers that may be avoided only by creditors existing at the time of the transfer (PUFTA § 5105) and transfers that may be avoided by existing and future creditors (PUF-TA § 5104(a)(2)). That difference is immaterial here because there was ample evidence that DCI had actual creditors at the time of the Transfers. Therefore, pursuant to § 544(b), DCI may assert a claim under PUF-TA § 5105 as well as § 5104(a)(2).
The other difference between the statutes does matter. While PUFTA has a four (4) year "reachback,” § 548 of the Bankruptcy Code only has a two (2) year "reachback.” DCI seeks to set aside transfers going back two (2) years and five (5) months. Because PUFTA captures all the Transfers involved in the Amended Complaint, I will analyze the Transfers under the state law provisions.
. In this Opinion, I will use the short cite "Allegheny Health " to refer only to the Pennsylvania Supreme Court opinion.
. See Official Comm, of Unsecured Creditors of Allegheny Health Educ. and Research Found, v. PricewaterhouseCoopers, LLP, 2008 WL 3895559 (3d Cir. July 1, 2008).
. In this vein, the court also stated that the doctrine "permits matters of public policy to be taken into consideration in determining the defense’s availability in any given set of circumstances” and rejected the contention that the defense should be "woodenly applied and vindicated in any and all instances in which the culpability of the plaintiff can be said to be at least equal to that of the defendant.” Allegheny Health, 989 A.2d at 330 (citations omitted).
.Several state courts have dispensed with the requirement that the plaintiff's degree of fault must be equal to or greater than that of the defendant. Pennsylvania has not relaxed this requirement. Allegheny Health, 989 A.2d at 329 n. 19.
. Here DCI was a Pennsylvania corporation; presumably Pennsylvania law will apply.
. BOA points out that DCI’s position is that it was insolvent at all relevant times and that upon insolvency "the fiduciary duty of the controlling shareholders arises in favor of the corporate creditors.” In re Jamuna Real Estate LLC, 365 B.R. 540, 570 (Bankr.E.D.Pa.2007); see also In re Total Containment, Inc., 335 B.R. 589, 603-04 (Bankr.E.D.Pa.2005).
. Interestingly, in Allegheny Health, the Court recognized the similarity between the in pari delicto doctrine and concepts of contributory and comparative negligence defense:
[I]n pari delicto has also been referenced by courts in the negligence setting, for example, in cases involving personal injury or property damage. In this class of cases at least, however, the comparative negligence and contribution statutes serve to cover much of the ground formerly traveled by reference to the common-law maxim.... Thus, where these statutes are applicable, it is only in unusual cases involving intentional wrongdoing on the part of a plaintiff in which in pari delicto may retain relevance.
989 A.2d at 328 n. 17.
. The majority view is that a trustee's statutory avoidance claim is not property of the debtor to which a trustee succeeds under § 541(a); an avoidance claim is not property of the bankruptcy estate. See generally In re Feiler, 218 F.3d 948, 953 (9th Cir.2000) (“what property is part of the bankruptcy estate and what property may be recovered with a trustee's avoidance powers are two separate questions”); In re Gronczewski, 444 B.R. 526, 531 n. 3 (Bankr.E.D.Pa.2011) (citing line of cases holding that property transferred by the debtor pre-petition becomes estate property only after it has been recovered by the bankruptcy trustee); In re Wagner, 353 B.R. 106, 112-13 (Bankr.W.D.Pa.2006) (trustee’s statutory avoidance claim is not property of the estate, but property actually recovered in exercise of the avoidance power is property of the estate).
. All of these decisions holding that the in pari delicto doctrine is inapplicable to bankruptcy trustee avoidance actions may be characterized as a practical application of Pennsylvania Supreme Court’s suggestion that the legislative objectives in creating statutory causes of action and considerations of "public policy” may override the in pari delicto doctrine. See Allegheny Health, 989 A.2d at 330; see also Part V.C.I., supra.
. This is another flaw in BOA’s defense theory. DCI is acting in a representative capacity. While its controlling shareholder (the David Estate) may or may not have been overly passive in permitting Darryl to operate DCI unfettered — an issue I do not reach — the benefits of this action against BOA will not accrue solely to the David Estate (in its capacity as holder of the Note). There are other creditors who could receive an enhanced distribution under the terms of the confirmed chapter 11 liquidating plan if DCI recovers the value of the Transfers. A review of the Claims Register reveals that, without consideration of filed priority claims or claims allowed because they were scheduled as noncontingent, liquidated and undisputed, see Fed. R. Bankr.P. 3003(b)(1), more than 35 claims (other than the David Estate's claim), in excess of $1.3 million, have been allowed.
In this regard, I note further that § 544(b) allows the bankruptcy trustee to access the state law avoidance claims of any actual creditor of the debtor. Thus, even if the David Estate’s conduct could give rise to an in pari delicto defense in a nonbankruptcy PUFTA action, the defense would not be applicable to a PUFTA action brought by any of DCI’s other creditors. DCI, as bankruptcy trustee, can "stand in the shoes" of any of those other creditors. See In re Greater Southeast Community Hosp. Corp. I, 365 B.R. 293, 301-02 (Bankr.D.Dist.Col.2006); In re Porras, 312 B.R. 81, 97 (Bankr.W.D.Tex.2004).
Finally, I observe that it is questionable whether BOA falls within the class of defendants that the doctrine was intended to protect. In Allegheny Health, the court stated that the underlying purpose of imputation "is fair risk-allocation, including the affordance of appropriate protection to those who transact business with corporation." 989 A.2d at 335. In this matter, it is doubtful that BOA was "transacting business” with DCI within the Pennsylvania Supreme Court's meaning. BOA was not in any contractual relationship with DCI. DCI was merely a third party who made payments on behalf of another party (Darryl), who was in the contractual relationship with BOA. Would it ever be appropriate to extend the in pari delicto doctrine to this setting unless, perhaps, the "sole actor” doctrine applies?
. The Employment Agreement may have been amended; however, there is only an unexecuted copy of the amendment and no corroborating testimony that the parties in fact entered into the amendment. The amendment provided for modifications to Darryl’s bonus and did not change his (unspecified) base salary.
. Corroborating testimony was presented by DCI in the form of Deborah Farina and Howard Chinn, who both described Darryl's role at DCI as not involving any type of sales in the period after 2004. (1 N.T. 93, 2 N.T. 41). In fact, both witnesses testified that Darryl’s presence at DCI on a daily basis was limited, with at times, week-long absences.
. In addition, there is a presumption of insolvency under § 5102(b):
A debtor who is generally not paying the debtor’s debts as they become due is presumed to be insolvent. This presumption shall impose on the party against whom the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.
In its post-trial memorandum, BOA asserts that the presumption of insolvency under § 5102(b) was inapplicable. Because I find that DCI proved insolvency under § 5102(a), I do not reach this issue.
. DCI also argues that the Note was under seal and the statute of limitations was twenty (20) years. See 42 Pa.C.S. § 5529(b)(1). BOA disputes that the Note was under seal on the ground that the Note contains only a "corporate seal" not a separate "contractual seal.” BOA also counters that the Note modification "unsealed” the Note, so to speak, rendering the four (4) year limitations period applicable.
Because I conclude that the Note was enforceable under the four (4) year statute of limitations, I need not decide whether the original Note was under seal. Compare In re Joshua Hill, Inc., 199 B.R. 298, 324-26 (E.D.Pa.1996) (distinguishing a corporate seal from a contract signed under seal): Coleman v. Pittsburgh Coal Co., 158 Pa.Super. 81, 43 A.2d 540, 541 n. 1 (1945) (same), with Beneficial Consumer Discount v. Dailey, 434 Pa.Super. 636, 644 A.2d 789 (1994) (rebuttable presumption of a sealed contract arises when a party signs a contract which contains the pre-printed word “seal”).
Nor need I decide whether the extension of the statute resulting from the execution of a contract under seal is vitiated by a subsequent modification of the contract, if the modification is in a writing not executed under seal. See Novice v. Alter, 291 Pa. 64, 139 A. 590, 592 (1927) (if modification did not create new contract, a party may sue on the original agreement under seal); Wachovia Bank, N.A. v. Rosen, 2004 WL 1593644, at *1 (C.P.Phila. June 17, 2004) (subsequent modifications to a Surety Agreement which was signed under seal does not transform the twenty (20) year statute of limitations to a four (4) year statute of limitations).
. One court has identified the following factors to be considered in evaluating the propriety of awarding prejudgment interest:
(1) whether there is a statutory provision to the contrary;
(2) whether the award of prejudgment interest would serve to compensate the injured party;
(3) whether the award is otherwise equitable; and
(4) whether the amount of the contested payment was determined prior to the court’s judgment.
In re Jackson, 249 B.R. 373, 378 (Bankr.D.N.J.2000).
. In proceedings under § 544(b), some courts have looked to state law in evaluating whether to award prejudgment interest. See, e.g., In re Agricultural Research and Technology Group, Inc., 916 F.2d at 540; In re Keefe, 401 B.R. 520, 526-27 (1st Cir. BAP 2009); cf. Supplement Spot, 409 B.R. at 208 (the right to prejudgment interest arises under federal law, but the interest rate is determined under state law). Respectfully, I disagree with these decisions.
The request for prejudgment interest arises in a federal bankruptcy cause of action, i.e., 11 U.S.C. § 550(a), that provides the remedy for the transfer avoided under § 544(b). That the preliminary claim under § 544(b) happens to incorporate by reference the elements of state law in determining whether the transfer may be avoided is distinct from the express federal remedy provided once the transfer is avoided. Accordingly, I see the issue whether prejudgment interest should be awarded as a question of federal law arising under 11 U.S.C. § 550(a), not state law. Accord In re Harlin, 325 B.R. 184, 192 (Bankr.E.D.Mich.2005).
.In Interstate Bakeries, the court also stated broadly that "[a] trustee is not generally entitled to prepetition interest if there existed a good faith dispute as the creditor's liability.” 499 B.R. at 391. Although there are reported cases in which bankruptcy courts have denied prejudgment interest where defendants raised "credible or respectable defenses,” In re Felt Mfg.Co., Inc., 2009 WL 3348300, at *13 (Bankr.D.N.H. Oct. 16, 2009) (citing cases), it may be an overstatement to state the existence of such a defense generally precludes an award of prejudgment interest. In this proceeding, although I certainly would charac*80terize BOA’s defense as "respectable,” in the particular circumstances presented, I am not convinced that the equities are sufficient to overcome DCI’s presumptive right to prejudgment interest.
. In In re Great-Point Intermodal, LLC, 334 B.R. 359, 363-64 (Bankr.E.D.Pa.2005), the court suggested that, as a general rule, prejudgment interest accrues from the date of the pre-complaint demand for payment of the value of an avoidable transfer. Many courts follow this approach, further holding that in the absence of evidence of the date of the trustee's pre-complaint demand for recovery of unauthorized transfers, the court will treat the date of the filing the complaint as the date of demand. In fact, this is what occurred in Great Point Intermodal. Id.; accord In re Living Hope Southwest Med. SVCS, LLC, 450 B.R. 139, 158 (Bankr.W.D.Ark.2011); In re Global Technovations, Inc., 431 B.R. 739, 776 (Bankr.E.D.Mich.2010). But cf. In re Sophisticated Communic'ns, Inc., 2007 WL 3216613, at *4 (Bankr.S.D.Fla. Oct. 24, 2007) (date of complaint used as starting point because preferential transfers were not identified sufficiently in demand letter to put defendant on notice of avoidability of the transfers).
Other courts have awarded prejudgment interest back to the date of the transfers. See, e.g., In re Quebecor World (USA), Inc., 2013 WL 5365404, at *4 (Bankr.S.D.N.Y. Sept. 25, 2013); In re Vaso Active Pharmaceuticals, Inc., 2012 WL 4793241, at *23-24 (Bankr.D.Del.2012) (same). But cf. In re Affinity Health Care, Mgt., Inc., 499 B.R. 246, 266 (Bankr.D.Conn.2013) (running interest from date of demand rather than the date of transfer after avoidance of a preference is appropriate because “the transfer is not improper in any respect at the time it occurs”).
. Section 1961 provides:
(a) Interest shall be allowed on any money judgment in a civil case recovered in a district court.... 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....
(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. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496548/ | CHAPTER 11
ORDER
A. Thomas Small, United States Bankruptcy Court Judge
The matter before the court is its order directing WM Six Forks, LLC (“debtor”) to appear and show cause why its case should not be dismissed or sanctions imposed for failure to remit the appropriate quarterly fee for the second quarter of 2013. At issue is whether a credit bid, exercised by a secured creditor pursuant to § 363(k) of the Bankruptcy Code, is considered a “disbursement” for purposes of calculating the quarterly fee due under 28 U.S.C. § 1930(a)(6). A hearing on the matter was held on September 5, 2013, in Raleigh, North Carolina.
The debtor filed a voluntary petition seeking relief under chapter 11 of the Bankruptcy Code on August 12, 2012. As of the petition date, the debtor owned a mixed-used building in Raleigh, North Carolina, known as Manor Six Forks, which included 298 residential apartments and 14,000 square feet of retail space (the “project”). Prior to the petition date, on July 22, 2008, the debtor executed a building loan agreement in favor of Capmark Finance Inc. (“Capmark Finance”) in the original principal amount of $36,587,800.00 (the “loan agreement”), which was secured by a deed of trust and assignment of rents, profits and income encumbering the project as well as a security agreement and financing statement covering “collateral ... now or thereafter located on the premises of, relate to, or used in connection with the construction, financing, repair, ownership, management, and operations of [the project.]” (collectively, the “security instruments”). On August 14, 2012, Lenox Mortgage XVII LLC (“Lenox Mortgage”), successor-by-assignment to Capmark Finance,1 filed a proof of claim, Claim No. 1, in the amount of $39,027,860.00.
*90The debtor and Lenox Mortgage entered into a purchase and sale agreement, dated December 10, 2012 (the “purchase agreement”), which provided for the sale of the project to Lenox Mortgage for a total purchase price of $37,100,000.00. .The purchase agreement entitled Lenox Mortgage “to exercise its credit bid right pursuant to section 363(k) of the Bankruptcy Code on account of its allowed secured claim in an amount not less than $39,027,860.00....”
On February 15, 2013, the court entered an order confirming the debtor’s plan of liquidation dated December 10, 2012, as amended on February 5, 2013, which provided for the sale of the project pursuant to §§ 363(b) and 1123(a)(5)(D) of the Bankruptcy Code following court-approval of the purchase agreement and certain bidding procedures (the “confirmation order”). The confirmation order provided, in accordance with the terms of the purchase agreement, for the transfer of the project to Lenox Mortgage in full satisfaction of its allowed claim. The confirmation order also approved the procedures and deadline by which qualified bids were to be submitted and scheduled a hearing for the approval of the sale of the project, which was held on March 21, 2013.
There were no other qualified bids, and on March 27, 2013, in accordance with the confirmation order and the purchase agreement, the court entered an order approving sale of the project to Lenox Mortgage in exchange for a credit bid of $37,100,000.00. On April 11, 2013, the debtor closed on the sale of the project, which was purchased by Deancurt Raleigh, LLC (“Deancurt”), the successor-by-assignment to Lenox Mortgage under the purchase agreement. At the closing and pursuant to the purchase agreement, confirmation order and order approving the sale, the project was transferred to Dean-curt in consideration of the credit bid in the amount of $37,100,000.00.
On August 1, 2013, the debtor filed its quarterly fee statement and its post-confirmation report for the quarter, which ended June 30, 2013. The debtor, in this post-confirmation report, listed total disbursements for the second quarter in the amount of $111,821.65, resulting in a quarterly fee of $975.00 that was subsequently paid by the debtor on August 2, 2013. Under the section of the post-confirmation report entitled “Sale of Property,” the debtor stated the “[pjroject was sold to Lenox Mortgage XVII LLC in April of 2013.”
On August 8, 2013, and on the motion of the bankruptcy administrator, the court entered an order directing the debtor to appear and show cause currently before the court for its failure to pay the correct quarterly fee for the second quarter. In her motion, the bankruptcy administrator contends that the debtor owes the maximum quarterly fee of $30,000.00 for the second quarter, based on the credit bid submitted by Lenox Mortgage in the amount of $37,100,000.00.
Section 1930(a)(6) of Title 28 of the United States Code provides that debtors shall pay quarterly fees to the United States Trustee “in each case under chapter 11 of title 11 for each quarter (including any fraction thereof) until the case is converted or dismissed, whichever occurs first.” 28 U.S.C. § 1930(a)(6). The quarterly fees are calculated on a graduated scale that is based on the “disbursements” made during a given quarter:
The fee shall be $325 for each quarter in which disbursements total less than $15,000; $650 for each quarter in which disbursements total $15,000 or more but less than $75,000; $975 for each quarter in which disbursements total $75,000 or more but less than $150,000; $1,625 for *91each quarter in which disbursements total $150,000 or more but less than $225,000; $1,950 for each quarter in which disbursements total $225,000 or more but less than $300,000; $4,875 for each quarter in which disbursements total $800,000 or more but less than $1,000,000; $6,500 for each quarter in which disbursements total $1,000,000 or more but less than $2,000,000; $9,750 for each quarter in which disbursements total $2,000,000 or more but less than $3,000,000; $10,400 for each quarter in which disbursements total $3,000,000 or more but less than $5,000,000; $13,000 for each quarter in which disbursements total $5,000,000 or more but less than $15,000,000; $20,000 for each quarter in which disbursements total $15,000,000 or more but less than $30,000,000; $30,000 for each quarter in which disbursements total more than $30,000,000. The fee shall be payable on the last day of the calendar month following the calendar quarter for which the fee is owed.
28 U.S.C. § 1930(a)(6).2 “Disbursements” is not defined by § 1930(a)(6), its legislative history or the Bankruptcy Code. See, e.g., Walton v. Jamko, Inc. (In re Jamko, Inc.), 240 F.3d 1312, 1314 (11th Cir.2001); Robiner v. Danny’s Mkts., Inc. (In re Danny’s Mkts., Inc.), 266 F.3d 523, 525 (6th Cir.2001) (stating that “Congress has failed to define ‘disbursements’ anywhere in either the bankruptcy code or its legislative history[ ].... ”). Because quarterly fees are assessed on a graduated scale based upon aggregate disbursements in a given quarter, the definition of that term is critical.
The parties dispute the meaning and the scope of the term “disbursements” in § 1930(a)(6). The bankruptcy administrator contends that disbursements should be afforded a broad interpretation to include the successful credit bid of $37,100,000.00 exercised by Lenox Mortgage pursuant to § 363(k) at a public sale and should be included for purposes of calculating the appropriate quarterly fee pursuant to § 1930(a)(6). A broad interpretation, according to the bankruptcy administrator, is consistent with the plain meaning of the term as well as the purpose and legislative history of § 1930(a)(6). The debtor, on the other hand, disputes that the credit bid exercised by Lenox Mortgage falls within the definition of “disbursements” upon which the quarterly fee is calculated. In support of its position, the debtor relies upon the closing statement, which indicates that the debtor did not receive nor did it make payments totaling $37,100,000.00 in exchange for the project or in partial satisfaction of the existing debt owed to Lenox Mortgage.
The term “disbursement” is defined as “[t]he act of paying out money, commonly ... in settlement of a debt or account payable.” Black’s Law Dictionary 530 (9th ed. 2009); see Merriam-Webster’s Dictionary & Thesaurus 225 (2007) (defining disbursement as “the act of disbursing” or “funds paid out”); Id. (indicating that the term “disburse” is synonymous with “expend” and “distribute”); Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979) (“A fundamental canon of statutory construction is that ... words will be interpreted as taking their ordinary, contemporary, common meaning.”).
*92Sections 326(a) and 543(2), two unrelated sections of the Bankruptcy Code, shed light on the issue before the court. Section 326(a), which sets the limits placed on the compensation of chapter 7 and chapter 11 trustees, is based on “moneys disbursed.” 11 U.S.C. § 326(a). The use of the term “moneys” in § 326(a) circumscribes the word “disbursed” and suggests that disbursement means something more than monies. See, e.g., In re Lan Assocs. XI, L.P., 192 F.3d 109, 116 (3d Cir.1999) (concluding that the value of a credit bid may not be included in a trustee’s compensation base under § 326(a)); U.S. Trustee v. Tamm (In re Hokulani Square, Inc.), 460 B.R. 763, 777-78 (9th Cir. BAP 2011) (concluding that the plain meaning of the phrase “moneys disbursed” present in § 326(a), which is used to calculate the cap placed on a trustee’s compensation, cannot include secured creditors’ credit bids). Section 543, setting forth the obligations of a custodian, utilizes the term “disbursement” in subsections (a) and (c). See 11 U.S.C. § 543(a), (c). Section 543(a) prohibits a custodian, with knowledge of the commencement of the debtor’s case, from “mak[ing] 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....” Id. § 543(a). Plainly, the prohibition with respect to disbursements by a custodian present in § 543(a), which includes disbursement of “offspring,” is broader than the disbursement of money. Id.
Disbursements, for purposes of calculating the quarterly fee under § 1930(a)(6), has been interpreted broadly to include all payments, whether made directly by the debtor or by a third party on the debtor’s behalf. See, e.g., U.S. Trustee v. Hays Builders, Inc. (In re Hays Builders, Inc.), 144 B.R. 778, 780 (W.D.Tenn.1992) (“The ordinary, plain meaning of the statutory language requires that all disbursements, whether direct or through a third party, be included in the calculation of fees due ... under § 1930(a)(6).”); U.S. Trustee v. Wemerstruclc, Inc. (In re Wernerstruck, Inc.), 130 B.R. 86, 89 (D.S.D.1991) (holding that prepayments the debtor made to a lender pursuant to modified settlement agreement that reduced the balance of loan and accrual of interest were considered disbursements for purposes of calculating the quarterly fee); In re Warren Oil Props., LLC, No. 02-02273-5-ATS, at 4-6 (Bankr.E.D.N.C. Nov. 12, 2003) (holding that payments made by third parties on behalf of debtors are disbursements notwithstanding the debtors’ lack of control over the funds); In re Huff, 270 B.R. 649, 653 (Bankr.W.D.Va.2001) (concluding that payments the debtor made in connection with a transaction to refinance an existing debt, which was satisfied by the proceeds from a new loan, was a disbursement for purposes of 1930(a)(6)); In re Pars Leasing, Inc., 217 B.R. 218, 220 (Bankr.W.D.Tex.1997) (holding that “disbursements” for purposes of calculating the quarterly fee included payments made by third parties on the debtor’s behalf); In re Flatbush Assocs., 198 B.R. 75, 78 (Bankr.S.D.N.Y.1996) (characterizing the rent paid by the debtor’s subtenants directly to the debtor’s landlord as “disbursements” for purposes of calculating the quarterly fee). Although not defined, “Congress intended to include in the calculation of UST fees all payments made by a Chapter 11 debtor, from whatever source and to whomever paid.” Huff, 270 B.R. at 650; see St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525, 1534 (9th Cir.1994) (addressing whether “disbursements” included payments made directly to a secured creditor by a third-party from the sale proceeds of *93property serving as security and holding that “a plain language reading of the statute shows that Congress clearly intended ‘disbursements’ to include all payments from the bankruptcy estate.”); but see U.S. Trustee v. Tamm (In re Hokulani Square, Inc.), 460 B.R. 763, 777-78 (9th Cir. BAP 2011) (concluding that that the plain meaning of the phrase “moneys disbursed” present in § 326(a), which is used to calculate the cap placed on a trustee’s compensation, cannot include secured creditors’ credit bids).
The congressional purpose underlying the United States Trustee Program and quarterly fees lend additional support to a broad reading of the term “disbursements” in § 1930(a)(6).3 Section 1930(a)(6) was established by Congress as a “revenue-generating mechanism” operating to fund the United States Trustee Program by “imposing the costs ... on ‘the users of the bankruptcy system, not the taxpayer.’ ” Jamko, 240 F.3d at 1315 (characterizing quarterly fees imposed by § 1930(a)(6) as “akin to a user tax.” (citations omitted)); In re Cash Cow Servs. of Fla., LLC, 249 B.R. 33, 37 (Bankr.N.D.Fla.2000) (finding quarterly fees to be “akin to a tax” and noting that “[t]ax laws are to be construed in a light most favorable to the taxing authority as a matter of public policy.” (citation omitted)).
Section 363(k) of the Bankruptcy Code provides:
At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.
11 U.S.C. § 363(k). With respect to credit bidding, the Supreme Court recently recognized that “[t]he ability to credit-bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price[]” by “enabl[ing] the [secured] creditor to purchase the collateral for what it considers the fair market price (up to the amount of its security interest) without committing additional cash to protect the loan.” RadLax Gateway Hotel, LLC v. Amalgamated Bank, — U.S. -, 132 S.Ct. 2065, 2070 n. 2, 182 L.Ed.2d 967 (2012). Credit bidding “allows the secured creditor to bid for its collateral using the debt it is owed to offset the purchase price[,]” which “ensures that, if the bidding at the sale is less than the amount of the claim the collateral secures, the secured creditor can, if it chooses, bid up the price to as high as the amount of its claim.” Quality Props. Asset Mgmt. Co. v. Trump Va. Acquisitions, LLC, No. 3:11— CV-00053, 2012 WL 3542527, at *7 n. 14 (W.D.Va. Aug. 16, 2012). A secured creditor’s purchase of assets, that are subject to its lien, by credit bid “is the equivalent of a cash purchase.” Spillman Inv. Grp., Ltd. v. Am. Bank of Tex. (In re Spillman Dev. Grp., Ltd.), 401 B.R. 240, 253 (Bankr.W.D.Tex.2009) (citations omitted); see Lexington Coal Co. v. Miller, Buckfire, Lewis Ying & Co. (In re HNRC Dissolution Co.), 340 B.R. 818, 824-25 (Bankr.E.D.Ky.2006). As observed by the court in Lexington Coal, “[c]learly 11 U.S.C. § 363(k) treats credit bids as a method of payment — the same as if the secured creditor has paid cash and then immediately *94reclaimed that cash in payment of the secured debt.” 340 B.R. at 824-25.
Similar to the credit bid in the instant case, courts have found a wide range of payments to constitute disbursements for purposes of calculating quarterly fees, including those where sale proceeds are utilized to retire existing debt. See, e.g., See In re FPD, LLC, No. 10-30424(PM), at 9 (Bankr.D.Md. May 26, 2011); Huff, 270 B.R. at 652-53; Munroe, 2011 WL 1157542, at *1. In Huff, the court concluded that the plain meaning of the term “ ‘disburse’ ... seems to sweep broadly enough to cover the refinance transaction ... since money was paid out to retire a debt.” Id. at 651. The court held that retiring existing debt from funds obtained through the new loan, although merely a substitution of debt that did not result in any benefit to the estate, was a disbursement because the existing loan “was retired by a payment made by the debtor or on behalf of the debtor and it was made to a creditor.” Id. at 653. Similarly, the court in Munroe held that the satisfaction of underlying debt from the proceeds realized from several sales of real property serving as security were disbursements falling under the purview of § 1930(a)(6). 2011 WL 1157542, at *1. The court opined as follows:
The distribution of the proceeds from the sale of the properties went to pay obligations that were the sole legal obligation of the debtor. The court con-eludes that these payments are disbursements that fall within the statute in question, and thus must be included in the computation of quarterly fees.
Id. (relying on Jamko, Huff and In re Central Copters, 226 B.R. 447 (Bankr.D.Mont.1998), to observe that “[a]ll disbursements, whether made directly or through a third party, are included in the calculation [of quarterly fees].” Munroe, 2011 WL 1157542, at *1 (citation omitted)). In FPD, the court required that the quarterly fees “be paid from all sales approved[,] ... including [properties purchased by Wells Fargo through credit bids.... ” No. 10-30424(PM), at 9.4
Based on the foregoing and utilizing a broad interpretation of the term “disbursements” under § 1930(a)(6), the court finds that the credit bid submitted by Lenox Mortgage is a disbursement and should be included in the calculation of the applicable quarterly fee. See FPD, No. 10-30424(PM), at 9. Accordingly, the quarterly fee owed for the second quarter is $30,000.00, $975.00 of which has been paid by the debtor.
SO ORDERED.
. The loan agreement, security instruments, and all rights and interests thereunder, were subsequently assigned by Capmark Finance to Berkadia Commercial Mortgage LLC ("Ber-kadia”) in a series of assignments dated December 9, 2009, and December 16, 2009. Berkadia, in turn, assigned its rights and interests under the loan agreement and security instruments to the Secretary of Housing and Urban Development ("HUD”) on September 20, 2011. On July 9, 2012, HUD assigned all rights, title and interests under the loan agreement and security instruments to Lenox Mortgage.
. The assessment of quarterly fees in the three judicial districts in North Carolina, none of which are part of the United States Trustee Program as defined in 28 U.S.C. § 581, are governed by 28 U.S.C. 1930(a)(7), which provides that “the Judicial Conference of the United States may require the debtor in a case under chapter 11 of title 11 to pay fees equal to those imposed by paragraph (6) of this subsection.” 28 U.S.C. § 1930(a)(7).
. To fund the United States Trustee Program, Congress created the United States Trustee System Fund, see 28 U.S.C. §§ 586(a), 589a(a), a significant portion of which is made up of the quarterly fees assessed to chapter 11 debtors pursuant to § 1930(a)(6). Jamko, 240 F.3d at 1315.
. Wells Fargo, the secured creditor in FPD, and the United States Trustee disagreed whether quarterly fees were payable on the properties purchased via the credit bid of Wells Fargo. No. 10-30424(PM), at 10. However and to facilitate entry of an order approving the sales, the debtor and Wells Fargo agreed to retain sufficient funds to pay the estimated quarterly fees on the properties purchased by credit bid. Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496549/ | OPINION AND ORDER
ENRIQUE S. LAMOUTTE, Bankruptcy Judge.
This case is before the court upon CPG/GS PR NPL, LLC’s (hereinafter referred to as “CPG” or “Creditor”) Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of CPG/GS’ Cash Collateral alleging that Builders Group & Development Corp. (hereinafter referred to as “Builders Group” or “Debtor”) has no right to use CPG’s post-petition rents because the same were foreclosed and ownership of the rents was transferred pre-petition to CPG pursuant to Articles 1416 et seq. of the Puerto Rico Civil Code (“PR Code”), 31 L.P.R.A. § 3941 et seq. CPG alleges that the rents do not constitute property of the estate pursuant to 11 U.S.C. § 541(a)(6) (Docket No. 35). Builders Group in its Opposition to CPG’s Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of Cash Collateral argues that: (i) the Debtor’s interest in the rents, which constitute cash collateral, can only be extinguished by a foreclosure of the rent producing collateral pursuant to state law; thus the foreclosure of the Cu-pey Professional Mall is required to effect a foreclosure on the post-petition rents; and (ii) since the Cupey Professional Mall is owned by Builders Group and is property of the estate pursuant to 11 U.S.C. § 541(a)(1), the rents derived from property of the estate form part of the bankruptcy estate under 11 U.S.C. § 541(a)(6). For the reasons set forth below this court finds that the rents constitute property of the estate under state law and that the same constitute cash collateral to CPG’s debt. The court also finds that the Debt- or has not provided adequate protection to *99CPG for its two separate interests; namely, its mortgage on the real property and its security interest in the post-petition rents.
Jurisdiction
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1384(b) and 157(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(E) and (M). Venue of this proceeding is proper under 28 U.S.C. §§ 1408 and 1409.
Procedural Background
Builders Group filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on June 12, 2013. The Debtor included CPG in its Schedule DCreditors Holding Secured Claims — as a secured creditor of two (2) mortgage loans from 08/10/2011, which amount to $9,400,000.00. The Debtor listed the value of the property subject to the mortgage lien in the amount of $11,900,000.00.
On July 10, 2013, CPG filed a Notice of Foreclosure of Rents and Adequate Protection informing that: (i) on or around April 7, 2011 it foreclosed on the rents of Debtor’s properties, thus the same does not constitute property of the estate pursuant to 11 U.S.C. § 541; and (ii) to the extent that it has not foreclosed on certain of Debtor’s rents pre-petition, it does not consent to the use of its cash collateral, and thus demands adequate protection of its secured interests in the properties of Debtor (Docket No. 33). On July 11, 2013, Builders Group filed a Motion in Response to Notice of Foreclosure of Rents and Adequate Protection alleging that: (i) CPG fails to attach any documentation to support its allegation that it foreclosed on the rents of Builders Group properties on or around April 7, 2011; (ii) the only foreclosure that Builders Group is aware of is a complaint for foreclosure filed on August 16, 2011, months after the alleged foreclosure of rents; (iii) “[u]pon information and belief, Builders [Group] was current with Firstbank at the time of the discounted sale to CPG and CPG continued to collect, but is mute with respect to accounting for the application of the rents to the loan for approximately the last eighteen months and the disappearance of $500,000 in escrow held by Firstbank at the time of the sale;” (iv) “Builders [Group] contends that the $2,500,000.00 of equity cushion in the Cupey Professional Mall provides adequate protection to CPG’s interest in the collateral, but also offers to pay $23,961.00 in monthly adequate protection payments, essentially non-default rate interest, and well beyond the $15,000.00 tentatively agreed to between the parties prepetition;” and (v) Builders Group intends to file a motion for the use of cash collateral and objects to CPG’s Notice of Foreclosure (Docket No. 34).
On July 12, 2013, CPG filed an Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of CPG/GS’ Cash Collateral alleging: (i) Builders Group has no right to use CPG’s cash collateral, given that the same was foreclosed and transferred pre-petition to CPG and does not constitute property of the estate; (ii) Builders Group has no equity in its assets because they are substantially encumbered by CPG; and (iii) “there exists no reorganization or refinancing alternatives that could even remotely provide a viable exit strategy pursuant to which creditors, such as CPG/GS, will be paid the amount and value of their security interest” (Docket No. 35). CPG argues that the cash collateral, in this case the rents, are not property of the estate and thus belong to CPG based on the following: (i) other courts have applied a similar reasoning to pre-petition foreclosures of rents such as the one performed by CPG pursuant to the foreclosure letters; (ii) in In re Northwest *100Commons, Inc., 136 B.R. 215, 219 (Bankr.E.D.Mo.1991), the Court held that after a secured lender had exercised its contractual right under the mortgage deed to notify the debtor’s tenants to pay the secured lender directly all amounts due for rents as a result of a default by the debt- or on its obligations to the secured lender, such notification constituted a pre-petition foreclosure on the cash collateral (“When a mortgagee completes all steps necessary to enforce its rights under an assignment of rent clause pre-petition, all interests of the Debtor in the rents are extinguished and the rents do not become property of the estate or cash collateral”) Id. at 220.; (iii) in In re Century Investment Fund VIII Limited Partnership, 937 F.2d 371, 375 (7th Cir.1991), the Court stated in dicta that, “if a mortgagee has protected its security interests in a mortgagor’s property and rental proceeds by perfecting its liens under the requirements of state law, then those interests do not later become the property of the bankruptcy estate;” (iv) in In re VIII South Michigan Associates, 145 B.R. 912, 914-915 (N.D.Ill.1992), the court followed a similar reasoning by stating that a creditor who sent demand letters to tenants after the debtor’s default but prior to the debtor’s chapter 11 proceeding, divested the bankruptcy estate from ownership of the rents because the creditor had “perfected” and “enforced” its rent assignment;” (v) “... other cases have reached similar results, concluding that if a creditor takes sufficient steps to ‘enforce’ the assignment (usually making demand after default and sending notices to tenants for direct payment of the rents), the creditor cuts off ownership of the rents because the creditor has taken the steps required under the assignment and state law to entitle it to immediate possession of the rents. See In re South Pointe Associates, 161 B.R. 224 (Bankr.E.D.Mo.1993)(“The court finds that under Missouri law, a creditor holding an assignment of rents is entitled to possession of the rents after default and sending demand letters to tenants. Because the creditor completed these enforcement steps pre-petition, the court rules that the creditor cut off the debtor’s ownership in the rents and the rents were not property of the estate”); In re Mount Pleasant Limited Partnership, 144 B.R. 727 (Bankr.W.D.Mich.1992) (“The court finds that under Michigan assignment of rents statute, the holder of assignment of rents is entitled to possession of rents upon serving a notice of default and demand for rents on tenants. Once these enforcement steps are completed, the creditor cuts off debtor’s ownership of the rents”) (Docket No. 35). CPG further alleges that: “... following Puerto Rico law, properly sent the [f]oreelosure [Betters prior to the [p]etition date and, accordingly, and in line with the cases described above, divested the Debtor of all title and interest in the foreclosed rents” (Docket No. 35).
On July 15, 2013, the Debtor filed a Motion for Entry of an Interim Order on an Expedited Basis requesting (i) authorization to use the cash collateral; namely the rents generated by the shopping mall, (ii) to grant the adequate protection monthly payments in the amount of $23,961.00 to CPG and (iii) the scheduling of a final hearing to determine whether the rents (cash collateral) are property of the estate or of the Creditor (Docket No. 38). On July 18, 2013, Builders Group filed a Motion in Opposition to CPG’s Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of Cash Collateral arguing that the post-petition rents are property of the estate based on the following: (i) the cases cited by CPG conclude that; “the debtor’s interest in the rents, which consti*101tuted cash collateral, can be extinguished only by a foreclosure of the rent producing collateral pursuant to state law;” (ii) “[alp-plied to the present case, CPG has to conclude that foreclosure on the Mall is required to effect a foreclosure on the post-petition rents;” (iii) “[t]he statutory language set forth in §§ 363(a), 363(c)(2)(B), 541(a)(6) and 552 contemplates rents, including those which are the subject of perfected assignments, as property of the estate. In this sense, the notification to tenants and collection of rents prepetition by a mere letter notice is really an enforcement mechanism for collection, rather than the ultimate foreclosure of an interest in property;” (iv) in In re Mullen, 172 B.R. 473, 475 (Bankr.D.Mass.1994) the court stated; “[i]n collecting rents, a creditor holding a rent assignment is obviously realizing upon its collateral. The collection of rents is therefore foreclosure of a security interest under another name. Assuming a debtor has reasonable prospects of reorganization, a creditor otherwise entitled to foreclose may do not do so unless cause, including lack of adequate protection, exists to vacate or modify the automatic stay against foreclosure;” and (v) “[i]n the present case, where the assignment recognized the prior construction loan agreement and granted Builders the right to collect the rents and CPG (then Firstbank) the right to collect only in the event of default under the notes, and only until such time as the default is cured, it is apparent that it affords CPG (Firstbank), as lender-assignee, only additional security for the debt” (Docket No. 40).
On July 19, 2013, the court entered an Interim Order authorizing Builders Group to use cash collateral only for operating expenses as provided for in the cash flow projections, granting replacement liens, and ordering the Debtor to make monthly payments of $23,961.00 due on the 15th of each month. The court scheduled a hearing for August 26, 2013 (Docket No. 41).
On the same date, that is, July 19, 2013, CPG filed a Motion to Alter or Amend Interim Order (Docket No. 4I) and Opposition to Debtor’s Use of Cash Collateral premised on the following: (i) the cash collateral is the property of CPG and thus does not form part of the bankruptcy estate; (ii) alternatively, Builders Group cannot show the existence of sufficient adequate protection to warrant the use of CPG’s cash collateral because there is no proof of an existing equity cushion and the Debtor does not have the financial capacity to make the monthly payments to CPG; and (iii) the Debtor should not be allowed to relitigate in this forum issues which constitute res judicata (Docket No. 42). On July 20, 2013, Builders Group filed a Motion in Opposition to CPG’s Motion to Alter or Amend Interim Order (Docket No. II) arguing that CPG has failed to show a manifest error of law or fact, newly discovered evidence or previously unavailable evidence, manifest injustice or an intervening change in controlling law, and thus its request to alter or amend interim Order under Fed.R.Civ.P. 59(e) should be denied. Builders Group also states that at the 341 meeting of creditors, CPG was concerned about whether Builders will assume or reject the commercial lease contracts. Builders Group contends that the logical conclusion is that the rents are property of the estate, given that the assumption or rejection of the leases determines whether the rents even exist (Docket No. 43). On July 22, 2013, the court ordered and noticed that the objection to Debtor’s use of cash collateral and to alter or amend the interim Order entered on 07/19/2013 filed by CPG (Docket No. 42) and Debtor’s opposition to the same (Docket No. 43) be heard at the hearing scheduled for 08/26/2013 (Docket No. 45).
*102On July 29, 2013, CPG filed an Urgent Motion to Schedule Hearing to Consider CPG/GS’ Foreclosure of Rents (Docket No. 35) because it is CPG’s position that the determination of the urgent motion is not only indispensable for these proceedings, but it is also mandatory in order for Builders Group to persuade the court to approve the cash collateral motion since the court must first resolve whether the cash collateral constitutes part of the Debtor’s bankruptcy estate (Docket No. 50). CPG also filed a Motion for Leave to Reply to Debtor’s Opposition to Urgent Motion on Foreclosure of Rents requesting a seven (7) day extension of time until August 5, 2013 to file its reply (Docket No. 51). On August 1, 2013, Builders Group filed an Urgent Motion in Opposition to CPG’s (A) Request for Urgent Hearing and (B) Leave to File Reply (Docket No. 54). On August 2, 2013, CPG filed its Supplement to its Rule 9023 Motion (Docket No. 4-2) to Amend and Clarify Interim Order Authorizing Debtor to Use Cash Collateral (Docket No. 41) including these additional arguments: (i) “[t]he lessees received pre-petition notice of default, and the assignment previously perfected, completing then the transfer from Debtor to CPG of whatever property rights Debtor had in each lessee’s rent payable;” (ii) “[t]he language of the Collateral Assignment paragraph (1) (as well as paragraph SEVENTH (b) of ... each of the Mortgage Deeds), underscores the conclusion that, under Puerto Rico law, the rents became CPG/GS’ property when the lessees received notice of Debtor’s default and the assignment of rents;” and (iii) CPG requests that the Interim Order be clarified or amended to clarify that the rents from the Cupey Professional Mall subsequent to the default notice date (April 7, 2011), are property of CPG and thus, Debtor may not use such property (Docket No. 55).
On August 2, 2013, the court scheduled an expedited hearing for 08/06/2013 to consider: (i) the Urgent motion to schedule hearing to consider CPG/GS foreclosure of rents (Docket No. 50) filed by CPG and Debtor’s Urgent motion in opposition (Docket No. 54) (Docket No. 59).
On August 5, 2013, the Debtor filed a Motion to Strike Supplement to CPG/GS’ Rule 9023 Motion (Dkt. No. 55) alleging that CPG raises new arguments that should have been presented in its earlier memorandum and rehashes old arguments, violating the requirements for leave to reply found in L.Cv.R. 7(c) (D.P.R.2009) and P.R. LBR 1001-1 (b) (Docket No. 55). On August 5, 2013, CPG filed its Preliminary Response to Docket No. 54 (Docket No. 65). On August 5, 2013, CPG filed its Reply to Debtor’s Opposition to CPG/GS’ Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of Cash Collateral (Docket No. 40) focusing on the indispensable threshold issue; namely whether CPG is the rightful owner of the rents generated by the Cupey Professional Mall pursuant to Puerto Rico Law (Docket No. 66). CPG contends that it is the rightful owner of the rents under Puerto Rico Law based on the following arguments: (i) the perfection of assignment of rents in Puerto Rico is governed by the Civil Code of Puerto Rico (“Civil Code”) as the same were expressly excluded from the Puerto Rico Commercial Transactions Act (“PR UCC”) pursuant to § 9-104(j). Laws of P.R. Ann. Tit. 19 § 2004(j). “The exclusion is a recognition that the differences of real property law from jurisdiction to jurisdiction makes uniformity extremely unlikely, as well as the fact that courts, and commentators alike, have considered that a right to receive rents under a lease agreement is more properly characterized as a real estate interest, hence, not subject to application under Article 9 of the UCC;” (ii) Arti*103cle 1065 of the PR Civil Code provides that all the rights acquired by virtue of an obligation are transmissible, subject to the law and absent a stipulation to the contrary. 31 L.P.R.A. § 3029. The Civil Code does not specifically define the term “assignment,” instead it lists the effects that assignments have over contracting parties, as well as other third parties;” citing José Ramón Vélez Torres, Derecho de Obligaciones, 2nd ed., p. 251, Universidad Interamericana de Puerto Rico, Facultad de Derecho, 1997; (iii) Article 1416 of the Civil Code states that; “[t]he assignment of a credit, right, or action shall produce no effect against a third person but from the time the date is considered fixed, in accordance with §§ 3273 and 3282 of this title” Laws of P.R. Ann., Tit. 31 § 3941. Pursuant to Article 1416, an assignment will not be effective as against third parties until after the time the date is considered fixed; (iv) the Civil Code provides the following methods by which an assignment is considered to have a fixed date; namely, (a) execution of the assignment on a public document; (b) the filing of a private assignment document in a public registry, and/or (c) delivery of the assignment to a competent public official. 31 L.P.R.A. §§ 3273 and 3282. The Puerto Rico Supreme Court in Building Maintenance Services, Inc. v. Hato Rey Executive Building, Inc., 109 D.P.R. 656, 659 (1980) held that the fixed date requirement for an assignment contract pursuant to Article 1416 was satisfied if the document was executed before a Notary Public under an affidavit; (v) “Once the assignment meets the fixed date criteria of article 1416, the same becomes binding, valid and enforceable erga amnes. At such time, the assignee acquires full rights ownership over the assigned obligations inasmuch as the assignment is ‘an operation by which a third party, in substitution of the original creditor, becomes the effective titleholder of an obligation which, notwithstanding remains the same” citing José Ramón Vélez Torres, Derecho de Obligaciones, 2nd ed., p. 251, Universidad Interamericana de Puerto Rico, Facultad de Derecho, 1997, quoting Federico Puig Peña, Compendio de Derecho Civil Español, To. III, #rd. ed., Madrid, Ediciones Pirámide, 1976, p. 37; (vi) “[AJrticle 1417 of the Puerto Rico Civil Code requires that, in order to effectively link the debtor with the assignee of a credit, notice to the debtor of the assignment (or proof of knowledge of the same) is required. Laws of P.R. Ann., Tit. 31 § 3942; and (vii) the Civil Code does not specify a particular form or manner of the notification required to link a debtor with an assignee. It only requires that the debtor have knowledge as to the existence of the assignment rather than a specific notice document” Eduardo Vázquez Bote, Tratado Teórico, Práctio y Crítico de Derecho Privado Puertorriqueño, T. V, § 8.5, p. 334, Equity Publishing, 1991. CPG further argues that in the instant case, it acquired ownership of the rents pursuant to the Civil Code and state jurisprudence based upon the following: (i) Debtor entered into a “Collateral Assignment of Lease Agreements and Rents” (the “Assignment”) of the rents generated by the Shopping Center with CPG/GS (then FBPR) on May 18, 2004. The Assignment was executed by the parties before a Notary Public and certified through an affidavit;” (ii) Pursuant to Article 1416 of the PR Civil Code and interpretative jurisprudence, “the Assignment became binding, valid, and opposable against third parties on May 18, 2004.” “... CPG/GS, as the substitute of FBPR, acquired conditional title over the rents as of May 18, 2004, subject to the declaration of a default by Secured Creditor;” (iii) prior to the petition date, Builders Group defaulted on its obligations under the Loan Documents, which defaults were duly notified to Debt- *104or; (iv) “Debtor recognized these defaults, as well recognized the validity and effectiveness of the Assignment (and their notifications thereto), and even ratified and agreed to CPG/GS’ continued collection of the Assignment on August 24, 2010 (the “Forbearance Agreement”);” (v) as a result of such defaults, on or about April 7, 2011, CPG sent the foreclosure letters to certain of the Debtor’s tenants as authorized by the Civil Code, the Cash Collateral Security Agreements, the Assignment and the Forbearance Agreement; and (vi) due to the defaults, CPG commenced a state court case on August 16, 2011 for foreclosure of mortgages and collection of monies before the Puerto Rico Court of First Instance, San Juan Section, Civil Num. KCD2011-1828 in which CPG obtained a Judgment in its favor. The Judgment was upheld in the Puerto Rico Court of Appeals and the Supreme Court of Puerto Rico (Docket No. 66).1
An evidentiary hearing was held on August 6, 2013.2 The following matters were addressed: (i) Builders Group status report; (ii) the U.S. Trustee’s request for a fourteen (14) day period of time to state its position regarding the application to employ of CPA/Insolvency and Restructuring Advisors, Monger Robertin & Asociados, Inc. (Docket No. 13); and (iii) the contested matter regarding the foreclosure of the rents (Docket Nos. 74 & 77). The Debtor and CPG agreed to submit jointly Exhibits I and II which correspond to the Collateral Assignment of Lease Agreement and the Forbearance Agreement, respectively. Debtor objected to Identification III, the foreclosure letters and Identification IV, the state court Judgment. The court stated that it may take judicial notice over the state court Judgment (Docket No. 77). CPG proffered at the hearing that the basic facts are the following: (1) “[o]n May 2004, the Debtor executed a collateral assignment of lease agreement and rights (Joint Exhibit I) by which the Debtor assigned to the predecessor Lender the rents that were generated by the Cupey Professional Mall as collateral for the loan;” (2) “Debtor in the year 2010 defaulted on its obligations under the agreement with the Lender and thus entered into a forbearance agreement (Joint Exhibit II) by which Debtor acknowledges that there was a default, that the rents were notified or foreclosed, acknowledges and amends the collateral assignment of leases to provide that the conditional assignment based upon default, the default language would be stricken out and the assignment was not in the event of default but rather an assignment of these rents;” (3)[t]he Debtor subsequently defaulted and the loans were assigned to CPG/GS. CPG/GS filed a col*105lection of monies action in state court and obtained a Judgment and the same reflects that the defaults continued;” and (4) “[t]he letters (Exhibit 3) sent jointly by First-Bank and CPG/GS on April 7, 2011 instructing all lessees that all rent payments under the leases of the Cupey Professional Mall must be made to CPG/GS” (Docket No. 77). The court noted at the hearing that it is an uncontested fact that the lessees were given notice that they should remit payment to CPG, thus the court does not need the letters. The court granted the Debtor and CPG five (5) working days to supplement their legal memorandum and thereafter the matter regarding whether the rents are property of CPG or collateral in favor of CPG will be deemed submitted (Docket No. 77).
On August 12, 2013, CPG filed its Memorandum Brief and Supplement to Dockets Nos. 35 and 66 (Docket No. 73). CPG sustains its position that the rents generated by the shopping center are not property of the bankruptcy estate and has included the following additional legal arguments; (i) “[t]he Supreme Court of Puerto Rico has defined an assignment as that ‘legal vehicle by which the assigning creditor transmits to the assignee the ownership over the assigned credit.’ IBEC Housing Int’l v. Banco Comercial de Mayaguez, 117 D.P.R. 371, 377 (1986), citing L. Diez-Picazo, Fundamentos del Derecho Civil Patrimonial, Madrid, Ed. Tecnos, 1979, Vol. 1, pg. 789. The Puerto Rico Supreme Court has explicitly ruled that an assignment of rents is an assignment of credits as per Article 1065 of the Civil Code. Building Maintenance Serv. v. Hato Rey Executive Bldg., Inc., 109 D.P.R. 656 (1980)” (Docket No. 73, paragraph 30, pg. 10); (ii) “[t]his transfer of ownership of the assigned credit upon ‘perfection’ of the assignment has been recognized on numerous occasions by the Puerto Rico case law. See Consejo de Titulares del Condominio Orquídeas v. C.R.U.V., 132 D.P.R. 707 (1993) (“Upon transmittal of the credit, the assignee installs himself in the same position and obligatory relationship with the debtor”); See also; PRTC v. All Systems Electronics, Inc., 2001 PR App. Lexis 375, *18-20 (2001); Doral Fin. Corp. v. Dorado Real, 2013 PR App. Lexis 1866, *23-24, 2013 WL 3733116 [*9-10] (2013)” (Docket No. 73, paragraph 35, pg. 11); (iii) “... the Assignment provides that [CPG’s] ownership over the rents generated by the Shopping Center was conditioned upon ‘the event [that Debtor] defaults its obligations under [the Loans]’ (Docket No. 73, paragraph 42, pg. 13); (iv) “According to the Assignment as executed, the Secured Creditor’s title over the rents was predicated upon the occurrence of a particular condition precedent (‘condición suspensi-va’), i.e., Debtor’s default under the Loans” (Docket No. 73, paragraph 42, pg. 13) and; (v) CPG became the full and unconditional owner of the rents since August 24, 2010 (Docket No. 73).
On August 13, 2013, Builders Group filed a Motion in Compliance with Court’s Order at Hearing of August 6, 2013 presenting the following additional allegations and arguments: (i) Builders concedes that there was a pre-petition assignment and that the post-petition rents constitute CPG’s cash collateral; (ii) there is a line of cases that has held that debtor’s interest in the rents, which constitutes cash collateral, can be extinguished only by a foreclosure of the rent producing collateral citing In re Mullen, 172 B.R. 473 (Bankr.D.Mass.1994); In re Willows of Coventry, Ltd. Partnership, 154 B.R. 959 (Bankr.N.D.Ind.1993); In re Mews Assoc., L.P., 144 B.R. 867 (Bankr.W.D.Mo.1992); In re Bethesda Air Rights Ltd. Partnership, 117 B.R. 202 (Bankr.D.Md.1990); Principal Mut. Life Ins. Co. v. Atrium Dev. Co. (In re Atrium Dev. Co.), 159 B.R. 464 (Bankr.E.D.Va. *1061993); In re Newberry Square, 175 B.R. 910 (Bankr.E.D.Mich.1994); (iii) in In re South Side House, LLC, 474 B.R. 391 (Bankr.E.D.N.Y.2012), “... the bankruptcy court squarely faced the issue of whether post-petition rental income generated by the debtor’s property was property of the estate and cash collateral or whether pursuant to a pre-petition assignment of rents, they never came into the estate. Citing New York Law, the court differentiated types of assignments, such as where an assignment is additional security for a mortgage loan, or alternatively, where it is an absolute or conditional assignment. [In re ] South Side House, LLC, 474 B.R. at 403. The bankruptcy court concluded that ‘[w]hen an assignment is for additional security, the lender has a lien on the rents, but title to the. rents remains with the borrower.’ Id.” (Docket No. 76, paragraph 7a, pgs. 4-5); (iv) “Courts in other circuits have reached the same conclusion;” In re South Side House, LLC citing In re Buttermilk Towne Ctr., LLC, 442 B.R. 558, 564 (6th Cir. BAP 2010); In re Senior Hous. Alternatives., Inc., 444 B.R. 386, 401 (Bankr.E.D.Tenn.2011); In re May, 169 B.R. 462 (Bankr.S.D.Ga.1994); the court in In re Senior Hous. Alternatives, Inc. cites Lyons v. Federal Sav. Bank (In re Lyons), 193 B.R. 637, 648 (Bankr.D.Mass.1996) “... for the proposition that, ‘[t]he fact that the assignments are conditioned upon default and will terminate upon satisfaction of the debt indicates that they are merely additional security for the loan, and not an absolute transfer of the Debtor’s interest in the rents to the Banks;’ ” In re Senior Hous. Alternatives, Inc., 444 B.R. at 398 (Docket No. 76, paragraph, 7b, pgs. 5-6); (v) “... the bankruptcy court in [In re ] Senior Hous. Alternatives, Inc., concluded that at a minimum, the debtor retained ‘at least one lingering interest in the rents’ related to the fact that upon payment of the underlying note, the assignment would be nullified, and the rents would return to the debtor and this equitable interest constituted property of the estate pursuant to the unambiguous language of 11 U.S.C. § 541(a)(6)” (Docket No. 76, paragraph 7(b), pgs. 6-7); and (vi) in In re Amaravathi Ltd. Partnership, 2010 Bankr.Lexis 5306 (Bankr.S.D.Tex.2010), the court concluded, “... that since the properties were owned by the debtors and the real properties are properties of the estate under 11 U.S.C. § 541(a)(1), there is no doubt that the rents, which are derived from the properties of the estate, themselves are property of the estate pursuant to the unambiguous language of 11 U.S.C. § 541(a)(6)” (Docket No. 76, paragraph 7c, pg. 7).
On August 26, 2013, a final hearing regarding the use of cash collateral by Builders Group and CPG’s objection to Debtor’s use of the cash collateral was held in which the Court ordered the parties to file proposed findings of fact and conclusions of law regarding the legal controversy of whether the rents generated by the mall constitute property of the estate and the issue of whether Debtor is providing adequate protection for CPG’s cash collateral (the rents) pursuant to 11 U.S.C. § 363(e) and (p) (Docket No. 87).
On September 4, 2013, CPG filed its Proposed Findings of Fact and Conclusions of Law on Contested matters (Dockets No. 35, 38, 41, 42, 55) (Docket No. 91). On September 4, 2013, Builders Group filed its Proposed Findings of Fact and Conclusions of Law (Docket No. 92).
Positions of the Parties regarding ownership (title) of post-petition rents
Both parties have submitted motions, which have been supplemented throughout the case, regarding the legal issue as to the ownership of the post-petition rents *107which are generated by the Debtor’s shopping center. The parties disagree in two (2) core elements; namely: (1) the supporting document which should be used to evince whether the post-petition rents are property of the estate or of CPG; and (2) the particular source of law that should be used in determining the title (ownership) of post-petition rents generated by Debt- or’s commercial property. CPG argues that the controlling document is the Collateral Assignment of Lease Agreement and Rents which was executed in tandem with the loan documents and the mortgage deeds. Builders Group contends that the controlling documents are the two (2) Mortgage Deeds which provide the collateral to secure the various loan agreements with certain real property which were executed between Debtor and FirstBank (the predecessor secured creditor). CPG argues that the Collateral Assignment of Lease Agreement and Rents transfers the ownership upon an event of default and that the applicable law are Articles 1416 et seq. of the Civil Code of Puerto Rico, 31 L.P.R.A. § 3941 et seq., the limited state law jurisprudence which has discussed the juridical figure of the cession of credit, and Spaniard commentators that have discussed this juridical figures based on the corresponding articles of the Civil Code of Spain. The court notes that the term cession of credit has been translated as assignment of credit by the Laws of Puer-to Rico Annotated. In addition, the court notes that the basis of the Civil Code of Puerto Rico is, in essence, the Civil Code of Spain, which was adopted by Puerto Rico in the year 1889 and was revised in the years 1902 and 1930, and in later years with very few amendments.
Contrary to CPG, Builders Group argues that the controlling documents are the two (2) Mortgage Deeds and that pursuant to the controlling clause in paragraph seventh, in order for CPG or a secured creditor to be entitled to the rents it must have foreclosed on the property. Moreover, Builders Group argues that the controlling law is the Bankruptcy Code; in particular Section 541(a)(6) which the Debtor argues preempts state law and the United States Supreme Court decision in Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Builders Group bases its argument on the case of Amaravathi Ltd. Partnership, 416 B.R. 618 (Bankr.S.D.Tex.2009) in which the court held that the post-petition rents were property of the estate because Section 541(a)(6) governed the outcome of the case since it mandates that rents generated from property of the estate be included within the bankruptcy estate.
Findings of Fact
1. Prior to the petition date, Builders Group entered into various loan agreements with FirstBank (CPG is the successor creditor), pursuant to which FirstBank as the predecessor creditor provided certain credit facilities to the Debtor which are evidenced by the loan documents.
2. The loans are secured by, among other things, certain real property that is described in detail in the mortgage deeds.The real estate collateral is the Cupey Professional Mall.
3. The Debtor generates rental income from the Shopping Center, which was pledged to CPG.
4. As part of the loan documents and collateral for the loans, on May 18, 2004, the Debtor granted CPG a pre-petition “Collateral Assignment of Lease Agreements and Rents,” as attested through an affidavit issued by a Notary Public, which provided a lien in favor of CPG over the rents generated by the Cupey Professional Mall.
5. Prior to the petition date, Debtor defaulted on its obligations under the loan *108documents, which defaults were duly notified to the Debtor.
6. The Debtor admitted to these defaults by and through the Forbearance Agreement executed on August 24, 2010, which was attested through an affidavit before a Notary Public.
7. On or about April 7, 2011, as a result of such defaults, CPG sent letters to certain of the Cupey Professional Mali’s tenants, as authorized by the “Collateral Assignment of Lease Agreements and Rents” and the Forbearance Agreement, instructing such tenants to remit payments directly to CPG.
8. As a result of the defaults, on August 16, 2011, CPG commenced a civil action for foreclosure of mortgages and collection of money in the Puerto Rico Court of First Instance, San Juan Section, Civil Case No. K CD2011-1828.
9. Prior to the petition date, CPG obtained Judgment in its favor in the state court case. The Judgment was upheld in the Puerto Rico Court of Appeals as well as the Supreme Court of Puerto Rico.
10. Builders Group filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on June 12, 2013.
11. Builders Group included CPG in its Schedule D-Creditors Holding Secured Claims — as a secured creditor of two (2) mortgage loans from 08/10/2011, which amount to $9,400,000.00. The Debtor listed the value of the property subject to the mortgage line in the amount of $11,900,000.
12. CPG filed a proof of claim on August 26, 2013, in the amount of $23, 57,-297.28 including its secured portion of $8,731,063.00 (the remaining $14,326,34.28 are listed as unsecured). These amounts were stipulated by the Debtor for purposes of the cash collateral hearing.
13. Mr. Héctor del Rio is the asset manager of the loans which are secured by the Cupey Professional Mall and manages the accounts and everything related to these loans.
14. Mr. del Rio as part of his job has visited monthly the Cupey Professional Mall since the acquisition of these loans in late February 2011. The property has deteriorated since he first started visiting the property in the year 2011.
15. CPG has been collecting the rents from the Cupey Professional Mall commencing on or about April 2011 until the petition date. CPG has collected on average total monthly rents from the shopping center in amounts ranging from $35,000 to $40,000. However, since the entry of the Interim Order on July 19, 2013, the Debtor is the only party collecting and/or receiving the rents.
16. According to the testimony of Mr. José Monge Robertin, CPA and Insolvency and Restructuring Advisor, Debtor collected rental income in the amounts of $1,100.00 in June 2013, $21,542.79 during the month of July 2013, and $77,164.24 during the month of August 2013. CPA Monge projected revenues in the amount of $114,552.00 for the month of September 2013.
17. The $77,164.24 rental income for the month of August 2013 referred to by Mr. Monge includes, and takes into account, the $46,672.56 amount consigned by CPG on August 6, 2013.
18. The Debtor has not met the projected revenues for the months of June, July and August 2013.
19. The $400,000.00 proposed renewal fee with Wendy’s has not been paid to date, and will be paid when and if the parties enter into a new lease agreement.
20. The projections for the rental income are based on the contracts, the ten*109ants and the rental space. The CAM (common area management expenses) is part of certain rental agreements in which the lessor separates a budget and includes as part of the payment, the tenant’s participation in the CAM expenses. The CAM payments include: common electrical expenses, common water expenses, cleaning, maintenance, security, insurance, all the expenses related to the management of the mall.
21. The September 2013 projection includes the addition of three (3) new leases. However, as of August 26, 2013 there have been no deposits paid for these leases.
22. Debtor projected total revenues of $1,216,864.00 for the six (6) months period commencing on July 2013 and ending on December 2013. However, there is no specific rent roll identifying and supporting the projections.
23. Debtor’s tax return for the calendar year 2012, reported in line item #11, rental income in the amount of $954,146, and in line item # 47 of the tax return, a net loss of $3.3 million was listed for the year 2012.
24. Debtor’s tax return for the calendar year 2011, reported in line item # 11, rental income in the amount of $565,808, and in line item # 47 of the tax return, a net loss of $102,000 was listed for the year 2012.
25. CPG makes no payments for electric or water services for the shopping center, but does pay for property insurance for the mall.
26. Builders Group’s expenses include electricity, security guards, elevator maintenance, exterminating, landscaping, garbage disposal, maintenance employees, janitorial services, water, telephone, management, taxes, medical insurance and other necessary expenses.
27. The shopping center has been deteriorating since February 2011 and has continued to deteriorate to date. The shopping center is in need of repairs and large line items have been proposed, including roof and window repairs, a new principal elevator, remodeling of the existing elevators, repairs of the perimeter fence, the trash container area, an emergency generator, security camera system upgrades and an access control system.
28. Debtor recognizes the need for near-term repairs to the shopping center. However, the improvements to the shopping center have not been made due, in part, to the fact that the purported renewal fee with Wendy’s has not been paid.
29. Builders agreed for purposes of the cash collateral hearing that the amount of CPG’s secured claim is $8,731,063.00, which is also the value of the mall.
30. Builders Group originally offered CPG both an equity cushion and $23,961.00 in monthly adequate protection payments which was based on an estimate of CPG’s secured portion of the debt in the amount of $9,400,000.
31. At the August 26, 2013 hearing, Builders offered CPG monthly adequate protection payments of 3.05% (annualized), which is 2 and 3/8 percent over LIBOR (London Interbank Offered Rate) (the same rate as the original loan), and based on CPA Monge’s testimony.
32. At 3.05% the annual adequate protection payment to CPG would be $266,297.42 or $22,191.45 monthly.
Commercial Mortgage Transactions and Assignment of Rents
There are two (2) prevailing common law theories which govern a mortgagee’s rights to rents as security; namely, the “title” and “lien” theory. Under the title theory, the mortgagee receives all incidents of the legal title which includes *110the right to possession of the land and the right to collect rents from the land. The mortgagee may exercise its rights prior to the mortgagor’s default, unless otherwise agreed. See R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L.Rev. 1, 6 (Winter 2006). Under the lien theory, which is the theory prevailing in most American states, the mortgagor has legal title over the land and the mortgage deed grants the mortgagee a right of security which is enforceable via foreclosure in the event of a default by mortgagor. Until such enforcement occurs, the mortgage does not convey to the mortgagee legal title to the land. Id. at 6. The mortgage deed does not by itself convey the incidents of title, such as the right to collect rents accruing from the land. “This means that a lien theory mortgagee would have no way to collect rents (at least those rents that accrued prior to completion of a foreclosure sale) unless the mortgage documentation specifically assigned those rents as collateral. Thus, in lien theory states, it became customary for a commercial mortgage lender to require the mortgagor to execute an assignment of leases and rents from the mortgaged real property (in addition to the mortgage itself).” Id. at 7. The documentation in nearly all commercial mortgage transactions includes an express assignment of rents which can be included in the mortgage itself, in a separate document or both. Id. at. 22.
The relevance of whether the “lien” or “title” theory applies is that in lien theory states, the secured lender is not entitled to possession of the rents, unless the mortgage documentation specifically assigned those rents as collateral. “Thus, bankruptcy courts applying the law of lien theory states are generally reluctant to uphold an absolute transfer of rents unless it is clear from the language of the instrument and the context of the transaction that the parties intended the assignment to be absolute in nature.” See Jeral Ancel and Jeffrey Graham, Posi-Petition Rents as Property of the Estate: State or Federal Law?, 29-6 ABIJ 44 (August 2010). Moreover, “[m]ost bankruptcy courts are hesitant to construe an assignment of rents as an absolute transfer of rights because most states adhere to a ‘lien theory’ rather than a ‘title theory.” Id. at 44. An “absolute assignment” will include language to the effect that it is “not merely for purposes of security” and “that the borrower no longer has an interest in unaccrued rents other than a revocable license (or that the borrower no longer has a property right) to collect such rents prior to the to the borrower’s default.” See R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L.Rev. 1, 30 (Winter 2006). In “title theory” states, an assignment of rents makes an immediate transfer of all rights to receive the rents to the lender and the borrower retains a revocable license to collect the rents. Id. at 45. Thus, “bankruptcy courts applying the law of the ‘title theory’ state are more apt to give effect to an absolute assignment of rents without inquiring beyond the language of the instrument to determine the intent of the parties.” Id. at 45. However, “[t]he majority of cases to consider language in a security agreement granting a mortgagee an alleged absolute assignment of rents have found the true nature of the mortgagee’s interest to be no more than security even in those states following the ‘title theory’ of mortgages.” See e.g., In re McCann, 140 B.R. 926, 927 (Bankr.D.Mass.1992); In Bethesda Air Rights Limited Partnership, 117 B.R. 202, 206 (Bankr.D.Md.1990) (“title theory” state); In re Willowood East Apartments of Indianapolis II, Ltd., 114 B.R. 138, 141 (Bankr.S.D.Ohio 1990).” In re Buttermilk *111Towne Ctr., LLC, 442 B.R. 558, 563 (6th Cir. BAP 2010) citing In re Guardian Realty Group, LLC, 205 B.R. 1 (Bankr.D.D.C.1997).
The crucial question is whether Puerto Rico falls under the “title” or “lien” theory. In Puerto Rico, mortgages are governed by both the Civil Code of Puerto Rico and the Mortgage Law of Puerto Rico. Article 1756 of the Civil Code of Puerto Rico provides that, “[t]he following are essential requisites of the contracts of pledge and of mortgage:
(1) That they be constituted to secure the fulfilment of a principal obligation.
(2) That the thing pledged or mortgaged is owned by the person who pledges or mortgages it.
(3) That the persons who constitute the pledge or mortgage have the free disposition of their property, and, should they not have it, that they are legally authorized for the purpose.” 31 L.P.R.A. § 5001.
Article 1757 of the Civil Code of Puerto Rico provides, “[i]t is also essential in these contracts that when the principal obligation is due, the things of which the pledge or mortgage consists may be alienated to pay the creditor.” 31 L.P.R.A. § 5002.
The Supreme Court of Puerto Rico, has held that a mortgage is “a property right over the real property of the debtor or of a third person, belonging to the creditor — by reason of the recording thereafter — by virtue of which right the creditor acquires the power to claim it, no matter in whose possession it is, in order to be paid the price of the same, with the preference corresponding to the order of its recording, even though the debtor or third person retains the mortgaged thing in his possession and the power to dispose of it.” See Liechty v. Descartes Saurí, 9 P.R. Offic. Trans. 660, 667, 109 D.P.R. 496 (1980) citing Puig Peña’s definition in II Compendio de Derecho Civil 623 (1972 ed.). Thus, pursuant to the Civil Code of Puerto Rico and the Mortgage Law of Puerto Rico, it is the mortgagor that remains with the legal title over the property and the mortgage deed grants the mortgagee, once the mortgage deed is duly recorded (due to its constitute nature) in the Property Registry, “the security produces real effects and becomes operative erga omnes in the sphere of real rights.” See Rosario Pérez v. Registrar, 15 P.R. Offic. Trans. 644, 648, 115 D.P.R. 491, 494 (1984); Article 1774 of the Puerto Rico Civil Code, 31 L.P.R.A. § 5042; Article 188 of the Mortgage Law of Puerto Rico, 30 L.P.R.A. § 2607. In the event of default by mortgagor, the mortgage deed grants the mortgagee the real right to foreclose on the property. See Article 210 of the Mortgage Law of Puerto Rico, 30 L.P.R.A. § 2701. The First Circuit Court of Appeals has held that, “[u]nder Puerto Rico law, the registration is a ‘constitutive’ act for a mortgage, and without the existence of a mortgage, a creditor only has an unsecured personal obligation regarding the underlying debt.” Soto-Rios v. BPPR (In re Soto-Rios), 662 F.3d 112, 121 (1st Cir.2011).
In Puerto Rico, a mortgage has an accessory nature, meaning that it is an accessory property right, in terms of the existence of a principal obligation serving as a security. See Liechty v. Descartes Saurí, 9 P.R. Offic. Trans. 660, 666, 109 D.P.R. 496 (1980). It is an essential requirement of a mortgage that it be executed to secure the performance of a principal obligation. “The mortgage contract presupposes the existence of two legal concepts, to wit, a principal obligation and the mortgage itself, which serves as security to the former’s creditor. A mortgage cannot *112be thought of without a secured obligation.” Id. at 668, 109 D.P.R. 496 citing Carreras et al. v. Am. Colonial Bank, 35 P.R.R. 83, 87-88, 35 D.P.R. 90 (1926). In addition, “[t]his accessory nature explains the fact that the mortgage effectively subsists while the credit it secures is outstanding. When the credit is extinguished, the mortgage is extinguished; when the credit is transmitted, the mortgage is transmitted; the voidness or ineffectiveness of the credit causes the voidness or ineffectiveness of the mortgage.” Id. at 668, 109 D.P.R. 496. Thus, a mortgage under Puerto Rico law is an accessory guarantee right which serves to secure a principal obligation. See Luis R. Rivera Rivera, Derecho Registral Inmobiliario Puertorri-queño, pg. 484 (2000).3 Consequently, the principal obligation stems from a commercial loan that in turn is secured (guaranteed) by a mortgage which is an accessory right. A mortgage does not constitute an autonomous independent right.
The assignment of rents and leases in a mortgage deed stems from an accessory right, the mortgage, and this type of agreement is executed in the event that the borrower defaults on the principal obligation which is the commercial loan. The assignment of rents is an additional guarantee that the secured creditor has to enforce the payment of the principal obligation.
The Seventh Clause in the Deed of Mortgage between Debtor and Firstbank (the predecessor secured creditor), states the following;
“[u]pon the occurrence of a default under this Mortgage, then at any time thereafter Mortgagee may, at its election;—
(a) proceed to foreclose the lien of this Mortgage as against all or any part of the Mortgaged Property (by summary proceedings or otherwise) and[d] to have the same sold under the judgment or decree of a court of competent jurisdiction; and/or-
to the extent permitted by law, enter upon take possession of the Mortgaged Property or any part thereof by force, summary proceedings, ejectment or otherwise and may remove Mortgagors and all other persons and any and all properties therefrom, and may hold, operate and manage the same and receive all earnings, income, rents, issues, and proceeds accruing with respect thereto or any part thereof.-
- In connection with any action brought to foreclose this Mortgage, Mortgagee shall, as matter of right, and without regard to the solvency of the Mortgagors or the adequacy of the security for the indebtedness from Mortgagors to Mortgagee, be entitled to the appointment of a receiver for all or any part of the Mortgaged Property, whether such receivership be incidental to a proposed sale of the Mortgaged Property or otherwise, and Mortgagors hereby consents to the appointment of such receiver and *113will not oppose any such appointment” (Docket No. 35, Exhibit A-2).
The Collateral Assignment of Lease Agreement and Rents executed by the Debtor and FirstBank states in pertinent part:
“Whereas, Assignee requires that the payment of the indebtedness evidenced by certain promissory notes (hereinafter the “Notes”) in the principal amount of ELEVEN MILLION DOLLARS ($11,-000,000.00), and an Interim Construction Loan Agreement in the principal amount of ONE MILLION DOLLARS ($1,000,-000) (hereinafter the “Loan Agreements”), of even date, and authenticated under Affidavits Nos. 9096 and 9098 respectively, before Notary Public Nelson Biaggi Garcia, be guaranteed among others, by the assignment to the Assign-ee of all rights, title, and interest, of Assignor in and to all the rents, issues and profits of and from the Property and in and to all leases now or hereafter existing, of all or any part of the Property.” (Docket No. 35-2, Exhibit A-2).
Paragraph one (1) of the Collateral Assignment of Lease Agreement and Rents provides;
“(1) Subject to the provisions of paragraph seven (7) hereunder, Assignor grants, transfers, and assigns irrevocably to Assignee, as collateral each and all lease contracts, hereinafter the Leases, with each of the tenants, and any future tenants of the Property, hereinafter the Tenants, which assignment includes all of Assignor’s rights derived from the Leases (but none of the Assignor’s obligations under the Leases, which obligations shall remain to be Assignor’s obligations) with the express purpose that in the event that Assignor defaults in its obligations under the Note and the Construction Loan Agreement, Assignee shall receive, every month, each and all of the rental payments made by the Tenants including, but without limitation, all payments due by the Tenants for overages and for their respective participation in the maintenance costs, insurances, and property taxes, including but not limited to those accrued for the year 2003, but not yet paid until such time as such default is cured by Assignee.” (Emphasis ours )(Docket No. 35-2, Exhibit A-2).
The language in the Collateral Assignment of Lease Agreement and Rents, provides an additional security to the principal obligation, which will be triggered in the event of a default by the Assignor regarding its obligations under the Note and the Construction Loan Agreement. The assignment of rents and leases originates from an accessory right, the mortgage note. This type of agreement is executed in the event that the borrower defaults on the principal obligation which is the construction loan agreement. The assignment of rents is an additional guarantee that the secured creditor has to enforce the payment of the principal obligation.
The significant and practical purpose of an assignment of leases and rents is to provide a mortgage lender the right to collect rents that accrue from the mortgaged real property for the period between the mortgagor’s default and a completed foreclosure. See R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L.Rev. 1, 5 (Winter 2006). An assignment of leases and rents is essential, particularly in states which permit only judicial foreclosure and the foreclosure process is lengthy, because it protects the mortgage lender from the “milking” of the rents. Id. The “milking” of the rents is the risk that the mortgage lender is exposed to when the foreclosure proceeding is pending and the debtor may *114collect the rents and spend them instead of the rents being applied to reduce the mortgage debt. Id4
Post-Petition Rent-Property of the Estate
The threshold issue the court must first address is whether the post-petition rents are property of the estate under Puerto Rico Law; namely, how the property interests of lenders and borrowers in an assignment of rents is treated under Puerto Rico law.
To determine whether the post-petition rental income generated by the mall is property of the estate the court must analyze Puerto Rico law regarding the property interests of borrowers and lenders under the Collateral Assignment of Lease Agreements and Rents. If the post-petition rents are not property of the estate, the Debtor may not use them as they are property of CPG. However, if the post-petition rents are property of the bankruptcy estate, the court must then determine whether the Debtor is providing adequate protection to CPG pursuant to 11 U.S.C. § 363(e) and (p). The Debtor does not contest that there is a pre-petition security interest on the rents and that the post-petition rents generated by the mall constitute CPG’s cash collateral pursuant to 11 U.S.C. § 363(a) and 552(b)(2) (Docket No. 76). This admission provides CPG with significant leverage in this bankruptcy proceeding by placing it in a position to question the Debtor’s flexibility in spending the post-petition rents.
Discussion
When a bankruptcy petition is filed, an estate is created and 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). This statutory language evinces congressional intent to include a broad range of property. See City of Springfield v. Ostrander (In re LAN Tamers, Inc.), 329 F.3d 204 (1st Cir.2003) citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Property of the estate also includes, “[pjroceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.” 11 U.S.C. § 541(a)(6).
A bankruptcy court must look to state law or other applicable non-bankruptcy law to determine whether a debtor has a pre-petition property interest in the rents. See 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 required a different result, there is no reason why such interests should be analyzed differently simply because an in*115terested party is involved in a bankruptcy proceeding”). “In fact, every conceivable interest of the debtor, future, nonpossesso-ry, contingent, speculative, and derivative, is within the reach of § 541.” Wood v. Premier Capital, Inc. (In re Wood), 291 B.R. 219, 224 (1st Cir. BAP 2003) citing In re Yonikus, 996 F.2d 866, 869 (7th Cir.1993). “The question of whether an interest claimed by the debtor is ‘property of the estate’ is a federal question to be decided by federal law; however, courts must look to state law to determine whether and to what extent the debtor has any legal or equitable interests in property as of the commencement of the case.” Id. at 224. Assignments of rents are interests in real property and, as such are created and defined pursuant to state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“The justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests, including the interest of a mortgagee in rents earned by mortgaged property”). The Third Circuit in First Fidelity Bank, N.A. v. Jason Realty, L.P. (In re Jason Realty, L.P.), 59 F.3d 423, 427 (3rd Cir.1995) stated, “[a] federal court in bankruptcy is not allowed to upend the property law of the state in which it sits, for to do so would encourage forum shopping and allow a party to receive a “windfall merely by reason of the happenstance of bankruptcy.’ Butner, 440 U.S. at 55, 99 S.Ct. at 918. Thus, in determining whether the parties’ assignment of rents transferred title or, instead, created a ‘security interest,’ our goal must be to ensure that [the lender] ‘is afforded in federal bankruptcy court the same protection [it] would have under state law if no bankruptcy had ensued. Id. at 56, 99 S.Ct. at 918.”
In the instant case, CPG argues that it acquired ownership rights over the rents generated by the mall based upon the “Collateral Assignment of Lease Assignments and Rents.” The Collateral Assignment of Lease Assignments and Rents is in turn governed by Articles 1416 et seq. of the PR Code, 31 L.P.R.A. § 3941 et seq.
Builders Group argues that its interest in the rents can only be extinguished by a foreclosure of the rent producing collateral and cites cases from different jurisdictions which support this conclusion. Builders Group also cites In re South Side House, LLC, 474 B.R. 391 (Bankr.E.D.N.Y.2012), a case based upon New York law and which distinguishes between two different concepts: the right to collect rents and having ownership of the rents. In re South Side House, LLC, 474 B.R. 391, the court stated that; “... the right to collect rents is not the same as having title to them. Under New York law, the right to enforce an assignment or collect the rents does not confer title. As courts have noted: ‘[a] mortgagee with a rent assignment has an equitable right to collect, but does not have legal title to rents automatically upon default. Rent is an incident of title which in New York remains in the mortgagor after default and which cannot be conveyed by a rent assignment clause in a mortgage prior to a foreclosure’” In re South Side House, LLC, 474 B.R. at 404 citing In re Cerrico Realty Corp., 127 B.R. 319, 323 (Bankr.E.D.N.Y.1991) (quoting Ryen v. Park Hope Nursing Home, Inc. (In re Flower City Nursing Home, Inc.), 38 B.R. 642, 645 (Bankr.W.D.N.Y.1984)).
A law review article titled, Absolutely Not! The Ability of a Lender to Extinguish a Debtor’s Interest in Rents Under an Absolute Assignment, discusses how courts have taken different approaches in their analysis of “absolute” assignment of rents that stem from commercial transactions in which the loan is secured by a first mortgage with a rent assignment pledge *116on the borrower’s only asset; namely a shopping center. The article notes that;
“[t]he troubling aspect of these cases is their failure to discuss or analyze relevant state law, despite the fact that they uniformly begin their analysis with a reference to the dictates of Butner. These cases have pinned their rulings on a determination that once a creditor has taken the ‘enforcement’ steps required under the rent assignment or state law that entitle the creditor to collect the rents, the debtor’s ownership of the rents is extinguished. However, the decisions fail to analyze whether the right to collect rents is equal with ownership of rents under state law.” John R. Clemency and John A. Harris, Absolutely Not! The Ability of a Lender to Extinguish a Debtor’s Interest in Rents Under an Absolute Assignment, 13-8 ABIJ 20 (1994).
Builders Group argues that the controlling law is 11 U.S.C. § 541(a)(6), which preempts state law and makes inapplicable the United States Supreme Court decision in Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Builders Group bases its argument on the case of In re Amaravathi Ltd. Partnership, 416 B.R. 618 (Bankr.S.D.Tex.2009), in which the court held that the post-petition rents were property of the estate because Section 541(a)(6) governed the. outcome of the case since it mandates that rents generated from property of the estate be included within the bankruptcy estate. In In re Amaravathi Ltd. Partnership, the bankruptcy court determined that in enacting Section 541(a)(6), Congress decided to supersede state law so that debtors could use post-petition rents to operate and reorganize. See In re Amaravathi Ltd. Partnership, 416 B.R. at 624-625.
This court does not agree with the Debtor’s analysis of the holding in In re Amaravathi Ltd. Partnership for the following reasons: (i) Section 541 is not intended to expand a debtor’s rights beyond those that exist pursuant to state law. See Paul Rubin, Absolute Assignments of Rents Survive Filings, 30-1 ABIJ 50 (February 2011). The House of Representatives and Senate reports provide that Section 541, “is not intended to expand the debtor’s rights against others more than they exist at the commencement of the case.” Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.1984) (quoting House Report, H.R., Rep. No. 595, 95th Cong., 1st Sess. reprinted in 1978 U.S.Code Cong. & Ad. News 5787); Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir.2002) (quoting Senate Report, S.Rep. No. 95-989. at 82 (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5868); and (ii) “[t]here is a strong presumption against inferring congressional pre-emption of state law property rights in the bankruptcy context. When Congress intends to displace state nonbankruptcy law it has done so clearly and explicitly, using the phrase ‘notwithstanding any other applicable non-bankruptcy law1 or similar language, which appears in other Code provisions, such as §§ 1123(a), 541(c)(1), 728(b) and 363(1). Neither the legislative history nor the text of § 541 reflects an intent to preempt state law property rights in rents absolutely assigned pre-petition.” Paul Rubin, Absolute Assignments of Rents Survive Filings, 30-1 ABIJ 50 (February 2011).
The court does agree that the Bankruptcy Reform Act of 1994 added section 552(b)(2) to have rents treated as cash collateral notwithstanding the lender’s pre-petition failure to seek enforcement of its security interests. See In re National Promoters & Services, 499 B.R. 192, 206 (Bankr.D.P.R.2013).
*117State law determines whether the Debt- or or CPG owns the rents. Therefore, the court proceeds to analyze the interface of applicable law in Puerto Rico and the Bankruptcy Code. Assignments under the Civil Code of Puerto Rico
This court in the case of In re National Promoters & Services, Inc., established the following about the nature of rents under the Civil Code of Puerto Rico;
“Article 260 of the Civil Code of Puerto Rico distinguishes properties between movables and immovables. 31 L.P.R.A. § 1029. “Immovables are, in general, those which cannot move themselves or be removed from one place to another.” Article 261 of the Civil Code, 31 L.P.R.A. § 1041. “Things may be immovable either by their own nature or by their destination or the object to which they are applicable.” Article 262 of the Civil Code, 31 L.P.R.A. § 1042. Immovable properties include “[ljands, buildings, roads and structures of every kind adherent to the soil.” Article 263(a) of the Civil Code, 31 L.P.R.A. § 1043(a). Incorporeal objects can also be considered immovable from the object to which they apply. See Article 264 of the Civil Code, 31 L.P.R.A. § 1044. Rights and obligations established on an immovable object are also considered immovable. Article 264(b) of the Civil Code, 31 L.P.R.A. § 1044(2). Rents are defined as the proceeds from a lease agreement. See e.g. Vélez v. San Miguel, 68 P.R.R. 535, 549, 68 D.P.R. 575, 591 (1948) (Dissenting Opinion by Justice Todd); Black’s Law Dictionary, 9th ed., West, 2009, p. 1141 (defining “rent” as the payment “for the use of another’s property”). Rents are typically considered movable properties except when they constitute a lien on a real property or mortgage loans. Article 269 of the Civil Code, 31 L.P.R.A. § 1065. Similarly, “[t]he ownership of property, whether movable or immovable, carries with it the right, by accession, to everything which is produced thereby, or which is united thereto or incorporated therewith, either naturally or artificially.” Article 287 of the Civil Code, 31 L.P.R.A. § 1131. Ownership of a property also entitles ownership over its “civil fruits.” Article 288(3) of the Civil Code, 31 L.P.R.A. § 1141(3). “Civil fruits are the rents of buildings, the price paid for the lease of lands, and the amount of perpetual, life or other similar incomes.” Article 289 of the Civil Code, 31 L.P.R.A. § 1142.” In re National Promoters & Services, 499 B.R. 192, 202 (Bankr.D.P.R.2013).
Article 1065 of the Civil Code of Puerto Rico provides that; “[a]ll the rights acquired by virtue of an obligation are transmissible, subject to law, should there be no stipulation to the contrary.” 31 L.P.R.A. § 3029. Article 1065 includes all sorts of rights of credits. Consejo de Titulares v. C.R.U.V., 132 D.P.R. 707, 718 (1993). There are four (4) requirements for a transfer of a credit to be valid: (1) the credit must be transmittable; (2) it must be grounded on a valid title; (3) the credit must be existent; and (4) it must be originating from an efficient obligation. Id. at 718, quoting IBEC v. Banco Comercial, 117 P.R. Off. Trans. 446, 453-454, 117 D.P.R. 371, 377 (1986). Rents owed to a lessor may constitute a transmittable credit.
The Civil Code of Puerto Rico does not expressly define “assignments,” but rather provides the effects they have over the contracting parties and third parties. See José R. Vélez Torres, Derecho de Obligaciones, Interamerican University School of Law, 2nd ed., 1997, p. 251; In re National Promoters & Servs., 499 B.R. 192, (Bankr.D.P.R.2013). Article 1416 of the Civil *118Code of Puerto Rico provides; “[t]he assignment of a credit, right, or action shall produce no effect against a third person but from the time the date is considered fixed, in accordance with sections 3273 and 3282 of this title. If said assignment involves real property, from the date of its entry in the registry” 31 L.P.R.A. § 3941.
Spanish commentator Espin explains, “that the voluntary assignment of credit requires consideration (“causa”) that serves as the basis for the juridical business by which the conventional assignment is realized (executed). The consideration may consist in a gratuitous title (such as a donation given by the mere liberality of the benefactor), a valuable consideration (such as a purchase-sale, an in kind exchange (“permuta”)) or the consideration may consist in extinguishing another debt by providing payment with the assigned credit.” Diego Espín, Manual de Derecho Civil Español, 228, Vol. III. Madrid, Ed. Revista de Derecho Privado (4th ed. 1975).5
The Supreme Court of Puerto Rico has defined “cesión de crédito,” or assignment of credit, as “a legal business executed by the assignor with another person, the as-signee, by virtue of which the former transfers the latter the ownership of the right of the assigned credit.” IBEC v. Banco Comercial, 117 P.R. Off. Trans. 446, 453, 117 D.P.R. 371, 376 (1986) citing I L. Diez-Picazo, Fundamentos del Derecho Civil Patrimonial 789, Madrid, Ed. Tecnos (1979) and also as: “that operation whereby a third person, substituting the creditor, comes into the possession of an obligation that, nonetheless remains the same.” Id. citing III F. Puig Peña, Compendio de Derecho Civil Español 242-243, Madrid, Ed. Pirámide (3d ed. 1976);6 See also, IV-I J.R. Vélez Torres, Curso de Derecho Civil-Derecho de Obligaciones 229, San Juan (1981); and III — 1 E. Vázquez Bote, Derecho Civil de Puerto Rico 319, San Juan Eds. Jurídicas (1973).
Commentator Puig Peña further explains, that from this definition of assignment of credit the following characteristics are derived: (a) the creditor, that relinquishes the title, is absolutely eliminated from the obligation (b) the new creditor assumes the obligation in the same position of the old (original) creditor and with the same conditions as the old (original) creditor, (c) notwithstanding the transposition of creditors, the obligation remains the same. As a consequence, the following results: (1) the credit guarantees in favor of the new creditor continue to exist. Article 1528 [Article 1418 of the PR Code], “[t]he sale or assignment of a credit includes that of all the accessory rights, such as the security, mortgage, pledge, or privilege.” The new creditor is also entitled to the interests, fruits, torts and expenses which constitute part of the credit; (2) the debtor of the obligation can present to the new creditor the same exceptions that it could present to the original creditor be*119cause the situation of the debtor may not worsen as a result of the assignment. Id. at 243-244.7
“The assignee holds the same position and binding relationship with regard to the debtor from the moment the credit is transferred. It is a transfer of credit made by the creditor or assignor to the assignee through an inter vivos act which accomplishes an economic function of great importance and utility in modern economics.” IBEC v. Banco Comercial, 117 P.R. Off. Trans. 446, 453, 117 D.P.R. 371, 376 (1986) citing I L. Diez-Picazo, Fundamentos del Derecho Civil Patrimonial 789, Madrid, Ed. Tecnos (1979).
Puig Pefia discusses the composition of the assignment as a juridical figure in terms of two (2) relationships: (1) the relationship between the assignor and the as-signee and (2) the relationship between the assignee and the debtor. In the relationship between the assignee and the assign- or the following results: (a) the assignor transfers to the assignee the right to collect the nominal amount of a credit, even if the same has been paid at a lower price; (b) the assignor is obliged not to execute any act contrary to what has been agreed to; (c) the assignor must transmit to the assignee all of the accessory rights, such as the security, mortgage, pledge, or privilege, including all the privileges which are not purely personal in nature; and (d) the assignor must provide to the assignee a guarantee obligation. See III F. Puig Peña, Compendio de Derecho Civil Español 247, Madrid, Ed. Pirámide (3d ed. 1976).8
*120In the instant case, CPG argues that its assignment of rents originates from the “Collateral Assignment of Lease Agreement and Rents” executed on May 18, 2004 between Builders Group and First-Bank, the predecessor creditor. CPG contends that in conformity with Article 1416 of the PR Code and the corresponding case law, the Assignment became binding, valid, and opposable against third parties on May 18, 2004 and “... CPG/GS, as the substitute of FBPR [FirstBank Puerto Rico], would have acquired unconditional title over the Rents as of May 18, 2004” (Docket No. 91, pg. 17, paragraphs 49 & 50). CPG alleges that the Assignment provides that the secured creditor’s ownership over the rents was conditioned upon “the event [that Debtor] defaults its obligations under [the Loans]” and that pursuant to the Assignment, “... the secured creditor’s title over the [r]ents was predicated upon the occurrence of a particular condition precedent (‘condición suspensi-va’), i.e. Debtor’s default under the Loans” (Docket No. 91, pgs. 17-18, paragraph 51). Thus, CPG concludes that once the creditor proves the existence and date of the default, the assignment becomes fully enforceable under the Civil Code of Puerto Rico (Docket No. 91, pg. 18, paragraph 54). CPG states that a default occurred under the Loans and the Loan Documents as of August 24, 2010, date in which the Forbearance Agreement was executed through an affidavit before a Notary Public, and thus, “... it is uncontested that CPG/GS acquired full and unconditional title over the [r]ents generated by the Shopping Center as early as August 24, 2010” (Docket No. 91, pg. 19, paragraph 57). CPG/GS further states that it sent the [foreclosure letters to certain of Debtor’s tenants on or about April 7, 2011, instructing such tenants to pay the rents directly to CPG/GS, as authorized by the Puerto Rico Civil Code, the Assignment and the Forbearance Agreement (Docket No. 91, pg. 19, paragraph 58).
This court concludes that in the instant case, the Collateral Assignment of Lease Agreement and Rents does not transfer title (ownership) of the rent pursuant to Articles 1416-1427 of the PR Code, 31 L.P.R.A. § 3941-3961, the limited state case law available and the explanations of this juridical figure by various commentators. CPG’s right to collect the rental revenues from the mall was an accessory right derived from the principal obligation of the Debtor, the payment of a commercial loan, which was additionally secured by a promissory mortgage note and mortgage deed.9 If the Debtor defaulted on its *121principal obligation, then its secured creditor could collect all of the rental payments made by the tenants as additional collateral (security). Accessory rights may not be assigned unless the principal obligation (or right) is also assigned. Manuel Albaladejo and Silvia Díaz Alabart, Comentarios al Código Civil y Compilaciones Forales, Tomo. XIX, 697-698, Madrid, Ed. Revista de Derecho Privada (2nd. ed. 1991).
The obligations of Debtor under the “Collateral Assignment of Lease Agreement and Rents” do not meet the elements that the juridical figure of assignment of credit is supposed to encompass. Builders Group has not relinquished its title to the lease agreements and the rents through the assignment, and is not “absolutely eliminated from the obligation” because Builders Group is still obliged as the Assignor (Lessor) to the obligations under the lease agreements. CPG is not assuming the obligations under the lease agreements with and under the same conditions as Builders Group. The assignment of credit by Builders Group is in effect an additional security which originates from the loan documents and the corresponding mortgage notes and mortgage deeds provided by Builders Group to the secured creditor. The security agreement (namely the “Collateral Assignment of Lease Agreement and Rents”) that was executed by Builders Group and secured creditor (FirstBank) was an additional security to the commercial loan which was secured by a promissory mortgage note and two (2) mortgage deeds and that the same extends to post-petition rents pursuant to 11 U.S.C. § 552(b)(2).
Therefore, the rents constitute property of the estate since the ownership rights (title) of the rents were not transferred to the secured creditor. The rents do constitute cash collateral in favor of CPG.
Use of Cash Collateral & Adequate Protection
Builders Group accepts that CPG holds an 11 U.S.C. § 552(b)(2) security interest in the post-petition rents and that the rents constitute CPG’s cash collateral. The court agrees with the Debtor’s position following the rationale in In re National Promoters & Services, Inc. The only issue is whether Builders Group has offered CPG adequate protection for the real estate and for the use of the rents.
In In re National Promoters & Services, Inc., this court stated the following regarding the applicable law regarding cash collateral:
“Section 363(c) of the Bankruptcy Code prohibits the debtor to “use, sell, or lease cash collateral” in the ordinary *122course of business, unless the secured creditor consents or the court authorizes it. 11 U.S.C. § 363(c)(2). Under Section 363(b), a debtor may use cash collateral other than in the ordinary course of business, subject to objection by the secured creditor under Section 363(e). Section 363(e) provides that when a creditor objects to a debtor’s use of its cash collateral, the bankruptcy court “shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.” 11 U.S.C. § 363(e).
“It is well settled that the debtor bears the burden to demonstrate that a creditor is adequately protected.” In re South Side House, LLC, 474 B.R. at 408. When considering adequate protection for the use of rents, courts have recognized that Section 552(b) creates a security interest in post-petition rental income that is separate and distinct from the creditor’s security interest in the property securing the mortgage. See In re Gramercy Twins Assocs., 187 B.R. 112, 121 (Bankr.S.D.N.Y.1995).
Adequate protection may be provided by cash payments or additional or replacement liens “to the extent” the debtor’s use of the property “results in a decrease of value of such entity’s interest in such property.” 11 U.S.C. § 361(1). A secured creditor “is entitled to adequate protection of two distinct interests: its mortgage on the property and its right to collect the rents flowing from the property or, at the very least, its security interest in such rents.” Financial Center Assoc. v. TNE Funding Corp., 140 B.R. 829, 834 (Bankr.E.D.N.Y.1992). In re National Promoters & Services, 499 B.R. 192, 207-08 (Bankr.D.P.R.2013).
Moreover, “[w]here [] there is a specific assignment of rents given as security, a diversion of any portion of the rents to a party other than the secured party is clearly a diminution of the secured party’s interest in the assignment of rents portion of the security. To protect against that diminution in value, a debtor must provide adequate protection for the interest in rents above and beyond any adequate protection for the interest in the real property ... Any such decrease attributable to the [debtor’s usage, therefore, must be protected by cash payments from another source, an additional or replacement lien, or other such indubitable equivalent” In re Smithville Crossing, LLC, 2011 Bankr.Lexis 4605, :;:29, 2011 WL 5909527, *10 (Bankr.E.D.N.C.2011) eiting In re Griswold Building, LLC, 420 B.R. 666, 699 (Bankr.E.D.Mich.2009); See also; Travelers Ins. Co. v. River Oaks Ltd. Partnership (In re River Oaks Ltd. Partnership), 166 B.R. 94, 99 (E.D.Mich.1994); In re Buttermilk Towne Ctr., LLC, 442 B.R. 558, 566 (6th Cir. BAP 2010).
In addition, the fact that rental income is utilized to pay the operating expenses of the shopping center by itself does not provide the adequate protection required under 11 U.S.C. § 363 for the security interest regarding the assignment of rents. See In re River Oaks Ltd. Partnership, 166 B.R. at 99 (“The Court does not believe the mere fact that the rental income is used to pay the necessary expenses of operating and maintaining the property or that the property is adequately maintained and not depreciating, in and of itself, provides the adequate protection required under § 363 for the security interest covered by the assignment of rents.”).
In the instant case, CPG holds both a mortgage on the real property and a security interest in the post-petition rents. Builders Group has offered adequate protection for the mortgage on the shopping center which consists in a monthly payment of $22,191.45 which is based on a 3.05% annual interest rate of CPG’s se*123cured portion of its claim, which both parties have agreed for this particular issue of cash collateral amounts to $8,731,063. However, Builders Group has not provided adequate protection for CPG’s security interest in the postpetition rents which must be adequately protected in their own right. The burden of proof is on the debtor to demonstrate that the creditor is adequately protected for purposes of using its cash collateral. 11 U.S.C. § 363(p)(l).
Builders Group’s amended cash flow projections reflect that the revenues from the Cupey Professional Mall for the following months are as follows: (i) $102,619 for the month of July; (ii) $649,451 for the month of August; and (iii) $114,552 for the month of September (Docket No. 72-1, pg. 1). The rental revenue for the month of August includes the estimated $400,000 in renewal fees from a tenant (Wendy’s) and $150,000.00 from a settlement expected to be received from another tenant, Cupey Bowling. The projected expenses for these three (3) months are the following: (i) $58,275 for the month of July; (ii) $51,538 for the month of August; and (iii) $56,138 for the month of September (Docket No. 72-1, p. 1). The common area management expenses for these months, which include all the expense listed except the administrative expense portion, consist of the following: (i) $37,327 for the month of July; (ii) $33,698 for the month of August; and (iii) $34,298 for the month of September (Docket No. 72-1 pgs. 7 & 8). Note 12 of the amended projections stated that, “[t]he projections are based on actual collections (estimated by Debtor) by adjusting the total rent roll for items not collected normally, or contracts commencing in September or subsequently.” (Docket No. 72-1, pg. 5). The detail regarding the cash inflows for the monthly projections for these months (July, August and September) all include a line item for prepetition account receivable in the amount of $20,000 (Docket No. 72-1, pg. 6). Note 9-Rent Receivable of the Amended Preliminary Cash Flow Projections states that; “[r]ent receivable and rent collections had to be investigated by Debtor and are based on the information provided by tenants. CPG Servicing has not provided Debtor, despite multiple requests, a complete historical record of payments by tenants and other collection.” (Docket No. 72-1, pg. 4). The estimated revenues for rents which includes the base rent, electricity charges, CAM and taxes charge for the months of July, August and September are the following: (i) $82,443 for the month of July; (ii) $79,275 for the month of August; and (iii) $94,378 for the month of September (Docket No. 72-1, pg. 6). The actual rental income for the month of July was in the amount of $21,542.79 (Docket No. 85-1, pg. 1). The actual rental income for August 1-7 was in the amount of $77,164.24 and included the amount of $46,672.56 which was deposited by CPG in court. The expected total rental income for the month of August is in the amount of $126,119.70 and includes $48,955.46 which listed as expected payments to be received directly by Builders Group. However, there is no explanation as to the source of these funds which are expected to be received by the Debtor. Thus, the actual rental income for the months of July and August was in the amount of $98,707.03, not including the expected payment of $48,955.46 which is expected to be received by Builders and for which there is no explanation as to the source for this payment.
This court finds that the actual revenues generated in the months of July and August ($98,707.03) are not sufficient to cover CPG’s adequate protection for the real estate property (the monthly payment of $22,191.45) and for the estimated common area management expenses corresponding to these months, not including the administrative expenses, which amount to $37,327 for the month of July and $33,698 for the *124month of August. Moreover, the court finds that at the August 26, 2013 hearing, CPA Monge did not have conclusive information as to whether the three (3) tenants that were supposed to begin their leases in the month of September had signed the same and provided a security deposit. However, according to Note 12 of the amended preliminary cash flow projections, the companies starting in September would pay $10,892 for base rent, $2,178 for electricity and $2,859 for CAM-taxes which amounts to a monthly payment of $15,929. The court finds that these amended cash flow projections are not supported by the average rental income that CPG has received from the tenants for the past two (2) years which averages in the range of $35,000-$40,000. Moreover, as of the hearing date, one of the shopping center’s anchor tenants (Wendy’s) had not renewed its lease and it is from the renewal fee of $400,000 from which the Debtor will fund the repairs and maintenance of the shopping center. Note 7 of the Amended Preliminary Cash Flow Projections regarding the renewal fees states that: “[t]he cash flow includes renewal fees that are being negotiated with Wendy’s since the original twenty year contract elapsed. The estimated renewal fee is expected to be $400,000.” (Docket No. 72-1, pg. 3). There is no information as to the date the lease with Wendy’s expired.
The court finds that the Debtor has not satisfied its burden under 11 U.S.C. § 363(p)(l) to prove that CPG is being adequately protected for both its mortgage on the real property and its security interest in the post-petition rents. The evidence before the court shows that the actual rental income received in the past months and for the past two (2) years is not sufficient to cover the operating expenses (exclusive of the administrative expenses) and to provide adequate protection of the real estate property given as collateral to CPG. This is without taking into account the adequate protection that the Debtor would have to provide CPG for the use of the post-petition rents.
Conclusion
In view of the foregoing, the court finds that the rents constitute property of the estate under state law and that the same constitute cash collateral to CPG’s debt. However, the court also finds that the Debtor has not provided adequate protection to CPG for its two separate interests; namely, its mortgage on the real property and its security interest in the post-petition rents. Thus, Builders Group may not use CPG’s cash collateral (the post-petition rents).
SO ORDERED.
. CPG in this motion presents other issues regarding the use of cash collateral which the court will not address at this juncture. The additional issues consist of the following; (i) the state court Judgment precludes the issue as to the amount of the debt through both collateral estoppel and the Rooker-Feldman doctrine; (ii) Debtor’s claim for recovery of monies under 11 U.S.C. § 506(c) is legally insufficient; (iii) Debtor’s claims for additional relief such as the alleged violation of the automatic stay are not applicable; (v) Debt- or’s request for injunctive relief or other equitable relief against a non-debtor entity, the request for recovery of monies under 11 U.S.C. 506(c) are all procedurally defective because they require the filing of an adversary proceeding in conformity with Fed. R. Bankr.P. 7001; (iv) Debtor's use of funds which constitute cash collateral prior to the Interim Order violate 11 U.S.C. § 363; and (v) the Court should prohibit the use of any cash collateral due to Builders Group inability to properly administer the shopping center.
. On that same date, CPG initiated an adversary proceeding (Adversary Proceeding No. 13-00165) against Debtor requesting a declaratory judgment on CPG's title to rents derived from the Cupey Professional Mall and consignment of funds.
. The following is a direct cite to the treatise: “La hipoteca no es ni puede ser un derecho autónomo, pues por su condición de derecho de garantía es requisito esencial e indispensable que se constituya para asegurar el cum-plimiento de una obligación principal (art. 1756 del Código Civil). La hipoteca viene al servicio de un crédito y por ello no es conce-bible que pueda corresponder a persona dis-tinta de la del crédito garantizado; es un pacto accesorio al principal que no constituye un derecho independiente con existencia pro-pia. Su dependencia es de tal grado que si la obligación garantizada es nula, la hipoteca también lo será, y si la obligación es inexis-tente, tampoco existirá la hipoteca.” See Luis R. Rivera Rivera, Derecho Registral Inmobili-ario Puertorriqueño, pg. 484 (2000).
. For almost three decades there has been much litigation in the bankruptcy courts regarding the proper treatment and characterization of assignment of rents, which have been summarized by Professor R. Wilson Freyermuth as follows: (i) the proper scope of the term "rents;” (ii) when a security interest in rents has been properly "perfected;” (iii) whether a mortgagor can make an “absolute assignment of rents” as opposed to an assignment for additional security; and (iv) whether a security interest in rents creates an interest that is different from the mortgaged real property. See R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L.Rev. 1, 8-9 (Winter 2006). These issues regarding the assignment of rents rely on state law because state law governs the creation and enforcement of security interests in rents. Id. at 7. The New Uniform Assignment of Rents Act by the National Conference of Commissioners on Uniform State Laws was drafted in the year 2005 to resolve these issues which are constantly being litigated.
. “La cesión voluntaria representa respecto a la obligación, lo mismo que la traditio para los derechos reales, y al igual que ésta, requi-ere una causa que sirva de fundamento al negocio jurídico, por virtud del cual se realiza la cesión convencional. Esta causa puede ser tanto un acto a título gratuito (donación) como a título oneroso (compraventa, permu-ta), como igualmente puede servir para extin-guir otra deuda dando en pago de ésta el crédito cedido” Diego Espín, Manual de Der-echo Civil Español, 228 Vol. II. Madrid, Ed. Revista de Derecho Privado (4th ed. 1975).
. "Se entiende por cesión de créditos < «aqu-ella operación en virtud de la cual un tercero, sustituyendo al acreedor, se convierte en el titular activo de una obligación que, no ob-stante, permanece la misma>>” III F. Puig Peña, Compendio de Derecho Civil Español 242-243, Madrid. Ed. Pirámide (3d. ed. 1976).
. “De esta definición se deducen los carac-teres siguientes:
(a) El acreedor, al conceder el título, queda eliminado absolutamente de la obliga-ción. Claro está que esto ha de enten-derse desde el momento en que la cesión ha quedado articulada en la persona del deudor, pues hasta tanto, el acreedor primitivo sigue siendo en principio el titular del crédito, si bien tendrá que responder frente al cesionario de la cesión realizada.
(b) El nuevo acreedor entra en la obliga-ción en el mismo lugar y condiciones en que se hallaba el antiguo.
(c) No obstante la transposición de acree-dores, la obligación permanece la misma. En consecuencia:
(a) Subsisten en favor del nuevo acree-dor (y en esto se diferencia de la cesión del crédito de la novación subjetiva por cambio de la persona del acreedor) todas las garantías de su crédito, así como las acciones del mismo. Según nuestro art. 1.528 [Art. 1418 Código Civil de Puerto Rico], "la venta o cesión de un crédito comprende la de todos los derechos ac-cesorios, como la fianza, la hipoteca, prenda o privilegio." III F. Puig Pefia, Compendio de Derecho Civil Español 243, Madrid. Ed. Pirámide (3d. ed. 1976). “En principio, corresponden también al nuevo acreedor las pretensiones de in-tereses, frutos, provechos, dafios y gastos; pues, como dice Enneccerus, desde el punto de vista económico, constituyen un todo con el crédito, si bien por lo que respecta a los intereses vencidos, parece que no deben transferirse con el mismo, (a) “El deudor de la obligación puede oponer al nuevo acreedor las excepciones que podría oponer al acreedor ordinario. Esto es consecuencia del principio de que la situación del deudor no puede empeo-rarse por virtud de la cesión.” III F. Puig Pefia, Compendio de Derecho Civil Español 243-244, Madrid. Ed. Pirámide (3d. ed. 1976).
. "Al estudiar el contenido de esta figura, debemos hacernos cargo de las dos clases de relaciones siguientes:
(a) Relación cesionario — cedente.—En la relación entre el cesionario y el cedente se producen los siguientes efectos:
1. El cedente transmite al cesionario el derecho a cobrar el importe nominal del crédito, aunque éste haya pagado aquél un precio inferior a dicho importe;
2. El cedente queda obligado a no ejecu-tar acto alguna que se oponga a que lo convenido alcance sus naturales efectos (sentencia de 7 de junio de 1941);
*1203. El cedente debe transmitir al cesion-ario todos los derechos accesorios de cré-dito (fianza, hipoteca, prenda), así como los privilegios que no sean de matiz pura-mente personal (art. 1.528);
4. El cedente, por último, debe prestar, respecto al cesionario, la llamada obliga-ción de garantía o saneamiento.” Ill F. Puig Peña, Compendio de Derecho Civil Español 247, Madrid, Ed. Pirámide (3d. ed. 1976).
. The third "Whereas” of the Collateral Assignment of Lease Agreement and Rents” provides the following;
"Whereas, Assignee requires that the payment of the indebtedness evidenced by certain promissory notes (hereinafter the ‘Notes') in the principal amount of Eleven Million Dollars ($11,000,000.00), and an Interim Construction Loan Agreement in the principal amount of One Million Dollars ($l,000,000.00)(hereinafter the 'Loan Agreements'), of even date, and authenticated under Affidavits Nos. 9096 and 9098 respectively, before Notary Public Nelson Biaggi Garcia, be guaranteed, among others, by the assignment to the Assignee of all rights, title, and interest, of Assignor in and to all the rents, issues and profits of and from the Property and in and to all leases now or hereafter existing, of all or any part of the Property;
*121Now Therefore, in consideration of the foregoing, and of the mutual and separate agreements, covenants, and warranties of the parties hereto, and for other good and valuable considerations:
(1) Subject to the provisions of paragraph seven (7) hereunder, Assignor grants, transfers, and assigns irrevocably to As-signee, as collateral each and all lease contracts, hereinafter the Leases, with each of the tenants, and any future tenants of the Property, hereinafter the Tenants, which assignment includes all of Assignor’s rights derived from the Leases (but none of the Assignor’s obligations under the Leases, which obligations shall remain to be Assignor’s obligations) with the express purpose that in the event Assignor defaults its obligations under the Note and in the Construction Loan Agreement, Assignee shall receive, every month, each and all of the rental payments made by the Tenants including, but without limitation, all payments due by the Tenants for overages and for their respective participation in the maintenance costs, insurances, and property taxes, including but not limited to those accrued for the year 2003, but not yet paid until such time as such default is cured by Assignee.” (Docket No. 35, Exhibit A-2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496550/ | Chapter 7
DECISION
CARLA E. CRAIG, Chief United States Bankruptcy Judge
In these adversary proceedings, the trustee in a chapter 7 case of a married couple, who filed as joint debtors, seeks to recover from two parochial schools tuition payments made by the debtors prior to the commencement of the case for the education of their two minor children, as fraudulent conveyances. The trustee’s claims are based upon the theory that because the parents were not “direct beneficiaries” of the tuition payments, and because private schooling of their children was, in the trustee’s judgment, “not reasonably necessary,” the debtors did not receive reasonably equivalent value or fair consideration for the tuition payments under § 548(a)(1)(B) of the Bankruptcy Code or § 273 of the New York Debtor & Creditor Law. (Pl.’s Opp’n ¶ 3, Adv. Pro. No. 13-1105-CEC, EOF No. 19; Pl.’s Opp’n ¶ 3, Adv. Pro. No. 13-1107-CEC, ECF No. 16.)
The trustee’s claims are based on a fundamentally flawed legal theory that is, moreover, at odds with common sense. The education provided by the defendants *128to these minor children constitutes both a direct and indirect benefit to their parents, who, with their children, must be considered a single economic unit for purposes of this analysis. Accordingly, the defendants’ motions to dismiss these adversary proceedings are granted.
Jurisdiction
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (H), 28 U.S.C. § 1384, and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This decision constitutes the Court’s findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.
Background
The following facts are undisputed or are alleged by the plaintiff.
On March 25, 2011, Olaniyi L. Akanmu and Omolayo T. Suara (together, the “Debtors”) filed a voluntary petition under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”). Following the commencement of the bankruptcy case, pursuant to §§ 701 and 702,1 Robert L. Geltzer (the “Trustee”) was appointed as trustee of the Debtors’ bankruptcy estate.
From 2005 through 2011, the Debtors’ two minor children were students at Our Lady of Mt. Carmel-St. Benedicta School (“Mt. Carmel”) and Xaverian High School (“Xaverian,” and with Mt. Carmel, the “Defendants”) at various times. The older child was a student at Mt. Carmel during the 2005-2006 school year, and was a student at Xaverian from 2006 through 2010. (Mt. Carmel’s Mem. of Law in Supp. of Mot. to Dismiss at 3, Adv. Pro. No. 13-1107-CEC, ECF No. 9-1; Xaverian’s Mot. to Dismiss ¶ 1, Adv. Pro. No. 13-1105-CEC, ECF No. 10.) The Debtors’ younger child attended Mt. Carmel from 2005 through 2011. (Mt. Carmel’s Mem. of Law in Supp. of Mot. to Dismiss at 3, Adv. Pro. No. 13-1107-CEC, ECF No. 9-1.)
From 2005 to 2011, Mt. Carmel received approximately $21,540 (the “Mt. Carmel Tuition Payments”) for tuition paid on behalf of the younger child and approximately $3,206 for tuition paid on behalf of the older child. (Compl. ¶¶ 10-11, Adv. Pro. No 13-1107-CEC, ECF No. 1). From 2006 through 2010, Xaverian received approximately $21,816 (the “Xaverian Tuition Payments,” and together with the Mt. Carmel Tuition Payments, the “Tuition-Payments”) for tuition paid on behalf of the older child. (Compl. ¶¶ 8-9, Adv. Pro. No. 13-1105, ECF No. 1.)
On March 22, 2013, the Trustee commenced these adversary proceedings against Xaverian and Mt. Carmel seeking to recover the Tuition Payments, totaling $46,562, as constructively fraudulent transfers under §§ 544 and 548(a)(1)(B) and New York Debtor & Creditor Law (“DCL”) § 273. The Trustee alleges that because the Debtors’ children, not the Debtors, received the education provided by the Defendants, the Debtors did not receive reasonably equivalent value or fair consideration in exchange for the Tuition Payments. The Trustee also contends that, at the time each tuition payment was made, the Debtors (i) were insolvent or were rendered insolvent as a result of such transfers, (ii) had unreasonably small-capital for the business in which they were engaged or were about to engage, and/or (iii) intended to incur, or believed that they *129would incur, debts beyond their ability to pay as such debts matured. (Compl. ¶ 24, Adv. Pro. No. 13-1105-CEC, ECF No. 1; Compl. ¶ 26, Adv. Pro. No. 13-1107-CEC, ECF No. 1.)
The Defendants’ motions to dismiss focuses on the element of reasonably equivalent value and fair consideration, contending that, as a matter of law, the value provided in the form of an education for the Debtors’ children constitutes reasonably equivalent value and fair consideration to the Debtors.2
Legal Standard for Dismissal of Complaints
Federal Rule of Civil Procedure 12(b)(6), made applicable to these adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b), provides that a complaint may be dismissed “for failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012(b). The purpose of Rule 12(b)(6) “ ‘is to test, in a streamlined fashion, the formal sufficiency of the plaintiffs statement of a claim for relief without resolving a contest regarding its substantive merits.’ ” Halebian v. Berv, 644 F.3d 122, 130 (2d Cir.2011) (quoting Global Network Commc’ns, Inc. v. City of New York, 458 F.3d 150, 155 (2d Cir.2006)).
“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) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In making this determination, a court must liberally construe the complaint, accept the factual allegations as true, and draw all reasonable inferences in favor of the plaintiff. Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir.2008). However, courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986); see also Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”). A complaint must make a “ ‘showing,’ rather than a blanket assertion, of entitlement to relief’ supported by sufficient “factual allegation[s].” Twombly, 550 U.S. at 556 n. 3, 127 S.Ct. 1955. “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (alteration in original) (citations and internal quotation marked omitted).
Discussion
A. Constructively Fraudulent Conveyance
1. Legal Standard for Avoidance Based on Constructive Fraud
Section 548(a)(1)(B) authorizes a trustee to avoid a transfer of an interest in property of the debtor under a theory of constructive fraud. That section provides:
The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the *130filing of the petition, if the debtor voluntarily or involuntarily—
(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;
(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;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C § 548(a)(1)(B). The purpose of this provision is to set aside transactions that “unfairly or improperly deplete a debtor’s assets” so that the assets may be made available to creditors. Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 435 B.R. 866, 875 (Bankr.S.D.N.Y.2010) (citing 5 Collier on Bankruptcy ¶ 548.01 and In re PWS Holding Corp., 303 F.3d 308, 313 (3d Cir.2002)). See also Walker v. Treadwell (In re Treadwell), 699 F.2d 1050, 1051 (11th Cir.1983) (“The object of section 548 is to prevent the debtor from depleting the resources available to creditors through gratuitous transfers of the debtor’s property.”).
Section 544(b) authorizes a trustee to avoid a transfer of an interest in property of the debtor by utilizing applicable state law that permits such avoidance. 11 U.S.C. § 544(b). Here, the “applicable law” is DCL § 273, which 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.
N.Y. Debt. & Cred. Law § 273.
The Bankruptcy Code does not define “reasonably equivalent value.” “[T]he question of reasonably equivalent value is determined by the value of the consideration exchanged between the parties at the time of the conveyance or incurrence of debt which is challenged.” FCC v. NextWave Personal Commc’ns, Inc. (In re NextWave Personal Commc’ns, Inc.), 200 F.3d 43, 56 (2d Cir.1999) (emphasis, internal quotations, and citation omitted). The consideration given in exchange for the transfer need not be mathematically equal, or a penny for penny. Pereira v. Wells Fargo Bank, N.A. (In re Gonzalez), 342 B.R. 165,174 (Bankr.S.D.N.Y.2006); MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., 910 F.Supp. 913, 937 (S.D.N.Y.1995). See also U.S. v. McCombs, 30 F.3d. 310, 326 (2d Cir.1994) (“[T]he concept [of fair consideration] can be an elusive one that defies any one precise formula.” (discussing DCL § 272)). In reaching its determination, a “court should consider both direct and indirect benefits flowing to the debtor as a result of the exchange.” The Liquidation Trust v. Daimler AG (In re Old CarCo LLC), No. 11 Civ. 5039(DLC), 2011 WL 5865193, at *7 (S.D.N.Y. Nov. 22, 2011) (citing Mellon Bank, N.A. v. Metro Commc’ns, Inc., 945 F.2d 635, 646-47 (3d Cir.1991) and Rubin v. Mfrs. Hanover Trust Co., 661 F.2d 979, 991-92 (2d Cir.1981)).
“Fair consideration” for purposes of DCL § 273 can be established by show*131ing that the transfer was in exchange for “fair equivalent” value and that the transferee acted in good faith. DCL § 272(a). “Fair consideration” under the DCL and “reasonably equivalent value” under § 548(a)(l)(B)(i) have substantially the same meaning. Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC), 458 B.R. 87, 110 (Bankr.S.D.N.Y.2011).
Section 548(d) defines “value” as “property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.” 11 U.S.C. § 548(d)(2)(A). In other words, transfers that satisfy, discharge, or secure all or part of an obligation of the transferor are for “value.”
Generally, a debtor’s payment of another’s debt may be avoided as a constructively fraudulent transfer under § 548(a) if the debtor was insolvent or was rendered insolvent thereby. See, e.g., H.B.E. Leasing Corp. v. Frank, 48 F.3d 623, 638 (2d Cir.1995); Rubin v. Mfrs. Hanover Trust Co., 661 F.2d 979, 991-992 (2d Cir.1981); In re Richards & Conover Steel, Co., 267 B.R. 602, 613 (B.A.P. 8th Cir.2001); Silverman v. Paul’s Landmark, Inc. (In re Nirvana Rest. Inc.), 337 B.R. 495, 502 (Bankr.S.D.N.Y.2006). However, it is well-established that a debtor may receive indirect value by paying a debt for which is he is not liable. See Rubin, 661 F.2d at 991-992.
While the defense of indirect benefit is most often asserted in the corporate context, for example, cases involving a parent company and a subsidiary, indirect benefits have also been found in cases where the transferor is an individual debtor. See, e.g., Montoya v. Campos (In re Tarin), 454 B.R. 179 (Bankr.D.N.M.2011) (Debtors received reasonably equivalent value for amount paid to their daughter’s wedding planner because the debtors, their guests, and the daughter, “got to smell the flowers, listen and dance to the music, eat the food, etc.”); Barber v. Iverson (In re Iverson), Case No. 05-80982, Adv. No. 06-8169, 2008 WL 2796998 (Bankr.C.D.Ill. Jul. 21, 2008) (Debtors received indirect benefit for payments made on third party’s debt by reducing the debtors’ debt to the third party.); Pereira v. Wells Fargo Bank, N.A. (In re Gonzalez), 342 B.R. 165 (Bankr.S.D.N.Y.2006) (Debtor received reasonably equivalent value when he made mortgage payments for a home in which a child for which he acknowledged paternity and the child’s mother lived.); Satriale v. Key Bank USA, N.A. (In re Burry), 309 B.R. 130 (Bankr.E.D.Pa.2004) (Debtor received reasonably equivalent value when he made payments for a friend’s boat, where the debtor also used the boat.); Jones v. Williams (In re McDonald), 265 B.R. 632 (Bankr.M.D.Fla.2001) (Debtor received reasonably equivalent value for payments made for neighbor’s delinquent lot rental in mobile home park because the debtor’s opportunity to purchase the neighbor’s mobile homes was preserved.); Harker v. Ctr. Motors, Inc. (In re Gerdes), 246 B.R. 311 (Bankr.S.D.Ohio 2000) (Debtor received “significant indirect benefit” by avoiding personal liability when she paid a debt of her wholly-owned corporation.).
2. Application of the Legal Standard to these Adversary Proceedings
The Trustee argues that the Debtors did not receive reasonably equivalent value in exchange for the Tuition Payments, because the Debtors’ children, not the Debtors, attended the schools and received the education provided by the Defendants. Contrary to the Trustee’s contention, the Debtors received reasonably equivalent value and fair consideration, di*132rectly and indirectly, in exchange for the Tuition Payments, in the form of the education provided to their children.
It is axiomatic that parents are obligated to provide for their children’s necessities, such as food, clothing, shelter, medical care, and education. See Holodook v. Spencer, 36 N.Y.2d 35, 44, 364 N.Y.S.2d 859, 324 N.E.2d 338 (1974). Under New York law, parents are legally obligated to supply their children with “adequate food, clothing, shelter [and] education ... medical, dental, optometrical [and] surgical care.” Fam. Ct. Act § 1012(f)(i)(A) (defining “neglected child”). See also N.Y. Comp.Codes R. & Regs. tit. 22 § 202.67(g) (A court may not permit a parent to use a child’s personal injury settlement funds “where the parents are financially able to support the [minor] and to provide for the [minor]’s necessaries, treatment and education.”). Additionally, New York state law requires parents to ensure school attendance by their child. N.Y. Educ. Law § 3212; In re Gabriella G., 104 A.D.3d 1136, 962 N.Y.S.2d 537, 539 (N.Y.App.Div.2013) (“ ‘Proof that a minor child is not attending a public or parochial school in the district where the parent[] reside[s] makes out a prima facie case of educational neglect pursuant to section 3212(2)(d) of the Education Law.’ ” (alteration in original) (quoting In re Matthew B., 24 A.D.3d 1183, 1184, 808 N.Y.S.2d 513 (N.Y.App.Div.2005))). “A parent’s failure to observe minimum standards of care in performing these duties entails both remedial sanctions, such as the forfeiture of custody, and criminal sanctions.” Holodook, 36 N.Y.2d at 44, 364 N.Y.S.2d 859, 324 N.E.2d 338. The Debtors, by paying tuition to the Defendants and enrolling their children as students, satisfied their legal obligation to provide for their education.
The Trustee argues that New York law does not require the Debtors to provide parochial or private school education, and that the Debtors could have satisfied their obligation at no cost by sending the children to public school. This argument misses the point. The fact that the Debtors chose to educate their children in parochial school rather than public school, arguably exceeding the “minimum standard of care,” does not change the fact that, by doing so, they satisfied their legal obligation to educate their children, thereby receiving reasonably equivalent value and fair consideration. It is irrelevant to this determination whether the Debtors could have spent less on the children’s education, or, for that matter, on their clothing, food, or shelter. To hold otherwise would permit a trustee to scrutinize debtors’ expenditures for their children’s benefit, and seek to recover from the vendor if, in the trustee’s judgment, the expenditure was not reasonably necessary, or if the good or service could have been obtained at a lower price, or at no cost, elsewhere. For example, a trustee could seek to avoid a debtor’s payments to a restaurant for a meal purchased for the debtor’s child, or payments to a department store for clothing purchased for the child, on a theory that adequate food or clothing could have been obtained at lower cost. A trustee could sue the vendor to recover the cost of a computer or other electronic device purchased pre-petition by a debtor for his child, on the theory that the item was not reasonably necessary. (See Pl.’s Opp’n ¶ 3, Adv. Pro. No. 13-1105-CEC, ECF No. 19; Pl.’s Opp’n ¶ 3, Adv. Pro. No. 13-1107-CEC, ECF No. 16; Tr.3 at 36, 58.) The absurdity of this scenario is obvious.
A trustee is not granted veto power over a debtor’s personal decisions, at *133least with respect to pre-petition expenditures. “[A] trustee’s powers are not limitless.” In re Thompson, 253 B.R. 823, 825 (Bankr.N.D.Ohio 2000). “[T]he ‘Bankruptcy Code confers absolutely no power upon the trustee to make decisions concerning how a debtor manages his everyday affairs such as where the debtor will live or work.’ ” French v. Miller (In re Miller), 247 B.R. 704, 709 (Bankr.N.D.Ohio 2000) (determining whether a chapter 7 trustee may waive the attorney-client privilege of a debtor). This is equally applicable to a debtor’s decisions concerning where and how to educate his children.
Nor does the fact that a debtor’s pre-petition expenditures may have been unwise or ill-advised, without more, constitute grounds for avoidance of the transaction as a constructive fraudulent conveyance. As one court has noted:
Often, a debtor prior to bankruptcy will make improvident purchases or expenditures which have a detrimental effect on creditors and may even be the precipitating cause of bankruptcy. A spendthrift debtor may purchase clothes or a new car, take costly vacations on credit, or otherwise incur unpayable debts for goods or services. The fact that all these transactions may be said to “exacerbate the harm to creditors and diminish the debtor’s estate” from an overall perspective does not mean that the debt- or received less than reasonably equivalent value in respect of each particular transaction.
Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortg. Inv. Corp.), 256 B.R. 664, 681 (Bankr.S.D.N.Y.2000), aff'd sub nom. Balaber-Strauss v. Lawrence, 264 B.R. 303 (S.D.N.Y.2001).
Another court, in rejecting a chapter 7 trustee’s fraudulent conveyance claim for pre-petition payments made by a debtor for costs related to a horse owned by the debtor’s spouse, made a similar point concerning a debtor’s pre-petition expenditures on behalf of his family:
[T]he Court views these horse related costs as an expense of the family, albeit a high expense given that owning a horse is obviously not a family necessity, no different than had Debtor paid $5,000 in elective surgery for his wife during the year prior to bankruptcy, paid $5,000 to take her on a vacation, paid for gasoline or repairs to a car she owned, or paid her share of the family’s restaurant bills, grocery bills, utility bills, etc. Similarly, Debtor’s schedules reflected a monthly clothing bill of $520, of which undoubtedly some significant portion belonged to [the spouse] and Debtor’s children, but the Trustee is not trying to recover those clothes or the amount Debtor spent for those clothes, from [the spouse] or his children.
Although in retrospect, Debtor’s decision to pay these large expenses for riding lessons, boarding costs, horse shows, and veterinarian bills, as well as his decision to pay, each month, $975 for food for a family of four, $229 for recreation, $880 for two car payments, $142 for cell phones, $129 for health club dues, $229 for personal care, or $520 for clothing, may not have been financially sound ones, in light of his mounting debt, the Court will not under the unique facts of this case tell this Debtor, after the fact, that similar amounts spent herein for what the family treated as a routine monthly expense, are subject to recovery by a trustee under § 548.
Morris v. Vansteinberg (In re Vansteinberg), Case No. 01-15474, Adv. No. 02-5151, 2003 WL 23 83 8125, at *6 (Bankr.D.Kan. Nov. 26, 2003).
More recently, a court rebuffed a trustee’s attempt to recover from the debtors’ *134daughter the funds paid by the debtors to a wedding planner for her wedding. In dismissing the action with prejudice, the court questioned: “If [the trustee] were entitled to recover from the daughter, would he also be entitled to recover from the guests? And what would be the difference between this set of facts and a situation in which [d]ebtors hosted Thanksgiving dinner for all the extended family?” Montoya v. Campos (In re Tarin), 454 B.R. 179, 183 (Bankr.D.N.M.2011).
The Trustee, citing Watson v. Boyajian (In re Watson), 309 B.R. 652 (B.A.P. 1st Cir.2004), argues that the Tuition Payments are “not beyond the pale of examination.” (Pl.’s Opp’n ¶ 9, Adv. Pro. No. 13-1105-CEC, ECF No. 19; Pl.’s Opp’n ¶ 9, Adv. Pro. No. 13-1107-CEC, ECF No. 16.) The Trustee’s reliance on Waíso^, a chapter 13 case, is misplaced. In that case, the question before the court was whether the debtors’ post-petition expenses for their children’s private school education were “reasonably necessary” for purposes of calculating the debtors’ projected disposable monthly income under § 1325. Watson, 309 B.R. at 660-662.
In a chapter 13 case, a debtor is required to formulate a plan to repay creditors. 11 U.S.C. §§ 1321, 1322. If the chapter 13 trustee or an unsecured creditor objects to the confirmation of the plan, a court may not confirm the plan unless all claims are being paid in full under the plan, or the debtor is committing all of his “projected disposable income” to fund the plan. 11 U.S.C. § 1325(b)(1). A chapter 13 debtor’s disposable income is calculated by subtracting amounts that are “reasonably necessary ... for the maintenance or support of the debtor or a dependent of the debtor” from the debtor’s current monthly income. 11 U.S.C. § 1325(b)(2). The court therefore must review the chapter 13 debtor’s expenses on a going-forward basis and evaluate whether those projected expenses are reasonably necessary for the maintenance or support of the debtor or the debtor’s family, in order to determine whether the debtor’s plan properly allocates all of the debtor’s disposable income to the repayment of creditors.
The “reasonably necessary” analysis is entirely inapplicable in a chapter 7 case. A chapter 7 debtor does not propose a plan to repay creditors, and his post-petition income is not included in the chapter 7 estate or in the distributions received by creditors.4 In a chapter 7 case, the trustee collects and liquidates the debtor’s pre-petition, non-exempt assets. 11 U.S.C. § 704. The proceeds are then divided amongst creditors in order of priority. 11 U.S.C. § 726. Unless the chapter 7 case would be an abuse of the Bankruptcy Code, ie., if the debtor has the financial ability to repay creditors under a chapter 11 or chapter 13 plan, there is no review of a chapter 7 debtor’s post-petition income and expenses. See 11 U.S.C. § 707(b).
However, none of the chapters of the Bankruptcy Code authorize the trustee to review the reasonableness of a debtor’s pre-petition expenditures or to seek recovery of expenditures deemed not “reasonably necessary.” While a debtor’s pre-petition spending may be relevant in an action to deny a chapter 7 debtor’s discharge for the failure “to explain satisfactorily ... any loss of assets or deficiency of assets to meet the debtor’s liabilities” under § 727(a)(5), even then, a debtor is not required to justify the reasonableness *135of his expenditures. “[T]he focus of § 727(a)(5) is not on whether such spending is on illegal, immoral, or otherwise imprudent activities, but rather on the sufficiency of the explanation for the loss.” Richardson v. Von Behren (In re Von Behren), 314 B.R. 169, 181 (Bankr.C.D.Ill.2004) (Trustee’s criticism of the debtors’ “ ‘lavish spending’ on vacations and nice vehicles,” was irrelevant to whether the debtors’ discharge would be denied under § 727(a)(5).).
The Trustee’s argument that parents do not receive reasonably equivalent value when they make tuition payments for their children’s education was recently rejected in McClarty v. University Liggett School (In re Karolak), Case No. 12-61378, Adv. No. 13-04394-PJS, 2013 WL 4786861 (Bankr.E.D.Mich. Sept. 6, 2013). In that case, a chapter 7 trustee sought to recover $16,690 in tuition payments made by a chapter 7 debtor to a private school for her three minor children, pursuant to §§ 548(a)(1)(B) and 544. Karolak, 2013 WL 4786861, at *1. On cross-motions for summary judgment, the court ruled against the trustee, reasoning:
The reasonably equivalent value consisted of the grammar school education that [the debtorj’s children received at [the defendant]. This is not a case where the value comes from someone other than the recipient of the transfer. In exchange for the tuition payments, [the defendant] provided reasonably equivalent value to [the debtor] in the form of educating her three minor children. [The debtor] purchased the education for her children and she directly received the benefit of that purchase. In the state of Michigan, a parent has a legal obligation under Mich. Comp. Laws Ann. § 380.1561(1) to provide schooling for their children. [The debt- or]’s tuition payments to [the defendant] provided schooling for her minor children and enabled her to fulfill her statutory duty- The fact that [the debt- or] could arguably have provided a cheaper form of education to her children than sending them to [the defendant] does not mean that she did not receive a reasonably equivalent value in exchange for the tuition payments.
Id. at *3.
Similarly, in Watson, the court noted the value given to the debtors in exchange for tuition payments for their children. In concluding that private school tuition expenses did not constitute permissible charitable contributions for purposes of § 1325, the Watson court pointed out: “[The debtors] receive educational services in return for their tuition payments. Indeed, as [one of the debtors] testified, the [debtors] and their children highly value the education received in return for their tuition payments.” Watson, 309 B.R. at 662.
The two cases cited by the Trustee in which pre-petition tuition payments were avoided as fraudulent conveyances concerned tuition payments for students over the age of 18, and are therefore distinguishable from the instant case. In Gold v. Marquette University (In re Leonard), the trustee sought to avoid college tuition payments made by the debtors on behalf of their adult child. Gold v. Marquette Univ. (In re Leonard), 454 B.R. 444 (Bankr.E.D.Mich.2011). The college sought summary judgment, arguing that the debtors received reasonably equivalent value for the tuition payments by receiving peace of mind in knowing that their son was receiving a quality education, and by receiving the expectation that their son would become financially independent because of such education. Id. at 454-455. The court, noting that the debtors were not legally obligated to provide their adult child with a college education, determined *136that the debtors did not receive any value in exchange for the tuition payments because the debtors’ benefit was not concrete and quantifiable. Id. at 457-458.
In Banner v. Linsday (In re Lindsay), a debtor made various pre-petition transfers, including the pre-payment of his son’s college tuition, after the debtor’s business partner had commenced an action against him. Banner v. Linsday (In re Lindsay), Case No. 06-36352(CGM), Adv. No. 08-9091(CGM), 2010 WL 1780065 (Bankr.S.D.N.Y. May 4, 2010). The chapter 7 trustee filed an adversary proceeding against the debtor and his wife, seeking, among other things, recovery of the monies paid to the college. Noting that the debtor presented no evidence of a legal obligation to pay his son’s college tuition, the court held that the tuition transfers were avoidable under DCL § 273-a because the debtor did not receive fair consideration.5 Id. at *9-10.
It is by no means clear that the pre-petition tuition payments on behalf of a college-age child would be recoverable as a constructively fraudulent conveyance. Indeed, two recent cases have held to the contrary. In Sikirica v. Cohen (In re Cohen), Case No. 05-38135-JAD, Adv. No. 07-02517-JAD, 2012 WL 5360956 (Bankr.W.D.Pa. Oct. 31, 2012), rev’d on other grounds, 487 B.R. 615 (W.D.Pa.2013), the court rebuffed a chapter 7 trustee’s effort to recover payments made by the debtors for tuition for their children’s undergraduate educations, holding that “[wjhile the Pennsylvania legislature has not yet enacted a statute that requires parents to pay for their children’s post-secondary education, this Court holds that such expenses are reasonable and necessary for the maintenance of the Debtor’s family for purposes of the fraudulent transfer statute only.” Cohen, 2012 WL 5360956, at *10. Accord, Shearer v. Oberdick (In re Oberdick), 490 B.R. 687, 712 (Bankr.W.D.Pa.2013) (holding that funds paid for undergraduate college tuition for debtor’s children constituted expenditures for necessities that were therefore not avoidable under the Pennsylvania Uniform Fraudulent Transfer Act). See N.Y. Fam. Ct. Act § 413 (in child support actions, imposing an obligation on parents to support their children, including by providing education, through the age of twenty-one if the parent is financially able); N.Y. Dom. Rel. Law § 240 1-b (same).
Here, however, the result is crystal clear. The Debtors are legally obligated under New York Law to provide their minor children with an education. N.Y. Fam. Ct. Act § 1012(f). The fact that they chose to do so by sending their children to private or parochial school, rather than public school, does not render the payments subject to scrutiny by the Trustee for avoidance, any more than the Trustee would be entitled to second-guess other choices made by debtors pre-petition in providing clothing, food, shelter, or other goods or services, to their minor children.
The Debtors received reasonably equivalent value and fair consideration for the Tuition Payments for their children’s education, not only because the Debtors satisfied their legal obligation to educate their children, but also because the Debtors and their minor children must be viewed as a single economic unit for these purposes. In other words, goods and ser*137vices purchased by parents for their minor children should generally be treated, for purposes of constructive fraudulent conveyance analysis, as though they had been purchased by the parents for themselves.
This conclusion follows from the fact that the affairs of parents and their minor children are generally so entangled as to effectively create a single economic unit. As explained by the New York Court of Appeals:
It is artificial to separate the parent and child as economic entities.... The reality of the family is that, except in cases of great wealth, it is a single economic unit and recovery by a third party against the parent ultimately diminishes the value of the child’s recovery.
Holodook, 36 N.Y.2d at 47, 364 N.Y.S.2d 859, 324 N.E.2d 338 (discussing the rationale for prohibiting third-party defendants from seeking contribution from an injured child’s parent on the basis of negligent supervision). Put differently, dependent minor children have no separate economic life from their parents; they have no independent means of support and no control over the economic choices made on their behalf. Conversely, parents’ economic lives cannot be meaningfully separated from those of their dependent minor children, whose assets are generally inextricably commingled with their parents’, who generally have no liabilities, and who are wholly dependent upon their parents for all of the goods and services they receive. This reality compels the conclusion that goods or services provided to a minor child (in these cases, educational services) may constitute consideration to the parents.
At the hearing on this motion, the Trustee’s counsel raised for the first time the argument that the record on this motion is insufficient for the Court to determine whether the Debtor’s children in fact received any educational benefits from the Defendants. In so doing, the Trustee’s counsel suggested that discovery concerning such matters as the children’s attendance records or the parents’ participation in parent-teacher conferences would be appropriate. (Tr. at 38:6-14, Adv. Pro. No. 13-1105-CEC, ECF No. 23; Tr. at 38:6-14, Adv. Pro. No. 13-1107-CEC, ECF No. 19.)
This last minute argument is entirely meritless. The complaints in these adversary proceedings are devoid of any allegation that the Defendants failed to provide an education to the Debtors’ children. Indeed, the complaints contain few, if any, specific factual allegations, instead presenting “[t]hreadbare recitals of the elements” of the Trustee’s claims and “labels and conclusions ... [and a] formulaic recitation of the elements of a cause of action.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; Twombly, 550 U.S. at 555, 127 S.Ct. 1955. (See Compl. ¶¶ 13-20; Adv. Pro. 13-1105, ECF No. 1; Compl. ¶¶ 15-22, Adv. Pro. No. 13-1107, ECF No. 1.) Under standard articulated in Iqbal and Twombly, the Trustee cannot avoid dismissal of a formulaic, general, fact-free pleading by arguing that he needs discovery to add flesh to the bare bones of his complaint. This is particularly so given that, in this chapter 7 case, the trustee could have obtained discovery prior to the commencement of this case pursuant to Bankruptcy Rule 2004 to investigate the factual underpinning of his claims. It is obvious that this far-fetched argument is nothing more than a red herring proffered in a last-ditch effort to avoid dismissal.
Equally lacking in merit is the Trustee’s argument that discovery is needed to determine whether the Debtors benefited by the “religious formation” provided by the Defendants to the Debtors’ children. (Tr. at 49, Adv. Pro. No. 13-1105-CEC, ECF No. 23; Tr. at 49, Adv. Pro. No. 13-1107-*138CEC, ECF No. 19; Pl.’s Opp’n ¶ 10, Adv. Pro. No. 13-1105-CEC, ECF No. 20; Pl.’s Opp’n ¶ 10, Adv. Pro. No. 13-1107-CEC, ECF No. 16.) Putting aside, for the moment, concerns about the inappropriateness of permitting the Trustee to interrogate the Debtors concerning their religious beliefs and practices, this argument too is a red herring. The Defendants do not rely on any “religious formation” provided to the Debtors’ children as a basis for dismissing the complaint, and the outcome of the Defendants’ motions to dismiss would be same if the Defendants were secular private schools rather than parochial schools. The Defendants’ motions, and this decision, address the only claim even arguably articulated in the complaints: that because the recipients of the education provided by the Defendants were the Debtors’ children, and not the Debtors, no reasonably equivalent value or fair consideration was received in exchange for the Tuition Payments. This claim, for all of the reasons set forth above, must be emphatically rejected.
B. Unjust Enrichment
The Trustee alleges that the Debtors’ children and/or the Defendants were unjustly enriched at the expense of the Debtors’ estate, and therefore seeks the imposition of a constructive trust on the Debtors’ interest in their children’s and/or the Defendants’ bank accounts.
To succeed on a claim for unjust enrichment under New York Law, one must show “that (1) defendant was enriched, (2) at plaintiffs expense, and (3) equity and good conscience militate against permitting defendant to retain what plaintiff is seeking to recover.” Briarpatch Ltd. v. Phoenix Pictures, Inc., 373 F.3d 296, 306 (2d Cir.2004). The concept is that one party has received a benefit at the expense of another party. Kaye v. Gross-man, 202 F.3d 611, 616 (2d Cir.2000). “Recovery under unjust enrichment is a recovery in quasi contract.” Geltzer v. Borriello (In re Borriello), 329 B.R. 367, 381 (Bankr.E.D.N.Y.2005). The presence of unjust enrichment is a necessary element for the imposition of a constructive trust. Pryor v. Ventola (In re Ventola), 398 B.R. 495, 498 (Bankr.E.D.N.Y.2008) (“Under New York law, to find constructive trust the courts look to see if there are (1) a confidential or fiduciary relation, (2) a promise, (3) a transfer in reliance thereon, and (4) unjust enrichment.”).
The Defendants received tuition payments from the Debtors and, in exchange, provided education to the Debtors’ minor children. The Debtors received the direct and indirect benefit of their children receiving an education. The enrichment, as between the Defendants and the Debtors, therefore, was not unjust. See Kramer v. Chin (In re Chin), 492 B.R. 117, 125-126 (Bankr.E.D.N.Y.2013) (finding no unjust enrichment when the debtor transferred property, to which she held bare legal title, to her brother because he was the “true” owner); Boriello, 329 B.R. at 381-382 (finding no unjust enrichment when the debtor transferred his interest in real property to wife). For an unjust enrichment claim to succeed, the transfer must be unfair as between the transferor and the transferee. Boriello, 329 B.R. at 382. As long as the transferor received a benefit, as the Debtors did here, the transferee is not liable on an unjust enrichment claim. Id. at 381-382. Whether the transferor’s creditors also benefitted from the transfer is irrelevant to an unjust enrichment claim. Id. at 382. For these reasons, the Trustee’s unjust enrichment claims against the Defendants must fail, and there is no basis for the imposition of a constructive trust.
*139The Trustee’s unjust enrichment claims against the Debtors’ children must also fail. The children are not defendants in these adversary proceedings. Moreover, the children’s “enrichment” by receiving an education paid for by the Debtors is not unjust.
Conclusion
For the foregoing reasons, the Defendants’ motions to dismiss are granted. A separate order will issue.
. Unless otherwise specified, all statutory references herein are to the Bankruptcy Code, Tide 11, U.S.C.
. Mt. Carmel alternatively argues that, if it is determined that the Debtors did not receive value in exchange for the tuition payments, the Mt. Carmel Tuition Payments should be considered charitable contributions and therefore exempt from avoidance pursuant to § 548(a)(2). Given the conclusion that the Defendants gave reasonably equivalent value and fair consideration to the Debtors by providing education for their children, it is unnecessary to address this defense.
. "Tr.” refers to the transcript of the hearing held on July 11, 2013.
. One exception to this rule, not relevant here, is that a debtor’s post-petition property interest in an inheritance, property settlement with a spouse, or life insurance proceeds becomes property of the estate if received within 180 days of the bankruptcy filing. 11 U.S.C. § 541(a)(5).
. DCL § 273-a provides: "Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.” N.Y. Debt. & Cred. Law § 273-a. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496552/ | OPINION
HONORABLE MORRIS STERN, Bankruptcy Judge
I. FACTUAL BACKGROUND.
Movant here (collectively “Hudson”)1 was the successful bidder in bankruptcy for essentially all of the assets of Chapter 11 debtor Christ Hospital, a New Jersey not-for-profit corporation (the “hospital” or the “debtor”). The sale, pursuant to a court-ordered auction process, was approved by order of this court on March 27, 2012 (the “Sale Approval Order”). That Order provided Hudson with what it contends are the benefits of broad “free and clear” protections as a purchaser of hospital assets per 11 U.S.C. § 363(f).2 Hudson now seeks to enjoin Prime Healthcare Services, Inc. (“Prime”) from pursuing its pending lawsuit against Hudson in the New Jersey Superior Court (the “State litigation”). There Prime asserts remaining active claims of “Tortious Interference in Contractual Relations,” “Tortious Interference with Prospective Economic Gain” and “Unfair Competition” relating to Hudson’s acquisition of hospital assets but with origins before the hospital filed its February 6, 2012 voluntary Chapter 11 bankruptcy petition.3 Hudson asserts, inter alia, that the Sale Approval Order and this court’s order confirming the hospital’s plan of liquidation (the “Confirmation Order”) *162are being collaterally attacked and violated by Prime’s pursuit in the State litigation. Hudson relies heavily on res judicata and collateral estoppel concepts. Prime, as Hudson sees it, should thus be enjoined from continuing that litigation. In fact, sale-related injunctions inuring to the benefit of the successful § 363 sale bidder were included in the Sale Approval Order and the Confirmation Order.
Prime filed opposition to Hudson’s motion for an injunction and a cross-motion to have the reference withdrawn by the district court pursuant to 28 U.S.C. § 157(d), thus allowing that court to hear the current disputes. Prime argues that none of the following gives the bankruptcy court subject matter jurisdiction over Prime’s state law claims: any order entered in the bankruptcy case; 28 U.S.C. § 1334(b); United States Supreme Court cases which otherwise restrict bankruptcy court jurisdiction or the ability of this court to enter final judgments;4 or, 11 U.S.C. § 105(a) (bankruptcy court power to issue orders “necessary or appropriate” to carry out provisions of Title 11 or enforce its orders). Prime also argues that no bankruptcy court order precludes Prime’s State litigation claims under collateral estoppel or res judicata. Contesting Hudson’s position and the precedent it relies on, Prime asserts:
Here, the Bankruptcy Court did not hear evidence, consider, or make findings on Prime Healthcare’s claims against [Hudson] for Prime’s state court claims. These issues were not adjudicated or litigated in the Bankruptcy Court, and were not required to be determined by the Bankruptcy Court. Simply, [Prime’s] state law claims involving multiple hospitals in multiple states are separate and apart from the Christ Hospital Bankruptcy Proceeding. ...
[Hudson] relies on the case In re Farmland Industries, Inc., 376 B.R. 718, 725-26 (Bnkr.W.D.Mo.2007)[sic], aff'd, 639 F.3d 402 (8th Cir.2011) for the proposition that an unsuccessful bidder asserting post-sale tortious interference claims is not permitted to collaterally attack a bankruptcy sale order because it would require “overruling numerous findings from the Sale Orders.” Id. at 727. However, this case is factually in-apposite to the instant matter.5
Here, [Prime’s] claims in no way relate to [Hudson’s] conduct during the Christ Hospital bankruptcy sale process, nor does [Prime’s] Superior Court Complaint allege misconduct in connection with the Bankruptcy Proceedings. *163Rather, [Prime’s] state law claims relate solely to [Hudson’s] pre-petition, pre-bidding conduct involving Christ Hospital. These claims are wholly unrelated to the Bankruptcy Proceeding and the Bankruptcy Court’s determination that [Hudson] was a “good faith” purchaser.
(Dkt. 1302, Prime’s Memorandum of Law in support of its cross-motion and in opposition to Hudson’s motion for an injunction.) As will be seen, this court acknowledges a certain degree of relevance of Farmland, but finds no need to rely heavily on that opinion for factual or conceptual support.
At outset and most fundamentally, this court disagrees with Prime’s characterization of its economic tort claims — they are quite obviously intertwined with this Chapter 11 case. Indeed, Prime’s convenient current statement that its tort claims do not encompass any Hudson misconduct “in connection with” the bankruptcy or its sale proceeding flies in the face of its own State litigation pleadings; a “forced” bankruptcy is alleged and, having supposedly driven Prime from the marketplace by unfair competitive practices, Hudson is said to have acquired the Christ Hospital assets for a diminished price. Moreover, the “missing” bankruptcy hearing on Prime’s remaining economic tort claims was solely a function of Prime’s silence. Those claims, which are independent of later market competition between Prime and Hudson for other hospitals, had manifested as of the time of the § 868 sale. However, only Prime was in a position to be aware of its status as a potential tort claimant.6 While Prime was not required to voice its objection to the sale in bankruptcy, it was put to the burden as a knowing claimant to object or risk loss of its claim to a necessarily accelerated bankruptcy process (with broad orders of process protection).
The cross-motion to withdraw the reference was transmitted to district court pursuant to D.N.J. LBR 5011-1; hearing on this withdrawal motion was eventually adjourned at Prime’s request, pending resolution by the bankruptcy court of Hudson’s motion. Prime had filed with the bankruptcy court (pursuant to Fed. R. Bankr.P. 5011(c)) a motion to stay the hearing on Hudson’s motion for an injunction until the district court’s resolution of Prime’s motion to withdraw the reference. This court denied Prime’s motion for a stay for the reasons set forth on the record, and heard extensive oral argument on Hudson’s motion.
The Parties. Prime’s complaint describes Prime as a major operator of for-profit acute care hospitals (sixteen in California, Nevada, Pennsylvania and Texas). It also operates not-for-profit hospitals in *164California and Texas through a charitable foundation. Its hospital employees total more than 16,000. Hudson owns and operates three for-profit hospitals (including the successor to Christ Hospital) in Hudson County, New Jersey.
Petition Events/Reasons for Chapter 11 Filing. In its Disclosure Statement dated April 23, 2013 the debtor describes as follows certain events leading up to this case (some of which parallels factual statements in Prime’s State litigation complaint) (Disclosure Statement, dkt. 1172, pp. 8-11, including quoted and synopsized passages).
Debtor’s earliest contact with Prime was June, 2011. “Debtor entered into a Letter of Intent on August 12, 2011 (the “LOI”) with Prime ... followed by a December 2, 2011 asset purchase agreement (the “Prime APA”).”
“As of the date the Debtor executed the LOI with Prime, and given the Debtor’s application to terminate the pension plan, the Debtor owed approximately $90,000,000 to the Pension Benefit Guaranty Corporation (“PBGC”) and the Internal Revenue Service (“IRS”), $12,700,000 to Bon Secours Health System (“Bon Secours”), and $20,000,000 to other unsecured creditors, for total balance sheet liabilities on these three items alone of $122,700,000.... ”
“With Prime’s support, the Debtor was able to borrow an additional $5,600,000 on its line of credit with HFG (defined below) because of Prime’s agreement to participate in that transaction. As part of this, the Debtor resolved the Bon Secours claim of $12,700,000 for $1,100,000, which was funded by Prime through the HFG line and paid on September 1, 2011.... ”
“On September 14, 2011 ... the Debt- or filed its notice under the Community Healthcare Asset Protection Act (“CHA-PA”) with the Attorney General. On September 30, 2011, Prime filed its Certificate of Need (“CON”) Application with the DOH [New Jersey Department of Health].”
“In connection with Charity Care advances made by the DOH in the 4th quarter of 2011, the DOH had required that the Debtor present the executed Prime APA prior to the December, 2011 advance, which the Debtor did on December 2, 2011. Thereafter, the State released the requested Charity Care advance.”
“The Debtor invited the unsecured creditors to form an unofficial committee, which they did ... The Unofficial Committee retained its own restructuring attorneys and financial advisors, and in the spirit of cooperation, the Debtor funded those advisors an initial retainer of $150,000.”
“On December 23, 2011, and despite the fact that it was under an exclusive agreement with Prime, the Debtor received an unsolicited offer to purchase its assets from Hudson Hospital Holdco, LLC (“Hudson”), an affiliate of the entity that had purchased both Bayonne Medical Center and Hoboken University Medical Center out of bankruptcy.”
“On January 20, 2012, the Debtor received an unsolicited offer to purchase its assets from Community Healthcare Associates (“CHA”), the entity that had purchased Barnert Hospital out of bankruptcy. CHA’s proposal was joined in by Jersey City Medical Center/Liberty Health, who would become a tenant for a portion of the Hospital premises if CHA was selected as the successful purchaser.”
*165“Following these two expressions of interest, a significant amount of “public opinion” arose over who would be the best suitor for the Hospital. Notwithstanding, the Debtor and its Board remained committed, not just contractually, but in accordance with its best business judgment, to proceed forward to close on the Prime APA.”
“On or about January 12, 2012, the Debtor received two discouraging pieces of news: first, that the State’s second quarter Charity Care advance would not be forthcoming in the first Quarter, and second, that it did not seem likely that the Debtor’s CHAPA or Prime’s CON applications, commenced in September of 2011 would be finalized until May or June, well into the second Quarter of 2012, and well beyond Prime’s then desired closing date of March 31, 2012.”
“Prime interpreted this news (rightly or wrongly) to mean that the State was not supporting the Prime transaction
“On January 25, the Debtor received word that its request for reconsideration by DOH [regarding Charity Care funds] had been denied. On January 26, 2012 ... Prime advanced the Debtor an additional $1 million through the HFG line, which enabled the Debtor to meet its January 27 payroll.”
“On Tuesday, January 31, 2012, Prime advised the Debtor that it would withdraw its bid and no longer finance the Debtor’s operations by backstopping the HFG line.”
Prime’s Appearance in this Chapter 11 Case; Case References to Prime. The day after the February 6, 2012 petition filing the debtor moved for approval of post-petition financing and use of cash collateral. Its prepetition secured lenders appeared through HFG Health Co-4, LLC (“HFG” or “HF-4”) as their agent (Motion for an Interim Order, dkt. 12), which remained a very active participant in the case. The debtor stipulated in the February 7, 2012 Interim Order for post-petition financing and the use of cash collateral that HF-4 was the only prepetition lender on the debtor’s revolving loan and the debtor’s term loan (Interim Order, February 7, 2012, dkt. 29, ¶¶ B.l and B.6) (“Interim Order”). Because of Prime’s prepet-ition loans to the debtor, Prime retained an interest in the term loan debt. In relevant part the Interim Order provided:
As of the Filing Date, HFG was the only Prepetition Term Lender. However, as of the Filing Date, Prime Healthcare Services, Inc. holds certain last-out participation interests in the Prepetition Term Loan Debt in the approximate amount of $5.6 million. [Emphasis added.]
(Dkt. 29, ¶6.6). Prime, through counsel, filed a Notice of Appearance on February 7, 2012 (dkt. 30) but did not file a proof of claim independent of that of HFG. The court approved Bid Procedures by Order entered on February 22, 2012 (dkt. 98), and an auction was conducted over a number of days (March 19-26). Prime did not submit a bid. The court held a hearing to approve the sale on March 23, 2012 and March 27, 2012 which culminated in the Sale Approval Order of March 27, 2012. Prime did not appear at the hearings to approve the sale.
State Litigation. On March 13, 2013 Prime initiated the State litigation. It is noteworthy that up to this time Prime could have sought to avail itself of Fed. R. Bankr.P. 9024 (see Fed.R.Civ.P. 60(b)), seeking relief from the terms of the Sale Approval Order of March 27, 2012. No such effort was made, nor was any recourse by way of a request for interpretation or otherwise sought by Prime in the *166bankruptcy court, notwithstanding the persisting Sale Approval Order injunctive provisions. Prime instead chose, in Hudson’s view, to collaterally attack that order.
Substantial portions of Prime’s complaint allege claims for anticompetitive acts of Hudson post-petition (indeed, after the sale to Hudson was concluded) as to Prime’s efforts to acquire other New Jersey hospitals, i.e., St. Michael’s and St. Mary’s (as well as a Rhode Island hospital). Nevertheless, both linking the allegations against Hudson regarding Christ Hospital to those other purported anti-competitive acts (i.e., Hudson’s supposed modus operandi) and complaining that Hudson had also damaged it as to Christ Hospital independent of the later anticom-petitive events, Prime asserted:
First Count (Violation of the New Jersey Anti-Trust Act, N.J.S.A. 56:9-3— Conspiracy);
Second Count (Violation of the New Jersey Anti-Trust Act, N.J.S.A. 56:9-4(a)— Monopoly);
Third Count (Tortious Interference in Contractual Relations);
Fourth Count (Tortious Interference with Prospective Economic Gain); and Fifth Count (Unfair Competition).
Much of the purported factual footing for Prime’s Christ Hospital-based claims track the August 2011 to February 2012 history of Prime’s negotiation and intense efforts to acquire the hospital’s assets, including: its August 2011 Letter of Intent; more than $6 million of loans to keep the hospital afloat and out of bankruptcy; the December 2011 Prime-hospital Asset Purchase Agreement; then the Hudson unsolicited offer (through Hudson’s principal, Garipalli) for hospital assets; and, ultimately the following:
18.Before and following that offer, Defendant Garipalli, individually, and through his entity Hudson Holdco, for the improper purpose of preventing and/or interfering with Prime Healthcare’s purchase of Christ Hospital, organized and managed a campaign to destroy Prime Healthcare’s reputation and undermine its ability to conduct business in New Jersey through the exertion of political influence and other non-public activities, the creation of alliances with unions, other hospitals and others, and the transmission of misinformation concerning Prime Healthcare. In addition, it was clear that Garipalli and Hudson Holdco’s intent was to make it untenable for Prime Healthcare to continue to buy Christ Hospital in order to force it into bankruptcy so that Garipalli could purchase the struggling facility for less than what was agreed upon between Prime Healthcare and Christ Hospital in their APA. [Emphasis added.]
19. As a direct result of Garipalli and Hudson Holdco’s actions, it became clear by February 2012 that Prime Healthcare’s contractual opportunity to purchase Christ Hospital had been unfairly and irreparably destroyed by statements and actions made by these Defendants, as State authorities then made it clear that the purchase process would be so protracted as to be make the deal economically unfeasible, requiring Prime Healthcare to withdraw its offer to purchase. This immediately and predictably forced Christ Hospital into bankruptcy. [Emphasis added.]
20. Defendant Garipalli, through his entity Hudson Holdco, then immediately made an offer to buy Christ Hospital which was significantly less than what Prime Healthcare had offered, and the offer was deemed inappropriate by the trustees because the hospital would, pursuant to the bankruptcy code, need to be put up for auction for the benefit of creditors. Hudson Holdco later won a *167bankruptcy auction and according to the N.J. Attorney General’s June 2012 review of the sale under the Community Health Care Assets Protection Act, the value of Prime Healthcare’s total bid was approximately $80 million dollars, and the value of Hudson Holdco’s bid in bankruptcy was about $70 million dollars, about $10 million less than what it would have been had the hospital not been driven into bankruptcy by Hudson Holdco. [Part of emphasis in original; part emphasis added.]
See, inter alia, Prime’s New Jersey Superior Court complaint ¶¶ 14-20.
Hudson moved in the New Jersey Superior Court for dismissal of the State litigation based upon inadequacy of Prime’s pleading. See N.J. Court Rule 4:6-2(e). That court ruled via its opinion and order on August 22, 2013 (the “Superior Court Order” and the “Opinion”). Specifically, the court:
• dismissed without prejudice the First and Second Counts of the complaint (New Jersey statutory antitrust claims);
• dismissed without prejudice the Third, Fourth and Fifth Counts of the complaint (tortious interference and unfair competition) as they related to St. Mary’s Hospital and St. Michael’s Hospital; but
• denied dismissal of the Third, Fourth and Fifth Counts of the complaint as they related to Christ Hospital.
(Dkt. 1300, Hudson’s motion, Exhibit C.) The Opinion initially addressed antitrust claims but in terms later apparently applied to all counts, stated in relevant part as to both the state court “CHAPA” sale approval order and bankruptcy court orders the following:
Allowing this litigation to proceed with respect to Christ Hospital would not constitute a collateral attack on the previous orders from the Bankruptcy Court or Superior Court. Those proceedings relate to the sale of Christ Hospital after it went into bankruptcy. Plaintiffs antitrust claims pertain to defendants’ actions that took place prior to, and allegedly during, this transaction. A finding by this court that Defendants engaged in illegal activity with respect to Christ Hospital would not necessarily conflict with the Superior Court findings which said that the bidding and process done in Bankruptcy Court was fair and competitive. [The antitrust claims were nevertheless dismissed without prejudice on other grounds.]
Defendants argue that the Bankruptcy Court order expressly relieves the successful bidder of liability on any theory of law or equity for claims relating to the Christ Hospital transaction. Paragraph U of the Sale Order specifically bars antitrust claims. Again, this refers to the Christ Hospital transaction as conducted in the Bankruptcy Court, after foreclosure [the petition or sale date?]. Therefore, claims against Defendants Holdco and Garipalli can be construed as independent of CHAPA-facilitated transaction because the alleged anticompetitive behavior was happening separately from, and prior to, those proceedings.
This litigation is not seeking to undo the sale of Christ Hospital or challenge the outcome of the CHAPA proceedings. Thus, the litigation with respect to Christ Hospital is not an impermissible collateral attack on the Bankruptcy Court or Superior Court orders.
(Id. at Opinion, p. 2., emphasis added.) The Opinion goes on to assess Counts Three through Five as pled. As to Tor-*168tious Interference Counts Three and Four, the court opined:
... Plaintiffs claims for tortious interference with respect to Christ Hospital are sufficient to survive the extreme measure of dismissal under the generous standards of notice pleading. Here, Plaintiff has alleged that Defendants Garipalli and Holdco worked to create opposition to their acquisition of Christ Hospital, forcing them to withdraw their hid. Prime has alleged facts which, at a minimum, put Defendants Garipalli and Holdco on notice that organizing opposition to Prime’s acquisition of Christ Hospital at various levels, if proven to be true and illegal at a later stage in litigation, effectively forced Prime out of the market for Christ Hospital and caused Prime financial loss. This is distinguishable from the tortious interference claims regarding St. Mary’s and St. Michael’s, where the alleged interference has not actually taken place.
(Id. at Opinion, p. 5, emphasis added.) The Count Five unfair competition claim was said to be predicated on the same facts supporting the tortious interference counts.
Current Status of Case. In accordance with the Sale Approval Order (with Hudson’s signed APA attached) the sale of the assets of the hospital to Hudson closed on July 13, 2012. The case remained fully active, with substantial post-closing administrative matters over the next eleven months leading up to Plan confirmation. The debtor and Committee filed a Disclosure Statement and Joint Plan of Orderly Liquidation with a March 15, 2013 motion to approve the former.7 The court approved the Disclosure Statement by Order of April 23, 2013. By Order of June 4, 2013 the court confirmed the Joint Plan of Orderly Liquidation. Since the entry of the Confirmation Order, there has been yet again substantial case activity (see, e.g., dkt. 1214 through 1299). Hudson then filed the instant motion on September 30, 2013.
Relevant Bankruptcy Court Order Provisions; In Rem Character of Case and Proceedings. As referenced earlier, two orders of this court are of most significance to the current dispute: the Sale Approval Order of March 27, 2012, incorporating the Christ Hospital-Hudson Asset Purchase Agreement, and the Confirmation Order of June 4, 2013, with the attached Joint Plan of Orderly Liquidation.
The Sale Approval Order includes among its findings: that the “Successful Bidder,” per § 363(m), “is a purchaser in good faith” (¶ K); that the Purchase Agreement is not the product of collusion, and developed from arm’s length bargaining positions (¶ L); that the hospital assets may sell “free and clear of ‘Liens and Claims’ ” per one or more of the § 363(f)(l)-(5) requirements and that non-objecting holders of such liens and claims are deemed to have consented to the free and clear sale (¶ P); that the transfer of assets at closing “will vest the Successful Bidder ... with all right, title, and interest in and to the Assets, free and clear of the Liens and Claims.... ” (¶ S); that “an injunction against creditors and third parties pursuing the Liens and Claims ... is necessary to induce the Successful Bidder to close” (¶ T, emphasis added); and, that the transfer of assets to the Successful Bidder will not subject it to an expansive array of liability, including liability on “any theory of law or equity” (¶ U). These findings, in turn, generated implementing decretal paragraphs, including among others: authorization for the hospital to sell and transfer its assets per *169§§ 105, 363(b) and (f), “free and clear” of liens (as broadly defined) and claims (again, as broadly defined), referencing the “claim” definition of § 101(5), and specifically including “causes of action and claims, to the fullest extent of the law ... whether arising prior to, on, or subsequent to the Petition Date .... ” (¶ 5, emphasis added); that the transfer of assets will not subject the Successful Bidder to a broadly stated array of liability, and that “persons and entities ... are forever barred, es-topped, and permanently enjoined from asserting ... Liens and Claims against the Successful Bidder Entities” (¶ 6, emphasis added); that this court retains exclusive jurisdiction to enforce the Sale Approval Order (including the incorporated agreement), to interpret its provisions and hear “all issues and disputes” including “those concerning the transfer of the Assets free and clear of the Liens and Claims” (¶ 15, emphasis added); that “[e]f-feetive on the Closing Date ... [those] ... asserting Liens and Claims ... against the Debtor and/or any of the Assets are hereby permanently enjoined and 'precluded” as to such Liens and Claims from “commencing or continuing ... any action against the Successful Bidder Entities ...” (¶ 18, emphasis added); and, that § 363(m) protections were ordered (¶ 24).
The Confirmation Order (largely through its attached Plan) essentially reaffirms the sale, including the terms of the Sale Order and its incorporated asset purchase agreement (Plan ¶ 12.7). Retention of jurisdiction by this court is likewise reiterated. See Plan ¶ 11. 1, including, in particular, parts (j) and (k). And, the Plan provides explicitly that “[a]ll injunctions ... contained in the Sale Order and [Asset Purchase Agreement] shall remain in full force and effect and binding on all parties and Creditors.” Plan ¶ 12.2 (emphasis added). These injunctions are likewise supported by the Confirmation Order, ,¶¶ 43, 44 and 77.
Inter alia, the Sale Approval Order and the reaffirming aspects of the Confirmation Order are products of in rem proceedings (i.e., one per § 363 and the other being the case confirmation itself) and as such affect or otherwise run with the asset transfer and the assets.8
Issues to be Decided. Hudson claims the benefit of § 363 sale protection, inter alia contending: (i) Prime had an “interest” which could be (and was) affected by a “free and clear” sale per § 363(f); (ii) having full notice and knowledge of the impending § 363(b) sale and the proposed terms of its implementing order(s), Prime failed to object to the sale terms and seek protection for that interest in the case; and, (iii) Prime is now precluded from asserting its interest. Subsumed in these general propositions are the following issues:
(i) Are the now-asserted economic torts “interests” in the assets sold to Hudson which, in the contemplation of the Bankruptcy Code, could be affected by a “free and clear” sale per § 363(b) and (f)?
(ii) If so, have the Bankruptcy Code requirements for a § 363(f) “free and clear” sale, notice, and the availability of “adequate protection”9 for Prime’s interests been satisfied?
*170(iii) If so, do specific bankruptcy court orders in the case preclude the current assertion by Prime of rights based upon such interests?
(iv) If the sale-related orders are deemed to be preclusive, does the State litigation serve as a collateral attack on those orders, given that Prime’s requested remedy is limited to damages from Hudson?
(v) If the sale-related orders are deemed to be preclusive, are they issued and enforceable within the constitutional limits of bankruptcy court jurisdiction?
(vi) Do the Anti-Injunction Act or the Superior Court Order and Opinion of August 22, 2013 limit the bankruptcy court in hearing and determining Hudson’s motion?
II. PRIME’S REMAINING ACTIVE CLAIMS ARE “INTERESTS” WITHIN THE SCOPE OF § 363(f).
A major contention in Prime’s defense against Hudson’s motion to enjoin is that its remaining active tort and unfair competition claims arose prepetition and as such are unaffected by the bankruptcy case and its orders.10 As a concomitant point, Prime contests Hudson’s reliance on the doctrines of res judicata and collateral es-toppel, arguing inter alia that those claims were never at issue in this court and, most articulated, that Prime was not a party to the sale proceeding. This court agrees with Prime’s position that res judicata and collateral estoppel do not apply to this dispute. See also Point III, infra. This conclusion, however, does not end the inquiry into the effect of the § 363 sale on Prime’s claims. That inquiry requires examining the scope of “interests,” as that term is used in § 363(f).
It is clear that “interests” developed pre-petition which would nevertheless affect the “free and clear” aspects of asset transfers in a § 363(b) sale in bankruptcy are regularly impacted by such sales. Section 363(e) and (f) protections are available to holders of affected interests where such holders have notice of a pending “free and clear” sale. See Point III, infra. Proposed sales “free and clear of any interest in such property of an entity other than the estate,” § 363(f), would have little functional value if interests created prepet-ition were not to be affected. Hence, it is not the timeline that controls (as Prime advocates), but rather the nature of the interest at issue. (And, in any event, notwithstanding Prime protestations to the contrary its claims did not mature completely prepetition, given that they complain of a “forced” Chapter 11 filing and inadequacy of the § 363 sale.)
The Bankruptcy Code does not define the scope of the sale-affected interests, though the term must be subject to certain limitations. See, e.g., Folger Adam Sec., Inc. v. DeMatteis/MacGregor, JV, 209 F.3d 252 (3d Cir.2000) (excluding defenses or recoupment rights from the § 363(f) term “interests”).
Courts have struggled to define the scope of “interest” for purposes of sec*171tion 363(f). Although some courts have limited the term to in rem interests in the property, the trend seems to be in favor of a broader definition that encompasses other obligations that may flow from ownership of the property.
3 Collier on Bankruptcy, ¶ 3 63.06[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) at pp. 363-47 and 48 (footnotes omitted) (hereinafter “Collier”). The broadening trend in the law is reflected in the oft-cited 1996 Fourth Circuit case of In re Leckie Smokeless Coal Co., 99 F.3d 573 (1996), cert. denied, 520 U.S. 1118, 117 S.Ct. 1251, 137 L.Ed.2d 332 (1997). There, the purchaser in bankruptcy acquired assets “free and clear” of “successor in interest” liability per the Coal Act (26 U.S.C. §§ 9701-9722). The court emphasized the relationship between the avoided liability and “the use to which [the purchaser] put their assets,” as bringing the Coal Act liability within the purview of § 363(f). 99 F.3d at 582.
The Third Circuit opinion in In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir.2003) referred positively to Leckie in the evolution of § 363(f) law. Folger Adam, 209 F.3d at 258-61, had distinguished Leckie; the TWA opinion, in reviewing the Folger Adam analysis of Leckie, said:
Importantly, in the course of our review of Leckie, we noted that “the term ‘any interest’ is intended to refer to obligations that are connected to, or arise from, the property being sold.” Folger Adam, 209 F.3d at 259 (citing 3 Collier on Bankruptcy ¶ 3 63.06( [1]).
322 F.3d at 289. In deeming travel voucher obligations and other EEOC claims arising out of a seller-debtor’s disputes with employees to be § 363(f) “interests,” the TWA court stated:
Here the Airlines [debtor-seller TWA and purchaser American Airlines] correctly assert that the Travel Voucher and EEOC claims at issue had the same relationship to TWA’s assets in the § 363(f) sale, as the employee benefits did to the debtors’ assets in Leckie. In each case it was the assets of the debtor which gave rise to the claims. Had TWA not invested in airline assets, which required the employment of the EEOC claimants, those successor liability claims would not have arisen. Furthermore, TWA’s investment in commercial aviation is inextricably linked to its employment of the ... claimants as flight attendants, and its ability to distribute travel vouchers as part of the settlement agreement. While the interests of the EEOC and the [travel voucher holders] in the assets of TWA’s bankruptcy estate are not interests in property in the sense that they are not in rem interests, the reasoning of Leckie and Folger Adam suggests that they are interests in property within the meaning of section 363(f) in the sense that they arise from the property being sold.11
Id. at 289-90 (emphasis added).
Defining in functional terms the reach of § 363(f) “interests” requires, of course, case-by-case analysis.12 As empha*172sized throughout this opinion, the overarching factor in evaluating Prime’s economic tort claims as § 363(f) “interests” is the undeniable linkage — as Prime has claimed it — of Prime’s asset purchase agreement of December 2011, its purported “loss” of the benefit of that agreement, the supposed “forcing” of the hospital into bankruptcy, and the sale of hospital assets at a diminished price to Hudson in a bankruptcy auction. The culmination of this chain of events has been the transfer to and use of hospital assets by Hudson, very much in opposition to Prime’s goal for the transfer and use of those same assets.13 Thus, Prime’s stated factual claims “are connected to, or arise from, the property being sold,” consistent with Third Circuit precedent establishing the scope of § 363(f) interests. Moreover, the legal framework for Prime’s assertions — economic tort law — provides remedies for lost contractual benefits and expectancies from the enjoyment of property. As property-related remedies they have long been recognized in New Jersey as follows:
In a civilized community which recognizes the right of private property among its institutions, the notion is intolerable that a man should be protected by the law in the enjoyment of property once it is acquired, but left unprotected by the law in his efforts to acquire it. The cup of Tantalus would be a fitting symbol for such mockery.
[Brennan v. United Hatters of N.Am. Local 17, 73 N.J.L. 729, 742-43, 65 A. 165 (E. & A.1906).]
Quoted in Printing Mart-Morristown v. Sharp Electronics Corp. 116 N.J. 739, 750, 563 A.2d 31 (1989).
Courts have readily barred assertion of economic tort claims (as well as fraud and RICO claims) as collateral attacks on § 363 sale orders, albeit in contexts that vary from the matter at bar. So, certain of this § 363 preclusion precedent has developed pursuant to § 363(m) “good faith” findings and their effect (not applicable sub judice) through the medium of res judicata or collateral estoppel. Less frequently addressed is the in rem character of § 363(b) asset sale orders and their independent effect as a bar to collateral attack. Typically, in Farmland a disgruntled would-be but disqualified bidder at a § 363 sale (“GAF”) sued in a post-sale proceeding seeking damages for tortious interference with an alleged business expectancy. The selling Chapter 11 debtor, the § 363 sale purchaser, and others were named defendants. No objection had been raised at the time of the sale to the bid procedure order, form of noticed sale, or *173the order approving the sale, which included a finding that the successful bidder was a “good faith” purchaser per § 363(m). Yet the tortious interference claim maintained that asset values far exceeded the sale price (an assertion said to be backed by “new” evidence). While much of the opinion focuses on the collateral estoppel bar to this tortious interference claim, the in rem protections of § 363 sales, independent of collateral estoppel, were ultimately stressed. “Even if the Court determined that GAF is not bound by collateral estoppel to the Court’s earlier findings that bar GAF’s complaint, the Defendants are still immune from GAF’s lawsuit under § 363(m) of the Bankruptcy Code, which provides purchasers (and by the terms of the Sale Order — the seller, as well) the same, if not greater, protection from attacks on the propriety of the sale of assets under § 363 of the Bankruptcy Code.” 376 B.R. at 729.
For other cases barring similar economic tort and tort-like attacks on sale approval orders where the in rem character of the sale was deemed significant if not determinative, see Regions Bank v. J.R. Oil Co., LLC, 387 F.3d 721, 731-32 (8th Cir.2004) (relied upon extensively by Farmland, ibid., barring a fraud and conspiracy claim by a prepetition nonparty lender against insider purchasers and affiliates at a § 363(b) sale given that “[a] bankruptcy sale under ... § 363, free and clear of all liens, is a judgment that is good against the world, not merely against parties to the proceedings”); In the Matter of Met-L-Wood Corp., 861 F.2d 1012, 1017 (7th Cir.1988) (Judge Posner’s opinion being a fundamental resource for both Farmland and Regions Bank, articulating bar arising from § 363 in rem proceeding, as distinguished from bar via participating party-based res judicata, while noting § 363(m)’s inapplicability to the case); see also Food King, Inc. v. Norkus Enters., 2006 WL 3674997 (D.N.J. December 13, 2006) (dismissing losing bidder’s tortious interference claim against purchaser at a § 363 sale where thát purchaser was controlled by an influential person and board member of an umbrella entity that exercised substantial authority over the plaintiffs business); cf. FutureSource LLC v. Reuters Ltd., 312 F.3d 281, 286 (7th Cir.2002); In re CHC Indus., Inc., 389 B.R. 767, 773 (Bankr.M.D.Fla.2007).
In sum, Prime’s intense prebankruptcy sale efforts are a large part of the fiber of its economic tort claims, claims which transcend the hospital’s bankruptcy filing to become directly attributable to the transfer of assets of Christ Hospital and their use by Hudson.14 Those tort claims, thus qualifying as § 363(f) interests, would under proper circumstances be barred by the in rem protected sale of hospital property “free and clear.”15
*174III. REQUIREMENTS OF § 363(f)(2) AND ANY OTHER § 363(b) SALE NOTICE REQUIREMENTS HAVE BEEN SATISFIED; MOREOVER, PRIME HAD THE OPPORTUNITY TO SEEK ADEQUATE PROTECTION OF ITS INTERESTS.
Prime presses the point that it was not a “party” to the sale proceeding. However, at a more general level Prime would have fit within the rubric of “party in interest” (§ 1 109(b)) if it had sought to participate more actively in this Chapter 11 case.16 And, what is most obvious is that Prime was on notice and could have been nothing but acutely aware of (i) the bankruptcy sale process, and (ii) the proposed terms of the bankruptcy sale of hospital assets which it had so intensely pursued and contracted to purchase. The transfer of those assets to its purported tortfeasor was being sanctioned by the court “free and clear” of interests including “claims” as broadly defined in the proposed (and ultimately issued) Sale Approval Order. Prime, solely aware of its position as a potential tort claimant, stood by knowingly and without objection, at every stage of the bankruptcy case which affected its claims. The net effect of notice to,17 knowledge of, and nonobjection by Prime to the fully public bankruptcy sale process is as follows:
(i) Prime shall have been deemed to consent to the sale of hospital assets “free and clear” of its interest (i.e., tortious interference and unfair competition claims);
(ii) Prime shall have waived its rights to § 363(e) adequate protection; and
(iii) Prime shall have been sufficiently placed on notice to satisfy due process and fairness concerns which might otherwise put in question the propriety of in rem proceeding orders issued pursuant to § 363(b) and (f) barring Prime from asserting its claims.
Given adequate notice, failure to object to a § 363 sale has been found to constitute consent per § 363(f)(2) to a “free and clear” sale of the nonobjector’s interests in property being sold. See, e.g., Future-Source, 312 F.3d at 285; In re Tabone, Inc., 175 B.R. 855, 858 (Bankr.D.N.J.1994); In re Elliot, 94 B.R. 343, 345-46 (Bankr.E.D.Pa.1988); compare and contrast In re DeCelis, 349 B.R. 465 (Bankr.E.D.Va.2006); In re Roberts, 249 B.R. 152, 154-57 (Bankr.W.D.Mich.2000). Indeed, the Sale Approval Order expressly provided for *175such consent (¶ P). Prime’s causes of action were thus impacted by the § 368 sale bar.18 Though not without enduring controversy, FutureSource provides the strongest case for consent based upon failure to object to a free and clear sale under § 368(f)(2). In that case the following practical point was made:
It is true that the Bankruptcy Code limits the conditions under which an interest can be extinguished by a bankruptcy sale, but one of those conditions is the consent of the interest holder, and lack of objection (provided of course there is notice) counts as consent. It could not be otherwise; transaction costs would be prohibitive if everyone who might have an interest in the bankrupt’s assets had to execute a formal consent before they could be sold.
And in any event 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. FutureSource [an entity whose interest in a financial database which was originally the subject of a contract with a bankruptcy provider] has made no effort to bring itself within those limits; and now that more than a year has passed since the order was issued, it is doubtful, to say the least, that FutureSource could succeed in such a collateral attack.
[312 F.3d at 285-86. (Italics in original, internal citations omitted).]
What is clear and uncontroversial is that such consent-based bankruptcy sale orders — even if wrong (despite Judge Posner’s view and other ample precedent to the contrary) — are not subject to collateral attack. Fed.R.Civ.P. 60(b) is the appropriate remedy for relief from such orders, a remedy not accessed by Prime in this case. See DeCelis, 349 B.R. at 470-73; see also Cummings Props., LLC v. Heidelberg Print Fin. Americas, Inc., 2002 WL 1839252 (D.Mass. August 12, 2002); cf. In re MMH Auto. Group, LLC, 385 B.R. 347 (Bankr.S.D.Fla.2008).19
Similarly, any rights to adequate protection of its causes pursuant to § 363(e) were lost to Prime by virtue of its inaction.
And, most notably, this is not a case where the applicable in rem-based orders were issued by “ambush.” The sale orders were not a surprise to Prime given notice to Prime of the impending bid procedures, auction sale, and the terms of the Sale Approval Order (including the asset purchase agreement). Prime then became aware, by notice and again without objection, of the details of the asset sale closing, the Disclosure Statement approval pro-*176cess, and the Confirmation Order (with the attached Plan of Liquidation). However, all of this notice, as well as knowledge on Prime’s part, does not establish a res judi-cata or collateral estoppel bar impacting on Prime’s later litigation. Indeed, Prime’s resistance to such a bar based upon its failure to participate in the sale process and the absence of any bankruptcy hearing regarding its tort claims is not without merit. Prime thus does not suffer the bar advanced by Hudson.20 “But it is barred. A proceeding under section 363 is an in rem proceeding. It transfers property rights, and property rights are rights good against the world, not just against parties to a judgment or persons with notice of the proceeding.” In the Matter of Met-L-Wood, 861 F.2d at 1017 (emphasis added).
The in rem bar here defeats Prime’s arguments that its State litigation is not a collateral attack on bankruptcy court orders because this court “did not hear evidence, consider, or make findings on [Prime’s] claims against [Hudson] for Prime’s state court claims.” In addition, the actuality of notice sub judice fully assured not only consent by failure to object per § 363(f)(2), but also basic due process; and, in terms of fundamental fairness, that notice offsets concerns for harsh application of in rem orders. Cf. In the Matter of Met-L-Wood, 861 F.2d at 1019.
IV. SPECIFIC BANKRUPTCY COURT ORDER PROVISIONS AUTHORIZED THE TRANSFER OF HOSPITAL ASSETS “FREE AND CLEAR” OF PRIME’S ECONOMIC TORT CLAIMS AND EXPRESSLY ENJOINED COLLATERAL ATTACK ON THE SALE.
In addition to satisfying legal requirements (see Point II, supra) there is no doubt that the organic orders in this case support the proposition that Prime’s economic tort causes of actions were intended to be and are “interests” as that term is used in § 363(f). First, the Bid Procedure Order, and then the Sale Approval Order defined the § 363(f) “free and clear” aspects of the hospital asset sale in the broadest terms. Asset protection from “liens and claims” is explicit, applying to “causes of action and claims, to the fullest extent of the law ... whether arising prior to, on, or subsequent to the Petition Date” (Sale Approval Order ¶ 5). Equally explicit is the protection for the successful sale bidder, who is thoroughly shielded from such causes of action by reason of the asset transfer (id. at ¶ 6). See also id. at ¶¶ S and U. The Sale Ap*177proval Order is thus a prototypical product of an in rem proceeding, providing rights running with the hospital assets and their transfer. That broad scope order has been reaffirmed by and through yet another in rem proceeding order, the Confirmation Order.
Coupled with the asset protections of § 363(b) and (f) at and after the point of asset transfer, the Sale Approval Order and Confirmation Order expressly enjoined collateral attack on these ordered protections. The factual basis for “an injunction against creditors and third parties pursuing the Liens and Claims ... is [that it is] necessary to induce the Successful Bidder to close (Sale Approval Order ¶ T, emphasis added). Implementing this finding are injunctive orders. “[P]ersons and entities ... are forever barred, estopped and permanently enjoined from asserting ... Liens and Claims against the Successful Bidder Entities” (id. ¶ 6, emphasis added); likewise, an enduring injunction was ordered which precludes the “commencing or continuing ... any action against the Successful Bidder Entities” as to Liens and Claims (id. at ¶ 18). These injunctive provisions are reaffirmed as if reissued in the Confirmation Order through the Plan, which provided that “[a]ll injunctions ... contained in the Sale Order and [Asset Purchase Agreement] shall remain in full force and effect and binding on all parties and Creditors” (Plan ¶ 12-2; see also Confirmation Order ¶¶ 43, 44 and 47).
Overall, the comprehensive network of bankruptcy orders both shielded the hospital asset transfer from “Liens and Claims” — including those of Prime for its remaining economic tort causes — and enjoined Prime’s efforts to enforce those causes in a collateral state court proceeding.
V. PRIME’S ASSERTION IN STATE LITIGATION OF ITS REMAINING ACTIVE CLAIMS, THOUGH NOT SEEKING TO SET ASIDE THE SALE OR PURPORTEDLY IMPUGN THE AUCTION PROCESS, NEVERTHELESS CONFLICTS WITH BANKRUPTCY COURT ORDERS AND IS THUS BARRED; THE ADDITIVE EFFECT OF THE “GOOD FAITH” FINDING ON THE CURRENT DISPUTE IS SIGNIFICANT.
Prime’s State litigation claims, limited to damages allegedly caused by Hudson’s torts, are nonetheless a collateral attack on bankruptcy court orders and the bankruptcy sale process. Farmland makes the plain point: “The fact that GAF [the disgruntled losing bidder at the § 363(b) sale] does not seek to undo the sale with regard to title is not dispositive; it is sufficient that the Plaintiff is seeking to undo the economics of the sale by seeking damages against CRLLC [the successful bidder]....” 376 B.R. at 726 (emphasis added). Similarly, Judge Posner’s formative opinion, In the Matter of Met-L-Wood, 861 F.2d at 1018, instructs as follows:
[The collateral] suit does not seek to rescind the sale. But by seeking heavy damages from the seller, the purchaser, [and others who benefitted from the sale], the suit is a thinly disguised collateral attack on the judgment confirming the sale.
To the same effect, see generally Regions Bank, 387 F.3d 721; Food King, 2006 WL 3674997; and, consider the court’s reasoning in In re CHC Indus., 389 B.R. at 775 (“By asserting the [fraud claims for damages in a state court proceeding] ... the Debtor is attempting to unravel the economic integrity of the sale, a result which *178363(m) of the Bankruptcy Code is intended to prevent”).
As indicated, an attack on the fundamentals of the sale via a damage claim fares no better than a collateral attack seeking to set aside bankruptcy sales. Successful § 363 sale bidders’ efforts to develop funds (i.e., capital and loans) to engage in the purchase at auction of, in particular, any major enterprise should not be exploded by after-the-fact collateral attacks for damages; this is emphatically the case where a functioning public hospital is the selling-debtor and the successful bidder commits, as here, to maintain the delivery of acute care hospital services.
Section 363(b) sales are thus favored with finality benefits — protection from reversal modification on appeal (subject only to a stay pending appeal) — per § 363(m). Much of the anticollateral attack precedent, as seen throughout this opinion, is supported by a finding of “good faith” by the purchaser. The Sale Approval Order supports the good faith finding in this case,21 consistent with the rationale of this Circuit’s prominent § 363(m) opinion, In re Abbotts Dairies of Pa., Inc., 788 F.2d 143 (3d Cir.1986). The scope of such a finding is not necessarily fixed or formu-larized: is it limited to a determination of noncollusion, absence of fraud in the bidding process or no showing of an attempt to take grossly unfair advantage of other bidders? (Prime sub judice maintains for motion purposes that it does not assert any of these bases for questioning the good faith finding; rather Prime argues its disputed point that the torts alleged were “committed” prepetition.) Or, in this particular situation does the good faith finding also serve to rebut the substance of the economic tort allegations? Since Prime directly implicates as integral components of the pled economic torts the alleged “forced” filing of the hospital’s Chapter 11 petition and the § 363 sale processes (including alleged grossly unfair treatment of Prime as a prepetition would-be purchaser and a devaluing of the sale assets), in this dispute the § 363(m) finding is thoroughly inconsistent with Prime’s remaining economic tort claims.
Tortious interference per New Jersey’s applicable law requires a plaintiff to prove that the defendant’s “actions were malicious in the sense that the harm [complained of] was inflicted intentionally and without justification or excuse.” Mandel v. UBS/PaineWebber, Inc., 373 N.J.Super. 55, 79-80, 860 A.2d 945 (App.Div.2004), cert. denied, 183 N.J. 213-14, 871 A.2d 91 (2005) (quoted with approval in Singer v. Beach Trading Co., Inc., 379 N.J.Super. 63, 82, 876 A.2d 885 (App.Div.2005)). See also Dello Russo v. Nagel, 358 N.J.Super. 254, 268-69, 817 A.2d 426 (App.Div.2003); DiMaria Constr. Inc. v. Interarch, 351 N.J.Super. 558, 567, 799 A.2d 555 (App.Div.2001), aff'd, 172 N.J. 182, 797 A.2d 137 (2002).22 This bankruptcy court’s finding that Hudson was acting as a “good faith” purchaser, under the circumstances of this *179case, counters Prime’s necessary tort assertion of Hudson’s malicious behavior. That finding thus becomes another target of Prime’s collateral attack; it is in addition to Prime’s affront to the Sale Approval Order’s § 363(f) “free and clear” asset transfer.
VI. THE BANKRUPTCY COURT HAS JURISDICTION TO HEAR AND DECIDE THE HUDSON MOTION AND PROVIDE INJUNCTIVE RELIEF.
Prime puts forth a blunderbuss of contentions, challenging this court’s authority to hear (based upon jurisdictional limitations) or hear and determine (based upon lack of court authority) Hudson’s motion. A number of these contentions have already been dealt with in this opinion; however, for the sake of completeness there will be some repetition of points made earlier.23 In this regard, much of what is argued by Prime continues to turn a blind eye to the essence of bankruptcy jurisdiction, which “at its core, is in rem.” Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 362, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006); Gardner v. N.J., 329 U.S. 565, 574, 67 S.Ct. 467, 91 L.Ed. 504 (1947). Property held in custodia legis by the courts has traditionally (and logically) been the subject of in rem oversight. Local Loan Co. v. Hunt, 292 U.S. 234, 241, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 738, 51 S.Ct. 270, 75 L.Ed. 645 (1931).
A bankruptcy court’s in rem jurisdiction permits it to “determin[e] all claims that anyone, whether named in the action or not, has to the property or thing in question. The proceeding is ‘one against the world.’ ” 16 J. Moore, et al., Moore’s Federal Practice § 108.70[1], p. 108-106 (3d ed. 2004). Because the court’s jurisdiction is premised on the res, however, a nonparticipating creditor cannot be subjected to personal liability.
Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 447, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004) (certain citations omitted).24
Notwithstanding the historic and enduring in rem character of bankruptcy, in its modern form in personam aspects of cases are adjudicated in the ordinary course by bankruptcy courts. The nonex-*180elusive listing of “core proceedings,” 28 U.S.C. § 157(b)(2), is a blend of matters which do not readily adhere to any well-defined in rem — in personam breakdown. Most relevant to this motion are 28 U.S.C. § 157(b)(2)(L) and (N), rendering “core” the following:
(L) confirmations of plans; ...
(N) orders approving the sale of property....
These provisions make clear that this case’s Sale Approval Order and the Confirmation Order are “core,” and their history and logical scope render them the product of in rem aspects of bankruptcy. Enforcement motions relating to such orders are likewise “core” and squarely within this court’s jurisdiction to hear and determine!25
Discounting the precepts of in rem jurisdiction, Prime argues that it did not participate in the hospital’s Chapter 11 case and thus cannot be bound by the organic orders issued in that case. Similarly, it would argue that Hudson, a non-debtor, cannot avail itself of enforcement rights against Prime (again, a nonparticipant in the case) through the good offices of the bankruptcy court.26 These contentions ignore an essential point in this dispute: once Hudson became the successful auction bidder, the asset transfer, the assets and their use by Hudson garnered protections under the Sale Approval Order which are within the jurisdiction of this court to provide and which are enforceable in bankruptcy against Prime.
Inter alia, Prime continues to premise its position on the supposed necessity of a bankruptcy hearing on Hudson’s conduct relative to Prime, a purported prerequisite to barring Prime’s claims through the § 368 sale process. Yet, it was only Prime who was able to formulate and disclose that conduct and those claims at the time of the sale. Prime chose to remain silent then and only later would collaterally attack the sale process during the pendency of the Chapter 11 case as if its silence and purported nonparticipation in the case shields it from this court’s asset sale-based jurisdiction. To allow such a practice would introduce damaging uncertainty into § 363 sales, with resulting impact on the economics of such sale.27
As noted earlier and throughout, Prime has defined its economic tort claims in *181terms of Hudson’s conduct and intent: that is, to render Prime’s potential as a buyer of hospital assets untenable, force Christ Hospital into bankruptcy, and then take advantage of the bankruptcy sale process to acquire the assets at a lesser price than Prime’s prebankruptey contract price. The assets, upon transfer, would position Hudson to operate a fully functioning hospital in the marketplace which Prime had staked out prepetition (only to be denied by Hudson and through the processes of this Chapter 11 case). There is thus a clear factual connection between the specifics of these economic tort claims and the bankruptcy sale of the hospital assets per § 363(b) and (f). The claims are § 363(f) “interests,” subject historically in bankruptcy to being affected by a “free and clear” sale.28 Moreover, the applicable law (that of New Jersey) has long recognized these particular economic torts as property protection.29
Once the Christ Hospital assets were brought under the control of this court, bankruptcy jurisdiction (including traditional in rem jurisdiction) was implicated. That jurisdiction, in turn, was exercised in the necessarily fast-moving process of selling the essence of a functioning but financially desperate hospital to an auction-bidding purchaser. Substantial bankruptcy policy supports quickly organized and effectuated § 363 sales; sub judice, a true community emergency — the potential loss of Christ Hospital to its service area — was reflected in this Chapter 11 case. Prime had been the major suitor for hospital assets, was a contract party for them, and an enabling lender to keep the hospital from closing while sale and regulatory requirements could be dealt with. Prime then “lost” its contract-party position, terminating its asset purchase agreement, appeared by Notice in the Chapter 11 case, and awaited repayment of its $6 million loan (through HFG) upon closing. It did not bid for the assets; rather, Prime remained as a relatively passive observer, receiving notice of sale and confirmation processes and proposed implementing orders which broadly enjoined recourse against the successful auction buyer, the purported tortfeasor, Hudson, and went further to find that Hudson was a § 363(m) “good faith purchaser” at the sale.
Now, Prime contests the Sale Approval Order, and the Confirmation Order as they would apply to its remaining active economic tort claims. Its challenge is generally jurisdiction-based (and is not couched in “Relief from Judgment or Order” terms of Fed. R. Bankr.P. 9024, the Fed.R.Civ.P. 60 equivalent).30 Such a tactic is contrary to basic bankruptcy policy (including the need for finality of sales), and misconceives traditional bankruptcy jurisdiction.
*182It should be clear, contrary to Prime’s argument, that the in rem bar here is not a resolution of state law claims, nor is such a resolution necessary to decide the pending motion. That bar is an estoppel; it is based upon bankruptcy sale/marketplace necessities and, in this case Prime’s conduct as well. Similarly, Prime’s contentions that its economic tort claims do not “arise under title 11” or “arise in a case under title 11,” and are thus not derived from the debtor or the bankruptcy case or law, misses the point that those claims are § 363(f) interests. It is the bankruptcy sale (including order enforcement) which is “core” here, not resolution of the economic tort claims alleged by Prime.
Prime invokes Stern v. Marshall, — U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) but fails to relate it specifically to § 363 sales, in rem bankruptcy jurisdiction, or anything factually analogous to the matter at bar.
In the final analysis of jurisdictional matters here, Prime is in the position of an “interest” holder for § 363(f) purposes. Prime had complete notice and knowledge of the bankruptcy case and the § 363 sale. It took no steps to protect its interests in the Chapter 11 case (notwithstanding multiple opportunities). Further, Prime chose to collaterally attack the Sale Approval Order and, ultimately, the Confirmation Order while this case was ongoing. The State litigation pleading was filed in March 2013, seeking bankruptcy-sale affecting damages at a preconfirmation stage of the Chapter 11 case. Stem v. Marshall, restricting under certain circumstances bankruptcy courts from adjudicating state law-based counterclaims as part of bankruptcy adversary proceedings, does not unsettle the scope of traditional bankruptcy processes. There is absolutely no reason to believe that “free and clear” sales are suddenly outside the ambit of the bankruptcy court. If in particular cases due process issues arise based upon notice and fundamental fairness concepts (put at risk in sanctifying and enforcing the terms of bankruptcy sales), those concerns can be addressed where raised. However, in the case at bar there is no such notice or fairness impediment to the enforcement of the Sale Approval Order and the Confirmation Order.31
This bankruptcy court here asserts its historic and time-honored jurisdiction to interpret and enforce its own prior orders. *183Local Loan Co. v. Hunt, 292 U.S. at 239, 54 S.Ct. 695. In doing so, it is concluded that the dispute before this court is within its jurisdiction to hear and decide; it is a core proceeding, principally arising under title 11 pursuant to § 363 sale processes. In aid of existing injunctions issued during the pendency of this case, an injunctive order is called for barring collateral attack on the bankruptcy sale process and organic court orders.32
VII. INJUNCTION, CONSISTENT WITH THE ALL WRITS ACT AND THE ANTI-INJUNCTION ACT AND NOT PREEMPTED BY THE STATE COURT ORDER OR OPINION, SHOULD BE ISSUED BY THIS COURT.
This court has issued, as part of the March 27, 2012 Sale Approval Order and the June 4, 2013 Confirmation Order, a related series of injunctions which bar collateral attack on the § 363 sale of hospital assets. The current motion calls for interpretation and enforcement of those orders, not newly minted injunctions. The State litigation, at the pleading stage, included a review and interpretation of those orders; now, back before the issuing court on the immediate motions, the question of impact of the State action on this motion should be addressed. In fact, there is no effort by this bankruptcy court to exercise appellate jurisdiction over State court orders or judgments. Rather, this court is called upon to implement its preexisting orders. Hence, the Rooker-Feldman doctrine has no application here.33
The Anti-Injunction Act (28 U.S.C. *184§ 2283)34 is applicable here. However, it does not require the bankruptcy court to permit its preexisting injunctive orders (and other orders) to be collaterally attacked. Rather, this court is authorized to grant Hudson’s motion enjoining state court proceedings so as “to protect or effectuate [this court’s] judgments.” Such an injunction is thoroughly supported by the All Writs Act, 28 U.S.C. § 1651.35 See generally, In re Prudential Ins. Co. of Am. Sales Practice Litigation, 261 F.3d 355 (3d Cir.2001). And, in terms of Bankruptcy Code underpinning, see 11 U.S.C. § 105(a).36
Still to be determined is the scope of this court’s injunction of the State litigation. A review of the State complaint makes it clear that Prime has attempted to combine claims pertaining to its efforts to purchase the assets of other hospitals, as well as those of Christ Hospital. However, it is also quite clear (and was to the Superior Court judge) that economic tort claims concerned with Christ Hospital are freestanding and would (and, in fact, did) survive as claims even when the allegations relating to the other hospitals were excised from the litigation.
More specifically, the State complaint ties in Hudson’s purported anticompetitive behavior as to Christ Hospital with marketplace manipulation impacting on Prime’s efforts to acquire St. Michael’s, St. Mary’s and a Rhode Island hospital. (Again, as to those other hospitals, the complaint has been dismissed without prejudice at the pleading stage.) Hudson’s Christ Hospital-related conduct exhibited, as Prime sees it, a “modus operandi” later applied to these other hospitals. This court will only issue an injunction which is tailored to cover the collateral attack on Christ Hospital orders, not more general restrictions on the State litigation (if it should be regenerated as to hospitals other than Christ Hospital). Hence, Prime and the State litigation should be enjoined only to the extent that relief is sought for the loss of the purported benefits to Prime from the Christ Hospital deal that was said to have been scuttled by Hudson. Whether Hudson’s “methods” or a continuum of its conduct should bear on *185other hospital deals is beyond the scope of this court’s original injunctive orders and that which will issue now. 37
VIII. CONCLUSION.
A. Prime’s remaining economic tort claims are purported obligations of Hudson which “are connected to or arise from” the § 363 sale of assets and their use by Hudson as the successful bankruptcy sale bidder. They are thus “interests” per § 363(f), and as such, are subject to a § 363 sale “free and clear” of them.
B. Prime had complete notice and knowledge of the terms of the § 363(b) sale of hospital assets but did not object to the sale or apply for any adequate protection of its interests. Those interests, as fully manifested asset-related claims, were exclusively within the ken and control of Prime. Under these circumstances, Prime’s failure to object to the asset sale “free and clear” of its interests is properly considered consent to the auction sale on that basis pursuant to § 363(f)(2).
C. This court’s Sale Approval Order, later reaffirmed by the Confirmation Order, explicitly authorized the “free and clear” asset sale and enjoined collateral attack on that sale. Yet Prime chose to eschew any application to the bankruptcy court for relief (whether per Fed. R. Bankr.P. 9024 or otherwise), and went forward during the pendency of this case (indeed, preconfirmation) with the State litigation which, in fact, was such a collateral attack.
D. Prime’s would-be State litigation remedy — damages from Hudson — presents a frontal attack on the economic integrity of the § 363(b) sale, and is thus no less a collateral attack than one which seeks to set aside that sale. Prime also attacks through the State litigation the “good faith” purchase finding of the Sale Approval Order.
E. This court’s jurisdiction to interpret and enforce its sale and confirmation orders is historic and unimpeded by Stem v. Marshall or other recent developments in the law. Moreover, the in rem aspect of § 363(b) sales remains unaltered by currently debated jurisdiction issues. “Arising under,” “arising in” and “core” requirements of 28 U.S.C. §§ 1334(b) and 157(b)(2)(L) and (N) are well satisfied. In addition, full and complete notice of the terms of sale was provided to Prime, thereby satisfying basic due process and fundamental fairness concerns; and, Prime (and only Prime) held the key to the existence at the time of the § 363(b) sale of its later advanced economic tort claims. Prime: failed to disclose its claims; allowed the bankruptcy sale to proceed under the assumption that the purchaser would take “free and clear” of such interests; collaterally attacked the sale contrary to the Sale Approval Order injunc-tive provisions; never sought recourse in this court, per Fed. R. Bankr.P. 9024 or otherwise, notwithstanding the active pen-dency of this Chapter 11 case; and, now attempts to fend off bankruptcy court enforcement on jurisdictional grounds. Such tactics should not be permitted.
F. This court is authorized to issue an injunction under the circumstances of this case. In fact, a current injunction would be in aid of preexisting injunctions embod*186ied in the Sale Approval Order and the Confirmation Order. No Anti-Injunction Act restrictions have application here; the All Writs Act and 11 U.S.C. § 105(a) enable the injunctive process in this case. Of course, the injunction should be limited to the collateral attack in the State litigation to those counts (the remaining active claims) which seek damages for economic torts said to have been committed by Hudson in connection with its § 363(b) purchase of hospital assets. The determination of the State Court (August 22, 2013) which would interpret, at the pleading stage of the State litigation, preexisting bankruptcy court orders during the pen-dency of this bankruptcy case, is not binding on this court, nor does it preempt Hudson’s application here.
G.Hudson’s motion for injunctive relief is granted. The court will issue its implementing order.
. Hudson includes Hudson Hospital Propco, LLC, Hudson Hospital Opeo, LLC, Hudson Hospital Holdco, LLC and Vivek Garipalli, a principal of and alleged major stakeholder in the Hudson entities.
. 11 U.S.C.§ 363(f) is 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.
.The basic factual background documented in portions of the parties’ motion-related submissions and in the docket of this Chapter 11 case appears to be uncontroversial and is relied upon herein.
. See Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2010), reh’g denied, - U.S. -, 132 S.Ct. 56, 180 L.Ed.2d 924 (2011); Langenkamp v. Culp, 498 U.S. 42, 44-45, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990); Granfinanciera v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982); Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966).
. Prime continues:
In Farmland, the Court dismissed a tortious interference claim by an unsuccessful bidder that was entirely based upon the conduct of the debtor and the successful bidder during the sale process, including allegations that they colluded to mislead the bankruptcy court "into believing that the sale ... was a good deal which should be approved quickly and without close scrutiny.” Id. (emphasis added). The Farmland Court held that the tort claims were a collateral attack on the approved sale and barred by the doctrine of collateral estoppel in light of the court’s finding that the successful bidder had acted in good faith under section 363(m) of the Bankruptcy Code. Id.
. Prime, a substantial enterprise experienced in the competitive for-profit hospital marketplace, was fully aware at the time of the bankruptcy sale of the facts ultimately pled in its Christ Hospital-related economic tort claims. Therefore, while one cannot specifically account for Prime's perception of its claims, including the timing of when it believed it had a legally cognizable action, this court concludes that Prime (in its view) knew that it had been wronged by Hudson as the Chapter 11 case was filed. Moreover, at the time Hudson became the successful auction bidder, Prime must be charged with the knowledge that the proposed (and later issued) Sale Approval Order would affect Prime’s perceived causes. And, nothing in the record indicates that as of the bankruptcy sale, Hudson had been made aware of Prime’s perceived causes. It is with these underpinnings that the point is made throughout this opinion: only Prime was, at the time of the bankruptcy sale, aware of its position as a potential tort claimant against Hudson as the successful bidder. This point is undisturbed by any assertion that the State litigation was largely a reaction by Prime to later marketplace conduct by Hudson as to other hospitals.
. Prime filed its State litigation complaint on March 13, 2013.
. In rem bankruptcy jurisdiction is a fundamental in this case, and as to the embedded § 363(b) sale proceedings in particular; references will be made throughout this opinion to in rem case characteristics.
. In relevant part, 11 U.S.C. § 363(e) is as follows:
Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property ... sold ... or proposed to be ... sold ... by the trus*170tee, the court, with or without a hearing, shall prohibit or condition such ... sale ... as is necessary to provide adequate protection of such interest ...
. Prime asserts in the State litigation that Hudson continued its misdeeds as to other medical institutions, after the Christ Hospital asset sale closing of July 2012. Those claims appear to be embodied in counts dismissed (without prejudice) in the State litigation (i.e., not included in what this court denominates "remaining active claims”). In any event, this court's focus is on Counts Three, Four and Five as they are limited to the sale of assets of Christ Hospital, and not as a predicate to other possible causes of action linked to post-sale closing developments pertaining to any other hospital.
. It is important to distinguish § 363(f) “interests” as not requiring in rem property status, from § 363 sales which are in rem proceedings.
. This matter presents itself in the following context which could well be considered, in one or another particular, atypical:
(i) The "interests” of which Hudson would take free — Prime’s economic tort claims— arose between Hudson and Prime, not as a direct function of the hospital’s conduct or that of a hospital “insider” (in that sense Christ Hospital was the “stakeholder” of the assets being at the center of market competition);
*172(ii) The Prime-Hudson prepetition competition, by Prime’s reckoning, had already caused Prime to terminate its asset purchase agreement before the Chapter 11 petition was filed;
(iii) Prime was not a bidder at the March 2012 auction sale;
(iv) The immediate circumstances of the auction sale — i.e., the propriety of the bid procedures, the auction process itself, and the sale approval process — are, as said by Prime, not being challenged; and
(v) Prime's claims are for damages (only) arising out of Hudson’s alleged economic torts (i.e., that no effort is being made to undo the sale).
As will be demonstrated, these factors do not offset the estopping effect of §§ 363(b) and (£) on Prime’s assertion of its remaining economic tort claims in a collateral attack on the bankruptcy sale.
. Prime has pled the following;
[I]t was clear that Garipalli and Hudson Holdco’s intent was to make it untenable for Prime Healthcare to continue to buy Christ Hospital in order to force it into bankruptcy so that Garipalli could purchase the struggling facility for less than what was agreed upon between Prime Healthcare and Christ Hospital in their APA. [State litigation complaint ¶ 18.]
. Hudson’s purchase and use of the Christ Hospital assets has given rise (as Prime sees it) to its displacement in a portion of the New Jersey for-profit hospital marketplace (contrast a circumstance where the nature of assets sold in bankruptcy was more ordinary and available commercial fare rather than the framework of a functioning acute care medical institution).
. Matters in dispute here would have been substantially different if Hudson had not been the successful bidder for and acquirer of Hudson's assets. Such a circumstance would have, on the one hand, limited the tort allegations to Prime’s loss (if any) without the countervailing asset acquisition advantage alleged to have been garnered by Hudson, while, on the other hand, removing the array of Hudson's bankruptcy preclusion contentions arising out of the bankruptcy process and orders. The actuality here, however, is that the transfer to and use by Hudson of hospital assets underpins Prime's economic tort allegations - that is, Prime's claims arise out of Hudson’s ultimate use of the hospital’s assets. As such, those claims are § 363(f) "interests.”
. The term “party in interest” is seen as a broad and "elastic concept”; see In re Johns-Manville Corp., 36 B.R. 743, 748-49 (Bankr.S.D.N.Y.1984), cited with approval in In re Amatex Corp., 755 F.2d 1034, 1042, (3d Cir.1985). While investors in a creditor are often denied the § 1109 status, see, e.g., In re Refco Inc., 505 F.3d 109 (2d Cir.2007), Prime in the immediate case is not only a “backstopping” lender through an existing credit facility, it was intimately involved in prepetition debt restructuring in conjunction with the debtor, and a contracting party to acquire its assets right up to the threshold of bankruptcy. Most significantly, Prime considers itself to be the victim of economic torts whose elements include the hospital's Chapter 11 filing and Hudson's purchase in bankruptcy of the hospital’s assets. See FutureSource, 312 F.3d at 284 (as to a party in interest "holding a direct financial stake in the outcome of the [bankruptcy] case”). [Citation to Collier omitted.] In any event, Prime could have availed itself of rule-based permissive intervention per Fed. R. Bankr.P.2018(a) if it chose to be heard regarding the sale and Sale Approval Order.
. The Notice of Appearance filed by counsel for Prime on February 7, 2012 (within a day of the petition filing), dkt. 30, enabled Prime to keep tabs on the entire case. In fact, the case docket supports the delivery of complete and comprehensive notice of case events/filings to Prime and/or its counsel.
. For historical perspective, including the equitable power to sell in bankruptcy “free and clear” of liens, see Van Huffel v. Harkelrode, 284 U.S. 225, 227-28, 52 S.Ct. 115, 76 L.Ed. 256 (1931).
. Again, it must be emphasized: Prime (and only Prime) was in a position to be fully aware of its economic tort claims against Hudson, completely developed as of the bankruptcy auction sale. (This point, without more, establishes a stronger case for "consent" by “failure to object” than much of the pro-consent precedent.) Prime thus had the opportunity to disclose those claims and use them to put in question the bona fides of the sale, though it was well-advised of the § 363(f) jeopardy those claims faced. Prime likewise remained silent as to the scope of the Sale Approval Order. If Prime had decided that the order had no effect on its claims and therefore Prime could remain on the sidelines in this case (rather than taking even the most modest protective step and come forward to "reserve its rights”), that decision was ill-advised. So, too, was the decision to collaterally attack the Sale Approval Order rather than return to this court for an interpretation of the order, or per Fed. R. Bankr.P. 9024 (essentially incorporating Fed.R.Civ.P. 60(b)).
. Establishing collateral estoppel (i.e., "issue preclusion”) requires that:
(1) the issue to be precluded is identical to the issue decided in the prior proceeding,
(2) the issue was actually litigated in the prior proceeding,
(3) the court in the prior proceeding issued a final judgment on the merits,
(4) the determination of the issue was essential to the prior judgment, and
(5) the party against whom the doctrine is asserted was a party to or in privity with a party to the earlier proceeding.
In re Dawson, 136 N.J. 1, 20-21, 641 A.2d 1026 (1994) (internal citations and parenthetical omitted). See also State v. Gonzalez, 75 N.J. 181, 189, 380 A.2d 1128 (1977); Slowinski v. Valley Nat’l Bank, 264 N.J.Super. 172, 182-83, 624 A.2d 85 (App.Div.1993). The New Jersey criteria comport with the rule set forth in the Restatement of Judgments:
When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.
Restatement (Second) of Judgments § 27 (1982) (Issue Preclusion-General Rule). Res judicata would involve resolution of the same claim in the prior proceeding.
. See Sale Approval Order (¶ K), finding that the "Successful Bidder” is a § 363(m) qualified “purchaser in good faith”; ¶ L (absence of collusion; arm’s length bargaining established); and ¶ 24 (ordering § 363(m) protections as to finality of the sale).
. Historically, tortious interference was described as follows:
An action for tortious interference with a prospective business relation protects the right "to pursue one’s business, calling or occupation free from undue influence or molestation.” Louis Kamm, Inc. v. Flink, 113 N.J.L. 582, 586, 175 A. 62 (E. & A. 1934). What is actionable is ”[t]he luring away, by devious, improper and unrighteous means, of the customer of another.” Ibid.
Printing Mart-Morristown, 116 N.J. at 749, 563 A.2d 31
. Synopsized, Prime contends:
Though disguised as a motion to enforce a sale order and confirmation order, what [Hudson] actually seeks is to enjoin Prime Healthcare from litigating its non-derivative state law claims against [Hudson] in any forum — state law claims that were not considered by the Bankruptcy Court, and over which the Bankruptcy Court lacks jurisdiction under Article III. See Stern v. Marshall [— U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475], (2011)....
[T]he Bankruptcy Court did not hear evidence or make determinations on the pre- and post-bankruptcy conduct of [Hudson] that forms the basis of Prime[’s] state law claims against [Hudson]. [Hudson’s] pre- and post-bankruptcy conduct was not at issue; rather, only [its] separate conduct in the course of the sale proceedings was before the Bankruptcy Court. See In re Abbotts Dairies .... Moreover, the Bankruptcy Court had no jurisdiction under Article III of the Constitution or Stem, supra, to enter final judgment on Prime[’s] state law claims against [Hudson], nor to grant [Hudson] either a release or permanent injunction from such non-derivative claims.
[Prime’s Supplementary Letter Memorandum, Oct. 22, 2013, p. 2.] Labeling these economic tort claims as "non-derivative” without an explanation of any functional impact of such a characterization, ignores again the inseparable linkage of those claims to this Chapter 11 case and sale.
. Consistent with in rem jurisdiction, only Prime's § 363(f) interests as affected by the § 363 sale are at issue in this dispute; no personal liability of Prime was determined in the sale process (and none is currently at issue in this enforcement motion).
. This court’s jurisdiction is derived from 28 U.S.C. § 1334(b) and this District’s Standing Orders of Reference of July 23, 1984 and September 12, 2012. This matter is "core,” emanating from 28 U.S.C. § 157(b)(2)(L) and (N), now presented as a motion to enforce terms of the § 363 Sale Approval Order and the Confirmation Order. This matter "arises under title 11” (§ 363 and the statutory confirmation process), and "arises in” a case under title 11 (that is, the collateral attack on this court's orders undertaken during the pen-dency of this Chapter 11 case).
. For a full exposition of a post-confirmation dispute between two nondebtors involving interpretation and enforcement of a bankruptcy court sale order, see In re Hereford Biofuels, L.P., 466 B.R. 841 (Bankr.N.D.Tex.2012). "Core,” “arising in” jurisdiction was found, as was the bar to collateral attack based upon in rem concepts, with substantial reliance on In re Met-L-Wood Corp, 861 F.2d at 1016-19. (Note that sub judice, the Chapter 11 case remains active and that the State litigation was initiated preconfirmation.)
.Prime would turn the in rem aspect of the bankruptcy sale on its head. A § 363 sale serves to transfer of property rights "good against the world,” not just against parties to a judgment or persons with notice of the sale hearing. Matter of Met-L-Wood, 861 F.2d at 1017. Of course, in the immediate matter the most specific actual notice of sale terms were provided to a knowing suitor. Compare In re MMH Auto. Group, 385 B.R. at 357 ("The law is clear that an entity that holds or asserts an interest in a property the trustee seeks to sell is entitled to receive notice of the trustee’s intent to sell that property, particularly when the trustee seeks to sell the property free and clear of that entity's interest.... However, a *181party whose interest is hidden, whether by design or failure to do what is necessary to protect or disclose such interest, cannot complain that its interest has been compromised without notice, because, logically, the trustee cannot be expected to know that a 'hidden' interest exists.”) (Citations omitted.)
. See Van Huffel, 284 U.S. at 227-28, 52 S.Ct. 115.
. See Printing Mart-Morristown, 116 N.J. at 750, 563 A.2d 31.
. However, more narrowly, Prime reads the Sale Approval Order ¶ 15 as limiting this court’s role in enforcing the order’s provisions and those of the incorporated asset purchase agreement. In fact, that provision is extensive and contemplates both enforcement and interpretation which well cover the current dispute. The Sale Approval Order, ¶ 15, is as follows:
15. This Court shall retain exclusive jurisdiction to enforce the provisions of this Order and the Purchase Agreement, and to resolve any dispute concerning this Order, the Purchase Agreement, or the rights and duties of the parties hereunder or thereunder or any issues relating to the Purchase Agreement and this Order, including, but *182not limited to, interpretation of the terms, conditions and provisions thereof, and the status, nature and extent of the Assets, and all issues and disputes arising in connection with the relief authorized herein, inclusive of those concerning the transfer of the Assets free and clear of the Liens and Claims.
Prime fails to address Order ¶¶ 6 and 18, which even more comprehensively protect via injunction the successful auction bidder. See Order ¶ 6 (“persons and entities ... are forever barred, estopped, and permanently enjoined from asserting ... Liens and Claims against the Successful Bidder Entities") and ¶ 18 (“[effective on the Closing Date ... [those] ... asserting Liens and Claims ... against the Debtor and/or any of the Assets are hereby permanently enjoined and precluded" as to such Liens and Claims from “commencing or continuing ... any action against the Successful Bidder Entities"). (Emphasis added.)
. Prime relies on Travelers Indem. Co. v. Bailey, 557 U.S. 137, 153 n. 6, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009), said to permit in "rare situations” collateral attack on previously determined or nonchallenged subject matter jurisdiction. In fact, the Court did not adopt (or reject) this exceptional standard. In any event, such a "rare situation” does not exist here; this case involves a normal course § 363 sale, albeit on an emergency basis and as an effort to save an important community institution. If anything, in a narrowly drawn holding Travelers supports at least the finality of a confirmation order based injunction, serving as a bar against further litigation of certain nonderivative claims. Id. at 154-55, 129 S.Ct. 2195.
. Fed. R. Bankr.P. 7001(7) requires a party to file an adversary proceeding "to obtain an injunction or other equitable relief, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for the relief’ (emphasis added). This rule was amended effective December 1, 1999 to add the highlighted language, "to make it clear tha[t] an adversary proceeding is not necessary to obtain injunctive or other equitable relief that is provided for in a plan when substantive law permits such relief.” In re Bryant, 296 B.R. 516, 520 (Bankr.D.Colo.2003) (emphases in original); Fed. R. Bankr.P. 7001 (West 2006) (Advisory Committee Notes). The court in In re Continental Airlines, Inc., 236 B.R. 318, 326-27 (Bankr.D.Del. June 28, 1999), aff’d 2000 WL 1425751 (D.Del. September 12, 2000), aff'd 279 F.3d 226 (3d Cir.), cert. denied, 537 U.S. 944, 123 S.Ct. 345, 154 L.Ed.2d 252 (2002), interpreting the text of Fed. R. Bankr.P. 7001(7) as it existed before December 1, 1999, concluded, even without the amended language, that, where the debtor did not seek "to obtain an injunction" but "merely ... to enforce an injunction already in place — that created by sections 1141 and 524 of the Bankruptcy Code and the express terms of the Confirmation Order," an adversary proceeding is not required (emphasis in original). Accord In re Kalikow, 602 F.3d 82, 93 (2d Cir.2010). Motion practice is thus justified in the instant case. See Sale Approval Order, ¶¶ 6 and 18, and the reaffirming of these injunctions per Plan of Orderly Liquidation, ¶ 12.2, and Confirmation Order, Findings of Fact, Conclusions of Law and Order Confirming Joint Plan of Orderly Liquidation, ¶¶ 43, 44 and 77.
. See Exxon Mobil Corp. v. Saudi Basic Indus., 544 U.S. 280, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005), limiting the doctrine as follows:
The Rooker-Feldman doctrine, we hold today, is confined to cases of the kind from which the doctrine acquired its name: cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments. Rooker-Feldman does not otherwise override or supplant preclusion doctrine or augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to state-court actions.... [Id. at 284, 125 S.Ct. 1517.]
When there is parallel state and federal litigation, Rooker-Feldman is not triggered simply by the entry of judgment in state court. *184This Court has repeatedly held that ‘the pen-dency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction.” Comity or abstention doctrines, may in various circumstances, permit or require the federal court to stay or dismiss the federal action in favor of the state-court litigation.... [Id. at 292, 125 S.Ct. 1517 (internal citations omitted).]
But neither Rooker nor Feldman supports the notion that properly invoked concurrent jurisdiction vanishes if a state court reaches judgment on the same or related question while the case remains sub judice in a federal court.... [Id. at 292, 125 S.Ct. 1517 (internal citations omitted).]
.28 U.S.C. § 2283. Stay of State Court Proceedings.
A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.
. 28 U.S.C. § 1651. Writs.
(a) The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law
. 11 U.S.C. § 105. Power of court
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
. It is understood that Prime might well have kept its Christ Hospital grievances out of court, but for the subsequent competition to acquire other hospital assets; this tactical or causative point is not relevant. Prime (by its pleading) held established economic tort claims ultimately pressed against Hudson which are limited to the Christ Hospital transaction (including components which transcend the petition filing in this case and its § 363 asset sale). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496553/ | OPINION
JUDITH H. WIZMUR, JUDGE, U.S. BANKRUPTCY COURT
In this matter, a tax sale certificate holder seeks relief from the automatic stay to continue with the sale of the debtors’ principal residence, acquired by the mov-ant through a foreclosure judgment. The debtors seek to cure the outstanding amount due for their real estate taxes through their proposed Chapter 13 plan, and the return of their home. The debtors *188contend that the involuntary transfer of their property may be avoided pursuant to either 11 U.S.C. § 547 as a preferential transfer, or 11 U.S.C. § 548 as a fraudulent transfer. While it appears that the transfer of the debtors’ property cannot be avoided as a preferential transfer because the transfer occurred outside of the 90 day preference period, see 11 U.S.C. § 547(b)(4)(A), the debtors may be able to establish that the judgment of foreclosure is avoidable as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B). The creditor’s motion for relief is denied without prejudice.
FACTS
Guy P. and Kathleen M. Varquez filed a voluntary petition under Chapter 13 of the Bankruptcy Code on September 19, 2013. The debtors’ residence at 207 Summit Avenue in Mantua Township, New Jersey was listed with a value of $135,735.00 and no encumbrances. The debtors scheduled Mantua Township with a claim for real estate taxes in the amount of $35,999.76, noting in their Statement of Financial Affairs that a tax sale certificate holder had obtained a judgment of foreclosure against the debtors prior to the filing of their petition. The debtors’ Chapter 13 plan proposes to pay $1,200 a month for 60 months to satisfy all administrative and priority claims, including the delinquent real estate taxes, and to pay a 100% dividend to unsecured creditors.
On October 1, 2013, Sparrow Investments, LLC (hereinafter “Sparrow”) moved for relief from the automatic stay to proceed with the sale of the debtors residence. A tax sale had been conducted against the property on or about December 4, 2009, and the successful bidder assigned the tax sale certificates to Sparrow on May 29, 2013. Sparrow filed a complaint to foreclose the debtors’ right of redemption, and with the entry of a final judgment of foreclosure on the tax lien on June 20, 2013, Sparrow acquired fee simple title to the debtors’ residence. A writ of possession, also issued on June 20, 2013, was executed on September 18, 2013. Sparrow contends that the debtors no longer own or occupy the property and that it does not constitute property of the debtors’ bankruptcy estate.
The debtors oppose Sparrow’s motion, certifying in part that Guy Varquez had no notice of the delinquency on real property taxes due to Mantua Township, because his wife failed to inform him about it. As well, Mr. Varquez complains that he had no notice of the fact that a foreclosure had occurred until he came home to find the sheriff evicting him from the property. According to the debtors, at the time that the complaint and summons for the lawsuit filed against the debtors were served at the residence, the debtors were separated, and Guy Varquez was not living in the home. They also contend that Sparrow improperly changed the locks on the home and listed the property for sale following the filing of their bankruptcy petition on October 7, 2013, in violation of the automatic stay.
In response, Sparrow contends that Guy Varquez’s alleged lack of notice is without merit, and that the movant complied with all state law noticing requirements. Sparrow explains that the debtors were legally removed from the property prepetition pursuant to the judgment of foreclosure and writ of possession, but that the movant subsequently granted the debtors access to the property to retrieve their possessions. When the debtors failed to vacate the property, the movant changed the locks on October 7, 2013 to prevent further trespassing. Sparrow contends that the debtors have no standing to avoid an alleged preferential or fraudulent transfer. Final*189ly, Sparrow asserts that a tax foreclosure is not an avoidable preference under 11 U.S.C. § 547, or an avoidable fraudulent conveyance under 11 U.S.C. § 548.
DISCUSSION
Several issues raised by the parties, both in support of and in opposition to the motion for relief from the automatic stay, can be readily disposed of. First, Sparrow is correct that as of the date of the filing of the petition, the automatic stay was not in effect as to the property in question, because the debtors’ interest in their former residence had been extinguished prior to the filing. Section 362(a)(3) proscribes any post-petition act “to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). Property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The nature and extent of the debtors’ interest in property are defined by state law. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). Under the New Jersey Tax Sale Law, when a final judgment of foreclosure is entered, “an absolute and indefeasible estate of inheritance in fee simple” may be vested in the purchaser. N.J.S.A. § 54:5-87. In fact, the June 20, 2013 judgment did just that.1 The writ of possession issued against the property was executed the day before the bankruptcy filing. As a result, at the time of the filing, the debtors had lost their legal and equitable interest in the property. Sparrow’s motion for relief from the stay is actually a request for a comfort order that the automatic stay does not apply, and that Sparrow may proceed to protect its interests outside of the bankruptcy process. See 11 U.S.C. § 362(j). On this record, I conclude that no violation of the automatic stay occurred.
Second, the debtors’ challenge to the state court judgment on the ground that Guy Varquez had no notice of the debtors’ default on their real estate tax obligations, and was not properly served with the complaint, must fail. Under the Rooker-Feldman doctrine,2 this court cannot serve as an appellate forum to challenge decisions made in the state courts. See Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 1521-22, 161 L.Ed.2d 454 (2005) (doctrine applies to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments”); Howell v. Young, 530 Fed.Appx. 98, 100 (3d Cir.2013) (“The Rooker-Feldman doctrine deprives federal district courts of jurisdiction ‘over suits that are essentially appeals from state-court judgments.’ ”). *190Because the issues raised by the debtors essentially constitute an appeal of the state court foreclosure judgment, this court cannot entertain those arguments.
Third, Sparrow’s contention that the debtors have no standing to bring an avoidance action against it must be rejected. Under sections 522(g) and (h) of the Bankruptcy Code, Chapter 13 debtors have the authority to avoid a transfer in place of the Chapter 13 trustee, in the event that the debtors could have exempted the property if the trustee had successfully prosecuted the avoidance action. See 11 U.S.C. §§ 522(g),(h); see also In re Dickson, 655 F.3d 585, 592 (6th Cir.2011) (“a Chapter 13 debtor has standing to avoid a transfer under § 522(h) if five conditions are met: (1) the transfer was not voluntary; (2) the transfer was not concealed; (3) the trustee did not attempt to avoid the transfer; (4) the debtor seeks the avoidance pursuant to §§ 544, 545, 547, 548, 549, or 724(a) of the Bankruptcy Code; and (5) the transferred property is of a kind that the debtor would have been able to exempt from the estate if the trustee had avoided the transfer under one of the provisions in § 522(g)”). In this case, if the Chapter 13 trustee had successfully prosecuted an avoidance action, it appears that the debtors could have asserted their exemptions against the proceeds of the property.
Fourth, the debtors pose the prospect that they might succeed in avoiding the transfer of their property to Sparrow under 11 U.S.C. § 547, the section governing the avoidance of preferential transfers. Pursuant to section 547(b), a critical component of a successful preference action is that the transfer occurred “on or within 90 days before the date of the petition.” 11 U.S.C. § 547(b)(4)(A). The transfer at issue in this case occurred on June 20, 2013. Excluding the first day triggering the period and counting the final day, as directed by Fed.R.Bankr.P. 9006(a)(1), the 90 day preference period would have extended back only to June 21, 2013, one day after the transfer occurred. There is no suggestion in this record that the creditor may be characterized in any way as an insider, as defined under 11 U.S.C. § 101(31), which would have extended the preference period to one year. 11 U.S.C. § 547(b)(4)(B). Because the transfer occurred outside of the 90 day period before the debtors’ bankruptcy filing on September 19, 2013, any potential preference action must fail.
As a further defense to the motion for relief from the automatic stay, the debtors also pose the prospect of successfully avoiding the transfer of their property as a fraudulent transfer. While no adversary proceeding has yet been commenced to recover the debtors’ property on fraudulent transfer grounds, as would be required under Fed. R. Bankr. P. 7001(1), we must consider whether such an action, if filed, might be successful.
Pursuant to section 548, a trustee can avoid transfers involving actual or constructive fraud. Section 548(a)(1)(A), describing actual fraud, authorizes a trustee to avoid a transfer made “with actual intent to hinder, delay, or defraud any entity to which the debtor was or became ... indebted.” 11 U.S.C. § 548(a)(1)(A). Subsection 548(a)(1)(B) addresses constructive fraud. Constructive fraud “is presumed once the plaintiff establishes the requisite elements.” In re Fruehauf Trailer Corp., 444 F.3d 203, 210 (3d Cir.2006). Those elements include:
(1) the debtor had an interest in property;
(2) a transfer of that interest occurred within one year of the bankruptcy filing;
*191(3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer; and
(4) the transfer resulted in no value for the debtor or the value received was not “reasonably equivalent” to the value of the relinquished property interest.
Id. at 210-11.
The first three elements are readily established on this record. The debtors had an interest in the subject property. The “transfer” occurred within one year of the bankruptcy filing and the debtors became insolvent as a result of the transfer. The definition of a transfer under 11 U.S.C. § 101(54) includes involuntary transfers and transfers involving foreclosure of the debtor’s equity of redemption. Our focus here is on whether the transfer in this case was for “less than a reasonably equivalent value.” 11 U.S.C. § 548(a)(1)(B).
The seminal case on section 548 in the context of foreclosures, and the focus of the parties in this case, is BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). In BFP, the debtor partnership held property subject to two mortgage liens. When BFP defaulted under the terms of the first mortgage, the lender foreclosed and the property was sold at a sheriffs sale for $433,000, an amount that satisfied the two mortgages. Approximately three months later, BFP filed for protection under Chapter 11 of the Bankruptcy Code and sought to avoid the foreclosure sale as a fraudulent transfer under 11 U.S.C. § 548. The debtor asserted that the property was worth over $725,000 at the time of the sale. Therefore, the debtor asserted that it did not receive “reasonably equivalent value” in exchange for the property.
The Supreme Court examined the manner in which the phrase “reasonably equivalent value” must be interpreted in the context of a mortgage foreclosure sale, and held that a “reasonably equivalent value” for foreclosed real 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. The Court rejected fair market value as the benchmark for determining reasonably equivalent value, citing to the definition of fair market value in Black’s Law Dictionary, which contrasts fair market value with the value that may be achieved at public auction or forced sale.
“The market value of ... a piece of property is the price which it might be expected to bring if offered for sale in a fair market; not the price which might be obtained on a sale at public auction or a sale forced by the necessities of the owner, but such a price as would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular ... piece of property.”
Id. at 537-38, 114 S.Ct. at 1761 (quoting Black’s Law Dictionary 971 (6th ed. 1990)). Focusing on the manner in which foreclosed property is sold, the Court canvassed state foreclosure procedures, noting that foreclosure laws, in addition to providing notice to the borrower, typically require publication of a notice of sale, and “strict adherence to prescribed bidding rules and auction procedures.” Id. at 542, 114 S.Ct. at 1763. Presumably, by these comments, the Court was opining that state procedures are designed to solicit prospective purchasers and control auction processes in order to maximize the value achieved at such sales. The Court recognized the difficulty of valuing a property that must be sold within the strictures of state-prescribed foreclosure procedures, noting that “property that must be sold within those *192strictures is simply worth less.” Id. at 539, 114 S.Ct. at 1762 (emphasis in original).
The Court underscored its vision that a procedurally valid foreclosure sale produces a price that confirms the property’s actual value under the circumstances, thereby satisfying the concept of reasonably equivalent value.
Any irregularity in the conduct of the sale that would permit judicial invalidation of the sale under applicable state law deprives the sale price of its conclusive force under § 548(a)(2)(A), and the transfer may be avoided if the price received was not reasonably equivalent to the property’s actual value at the time of the sale (which we think would be the price that would have been received if the foreclosure sale had proceeded according to law).
Id. at 545-46, 114 S.Ct. at 1765. Further, the Court noted that
foreclosure has the effect of completely redefining the market in which the property is offered for sale; normal free-market rules of exchange are replaced by the far more restrictive rules governing forced sales. Given this altered reality, and the concomitant inutility of the normal tool for determining what property is worth (fair market value), the only legitimate evidence of the property’s value at the time it is sold is the foreclosure sale price itself.
Id. at 548-49, 114 S.Ct. at 1767. In short, the Court concluded that the price achieved at a regularly conducted, properly noticed foreclosure sale conclusively establishes that price as the reasonably equivalent value for the property.
Here, the question posed is whether the conclusion drawn by the Supreme Court in BFP in the context of a mortgage foreclosure sale must also be applied in the context of a transfer, under the New Jersey Tax Sale Law, of title to property from a debtor to a tax sale certificate holder upon the entry of a judgment of possession.
I conclude that the answer is no. The reason is simple. Under the New Jersey Tax Sale Law, at the point of the entry of a judgment of foreclosure, there is no sale, forced or otherwise. There is simply the foreclosure of the debtor’s equity of redemption, and the transfer of a fee simple interest in the property to the tax sale certificate holder. N.J.S.A. § 54:5-87. In contrast, mortgage foreclosure processes in New Jersey customarily involve the entry of a judgment of foreclosure in favor of the mortgagee, followed by a sale process conducted by the sheriff of the county where the property is located. The sale is governed by N.J.S.A. §§ 2A:61-1 to 21, which, among other things, delineates public advertisement requirements preceding the sale, N.J.S.A. § 2A:61-1, and specifies auction requirements, N.J.S.A. § 2A:61-4. See also In re McGrath, 170 B.R. 78, 81 (Bankr.D.N.J.1994). Following the sheriffs sale and the expiration of a 10 day period to object to the sale, see N.J. Court Rule 4:65-5, the successful purchaser receives title to the property free and clear of all subsequent encumbrances joined in the foreclosure action. N.J.S.A. § 2A:50-37; In re McGrath, Id.
Unlike the acquisition of title to property by a purchaser through a mortgage foreclosure sheriffs sale, which follows extensive public advertisement and a public auction, the acquisition of free and clear title to property by a tax sale certificate holder through the foreclosure of a debt- or’s equity of redemption involves no sale, no notice requirements to third parties, no auction procedures, and no other exposure to the marketplace in any way. The New Jersey tax foreclosure process was described succinctly by Judge Stripp in the McGrath case, as follows:
*193The New Jersey Tax Sale Law provides a municipality with a lien on land for taxes which are assessed on such land. N.J.S.A. § 54:5-6; 34 Miohael A. Pane, New Jersey Practice, Looal Government Law, § 244 (1993). If taxes are not paid, the municipality is entitled to enforce this lien by selling the property. N.J.S.A. § 54:5-19. Notice of the sale must be given by posting in the five most public places in the municipality, and in a newspaper circulating within the municipality. N.J.S.A. §§ 54:5-25 to 26. The purchaser at such a sale received a tax certificate which is a lien that remains subject to the right of redemption. N.J.S.A. § 54:5-54. After this two-year period, the purchaser is entitled to proceed to foreclose the right of redemption under N.J.S.A. § 54:5-86. When a final judgment is entered, “an absolute and indefeasible estate of inheritance in fee simple” is vested in the purchaser, and any application to reopen the judgment must be heard by the court within three months and then only on the grounds of lack of jurisdiction or fraud. N.J.S.A. § 54:5-87.
170 B.R. at 81.
In the context of New Jersey tax sale certificate foreclosures, the sale aspect of the transaction occurs at least two years before the transfer of title to the property, when the municipality that is owed a tax by the debtor sells its lien against the debtor’s property to a successful bidder. The auction process for the purchase of a tax sale certificate has similar noticing requirements to mortgage foreclosure sales, see N.J.S.A. § 54:5-26, but the process does not relate to the value of the property. The amount bid on by prospective purchasers of the tax sale certificate is the same for all purchasers. It is the amount of the outstanding charges owed to the municipality. N.J.S.A. § 54:5-25 and 5-31. The successful purchaser is the purchaser who bids for the property “subject to redemption at the lowest rate of interest, but in no case in excess of 18% per annum.” N.J.S.A. § 54:5-32. In other words, the bidders are only bidding on the interest rate to be paid to them by the debtor in the event that the debtor redeems the certificate.3 If the two year redemption period expires without redemption by the debtor, and the successful purchaser achieves a judgment of foreclosure, fee simple title to the property vests in the purchaser. The purchaser will have paid the amount of the outstanding municipal charges due on the property. The “value” received by the debtor, i.e., the satisfaction of the outstanding tax debt due to the tax sale certificate holder, has no relation to the value of the property being transferred. The concept of “reasonably equivalent value” cannot rest on the amount of tax debt paid by the purchaser two years prior to the transfer of title.
This case may be a perfect example of the fact that “reasonably equivalent value” cannot be ascertained from a tax sale foreclosure under New Jersey law. The tax debt against this property is about $36,000, while the value of the property may be at least $100,000 greater than the amount of the debt that was satisfied by the transfer. The debtors allege that Sparrow has offered the property for sale for $279,000. The property was not offered for sale prior to the transfer of title, i.e., prior to the entry of the judgment of foreclosure.
*194In a recent opinion on this subject, Judge Kaplan concluded that the holding of BFP, focusing as it does on mortgage foreclosure sales, does riot apply to transfers occurring in the context of New Jersey tax foreclosure proceedings. He observed that with regard to tax sales,
public bidding occurs at the inception of the process, within months after the delinquency, and is limited to the rate of interest on the unpaid taxes (which . amounts have little connection to the value of the property). Similarly, the fixed redemption amount at the time of foreclosure of the tax sale certificate is calculated from the accrued taxes and interest thereon, not the value of the underlying property.
In re Berley, 492 B.R. 438, 489 (Bankr.D.N.J.2013). Judge Kaplan cited to In re McKeever, 166 B.R. 648, 650-51 (Bankr.N.D.Ill.1994), for the fundamental proposition that “[t]here is no correlation between the sale price [of a tax sale] and the value of the property.” Id. I agree with Judge Kaplan, and others who have rejected the automatic extension of BFP to tax foreclosures without consideration of the nature of the state law tax sale processes. See, e.g., City of Milwaukee v. Gillespie, 487 B.R. 916, 920 (E.D.Wis.2013) (“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”); In re Smith, Adv. No. 07 A 00239, 2013 WL 3936357, *3 (Bankr.N.D.Ill. July 30, 2013) (“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 re Murphy, 331 B.R. 107, 120 (Bankr.S.D.N.Y.2005) (“A plaintiff has stated a claim that reasonably equivalent value was not obtained for a property seized by tax forfeiture where the state’s procedure for tax forfeiture does not provide for a public sale with competitive bidding.”).
Since the BFP case was decided, the issue of the import of the case on tax foreclosure sales has been vigorously debated in the courts, and many courts have opined that the reasoning of BFP applies with equal force to tax foreclosures. In addition to the two New Jersey cases that have so ruled, including In re McGrath, supra, and In re 2135 Plainfield Avenue, Inc., 72 F.Supp.2d 482 (D.N.J.1999), aff'd, 213 F.3d 629 (3d Cir.2000), two Courts of Appeal have also joined this camp, including In re T.F. Stone Co., 72 F.3d 466 (5th Cir.1995) and In re Grandote Country Club, Ltd., 252 F.3d 1146 (10th Cir.2001). See also In re Washington, 232 B.R. 340 (Bankr.E.D.Va.1999); In re Lord, 179 B.R. 429 (Bankr.E.D.Pa.1995).
In In re T.F. Stone, ad valorem taxes were due to Bryan County, Oklahoma. Post-petition, without notice of the bankruptcy, the county conducted a tax foreclosure sale. No bidders came forward, whereupon the county took title to the property, subject to the debtor’s two-year redemption period. The debtor failed to redeem, and the county conducted a “Tax Resale”, selling the property to a third party for $325. Thereafter, the debtor repurchased the property from the third party for $39,500. 72 F.3d at 468.
The debtor filed suit against the county, claiming that the county engaged in an unauthorized post-petition transaction, and seeking money damages from the county under 11 U.S.C. §§ 549 and 550. The county defended on § 549(c) grounds, i.e., that the transfer was made “to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value.” 11 U.S.C. § 549(c). *195The parties did not dispute that the third party purchaser was a good faith purchaser without knowledge of the bankruptcy. The focus was on whether “present fair equivalent value”, which the court equated with the “reasonably equivalent value” requirement of the constructive fraud section, § 548, was achieved when the “Tax Resale” took place. Id. at 470. Relying on BFP, the court concluded that the principles applicable to mortgage foreclosure sales were equally applicable to sales conducted to satisfy delinquent tax obligations, leading to the ultimate conclusion that the price actually achieved in the context of a regularly conducted tax sale represents a “fair equivalent value” for the property. Id. at 471.
The T.F. Stone decision cannot be applied here because the court in that case was focusing on the consequences of a “Tax Resale” under Oklahoma law. The procedure for tax resales under Oklahoma law exposes the property to the marketplace, with public advertisement and auction processes.4 When the T.F. Stone court compared mortgage foreclosure sales to tax sales, it was comparing procedures that are both appropriately characterized as forced sales that expose the property to the marketplace. The court concluded that both mortgage foreclosure sales, as described in BFP, and forced tax sales under Oklahoma state law produce value that is reasonably or fairly equivalent under the circumstances. See also In re Grandote Country Club, Ltd., 252 F.3d 1146, 1152 (10th Cir.2001)(“[T]he decisive factor in determining whether a transfer pursuant to a tax sale constitutes ‘reasonably equivalent value’ is a state’s procedure for tax sales, in particular, statutes requiring that tax sales take place publicly under a competitive bidding process.... RTV (the successful purchaser) acquired the property through a regularly conducted tax sale under Colorado law subject to a competitive bidding procedure.”).
As I described above, we have a different circumstance in this case. The transfer sought to be avoided here, which occurred three months prior to the debtors’ bankruptcy filing, foreclosed the debtors’ equity of redemption. There was no public advertisement or competitive bidding process. The price actually achieved by the transfer, i.e., the satisfaction of tax debt against the property, cannot represent “reasonably equivalent value” for the property.
In reaching the conclusion that the holding of BFP does not preclude the avoidance of the pre-petition transfer of the debtors’ property under section 548(a)(1)(B), I readily acknowledge the deference shown by the Court to “the essential sovereign interest [of state governments] in the security and stability of title to land”. BFP v. Resolution Trust Corp., 511 U.S. at 545 n. 8, 114 S.Ct. at 1765 n. 8. The Court expressed concern that exposing mortgage foreclosure sales to avoidance under the constructive fraud provi*196sion of the Bankruptcy Code “would have a profound effect upon that interest: The title of every piece of realty purchased at foreclosure would be under a federally created cloud.” Id. at 544, 114 S.Ct. at 1765. But the Court qualified and limited its holding as follows: “We emphasize that our opinion today covers only mortgage foreclosures of real estate. The considerations bearing upon other foreclosures and forced sales (to satisfy tax liens, for example) may be different.” Id. at 538 n. 3, 114 S.Ct. at 1761 n. 3. The Court thus expressly left open the prospect that transfers occurring in the context of “tax sale” may be avoidable under § 548.
The context in which the BFP issue arises here is the potential avoidance of the transfer of the debtors’ property under § 548, which is raised as a defense to Sparrow’s motion to vacate the automatic stay. If the debtors intend to file an adversary proceeding to avoid the transfer under § 548(a)(2), they must do so within ten (10) days of the date of the entry of an order on this motion. See In re Lebbos, 455 B.R. 607, 614 (Bankr.E.D.Mich.2011) (“any such defenses or counterclaims raised during a § 362(d) hearing, would and should still be pursued in the context of an adversary proceeding for a final decision on their merits”); In re Hurst, 409 B.R. 79, 83 (Bankr.D.Md.2009) (“While a court may consider counterclaims that strike at the core of a movant’s secured interest, any such decision should only be preliminary, pending an adversary proceeding.”). If the complaint fails, relief from the stay will be granted. On this record, relief from the stay is denied without prejudice.
Debtors’ counsel shall submit an order in conformance with this opinion.
. "IT IS therefore on this 20th day of June, 2013, ORDERED AND ADJUDGED that the Defendants, GUY P. VARQUEZ, KATHLEEN M. VARQUEZ and THE STATE OF NEW JERSEY and all persons claiming by, from or under them, stand absolutely debarred and foreclosed of any and all right, and equity of redemption, in and to the lands and every part thereof, ... [and it is further] ORDERED AND ADJUDGED that the Plaintiff, SPARROW INVESTMENTS, LLC ... is vested with an absolute and indefeasible estate of inheritance in fee simple to the premises above described.” Motion for Relief from Stay, Exh. A, Final Judgment of Foreclosure, 6/20/13.
. The doctrine takes its name from two U.S. Supreme Court decisions which were rendered 60 years apart: Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983).
. The only qualification here is that if bidders offer to purchase a tax sale certificate subject to redemption at no interest to the debtor, the successful purchaser will be the bidder who offers the highest premium “over and above the amount of taxes, assessments or other charges ... due the municipality.” N.J.S.A. § 54:5-32.
. Under Oklahoma state law, the county treasurer is required to publish notice in local newspapers, and provide notice by certified mail to the owner, of any intent to sell real property to satisfy delinquent real estate taxes. Okla. Stat. tit. 68 §§ 3105; 3106. The sale is subject to a period of redemption. Okla. Stat. tit. 68 § 3113. If no one purchases the property, the county retains the tax lien. If the property remains unredeemed at the end of the redemption period, the treasurer can then sell the property pursuant to statutory resale provisions. Okla. Stat. tit. 68 § 3125. These provisions also require notice of the sale to be published in local newspapers and notice to the owner and any mortgagees by certified mail. Okla. Stat. tit. 68 § 3127. The notice must indicate that the sale will go to the “highest bidder for cash.” Id. The sale is by public auction and cannot be less than 2/3 of the current assessed value for the property or the amount of outstanding taxes and associated costs, whichever is lesser. Okla. Stat. tit. 68 § 3129. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496554/ | Chapter 12
ORDER DENYING CONFIRMATION AND DISMISSING CASE
David R. Duncan, Chief US Bankruptcy Judge, District of South Carolina
THIS MATTER is before the Court to consider confirmation of Debtor’s chapter 12 plan and on the motions of AgSouth Farm Credit, ACA (AgSouth), Jones Farm LLC (Jones), and the chapter 12 trustee (Trustee) to dismiss the case with prejudice. Farm Services Agency orally joined in the motions. A hearing on the motions to dismiss convened October 3, 2013 and, after consuming the afternoon, was continued to October 15th, the date set for considering confirmation. Testimony and exhibits were received. Confirmation of the modified plan filed October 3, 2013 is denied as the plan is not feasible. The case is, in light of the failure of this second reorganization effort, dismissed because of continuing losses and an absence of a reasonable likelihood of rehabilitation. The dismissal is without prejudice.
FACTS
Debtor is a young farmer. He grew up with parents in the wholesale produce industry and grandparents who farmed. Debtor knows the meaning of hard work and dedication. He grew up playing baseball and excelled, ultimately drafted by a Major League Baseball team. After a stint in professional baseball he decided to farm. He owns, subject to liens, a 117.54 acre farm in Lexington, S.C. that was acquired from his grandparents, a 256.41 acre farm he purchased from Jones, and a residence in Martinez, Georgia. Debtor’s parents live in the Martinez residence and *199are supposed to pay rent. Debtor now plans to join them and make this his home as well. He owns farm equipment valued at nearly $180,000.00 and leases other equipment. Debtor transitioned cattle and turf operations into what is now primarily a vegetable row crop business. In the five previous years he farmed he has not made a profit. The current farm year has been a disaster with too much rain and resulting ruined crops.
Debtor previously filed a chapter 12 case (12-02757-dd) on April 30, 2012. That case was dismissed after confirmation of a modified plan was denied and the debtor failed to file a further amended plan within the time set by the court. The case was dismissed November 7, 2012. Thereafter secured creditors moved to foreclose mortgages and claim and deliver personal property collateral. The present case was filed May 30, 2013 in order to avoid the sale of collateral by the lenders. AgSouth filed a motion to dismiss on August 13, 2013 and was joined by Trustee. Debtor filed a plan on August 28, 2013. Jones filed a motion to dismiss September 9, 2013. Debtor objected to the motions to dismiss and the creditors objected to the plan. After a pre-confirmation conference with Trustee and the creditors, Debtor proposed an amended plan on October 3, 2013. The amended plan did not draw the concurrence of the creditors or Trustee.
Debtor’s initial plan proposed in this case called for a 2013 annual payment to creditors through Trustee in the amount of $82,044.45 with subsequent payments of $178.954.04 each year for four years. This was premised on gross farm income of $722,350 and net income of $126,210 in 2013 and net income projections of $203,285 in subsequent years. As noted, the 2013 crop year has been a disaster for Debtor. He filed an amended plan on October 3, 2013, the day the hearing on the motions to dismiss commenced.
The amended plan provides for the surrender of the Lexington County farm (subject to the AgSouth lien) and retention of the other assets. It provides for a 2013 payment of $55,588.05 (applied to interest on secured claims) and four subsequent annual payments of $112,289.90. The secured debt to Jones on the Barnwell farm is amortized over a period of 15 years with the first payment beginning in January 2015. The AgSouth second mortgage on the Barnwell farm is valued at $0 as is the Farm Services Agency second mortgage on the Lexington farm. . The AgSouth and Farm Service Agency liens on farm equipment are each valued and paid over a 7 year term beginning in January 2015. The arrearage to Wells Fargo on the Martinez, Georgia residence is to be paid over a 5 year period with ongoing mortgage payments paid directly each month beginning in October 2013. Priority tax debt to the Internal Revenue Service and ad valo-rem tax debt to various counties (or in reimbursement of tax advances to secured creditors) is addressed. Unsecured creditors, including the deficiency claims of Ag-South and Farm Services Agency, receive an annual payment of $16,386.64 plus any other disposable income available as calculated by Trustee and Debtor in January 2015, 2016, 2017, and 2018. Debtor also proposes to “assume” farm equipment leases between his grandmother and John Deere Credit.
Debtor lost money on the farming operation in each of the past 5 years. AgSouth Exhibits 2 and 3 a-d reflect ongoing losses as follows:
*2002008 ( 33,697)
2009 (118,178)
2010 (304,832)
2011 (233,294)
2012 ( 37,762)
In only one of the years was interest paid to secured creditors and testimony showed that the interest payment was funded by a loan from Farm Services Agency. Debtor testified that the losses were moderating as he transitioned to a row crop operation and suggested that he would realize a profit in 2013. He now projects 2013 gross income of $214,400 and expenses of $147,068.60 leaving $67,331.40 to make the plan’s proposed $55,588.05 interest payment. This is a far cry from the $722,350 gross farm income projected with the August, 2013 plan and the testimony and exhibits reveal that even this reduced projection is not realistic.
Debtor introduced Exhibits A-P, photographs of crops in the field at the Barnwell farm in 2011, 2012, and 2013. The 2013 crop photographs (D-P) reflect initially flourishing crops but reveal extensive rain damage and deteriorating crops (D, E, F, M, O, and P). Even with the dire picture painted of crops ruined by the rain, Debtor projects (attachments to Exhibit S) a final quarter of the year with sales of $132,000 from 20 acres of collards, $30,000 from 18 acres of peanuts, $12,800 from the remaining 10 acres of okra, and $36,300 from 6 acres of cabbage. Debtor also projects the receipt of $43,300 in crop insurance and farm program payments. He projects another $132,000 in receipts from the sale of collards grown on the 20 acres in January and February 2014. Debtor testified that he would recover 50 to 75% of his lost and rain damaged crops from the crop insurance claim. This potential recovery does not reconcile with the initial or subsequent estimates of net farm profit.
AgSouth’s special assets manager testified that he inspected the farm fields on October 2, 2013. At the October 3rd hearing, he projected gross sales from growing crops totaling $106,922. AgSouth also introduced a series of photographs (Ex. 12-25) taken the day before the October 15, 2013 hearing. The photographs lend credibility to the lower projected income figure. Exhibits 13, 14, 15, 18, 19, and 21 especially highlight the poor yield from the fields and the Court finds the AgSouth testimony more credible and believable as to the issue of 2013 farm income. At the October 15th hearing, the witness testified that, based on the visit at which photographs were taken and a recalculation of growing crops actually in the ground that gross income for the final three months of the year would be at most $60,000.
As to the future operations proposed by Debtor, testimony revealed that his father had loaned significant sums (between $60,000 and $70,000) to finance the farming operation since the filing of the bankruptcy case. The creditors complained that none of the advances of credit were approved by the court and that Debtor and his father were inconsistent in describing the funds alternately as a loan and a capital contribution. The testimony also was inconsistent as to the terms of repayment. Debtor testified that he had no other source of operating funds. Without the operating loans from the father Debtors operational losses to date as reflected in monthly operating reports filed with the court would be significantly greater. (Exhibits 7 a-c)
*201Father and son testified that future credit would be available; however the father refused to answer questions about the source of the funds and would not identify the detail of his own obligations to repay borrowed funds or his ability to acquire additional funds. He simply stated that the funds came from a loan the father received from a friend that was secured by property of another friend. In short, with the 2013 crop failure, a lack of funds to carry over to farm in 2014, and the peculiar hesitancy of the father to answer questions, there is no evidence of any ability of Debtor to fund or obtain credit for ongoing farm operations. Debtor did testify that much of his difficulty in past years arose because he had no operating capital or that operating loans were not properly timed to the cash flow needs of the farm operation.
Apart from these findings as to the gross and net income of the farm, testimony showed the following:
1. Debtor sold a trailer valued at approximately $2,000 that had been under lien to AgSouth and did not pay the proceeds to the creditor. Debtor testified that the purchaser is willing to return the trailer or pay $2,000 to AgSouth. Debtor also testified that he had earlier remitted $2,000 to his attorney to hold for AgSouth. Those funds have not been located. The alleged remittal to the attorney was not reflected in Debtor’s monthly financial reports to the court. The inconsistency in claiming a previous remittance to counsel and the purchaser’s willingness to now pay the funds has not been reconciled.
2. In the interim between the two bankruptcy cases, Debtor or his father paid unsecured claims of two individual creditors, one of whom was identified as a girlfriend of Debtor.
3. Except as noted immediately above, the difference in the debt reflected in the schedules attached to the first and second bankruptcy petitions largely results from duplication of some entries, omissions of other creditor information, miscalculation of indebtedness and the accrual of interest.
4. Except as noted in the number paragraph 1 above, the difference in the value of property reflected in the schedules attached to the first and second bankruptcy petition results from the use of different appraisals, crop losses, and changes in opinion as to value.
5. The father is a co-maker on the Jones loan which is due December 1, 2013 and exceeds $585,000.
6. The AgSouth loans total in excess of $1,280,000. These loans are guaranteed by Farm Services Agency and some estimated loss adjustments have been paid by Farm Services Agency to AgSouth. AgSouth remains the servicer for the loans and collects the debt for itself and Farm Services Agency as their interests may be adjusted from time to time.
7. Debtor’s past financial projections have never been achieved and he attributes the farm failures to a combination of the absence of timely available operating loans, natural disasters, and “some fault” attributable to himself. Debtor attributed some of the difficulty in obtaining operating loans from agricultural lenders to animus relating to his race and youth. Debtor had previously testified that the reasons lenders had given him for their hesitancy to provide him crop loan advances *202was that he had insufficient collateral and that there was a concern with his level of farming experience.
8. Debtor’s present agriculture projections are based on his past operations and on yield projections available from the state agriculture service.
9. Debtor’s father testified that he did not expect to be repaid his operating loan to his son until his son’s creditors were paid.
10. Both the AgSouth manager and John Paul Jones on behalf of Jones testified that the Debtor’s Barnwell County farm was or, based on results, must have been mismanaged. According to Jones, the farm has center pivot irrigation, excellent soil and a history of top yields for turf. He testified that there was no reason, other than mismanagement, that the farm would not produce yields that would allow Debtor to make a living farming. Ag-South’s witness stated that the current farming practices of Debtor were inept.
11. The monthly operating report for August 2013 reflects end of month cash on hand of $13,983.21 following losses of $11,881.04 for the month. Debtor testified that his cash situation for the year would have been negative but for the loans from his father. Although the September 2013 report was not available at the time of the October 15th hearing, Debtor also testified that the end of month cash on hand as reflected in his updated feasibility analysis, based on the September cash on hand would be approximately $6,100. This reduction in cash between August and September reflects another month of operations at a loss.
CONCLUSIONS OF LAW
Although the hearing on the motions to dismiss was commenced first, it merged, with the agreement of the parties, with the issue of confirmation due to time constraints. The issue of confirmation is addressed first. Debtor has the burden of proof by a preponderance of the evidence to show that the plan should be confirmed. A plan must be confirmed if it meets the standards of 11 U.S.C. § 1225(a).1 The creditors and trustee variously argue that the plan is not proposed in good faith, is not feasible, does not meet the chapter 7 liquidation test, does not meet the best interest of creditors test (present value), and is otherwise deficient.
The multitude of issues raised by the creditors and the volume of evidence on good faith and liquidation need not detain the Court as the plan simply is not feasible. “Section 1225(a)(6) requires the court to find that the debtor will be able to make all payments under the plan and to comply with the plan.” 8 Collier on Bankruptcy ¶ 1225.02[5] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010) [hereinafter Collier]. Courts often resort to eases construing the similar feasibility requirements of chapters 11 and 13 of the Bankruptcy Code when faced with the issue of feasibility in a chapter 12 case. “The court should not confirm a plan unless it appears under the totality of circumstances that the plan has a reasonable likelihood of success.” In re Harrison, 203 B.R. 253, 256 (Bankr.E.D.Va., 1996) (a chapter 13 case). “[S]uccess of a debtor’s plan does not have to be guaranteed; instead, the plan must ‘present a workable scheme of organization and operation from *203which there may be a reasonable expectation of success.’ ” In re Om Shivai, Inc., 447 B.R.459, 462 (Bankr.D.S.C., 2011) (in a chapter 11 context) (citations omitted). In assessing feasibility, several factors may be relevant, including:
The reorganized debtor’s capital structure, the debtor’s projected earning power, the current state of the economy, the ability of management and the likelihood that the current management will continue to work for the reorganized debtors, and any other factors the court finds relevant to the success of the debt- or’s plan.
Id. (citing In re Radco Props., Inc., 402 B.R. 666, 679 (Bankr.E.D.N.C.2009)). Merging the factors which Courts look to in the more complicated chapters 11 business cases and the sometimes simpler consumer 13 cases is often necessary when considering the feasibility of a chapter 12 plan proposed by a family farmer.
Debtor has shifted his farming operation to his preferred choice as a vegetable farm. During the past he has not made a profit, not once. His operation during the previous chapter 12 case lost money and it is now losing money. The present year projections for gross income are not being realized and even the last minute revisions of the income projections are not realistic. The photographs of the crops growing on the farm at the time of confirmation paint a far different and more dismal picture than Debtor projects. Debtor has the burden of proof on feasibility and is far short of it. Without further operating loans, Debtor cannot pay his first (interest only) chapter 12 payment and have funds to plant next year’s crops. Without a fulsome planting schedule, Debtor cannot make his projected yields for subsequent years. His father’s testimony concerning an ability to continue to fund operations is simply not credible. Father refused to testify concerning the source and availability of money and the court infers that the funds are not in fact available. Additionally, father’s own financial circumstances and the looming default date on the Jones debt, with its potential impact on father, do not support Debtor’s cause. While family farmers may, from time to time, receive loans from family members, “[a] debtor relying on such financing will have to demonstrate that the financing is reliable to establish feasibility.” 7 Norton Bankr. L. & Prac. 3d § 134.12 fn10. The evidence of the reliability of ongoing financing is not convincing.
Turning to the motion to dismiss, the creditors again serially argue unreasonable delay and gross mismanagement, continuing loss to or diminution of the estate paired with the absence of a reasonable likelihood of rehabilitation, and bad faith or other cause. The case should be dismissed because Debtor continues to operate with no profit and rising debt because of the inability to pay secured creditors even their interest. There is no prospect for rehabilitating the farm operation. The debtor has had an adequate opportunity to confirm a plan in two chapter 12 bankruptcy cases and failed to obtain the court’s approval. “If the debtor has tried but failed to obtain confirmation of a plan ... the debtor should bear a greater burden in showing that the debtor has reasonable prospects for rehabilitation.” 8 Collier ¶ 1208.03[9] (16th ed. 2010).
Debtor does not have the cash flow to make the plan payments and does not have operating funds. Even with the surrender of the Lexington farm, the existing cash flow will not support Debtor’s revised plan. This is true even though the initial proposed plan payment covers interest only and is thus perhaps inconsistent with the payment of the present value of the se*204cured claims in a realistic timeframe. Additionally, based on Debtor’s own numbers, creditors will receive the same value under the proposed plan as they would in liquidation. However, liquidation would not take 5 years. It is questionable whether this is consistent with § 1225(a)(4). In sum, losses continue, debt builds, and the farm will not successfully operate considering the level of debt and realistic income that can be generated under the present business model. The Court does not find gross mismanagement on the part of the debtor, and this and the previous case have proceeded in due course with Debtor attending to the duties imposed by the Bankruptcy Code. While there have been delays in reporting and correcting information, these delays do not arise to the level of unreasonable delay or bad faith. However, the case should be dismissed under § 1208(c)(9) because of continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.
The creditors have asked that dismissal be with prejudice as to filing any bankruptcy petition for a period of at least one year. In connection with this request, the Court has considered the bad faith objections to confirmation put forward by creditors. Dismissal of a bankruptcy case is ordinarily without prejudice to the filing of a subsequent case. “Unless the court, for cause, orders otherwise, the dismissal of a case under this title does not ... prejudice the debtor with regard to the filings of a subsequent petition under this title, except as provided in section 109(g) of this title.” § 349(a). Section 109(g) is not applicable. The court then turns to whether cause exists for barring a filing by Debtor for some period of time.
Debtor has, following loan defaults, twice stopped creditors from pursuing state law remedies in collateral by filing bankruptcy petitions. Section 362(c)(8) provides no relief from or limitation to the automatic stay in a subsequent chapter 12 filing. The one year window of § 362(c)(4), applicable to a third case filed under any Bankruptcy Code chapter when two or more cases were pending by the same individual debtor in a one-year period is set to expire at or near the time this order is entered.
Our Court of Appeals has recognized under § 349(a) dismissals with prejudice to a subsequent discharge and dismissals with an injunction to re-filing both for “the 180-day period provided by § 109(g) or a longer period.” In re Tomlin, 105 F.3d 933, 939 (4th Cir.1997). However, courts generally do not dismiss bankruptcy cases with an injunction to refiling absent evidence of egregious conduct demonstrating bad faith. Id. at 937. In Tomlin, the decision of the bankruptcy court to dismiss a case with prejudice to re-filing for 180 days was affirmed following a serial bankruptcy filer’s sixth bankruptcy petition and the failure to attend the creditors meeting and file schedules. Id. at 935, 941-42. This does not suggest that a sixth filing is a minimum standard for considering a time-period injunction to future filings, but does point to the need to employ this type remedy only in the appropriate case.
The Debtor has not engaged in egregious conduct demonstrating bad faith. He has twice availed himself of chapter 12 relief in hopes of reorganizing his financial affairs. While he has been slow to file written amendments to his schedules he has filed the schedules and has been truthful in connection with a series of examinations under oath. The information necessary for progress in the case has been available, though perhaps Debtor and counsel could have been more attentive to ensuring correction of the written record. *205The inconsistencies in connection with testimony concerning the trailer and issues with the father’s reluctance to testify concerning the source of the operating loan are troubling but do not alone justify dismissal with prejudice in this case. Creditors have not availed themselves of the option to seek relief from the automatic stay in this or the previous case. Clearly the findings in this order would have a bearing on a motion for relief from stay or a motion to dismiss a subsequent case with prejudice were such a case to be filed without significantly different circumstances or goals. Dismissal is without prejudice.
CONCLUSION
Confirmation of the plan is denied and the case is dismissed. The Court retains jurisdiction of the case to consider the application for compensation filed by counsel for Debtor.
IT IS SO ORDERED.
. Further reference to the Bankruptcy Code will be by section number only. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496555/ | ORDER APPROVING APPLICATION FOR DEBTOR’S ATTORNEY’S FEES
JEFFREY P. HOPKINS, Bankruptcy Judge.
Before the Court is an Application for Allowance of Fees (the “Application”) for services related to the Debtor’s Chapter 13 case filed by James K. Ferris. See Doc. 93. The issue before the Court is whether a total fee of $11,822 calculated on the basis of 61.6 billable hours is reasonable for counsel’s services considering the Debtor’s inability to obtain confirmation of her Chapter 13 plan. For the reasons that follow, the Court approves the Application for attorney’s fees, but in the reduced amount of $6,206.67.
BACKGROUND
From the start, this case has had a troubled history in this Court. The case was initially filed under Chapter 7 on June 2, 2011 (Doc. 1), but was converted to Chapter 13 the following day (Doc. 8). Counsel for the Debtor has since explained that the Chapter 7 petition was filed inadvertently and that the case originally was meant to be filed under Chapter 13. The ease has been pending for more than a year without any meaningful progress towards confirmation. Multiple plans, more or less similar in substance, content and design, have been filed in the case. None of the plans have met the rather rigorous standards that apply under §§ 1322 and 1325 for confirmation of a Chapter 13 case involving the sale of real estate as the primary mechanism for funding a plan. Ultimately, the case will be dismissed.
The Debtor filed the original Chapter 13 plan of reorganization on July 14, 2011. The plan provided for the payment of all allowed secured claims and priority claims, and a 100% distribution to unsecured creditors. The plan further stated that funding would come primarily from the liquidation of real property. See Doc. 18. Plymouth Park Tax Services, LLC (“Plymouth”) and Fifth Third Mortgage Company, creditors in the case, filed objections to the plan contending that the plan failed to meet the standards under § 1322(b)(5). See Docs. 27 and 32. The plan did not provide adequate protection payments to secured creditors, did not offer a viable strategy for selling the properties in order to fund the plan, and failed to provide payment for certain creditor’s claims.
Subsequently, on October 7, 2011, the Debtor filed an amended plan. The amended plan stated that if Plymouth’s claim was not paid in full before May 1, 2012, the Debtor would commence making $1,200 in conduit payments to the Chapter 13 trustee, or in the alternative, the Debt- or would retain an auctioneer to conduct sales of certain properties. See Doc. 38. A hearing on the Amended Plan was held *208on February 14, 2012, and by February 23, 2012, a second amended plan (“Second Amended Plan”) was filed along with counsel’s first application for compensation in the amount of $6,549. See Docs. 49 and 50.
Much like the first two plans, the Second Amended Plan relied primarily upon the liquidation of real property for funding the plan. Unlike the other plans, however, the Debtor set out a detailed time frame for the sale of three of the estate properties. One property was to be sold by August 2012 while the other two properties were to be sold within 18 months from the filing of the Second Amended Plan. See Doc. 49. The Second Amended Plan did not provide a default remedy for creditors in the event the Debtor failed in her efforts to consummate a sale. See Doc. 49. On March 6, 2012, the Court denied confirmation of the Second Amended Plan and directed the Debtor to either convert the case to one under Chapter 7 or 11 or file a third amended plan. See Doc. 51.
On March 20, 2012, Plymouth filed motions for relief from the automatic stay on three properties upon which it held liens. See Docs. 54, 56, and 58. Prior to the hearing on Plymouth’s motions for relief from stay, the Debtor filed her Third Amended Plan. In the plan, she proposed to modify the sale dates and added default provisions. See Doc. 65. At the April 16, 2012, hearing, the Court expressed continued concern about the feasibility of the Debtor’s Third Amended Plan. Concerned with the Debtor’s inability to sell certain of the properties or to satisfy Plymouth’s claim, the Court issued an order conditioning the stay. See Doc. 75. Under the order conditioning the stay, the Debtor had until June 1, 2012, to sell the property located at 4038 Burwood Avenue, Nor-wood, OH 45212 or the stay would be lifted. The Court also granted the Debt- or’s motion to sell real property (Doc. 85), to retain a real estate broker (Doc. 82), and to retain an auctioneer (Doc. 86), strategies that perhaps should have been incorporated in the original plan as filed.
A confirmation hearing on the Debtor’s Third Amended Plan was held on June 12, 2012. During the hearing, counsel for the Debtor informed the Court that the Debt- or’s planned sale of the Burwood Property was unsuccessful. The Court again denied confirmation and continued the confirmation hearing to July 17, 2012. The Court also indicated that the Debtor would have one last opportunity to propose a feasible Chapter 13 Plan before the case would be converted or dismissed. On July 9, 2012, counsel for the Debtor filed a second application for fees, this time in the amount of $11,822. Thereafter, on July 11, 2012, instead of amending the plan, the Debtor moved to dismiss her case pursuant § 1307. See Doc. 94.
DISCUSSION
The Bankruptcy Code provides that after notice and hearing, a court may award “reasonable compensation for actual, necessary services” rendered by professionals. 11 U.S.C. § 330(a)(1)(A) and (B). Where a fee agreement “exceeds the reasonable value of any such services,” § 329 provides that the court may cancel the agreement to the extent excessive of the reasonable value. In re Radford, No. 10-21983, 2011 WL 5827316, at *2, 2011 Bankr.LEXIS 4389, at *4-5 (Bankr.N.D.Ohio Nov. 18, 2011). In determining the reasonable value of services, a court must consider “the nature, the extent, and the value of such services,” taking into account all relevant factors, including whether the services were necessary to the administration of the case, or beneficial at the time the service was rendered toward completion of the case. 11 U.S.C. § 330(a)(3)(C). Further, it is well settled *209that the reasonableness determination is made by the use of the Lodestar method, which calls for the multiplication of the attorney’s reasonable hourly rate by the number of hours reasonably expended. In re Boddy, 950 F.2d 334, 337 (6th Cir.1991).
Generally, “there is a strong presumption that the Lodestar amount represents ‘reasonable compensation.’ ” In re Big Rivers Elec. Corp., 252 B.R. 676, 686 (W.D.Ky.2000) (citing Pennsylvania v. Delaware Valley Citizens’ Council for Clean Air, 478 U.S. 546, 564-65, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986)). However, “[t]he product of reasonable hours times a reasonable rate does not end the inquiry.” Hensley v. Eckerhart, 461 U.S. 424, 434, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983). Additional factors can be considered and the court can adjust an award upward or downward to achieve a reasonable result. In re Boddy, 950 F.2d at 338. The additional factors to be considered are:
(1) the time and labor required; (2) the novelty and difficulty of the question; (3) the skill requisite to perform the legal service properly; (4) the preclusion of other employment by the attorney due to acceptance of the case; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) the amount involved and the results obtained; (9) the experience, reputation, and ability of the attorney; (10) the “undesirability” of the case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases.
Geier v. Sundquist, 372 F.3d 784, 792 (6th Cir.2004) (quoting Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir.1974)). Ultimately, the party seeking attorney’s fees bears the burden of proving the reasonableness of the hours and the rates. Hensley, 461 U.S. at 433, 103 S.Ct. 1933.
The Court finds that, given counsel’s experience, reputation, and ability in bankruptcy matters, $195.00 per hour is a reasonable rate. Thus, under the applicable case law, the Court’s inquiry next turns to whether expending 61.6 hours in this case was reasonable considering other relevant Lodestar factors. In this regard, ‘“the majority of [c]ourts agree that the results obtained is a major factor in determining whether the services at issue bestowed a benefit upon the estate.’ ” In re McLean Wine Co., 463 B.R. 838, 848 (Bankr.E.D.Mich.2011) (emphasis added) (quoting In re Allied Computer Repair, Inc., 202 B.R. 877, 886 (Bankr.W.D.Ky.1996)). The Court is quite conscious that it “... should resist the temptation to engage in 20/20 hindsight and [that it should] focus instead on facts known (or which should have been known) to the applicant at critical points during the pendency of the case.” Id. (quoting In re Arnold, 162 B.R. 775, 778 (Bankr.E.D.Mich.1993) (internal quotation marks omitted)). Accordingly, the most pertinent issue is whether “when viewed under the circumstances in existence at the time, [counsel’s] services were reasonably calculated to provide a benefit to the estate.” Id. (quoting In re Kennedy Mfg., 331 B.R. 744, 748 (Bankr.N.D.Ohio 2005) (internal quotation marks omitted)).
Counsel’s most recent Application states that he has received $651.00 and the attached time itemization indicates that a balance of $11,171.00 remains. See Doc. 93. Of the 61.6 hours billed, 2 hours were billed for paralegal assistance at a rate of $100.00 per hour, and 59.6 hours were billed for counsel’s services at a rate of $195.00 per hour. Almost 40 percent of the hours billed at counsel’s rate, or 23.1 hours, were incurred after the Court de*210nied confirmation of Debtor’s Second Amended Plan and after the Court expressed serious concern about the feasibility of Debtor’s plan in the Chapter 13 context. On September 10, 2012, the Chapter 13 Trustee (“Trustee”) filed a response to the Application. See Doc. 97. The Trustee noted that Debtor has only paid $9,310.00 into her office since the petition was filed. See Doc. 97.
It is settled law that a debtor bears the burden of proof as to the plan’s feasibility when seeking confirmation of her plan. 11 U.S.C. § 1325(a)(6); see In re Hogue, 78 B.R. 867, 872 (Bankr.S.D.Ohio 1987). Courts have consistently denied confirmation of plans containing speculative contingencies. In re Hogue, 78 B.R. at 872-873. While it is true that pursuant to § 1322(b)(8), a plan may “provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor,” the feasibility of a Chapter 13 plan funded from the sale of real property is conditioned on the reasonableness of the proposed time frame and whether a default remedy is provided for creditors in the event a sale does not occur. See e.g., In re Lynch, 2009 WL 1955748, at *4, 2009 Bankr.LEXIS 1863, at *10 (Bankr.E.D.N.Y. July 6, 2009); In re Jensen, 369 B.R. 210, 236-237 (Bankr.E.D.Pa.2007); In re Valdez, 2007 WL 1464439, at *4, 2007 Bankr.LEXIS 1789, at *11 (Bankr.D.N.M. May 17, 2007); In re Hogue, 78 B.R. 867, 874 n. 10 (Bankr.S.D.Ohio 1987).
According to his time records, during the month immediately preceding the commencement of the case counsel expended approximately 5 hours consulting with the Debtor and preparing the Debtor’s case for filing. See Doc. 93, Time Itemization. While preparing her schedules and her case under the means test, counsel must have become aware that the Debtor had limited regular income and that her best chance of funding a bankruptcy plan was through the uncertain mechanism of liquidating real property. Indeed, every new iteration of the plan that the Debtor filed proposed funding the reorganization effort through real property sales. See Docs. 18, 38, 49, and 65. Yet, counsel submitted a plan, on July 14, 2011, over a month after the petition was filed in this case, that was speculative, at best. Moreover, each of the amended plans filed by the Debtor, thereafter, contained many of the same defects. As proposed, the plans did not specify a reasonable time frame within which sales of the properties were to be consummated, nor did the plans provide default provisions to protect the secured creditors in the event the proposed property sales failed to materialize. See In re Hogue, 78 B.R. at 874 n. 10.
In sum, the Court concludes that counsel failed to properly take into account or address the Debtor’s significant burden of demonstrating the feasibility of a plan calling for funding substantially through property sales at numerous and critical points during the yearlong proceedings. A modicum of investigation into existing law, should have suggested to Debtor’s counsel that all the services he was providing were unlikely to produce a confirmable Chapter 13 plan and that the Debtor’s circumstances called for an alternate strategy. At the time the petition was filed, Debtor’s counsel should have contemplated whether a Chapter 13 filing offered a more viable alternative over Chapter 7 or whether filing bankruptcy was the most advisable course for the Debtor to take to solve her financial ills in the first place. See In re Polishuk, 258 B.R. 238, 248-49 (Bankr.N.D.Okla.2001) (“In order to benefit the estate, the services rendered must relate to a realistically obtainable goal. Counsel for a debtor or debtor in possession will *211not be compensated for time spent in preparation of a plan which has no realistic hope of confirmation.”); In re Saturley, 131 B.R. 509, 521 (Bankr.D.Me.1991) (“[F]utile efforts aimed at achieving unattainable. objectives are unreasonable. Fees generated in tilting at windmills will be disallowed.”) (other citations omitted); see also In re MFlex Corp., 172 B.R. 854, 857 (Bankr.W.D.Tex.1994) (“Chapter 11 cases which lack viable chances of reorganization may place the fees of counsel at risk.... [A]t some point counsel for the Debtor should have recognized that reorganization was not feasible and that services of counsel in that direction would be of no benefit to the estate.”) (internal quotation marks and citations omitted).
Instead of providing a benefit to the estate, the legal services rendered in this case burdened it with unnecessary fees, costs, and delays. Given the lack of results achieved in this case, and after over a year of proceedings, during which the Debtor proposed three plans, none of which were feasible or confirmable, the Court determines that the Application does not meet the difficult burden of showing that 61.6 hours was reasonable. See In re McLean Wine Co., 463 B.R. 838, 848 (Bankr.E.D.Mich.2011) (“ ‘[W]hen a professional’s efforts have failed to produce a significant benefit, the task of proving the reasonableness of the fees to the Court becomes unsurprisingly more difficult.’ ”) (quoting In re Unitcast, Inc., 214 B.R. 992, 1009 (Bankr.N.D.Ohio 1997)).
The Court notes that only $9,310.00 has been paid to the Chapter 13 Trustee towards a plan that calls for payment of all allowed secured and priority claims and a 100% distribution to unsecured creditors. The Court further realizes that counsel is not a guarantor that a debtor will make all payments to the trustee, or that a debtor will fulfill all the requirements for confirming a plan or obtaining a discharge. However, “[t]o justify more than a nominal fee, counsel must provide evidence of valuable professional efforts to investigate and to evaluate the facts, valuable professional efforts to assess the prospects for confirming a chapter 13 plan, valuable professional efforts to confirm a chapter 13 plan, valuable professional client counseling concerning the debtor’s postpetition duties and responsibilities, and a reasonable belief that a plan could be confirmed and consummated.” In re Phillips, 291 B.R. 72, 83 (Bankr.S.D.Tex.2003).
Here, the plan will not be confirmed and the case will be dismissed. This Court adopts and agrees with the Court in In re Burton, 278 B.R. 645 (Bankr.M.D.Ga.2001), which succinctly stated: “This Debtor might have been more ably and economically assisted by legal counsel that would have discouraged the filing of a chapter 13 case ...” In re Williams, 378 B.R. 811, 825 (Bankr.E.D.Mich.2007) (quoting In re Burton, 278 B.R. 645, 651 (“In substantially reducing the fees, the court [in In re Burton ] expressed its concerns that counsel had not considered filing a chapter 7 petition and questioned whether any petition should have been filed”)). While the Court is cognizant of the fact that counsel devoted a substantial amount of work in representing his client, those efforts must be measured against the benefit to the bankruptcy estate and the services rendered related to a realistically obtainable goal. See In re McLean, 463 B.R. at 848. It would run contrary to the law to disburse fees in this case for anything more than a nominal amount, especially when there was no discernible benefit to the estate. Most of the services performed in this case were in preparation of a plan which had no realistic hope of confirmation. “Finally, the fact *212that a debtor derives personal benefit from the delay of collection efforts against him or her due to the bankruptcy case does not constitute a benefit for purposes of awarding compensation.” In re Polishuk, 258 B.R. at 248; see Bachman v. Pelofsky (In re Peterson), 251 B.R. 359, 865 (8th Cir. BAP 2000) (affirming refusal to award fee where “efforts resulted in no benefit to the debtor under § 330(a)(4)(B), other than to cause delay in payment.”). The Court concludes that the amount of the fees awarded should be substantially reduced from the total requested.
Based on the foregoing, the Application is hereby DENIED in part and GRANTED in part. Attorneys fees in the amount of $6,206.67 is hereby awarded on the Application. The Trustee is ordered to remit $6,206.67 less the $651 already paid by the Debtor, for a total of $5,552.67 directly to Mr. Ferris.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496557/ | MEMORANDUM OF DECISION
EUGENE R. WEDOFF, Bankruptcy Judge.
This adversary proceeding presents a question about the requirements for an Illinois statutory trust in favor of subcontractors. The plaintiff in the proceeding is a subcontractor, Anchor Mechanical, Inc. Anchor alleges that it performed work on a project for which ICM, Inc., the debtor in this Chapter 7 case, was the general contractor. Anchor’s complaint states that Anchor fully performed its work on the project, but was not paid by ICM. The complaint seeks to impose a trust in favor of Anchor pursuant to Section 21.02(a) of the Illinois Mechanics Lien Act, 770 ILCS 60721.02(a) (2010), in the amount of its unpaid compensation, on funds of ICM held by the Chapter 7 trustee.
The trustee has moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(6), applicable in bankruptcy cases under Fed. R. Bankr.P. 7012(b). The trustee notes that although the complaint alleges that Anchor gave ICM a waiver of its mechanics lien *222and that ICM obtained payment after giving its own, separate lien waiver to the owner of the project, the complaint fails to allege that the payment to ICM resulted from Anchor’s lien waiver. The trustee argues that Section 21.02(a) imposes a trust only on funds received as a result of the trust claimant’s own lien waiver.
The trustee’s motion raises a question of the interpretation of Section 21.02(a) that has not previously been addressed in a published opinion. However, as discussed below, (1) the language of the statute can only reasonably be interpreted as the trustee has argued and (2) only the trustee’s reading is consistent with other provisions of the Mechanics Lien Act. Therefore the trustee’s motion to dismiss the complaint will be granted.
Jurisdiction
Under 28 U.S.C. § 1334(a), the federal district courts have “original and exclusive jurisdiction” of all cases under the Bankruptcy Code, but 28 U.S.C. § 157(a) allows the district courts to refer these cases to the bankruptcy judges for their districts, and the District Court for the Northern District of Illinois has made such a reference of all of its bankruptcy cases. N.D. Ill. Internal Operating Procedure 15(a). Under 28 U.S.C. § 157(b)(1), a bankruptcy judge to whom a case has been referred may enter final judgment on “core proceedings arising under” the Bankruptcy Code. The question to be determined in this proceeding — whether property of the debtor is subject to a trust — affects the nature and extent of property of the debtor’s bankruptcy estate, and so is a core proceeding under 28 U.S.C. § 157(b)(2)(A), in that it affects the administration of the estate. See Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 401-02 (4th Cir.1992) (claims of constructive trust against assets in the possession of a trustee are core proceedings).
Allegations of the Complaint
Anchor’s complaint — titled Third Amended Adversary Complaint for Constructive Trust under the Illinois Mechanics’ [sic] Lien Act (Adversary Proceeding 12-01659, Docket No. 17) — addresses two separate matters. First, as to contract performance and payment, the complaint alleges:
1. The owner of real property in Chicago entered into a contract with ICM to perform construction work on the property. (Complaint, ¶ 7.)
2. ICM, in turn, entered into a subcontract with Anchor for a portion of the construction work. (Complaint, ¶ 8.)
3. Anchor fully performed the work required by the subcontract. (Complaint, ¶ 9.)
4. The owner paid ICM for the work required by its contract with ICM, including the work done by Anchor under the subcontract. (Complaint, ¶¶ 15, 26.)
5. ICM did not pay Anchor for its work. (Complaint, ¶ 18.)
Second, the complaint addresses waivers of mechanics liens by both ICM and Anchor:
1. ICM submitted a lien waiver to the owner, attached to the complaint as Exhibit 1, in exchange for the payment it received from the owner. (Complaint, ¶ 16.)
2. The lien waiver is dated February 13, 2012, and acknowledges that ICM received full payment from the owner as consideration for ICM’s waiver. (Complaint, Exhibit 1.)
3. As part of the lien waiver form submitted to the owner, ICM also submitted a “Contractor’s Affidavit,” *223signed by ICM’s president under oath and notarized on February 13, 2012, falsely stating both that ICM was the only party who had furnished material or labor in connection with ICM’s contract services and that there were no other contracts for work outstanding or anything due to any person other than ICM. (Complaint, Exhibit 1.)1
4. Before February 13, 2012, ICM requested that Anchor provide ICM with a waiver of Anchor’s mechanics lien. (Complaint, ¶ 21.)
5. Anchor submitted a lien waiver and recorded the waiver in August 2012. (Complaint, ¶ 23.)
Based on these allegations, the complaint seeks a judgment “declaring that the funds received by ICM are not property of the Estate [and] that the Trustee shall hold the funds in trust for the benefit of Anchor.” Paragraph 22 of the complaint asserts that the basis for Anchor’s trust claim is Section 21.02(a) of the Illinois Mechanics Lien Act, 770 ILCS 60/21.02(a).
Discussion
Section 21.02(a) of the Illinois Mechanics Lien Act states the following:
Money held in trust; trustees. Any owner, contractor, subcontractor, or supplier of any tier who requests or requires the execution and delivery of a waiver of mechanics lien by any person who furnishes labor, services, material, fixtures, apparatus or machinery, forms or form work for the improvement of a lot or a tract of land in exchange for payment or the promise of payment, shall hold in trust the sums received by such person as the result of the waiver of mechanics lien, as trustee for the person who furnished the labor, services, material, fixtures, apparatus or machinery, forms or form work or the person otherwise entitled to payment in exchange for such waiver.
770 ILCS 60/21.02(a) (2010). Although the single sentence of this section is somewhat complex, its general application in the present case is clear. A payment received by a contractor like ICM is subject to a trust in favor of a subcontractor like Anchor if two conditions are met. First, the contractor must have requested or required the subcontractor to execute and deliver a waiver of the subcontractor’s mechanics lien. Second, the contractor must have received the payment “as the result of the waiver of mechanics lien.”
Anchor’s complaint plainly satisfies the first condition, alleging in Paragraph 21 that ICM requested Anchor to provide a lien waiver. The parties, however, disagree about whether the complaint satisfies the second condition. In her motion to dismiss, the trustee contends that the complaint fails to do so because it does not allege that ICM received payment as a result of a lien waiver that Anchor executed and delivered. Anchor, in contrast, argues that the complaint satisfies the condition by alleging that ICM received payment as a result of the lien waiver— Exhibit 1 to the complaint — that ICM executed and delivered.
Accordingly, the dispute over whether the complaint should be dismissed under Rule 12(b)(6) is not about whether the complaint provides enough factual detail, the issue addressed 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 *224L.Ed.2d 868 (2009). Rather, the dispute is about the meaning of Section 21.02(a) of the Illinois Mechanics Lien Act. Anchor does not dispute the trustee’s assertion that its complaint fails to allege that ICM received payment as a result of a lien waiver submitted by Anchor. Indeed, Exhibit 1 to the complaint states the contrary, that payment to ICM was based exclusively on ICM’s own lien waiver, which does not mention Anchor and reflects no sums due to any subcontractor. (The complaint alleges at Paragraph 23 that Anchor recorded its own lien waiver six months after the owner made its payment to ICM.) On the other hand, consistent with the content of Exhibit 1, the complaint alleges, at Paragraph 16, that ICM’s lien waiver caused the owner to pay ICM.
Anchor’s brief opposing the trustee’s motion to dismiss (Adversary Proceeding 12-01659, Docket No. 25) accurately reflects the parties’ different readings of Section 21.02(a). Anchor acknowledges the trustee’s position that the section imposes a trust in favor of a subcontractor only on payments that the contractor received on account of a lien waiver executed and delivered by the subcontractor. In response, the brief argues (at page 6) that the section does not contain this limitation, but rather “requires only that Anchor plead that [ICM] received funds from the Owner for the work performed by Anchor pursuant to a waiver of lien submitted by [ICM].”
If Anchor’s reading of Section 21.02(a) is correct, its complaint is sufficient. But if the trustee’s reading is correct, the complaint must be dismissed because it would fail to state or imply that ICM received payment resulting from an Anchor lien waiver, an essential element under the trustee’s reading of the statute. See R.J.R. Servs., Inc. v. Aetna Cas. & Sur. Co., 895 F.2d 279, 281 (7th Cir.1989) (“If the complaint fails to allege a requisite element necessary to obtain relief, dismissal is in order.”). Indeed, because the information set out in Exhibit 1 contradicts the possibility that ICM used an Anchor lien waiver to obtain payment, the propriety of dismissal is underlined. See Bogie v. Rosenberg, 705 F.3d 603, 609 (7th Cir.2013) (“When an exhibit incontrovertibly contradicts the allegations in the complaint, the exhibit ordinarily controls, even when considering a motion to dismiss.”).
While there appear to be no published opinions construing the relevant language of Section 21.02(a), both the language and the context of the section establish that the trustee’s reading of Section 21.02(a) is correct and that Anchor’s must be rejected.2
1. The wording of the section itself.
The language of Section 21.02(a) relevant to the present dispute is fairly simple, consisting of two clauses that each refer to “waiver of mechanics lien”:
Any ... contractor ... who requests or requires the execution and delivery of a waiver of mechanics lien by any person who furnishes labor, services, [or] material ... for the improvement of a lot or a tract of land ...
shall hold in trust the sums received ... as the result of the waiver of mechanics lien, as trustee for the person who fur*225nished the labor, services, [or] material....
In the second clause, “waiver of mechanics lien” is introduced by the definite article “the,” which indicates a particular item. See Am. Heritage Dictionary 1405 (3d college ed. 1998) (stating that “the” is used before nouns that “denote particular, specified persons or things”). In Section 21.02(a) the only particular, specified “waiver of mechanics lien” to which the second clause could refer is the waiver stated in the first clause — a waiver executed at the request of the contractor by the party claiming a trust interest in funds that the contractor had received. This structure — a noun introduced by “the” referring to a particular item identified earlier — is common in English. In its website titled “Learn English,” the British Council states that “[w]e use the definite article in front of a noun when we believe the hearer/reader knows exactly what we are referring to,” and gives previous identification as one way that a reader will know what “the” refers to. See http:/learnenglish. britishcouncil.org/en/english-grammar/ determiners-and-quantifiers/definite-article. The example provided by the website is exactly parallel to the structure of Section 21.02(a): “A woman who fell 10 metres from High Peak was lifted to safety by a helicopter. The women fell while climbing.” Id.
The words of the section, then, impose a trust in favor of a subcontractor on funds paid to a contractor only if the payment results from a lien waiver executed by the subcontractor. That meaning is definitive.
The plain language of the statute is the most reliable indication of legislative intent. DeLuna v. Burciaga, 223 Ill.2d 49, 59 [306 Ill.Dec. 136], 857 N.E.2d 229, 236 (2006). “[W]hen the language of the statute is clear, it must be applied as written without resort to aids or tools of interpretation.” DeLuna, 223 Ill.2d at 59 [306 Ill.Dec. 136], 857 N.E.2d at 236.
Weather-Tite, Inc. v. University of St. Francis, 233 Ill.2d 385, 330 Ill.Dec. 808, 909 N.E.2d 830, 833 (2009) (interpreting the Illinois Mechanics Lien Act).
2. The meaning of Section 22.01(a) in the context of the Illinois Mechanics Lien Act.
In addition to stating that statutes must be interpreted according to their clear language, the Illinois Supreme Court has also stated that a statute “should be evaluated as a whole; each provision should be construed in connection with every other section.” Wisnasky-Bettorf v. Pierce, 358 Ill.Dec. 624, 965 N.E.2d 1103, 1106 (2012). The context of Section 22.01(a) fully supports its clear meaning that a lien on funds paid to a contractor arises only in favor of a subcontractor whose lien waiver resulted in the payment.
Section 21(a) of the Illinois Mechanics Lien Act, 770 ILCS 60/21 (a), protects a subcontractor’s right to payment by granting subcontractors their own liens, and notice of subcontractors’ liens may be given to the owner of the property being improved in either of two methods. One method is direct notice from the subcontractor under Section 24(a) of the Act, 770 ILCS 60/24(a). The other method is under Section 5(a) of the Act, 770 ILCS 60/5(a), which requires the contractor to provide the owner with “a statement in writing, under oath or verified by affidavit, of the names and addresses of all parties furnishing labor, services, material, fixtures, apparatus or machinery, forms or form work and of the amounts due or to become due to each.”
Section 5(a) not only imposes a duty on the contractor to provide this affidavit before the owner makes payment, but also a duty on the owner to require the affidavit *226to be given. If the affidavit shows any sums due to subcontractors, the owner is required by Section 27 of the Act both to withhold from the contractor amounts sufficient to pay the subcontractors what they are owed and to pay those amounts to the subcontractors. 770 ILCS 60/27. If the owner pays the contractor the full amount due, including unpaid subcontractor charges, and the contractor does not pay the subcontractors, the liens of the subcontractors will be enforceable against the owner. See Weather-Tite, Inc. v. University of St. Francis, 330 Ill.Dec. 808, 909 N.E.2d at 836 (holding that an unpaid subcontractor listed in a contractor’s affidavit could enforce a lien in the unpaid amount against the owner’s property even though that amount was included in what the owner paid the contractor).3
Weather-Tite also notes an alternative available to the owner who receives a contractor’s affidavit listing unpaid subcontractors. Rather than withholding payment for the subcontractors, the owner can require lien waivers from them. “[A] lien waiver can be provided to the contractor when the subcontractor is paid, and the owner can require a lien waiver by every subcontractor when paying the contractor.” 330 Ill.Dec. 808, 909 N.E.2d at 835. With lien waivers from the subcontractors, the owner can pay the contractor in full, free of the subcontractors’ liens. This is the context in which Section 21.02(a) operates to protect the subcontractor’s right to payment — with the payment coming from the contractor rather than owner: if, based on the subcontractor’s lien waiver, the contractor obtains payment from the owner despite an unpaid subcontractor being listed on the contractor’s affidavit, the contractor will hold the owner’s payment subject to a trust in favor of the subcontractor’s claim. If, however, the owner made payment to the contractor without being given a lien waiver from the subcontractor, there is no reason for Section 21.02(a) to create a trust in favor of the subcontractor, since the subcontractor would still have an enforceable lien against the owner.
Indeed, in the context of the present case, a trust in favor of Anchor would contradict one of the purposes of the Mechanics Lien Act — providing for payment to parties who improved the owner’s property in a defined order of priority. If the amounts due to a contractor are insufficient to pay all claimants in full, the Act provides first for full payment of wages earned, then for pro rata payment to unpaid subcontractors, and finally, for payment of any remaining balance to the contractor. See 770 ILCS 60/15 and 60/26 (priority of wage claims over other Hens), 60/27 and 60/30 (priority of payments by owner). Where an owner makes full payment to the contractor without notice of *227unpaid subcontractors’ claims, a state court might well order the contractor to pay subcontractors in a manner consistent with this order of priority. In any event, there would be no reason to give a full priority to one subcontractor on the basis that it submitted to the contractor a lien waiver that had no bearing on the contractor’s receipt of payment from the owner.
Conclusion
As discussed above, Section 21.02(a) imposes a trust in favor of a subcontractor on a payment received by a contractor only if a lien waiver of the subcontractor resulted in receipt of the payment. Anchor’s complaint contains no assertions of fact directly or indirectly addressing this requirement for creation of a trust, and so dismissal is appropriate.
Courts ordinarily grant leave to amend an inadequate complaint, but leave may be denied if an amendment would be futile. Bogie v. Rosenberg, 705 F.3d 603, 608 (7th Cir.2013). There is such futility here. First, the trustee asserted the same basis for dismissal of Anchor’s trust claim in response to an earlier version of Anchor’s complaint. See Adversary Proceeding 12-01659, Docket No. 12 (Memorandum in Support of Trustee’s Motion to Dismiss) at 5 (arguing that “payment on account of a lien waiver received from the subcontractor is a prerequisite to formation of the statutory trust” and that this element was not alleged by the earlier complaint). Though given the opportunity, Anchor did not include an allegation addressing the asserted deficiency in its current complaint. A second, and more important consideration is that Anchor’s complaint asserts facts — particularly in Exhibit 1 — indicating that Anchor’s lien waiver had nothing to do with ICM’s receipt of payment. Anchor cannot amend the complaint in good faith to assert the contrary. Accordingly, dismissal of the complaint will be with prejudice.
. Although Paragraph 17 of the complaint alleges that the lien waiver "asserted that ICM fully paid all subcontractors," Exhibit 1 actually identifies no subcontractors and makes no statement about any payment to subcontractors.
. ICM cites Raymond Professional Group v. William A. Pope Co., 2011 WL 528551 (N.D.Ill. Feb. 8, 2011) as bearing on the interpretation of Section 21.02(a). This decision, however, dealt with a prior version of the section that did not include the language at issue here, as explained in the bankruptcy judge's initial opinion in the case. Raymond Prof'l Grp., Inc. v. William A. Pope Co. (In re Raymond Prof'l Grp., Inc.),. 386 B.R. 678, 681-82 (Bankr.N.D.Ill.2008).
. On the other hand, if a subcontractor is not listed in contractor's affidavit and the owner makes full payment to the contractor without notice of the unlisted claim, the unlisted subcontractor's lien is not enforceable. See Doors Acquisition, LLC v. Rockford Structures Const. Co., 2013 IL App (2d) 120052, ¶ 6,-N.E.2d-, -, 2013 WL 1788003, at *1 (2013) (holding that a sub-subcontractor not listed in the contractor’s affidavit could not enforce a lien against the owner's property where the owner had no notice of the unlisted claim before making full payment). The same rule was noted in the Supreme Court's Weather-Tite decision, which discusses Knickerbocker Ice Co. v. Halsey Bros. Co., 262 Ill. 241, 104 N.E. 665 (1914), a case in which a subcontractor's lien was limited to a falsely low unpaid balance shown in the contractor's affidavit. Weather-Tite explained the result this way: “[T]he owner had the right to rely on the contractor's sworn statement because the owner had no knowledge of the falsity of the statement.” 330 Ill.Dec. 808, 909 N.E.2d at 836. Subcontractors can avoid the risk of a false contractor's affidavit by serving a notice of their liens on the owner. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496558/ | MEMORANDUM OPINION ON DEBTOR’S OBJECTION TO PROOF OF CLAIM NO. 8
JACK B. SCHMETTERER.
The Debtor filed for bankruptcy relief under chapter 11. The claims bar date was designated as March 11, 2013. Creditor, SunTrust Mortgage, Inc. (“SunTrust”) filed Proof of Claim No. 8 on April 17, 2013, asserting security consisting of a mortgage on property located at Lot 959 Keene’s Pointe, Windermere, Florida (“the Lot 959 Property”). Debtor filed an Objection (Docket No. 136) and parties were ordered to file briefs on the legal issues presented.
Debtor objects to the Proof of Claim # 9 because (1) SunTrust filed its proof of claim late and (2) the claim is unenforceable because debtor was earlier discharged in his chapter 7 bankruptcy case. (Docket No. 136.) SunTrust does not dispute that its proof of claim was filed late. Rather, it argues that the proof of claim should not be disallowed because it has a valid lien under state law, and as a secured creditor it is not required to file proof of claim. *229(Docket No. 173 at 3.) SunTrust also argues in the alternative that its Motion for Relief from Stay filed on January 30, 2013 should be considered an informal proof of claim. (Id. at 2.) For reasons stated below, SunTrust Mortgage’s Proof of Claim No. 8 is disallowed.
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 December 7, 2012, the Debtor filed a petition for relief under chapter 11 of the Bankruptcy Code. On January 30, 2013, SunTrust filed a Motion for Relief from the Automatic Stay as to the Lot 959 Property. After briefing and trial on the factual issues, a Memorandum Opinion was issued, and the stay ordered to remain in effect until the Plan Confirmation hearing. (Docket No. 122.) The claims bar date was set for March 11, 2013. SunTrust filed Proof of Claim No. 8 on April 17, 2013. (Docket 173 at 2.) Further, The debt to SunTrust secured by the Lot 959 Property was scheduled as disputed in the debtor’s schedules. (Id. at 3.)
Other undisputed facts appear in the Discussion below.
Discussion
A. Jurisdiction
Jurisdiction lies over this 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. The Effect of Having a Valid State Law Lien but Late-Filed Claim
SunTrust argues that it does not matter that Proof of Claim No. 8 was filed late because it is undisputed that it has a valid in rem right against the Lot 959 property, and therefore its claim cannot be disallowed. (Docket No. 173 at 2.) Further, SunTrust argues that no part of its claim may be disallowed because SunTrust has made a § 1111(b) election. BatistaSanechez argues in reply that “SunTrust confuses lien avoidance ... and claims allowance.” (Docket No. 218 at 1.) SunTrust opined in its Surreply, that its Proof of Claim cannot be disallowed because its lien cannot be avoided: “SunTrust’s lien cannot be avoided merely because it filed its claim late. Therefore, SunTrust’s secured claim cannot be disallowed merely because it filed its claim late.” (Docket 238 at 5.)
SunTrust cites several authorities supporting its argument that its lien cannot be avoided. Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); In re Ryan, 725 F.3d 623 (7th Cir.2013); Palomar v. First Am. Bank, 722 F.3d 992 (7th Cir.2013); In re Tarnow, 749 F.2d 464 (1984); In re Hamlett, 322 F.3d 342 (4th Cir.2003); In re American Skate Corp., 39 B.R. 953 (Bankr.D.N.H.1984); In re Simmons, 765 F.2d 547 (5th Cir.1985). However, it cites no authority as to whether its Proof of Claim may be disallowed. Rather, SunTrust argues that, “[i]t is clear that when the Bankruptcy Code refers to an ‘allowed secured claim,’ it is referring to a claim that is secured under state law to the extent that there is value to support the claim.” (Docket No. 238 at 5.) However, under Dewsnup, the meaning of “allowed secured claim” means “any claim that is, first, allowed, and second, secured.” Dewsnup v. Timm, 502 U.S. 410, 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). *230In Dewsnup, there was “no question” as to whether the claim was allowed. Id. at 415, 112 S.Ct. 773. Here, whether the proof of claim may be allowed is the exact issue.
Nor is disallowance of a late filed proof of claim an “excessive punishment,” as SunTrust argues. (Docket No. 238 at 5.) In In re Penrod, 50 F.3d 459, 463 (7th Cir.1995) the Seventh Circuit refers to the disallowance of a late filed proof of claim in Tamow as being excessive punishment. However, it is clear from In re Tarnow, 749 F.2d 464, 465 (7th Cir.1984) that the excessive punishment would be the extin-guishment of the lien, not a disallowance of the proof of claim. Indeed, Tamow explicitly approved denying a late-filed proof of claim, even if it is secured:
While no one wants bankruptcy proceedings to be cluttered up by tardy claims, the simple and effective method of discouraging them is to dismiss the claim (that is, the claim against the bankrupt estate, as distinct from the claim against the collateral itself), out of hand, because it is untimely — which was done here ...
Id. at 466. Therefore, under reasoning in Tarnow, the late-filed proof of claim at issue here should be disallowed, but without extinguishing the lien.
C. The Informal Proof of Claim Issue
SunTrust also argues that its Motion to Lift Stay should be considered an informal proof of claim, citing a five-element test given in Collier. 9 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy § 3001.05[2]. However, “[t]he ‘informal proof of claim’ doctrine in this circuit is narrow.” In re marchFirst, 448 B.R. 499, 508 (Bankr.N.D.Ill.2011); See In re Fink, 366 B.R. 870 (Bankr.N.D.Ind.2007) (providing a history of the informal proof of claim as an equitable doctrine). Indeed, the Seventh Circuit has held that a bankruptcy court does not have equitable power “to allow a late-filed proof of claim outside the exceptions contained in Rule 3002(c).” Matter of Greenig, 152 F.3d 631, 635 (7th Cir.1998). The In re marchFirst opinion explained that in this Circuit, the informal proof of claim “doctrine thus applies only when a creditor timely files a document that is meant as a proof of claim but is somehow defective or incomplete.” marchFirst at 509. Here, the purported informal proof of claim was SunTrust’s Motion to Lift Stay. A motion to lift the automatic stay is not meant as a proof of claim. Rather, it is a request to proceed outside of the bankruptcy case. Therefore, SunTrust’s late proof of claim is not rescued here by an earlier informal proof of claim.
D. Consequences of Claim Disallowance
Even though Proof of Claim No. 8 is disallowed, the underlying lien is not extinguished by the mere fact of disallowance.
Section 506(d)(2) provides that, “To the extent hat a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless — (2) such claim is not an allowed secure claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.” § 502(d). Late filed proofs of claim are disallowed under § 502(b)(9). Therefore, it is argued that the lien should be extinguished. But that would create a nonsensical situation where a creditor loses its lien when it files a late proof of claim, but not when it files no proof of claim at all. “Liens are property rights and the forfeiture of such rights is disfavored.” Matter of Penrod, 50 F.3d 459, 462 (7th Cir.1995). Rather, as a Fourth Circuit opinion held, “[t]he failure to file a timely claim, like the failure to file a claim *231at all, does not constitute sufficient grounds for extinguishing a perfectly valid lien.” In re Hamlett, 322 F.3d 342, 349 (4th Cir.2003) (citing Tarnow) As the Tar-now court reasoned, “If an ordinary plaintiff files a suit barred by the statute of limitations, the sanction is dismissal; it is not to take away his property. And a lien is property.” Tarnow, 749 F.2d at 466.
While SunTrust retains its lien, it loses its right to vote and to a distribution under Rule 3004(c)(2). Further, there are consequences for plan confirmation. Section 1123(a) provides that a plan “shall— (1) designate, subject to § 1122 ... classes of claims.” Section 1122(a) requires that “claims” be classified together only if they are “substantially similar” to each other. Both §§ 1122 & 1123 refer to “claims” rather than “allowed claims,” so Sun-Trust’s claim must be classified because the valid lien is a “claim,” even though it is not an “allowed claim.” Claims secured by different properties are not substantially similar. 7 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy § 1122.03[3]. Creditors having claims on the same property with different priorities should be classified separately. Id. at § 1122.03[3][c][i].
If SunTrust’s claim secured by the Lot 959 Property is placed alone into its own class, then no creditor in that class will be able to vote. Although there is a split of authority as to whether a class where nobody casts a ballot should be deemed to accept, the better view is that such a class should be deemed to reject the plan. See In re Vita Corp. 380 B.R. 525, 527-28 (C.D.Ill.2008) (collecting cases). Since such a class would be deemed to reject, the plan can only be confirmed under the cramdown provisions. § 1129(b)(1). Cram-down is only possible with respect to “secured claims” — not “allowed secured claims” — if the plan provides (i) retention of any liens, (ii) a sale under § 363(k), with any liens attaching to the proceeds of the sale, or (iii) providing the class with an “indubitable equivalent.” § 1129(b)(2)(A). As a result, even though SunTrust loses the right to vote its claim, its lien will still remain attached to the property with the foregoing consequences.
Conclusion
For reasons discussed above, SunTrust Bank’s Proof of Claim No. 8 will by separate order be disallowed.
ORDER ON DEBTOR’S OBJECTION TO PROOF OF CLAIM NO. 8
For the reasons stated in the Memorandum Opinion on Debtor’s Objection to Proof of Claim No. 8, it is hereby ORDERED that:
SunTrust Bank’s Proof of Claim no. 8 is disallowed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496560/ | Chapter 13
ORDER DENYING MOTION TO RECONSIDER
A. Bruce Campbell, United States Bankruptcy Judge
Debtor moves this Court to reconsider its Order Denying Motion to Modify Confirmed Chapter 13 Plan entered on August 9, 2013 at Docket #65 (“Order”). The Chapter 13 Trustee, Douglas B. Kiel, (“Trustee”) filed a Memorandum in Support of Debtor’s Motion to Reconsider (“Memorandum”).
In his underlying motion to modify his confirmed plan, Debtor sought to modify his confirmed plan to surrender his residence to the holder of the first mortgage. Debtor also proposed to discharge any deficiency which might arise after the property was sold by the lender. Because Debtor had elected to keep his home, and because the first mortgage holder was the beneficiary of section 1322(b)(2) of the Bankruptcy Code, the home mortgage lender’s rights could not be modified except to the limited extent authorized by section 1322(b)(5).1 Debtor’s confirmed plan provided for curing the default in his monthly mortgage payments and maintaining his regular payments to that lender.
*240The issue presented to this Court by the Debtor’s proposed modified plan and again by Debtor’s Motion to Reconsid- ■ er (“Motion”) and the Trustee’s Memorandum is whether a debtor, who has elected to retain his home in his confirmed plan, can surrender his residence postconfirmation to the holder of the first mortgage and discharge any deficiency which results after the surrender and sale of the property. The Order of which Debtor seeks reconsideration denied Debtor’s motion to modify his confirmed Chapter 13 plan, holding that Debtor is bound by the provisions of his confirmed plan by section 1327(a) of the Code2 and that section 1329 of the Code does not permit the modifications which Debtor proposed.3 The Order did not include an extensive analysis but, instead, relied upon and cited this Court’s earlier decision in In re Knapp, No. 08-24134 ABC, 2013 WL 4384630 (Bankr.D.Colo. July 5, 2013).
Debtor and the Trustee argue in favor of the postconfirmation plan modifications which Debtor proposed and advocate for a more liberal construction of section 1329 of the Code. In addition to the arguments which this Court has previously considered and rejected, see In re Rutt, 457 B.R. 97 (Bankr.D.Colo.2013), and those which this Court addresses below in this opinion, Debtor and the Trustee contend that Debtor’s fresh start will be impaired. They maintain that if Debtor cannot surrender his residence and discharge any deficiency, he may be required to file another bankruptcy case resulting in unnecessary costs and delay in obtaining a discharge, including discharge of any deficiency on his home mortgage lender’s loan.
The foundation for this Court’s legal conclusions in this case, and in the Knapp and Rutt cases, is the opinion of the Sixth Circuit Court of Appeals,4 which recognizes the finality accorded to the confirmed plan by section 1327 of the Code and reads section 1329 narrowly. In re Nolan, 232 F.3d 528 (6th Cir.2000). A summary of the facts and the Sixth Circuit’s sound reasoning in Nolan bears repeating.
In Nolan, the debtor sought to surrender a vehicle, the value of which had been determined under section 506 at the time of confirmation of the debtor’s plan. Debtor’s confirmed plan had bifurcated the creditor’s claim into secured and unsecured portions based upon the value of the vehicle at the time of confirmation. The debtor proposed to modify that confirmed plan and to redetermine the amounts of the secured and unsecured portions of the secured creditor’s claim based upon the depreciated value of the vehicle at the time *241of the postconfirmation surrender. Nolan holds:
that a debtor cannot modify a plan under section 1829(a) by: 1) surrendering the collateral to a creditor; 2) having the creditor sell the collateral and apply the proceeds toward the claim; and 3) having any deficiency classified as an unsecured claim, (citation omitted). Section 1329(a) only permits modification of the amount and timing of payments, not the total amount of the claim.
In re Nolan, 232 F.3d at 535 (alteration in original). Pivotal to the Sixth Circuit’s conclusion that section 1329 should be narrowly construed is the use of the phrase in section 1329(a)(1), “increase or reduce the amount of payments on claims of a particular class provided for by the plan.” (emphasis added).
The debtor in Nolan had argued that the modifications she proposed fit squarely within sections 1329(a)(1) to (3). She urged that a surrender of collateral effects a reduction in the amount of payments, shortens the time for payments, and alters the distribution to the creditor by crediting the creditor’s claim with the amount the creditor receives after surrender upon the liquidation of the collateral. The Nolan court rejected the debtor’s arguments as follows:
First, section 1329(a) does not expressly allow the debtor to alter, reduce or reclassify a previously allowed secured claim, (citation omitted). Instead, section 1329(a)(1) only affords the debt- or a right to request alteration of the amount or timing of specific payments ....
Second, the proposed modification would violate section 1325(a)(5)(B), which mandates that a secured claim is fixed in amount and status and must be paid in full once it has been allowed, (citation omitted).
Third, (the) proposed modification would contravene section 1327(a), because a contrary interpretation postulates an unlikely congressional intent to give debtors the option to shift the burden of depreciation to a secured creditor by reclassifying the claim and surrendering the collateral when the debtor no longer has any use for the devalued asset, (citation omitted)....
Fourth, only the debtor, the trustee, and holders of unsecured claims are permitted to bring a motion to modify a plan pursuant to section 1329(a). The Jock5 interpretation would create an inequitable situation where the secured creditor could not seek to reclassify its claim in the event that collateral appreciated, even though the debtor could revalue or reclassify the claim whenever the collateral depreciated, (citation omitted) ....
Fifth, Jock’s interpretation is at odds with the plain language of section 1329. “This section does not state that the plan may be modified to increase or reduce the amount of claims. This is of significance in relation to secured claims.” (citation omitted). Jock fails to note that the terms “claim” and “pay*242ment” have two different meanings in the Bankruptcy Code.
... Read with the benefit of proper term definitions, section 1329 clearly indicates that modifications after plan confirmation cannot alter a claim (a right to a remedy or payment of a certain total amount), but can extend or compress payments and reduce or increase the amount of the delivery of value planned as an eventual satisfaction for the creditor’s claim.
In re Nolan, 232 F.3d at 532-535 (6th Cir.2000) (alteration in original).
The facts in Nolan are different than those in the case before this Court. This case involves the Debtor’s proposal to surrender his principal residence to the first mortgage holder. The collateral is not a car, and this case does not involve the effort to surrender collateral to the secured creditor whom debtor had crammed down in his confirmed plan. Unlike Nolan, this case did not involve the valuing of collateral under section 506 of the Code, and a resulting determination of the amount of an “allowed secured claim.”6 Accordingly, at confirmation, the court did not need to evaluate the Debtor’s plan and its treatment of the mortgage holder to see if the confirmation standards of section 1325(a)(5)7 had been met.
Regardless, Nolan’s reasoning and conclusion are instructive and guide this Court in its effort to reconcile the finality accorded to the confirmed plan by section 1327 of the Code and the modifications to that plan permitted by section 1329 of the Code. If, as Nolan concludes, section 1329(a)(1) prevents a re-bifurcation of the amount of a secured claim, a claim, the *243amount of which had been determined under section 506(a) at the time of confirmation, surely, section 1329(a)(1) cannot be interpreted so as to permit a debtor to modify the rights of a first mortgage holder whose rights debtor was prohibited from modifying at confirmation by section 1322(b)(2).8
Even assuming that a postconfirmation modification of the rights of the first mortgage holder secured by debtor’s residence fits in some way into the language of section 1329(a)(1), section 1329(b) requires the court to find that sections 1322(b)(2) and (5) have been complied with.9 If a debtor proposes a modified plan which does not meet those mandates, the court cannot approve it. Once a debt- or elects at the time of confirmation to retain the real property which is his residence, Congress prohibits that debtor from modifying that creditor’s rights, except to the limited extent permitted by section 1322(b)(5). Debtor is bound by that election. A subsequent postconfirmation proposal to bifurcate that claim into secured and unsecured portions, and to discharge any deficiency would violate the mandate of section 1322(b)(2).
Further bolstering this Court’s analysis and compelling its conclusion is that Congress expressly excepts from any discharge under section 1328(a) or (b), debts provided for under section 1322(b)(5)— debts, secured or unsecured, payments on which extend beyond the life of the plan.10 The Debtor’s effort here to surrender and discharge any deficiency would contravene those provisions, and the Court is statutorily prohibited from approving such a modification by sections 1329(b)(1) and 1325(a)(1).11
*244The Debtor and Trustee cite cases and treatises which permit a debtor to surrender depreciated collateral, recalculate the amount of the allowed secured claim, and discharge the new deficiency balance post-confirmation. Those courts and authorities so conclude by observing that Congress, by section 1329(b), made sections 1322(a), 1322(b), (particularly, 1322(b)(8)),12 1323(c) and 1325(a) applicable to the court’s review of postconfirmation modifications. “Examining these provisions shows that the statute permits post-confirmation modification allowing surrender of collateral in satisfaction of a secured claim.” Bank One, N.A. v. Leuellen, 322 B.R. 648, 652-253 (S.D.Ind.2005). See also, Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Ed. § 264.1, at ¶ 4-6, Sec.Rev. July 14, 2004, www.Chl3online.com. The Lundin treatise argues that, postconfirmation plan modification involving surrender of collateral and re-casting any deficiency into the plan’s unsecured creditor class, is justified under Chapter 13 because “there is no statutory reason why section 506(a) would not have its normal application at modification of a plan under section 1329.” Id. at ¶ 10.
The Jock line of cases and Lundin interpretations of section 1329, however, render section 1327 meaningless. If a debtor can modify the claims of his secured creditors whenever the value of the creditor’s collateral depreciates, then that debtor has not been bound by his confirmed plan. Moreover, in the context of the debtor’s effort to surrender a vehicle as in Nolan, those authorities’ interpretations of section 1329 ignore the language of section 1325(a) that ties the value of property to be distributed on account of the allowed secured claim to “the effective date of the plan.” 13
In the context of the postconfirmation surrender of a principal residence, as the Debtor proposes in this case, where the Debtor had elected at confirmation to retain his residence, sections 1322(b)(2) and (b)(5) simply make application of section 506 to the “rights” of the first mortgage holder unavailable. Such holder’s “rights” may not be modified. Nobelman v. American Savings Bank, 508 U.S. at 332, 113 S.Ct. at 2111.
More importantly, as this Court has observed in Knapp, it is not surrender of collateral postconfirmation which is prohibited by sections 1327 or 1329 of the Code. What a debtor cannot do postconfirmation is, as Nolan holds, recalculate the amount of the “allowed secured claim” based upon the depreciated value of the collateral after surrender and sale of the collateral, and discharge the new deficiency amount. In this case, Debtor may surrender his home to the mortgage holder, but he cannot modify that mortgage holders rights by bifurcating its claim and seeking to discharge any deficiency in contravention of section 1328(a)(1).
Finally, the inequities that Debtor and Trustee argue will be occasioned on debtors give this Court pause. In many cases, the court’s disapproval of the debtors’ sur*245render, bifurcation and effort to discharge any resulting deficiency may force debtors to dismiss and refile their cases. That concern, however, when weighed against the statutory protections afforded secured creditors by the Code in Chapter 13, is not enough to compel a different conclusion. It is this Court’s view that the Debtor’s postconfirmation proposed Chapter 13 plan modifications go beyond the limits of what Congress permitted in section 1329. This Court’s narrow reading of section 1329, like that of the Sixth Circuit, strikes the balance between the finality to be accorded confirmation orders as codified at section 1327 of the Code and Congress’s recognition in section 1329 of the potential for changed circumstances in the lives of Chapter 13 debtors who commit to repay debts over three or five years. Accordingly, it is
ORDERED that Debtor’s Motion to Reconsider is DENIED.
. 11 U.S.C. § 1322(b)(2) permits debtors to modify the rights of holders of secured claims, “other than a claim secured only by a security interest in the real property that is the debt- or’s principal residence....” 11 U.S.C. § 1322(b)(5) permits a debtor to modify the rights of the mortgage holder on his principal residence only by curing any arrearage and maintaining his regular monthly mortgage payments.
. Section 1327 of the Code is titled “Effect of confirmation.” Section 1327 states:
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.
. Section 1329 of the Code governs postcon-firmation modifications of confirmed chapter 13 plans. Section 1329(a) provides in pertinent part:
At any time after confirmation of the plan but before completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to—
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments;
(3) alter the amount of distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan; or
(4) ....
.The Tenth Circuit Court of Appeals has not spoken on the issue before the Court.
. In re Jock, 95 B.R. 75 (Bankr.M.D.Tenn.1989). Jock is among the lower court cases which read section 1329(a) to permit debtors to modify their confirmed plans to surrender collateral to their secured creditors and then treat the new, greater deficiency as an unsecured claim in the modified plan. See the cases cited in Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Ed. § 264.1, at n.22, Sec.Rev. July 14, 2004, www.Chl3online.com.
. The Bankruptcy Code does not define "allowed secured claim.” Section 506(a) provides the means for determining the extent to which an "allowed claim” is a secured claim. Section 506(a)(1) reads:
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.
Section 502(a) of the Code deems allowed "[a] claim or interest, proof of which is filed under section 501 of this title, ... unless a party in interest ... objects.” (emphasis added).
. Section 1325(a)(5) provides that the court shall confirm a plan if—
(5) with respect to each allowed secured claim provided for by the plan—
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that—
(I) the holder of such claim retain the lien securing such claim until the earlier of— (aa) the payment of the underlying debt determined under applicable nonbank-ruptcy law; or
(bb) discharge under section 1328; and (II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and
(iii) if—
(l) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and
(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or
(C)the debtor surrenders the property securing such claim to such holder; ....
. In Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), the Supreme Court highlighted Congress' focus on "rights" in section 1322(b)(2):
That provision does not state that a plan may modify "claims” or that the plan may not modify “a claim secured only by” a home mortgage. Rather it focuses on the modification of the “rights of holders" of such claims....
The term "rights” is nowhere defined in the Bankruptcy Code. In the absence of controlling federal rule, we generally assume that Congress has "left the determination of property rights in the assets of a bankrupt’s estate to state law,” since such "[plroperty interests are created and defined by state law.” (citations omitted). Moreover, we specifically recognized that “[t]he justifications for application of state law are not limited to ownership interests,” but "apply with equal force to security interests, including the interest of a mortgagee.” (citation omitted). The bank’s "rights,” therefore, are reflected in the relevant mortgage instruments, which are enforceable under (state) law. They include the right to repayment of the principal in monthly installments over a fixed term at specified adjustable rates of interest, the right to retain the lien until the debt is paid off, the right to accelerate the loan upon default and to proceed against petitioners’ residence by foreclosure and public sale, and the right to bring an action to recover any deficiency remaining after foreclosure .... These are the rights that were "bargained for by the mortgagor and mortgagee,” (citation omitted), and are rights protected from modification by § 1322(b)(2).
Nobelman v. American Savings Bank, 508 U.S. at 328-330, 113 S.Ct. at 2109-2110.
. Unless a proposed modification falls within those permitted by section 1329(a), "section 1329(b) does not come into play.” In re Nolan, 232 F.3d at 535 n. 13.
. Section 1322(b)(5) permits a plan to "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due." (emphasis added).
. Section 1325(a)(1) is among the Code provisions made applicable to the court's review of plan modifications by section 1329(b). To *244be confirmed, a plan must comply "with the provisions of this chapter and with the other applicable provisions of this title.” See section 1325(a)(1).
. Section 1322(b)(8) authorizes a debtor in a plan "to provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor.”
. A modified plan “becomes the plan unless, after notice and a hearing, such modification is disapproved.” 11 U.S.C. § 1329(b)(2). Thus, until the court determines: (1) that a proposed modification meets the elements of section 1329(a); and, if it does, (2) that the proposed modification complies with sections 1322(a), 1322(b), 1323(c) and 1325(a), the modified plan does not "become the plan.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496562/ | AMENDED MEMORANDUM OPINION DECLARING SOUTHERN VIRGINIA UNIVERSITY’S DEBT DIS-CHARGEABLE
REBECCA B. CONNELLY, Bankruptcy Judge.
Procedural History
On May 18, 2010, Cynthia Riley Dudley (the “Debtor”) filed a bankruptcy petition under Chapter 13 of the Bankruptcy Code. Her case was converted on May 25, 2010 to a case under Chapter 7 of the Bankruptcy Code. Southern Virginia University (“SVU” or the “University”) did not file a claim in her case, but the University and its counsel appeared on the creditor mailing matrix. On September 21, 2010, the Court issued a discharge order for Ms. Dudley and, shortly thereafter, closed her case. Seven months later, on May 6, 2011, the Debtor filed a motion to re-open her case. She urged the court to reopen the case so that she could file a motion for contempt against SVU for continuing collection action after the issuance of the bankruptcy discharge order. The Court re-opened the case, and the Debtor filed her motion for contempt. SVU answered the motion by asserting that the debt it was trying to collect upon was a “qualified education loan” that is non-dischargeable under 11 U.S.C. § 523(a)(8).
The Debtor then filed a complaint alleging 2 counts: (1) that the Rockingham County default judgment on the debt allegedly owed by the Debtor to SVU was void because the Debtor did not receive actual notice of the judgment proceedings; and (2) even if the Rockingham County default judgment debt was not void, that the Court should find the debt owed by the Debtor to SVU had been discharged. On August 18, 2011, SVU filed its answer to the complaint and motion to dismiss Count 1. The contempt motion was continued generally until the adversary proceeding could be resolved because the motion for contempt hinged on the issue in contention in the adversary proceeding: whether the debt SVU was trying to collect had been discharged.
This Court abstained from hearing Count 1, finding that abstention was in the interest of justice and comity with state courts pursuant to 28 U.S.C. § 1334(c)(1). Shortly after the Court abstained from hearing Count 1, SVU filed a motion for summary judgment on Count II. SVU also filed a state court action in relation to Count 1 to determine if its judgment was valid despite the alleged notice deficiency. On September 20, 2011, SVU filed a second motion for summary judgment on Count 1 alleging that it had obtained a state court decision that affirmed the validity of its judgment debt. In October, the Debtor officially withdrew Count 1, thereby obviating the need for the Court to rule on the motion for summary judgment on Count 1.
The Debtor objected to SVU’s motion for summary judgment on Count 2, arguing that the motion was improperly supported by a hearsay affidavit. The Debtor asserted that a motion for summary judgment cannot be supported by evidence that would be inadmissible at trial, citing Evans v. Technologies Applications & Service Co., 80 F.3d 954, 962 (4th Cir.1996) and Bankruptcy Rule 7056. The Debtor also requested that a hearing on the summary judgment motion be postponed until discovery could be completed. In November, the Debtor renewed her objection by filing an official response to the motion for summary judgment, which was heard by the Court on November 16, 2011.
*266The Court denied SVU’s motion for summary judgment on Count 2. In denying SVU’s motion for summary judgment, the Court took the following facts as true from the Debtor’s complaint:
At one time, Ms. Dudley was a student at SVU. When she was a student at SVU, Ms. Dudley entered into a student loan agreement with Nellie Mae. The loan agreement included a note by which Ms. Dudley agreed to repay the money loaned. When Ms. Dudley failed to repay the loan, Nellie Mae charged the loan, plus interest against SVU’s reserve account.
Decision and Order at 2, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Dec. 20, 2011), ECF No. 26. The Court found that the loan originally made by Nellie Mae to the Debtor was a qualified education loan excepted from discharge under the provisions of 11 U.S.C. § 523(a)(8). Id. The Court also found that SVU held a judgment debt against the Debtor. Id. at 4 (“there is no dispute that SVU has an outstanding claim”). What the Court was unable to decide at that point was whether, as a matter of law, the debt that SVU held was the same debt as the loan made by Nellie Mae. Even if the Court had found that the debt held by SVU was the same debt as the original Nellie Mae loan, the Court would still have had to decide whether the debt retained its status as a qualified education loan after it had been transferred and reduced to a judgment. The Court concluded that there were unresolved material issues of fact and, therefore, SVU’s motion for summary judgment had to be denied. In addition, SVU had supported its contentions solely with an affidavit that was deficient because it failed to establish the personal knowledge of the affiant. Id. at 4-5.
Two months later, in February 2012, SVU filed a motion to reconsider the Court’s denial of its first summary judgment motion. The motion for reconsideration alleged that a newly filed affidavit removed the “reliance on hearsay/personal knowledge” deficiency from its original motion for summary judgment on Count 2. The motion to reconsider also alleged that the removal of the hearsay objection combined with the Court’s finding that “this is a student loan transaction,” removed any remaining material factual disputes. The Debtor also filed a motion for summary judgment alleging that she was entitled to relief as a matter of law. The Debtor’s motion for summary judgment reasoned that in order for SVU’s debt to be excepted from discharge, SVU must show that the Nellie Mae debt was assigned to SVU, and since an assignment had not been produced, SVU could never prevail.
The Court heard SVU’s motion to reconsider and the Debtor’s motion for summary judgment and denied both motions. SVU’s motion to reconsider misconstrued the Court’s previous findings. The Court’s order denying summary judgment found that the original debt owed by the Debtor to Nellie Mae was a qualified educational loan, however, the Court’s denial of summary judgment did not determine if the debt on which SVU was attempting to collect was the same debt as the Nellie Mae qualified educational loan. Furthermore, in its order denying summary judgment, the Court did not determine what effect, if any, a transfer of the debt and reduction to judgment would have upon the debt’s status as a qualified education loan excepted from discharge under section 523(a)(8). For these reasons, the Court denied SVU’s motion to reconsider. The Court then considered the Debtor’s motion for summary judgment. In her motion, the Debtor argued that SVU’s failure to bring forward evidence of an assignment was fatal. The Court disagreed, holding that it is logically fallacious to *267conclude that absence of evidence is evidence of absence.
In October, the Court entered a pre-trial scheduling order requiring all discovery to be completed by November 30, 2012; exchange of witness lists and proposed exhibits to occur by January 8, 2018; and for any factual stipulations to be submitted by January 15. The order also allowed that any exhibits not objected to by January 15, 2013, would stand as admitted into evidence.
Both the Debtor and SVU waited until January 15 to file witness lists and exhibits. SVU did not object to the Debtor’s exhibits or witness list. The Debtor, however, filed objections to 39 of SVU’s 42 exhibits.1 Trial was scheduled for January 23 at 2:00 p.m. Concerned that it would be inefficient to hear the objections to exhibits at trial, the Court scheduled a pre-trial hearing on January 22 to allow the parties to be heard on the objections to the exhibits.
At the January 22 hearing, the Debtor withdrew 2 of her objections2 leaving 37 remaining objections to be determined. Nearly all of the Debtor’s objections cited Federal Rule of Evidence 401. The Debt- or asserted that the exhibits were not relevant and should not be admitted3 primarily because the facts they purported to prove were not material, or of consequence, to the underlying complaint.4 The Debtor also cited Federal Rule of Evidence 403 asserting that even if relevant, the exhibits should not be admitted on the grounds of prejudice, confusion or waste of time. Finally, the Debtor argued that the exhibits were hearsay, out of court statements offered to prove the truth of the matter asserted.5 At the January 22 hearing, the Debtor focused her argument on relevance and hearsay. The Debtor did not argue persuasively for any exhibit to be excluded under Federal Rule of Evidence 403.
SVU’s counter to the charges of both hearsay and relevance was that the exhibits offered for admission would show the “business practices” of SVU in relation to Nellie Mae loans. See e.g. Hr’g Tr. at 16:6-9, 17:9-12, 18:17-19, 20:13-15, 21:1-22:4, 23:5-22, 25:7-12, 27:8, 29:12-17, 31:19-21, 33:17, 37:14, 40:3-5, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. January 22, 2013), ECF No. 81.6 The Court construed SVU’s argument to mean that the documents were offered to establish a habit under Federal Rule of Evidence 406. If offered to establish a habit, the exhibits would no longer be offered for the truth of the matter asserted in the exhibits. SVU, however, never referenced Federal Rule of Evidence 406 at the January 22 hearing or at the trial on January 23, and instead insisted that the exhibits were admissible under Federal Rule of Evidence 807. See generally Hr’g Tr., Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. January 23, 2013), ECF No. 82.7 SVU contended that many of the exhibits were admissible because the certification of Walter Ralls made Federal Rule of Evidence 807 applicable. Jan. 22 Hr’g Tr. at 46:13, 47:6-14, 63:7-9. The Court *268found that neither the substantive requirements of Rule 807, nor its technical requirements had been met. Jan. 23 Hr’g Tr. at 3:18-4:17. The Court was unconvinced the substantive elements of Rule 807 had been met because the evidence offered was not “more probative on the point for which it is offered than any other evidence that the proponent [could] obtain through reasonable efforts.”8 See Fed. R.Evid. 807(a)(3). Similarly, the technical elements were not met because SVU had failed to provide the Debtor with the de-clarant’s name and address for each proffered hearsay statement. See Fed.R.Evid. 807(b).
Although it is clear from the hearing transcripts that SVU submitted the evidence named in the certification of Walter Ralls under Federal Rule of Evidence 807, the certification offered by SVU appears instead to have been intended to be submitted under Federal Rule of Evidence 902(11). The certification appears to track the rule for self-authentication of a regularly kept business record under Rule 902(11). Federal Rule of Evidence 902(11) allows for domestic records of a regularly conducted activity to be self-authenticating if a certification is given that the requirements of Federal Rule of Evidence 803(6)(A)-(C) have been met. Fed. R. Evid. 902(11).
The Court further interpreted SVU’s contention that the certification of Walter Ralls rendered the exhibits admissible under Rule 807 to mean that SVU sought to admit the exhibits under Federal Rule of Evidence 803(6). Federal Rule of Evidence 803(6) is an exception to hearsay for regularly conducted activities of an organization. The exception, however, requires that the record be made contemporaneously with the activity, by a person with knowledge; that the record is kept in the regular course of the organization; and that making a record was a regular practice for the activity. Fed.R.Evid. 803(6)(A)-(C). SVU failed to provide a custodian to testify, or certify, when the records were made, by whom, or how the records were made as part of that custodian’s business. SVU offered the certification of Mr. Ralls, yet failed to offer the exhibits as self-authenticating under Federal Rule of Evidence 902, failed to timely provide notice of the intention to use the certification pursuant to Rule 902(11), and failed to show that Mr. Ralls was the appropriate custodian to make the certification. See generally Jan. 22 Hr’g Tr. and Jan. 23 Hr’g Tr.
In addition to the objections of hearsay and relevance, authentication of the exhibits became an issue of contention. The Court repeatedly explored the issue at the pre-trial hearing on January 22. See Jan 22 Hr’g Tr. at 15:23-16:4, 17:20-17:23, 20:16-20:20, 23:23-23:25, 24:23-24:25, 26:2-26:7, 28:5-28:7, 29:18-29:22, 32:10-32:16, 35:18-35:21, 36:16-36:21, 38:5-38:8, 43:18-43:23, 44:6-44:20, 50:3-51:10, 51:20-52:3, 53:25-54:18, 54:25-55:7, 56:6-56:12, 56:24-57:5, 58:18-58:23, 60:12-60:21, 61:22-62:2. At the pre-trial hearing, the Court disallowed several exhibits as inadmissible hearsay, but conditionally admitted the balance of exhibits. The following exhibits were either admitted via the pre-trial order without objection or admitted conditionally at the January 22 pre-trial hearing: A, B, B-l, B-2, B-3, B-7, B-8, B-9, B-10, B-ll, B-12, B-13, B-15, B-16, B-24, B-29, B-30, B-31, K, L, M, and N.
*269Before the end of the January 22 hearing, SVU made an oral motion to disallow the Debtor from putting on evidence at trial for failure to provide disclosures required under Federal Rule of Civil Procedure 26. Jan. 22 Hr’g Tr. 63:14-63:20. The Court denied SVU’s motion based on the language of the consent scheduling order. Id. at 64:18-23. The scheduling order required exchange of exhibit and witness lists by a date certain. The Court found SVU’s oral motion for sanctions under Rule 26 inappropriate because Rule 26 allows for case specific orders that alter the required Rule 26 disclosures. See Fed.R.Civ.P. 26 (incorporated by Fed. R. Bankr.P. 7026); see also 6-26 Moore’s Federal Practioe — Civil §§ 26.21-22, 26.26 (highlighting the ability of a court to issue case-specific orders altering, expanding or eliminating Rule 26 disclosures). SVU contended that the Court’s scheduling order did not alter the Rule 26 disclosures, presumably because the scheduling order does not explicitly reference Rule 26. However, the scheduling order was a consent order and SVU, by signing the consent order, waived its ability to object under Rule 26. See 6-26 Moore’s Federal Practice — Civil § 26.26.
At trial, the Debtor repeated her hearsay objections arguing: (1) the witness was not able to qualify as a custodian of the record being offered; (2) the witness lacked personal knowledge of the content of the exhibit; and/or (3) the witness was unable to establish that the contents of the exhibit were created as a regularly kept record by a person with knowledge, at the time the exhibit was created. See Jan. 23 Hr’g Tr. at 25:5-26:25, 35:22-39:9, 44:17-48:20,' 50:9-51:7, 61:25-64:10, 66:12-68:5, 68:7-69:5, 69:7-71:6, 71:11-73:17, 73:22-75:8, 75:19-76:16, 76:18-72:3, 77:6-77:10, 92:10-100:5. Despite the contentious hearings, several important exhibits were admitted, including Debtor-Plaintiffs exhibit 1 and Defendant’s exhibits A, B-3, B-10, B-12, B-15, B-16, B-27, B-30, and K. Plaintiffs exhibit 1 is a copy of the pre-petition Virginia state court default judgment that is the subject debt at controversy in this case. See PL’s Ex. 1, Dudley v. S. Va. Univ., No. 11-05040 (Bankr. W.D.Va. Jan. 15, 2013), ECF No. 62. Defendant’s exhibit A is a copy of a “Full Recourse Agreément” between SVU and Nellie Mae that provides that SVU is the guarantor on all loans made by Nellie Mae to SVU students. See Def.’s Ex. A, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013), ECF No. 66. Defendant’s exhibits B-3, B-10, B-12, B-15, and B-16 are all internal accounting documents of the University. See Def.’s Ex. B-3, B-10, B-12, B-15, B-16, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013), ECF No. 66. Defendant’s exhibits B-12, B-15 and B-16 list outstanding accounts, each of which contain the Debtor’s name. See Def.’s Ex. B-12 at 2, B-15 at 6, B-16 at 6, Dudley v. S. Vet. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013), ECF No. 66. Defendant’s exhibit B-27 is a letter on SVU letterhead, addressed to “Nellie Mae Borrower.” Def.’s Ex. B-27, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013), ECF No. 66. Defendant’s Exhibit B-30 is a copy of the Debtor’s credit report as of July 15, 2004, and shows that Nellie Mae “charged off’ its account with the Debtor. Def.’s Ex. B-30 at 2, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013), ECF No. 66. Defendant’s exhibit K is a copy of the debt- or’s application for a Nellie Mae loan and also the promissory note for the Nellie Mae loan.9 Def.’s Ex. K, Dudley v. S. Va. *270Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013), ECF No. 66.
Conclusions Of Law
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 plaintiff in this adversary proceeding is a Chapter 7 debtor and the defendant is one of her creditors. The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1834. This matter is a core proceeding under the Bankruptcy Code because it is a proceeding to determine the dischargeability of a particular debt. 28 U.S.C. § 157(b)(2)(I). This Bankruptcy Court can hear this matter pursuant to 28 U.S.C. § 157 and the Western District of Virginia District Court Order of Reference.10
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. Stern v. Marshall, — 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 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 dispute in this case turns on whether the debt that the defendant is seeking to collect from the Plaintiff was discharged in the Plaintiffs Chapter 7 bankruptcy case. This question stems directly from the Plaintiffs bankruptcy, and requires the application of bankruptcy law. The Court concludes that it has authority to issue a final ruling in this core proceeding; the Stem holding does not call into question this conclusion.
SVU’s Motion to Dismiss for Lack of Jurisdiction
On the morning of the trial, SVU filed a motion to dismiss this adversary proceeding for lack of jurisdiction. SVU cited as its grounds Stem v. Marshall. According to SVU’s motion filed on the day of the trial, SVU does not consent to the jurisdiction of this Court; the question of dischargeability is not before the Court; therefore, the Court has no jurisdiction to decide the matter. These facts, according to SVU, compel dismissal. The Court heard the arguments of SVU, considered the pleading, and denied the motion to dismiss. SVU’s motion ignores the fact that the Plaintiff is a debtor in bankruptcy in this Court. This Court has subject matter jurisdiction over the bankruptcy case, as well as the proceeding seeking a declaration of the dischargeability of the SVU debt. SVU has participated, actively, in this adversary proceeding and only on the morning following a lengthy hearing in which the admissibility of some of SVU’s exhibits had been questioned did SVU announce that it did not consent to the jurisdiction of the Court. The Court disagrees with SVU’s statement that dischargeability is not before the Court. The Court finds that the crux of the dispute in this proceeding is the dischargeability of SVU’s *271claim. The Court concludes, therefore, that this Court may enter a final ruling. Even if, however, it is determined that this Court does not have the Constitutional authority to enter a final ruling in this matter, the result would be that this ruling would be deemed findings of fact and proposed conclusions of law for the District Court. Dismissal for lack of jurisdiction is not appropriate. See Elgin v. Dept. of Treasury, — U.S. -, 132 S.Ct. 2126, 183 L.Ed.2d 1 (2012) (holding that a non-Article III tribunal may hold and conduct evidentiary hearings, make findings of fact and proposed conclusions of law, even if it does not have Constitutional authority to issue a final ruling).
Burden of Persuasion
Generally, a creditor has the burden to show that its debt is excluded from discharge. Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (U.S.1991); Nunnery v. Rountree (In re Rountree), 330 B.R. 166, 170 (E.D.Va.2004). In Grogan, the Supreme Court explained the balancing of policy objectives that leads to the conclusion that the creditor bears the burden:
The statutory provisions governing non-dischargeability reflect a congressional decision to exclude from the general policy of discharge certain categories of debts — such as child support, alimony, and certain unpaid educational loans and taxes, as well as liabilities for fraud. Congress evidently concluded that the creditors’ interest in recovering full payment of debts in these categories outweighed the debtors’ interest in a complete fresh start. We think it unlikely that Congress, in fashioning the standard of proof that governs the applicability of these provisions, would have favored the interest in giving perpetrators of fraud a fresh start over the interest in protecting victims of fraud. Requiring the creditor to establish by a preponderance of the evidence that his claim is not dischargeable reflects a fair balance between these conflicting interests.
498 U.S. at 287, 111 S.Ct. 654. The Debt- or asserts that SVU has the burden to show that its debt is excepted from discharge. See Jan. 23 H’rg Tr. at 12:22-23. The Debtor’s assertion has not been disputed. Nor has this Court found any case law or statutory law indicating that burden must be shifted simply because the Debtor is the Plaintiff in this action.11 Therefore, the Court concludes that SVU has the burden to show that its debt is one that is excepted from discharge.12
The Debtor provided uncontroverted evidence to the Court of the following: (1) she obtained a discharge under Chapter 7; (2) she had a pre-petition debt to SVU;13 *272(8) she provided notice of her bankruptcy to SVU; and (4) following the discharge order, SVU obtained judgment (or began collection activity). The Debtor argues, therefore, that the debt to SVU was discharged and not subject to collection activity after the discharge order. SVU argues, on the other hand, that the debt is excepted from discharge under 11 U.S.C. § 523(a)(8).
11 U.S.C. § 523(a)(8)
Section 523(a)(8) of the Bankruptcy Code provides that “qualified educational loans” are excepted from discharge in bankruptcy, unless the loan imposes an “undue hardship” on the debtor and the debtor’s dependents. 11 U.S.C. § 523(a)(8). In this case, the Debtor argues that the debt held by SVU is not a “qualified educational loan.” It is undisputed that at one time, the Debtor financed part of her education at SVU with a loan from Nellie Mae. It is also undisputed that at the time of origination, that the loan by Nellie Mae to the Debtor was a qualified educational loan, non-dischargeable under section 523(a)(8). What is in dispute is whether the debt currently held by SVU is a non-dischargeable qualified educational loan debt. For this Court to find that the debt held by SVU is a nondischargeable loan debt, SVU must prove either: (1) that the debt SVU currently holds is the same debt as the Nellie Mae loan made to the Debtor and that the debt has retained its characterization as a qualified educational loan debt; or (2) SVU must prove the debt it holds is a qualified educational loan that SVU made with the Debtor.
SVU has not claimed that it originated a qualified education loan with the Debtor, nor has SVU presented any evidence that would allow it to succeed on that theory. The only theory presented by SVU is that its judgment debt is the same debt as the Nellie Mae loan. In order for the Court to determine if SVU has succeeded in showing that its judgment is the same debt as the Nellie Mae loan, the Court must examine the state court judgment held by SVU.
The Court has very little evidence regarding the state court judgment. Debt- or’s Exhibit 1 is a copy of the state court judgment. See Pl.’s Ex. 1. The state court judgment is a copy of the warrant in debt that has been stamped “JUDGEMENT.” See id. However, this warrant in debt/judgment does not provide any information as to what exact debt the judgment is based upon. As such, the Court is forced to determine what debt was represented by the pre-petition state court judgment by looking to other evidence. In doing so, the Court attempts not to disturb the state court judgment and assumes that the default judgment entered by the state court was proper; i.e. the debt held by SVU was valid, enforceable, and not barred by law or equity. See In re Heckert, 272 F.3d 253, 259-60 (4th Cir.2001) (finding that in determining whether a state court judgment was dischargeable, the bankruptcy court was required to give the state court judgment full faith and credit and could not alter or amend the terms of the judgment); In re Ansari, 113 F.3d 17, 19-20 (4th Cir.1997) (holding that a Virginia state court’s entry of a default judgment to be entitled to full faith and credit).
In light of the information available regarding the basis for the default judgment and the theory put forth by SVU, the Court determines that, as a threshold mat*273ter, SVU must show that it was entitled to enforce the Note in order for it to be possible that the state court default judgment debt and the debt evidenced by the Note are the same debts. This threshold inquiry is required because we assume the validity of the state court judgment. The state court would not have granted a judgment on an unenforceable debt. Therefore, if the judgment debt represents the Note, then SVU should be able to prove that it can enforce the Note.14 If SVU cannot show that it can enforce the Note, then the state court judgment is not based upon the Note. Assuming SVU is able to show that the debts are the same, SVU would still need to show that the non-dischargeable nature of the debt in the hands of Nellie Mae was not lost by a subsequent transfer to SVU. The Court does not reach the latter question because it finds, for the following reasons that SVU has failed to show that it was entitled to enforce the Note.
Choice of Law
SVU has argued and alluded to several state law contract theories, such as assignment subrogation, and commercial paper, to establish that it was entitled to enforce the Note. While this Court would generally apply Virginia commercial and contract law in similar eases involving two Virginia residents and an underlying state law issue,15 the documents giving rise to SVU’s state law theories contain choice of law clauses. Def.’s Ex. A and K, Dudley, No. 11-05040, ECF No. 66. As this Court sits in Virginia, we apply Virginia choice of law rules to determine the validity and effect of the parties’ choice of law provisions. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941) (“The conflict of laws rules to be applied by the federal court in [State X] must conform to those prevailing in [State X’s] state courts.”). Virginia law recognizes and gives effect to choice of law provisions such as the ones at issue here. Colgan Air, Inc. v. Raytheon Aircraft Co., 507 F.3d 270, 275 (4th Cir.2007); Paul Business Systems, Inc. v. Canon USA, Inc., 240 Va. 337, 397 S.E.2d 804, 807 (1990). The choice of law provisions contained in the Note and Agreement are effective and require application of Massachusetts law to determine whether SVU acquired Nellie Mae’s rights under the Note. Def.’s Ex. A and K Dudley, No. 11-05040, ECF No. 66.
Commercial Paper and Article 3
Promissory notes, such as the one at issue in this case, are often negotiable instruments and are governed, therefore, by Article 3 of Massachusetts’ version of the Uniform Commercial Code (the “UCC”). Mass. Gen. Laws ch. 106, § 3-102(a) (2012) (“This Article shall apply to negotiable instruments.”). If the Note is a negotiable instrument, Article 3 provides particular requirements for enforceability. The first question the Court must answer is whether the Note is a negotiable instrument.
A negotiable instrument is:
an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
*274(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
(2) is payable on demand or at a definite time; and
(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obli-gor.
Mass. Gen. Laws ch. 106, § 3-104(a) (2012). In addition to outlining the elements of a negotiable instrument, Article 3 goes on to define those various elements. For instance, a promise is unconditional as long as it does not state “(i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing, or (iii) that rights or obligations with respect to the promise or order are stated in another writing.” Mass. Gen. Laws ch. 106, § 3-106(a) (2012). Furthermore, section 3-109 explains the difference between when a promise is payable to bearer or to order:
(a) A promise or order is payable to bearer if it:
(1)states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;
(2) does not state a payee; or
(3) states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person.
(b) A promise or order that is not payable to bearer is payable to order if it is payable (i) to the order of an identified person or (ii) to an identified person or order. A promise or order that is payable to order is payable to the identified person.
Mass. Gen. Laws ch. 106, § 3-109 (2012). Additionally, section 3-108 outlines the differences between payable on demand and payable at definite time:
(a) A promise or order is “payable on demand” if it (i) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, or (ii) does not state any time of payment.
(b) A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of (i) prepayment, (ii) acceleration, (iii) extension at the option of the holder, or (iv) extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.
Mass. Gen. Laws ch. 106, § 3-108 (2012).
Based on the definition of negotiable instrument provided by Article 3, the Court finds that the Note is a negotiable instrument.16 The Note is an uneondition*275al promise to pay. A thorough review of the Note’s terms reveals that the Note does not contain any conditions to payment, is not subject to a separate writing, and does not state rights and responsibilities in a separate writing. See Def.’s Ex. K, ¶ F, Dudley, No. 11-05040, ECF No. 66. Second, the Note is payable to order. Paragraph F of the Note reads, “each of the undersigned ... agrees to pay to the order of Lender named above or to any subsequent holder of this Promissory Note....” Id. As such, the Note specifies a particular person to whom payment must be made. See Mass. Gen. Laws ch. 106, § 3 — 109(b)(i) (2012). Third, the Note is payable at a definite time. Paragraph 5 of the Note states that payments shall begin on the earlier of four years from the date of disbursement or forty-five days after the student-beneficiary of the Note graduates or ceases to be enrolled in a qualified institution. See Def.’s Ex. K, ¶ 5, Dudley, No. 11-05040, ECF No. 66. As such, the Note is payable at a fixed date. The Note, therefore, is an unconditional promise to pay to order at a definite time and does not force any condition on the promisor other than the promise to pay. Given these facts, the Court concludes that the Note at issue is a negotiable instrument under section 3-102(a).
Defendant’s Ability to Enforce the Note
Under Massachusetts’ version of Article 3, possession of the negotiable instrument sought to be enforced is a prerequisite to enforceability. Section 3-301 provides that a person is entitled to enforce a negotiable instrument if: a) he is the holder of the instrument; b) he is a nonholder in possession with rights of a holder; or c) he meets the requirements of 3-309. Mass. Gen. Laws ch. 106, § 3-301 (2012). The avenues of enforceability under section 3-301 all share a common characteristic: the person seeking to enforce the negotiable instrument must have had actual possession of the instrument at one time. Massachusetts law defines both a “holder” 17 and a “nonholder,”18 in part, as an individual who currently possess a negotiable instrument; the difference being that a holder possesses a “negotiated negotiable instrument,”19 whereas a nonholder possesses a “non-negotiated negotiable instrument.”20 Section 3-301 provides only one exception to the current possession requirement in the case of a lost or *276destroyed instrument. By incorporating section 3-309, section 3-301 permits an individual to enforce a lost or destroyed negotiable instrument, so long as the conditions of section 3-309 are met. Of importance to this analysis, section 3-309 permits enforcement of a lost or destroyed instrument only if the person seeking enforcement can establish that he was in possession of the instrument and entitled to enforce it at the time possession was lost or destroyed.21 Mass. Gen. Laws ch. 106, § 3-309(a) (2012). Based on the definitions of holder, nonholder, and the requirements of section 3-309 under Massachusetts’ version of the UCC, possession of the negotiable instrument at one time is a requirement for enforceability under section 3-301. As such, to show that it was entitled to enforce the Note, SVU must at least show that it was transferred possession of the Note at some point in time.
Transfer of Possession of the Note to Defendant
As a negotiable instrument, the transfer of the Note and its corresponding rights are governed by Article 3.22 See Mass. Gen. Laws ch. 106, §§ 3-203 (2012); Premier Capital v. Gavin, 319 B.R. 27, 31 (1st Cir. BAP 2004). When a person transfers23 an instrument to another, the transfer vests the transferee with the rights of the transferor and the power to enforce such rights. Mass. Gen. Laws ch. 106, §§ 3-203(b) (2012). A transfer of possession of a negotiable instrument occurs when a transferor delivers the instrument to a transferee with the purpose of giving the transferee the right to enforce the instrument. Mass. Gen. Laws ch. 106, § 3-203(a) (2012). Under this definition of transfer, a transfer does not take place without actual delivery of the instrument into the transferee’s physical possession. See Mass. Gen. Laws ch. 106, § 3-203, comment 1 (2012). The comment provides an explanatory example:
[S]uppose X is the owner and holder of an instrument payable to X. X sells the instrument to Y but is unable to deliver immediate possession to Y. Instead, X signs a document conveying all of X’s right, title, and interest in the instrument to Y. Although the document may be effective to give Y a claim to ownership of the instrument, Y is not a person entitled to enforce the instrument until Y obtains possession of the instrument. No transfer of the instrument occurs under Section 3-203(a) until it is delivered to Y.
Id. Furthermore, the case law states that proof of a transfer must be shown by direct evidence and not circumstantial evidence. Marks v. Braunstein, 439 B.R. 248, 251 (D.Mass.2010) (finding that pro*277duction of a recorded assignment was insufficient to show transfer of the instrument assigned because it did not provide direct evidence of possession of the negotiable instrument). With this understanding of transfer in mind, the Court seeks to determine whether SVU has provided sufficient direct evidence to show that Nellie Mae transferred the Note to SVU.
SVU presented internal accounting documents listing outstanding accounts, each of which contain the Debtor’s name. See Def.’s Ex. B-12 at 2, B-15 at 6, and B-16 at 6, Dudley, No. 11-05040, ECF No. 66. These documents, however, fail to contain any information regarding how the Debtor’s account was established, what the basis of the debt was, or any indication of a transfer of the Note from Nellie Mae to SVU. Id. Furthermore, SVU failed to elicit testimony from its witnesses that could answer these questions or explain the entries regarding the Debtor in more detail. See Jan. 23 H’rg Tr.
Defendants also presented a letter on SVU letterhead, addressed to “Nellie Mae Borrower” as evidence that Nellie Mae had transferred possession of the Note to SVU. Def.’s Ex. B-27, Dudley, No. 11-05040, ECF No. 66. The letter, however, provides little support for such a proposition and, actually, provides greater support for the proposition that Nellie Mae or its third-party collection agency had possession of the Note at the time the letter was written. The letter on countless occasions refers to the “Nellie Mae Loan,” directs the borrower to contact Nellie Mae, and instructs the borrower to pay Nellie Mae to rehabilitate the loan. Id. Had possession been transferred to SVU, Nellie Mae would not have been entitled to payment under the Note,24 and presumably, the letter would have instructed the borrower to contact SVU, rather than Nellie Mae.
Furthermore, the Debtor’s credit report as of July 15, 2004, shows that Nellie Mae “charged off’ its account with the Debtor. Def.’s Ex. B-30 at 2, Dudley, No. 11-05040, ECF No. 66. The credit report also shows that USAG (most likely USA Group, Nellie Mae’s collection agency, see Def.’s Ex. 27 at 2, Dudley, No. 11-05040, ECF No. 66) had “transferred or sold” a debt. Id. Had Nellie Mae transferred or assigned the Note to SVU, the Court would expect to see something more akin to the “transferred or sold” language next to the Nellie Mae debt, as opposed to the “charged off’ language.
In addition to the exhibits, SVU called Jaquie McDonnell, Director of Loan Accounting for Sallie Mae, as a witness. See generally Jan. 23 Hr’g Tr. at 18-32. Ms. McDonnell’s position at Sallie Mae requires her to supervise loan accounting for student loans serviced through Sallie Mae, which include loans issued by Nellie Mae. Id. at 19-20. Ms. McDonnell, however, did little to help establish that Nellie Mae transferred the Note to SVU. In particular, Ms. McDonnell admitted that the information she had regarding the Note was provided by SVU and was not contained in Nellie Mae’s records. Id. at 26: 2-15 (“Q. Okay. How did you obtain the record then? A. I obtained it from Southern Virginia.”).
The Court finds that SVU has failed to provide sufficient evidence that Nellie Mae transferred possession of the Note to SVU. SVU has not provided the Court with direct evidence of the Note’s transfer from Nellie Mae’s possession to SVU’s. Without such a showing, SVU cannot show that it can enforce the Note. Marks, 439 B.R. at 251. Further, the Court finds that even if the direct evidence rule was not a bar to *278SVU’s relief, the circumstantial evidence presented is insufficient to establish that Nellie Mae ever transferred possession of the Note to SVU. As SVU has failed to establish that it was ever in possession of the Note, it has failed to establish that it was ever entitled to enforce the Note. See Mass. Gen. Laws ch. 106, § 3-309 (2012). Without proof sufficient to show that it was entitled to enforce the Note, SVU cannot establish that the debt underlying the state court default judgment is the same debt underlying the Note issued between Nellie Mae and the Debtor.25 Therefore, SVU has failed to carry its burden of showing that the debt underlying the state court default judgment was a non-dischargeable debt under 11 U.S.C. § 523(a)(8).
Assuming Transfer of Possession, Was SVU Ever Entitled to Enforce?
Assuming there was evidence that Nellie Mae transferred possession of the Note to SVU, the fact remains that SVU has failed to produce the Note because it is currently lost. Without current possession of the Note, SVU’s ability to enforce the Note is controlled by section 3-309. See Mass. Gen. Laws ch. 106, § 3-301 (2012); comment to § 3-301; and Mass. Gen. Laws ch. 106, § 3-201(a) (2012). Section 3-309 entitles an individual to enforce an instrument he is not currently in possession of if: (1) he was in possession26 of and entitled to enforce the instrument when possession ceased; (2) he cannot reasonably obtain possession because the instrument was destroyed, its whereabouts cannot be determined, or is in the wrongful possession of another who is unknown, cannot be found, or is not amenable to service of process; and (3) the loss of possession did not result from a transfer or lawful seizure.27 Mass. Gen. Laws ch. 106, § 3-309(a) (2012); Marks, 439 B.R. at 250-51. Assuming possession at one time, SVU must still show, under section 3-309, that it was able to enforce the Note when it had possession. In order to show this, SVU would have to show that during its possession of the Note it was either a holder of the Note or a nonholder in possession with the rights of a holder. See Mass. Gen. Laws ch. 106, § 3-301 (2012). For the following reasons, the Court finds that, even if it is assumed SVU possessed the Note at one time, SVU has failed to establish that it was ever entitled to enforce the Note as either a holder or a nonholder in possession with the rights of a holder.
Defendant as a Holder28
Article 3 does not directly define the term “holder.” See Mass. Gen. Laws *279ch. 106, §§ 8-103(a)-(d) (2012). The term, however, is defined indirectly through the UCC’s definition of “negotiation.”29 According to the definition of “negotiation,” a “holder” is a one who is transferred possession of a negotiated instrument by a transferor who is not the issuer. See Mass. Gen. Laws ch. 106, § 3-201(a) (2012). Therefore, to be a holder of the Note, the Defendant must show that Nellie Mae was not the issuer of the Note, that Nellie Mae transferred possession of the Note to Defendant, and that the Note was negotiated.30
An issuer is the maker or drawer of an instrument, which means the person who signs or is identified in a note or draft as a person undertaking to pay or ordering payment, respectively. See Mass. Gen. Laws ch. 106, §§ 3-105(c) and 3-103(5) and (7) (2012). Nellie Mae is neither a maker nor a drawer of the Note and is, therefore, not the issuer of the Note. As the terms of the Note make clear, the Debtor is the issuer of the Note. See Def.’s Ex. K, ¶ F, Dudley, No. 11-05040, ECF No. 66.
Transfer of possession is governed by section 3-203. As addressed above, the Court is assuming for purposes of its enforcement analysis under section 3-309 that possession of the Note was transferred to SVU.31
Lastly, SVU would need to show that the Note had been negotiated. Under section 3-201, a note payable to an identified person is negotiated by transferring possession of an instrument indorsed by the transferor. Mass. Gen. Laws ch. 106, § 3-201 (b) (2012). A note is indorsed when signed by the holder of the note, for the purpose of negotiating it, restricting payment on it, or incurring liability on the note, or accompanied by an affixed, signed writing to the same. Mass. Gen. Laws ch. 106, § 3-204(a) (2012). Even if the Court assumes SVU possessed the note, SVU must provide the Court with evidence that the Note was indorsed to it by Nellie Mae because the Note was payable to an identified person. See New Haven Savings Bank v. Follins, 431 F.Supp.2d 183, 194-5 (D.Mass.2006). The record is void of any such evidence that would lead the Court to believe that the Note was ever indorsed to SVU. The actual Note is missing, so the Court cannot examine it for indorsements. Furthermore, SVU has neither provided testimony from Nellie Mae that the Note was indorsed to SVU, nor testimony from SVU that it received an indorsed Note from Nellie Mae. Therefore, even assuming the existence of a transfer of possession of the Note from Nellie Mae to SVU, SVU has failed to provide any direct or circumstantial evidence that would establish that the Note was indorsed and, as such, negotiated. Therefore, even if SVU had possessed the note at one time, the current evidence could not support a finding that SVU was a holder of the Note. Without such a finding, SVU cannot claim *280to have been a holder when it possessed the Note; thus, eliminating one avenue of enforceability under section 3-309.
Nonholder in Possession with the Rights of a Holder
Having ruled out SVU’s ability to enforce the Note as a holder under section 3-309, the only enforcement mechanism left for the Court to explore is SVU’s ability to enforce the Note under section 3-309 as a nonholder in possession with the rights of a holder.32 As stated previously, a nonholder in possession with rights of a holder is a person that is transferred possession of a non-negotiated negotiable instrument and acquires the rights of the previous holder by subrogation, assignment, succession, or otherwise. See comment to Mass. Gen. Laws ch. 106, § 3-301 (2012); Duxbury v. Roberts, 388 Mass. 385, 446 N.E.2d 401, 403-4 (1983) (finding that even though negotiable instrument was not negotiated, plaintiff acquired right of his transferor through a written, signed assignment of the instrument). Of consequence in this action is whether SVU was assigned or, in the alternative, subrogated to the rights of Nellie Mae under the Note.33
Assignment of the Note
Under Massachusetts law,34 an assignment of a contract right is the manifestation of the obligee’s intent to transfer rights under the contract to another person, the assignee, so that the obligor’s performance under the contract is due to the assignee, not the obligor. See In re Computer Engineering Assoc., Inc., 337 F.3d 38, 46 (1st Cir.2003). The assignment need not be in writing, but the assignment must exhibit an intent to assign a present right, identify the subject matter assigned, and must be accompanied by a divesture of control over the subject matter assigned. Cheswell, Inc. v. Premier Homes and Land Corp., 326 F.Supp.2d 201, 202 (D.Mass.2004). Although the intent of the parties is important, when an assignment involves the transfer of a negotiable instrument, the parties need to provide direct evidence of the assignment. New Haven Savings Bank, 431 F.Supp.2d at 198 (considering production of the original loan, various powers of attorney, written assignment, prior purchase agreement and bill of sale, as well as an affidavit of a loan manager to be sufficient to establish assignment of the Note); Norfolk Financial Corp. v. Mazard, 2009 WL 3844481, *3 (Mass.App.Div.2009) (citing New Haven Savings Bank) (finding that failure to submit direct and admissible evidence tending to prove assignment to be fatal). The reliance on direct evidence stems from section 3-309(b)’s requirement that the *281proponent of enforcement provide direct evidence of the instrument’s terms, ownership, and adequate protection from multiple recoveries. See Mass. Gen. Laws ch. 106, § 3 — 309(b) (2012); Premier Capital, 319 B.R. at 32-3 (interpreting the requirements of Mass. Gen. Laws ch. 106, § 3-309(b) (2012)) (“Article 3 makes clear that a break in the chain of title is bridged not by drawing a ‘reasonable inference’ from circumstantial evidence, but by providing direct evidence.... ”).
The Court finds that SVU has failed to establish that Nellie Mae assigned its rights under the Note to SVU. SVU has failed to provide any direct evidence of an assignment from Nellie Mae. There is no evidence of a written assignment, no recor-dation of an assignment, and no testimony from a witness with knowledge of an intent to assign the Note to SVU.
Furthermore, the evidence available is the same as that analyzed with regard to transfer of possession. Although assignment is legally distinct from transfer, the Court’s conclusions are the same. SVU’s internal financial statements,35 the letter from SVU to the debt- or,36 and the debtor’s credit report37 are not direct evidence of an intent by Nellie Mae to assign a then-existing present right in the Note to SVU and to divest itself of control over the Note. See Cheswell, Inc., 326 F.Supp.2d at 202. The accounting documents only show SVU believed Debt- or owed it money. The Debtor’s credit report contradicts SVU’s theory that the letter establishes that it was assigned the Note. The letter is dated September 22, 1999. See Def.’s Ex. B-27, Dudley, No. 11-05040, ECF No. 66. The credit report establishes that Nellie Mae maintained an ownership interest in the Note until June 2002, when the Note was charged off. See Defi’s Ex. B-30, Dudley, No. 11-05040, ECF No. 66. If Nellie Mae maintained an ownership interest in the Note until June 2002, Nellie Mae could not have assigned SVU the Note in 1999 because Nellie Mae apparently did not divest itself of control until approximately three years later.
In addition, the Note states that notice will be given to the obligor in the event Nellie Mae’s interest and rights under the Note are assigned. Def.’s Ex. K, ¶ 10, Dudley, No. 11-05040, ECF No. 66. There was no evidence presented that Debtor ever received or was sent notice of any assignment of Nellie Mae’s rights under the Note. As the terms of the Note expressly provide for notice in the event of an assignment, the lack of notice of an assignment is circumstantial evidence that an assignment of Nellie Mae’s interest in the Note never occurred.
Without direct evidence of an assignment from Nellie Mae to SVU, the Court cannot conclude that Nellie Mae assigned the Note to SVU. Even when the Court considers the circumstantial evidence before it, the evidence on the record is insufficient to establish that Nellie Mae ever assigned the note to SVU.38 Without proof *282of an assignment, one of SVU’s two avenues for showing rights as a nonholder in possession is eliminated.
Subrogation of Rights under the Note
A nonholder in possession of a non-negotiated negotiable instrument can acquire the rights of a holder through the common law doctrine of subrogation, which allows the payor on a debt to step into the shoes of the creditor vis-a-vis the party obligated to pay.39 Although often stemming from contractual relationships, such as here, the doctrine of subrogation is primarily an equitable remedy designed to avoid windfalls. Reliance Insurance v. Boston, 71 Mass.App.Ct. 550, 884 N.E.2d 524, 530 (2008); Goodman Industries, Inc. v. Max Goodman & Sons Realty, Inc., 21 B.R. 512, 519 (Bankr.D.Mass.1982). The general principle of the doctrine of subro-gation is that a guarantor required to pay the debts of the principal on a note will be subrogated to the rights of the creditor against the principal. Goodman Industries, 21 B.R. at 519. In addition to acceding to the rights of the creditor, the guarantor inherits only those rights the creditor had at the time of subrogation. McCabe v. Braunstein, 439 B.R. 1, 6 (D.Mass.2010). In determining whether subrogation applies, Massachusetts has fashioned a five factor test; although, the doctrine may still apply absent one of the five factors. East Boston Savings Bank v. Ogan, 428 Mass. 327, 701 N.E.2d 331, 334 (1998). Equitable subrogation will apply if:
(1) the subrogee made the payment to protect his or her own interest; (2) the subrogee did not act as a volunteer; (3) the subrogee was not primarily liable for the debt paid; (4) the subrogee paid off the entire encumbrance; and (5) subro-gation would not work any injustice to the rights of the junior lienholder.
Id. In light of the five factor test, the Court concludes that SVU has not established all five factors and, as such, has failed to establish that it was subrogated to the rights of Nellie Mae under the Note.40
*283Based on the evidence and record before the Court, SVU has sufficiently established factors (3) and (5). SVU was not primarily liable on the Note. See Def.’s Ex. K, IF, Dudley, No. 11-05040, ECF No. 66. The Agreement between SVU and Nellie Mae also provides circumstantial evidence that SVU was secondarily liable on all debts issued by Nellie Mae to SVU’s students. See Def.’s Ex. A, ¶ 1, Dudley, No. 11-05040, ECF No. 66. Furthermore, it is apparent that there are no junior lienhold-ers involved in this case.
SVU has not presented evidence sufficient to establish the remaining Ogan factors because it has not provided evidence that it paid Nellie Mae in accordance with the Agreement on the Note. The only exhibits relevant to the payments made to Nellie Mae are Defendant’s Exhibits B-3 and B-10, neither of which provides any evidence that payment was made on the Note. See Def.’s Ex. B-3 and B-10, Dudley, No. 11-05040, ECF No. 66. Those documents merely show reserve account balances and credits from the reserve account. There is no mention of the Note. Furthermore, SVU’s witnesses provided little credible evidence as to when the Note was paid, how it was paid, how much was paid, how much was owed, or whether it was paid in conjunction with other loans, etc. See generally Jan. 23 H’rg Tr. Without evidence of a payment, the Court cannot determine whether SVU paid on the Note, let alone whether payment was made to protect SVU’s interest under the Agreement, whether SVU acted as a volunteer, or whether SVU paid the entire amount. See Ogan, 701 N.E.2d at 334. Even if the Court assumed that a payment had been made, it would be impossible to determine, based on the record before the Court, whether the amount paid was for the entire amount because there is no evidence of what that amount is, when it was due, or even if demand was ever made by Nellie Mae. Without such evidence, it is not possible to find that SVU has established the existence of a sufficient number of the Ogan factors to permit it to succeed on its common law subrogation theory.
It is important at this juncture to address a statement made by the Court in an earlier released opinion and order in this case. The Court stated in its earlier summary judgment opinion and order, ‘When Ms. Dudley failed to repay the loan, Nellie Mae charged the loan, plus interest against SVU’s reserve account.” Decision and Order at 2, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Dec. 20, 2012) ECF No. 26. This statement was not issued as a finding of fact; rather, as the case was being heard on summary judgment, the Court treated the statements of fact in the Debtor’s complaint as admitted and true for purposes of ruling on SVU’s motion for summary judgment. Meltzer v. Atlantic Research Corp., 330 F.2d 946, 947 (4th Cir.1964); see Debtor’s Complaint at ¶ 24, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. July 7, 2011) ECF No. 1 (“Upon information and belief based upon a letter dated February 1, 1999, the debt owed to Nellie Mae was paid in full from a ‘reserve’ fund held on behalf of Southern Virginia University. A copy of this letter is attached as Exhibit H.”).
At this current stage of the litigation, the Court could consider Debtor’s factual assertion in her complaint to be a judicial admission withdrawing the fact from issue and dispensing wholly with SVU’s need to prove that Nellie Mae charged SVU’s reserve account for the full amount due on the loan, plus interest pursuant to the Agreement between Nellie Mae and SVU. 2 McCormiok on Evid. § 254 (7th ed.); Meyer v. Berkshire Life Ins. Co., 372 F.3d 261, 265 (4th Cir.2004) *284(citing Martinez v. Bally’s Louisiana, Inc., 244 F.3d 474, 477 (5th Cir.2001)) (“Although a judicial admission is not itself evidence, it has the effect of withdrawing a fact from contention.”). The Court, however, has the discretion to relieve a party of a judicial admission when it appears the admitted fact is untrue and the result of a mistaken belief when made. New Amsterdam Cas. Co. v. Waller, 323 F.2d 20, 24 (4th Cir.1963); Coral v. Gonse, 330 F.2d 997, 998 n. 1 (4th Cir.1964). Debtor’s assertion in her complaint was made on information and belief; the basis of which stems from a document addressed to SVU from someone at Nellie Mae that was deemed inadmissible by this Court when SVU moved for its admittance into evidence. Compare Debtor’s Complaint at ¶ 24 and Ex. H, Dudley, No. 11-05040 (Bankr.W.D.Va. July 20, 2011), ECF No. 1 with Def.’s Ex. B-31, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 16, 2013) ECF No. 66; see Jan. 23 Hr’g. Tr. at 31-32, 49-54. Without the letter, the Debtor would have had no basis for believing such fact to be true, nor would the Court expect her to have personal knowledge of the financial affairs of SVU as they pertain to the University’s relationship with Nellie Mae. According to Ms. McDonnell, SVU’s witness from Nellie Mae, this letter was provided by SVU, not Nellie Mae, as one might believe by looking at the contents of the document. Jan. 23 Hr’g. Tr. at 25-26. Furthermore, the record is devoid of any additional evidence that could suggest that Debtor’s assertion was true. Because Debtor’s assertion appears to be untrue and based on a mistaken belief that stems from an inadmissible and misleading document, the Court finds that Debtor’s assertion in her complaint— Nellie Mae charged the outstanding balance of the loan, plus interest against the reserve fund — is not a judicial admission and will not relieve SVU of its burden of producing admissible evidence capable of establishing such fact. Without evidence of a payment from SVU to Nellie Mae, SVU cannot satisfy sufficiently the requirements of Ogan to the degree necessary to succeed on its theory of subrogation. Therefore, the Court finds that SVU has failed to show that it was subrogated to the rights of Nellie Mae under the Note.
Conclusion
As a threshold matter to proving its case, SVU needed to show that it was entitled to enforce the Note against the Debtor. Based on the record before the Court, SVU has failed in this respect. Enforcement of a negotiable instrument under Massachusetts law requires that the party seeking to enforce the instrument show that it was transferred physical possession of the instrument. SVU’s evidence failed to establish that Nellie Mae ever transferred possession of the Note to SVU.
Even if the Court was to assume or find that a transfer of possession of the Note had occurred, SVU would still need to establish that when the Note was lost or destroyed, it was either a holder or a nonholder in possession with the rights of a holder. SVU was unable to establish either of these avenues of enforcement under section 3-309. First, SVU could not establish that it was a holder of a negotiated instrument because it provided no evidence establishing that Nellie Mae had indorsed the Note to SVU. Second, SVU could not provide the Court with direct evidence of an assignment of the Note from Nellie Mae or sufficient evidence to find that SVU had been subrogated to the rights of Nellie Mae. Either theory would have been sufficient for the Court to find that SVU was a nonholder in possession with the rights of a holder. Even if the Court was to assume or find that a transfer of possession had occurred, however, *285the record is devoid of evidence that would permit the Court to find the SVU was entitled to enforce the Note under section 3-309. Therefore, SVU has failed to show that it was entitled to enforce the Note against the Debtor. Without such a showing, the Court cannot conclude that the debt underlying the state court default judgment is the same debt as that evidenced by the Note. As the two debts are not the same, the Court need not address the question of whether the debt maintains its non-dischargeable character once transferred from an educational student loan lender to a third party. SVU has failed to carry its burden and, therefore, the Court finds that its debt, which it attempted to enforce in state court post-discharge, is a dischargeable debt and was discharged by Court order on September 21, 2010. A corresponding and contemporaneous order will be entered consistent with the above memorandum opinion.
Copies of this memorandum opinion shall be delivered to the following parties: the debtor, Cynthia Annette Riley Dudley, 512 Greenville School Road, Greenville, VA 24440; counsel for the debtor, Roland S. Carlton, Jr., Carlton Legal Services, PLC, 118 MacTanly Place, Staunton, VA 24401; the creditor, Southern Virginia University, Robert E. Huch, Registered Agent, Southern Virginia University, One University Hill Drive, Buena Vista, VA 24416; and counsel for the creditor, Grant A. Richardson, 100 South Main Street, Bridgewater, VA 22812.
. See Objection to Def.’s Ex., Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. Jan. 15, 2013), ECF No. 60.
. The Debtor withdrew her objection to Exhibit B27 and B30. See H'rg Tr. at 6:15-16, Dudley v. S. Va. Univ., No. 11-05040 (Bankr.W.D.Va. January 22, 2013), ECF No. 81.
.Fed.R.Evid. 402.
. Fed.R.Evid. 401, 403.
. Fed.R.Evid. 801.
. Hereinafter "Jan. 22 Hr'g Tr.”
. Hereinafter "Jan. 23 Hr'g Tr.”
. As an example, several the exhibits offered by SVU were generated by third party collections agencies. The Court believed testimony from an agent at the collection agencies would have been more probative and would have been obtainable through the reasonable means of serving a subpoena on the employee of the collection agency.
. Herein called the "Note.”
. See Order of Reference December 6, 1994; and Western District of Virginia District Court Local Rule 3.
. Moore’s Federal Practice acknowledges that confusion can arise when, as in many declaratory judgment suites, the positions of the Plaintiff and defendant are transposed. 12-57 Moore's Federal Practice — Civil § 57.62. Moore’s states that no clear rule of law exists to resolve this confusion. Id.
. If SVU carries its burden, the burden would shift to the Debtor to show by a preponderance of the evidence that the debt is an undue burden on her and her dependents. Spence v. Educ. Credit Mgmt. Corp. (In re Spence), 541 F.3d 538, 543-544 (4th Cir.2008) (citing Educ. Credit Mgmt. Corp. v. Mosko (In re Mosko), 515 F.3d 319, 324 (4th Cir.2008)). In this case, an undue burden has not been plead by the Debtor, therefore the only relevant burden is SVU's initial burden to show that the debt is non-dischargeable.
.The Debtor claimed that at one time, she entered into a loan directly with SVU to pay for tuition and fees. See Def.’s Ex. B-21, B-22, and B-23. Debtor’s counsel argued in his closing that the debt SVU was trying to collect may have been for this direct loan and not the Nellie Mae loan. Debtor's counsel *272further argued that it was SVU’s burden to show that the debt it was trying to collect was the Nellie Mae loan and not the direct loan from SVU. The Debtor asserted that the loan with SVU for fees and tuition was discharged, and SVU did not contest this statement.
. One of the simplest ways SVU could have demonstrated its ability to enforce the Note would have been to produce the instrument itself. SVU did not produce the Note because it claimed that the Note had been lost.
. In general, choice of law issues do not arise in cases invoking federal question jurisdiction. However, a federal court is required to apply the forum state's law, including its choice of law principles, whenever a substantive issue of state law arises in a case.
. In the alternative, if the Note is not a negotiable instrument, Defendant's ability to enforce the terms of the contract, as expressed in the Note, between Debtor and Nellie Mae, would be governed by the common law of contracts. See JPMorgan Chase & Co. v. Casarano, 2010 WL 3605427, *5-*6 (Mass. Land Ct.). In particular, the law of assignments and/or the doctrine of subrogation would be applicable. As the Nonholder in Possession with the Rights of a Holder section addresses these theories as they apply to the *275facts of this case and the results thereunder, the Court does not address this alternative theory of relief at this time. If it was found that the Note was not a negotiable instrument, the Court would rely on its analysis of Massachusetts contract law to dispose of the matter.
. A "holder” is an individual or entity that is transferred possession of a negotiated instrument by a transferor who is not the issuer. See Mass. Gen. Laws ch. 106, § 3-201(a) (2012).
. A "nonholder in possession with rights of a holder” is an individual or entity that is transferred possession of a non-negotiated instrument and acquires the rights of the previous holder by subrogation or assignment and is a successor to the holder, or otherwise acquires the holder's rights. See comment to Mass. Gen. Laws ch. 106, § 3-301 (2012).
. A "negotiated negotiable instrument" is a negotiable instrument that has been transferred to another with the proper indorsement by the transferor or the transfer of an instrument payable to bearer. Mass. Gen. Laws ch. 106, § 3-201 (2012). A non-negotiated negotiable instrument, therefore, is a negotiable instrument that has been transferred to another without the proper indorsement and is not payable to bearer.
. A "non-negotiated negotiable instrument” is a negotiable instrument that has been transferred to another without the proper in-dorsement and is not payable to bearer. Mass. Gen. Laws ch. 106, § 3-201 (2012).
. Unlike the UCC version, Massachusetts does not permit an individual who has never acquired possession to enforce a negotiable instrument. Under the UCC version, acquisition of an ownership interest from someone entitled to enforce is sufficient. Compare Mass. Gen. Laws ch. 106, § 3-309(a) (2012) with U.C.C. § 3-309(a)(l)(B) ("A person not in possession of an instrument is entitled to enforce the instrument if — the person seeking to enforce the instrument — has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred.").
. Defendant failed to address the UCC, as adopted by Massachusetts, and its various requirements for enforceability at the hearing; rather, Defendant made conclusory and unsubstantiated references to terms defined therein. See generally Jan. 23 Hr'g Tr.
. Mass. Gen. Laws ch. 106, § 3-203(a) (2012) defines "transfer” as the delivery of an instrument by a person other than the issuer to another for the purpose of giving the person the right to enforce the instrument.
. See Mass. Gen. Laws ch. 106, § 3-301 (2012).
. If SVU cannot enforce the Note, the judgment debt it holds cannot be based on the debt evidenced by the Note because the state court would not have entered a judgment on an unenforceable debt.
. As the Court has already addressed and analyzed the issue of transfer, for purposes of analyzing enforceability under section 3-309, the Court will assume that SVU was in possession of the Note prior to its disappearance. The purpose of this analysis is to illustrate that even if it is assumed that SVU possessed the Note at one time, the available evidence fails to demonstrate that SVU could have enforced the Note.
. Additionally, the individual attempting to enforce the absent instrument must prove the terms of the instrument and his right to enforce the instrument. Mass. Gen. Laws ch. 106, § 3 — 309(b) (2012); Marks, 439 B.R. at 251. Lastly, as an additional safeguard, the Court is not to enter judgment in favor of the enforcement seeker unless the Court determines that the payor is adequately protected against loss from alternative claims to enforce the same instrument. Id.
. At the hearing, Defendant stated that it was the holder of the Note, but did not provide the Court with any explanation as to how it came to that conclusion. Defendant did not *279address the definition of "holder” under Ma. St. § 3-201. See generally Jan. 23 Hr’g Tr.
. Section 3-201(a) reads, " ‘Negotiation’ means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder." Mass. Gen Laws ch. 106, § 3-201(a) (2012) (emphasis added).
. SVU claims to have acquired its rights directly from Nellie Mae. It would be possible for SVU to have acquired Nellie Mae’s rights via a transfer from Nellie Mae to a third party and then from the third party to SVU. As SVU has not claimed that it received its rights from a third party, the Court does not consider that possibility.
.As discussed previously, the Defendant’s evidence fails to establish that Nellie Mae ever physically delivered the Note to it. The same conclusion would be reached under this analysis.
. This analysis still assumes that SVU had possession of the Note at one time. The Court has previously found that SVU did not produce sufficient evidence to find that it did possess the Note.
. Money Store/Massachusetts, Inc. v. Hingham Mutual Fire Insurance Co., 430 Mass. 298, 718 N.E.2d 840, 842-3 (1999) ("Subro-gation and assignment are not the functional equivalent of each other. The former speaks in terms of broader equitable rights and remedies.”).
. The Agreement entered into by Nellie Mae and SVU provides for how and when assignment of Nellie Mae’s rights to SVU will occur. Def.'s Exhibit A, ¶ 1, Dudley, No. 11-05040, ECF No. 66. Furthermore, the Agreement provides that the agreement will be construed in accordance with the laws of Massachusetts. Id. at ¶ 9. Therefore, the legal analysis of any assignment made in accordance with the terms of the agreement would need to be construed in accordance with Massachusetts law. As such, we apply Massachusetts law to guide our determination of whether Nellie Mae assigned its rights under the Note to SVU, as SVU claims.
. Def’s Ex. B-12, B-15, and B-16, Dudley, No. 11-05040, ECF No. 66.
. Def.'s Ex. B-27, Dudley, No. 11-05040, ECF No. 66.
. Def.’s Ex. B-30, Dudley, No. 11-05040, ECF No. 66.
. At trial, it appeared that SVU believed all it needed to show was that the Agreement dictated that SVU would be assigned the Note if and when Nellie Mae drew from the reserve account. This evidence alone, if proved, would be insufficient circumstantial evidence of an assignment of a negotiable instrument. New Haven Savings Bank, 431 F.Supp.2d at 198 (describing evidence sufficient to show a transfer of a note). Even if circumstantial evidence was sufficient to prove assignment and all conditions precedent under the Agree*282ment had been satisfied, the presence of the recourse agreement would only establish that SVU was entitled to an assignment of the Note from Nellie Mae, not that Nellie Mae had assigned SVU the Note. Other circumstantial evidence of an actual assignment would be needed in order for SVU to succeed on this theory, such as records of an assignment, copies of the Note indorsed to SVU, admissible communications referring to and regarding the assignment, and/or notations on Debtor's credit report consistent with a transfer of Nellie Mae’s interest in the debt. SVU has not provided the Court with additional circumstantial evidence that could lead the Court to believe that an assignment from Nellie Mae to SVU has taken place.
. SVU did not sign the Note as a guarantor. Instead, SVU and Nellie Mae entered into a separate, independent recourse agreement. Common law principles of subrogation, rather than Massachusetts’ version of the UCC, apply to determine if SVU ever acquired the rights held by Nellie Mae under the Note. Cadle Co. v. DeVincent, 57 Mass.App.Ct. 13, 781 N.E.2d 817, 820 (2003) (“The defendant, having executed a separate contract of guaranty, rather than a guaranty that is part of the note, is governed by the provisions of that separate contract without immediate reference to the law governing negotiable instruments.”). Section 3-301 and 3-309 still apply and determine whether SVU may enforce the Note, given that SVU has or has not acquired the rights held by Nellie Mae through subrogation.
. Although subrogation may still apply in the absence of one or more of the five factors, Ogan, 701 N.E.2d at 334, the factors SVU has failed to prove are fatal to its claim. In particular, SVU’s failure to prove that it ever paid Nellie Mae in accordance with the terms of the Agreement on the Note is a crucial element. Without paying on the debt of another, there is no right to subrogation of the rights under that debt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496563/ | MEMORANDUM DECISION
WILLIAM F. STONE, JR., Bankruptcy Judge.
This decision recounts a cautionary tale about the inherent risks associated with a Chapter 11 case and the recriminations which fly when rosy expectations of a successful resolution of a multitude of serious interrelated financial issues are shattered and the businessman who started the process is left astounded by how quickly he has learned that one’s attempt to control events can come to grief in a reorganization case without the support of creditors. Filing a Chapter 11 case is something like a very sick man taking very potent medicine; it may restore him to health if it doesn’t kill him.
The particular matters before the Court in this Chapter 11 case are two Final Applications for Compensation for Debt- or’s general bankruptcy counsel, originally Copeland & Bieger, P.C., and then its successor with respect to representation of the Debtor in this case, Copeland Law Firm, P.C. In each of these firms Robert T. Copeland, Esq. has been the chief engagement partner for the Debtor’s representation. To these Applications an Objection has been filed by Richard D. Bays, the Debtor’s former president and sole shareholder. The Court has also considered a Comment which has been filed by the Official Committee of Unsecured Creditors. An evidentiary hearing was held in Abingdon on September 18, 2013, at which time the Applications and the Objection were taken under advisement. For the reasons set forth below, the Court will partially approve the Final Applications for Compensation.
FINDINGS OF FACT ■
Filing of Case and Application to Employ
This case was filed by the Debtor under Chapter 11 of the Bankruptcy Code on November 21, 2011. The petition was signed by its president, Richard D. Bays (Mr. Bays). The following day the Debtor filed an application, also signed by Mr. Bays, to employ Copeland & Bieger, P.C. as general bankruptcy counsel to represent it as debtor-in-possession. The application stated,
To the best of the Debtor’s knowledge, the partners and associates of Copeland & Bieger, P.C. do not have any connection with or any interest adverse to the Debtor, its creditors or any other party in interest, or its respective attorneys and accountants, except as may be set *289forth in the declaration of Robert T. Copeland....
(Application to Employ, at 3). Attached to the application to employ was the Declaration of Robert T. Copeland, Esq. which set out in relevant part:
6. Neither I, the Firm, nor its members to my knowledge represent or have any connection with any creditor or other party in interest in this case ... except as disclosed below in paragraph 9....
8. Prior to the commencement of Applicant’s Chapter 11 case, the Firm was employed by and was rendering specialized legal counsel and advice to Applicant relating to the claims of default made by numerous creditors, especially Space Petroleum and Brad Penn Lubricants ....
9. The Firm has not in the past represented nor does the Firm in the future plan to represent any related Debtors or principals of the Debtor. The Firm and Counsel’s connections in this case are: The principal of the Debtor is Richard Bays. Mr. Bays is a resident of Washington County Virginia. He is represented by John M. Lamie of Abingdon Virginia. A conflicts check was performed on all of the creditors of the Debtor Miners Oil, Inc[.], as well as on all customers of Miners Oil to determine if there were any disputes with any customers who might owe the Debtor money. As a result of the conflicts checks on both groups, it was determined that there were no conflicts with any creditors, that is, there were no active files for any creditor, however two current clients are customers of the Debtor. These two customers are Noah Horn Well Drilling from Buchanan County and B & F Parts and Service of Taze-well County. As of the date of the conflicts check, there was no outstanding balance due by B & F to the Debtor. However, Noah Horn Well Drilling had a very active account, purchasing products from the Debtor and paying for all purchases from Thursday one week to Wednesday the next on Friday every week, so that as of the date of the petition, there would be an outstanding balance due to the Debtor. The Noah Horn matters are handled by Daniel Bieger of the Firm and he has inquired as to whether or not there were any disputes with the Debtor over the account and he has been informed that there are none known. Counsel has requested the firm of Penn Stuart to serve as Special Counsel in this case to handle conflicts matters should any such conflict arise or become known in the case.
10. ... Prior to the commencement of this case, Applicant provided the Firm with a fee advance in the amount of Fifteen Thousand Dollars ($15,000) and a cost deposit of $1,046.00. The firm placed those funds in the Firms’ [sic] trust account and on November 18, 2011 transferred Five Thousand Eight Hundred Sixty Two Dollars and Fifty Cents ($5,862.50) to the attorneys account for services rendered on February 4, 2011 and from October 20th to November 21, 2011. If requested a detailed statement of pre petition services will be provided.
(Declaration, at 1-3). A copy of the Advance Fee Agreement was also attached to the application and, likewise, it was signed by Mr. Bays as president. The Advance Fee Agreement contained the following limitation:
The Company acknowledges that it is a closely held corporation whose sole shareholder is Richard Bays, and that the Firm has explained that it cannot represent both the Company and Richard Bays in any matter related to or arising under any reorganization case *290which may be filed by the Company because he is an “insider” under the Bankruptcy Code. The Firm’s representation of the Company excludes its representation of Richard Bays with respect to:
(1) his personal liability as a “control person” arising from any failure of the Company to pay federal or state withholding and other taxes;
(2) his filing of any proof of claim or interest in the Company’s bankruptcy case;
(3) the defense of any claim which may be asserted by any Trustee or any creditors’ committee against Richard Bays for the recovery of excess compensation, insider preferences, fraudulent transfers, setoffs, or for the equitable subordination of any claim or interest which he may assert;
(4) his assertion that any property in the possession of the Company is his personal property;
(5) any effort on his part either directly or indirectly to purchase any of the property of the Company from the Trustee (or from the Debtor in Possession if a sale not in the ordinary course of business is authorized by the Bankruptcy Court after notice and hearing);
(6) his assertion of any privilege against sélf-incrimination; and
(7) any other matters which in the exercise of the professional judgment of the Firm may create a conflict of interest in its representing the Company or the appearance of impropriety.
(Advance Fee Agreement, at 2-3). The Court sent a letter to Mr. Copeland expressing concerns regarding certain provisions of the Advance Fee Agreement unrelated to this decision on December 20, 2011. Mr. Copeland responded the next day stating that he would file an amended agreement. This Amended Engagement Agreement was filed on December 29, 2011 and was signed by Mr. Bays, as president, the same day. The agreement set forth, in relevant part:
8. Identity of Client. For the purposes set forth in this Agreement, and the Case contemplated herein, the Firm shall represent only the Client and no other party. All duties and responsibilities of the Firm created and imposed by this Agreement shall be owed only to the Client, and not to its board of directors or any officer, director, agent, or employee of the Client, or any other party to these proceedings....
13. “Persons in Control” Excluded. The following categories of persons or entities as set forth in the Bankruptcy Code are excluded from representation under this Agreement: (a) representation of officers, directors or other “persons in control” in connection with any personal liability; (b) filing of proofs of claim or interest by such “persons in control” in the bankruptcy case; (c) defense of any claims asserted by a creditor, party in interest, creditors’ committee or trustee against such “person in control” for the recovery of excess compensation, insider preferences, fraudulent transfers, set-offs, or for the equitable subordination of claims; (d) assertion or right to assert that any property in the possession of the Client is the personal property of such “person in control”; (e) any effort on the part of such “person in control,” either directly or through another person or entity, to purchase any of the property of the estate from the debtor, debtor-in-possession, or trustee if a sale not in the ordinary course of business is authorized by the Bankruptcy Court; (f) the assertion by any “person in control” of any privilege against self incrimination; and (g) any other matters *291which in the exercise of the Firm’s professional judgment may create a conflict of interest, an appearance of impropriety, or a legal or moral position not otherwise approved by the rules of professional conduct or applicable federal or state law or rules.
(Engagement Agreement, at 3-5). The Court approved the application to employ with the amended engagement agreement by Order entered January 6, 2012.
Interrelation of Miners Oil and Mr. Bays’ Divorce Case
At the time of, and for several years prior to, the filing of this case, Mr. Bays had been involved in what appears to have been an exceedingly acrimonious divorce case with his estranged wife, Laura Bays (Ms. Bays). Not only did this litigation present difficulties to Mr. Bays individually, it also created problems for his wholly owned corporation, Miners Oil Company, Inc. (Miners Oil), which apparently was claimed to be “marital property” under applicable Virginia domestic relations law. The divorce case was a driving factor in the filing of not only the Miners Oil case but also a separate Chapter 11 petition filed by Mr. Bays individually.1 Both bankruptcy cases were filed on the same day, which was the day before a scheduled hearing in Virginia state court in the divorce case.2 Pursuant to an order entered in that case on March 5, 2009, nunc pro tunc to December 13, 2006, Ms. Bays’ gas charging privileges were to be maintained at Miners Oil and any other store in which Mr. Bays held an ownership interest. Additionally, Ms. Bays had the right to advise Miners Oil if she needed money for an unforeseen circumstance and Mr. Bays was to “ensure that she receives the requested money.” These provisions were in addition to monthly support obligations payable by Mr. Bays in the amount of $1,000 by direct deposit to her bank account, payment of up to $5,000 of charges on a credit card issued to her upon a Miners Oil account, and payment for her house, vehicle, insurance, and other miscellaneous expenses. Among the various recitals contained in that March 5 order were references to various motions filed by Ms. Bays “for an injunction prohibiting and restraining [Mr. Bays] from interfering in the operation of Miners Oil Company, Inc., or any other of the marital business entities; ... for an order prohibiting [Mr. Bays] from directly or indirectly molesting, harassing, and imposing any physical restraint on her personal liberty; ... for an order requiring [Mr. Bays] to submit to a psychological examination by a licensed psychiatrist chosen by the court; ... for an order appointing a conservator to operate the marital business entities; ... [and] for an order finding [Mr. Bays] in contempt for his failure to comply with a previous order of this court in that he had interfered with the operation of the business he was specifically ordered not to interfere with.” (Order, at 1-2).
Following soon after the Court’s approval of the application to employ Copeland & Bieger, P.C., Mr. Copeland filed on January 23, 2012 an adversary proceeding against Ms. Bays seeking return of payments made to her or for her benefit by Miners Oil within the two year period preceding the bankruptcy filing.3 Mr. Cope*292land testified at the hearing on September 19, 2013 that the adversary proceeding was filed with the goal of getting some of those payments returned in order to fund ongoing operations and to stop her from using the corporate credit card. This strikes the Court as an after-the-fact rationalization to explain the filing of this adversary proceeding which in retrospect seems ill considered as an expenditure of scarce bankruptcy estate resources. Because all of the pre-petition payments appear to have been in the nature of current living expenses, the thought of obtaining a quick refund from Ms. Bays of these amounts seems fanciful. Turning to the indicated intent to stop Ms. Bays from using a Miners Oil credit card, the Court will make two observations: first, the adversary proceeding Complaint makes no reference at all to post-petition transactions or to Code § 549 which would be applicable to them; and second, it would seem that a much quicker and more effective means of stopping her continuing use of the credit card would have been simply to cancel the card she was utilizing and give contemporaneous notice to Ms. Bays and her attorneys that such action was being taken. The Court further notes that Mr. Copeland took no similar action at the time against the various business entities owned or controlled by Mr. Bays individually which were not under bankruptcy protection but owed substantial amounts to Miners Oil, which course of action seems open to considerable question in light of the allegation contained in paragraph no. 7 of the Complaint filed against Ms. Bays that Miners Oil had been “insolvent during the two (2) year period before November 21, 2011.” Accordingly, the Court does not find the advanced justification for the filing of this adversary proceeding to be entirely convincing. The Court does find, based on a review of the billing records and proration of some of the block time entries there contained, that $3,237.59 in fees were charged to the Debtor for the services related to the drafting, filing, and prosecution of this adversary proceeding.
Interrelation of Miners Oil, Mr. Bays, and Other Entities Owned by Mr. Bays
In addition to his sole ownership of Miners Oil, Mr. Bays had various other business interests, most of which had some obligations to, or other business relationships with, the Debtor. Schedule B, filed in the Miners Oil case, disclosed a general line item for Accounts Receivable totaling $1,590,521 and specific line items for Accounts Receivable from Bays Investments, Inc.4 (a corporation owned wholly by Mr. Bays) in the amount of $47,778, Progress Trucking Co., Inc. (a corporation owned 50% by Mr. Bays) in the amount of $449,777, and a shareholder receivable of $2,371,589 (representing money withdrawn from the company by Mr. Bays in a series of individual transactions).5 Schedule F in Mr. Bays’ individual bankruptcy case showed an undisputed debt owed to Miners Oil in the amount of $2,396,000. There was also overlap regarding Schedule E filed in each case with both listing priority claims owed to the Tennessee Department of Revenue (Miners Oil listed $117,329.85 *293and Mr. Bays listed $148,472.42 and $22,173.60), U.S. Treasury (both Miners Oil and Mr. Bays listed $36,515.90), Virginia Department of Taxation (Miners Oil listed $8,256.96 and $5,987 and Mr. Bays listed $14,047.48), Virginia Employment Commission (both listed $413.47), and Washington County Treasurer (Miners Oil listed $633.39 and Mr. Bays listed $1,703.75). Mr. Bays marked all of these claims as contingent and disputed. On Schedule D, filed in the Miners Oil case, Ally Financial ($38,049.84), BB & T ($5,138.55), Daimler Financial Services ($178,836.66), Ford Motor Credit ($48,-846.87), New Peoples Bank ($2,781,935), Stearns Bank ($33,297.66), and Wells Fargo ($42,879.29) are all listed as secured creditors. These creditors also appear on Mr. Bays’ personal Schedule F, in nearly the exact same amounts, as unsecured creditors and are marked contingent and disputed. On Amended Schedule F, filed in Mr. Bays’ individual case on February 17, 2012, he added Space Petroleum & Chemical Company in the amount of $1,900,000 and marked the claim as contingent and disputed.6 This claim was already included on Miners Oil’s Schedule F in the amount of $1,709,991.49. Schedule F filed in the Miners Oil case listed a claim of $436,590.78 to American Refining Group, Inc. While the claim was not listed on Mr. Bays’ schedules, American Refining Group filed a proof of claim in his case in the amount of $350,000 based on a personal guaranty of Miners Oil’s debt. Both Space Petroleum and American Refining Group filed non-dischargeability complaints against Mr. Bays with respect to their claims against him for credit extended to Miners Oil.7 Schedule G filed in the Miners Oil case showed that Miners Oil was leasing land from Bays Investments for $3,380 per month. On Schedule H, on which debtors are directed to list all co-debtors, Miners Oil only listed Mr. Bays as a co-debtor on the secured New Peoples Bank loan, but Mr. Bays did not list Miners Oil as a co-debtor on any claim.
Mr. Bays was also a majority owner of five incorporated convenience stores which were indebted to Miners Oil. The schedules in Mr. Bays’ individual case do not reveal anything regarding the debt owed to Miners Oil by the convenience stores, which were each valued at $1, but Schedule B in the corporate case lists “Accounts receivable” of $1,590,521, “Mise. Receivables” of $12,822, “Fuel tax Receivables” of $26,080, and then the receivables already listed for Bays Investments, Progress Trucking, and the shareholder receivable. Although not separately identified in Miners Oil’s schedules, it appears that approximately $800,000 of its general accounts receivable, that is to say more than 50%, represented fuel or other credit that it had furnished to these convenience stores. Mr. Bays shared ownership of the corporations owning these stores with an investment partner, Robert Breimann, who had also served as his long time personal and corporate attorney.8 Unfortunately *294these stores were in severe financial distress as well and proved to have no actual present ability to repay the credit which Miners Oil had extended to them.
Mr. Bays’ Removal from Management of Miners Oil
On January 23, 2012, the same date that he filed the adversary proceeding against Laura Bays, Mr. Copeland also filed on behalf of the Debtor an application to employ Kenneth Hess, a retired former employee, as its general manager and in that application stated “the owner of the Debt- or will reduce his compensation and role in management- of the Debtor, in favor of Mr. Hess.” (Application, at 2). On that same date, the Official Committee of Unsecured Creditors9 filed a motion to appoint a Chapter 11 Trustee and the United States Trustee also filed a motion to appoint a Trustee and objected to the Debtor’s payment of any compensation to Mr. Bays. The Committee filed a response to the Debtor’s application to employ Mr. Hess on February 3, 2012 stating,
The Committee believes that it is in the best interest of the estate and the creditors that Bays have no role in management of the Debtor’s business so that Hess will be able to make business decisions without the influence of Bays. Moreover, it does not appear that Bays should receive any compensation from the Debtor given his minimal role going forward and, as set forth in the Trustee Motion, his historic lack of involvement in the day to day operations of the business.
(Committee’s Response, at 2). Mr. Copeland, on behalf of the Debtor, filed a response to the Committee’s and the United States Trustee’s motions to appoint a trustee on February 6, 2012 and defended Mr. Bays’ actions under the business judgment rule and argued that a significant cause for the filing of this case was the constant draining of funds required by the divorce case. On February 8, 2012 Space Petroleum & Chemical Company joined the Committee’s and the United States Trustee’s motions to appoint a trustee. Twenty days later the Committee and the Debtor filed a joint motion seeking approval of an agreement resolving the Committee’s motion to appoint a Trustee. The agreement set out a number of terms, including a commitment by Mr. Bays to resign immediately as president of the Debtor and as a voting member of its board of directors and turn over management to a Chief Restructuring Officer. Contemporaneously with the filing of this motion, Mr. Copeland filed an application to employ P. Michael Kain as Chief Restructuring Officer. Both the agreement and the application were approved after notice and a hearing and orders to such effect were entered on March 15, 2012.
Subsequent Proceedings in Corporate and Individual Cases
Almost on the heels of this separation of Mr. Bays from any role in the management of Miners Oil came a development involving the company’s insurance coverage which in effect converted Mr. Kain’s job from Chief Restructuring Officer into Chief Crisis Management Officer. The chain of events which that development began destroyed any realistic possibility that the Debtor might be able to reorga*295nize and “earn” its way back to amicable business relationships with its creditors.
The Debtor’s principal business was the sale and delivery of bulk vehicle fuels and lubricants. This involved the bulk storage of petroleum products and their transport to its own facilities and the business locations of its customers. The continuation of this business was absolutely dependent upon its ability to maintain legally required liability insurance in force. Furthermore the Debtor was contractually obliged to its secured creditors to maintain casualty insurance in effect upon its property, which also was a requirement for the Debtor’s continued operation of its business as a Chapter 11 debtor. Apparently as a result of the bankruptcy filing, the Debtor’s existing insurer was unwilling to renew its existing coverages which were due to expire on July 7, 2012. Unless new insurance coverage could be obtained, it was obvious that the Debtor’s actual viability was at stake and the company would be faced with cessation of its operations, loss of its business, and presumably an early conversion to a Chapter 7 liquidation. On June 26, 2012 the Debtor filed an Emergency Motion for Permission to Incur Post-Petition Debt seeking approval to finance $169,650 for insurance premiums through two loans with Carter Machinery Co., Inc. and Imperial Credit Corporation. The terms of the loans required that the money be paid back in twelve equal monthly installments and that the loans be given administrative priority status under 11 U.S.C. § 364(b). The Motion was conditionally approved by Order entered June 27, 2012, which set a deadline of July 5 to file an objection thereto. The United States Trustee filed an Objection to Motion to Incur Debt on July 5, 2012 on the basis that the terms of the financing differed from those set forth in the motion. An Order was entered following the hearing on July 6, 2012 that approved the Debtor’s authority to enter into a premium finance agreement with IPFS Corporation and granted a first priority security interest in the insurance policies. A second Order was entered the same day granting the Emergency Motion on a final basis. Although replacement coverage was finally placed in the nick of time, the cost of that coverage was so much higher than had been the case previously that the company would be unable to sustain that expense for very long based on the level of its operations in bankruptcy. Accordingly, the Debtor was forced to pursue a sale of either its operating assets or itself forthwith because its clock was most definitely ticking.
The Debtor filed a Motion for Entry of a Sale Procedures Order on July 27, 2012 to establish bidding procedures to sell the Debtor’s assets based on a letter of intent received from Sampson Bladen Oil Company, Inc. Mr. Bays objected to the motion on the grounds that the Sampson Bladen offer was conditioned on receipt of a non-compete covenant signed by Mr. Bays and on a five year lease of the adjacent real estate used by Miners Oil but owned by Bays Investments, Inc. At the time of the objection Mr. Bays had not agreed to either condition and thus argued that the motion was premature. He asserted that Miners Oil had been working towards an auction without seriously considering the possibility of reorganizing. In referencing a plan he filed in this case on July 6, 2012,10 he stated that he was unable to respond to the Committee’s concerns regarding feasibility due to the lack of finan*296cial information available to him. Through his objection Mr. Bays sought denial of the Sale Procedures motion and an order requiring the Debtor to produce additional information concerning the sale. Ultimately amended bidding procedures were approved on August 28, 2012, over Mr. Bays’ objection, and an auction sale was held and concluded on September 12, 2012 at which Jones Oil Company, Inc. was the successful bidder. On October 2, 2012 the United States Trustee filed a Motion to Convert the case to Chapter 7 as it did not look like the sale to Jones Oil would close due to Mr. Bays’ refusal to lease or convey the real estate adjoining the Miners Oil property. The Debtor responded to the Motion to Convert by stating that the sale was scheduled to close on October 5, 2012 but was delayed due to Mr. Bays’ refusal to consent to lease or sell the adjoining parcels. The Debtor had filed a plan and disclosure statement crafted by Mr. Copeland in Mr. Bays’ individual case in an effort to liquidate his assets and consummate the sale to Jones Oil. The plan, filed by Miners Oil on August 14, 2012 and amended on September 5, called for a timely liquidation of Mr. Bays’ assets. Confirmation of that plan came on for hearing on October 17, 201211 at which time an agreement was reached with Mr. Bays whereby he would authorize the sale of the adjoining parcels of land. At that same hearing the Court ordered that the Miners Oil case would be converted on the United States Trustee’s motion unless the sale closed on or before November 5. A certification of closing was filed on October 30, 2012 indicating that the sale took place on October 23, 2012.
Applications for Compensation
Copeland & Bieger filed a series of five applications for compensation between January 26, 2012 and January 3, 2013, all of which were approved by the Court subject to a 15% hold-back on payment of otherwise approved compensation pursuant to the agreement between Mr. Copeland and the United States Trustee. The total amount sought in those five applications was $109,285.05 in fees and $2,439.89 in expenses for a total of $111,724.94, of which $94,460.01 was approved on an interim basis and $17,264.93 was held back pending the Court’s approval of the firm’s Final Application. The law firm of Copeland & Bieger was dissolved on December 31, 2012 and Mr. Copeland continued representation of the Debtor after that date with his new firm, Copeland Law Firm, P.C. A Chapter 11 Plan was confirmed on March 29, 2013. On April 23, 2013 Mr. Copeland filed Final Applications for Compensation on behalf of Copeland & Bieger, requesting final approval of fees and expenses that were already awarded on an interim basis and the amounts not yet awarded pursuant to the hold-back for a total of $111,724.94, and on behalf of Copeland Law Firm requesting approval of $14,125.00 in fees and $1,626.34 in expenses for a total of $15,751.34 subsequent to the dissolution of Copeland & Bieger and ending on the date of confirmation. In a pleading styled “Supplemental Fee Information” filed on May 31, 2013 (see footnote no. 12), the amount sought for fees in the latter application was increased from $14,125 to $17,050 with detailed entries provided.
On May 16, 2013 Mr. Bays, by counsel, filed an Objection to both Applications alleging a pre-petition conflict of interest and inadequate disclosure of such conflict to the Court. In the Objection Mr. Bays *297asserts that he believed Mr. Copeland was representing him in his personal capacity during pre-petition meetings on February 4, 2011 and from October 20, 2011 to the petition date. Mr. Copeland developed a “comprehensive legal strategy,” he states, where he and Miners Oil would each file for bankruptcy. Mr. Bays goes on to argue that he formed a personal attorney-client relationship with Mr. Copeland during this pre-petition planning period. Additionally, he contends that Mr. Copeland failed to make the requisite disclosures regarding the conflicts to the Court in his application to employ:
Mr. Copeland knew that at the time of filing the Miners Oil Company, Inc.’s bankruptcy petition that Miners Oil Company, Inc. was owed nearly $2.4 million from Richard Bays, that Miners Oil Company would likely be the largest creditor in Mr. Bays’ personal bankruptcy, and that he would have to take legal positions adverse to Mr. Bays’ stated legal goals to retain ownership of Miners Oil Company, Inc. and to negotiate settlements with his wife, Laura Bays, and his former attorney and business partner, Robert Breimann.
(Objection, at 6). Through his Objection, Mr. Bays requests that the orders approving the employment of Mr. Copeland, Copeland & Bieger, and Copeland Law Firm be vacated and that Mr. Copeland and Copeland & Bieger disgorge any and all fees and expenses previously approved.
Counsel for the Official Committee of Unsecured Creditors filed a Comment to the Final Application of Copeland Law Firm on May 17, 2013 requesting clarification regarding descriptions of certain time entries and some missing time entries. A hearing was held on May 22, 2013 at which Mr. Copeland’s request to file a supplement to his Application for compensation was granted.12 Daniel R. Bieger, Esq. appeared on behalf of Copeland & Bieger and Copeland Law Firm and asked for the opportunity to file a response to Mr. Bays’ Objection and to brief the issues of standing and estoppel; this request was also granted. On May 30, 2013 Mr. Bieger filed a response asserting that Mr. Bays does not have standing to file the Objection and it should be dismissed due to waiver or equitable estoppel. Mr. Bieger also filed a memorandum in support of his response. In summary, he argued that Mr. Bays does not have standing to object because a Chapter 11 Trustee has been appointed in his individual case and the Chapter 11 Trustee has not objected to either Application. Additionally he contended that, because Mr. Bays signed the application to employ and employment agreements on behalf of the corporation acknowledging that there could not be dual representation, he could not assert, so long afterwards, that there was dual representation based on the doctrines of waiver and estoppel. Mr. Bays filed a reply to the response on June 4, 2013 which largely reiterated the concerns raised in his Objection. He also discussed the unresolved issue of a February 4, 2011 initial conference, as the application to employ listed it but then Mr. Copeland stated he had no recollection of the meeting in his affidavit filed in opposition to the Motion for a Rule 2004 examination.13 Mr. Bays claimed that during the pre-petition meetings he *298divulged personal and confidential information to Mr. Copeland based on the belief that Mr. Copeland could resolve both his personal and business issues through bankruptcy.
A hearing was held on June 5, 2013 at which the Court overruled the contentions raised by Mr. Bieger of lack of standing, waiver, and estoppel and determined that the Objection would go forward as it raised questions that implicated the integrity of the process by which the original application to approve the employment of the law firm was determined. At that hearing counsel for the Official Committee of Unsecured Creditors confirmed that Mr. Copeland’s amendment to the Application for Compensation of Copeland Law Firm satisfied the Committee’s concerns. On June 6, 2013 the Court entered an Order setting forth its ruling from the hearing and limiting the scope of the proposed discovery to the time period beginning with the first professional contact between Mr. Copeland and Mr. Bays and ending with the date of the appointment of a Chief Restructuring Officer. It also limited the scope of the subject matter to any personal confidential information revealed prior to filing and any use of such information to the disadvantage of Mr. Bays, an itemization of pre-petition legal services whether or not charged for, all internal records relating to legal services provided to the Debtor and/or Mr. Bays pre-petition, and any other information supporting or relating to the allegations that Mr. Copeland was serving as Mr. Bays’ personal legal counsel or in any other manner made materially inaccurate or incomplete representations to the Court in the application to employ. Additionally, the Order directed the parties to confer and submit a discovery schedule, which was set forth in an agreed order entered on June 19, 2013; the order also set an evidentiary hearing for September 18, 2013.
Pursuant to that agreed Order, which was modified subsequently upon motions filed by counsel for the parties, on September 16, 2013 Mr. Bieger filed an amended witness list and the next day filed a list of seven enumerated exhibits consisting of the application to employ, original bankruptcy worksheets completed by Mr. Bays as president of Miners Oil, the amended engagement agreement, the Chapter 11 petition, five interim applications for compensation, the pre-petition billing statement from Copeland & Bieger, and e-mails from Mark Esposito, yet another attorney involved in the pre-filing discussions and planning, and Thomas M. Hicok, Mr. Bays’ accountant. Mr. Anderson also filed an exhibit list on September 17, 2013 detailing Exhibits A — M, which included the application to employ, amended fee agreement, a number of intra-office e-mails between Mr. Copeland and his assistant, Theresa Blankenship, or between Mr. Copeland and Mr. Bieger, the e-mails included in Mr. Bieger’s exhibits, the pre-petition billing statement, and “Robert Copeland Loose Papers.”14
Testimony Given at the Hearing
Mr. Copeland appeared and testified at the hearing on September 18, 2013, and largely reiterated the assertions made in his response filed to the Objection. He also discussed the circumstances surrounding the February 4, 2011 meeting. Mr. Copeland previously filed a response to Mr. Bays’ Motion for Rule 2004 Examination and he attached an affidavit to the *299effect that he had not charged for the meeting on February 4.15 Exhibit L, the pre-petition billing statement Mr. Copeland created and produced in discovery, did not show a meeting or a charge for February 4. The first entry is dated October 20, 2011. Upon questioning Mr. Copeland admitted that he later found a different version of the pre-petition billing statement, Exhibit 6, which showed a two-hour meeting on February 4 and that he charged Miners Oil for the time. While he knew that his previous production was inaccurate, as well as his affidavit, he did not take steps to remedy either beyond filing the amended pre-petition billing statement as an exhibit. Exhibit N was a note Mr. Copeland made on a legal pad that was dated “2/14/11”16 with the heading “Miners Oil.” Interestingly, this sheet does not even contain the name of Mr. Bays, although it does contain the name of Gary Charles, an employee of Miners Oil. Mr. Copeland also testified about a meeting which occurred on October 18, 2011 where he met with Mr. Bays and Mr. Hicok.17 At this meeting Mr. Copeland called Mr. Lamie and either spoke with him or left a voice message in order to refer Mr. Bays’ personal bankruptcy case to Mr. Lamie.
John M. Lamie, Esq. then testified regarding the commencement of his representation of Mr. Bays individually, which he stated began on November 10, 2011.18 This date was more than three weeks after the date of the October 18 meeting during which Mr. Copeland is indicated to have told Mr. Bays that he would need to be separately represented. When Mr. Anderson asked Mr. Lamie whether Mr. Bays had communicated any discontent with Mr. Copeland’s representation, he replied affirmatively, beginning in the Fall of 2012 when Mr. Copeland filed a plan in Mr. Bays’ case to liquidate his assets. Mr. Anderson also questioned him with regard to whether Mr. Bays wanted Mr. Lamie to assert claims against Mr. Copeland. Mr. Lamie answered that Mr. Bays had asked that he do so, but he declined as he did not see any damages and he was a personal friend of Mr. Copeland and would not have represented Mr. Bays in such an action. Mr. Lamie also testified, in response to questions by Mr. Bieger, that Mr. Bays came to him to represent him personally as he already had counsel for the corporation. He further stated that the timing of the filing for bankruptcy was at the direction of Mr. Bays, in consultation with his divorce attorney, due to a pending hearing in Mr. Bays’ divorce case set for November 22, 2011. Both Miners Oil’s petition and Mr. Bays’ petition were filed on November 21, 2011, with Miners Oil’s case being filed first and assigned a case number of 11-72854 and Mr. Bays’ case being filed next with a case number of 11-72855. Mr. Lamie stated that there was no effort to coordinate the filings with Mr. Copeland except for the looming divorce court hearing.
Mr. Bays testified next concerning the bases for his Objection and his relationship with Mr. Copeland. He discussed going to see Mr. Copeland to resolve his corporate and personal issues regarding his divorce *300and his conflicts with his business partner. He stated that he told Mr. Copeland about the approximately $800,000 in debt owed from the convenience stores to Miners Oil and his personal obligations to the company. Mr. Bays testified that he thought of Mr. Copeland as the “quarterback” who would align things both personally and on a corporate level for him. Because of this, he stated that he told him everything concerning his divorce and the debts owed among his various entities. Mr. Bays contended that Mr. Copeland made the decision that he would represent Miners Oil, not Mr. Bays, and then'referred his personal bankruptcy to Mr. Lamie. He continued that Mr. Copeland never informed him that he would have to take an adverse position to him personally, and if he had done so, Mr. Bays would have “found the door” and left. Upon questioning by Mr. Bieger, he later admitted that there was no confidential information revealed to Mr. Copeland as all of the information provided would have been disclosed in the bankruptcy petition. On redirect, Mr. Bays testified regarding his agreement to be removed as president of Miners Oil and to his replacement by a Chief Restructuring Officer.
Subsequent to Mr. Bays’ testimony, Mr. Bieger moved to dismiss the Objection on the ground that no confidential information had been revealed. The motion was denied due to outstanding issues of disclosure to the Court. After the motion was denied, Mr. Bieger called Mr. Thomas Hi-cok, a certified public accountant who worked with Mr. Bays. Mr. Hicok testified that he participated in a meeting with Mr. Bays and Mr. Copeland on October 18, 2011 where Mr. Copeland explained that he could not represent both Mr. Bays personally and Miners Oil. He also stated that Mr. Copeland contacted Mr. Lamie while they were in that meeting to discuss Mr. Lamie’s representation of Mr. Bays in his personal bankruptcy. Mr. Ken Hess, general manager of Miners Oil, was called next. Mr. Hess testified that he had discussions with Mr. Bays concerning the roles of attorneys in the case and that he told Mr. Bays that Mr. Copeland represented Miners Oil and not him personally. Mr. Gary Charles, who worked in operations for Miners Oil and was called next, spoke of similar situations where Mr. Copeland explained to Mr. Bays his role in representing Miners Oil. He added that when Mr. Bays asked Mr. Copeland questions regarding his personal affairs, Mr. Copeland told him that he would need to speak to Mr. Lamie about those issues. Finally, Mr. Travis Proffitt, the bookkeeper and accountant for Miners Oil, was called. He also affirmed that all meetings held which he attended were relative to Miners Oil and no personal legal advice was given to Mr. Bays. Following closing arguments the Court took the Final Applications and Objection under advisement. Before doing do, however, the Court invited the United States Trustee’s trial attorney, who had been present during the hearing, to comment on the questions presented to the Court. He advised that after listening to the testimony which had been given, the United States Trustee did not choose to join in the Objection asserted by Mr. Bays.
CONCLUSIONS OF LAW
This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1834(a) and 157(a) and the delegation made to this Court by Order from the District Court on July 24, 1984 and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. An application for employment is a “core” bankruptcy proceeding pursuant to the particular authority of 28 U.S.C. § 157(b)(2)(A) for “matters concerning the *301administration of the estate” and consideration of an application for compensation to be paid from the bankruptcy estate is likewise a “core” proceeding pursuant to § 157(b)(2)(B) as it involves “allowance or disallowance of claims against the estate.”
The circumstances presented in this case are quite unusual. The issue raised in the Objection to the Copeland Law Firm’s Final Application was not raised at the time the Debtor filed its application to employ the firm to represent it as lead counsel to it as debtor-in-possession in this case or as an objection to any of the five interim fee applications which the firm filed thereafter. The Objection was not filed by any creditor of the Debtor, the United States Trustee, the Unsecured Creditors’ Committee, which has been quite active in the case, or the Debtor itself. Indeed the party raising the Objection, Mr. Bays, is a major obligor to the Debtor as well as being the Debtor’s owner, former CEO, and signatory on behalf of the Debtor to the latter’s application to employ the firm as its bankruptcy counsel. The impetus behind the filing of the Objection is not based on any contention that the firm failed to render competent and aggressive legal advice to the Debtor as debtor-in-possession, but that it did so in such a zealous manner that the interests and wishes of Mr. Bays were disregarded and that Mr. Copeland became adverse to him. While the nature of the Objection suggests “sour grapes” on the part of Mr. Bays and a desire to retaliate against Mr. Copeland, this Court nevertheless concluded that it was appropriate to conduct a full evidentiary hearing on the issues raised because they implicate the integrity of the information provided to the United States Trustee and the Court upon which the latter’s original approval of the application to employ the firm was based.
Obligation of Counsel to Disclose “Connections” with Parties in Interest
During the past decade this Court has had several opportunities to review and enforce the obligation of counsel for a Chapter 11 debtor seeking to be employed as general bankruptcy counsel for the client as debtor-in-possession, that is to say in its effective capacity as bankruptcy trustee, to disclose “all connections” which the attorney has with the debtor, creditors and other parties in interest. The Court will summarize these decisions in chronological order.
In the case of In re Five Forty Park Corp., No. 03-04746 (Bankr.W.D.Va. Sept. 30, 2004), this Court prospectively disqualified counsel due to its failure to disclose the firm’s pre-filing representation of one side of a bitter inter-family dispute involving the corporate debtor. This Court reviewed in some detail the disclosure responsibilities imposed upon counsel by Bankruptcy Rule 2014, which
obliges the trustee or debtor-in-possession to include in an application for employment of a professional person, “to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, [and] any other party in interest”, and similarly requires the professional person to make “a verified statement ... setting forth the person’s connections with the debtor, creditors, [and] any other party in interest”. This disclosure must be explicit enough for the court and other parties to gauge whether the person is not disinterested or holds an adverse interest. In re Midway Industrial Contractors, Inc., 272 B.R. 651, 662 (Bankr.N.D.Ill.2001)[.] Published bankruptcy court decisions are quite consistent in requiring that debtors-in-possession and their attorneys, whose employment is sought to be *302approved, be meticulous in disclosing “all connections” with the debtor and other parties in interest, the failure to do so justifying a court’s taking significant punitive or corrective action. If no actual conflict of interest is presented and the Court is satisfied that there was no intent to conceal on counsel’s part, disqualification of counsel and/or denial of all compensation is not mandated and the proper remedy is left to the Court’s broad discretion. See In re Northwestern Corp., No. 03-12872(CGC), 43 Bankr.Ct.Dec. 93, [2004 WL 1661016] 2004 Bankr.LEXIS 1023 (Bankr.D.Del. July 23, 2004) (disqualification denied because disclosures made early in case to United States Trustee indicated no intent to conceal); and In re Midway Indus. Contractors, Inc., 272 B.R. 651, 663-65 (Bankr.N.D.Ill.2001). Nevertheless, because “[t]he objective of requiring disclosure is not so much to protect against prejudice to the estate, but to ensure undivided loyalty and untainted advice from professionals^] [citation omitted] ... lack of disclosure in and of itself is sufficient to warrant disqualification, even if in the end there was no prejudice.” Id., 272 B.R. at 664. See also In re Rabex Amuru of North Carolina, Inc., 198 B.R. 892 (Bankr. M.D.N.C.1996) (attorneys for debtor removed because of appearance of impropriety, even though no harm done to debtor).
Five Forty Park, slip op. at 22-23. After identifying five specific omissions of disclosure which the Court believed to be material, it concluded that “[t]he magnitude and seriousness of these failures to disclose were such as to provide the Court and the United States Trustee with a materially incomplete and misleading understanding of the nature of [the firm’s] pre-petition involvement with the Debtor and its equity and creditor constituencies.” Id. at 18.
The case of In re Byington, 454 B.R. 648 (Bankr.W.D.Va.2011), involved an unusual factual situation where the Debtors’ son, who had been the recipient of a transfer by the Debtors of their ownership stakes in three closely held corporations, provided to their bankruptcy counsel a check for the required $1,039 filing fee. This Court summarized the pertinent facts and its conclusions as follows:
The transfer of the companies to the son was disclosed, as it had to be, in [the Statement of Financial Affairs], but the combined facts of the transfer to the son, his participation in the conference at which the decision, whether provisional or final, was reached for the parents to file a Chapter 11 case, and his providing the case filing fee for that decision to be implemented were not mentioned in the Application or the Firm’s accompanying Declaration. The Court concludes that such facts should have been disclosed as they may bear on the extent, if any, to which the son is involved as a controlling force in the parents’ bankruptcy and indeed their very decision to file bankruptcy and the timing for doing so, as well as whether as a result of the son’s involvement the Firm would feel itself constrained from examining with a completely unclouded eye the propriety of that transfer to him.
Id. at 658. Although in view of the singular facts of the case the Court did not disqualify counsel for his failure to disclose these “connections” with a party in interest, it voiced, with specific reference to the information required in the Statement of Financial Affairs, the general principle that “[a]ny close or debatable issue ought to be resolved in favor of disclosure.” Id. at 650. The Court concludes that this general principle is equally applicable to the disclosure of the “connections” required by Rule 2014.
*303In the case of Circle T Pipeline, Inc., No. 11-70556, 2011 WL 9688240, 2011 Bankr.LEXIS 2490 (Bankr.W.D.Va. April 27, 2011), the United States Trustee took issue with the corporate Debtor’s counsel’s pre-petition representation of one Larry Sturgill, who was the corporation’s accountant and a co-obligor of a portion of its secured debt. Mr. Sturgill considered the attorney in question, Mr. Copeland in fact, to be the best Chapter 11 bankruptcy reorganization attorney around and recommended to the corporation that Mr. Copeland be engaged to file a Chapter 11 petition for it. Knowing that Mr. Copeland could not continue to represent him and also represent the corporation, Mr. Stur-gill on his own initiative retained another attorney to represent his interests in the case. This Court summarized the situation presented and its conclusions in considering the assertion by the United States Trustee that counsel’s disclosure of his “connection” to Mr. Sturgill had been inadequate to disclose all relevant facts, as follows:
The Court notes, however, that we are not dealing with whether the disclosures made would have been sufficient for Mr. Sturgill to disclose all of his connections with the Debtor if he sought to be employed as its accountant in this case, which definitely would not have been the case, but whether Mr. Copeland, who properly disclosed his “connection” with Mr. Sturgill, should have made an inquiry sufficient to disclose to the Court all of the information needed for it to assess properly the likely extent that Mr. Sturgill’s economic interests would be in play in the bankruptcy case. The Court acknowledges that such would have been the better practice and much more in line with the obligations of counsel to disclose “[a]ll facts that may have any bearing on the disinterestedness of a professional” and “to make sure that all relevant connections have been brought to light.” In re Leslie Fay Cos., 175 B.R. 525, 536 (Bankr.S.D.N.Y.1994). Even so, it is only fair to observe that the extent of the information provided about Mr. Sturgill may well have been shaped by the questions raised by counsel for the United States Trustee when Mr. Copeland sought to raise this issue of his representation of Mr. Sturgill prior to his agreeing to undertake representation of the Debtor. Even if this additional information had been provided to the Court regarding the nature of Mr. Sturgill’s involvement with the Debtor, it does not see that it changes the Court’s assessment that under the circumstances presented here it ought not to disregard the Debtor’s clearly expressed desire to continue to be represented by Mr. Copeland. In summary, this additional information regarding Mr. Sturgill’s economic and professional involvement with the Debtor does not cause the Court to question counsel’s ability to provide untainted devotion to the interests of his client in this case or to suspect that counsel has intentionally abbreviated his disclosures to the Court and the United States Trustee. If the Court concluded that either was the case, its analysis would be much different.
Id. at *53-55.
Most recently, in the case of In re Vencill, No. 10-72956 (Bankr.W.D.Va. October 31, 2011), this Court took exception to the failure of counsel for an individual debtor to disclose the fact that he had given pre-filing advice to the client concerning a transfer of family property to her son which she made after engaging the attorney to file a Chapter 11 case. This Court concluded that this involvement should have been disclosed in the following words:
*304The Court concludes that Debtor’s [counsel’s] pre-petition advice to his client concerning a transfer of property which she wished to effect to a close family member for personal rather than business reasons was a “connection” which he was obliged to disclose explicitly in his Declaration accompanying the application to approve the Firm’s employment. The disclosure which was made, that the Firm had provided “specialized” advice to the client was vague to say the least and woefully inadequate to apprize the Court of a matter which could compromise counsel’s vigorous representation of the interests of the bankruptcy estate. The fact that he had given advice to her on such a matter, irrespective of what the advice was, obviously was a factor which reasonably would influence his professional advice to the client as post-filing debtor-in-possession about whether that transaction was suspect.
Vencill, slip op. at 21-22. Counsel’s failure to disclose that “connection” coupled with his post-petition efforts to obscure its existence from the Court and other parties in interest resulted in the vacating of the order approving the application to employ such counsel and such counsel’s disqualification.
Other bankruptcy courts have also noted the duty of counsel wishing to be employed as general bankruptcy counsel for a Chapter 11 debtor-in-possession to disclose sufficient detail concerning prefiling connections with parties in interest that the Court and the United States Trustee are fully informed as to the relevant circumstances surrounding such connections. This principle was upheld and applied by Judge Kevin Huennekens of the Bankruptcy Court for the Eastern District of Virginia in the case of In re Lewis Road, LLC, No. 09-37672, 2011 WL 6140747 (Bankr.E.D.Va. Dec. 9, 2011). There the Debtor in its application to employ stated that proposed counsel had “connections with a creditor” and that the “potential conflict of interest has been waived” but without providing any other detail. Id. at *1-2. Proposed counsel did not file its own certification pursuant to Rule 2014. Citing to and quoting from this Court’s Circle T Pipeline decision, Judge Huennekens held that this disclosure was insufficient to satisfy the requirement of Rule 2014 due to its lack of detail. Id. at *12. The facts of that case were considerably more egregious than those present here as the firm had more than just a “connection” to a creditor, it concurrently represented the creditor and the debtor-in-possession in the bankruptcy case, but the principle does not vary whether the facts are egregious or only problematic. Even more recently Judge Thomas Small of the Eastern District of North Carolina Bankruptcy Court denied all compensation to a firm representing a Chapter 11 debtor-in-possession due to its failure to disclose that it also represented the 50% owner of a limited partnership to which the Chapter 11 debtor client had transferred property of significant value shortly before her petition filing. Judge Small noted:
[E]ven if the firm was unsure about whether the joint representation was permissible, at a minimum [it] certainly had an obligation to disclose the potential conflict and to bring the issue to the court’s attention. [Its] failure to make that required disclosure meant that the court reviewed the employment application on incomplete information and the misleading statement that the firm did not have a conflict and was disinterested.
In re Mitchell, 497 B.R. 788, 793 (Bankr.E.D.N.C.2013). See also In re LPN Healthcare Facility Inc., 498 B.R. 196, 200 *305(Bankr.S.D.Ohio 2018) (order approving employment of accounting firm vacated due to such firm’s failure to disclose as a “connection” the fact that it also was providing accounting services to individuals and entities involved with the debtor-in-possession).
Ethical Responsibilities of Counsel
This Court also has had occasion to address the intersection of an attorney’s responsibilities as an officer of the court with the ethical obligations the attorney has under applicable state bar Rules of Professional Responsibility. In the same Circle T Pipeline decision already noted, the following discussion appears:
Lastly, the authority of bankruptcy courts to require adherence to the applicable ethical obligations of the attorneys practicing before them is well established. As this Court noted in a joint decision signed by all three of its judges:
Bankruptcy courts are statutorily designated as “a unit” of the federal district courts and bankruptcy judges are declared to be “judicial officer[s]” of the district court by 28 U.S.C. § 151, which provides as follows:
In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.
It is part of the inherent authority of bankruptcy judges as judicial officers of the United States District Courts to regulate the practice of attorneys permitted to practice before them. See 11 U.S.C. § 105(a) and 2 Collier on Bankruptcy ¶ 105.04[7][b] at p. 84.4-84.6 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2005). McGahren v. First Citizens Bank and Trust Co. (In re Weiss), 111 F.3d 1159, 1171 (4th Cir.1997), cert. denied, 522 U.S. 950, 118 S.Ct. 369 [139 L.Ed.2d 287] (1997) (“A federal court also possesses the inherent power to regulate litigants’ behavior and to sanction a litigant for bad-faith conduct.”, citing and quoting from In re Heck’s Properties, Inc., 151 B.R. 739, 765 (S.D.W.Va.1992) (“It is well-recognized, ... quite apart from Rule 9011, that courts have the inherent authority to impose sanctions upon counsel who is found to have acted in bad faith, vexatiously, wantonly or for oppressive reasons.”))
In re Bowman, Misc. Proc. No. 07-00701, slip op. at 12-13 (Bankr.W.D.Va. March 31, 2008), aff'd, No. 7:08CV00339, 2010 U.S. Dist. LEXIS 62004, 2010 WL 2521441 (W.D.Va. June 21, 2010), quoted in In re Circle T Pipeline, 2011 WL 9688240 at *12, 2011 Bankr.LEXIS 2490 at *39-40.
DISCUSSION
There is no evidence before the Court that Mr. Copeland, or either law firm in which he is or has been a principal, has ever filed a pleading, written a letter, or made an appearance in court on behalf of Mr. Bays individually. Furthermore, while it is no doubt true that Mr. Bays did share with Mr. Copeland information about his personal business affairs, the Court has not found any specific information which was provided that any attorney representing Miners Oil would not have needed to know about the connections between the corporation’s obligations and claims and the business and personal affairs of Mr. Bays individually in order to *306represent the corporation properly in a reorganization case, even indeed just to be able to file accurate schedules of its assets and liabilities. Mr. Bays in his testimony was unable to point to any specific information provided which the corporation and he individually were not obliged to disclose to the Court and creditors in connection with their respective cases. Neither was he able to point to any truly confidential information, nor has the Court been able to discern any, that he disclosed to Mr. Copeland which the latter then turned around and used to his prejudice. The Court is further satisfied that Mr. Copeland has provided capable and vigorous representation of the Debtor in this case, which, to say the least, has proved to be a very challenging one.
Neither does the Court perceive that Mr. Copeland violated any ethical obligation owing to Mr. Bays. That follows from the Court’s conclusion that no actual attorney-client relationship was established between the two of them. There is no evidence that Mr. Bays ever expressly asked Mr. Copeland to represent him or that Mr. Copeland expressly agreed to represent him. Although not determinative, neither is there any evidence that Mr. Copeland ever charged Mr. Bays for any of the conferences which the two of them had or any other legal work he did involving Mr. Bays or his companies, or that Mr. Bays asked or expected to be billed for anything which Mr. Copeland did. Certainly there was a period of time during which Mr. Bays might have requested that Mr. Copeland represent him personally and suggest some other attorney to represent Miners Oil, but that path was not taken.
The Court concludes that, at most, Mr. Bays was what Rule 1.18 of the Virginia Rules of Professional Conduct governing attorneys terms a “prospective client.” An attorney does have a duty to a “prospective client” even when “no client-lawyer relationship ensures,”19 but it is not, as Mr. Bays would have it, a duty never to take a position adverse to that prospective client, but rather one not to “represent a client with interests materially adverse to those of the prospective client in the same or a substantially related matter if the attorney received information from the prospective client that could be significantly harmful to that person in the matter[.]” Rule 1.18(c). Even in that situation representation is permissible if both the “affected client and the prospective client have given informed consent, in writing” and certain other conditions are satisfied. Rule 1.18(d). In this case, however, Mr. Bays has been unable to point to any information he disclosed to Mr. Copeland which was not being made known anyway in the bankruptcy filings for himself and his company. Just as Mr. Lamie noted in his testimony at the hearing, I have not seen any evidence of any actual injury to Mr. Bays from Mr. Copeland’s use of any information which would not have been known to any attorney properly representing Miners Oil in its case. We must not lose sight of the fact that Mr. Bays had multiple capacities in which he was acting. To be sure one of those capacities was Richard Bays as an individual having very substantial financial obligations which he was not in a position to satisfy and having to respond to pressing claims advanced by his estranged wife in a bitter divorce case. Another capacity, however, was as the owner and president of Miners Oil, which also had major obligations to creditors which it was not in a position to satisfy, a company which seems to have been the crown jewel of Mr. Bays’ business empire *307and the failure of which would very likely lead to the loss of all or substantially all of his other business interests. In short, Mr. Bays had plenty of incentive to get the best bankruptcy attorney available to attempt to restructure and save Miners Oil. The testimony of Mr. Hicok, Mr. Bays’ accountant, at the hearing set forth in persuasive detail the dangers to Miners Oil resulting from the divorce case and the need as well as the intent, first and foremost, to hire Mr. Copeland to guide the company through an attempted restructuring in bankruptcy. So, is that all that needs to be considered and said? Regretfully, the Court concludes that such is not the case.
There is no mistaking that Mr. Bays had a genuine feeling that Mr. Copeland had betrayed him when the latter took actions on behalf of Miners Oil in its capacity as debtor-in-possession in its case and his individual case which Mr. Bays considered to be adverse to his interests and wishes. He seems to have believed that, although he approved Mr. Copeland’s representation of the corporation in its bankruptcy case, such representation would be carried out to advance what he hoped to accomplish, stated more baldly, that Mr. Copeland would “have his back” as the popular expression goes, and that the former would act as a sort of bankruptcy Wizard of Oz to control the course of both the corporate and individual cases for the overall benefit of Mr. Bays. The Court does agree with the contention made by Mr. Bieger that Mr. Bays is estopped to complain that Mr. Copeland ultimately represented the corporation’s fiduciary obligations to its creditors vigorously even when that proved highly objectionable to Mr. Bays. That ultimate performance, however, was unknown at the time the cases were filed. At that time Mr. Bays was in control of Miners Oil and Mr. Copeland was in the awkward position of having his client’s largest debtor being not only its president but also its sole shareholder. What the course of the two cases might have been, if the corporation’s creditors had not decided to become actively involved with very vigorous and capable representation of their own to force Mr. Bays out of the management of his own corporation, is unknowable. The plain fact, though, is that such active creditor participation forced the hands of both Mr. Bays and Mr. Copeland and brought home to them quickly that they no longer were managing events but rather were having to respond to the actions taken by others, specifically, the United States Trustee, the Creditors’ Committee, and some large unhappy creditors, all of such parties being very well represented. More pithily, they filed the corporate case playing offense, but very soon were having to play defense against some potent adversaries.
In retrospect and under careful scrutiny the shortcomings of counsel’s disclosure of a “connection” to Mr. Bays are not difficult to discern. The most striking aspect of that disclosure is that, although it does say that there is a “connection” to Mr. Bays, it discloses precious little about the actual nature of that “connection.” It simply states that Mr. Bays is the “principal” of the Debtor, that he lives in Washington County, Virginia, and that he is represented by separate counsel, Mr. John Lamie, as if that ended any further consideration of how the Debtor’s counsel might be affected by the unexplained connection to Mr. Bays. The information provided, while true, does nothing to make the Court aware of how intertwined the business affairs of the Debtor and Mr. Bays were, that he was not only its “principal,” but also its largest debtor. It gives no hint that the very filing of the case was substantially related to the divorce case in *308which Mr. Bays was involved, nor of the tremendous size of the aggregate debt owing to Miners Oil by the. several convenience stores of which he was the majority owner. More important than any of these circumstances, however, as potentially affecting the firm’s “disinterestedness,” was the fact that Mr. Bays had been intimately involved in the discussions with Mr. Copeland leading up to the decision to file the corporate case, that his personal representation by Mr. Lamie followed rather than preceded his initial conferences with Mr. Copeland and the decision to put the corporation into bankruptcy, and that Mr. Copeland had made the recommendation that Mr. Bays retain Mr. Lamie and had made the initial contact with the latter on Mr. Bays’ behalf. These facts, at least in summary form, were what was needed to apprise the Court fully as to the nature of the “connection” between the firm and Mr. Bays which might affect the independence of the former from the influence of the latter and therefore its sole loyalty to the interests of Miners Oil and its creditors without regard to the personal interests and wishes of Mr. Bays.
DECISION
I have taken more time considering this case than is my usual practice because it has been difficult to arrive at a decision which seems satisfying as being both correct in its application of the governing legal principles and fair. Certainly no creditor has voiced any support for the Objection and the United States Trastee, who has not been at all reluctant to challenge Mr. Copeland’s Chapter 11 representation in other cases, has stated on the record, by counsel, that she does not join in the Objection. So there seems to be a consensus that the firms have earned most, if not all, of the compensation sought in this case. I recognize that Mr. Copeland had to make decisions on the fly at the same time as he was dealing with a myriad of issues associated with the filing and prosecution of this case, not to mention innumerable other time pressures and demands which are part of the reality of a very busy bankruptcy legal practice. In contrast I come along two years later in the cool of the evening and with all the time I have thought necessary to review his actions' under a microscope as it were. I have not found any reported decision which closely mirrors the facts presented here as I have determined that Mr. Copeland never represented Mr. Bays personally and that he did not use any confidential information which the latter provided to him to the latter’s detriment. Even so, I have concluded that Mr. Copeland’s disclosure was inadequate and that the principle involved is so critical to the proper functioning of the bankruptcy system that it must be upheld even, or perhaps especially, in cases having hard facts. The applicable rules are well known to Mr. Copeland as he has been a very active bankruptcy attorney for over thirty years and during that time has filed and handled numerous Chapter 11 cases. Indeed he was involved, either as counsel for the debtor-in-possession or for some other party in interest, in all four of my prior decisions dealing with these matters which have been reviewed in an earlier portion of this opinion. The critical principle involved is that the disclosure of an attorney’s “connections” with parties in interest must be sufficiently detailed so that any issues potentially affecting the disinterestedness of counsel or his undivided loyalty to the debtor-in-possession (or other trustee) are brought to the attention of the United States Trustee and the Court. Here Mr. Copeland recognized, correctly, that he did have a “connection” to Mr. Bays, but then only noted facts which would not raise any concern about Mr. *309Bays having any influence over counsel’s independence and objectivity. Indeed the facts which were disclosed are such as to cause one to wonder why Mr. Bays had been listed as a “connection” in the first place. I conclude, as I did in the Five Forty Park Corporation case earlier quoted, that the disclosure which was made left the Court “with a materially incomplete and misleading understanding of the nature of [the firm’s] pre-petition involvement” with Mr. Bays as not just the Debtor’s “principal” but also its largest debtor and such individual’s various conferences with Mr. Copeland prior to his being represented by separate counsel. Another very important fact was the strong connection between the filing of the Miners Oil petition and the acrimonious divorce case in which Mr. Bays was then involved. These are the kind of facts that would prompt the Court and the United States Trustee to perk up their ears and consider whether it was possible for any attorney who had been involved so deeply in these discussions and the decision to file the case to be able to be free of the influence of the personal factors at play in this bankruptcy. Such a disclosure would likely have resulted at least in serious discussions between counsel and the United States Trustee and more likely a hearing at which the situation might have been fully explored before making the decision whether to approve the firm’s employment. This is not by any means to say that the firm’s employment would not have been ultimately approved, but rather that any such approval, if that were determined appropriate, would have occurred with all of the cards on the table and after a careful review of the situation which satisfied the Court that the firm could be wholly independent of the pressures associated with the many daunting problems facing Mr. Bays. Such an examination might well have caused the firm to pause and think through the implications of filing the adversary proceeding against Ms. Bays or, at the very least, the timing of doing so at such an early stage of the case as the only proceeding of its kind being filed, and whether this was being done because it gratified Mr. Bays or was likely to provide real benefit to the restructuring of Miners Oil.
I conclude that no persuasive showing has been made that the legal services involved with the adversary proceeding against Ms. Bays provided a benefit to Miners Oil. The burden =of making such a showing, especially in a situation such as this one where the Court had expressed on the record its concerns about the motivation for filing the action against Ms. Bays, rests on the individual or entity seeking allowance of compensation for doing so. I further conclude that such proceeding was filed without proper review and consideration by counsel of its prospects at that time to actually advance the Debtor’s restructuring or sale. Accordingly, I have decided to disallow compensation in the amount of $3,237.59 associated with those services.20 This disallowance is separate and apart from any disallowance as a result of the disclosure issue.
*310What action I should take with respect to that disclosure issue has proved to be the most difficult question to decide. I recognize that Mr. Copeland’s extensive Chapter 11 experience as counsel for many debtors-in-possession and his history of involvement in the cases resulting in the Court’s prior decisions which have already been reviewed in this opinion could justify a very serious sanction against his firms, even up to disallowance of all compensation. I believe that some judges might well reach that result, especially considering that absent the filing of the Objection the Court almost certainly would never have had occasion to know what had transpired between Mr. Bays and Mr. Copeland in connection with the decision to file this case. There are, however, factors weighing towards a much more modest sanction. The Court would identify those factors as being:
1. The timing of the filing of the Objection only after very substantial legal services had been rendered.
2. The very difficult and vigorous representation provided by Mr. Copeland to Miners Oil as debtor-in-possession after the removal of Mr. Bays from management of the corporation, even in the face of Mr. Bays’ quite evident displeasure, and the creditors’ satisfaction with those services.
3. The possibility that the Court’s ruling in the Circle T Pipeline case might have given a misleading signal to Mr. Copeland as to what the Court would accept as sufficient disclosure of the circumstances surrounding a disclosure of a “connection” to a party in interest other than the debtor. Even though in that decision, as already noted above, I specifically cited the Leslie Fay Cos. case and discussed the obligation of an attorney seeking approval of employment as counsel for the debtor-in-possession to disclose “[a]ll facts that may have any bearing on the disinterestedness of a professional”, I denied a motion filed by the United States Trustee to vacate the order approving Mr. Copeland’s employment on the ground that his disclosure of a “connection” to Mr. Sturgill failed to reveal relevant facts concerning that connection which might affect counsel’s disinterestedness, the same general issue which is presented in this case. So, why does a different result follow here? There are several reasons. First, in that case the “connection” related to advice given to the corporation’s accountant and guarantor of some of its loans, not to the person in control of the debtor and the person to whom counsel would answer. Second, the accountant had recognized that Mr. Copeland could not represent both him and the corporation in a bankruptcy case and on his own initiative had sought out separate counsel to represent him in the case. Third, the motion was filed at an early stage of the case and management of the Chapter 11 debtor client at a hearing on the United States Trustee’s motion had voiced its strong support of Mr. Copeland and desire that he continue to represent it in the bankruptcy case, so to have granted the motion would have deprived the debtor of its desired legal counsel to handle its reorganization case. Fourth, my assessment that the facts in question there would not have changed my decision to approve employment. Fifth, the fact that in that case Mr. Copeland had attempted to raise with the United States Trustee even before filing the case the issue of his earlier advice provided to Mr. Sturgill, which was indicative of an intent to disclose, not to conceal or intentionally “abbreviate[ ] his disclosures.” Sixth, the explanation I provided in the Circle T Pipeline opinion as to the basis for that decision ought to have served as fair warning to counsel that while the disclosure there was less than it *311ought to have been, that inadequacy would not be used under the particular circumstances presented there as a basis to disqualify him from representing the debtor. I expressly noted in that decision, however, that, under other facts, my analysis would be quite different.
I conclude that some sanction is necessary to make the message clear that failure to provide full disclosure of the relevant circumstances potentially affecting an attorney’s disinterestedness and reasonably raising a question about the existence of any divided loyalty on the part of counsel between a debtor-in-possession or other trustee and any other party in interest in the case will have consequences. It could lead to disallowance of all compensation. Under the challenging facts presented here, I conclude that disallowance of $8,500 of the net fees which otherwise would be approved, which here means the balance of total fees sought after disallowance of the fees associated with the adversary proceeding filed against Ms. Bays, is the best balance I can devise between enforcing the rules and providing fairness to Mr. Copeland and his firms. The disallowance of compensation associated with the adversary proceeding will be charged against the final application of Copeland & Bieger. The $8,500 disallowance will be assessed against both final applications (as supplemented) pro rata. No issue has been raised about the expenses claimed and they will be allowed in full.
An Order in accordance with this Memorandum Decision allowing (1) the final application of Copeland & Bieger, P.C. in the total amount of $101,134.50 comprised of $98,694.61 for fees (disallowing $7,352.85 + $3,237.59) and $2,439.89 for expenses, and (2) the final application of Copeland Law Firm, P.C. in the total amount of $17,529.19 comprised of $15,902.85 for fees (disallowing $1,147.15) and $1,626.34 for expenses, but otherwise overruling the Objection filed by Mr. Bays, will be entered contemporaneously herewith.
. Case No. 11-72355.
. Laura D. Bays v. Richard D. Bays, Case No. CL06-481-00, Circuit Court of Washington County, Virginia.
.The Complaint sought any payments made to or on behalf of Ms. Bays within the two years prior to filing for which the Debtor did not receive reasonably equivalent value. The adversary proceeding was ultimately dismissed without prejudice.
. There is a discrepancy in the filings in both this case and Mr. Bays’ individual case as to whether the proper name is Bays Investment, Inc. or Bays Investments, Inc. The records of the Virginia State Corporation Commission list Bays Investments, Inc., so that is the name the Court will use throughout this opinion.
. Item no. 23 of the Miners Oil Statement of Financial Affairs indicated that in the twelve month period preceding the bankruptcy filing there had been distributions by the Debtor to, or for the benefit of, Mr. Bays and/or other withdrawals by him from it, totaling $453,135.72.
. Space Petroleum filed a claim in Mr. Bays’ individual case in the amount of $1,921,363.67 alleging that the entire claim was non-contingent and liquidated due to an unconditional personal guaranty of payment. It also filed a claim in the Miners Oil case in the same amount based on goods sold.
. American Refining Group, Inc. v. Richard D. Bays, A.P. No. 12-07016, and Space Petroleum & Chemical Company, Inc. v. Richard D. Bays, A.P. No. 12-07018.
.The debt owed by the convenience stores to Miners Oil is itemized as follows: Kents Ridge Grocery, Inc., $71,984.84; Green Springs Grocery, Inc., $433,176.22; Lakeway Speed Mart, Inc., $33,184.71; Doran Grocery, Inc., $109,254.93; and Midway Grocery, Inc., $149,143.36, for a total of $796,744.06. These figures have been ob*294tained from the exhibits filed in support of the Chapter 11 Trustee’s Motion to Sell on April 5, 2013 in Mr. Bays’ individual case. These exhibits were admitted into evidence on April 10, 2013.
. The Committee is comprised of Space Petroleum & Chemical Company, Inc.; Warren Oil Company; KOST USA; Summit Lubricants, Inc.; and Gas Station Supply.
. The plan proposed to pay creditors over a period ranging from one to eighty-four months with a payment of $69,949.33 in the first month and $68,902.47 each month thereafter for the remaining months of the plan. Docket entry no. 241.
. The plan that Miners Oil filed in Mr. Bays’ case was never confirmed as a Chapter 11 Trustee was appointed.
. Copeland Law Firm’s supplemental fee breakdown, filed May 31, 2013, revised the previous Application and requested total compensation in the increased amount of $17,050 for fees plus expenses of $1,626.34 for a total of $18,676.34. Docket entry no. 444.
. The Motion for Rule 2004 examination was filed in Mr. Bays’ individual case and was denied by Order entered June 13, 2013.
. This exhibit consisted of a copy of a page from Mr. Copeland's intact legal pad, and it had notes he took during a meeting regarding this case. Although this page is undated, it appears to be most likely a product of a meeting which took place on October 18, 2011 involving Mr. Copeland, Mr. Bays and Mr. Hicok.
. The motion and response were filed in Mr. Bays' individual case.
. The discrepancy between the date of the indicated initial meeting on February 4, 2011 and the indicated date of February 14, 2011 on this exhibit was not explored or explained at the hearing.
. This meeting does not appear on either pre-petition billing statement.
. The bankruptcy petitions were filed on November 21, 2011.
. Rule 1.18(b) of the Virginia Rules of Professional Conduct.
. The Court notes that during the final stages of the editing and review of this decision before its release Mr. Copeland filed on behalf of the estate administrator for Miners Oil a more particularized version of this adversary proceeding against Ms. Bays seeking recovery of compensation allegedly paid to her for which no services were actually rendered and other payments for her benefit which it is claimed provided no benefit to the corporation. The Court’s action in disallowing compensation to Copeland & Bieger for the services related to the filing of the original proceeding for the reasons noted above should not be taken as expressing any view on the merit of the newly filed proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496564/ | Decision Determining Whether Action to Recover Damages for Stay Violation Must Be Brought By Adversary Proceeding
GUY R. HUMPHREY, Bankruptcy Judge.
I. Introduction
The sole issue before the court is whether a debtor must pursue damages under 11 U.S.C. § 362(k)(l) for a violation of the automatic stay imposed by § 362(a) through an adversary proceeding, or whether such damages may be pursued by motion as a contested matter under Federal Rule of Bankruptcy Procedure 9014. This is not a case of first impression in the courts and, for the reasons explained in this decision, the court joins the majority position and determines that an adversary proceeding is not required in order for a debtor to recover damages for violation of the stay.1
II. Facts and Procedural Posture
The debtor, Adam J. Ballard (“Ballard”), filed his Chapter 7 bankruptcy petition on July 3, 2012. On November 15, 2012 Ballard filed a Motion for Contempt and For Damages for Violation of the Discharge *314Injunction (doc. 15). He amended that motion on January 31, 2013 and titled his amended motion as “Debtor’s Amended Motion for an Order of Contempt and Damages for Violation of the Automatic Stay” (doc. 20) (the “Motion”). Through the Motion, Ballard seeks damages from the United States for an asserted violation of the automatic stay imposed by § 362(a) relating to the Internal Revenue Service’s (“IRS”) garnishment of funds from Ballard. The IRS subsequently returned those funds to Ballard.
The United States filed a response to the Motion which questioned the court’s subject matter jurisdiction to hear and decide this matter. Therefore, the court fixed April 5, 2013 as a date by which the parties were to file additional memoranda regarding this threshold issue. The United States filed a brief which not only expanded its argument that jurisdiction was lacking because Ballard had failed to exhaust his administrative remedies under the Internal Revenue Code, but also raised an additional argument having nothing to do with this court’s subject matter jurisdiction. The IRS now asserts for the first time that Ballard was required to commence an adversary proceeding in order to recover damages for violation of the automatic stay and that the proper remedy for failing to do so is to strike or dismiss the Motion.2
On May 21, 2013 the court conducted a telephonic status conference during which the United States waived the issue of whether Ballard had failed to exhaust his administrative remedies before seeking damages in this court. The parties then agreed that, before proceeding to the merits of the contested matter, the court should first decide whether Ballard was required to file an adversary proceeding in order to recover damages for the IRS’ alleged violation of the stay and that the court would determine only that issue at this initial stage of the matter.
III. Positions of the Parties
The United States argues that an action to recover damages for a violation of the automatic stay is a “proceeding to recover money” for purposes of Fed. R. Bankr.P. 7001(1) and, therefore, must be pursued through an adversary complaint. It draws this conclusion from the definition of “actual damages” which at common law purportedly consist of a monetary recovery to compensate for injury. The United States *315cites several bankruptcy court decisions which it believes support its position,3 as well as a “handful” of decisions which reject the principle that an adversary is required to recover actual damages pursuant to 11 U.S.C. § S62(k). It contends that those courts which have not required an adversary rely on Bankruptcy Act cases decided at a time when the stay existed by rule or general order, and not by statute, and that, consequently, the stay was enforceable only through contempt proceedings. The United States believes that after the Bankruptcy Code was adopted, doubts concerning the bankruptcy courts’ contempt power led to the enactment of what is now § 362(k) to provide for a statutory damages remedy for willful stay violations.
The United States also advances various policy reasons for requiring adversary proceedings to recover damages pursuant to § 362(k). First, it asserts that the failure to use adversary proceedings, when required by the rules, implicates due process principles. Second, if the reasoning of those courts which do not require adversary proceedings for actions to recover damages for stay violations is correct, the United States contends that the language of Bankruptcy Rule 7001 would be mere surplusage which could be ignored in all cases. Third, the United States maintains that, even if it lacks a constitutionally protected interest in the heightened level of procedure which adversary proceedings afford, there is no valid reason why the same protections should not be available in de*316fending against damages for stay violations as are available in contract and tort actions. The safeguards the United States is seeking to protect include the right to service of a complaint and summons and 35 days to answer, the right to seek a more definite statement, the right to file a motion to dismiss a complaint before an answer is required, the right to certain pretrial procedures under Rule 7016, and the right to the more formalized procedures and requirements for injunctive relief.
Ballard responds that none of the cases the United States cites in support of its position that an adversary proceeding is required are from this district, or even the Sixth Circuit. Ballard argues that in this district and within the Sixth Circuit actions to recover damages for stay violations are customarily brought by motion.
IV. Legal Analysis
A. Jurisdiction
Despite the early suggestions made by the United States that this court lacks subject matter jurisdiction over this contested matter, the court has jurisdiction to adjudicate the Motion. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (G), and (0). “Congress empowered the Bankruptcy Courts with core jurisdiction to determine the applicability of the automatic stay.” In re Hunt, 93 B.R. 484, 488-89 (Bankr.N.D.Tex.1988).
The issue which the United States initially described as a jurisdictional issue, in fact is not a jurisdictional issue, but rather, is an exhaustion of remedies issue. As recognized by the Sixth Circuit, failure of a party seeking damages from the United States on account of activity of the IRS to exhaust its remedies under 26 U.S.C. § 7433 does not deprive a court of subject matter jurisdiction over the matter — it may simply preclude the aggrieved party from prevailing in the recovery of damages from the United States. Hoogerheide v. Internal Revenue Service, 637 F.3d 634, 636 (6th Cir.2011). Thus, this court has subject matter jurisdiction over this contested matter.
B. Analysis of the Substantive Issues
1. Section 362 & Bankruptcy Rule 7001(1)
Section 362 governs matters pertaining to the automatic stay. It provides that a bankruptcy petition operates as a stay of actions and proceedings against the debtor and property of the bankruptcy estate. It further provides limits on the duration of the stay, exceptions to the applicability of the stay, and the criteria for granting relief from the stay.
Subsection (k)(l) is the provision of § 362 under which Ballard is proceeding and was originally added as subsection (h) through the Bankruptcy Amendments and Federal Judgeship Act of 1984. Pub.L. No. 98-353, 98 Stat. 352 (1984). Subsection (k)(l) provides in pertinent part that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” The Code does not provide the form of proceeding through which damages may be recovered for a violation of the stay. In addition, the Bankruptcy Rules do not clearly express the form of proceeding through which such damages should be pursued.
2. Bankruptcy Rule 7001(1) Interpretation Arguments
The IRS argues that Bankruptcy Rule 7001(1) provides the form of procedure for recovery of such damages because it states in pertinent part that: “The following are adversary proceedings ... a proceeding to *317recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee, or a proceeding under § 554(b) or § 725 of the Code, Rule 2017, or Rule 6002[.]” The United States’ argument concerning the interpretation of Rule 7001(1) is that to “recover” damages under § 362(k)(l) is to “recover money or property” as that term is used in Rule 7001(a) and, therefore, Rule 7001(1) dictates that an adversary proceeding be filed and prosecuted to recover damages under § 862(k)(l). Thus, an analysis of the term “recover money or property” as used in Rule 7001(1) is in order. Following its discussion of the meaning of Rule 7001(1), the court will consider the historical evolution of the proceeding to recover damages for violation of the stay and the policy arguments made by the United States in favor of requiring an adversary proceeding to determine damages awardable under § 362(k)(l).
The United States misconstrues the phrase “recover money or property.” Of course, the word “recover” by itself could have at least one of two primary meanings in this legal context: a) to get back or regain; or b) to gain by legal process. See Black’s Law Dictionary 1389 (9th ed. 2009). The United States’ argument is that Rule 7001(1) uses the latter meaning — “to gain by legal process.” Thus, it argues that to recover or obtain damages for violation of the stay under § 362(k)(l) is to gain money by legal process, thereby rendering Rule 7001(1) applicable. The court disagrees.
While the court agrees that to recover damages under § 362(k)(l) is to gain money by legal process, the court does not agree that to recover damages fits within the term “to recover money or property” as that term is used in Rule 7001(1). Code § 362(k)(l) states that an individual injured by a willful violation of the stay “shall recover actual damages.... ” Clearly, this use of the term “recover” refers to the second meaning of recover-to gain by legal process.
However, Congress used different language in Rule 7001(1) than in § 362(k)(l). Rule 7001(1) describes a proceeding “to recover money or property.” If Congress meant the same thing in Rule 7001 as in Code § 362(k)(l), it could have stated that an adversary proceeding is “a proceeding to recover damages.” Instead, Rule 7001(1) describes a proceeding to exert dominion and control over money or physical property. This distinction in the language chosen by Congress between § 362(k)(l) (“recover actual damages”) and Rule 7001(1) (“recover money or property”) is clear when Rule 7001(1) is read in its totality. All of the exceptions in Rule 7001(1) to requiring an adversary proceeding to “recover money or property” deal with money or property which ostensibly may be property of the bankruptcy estate and over which the trustee, the debtor, creditor, or other party in interest is seeking to assert dominion.4 Thus, the term *318“to recover money or property” in the context of Rule 7001(1) refers to a proceeding involving the exercise of dominion and control over money or property that may be property of the estate. The prime example of such a proceeding is a turnover action under §§ 542 or 543. See Ateeq v. Najor (In re Najor), 1998 WL 416070, at *2, 1998 U.S.App. LEXIS 14995, at *6 (9th Cir. June 4, 1998) (“Bankruptcy Rule 7001(1) governs turnover proceedings under 11 U.S.C. § 542. Rule 7001(1) requires the debtor in possession or the trustee to bring a request for turnover in an adversary proceeding.”); In re Perkins, 902 F.2d 1254, 1258 (7th Cir.1990); and Barringer v. EAB Leasing, 244 B.R. 402, 410 (Bankr.E.D.Mich.1999).5
This interpretation of Rule 7001(1) is reflected in case law. In In re Charter Co., 876 F.2d 866, 874 (11th Cir.1989) the court stated that: “Bankruptcy Rule 7001(1), has been applied in the context of replevin actions to recover money or property, motions to avoid post-petition transfers and actions for the turnover of collateral.” Similarly, in recognizing the distinction between a proceeding to compel the physical delivery of property and an award of monetary damages, a bankruptcy court granted a contempt motion for sanctions for violation of the stay, in lieu of a motion under § 362(k)(l), but denied relief for turnover of funds, stating: “The request for turnover of funds should have been presented in the form of an adversary complaint rather than by motion. See Fed. R. Bankr.P. 7001(1). Therefore, to the extent the Motion is a motion for turnover of funds, it was denied .... To the extent the Motion was a motion for contempt, it was taken under advisement.” In re Martin, 2011 Bankr.LEXIS 5720 at *2 (Bankr.S.D.Miss. Sept. 30, 2011).
Accordingly, the language of Rule 7001(1) does not require that an adversary proceeding be prosecuted in order for a debtor to recover damages under § 362(k)(l).
3. The Historical Evolution of the Proceeding to Recover Damages for Violation of the Stay
The historical evolution of the proceeding to recover damages supports the proposition that damages for violation of the stay may be pursued by motion as a con*319tested matter, rather than having to be pursued through an adversary proceeding.
As previously noted, subsection (k)(l) was originally added as subsection (h) through the Bankruptcy Amendments Act of 1984. Prior to that time, courts generally addressed violations of the stay through their contempt power. See In re Crabtree, 767 F.2d 919, 1985 WL 13441 (6th Cir.1985) (table) (“There is no question that violation of the automatic stay is a civil contempt of court.”); Archer v. Macomb County Bank, 853 F.2d 497, 498 (6th Cir.1988); Lagniappe Inn of Nashville, Ltd. v. Washington Nat’l Ins. Co. (In re Lagniappe Inn of Nashville, Ltd.), 50 B.R. 47, 50 (Bankr.M.D.Tenn.1985); and In re Depew, 51 B.R. 1010 (Bankr.E.D.Tenn.1985). Contempt proceedings have generally been pursued through motions. See Annese v. Kolenda (In re Kolenda), 212 B.R. 851, 852 (W.D.Mich.1997); Price v. Pediatric Academic Ass’n, 175 B.R. 219, 222 (S.D.Ohio 1994); and In re Skeen, 248 B.R. 312 (Bankr.E.D.Tenn.2000).6 In adding § 362(h) to the Bankruptcy Code in 1984, if Congress had wanted to change the practice of pursuing violations of the stay by motion, it could have explicitly done so at any time since 1984. Congress has amended the Bankruptcy Code and approved changes to the Federal Rules of Bankruptcy Procedure on a number of occasions since 1984, but has never amended Rule 7001 to require violations of the stay to be pursued through adversary proceedings. As noted by a number of courts, Rule 7001(1) explicitly lists ten such proceedings, but has not included a proceeding for violation of the stay as one of those proceedings. See Fortune & Faal v. Zumbrun (In re Zumbrun), 88 B.R. 250, 252 (9th Cir. BAP 1988); In re Hooker Invs., 116 B.R. 375, 378 (Bankr.S.D.N.Y.1990). Thus, from a historical perspective, stay violation proceedings have always been pursued by motion and there has been no clear legislative expression that those proceedings must now be pursued through an adversary proceeding.7
*3204. Policy Arguments
In addition to its argument based upon the language of Bankruptcy Rule 7001(1), the United States argues that there are policy reasons which support its conclusion that adversary proceedings should be used to pursue stay violations. This court concludes that if there are such policy reasons, the policy reasons supporting the use of a contested matter to address stay violations predominate over any policy reasons supporting the use of an adversary proceeding. However, before the court explains those reasons, a brief discussion of the differences between an adversary proceeding under Part VII of the Bankruptcy Rules and a contested matter under Rule 9014 is beneficial.
Distinction Between an Adversary Proceeding Under Bankruptcy Rule 7001 and a Contested Matter Under Rule 90U. There are two different types of litigated proceedings within bankruptcy cases: adversary proceedings and contested matters. While the United States goes to great lengths to distinguish these two types of proceedings, frequently the difference between in practice is much less. Both may end with a decision following a contested evidentiary trial or hearing.
Adversary proceedings are lawsuits filed within a bankruptcy case and are governed by Part VII of the Bankruptcy Rules. These Bankruptcy Rules, in large part, incorporate the Federal Rules of Civil Procedure. An adversary proceeding is commenced through the filing of a complaint and requires the service of the complaint with a summons. See Bankruptcy Rules 7001, 7003, & 7004. As noted earlier, Bankruptcy Rule 7001 enumerates the proceedings which must be pursued through an adversary proceeding.
Contested matters are provided for by Bankruptcy Rule 9014, which incorporates most of the Bankruptcy Rules governing adversary proceedings, as well as the Federal Rules of Civil Procedure. See Bankruptcy Rule 9014 and State Bank v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir.1996); Barrientos v. Wells Fargo, 633 F.3d 1186, 1189-90 (9th Cir.2011) (both distinguishing adversary proceedings and contested matters).
If an adversary proceeding is not required under Bankruptcy Rule 7001, then the request for damages for violation of the automatic stay is pursued by motion. “In a contested matter not otherwise governed by these rules, relief shall be requested by motion, and reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought.” Fed.R.Bankr.P. 9014(a). Thus, determination of the issue presented by the United States requires the court to interpret Bankruptcy Rule 7001, and particularly, Rule 7001(1).
Due Process Issues. The United States argues that due process concerns militate in favor of requiring adversary proceedings is in order for a debtor to recover damages for violation of a stay. This argument has been soundly rejected in a number of decisions. See In re Dunning, 269 B.R. 357, 368 (Bankr.N.D.Ohio 2001); Zumbrun, 88 B.R. at 252; and In re Hooker Invs., 116 B.R. 375, 378 (Bankr.S.D.N.Y.1990). These decisions amply demonstrate that the procedures afforded in contested matters provide all the process that is due. There are no differences *321between service of the complaint in an adversary proceeding and the manner of service of a motion in a contested matter. Bankruptcy Rule 9014(b) specifically provides that a motion “shall be served in the manner provided for service of a summons and complaint by Rule 7004.” Likewise there are no differences between adversary proceedings and contested matters as to the availability of discovery because Rule 9014(c) makes the discovery rules (Fed.R.Bankr.P. 7026 and 7028-7037) applicable to contested matters. For these and other reasons, pursuit of a proceeding as a contested matter when, under the Bankruptcy Rules, it should have been pursued as an adversary proceeding is frequently found to be harmless error. See Tully Constr. Co. v. Cannonsburg Envtl. Assocs., Ltd. (In re Cannonsburg Envtl. Assocs., Ltd.), 72 F.3d 1260, 1264-65 (6th Cir.1996); Trust Corp. of Montana v. Patterson (In re Copper King Inn, Inc.), 918 F.2d 1404, 1406-07 (9th Cir.1990). See also Fed. R. Bankr.P. 9005 (incorporating Fed. R. Civ. P. 61) (“... the court must disregard errors that do not affect any party’s substantial rights.”).
Uniformity Within the Circuit. While uniformity within a particular district on such procedures is particularly beneficial to bankruptcy practitioners, uniformity across district and state borders within a circuit is also advantageous.8 Uniformity on such issues and procedures prevents “traps” for the non-local practitioner unfamiliar with the particular customs of a particular region.
Expedience, Flexibility, and Economics. Bankruptcy courts should be able to address violations of the stay with the more expeditious and flexible procedures a contested matter provides. A debtor harmed through a willful violation of the automatic stay should not have to engage in the more elongated litigation procedures which accompany adversary proceedings. When the bankruptcy stay is willfully violated, prompt relief is warranted to provide the debtor with the benefit of the stay to which the debtor is entitled and to restore the debtor to the position that the debtor held when the stay was violated.
The alleged facts of the Motion, with a few foreseeable differences and changes made for illustrative purposes, provide a good example of why relief for a violation of the stay frequently needs to be addressed with the more prompt and flexible procedures which contested matters provide.9 Ballard has alleged that, in violation of the stay, the IRS continued to garnish funds after he filed his bankruptcy petition. Frequently, garnished funds are needed by debtors to meet their basic living needs and, thus, garnishment of such funds in violation of the stay requires the court to remedy that situation in an expeditious manner to avoid a potentially devastating impact on the debtors. Putting such a remedy on an adversary proceeding track could impact the primary objective of bankruptcy — to give the honest debtor a fresh start.
The advantage of using the contested matter procedures for stay violations is the flexibility they provide. Many stay violation allegations can be addressed in a shorter timeframe and do not require ex*322tensive briefing, discovery, or other litigation procedures. The court’s experience is that many stay violation allegations are resolved with telephone calls between legal counsel. Requiring an adversary proceeding with a full-blown trial and a pretrial scheduling order to decide whether a debt- or is entitled to damages for alleged stay violations would result in an unnecessary expenditure of resources by the court, parties, and counsel.10 However, some stay violation matters may require more extensive briefing, discovery, or other pre-hear-ing procedures and a lengthier evidentiary hearing. The procedures for contested matters allow for such circumstances. As previously stated, the discovery rules provided by the Federal Rules of Civil Procedure are available in contested matters. See Fed. R. Bankr.P. 9014(c). Federal Rule of Civil Procedure 42 concerning the consolidation or separation of hearings and trials is also available to the court in contested matters. Id. In addition, even if a particular Federal Rule of Civil Procedure is not specifically made applicable to contested matters through Rule 9014(c), the court may, at any stage of the proceeding, direct that one or more of the other Federal Rules of Civil Procedure apply. See id. Finally, Congress made sure that bankruptcy judges have the tools they need to manage litigation before them, providing in § 105 that:
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
(d) The court, on its own motion or on the request of a party in interest—
(1) shall hold such status conferences as are necessary to further the expeditious and economical resolution of the case; and
(2) unless inconsistent with another provision of this title or with applicable Federal Rules of Bankruptcy Procedure, may issue an order at any such conference prescribing such limitations and conditions as the court deems appropriate to ensure that the case is handled expeditiously and economically ...
11 U.S.C. § 105. In short, the tools which a bankruptcy court and parties have through § 105 and Rule 9014 to manage, prosecute, and adjudicate a contested matter allow the court and parties to give the matter whatever time, resources, and procedures are appropriate to resolution of the matter, without being constrained by the more rigid procedures involved with adversary proceedings, which frequently would be unnecessary and result in the expenditure of unnecessary time and resources.11
*323Time Provided to Respond. One of the primary differences cited by counsel for the United States for desiring adversary proceedings over contested matters — that governmental units have 35 days to answer an adversary complaint,12 as opposed to 21 days to answer a motion, does not justify use of an adversary proceeding for stay violations. With the three day mail rule of Bankruptcy Rule 9006(f) applied to motions served by mail or through electronic service, the difference in the response time is actually eleven days. In addition, it is the experience of this court that when additional time is needed for a party to respond to a motion, it is freely granted through agreement of counsel and, if necessary, through an order of the court. Further, this difference is even less for nongovernmental parties, which are more often the parties involved in stay violation matters, because nongovernmental defendants have 30 days after issuance of the summons to answer an adversary complaint.13 See Fed. R. Bankr.P. 7012(a). Thus, the additional time given for parties to file an answer to a complaint does not support any policy reason for construing the Bankruptcy Rules to require that adversary proceedings be used to recover damages for a stay violation under § 362(k).
V. Conclusion
This court agrees with the other judges within the Sixth Circuit and the majority of other courts who have addressed the issue and holds that an adversary proceeding is not required to recover damages for violation of the stay. A debt- or may proceed by motion through a contested matter pursuant to Bankruptcy Rule 9014 to recover damages for such a violation.14 The court will contemporane*324ously enter an order consistent with this decision.
IT IS SO ORDERED.
. All of the courts within the Sixth Circuit which have addressed this issue have determined that an adversary proceeding is not necessary to recover damages for a stay violation and that such damages may be recovered by motion as a contested matter under Bankruptcy Rule 9014. See Buckeye Check Cashing, Inc. v. Meadows (In re Meadows), 396 B.R. 485, 498 (6th Cir. BAP 2008) ("[Ajctions to recover damages for stay violations are generally brought by motion, with attorney fees expressly allowable under § 362(k)."); In re Dunning, 269 B.R. 357, 367-68 (Bankr.N.D.Ohio 2001); In re LTV Steel Co., 264 B.R. 455, 462-63 (Bankr.N.D.Ohio 2001); In re Phar-Mor, Inc., 152 B.R. 924, 926 (Bankr.N.D.Ohio 1993); and In re Timbs, 178 B.R. 989 (Bankr.E.D.Tenn.1994). See also In re Depew, 51 B.R. 1010 (Bankr.E.D.Tenn.1985) (awarding actual damages and attorney fees for violation of the stay through a motion filed by the debtors). Courts outside the Sixth Circuit are split on the issue, with a majority of those courts being in line with the courts within the Sixth Circuit in determining that an adversary proceeding is not necessary to pursue relief for violation of the stay under subsection (k), including the recovery of monetary damages. See Standard Indus, v. Aguila Inc. (In re C.W. Mining Co.), 625 F.3d 1240, 1246 (10th Cir.2010) (holding that because Rule 9020 provides that Rule 9014 governs a contempt motion, a party may pursue a violation of the stay through a contempt motion and need not do so through an adversary proceeding); Johnson v. RIM Acquisitions, LLC, 2012 WL 930386, 2012 U.S. Dist. LEXIS 36407 (S.D.Ill.2012) ("A motion for sanctions under § 362(h) is a contested matter governed by Bankruptcy Rule 9014.”); Patton v. Shade, 263 B.R. 861, 865 (C.D.Ill.2001) (same); Commercial Credit Corp. v. Reed, 154 B.R. 471 (E.D.Tex.1993); Karsh Travel, Inc. v. Airlines Reporting Corp. (In re Karsh Travel), 102 B.R. 778 (N.D.Cal.1989); Fortune & Faal v. Zumbrun (In re Zumbrun), 88 B.R. 250 (9th Cir. BAP 1988); In re Longoria, 400 B.R. 543, 549 (Bankr.W.D.Tex.2009); In re Thomas, 355 B.R. 166 (N.D.Cal.2006); Phillips v. Lehman Bros. Holdings (In re Fas Mart Convenience Stores, Inc.), 318 B.R. 370 (Bankr.E.D.Va.2004); In re Hildreth, 362 B.R. 523 (Bankr.M.D.Ala.2007); In re Hooker Inv., 116 B.R. 375, 378 (Bankr.S.D.N.Y.1990); and In re Benjamin, 2013 WL 5310530, 2013 Bankr.LEXIS 3942 (Bankr.N.D.N.Y. Sept. 18, 2013). It appears that all of the District Courts and Bankruptcy Appellate Panels which have addressed the issue have held that 362(k) damages may be pursued through a contested matter pursuant to Rule 9014. Courts in some cases have held *314that violations of the stay may be pursued through an adversary proceeding, but may also be pursued through a motion as a contested matter. See Zumbrun, 88 B.R. at 252; Hooker Invs., 116 B.R. at 378; Timbs, 178 B.R. at 995; In re Wagner, 87 B.R. 612 (Bankr.C.D.Cal.1988); and In re Forty-Five Fifty-Five, Inc. 111 B.R. 920 (Bankr.D.Mont.1990). The bankruptcy courts in the following cases have held that an adversary proceeding is required to pursue damages for violation of the stay under § 362(k)(l): In re McDonald, 265 B.R. 3 (Bankr.D.Mass.2001); In re Rimsat, Ltd., 208 B.R. 910 (Bankr.N.D.Ind.1997); In re Hunter, 190 B.R. 118, 119 (Bankr.Colo.1995) (determining that the court could not "punish violations of purely statutory provisions by contempt citations” and stating that: "Such relief should not and cannot be granted by the expedient of a summary contempt proceeding.”); In re Wyatt, 173 B.R. 698 (Bankr.D.Idaho 1994); and In re Smith, 2010 WL 5690097, *5 (Bankr.S.D.Ga.2010) (in dicta stating: "None of the motions could be adjudicated as contested matters, however, because the relief the [debtors] repeatedly sought-damages for stay violation and determination of an interest in real property — is available only through the filing of an adversary proceeding ... ”).
. The United States also questions in its brief Ballard’s standing to pursue damages under 11 U.S.C. § 362(h) because the IRS had already begun the process of refunding the pre-petition levy to Ballard prior to the filing of the Motion. This decision does not address the standing argument.
. In addition to the cases cited in footnote 1 standing for the proposition that an adversary proceeding is required under Bankruptcy Rule 7001(1) to recover damages under § 362(k), on pages 6-7 of its Memorandum With Respect to Jurisdictional Issues, the United States also erroneously listed a series of other cases for that proposition. First, in In re Irby, 321 B.R. 468, 470-71 (Bankr.N.D.Ohio 2005), the remedy sought was in-junctive relief, clearly required to be sought through an adversary proceeding under Rule 7001(7) — it was not a proceeding for damages under § 362(k). Second, in In re Moi, 381 B.R. 770, 771-72 (Bankr.S.D.Cal.2008) the court held that a debtor could pursue an objection to a proof of claim through an adversary proceeding; however, the court found that there was no basis upon which a debtor could pursue a contempt citation from the bankruptcy court and that power was reserved to the powers of the court itself and could not be directly asserted by the debtor. Again, this proceeding did not involve § 362(k) damages for violation of the stay. Third, in Smith v. Butler & Assoc. (In re Smith ), 2008 WL 4148923, *1 (Bankr.D.Kan.Aug. 29, 2008) the court dismissed the debtors’ claim for violation of the stay — but not on the basis that the damages were pursued through a motion (and in fact were brought through an adversary proceeding). Fourth, In re Vogt, 257 B.R. 65, 68-69 (Bankr.Colo. 2000), once again had nothing to do with a claim for damages under § 362(k)(l) — it was an adversary proceeding alleging violations of the Fair Credit Collection Act and the discharge order under § 524(a)(2). Fifth, in In re Rogers, 391 B.R. 317, 321 (Bankr.M.D.La.2008) the bankruptcy court dismissed an adversary complaint seeking damages for violation of the Fair Debt Collection Practices Act and for damages under § 362(k)(l) based on the debtors' contention that the creditor violated the stay by filing three time-barred proofs of claim. That decision, like the other cases discussed in this footnote, has nothing to do with whether damages for violation of the stay must be pursued through an adversary proceeding. Finally, In re Dean, 359 B.R. 218, 222-23 (Bankr.C.D.Ill.2006) stands for quite the opposite of the proposition asserted by the United States. In that case, the creditor argued that the debtors should have brought their claim for damages under § 362(k)(l) by motion under Rule 9014(a), rather than through an adversary proceeding. The court rejected this argument, stating: “[Ejven if it was error for the Debtors to bring their claim for mere technical violation of the automatic stay as an adversary proceeding, such error in this instance is a mere technical violation and therefore harmless.” Id. at 224. Accordingly, whether intentional or not, the United States overstates its argument.
. The first exception to Rule 7001(1) is “a proceeding to compel the debtor to deliver property to the trustee.” The Advisory Committee Note to Rule 7001 states the following with respect to this exception which was added through a 1987 rule amendment: "[a] trustee may proceed by motion to recover property from the debtor.” The only basis for a trustee’s recovery of property from the debtor would be if it were property of the bankruptcy estate. The second exception, a proceeding under § 554(b) would involve a request by a party in interest to compel the trustee to abandon property of the estate. In that situation, the proceeding would entail the debtor, a secured creditor, or third party seeking to assert dominion over property of the estate that is burdensome or of inconsequential value to the bankruptcy estate. The third exception, a proceeding under § 725, involves the trustee’s disposition of property of the estate which is not otherwise adminis*318tered through the case and in which a third party has an interest, such as a lien. The fourth exception is a proceeding under Bankruptcy Rule 2017. That Rule permits the court upon motion to examine fees paid to an attorney by the debtor and determine whether such payment is excessive. Presumably, if any payment is deemed excessive, the amount of fees overpaid would constitute property of the estate over which the trustee could then assert dominion. The final exception is a proceeding under Rule 4003(d). Under Rule 4003(d) a debtor may avoid or strip a lien on exempt property .pursuant to Code § 522(f) to the extent the lien impairs an exemption in that property through a motion under Rule 9014. Again, this exception deals with the debtor's removal of a creditor’s lien on physical property. All of these exceptions deal with a trustee’s or other interested party's attempt to assert dominion over money or property.
. The United States’ argument seems to implicitly suggest that any proceeding to obtain a monetary judgment must be through an adversary proceeding. While the court agrees that many proceedings resulting in a monetary judgment must be pursued through an adversary proceeding, not all must. For instance, sanctions for filing documents in violation of Rule 9011 are to be pursued by motion, but similar to an award under Code § 362(k)(l), may include a monetary award of attorney fees and expenses. See Fed. R.Bankr.P. 9011(c). In this regard, it is significant to note that Congress incorporated Federal Rule of Civil Procedure 54 and Bankruptcy Rule 7054 regarding the entry of judgments into contested matters through Rule 9014(c).
. Following the addition of subsection (h), now (k)(l), to § 362, some courts have determined that a stay violation may still be addressed through § 105 and the court’s contempt powers. See In re Martin, 2011 Bankr.LEXIS 5720, at *16 (Bankr.S.D.Miss. Sept. 30, 2011) and the authorities cited in that decision for that proposition. See also Standard Indus. v. Aguila Inc. (In re C.W. Mining Co.), 625 F.3d 1240, 1246 (10th Cir.2010) (holding that because Rule 9020 provides that Rule 9014 governs contempt motions, a party may pursue a violation of the stay through a contempt motion and need not do so through an adversary proceeding).
. As noted, the United States argues that those courts which have not required an adversary proceeding rely on Bankruptcy Act cases decided at a time when the stay existed by rule or general order, and not by statute, and that, consequently, the stay was enforceable only through contempt proceedings. The United States believes that after the Bankruptcy Code was adopted, doubts concerning the bankruptcy courts' contempt power led to the enactment of what is now § 362(k) to provide for a damages remedy for willful stay violations. The court agrees that the ambiguity about whether bankruptcy courts could enforce the stay and compensate debtors for violations of the stay through its contempt powers or through other means led to the enactment of § 362(h) (now § 362(k)(l)). However, that Congress amended the statute to give the bankruptcy courts the authority to both enforce the stay and to provide compensation for violations of the stay through a statutory amendment does not lead to the conclusion that the procedure for seeking redress for violations of the stay must be by adversary proceeding. But other statutory violations, including violation of the discharge injunction are pursued by motion. See Barrientos v. Wells Fargo Bank, N.A., 633 F.3d 1186, 1191 (9th Cir.2011) (violation of the discharge must be pursued by motion and not through an adversary proceeding); Keeler v. Academy of Am. Franciscan History, Inc. (In re Keeler), 257 B.R. 442, 444 (Bankr.Md.2001) (discharge violation pursued through a *320motion as a contested matter); In re Horton, 87 B.R. 650, 651 (Bankr.D.Colo.1987) (same). The multitude of bankruptcy decisions since 1984 in which bankruptcy courts issued contempt citations for violations of the stay based upon contempt motions also belies this proposition.
. Of course, if this court determined that, in its view of the law, the procedures in other districts were improper, it would follow a different path.
. By using the general facts of this case as the basis for an illustration, the court is not opining on the merits of the debtor's claim; but rather, is merely using the garnishment situation as an example of how conduct in violation of the stay could significantly hamper a debtor's fresh start if not promptly addressed.
. Dean v. Global Fin. Credit (In re Dean), 359 B.R. 218, 224 (Bankr.C.D.Ill.2006), a case cited by the United States in support of its position, involved a creditor who sought dismissal of the debtors’ adversary complaint for damages for violation of the stay, arguing that the debtors should have pursued that relief through a motion because "the issue is one of litigation economics: a contested matter is less costly to defend.”
. Based upon comments which counsel for the United States made during a telephonic conference on this matter, it appears that the United States' insistence that debtors use adversary proceedings to pursue violations of the stay is based upon one or several unusual circumstances under which the debtor or debtors were seeking extraordinary damages on account of allegations that the United States improperly exercised control over *323business assets. Those situations are not by any means the typical alleged stay violations that this court experiences. Most alleged stay violations this court experiences involve individual consumer debtors who have received collection letters or telephone calls from creditors or collection agencies seeking to collect a debt, with limited or no demonstrable out-of-pocket damages incurred by the debtors. However, as discussed, contested matters allow for the flexibility to deal with even those more extraordinary circumstances with increased procedures, while allowing simpler matters to be addressed more economically and expeditiously.
. See Fed. R. Bankr.P. 7012(a). Under the Federal Rules of Civil Procedure, the United States has 60 days to answer or otherwise respond to a complaint (See Fed.R.Civ.P. 12(a)(2)). Yet, Bankruptcy Rule 7012 does not incorporate Federal Rule of Civil Procedure 12, but instead gives the United States a shorter time within which to respond to a complaint, recognizing the time-sensitive nature of bankruptcy matters.
. In litigation, procedural and practical issues which are unique to the United States or governmental entities do not provide a basis for this court's determining that adversary proceedings should be used to adjudicate stay violations. Stay violations are asserted against private and public entities alike and the Bankruptcy Rules apply equally to them, with limited exceptions such as the time which they have to answer an adversary complaint.
.While the court finds that damages for violation of the stay may be pursued through a motion as a contested matter, the court also finds it acceptable to pursue such relief through an adversary proceeding if the debtor or other party seeking such relief proceeds in that manner. The focus of the court with respect to the choice of procedure — whether contested matter or adversary proceeding— should simply be to ensure that due process is observed. As long as due process is observed, the procedural mechanism through which the relief is sought may be left to the party seeking the relief. The parties and court have the tools to appropriately manage the litigation once it is commenced regardless of whether it is commenced as an adversary proceeding or as a contested matter. See In re Dean, 359 B.R. 218, 223 (Bankr.C.D.Ill.2006) and In re Dunmore, 262 B.R. 85, 87 n. 1 (Bankr. *324N.D.Cal.2001) ("the court is not aware of any case which has voided a judgment in an adversary proceeding because it should have been litigated as a contested matter”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496565/ | MEMORANDUM DECISION
TIMOTHY A. BARNES, Bankruptcy Judge.
The matter before the court arises out of a Motion to Dismiss Case for Ineligibility (the “Motion”), filed by Marilyn O. Marshall (the “Trustee ”), the standing chapter 13 trustee assigned to this ease, against Charles Walker (the “Debtor”), who is unrepresented in this case. For the reasons set forth herein, the court denies the Motion.
JURISDICTION
The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “Bankruptcy Code ”). 28 U.S.C. § 1334(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bank*326ruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). A motion to dismiss a bankruptcy case is unique to bankruptcy administration and arises only in a bankruptcy case. As such, such, a motion is unquestionably a core proceeding and within the bankruptcy court’s statutory and constitutional jurisdiction. 28 U.S.C. § 157(b)(2)(A); In re Gossett, 369 B.R. 361, 364 (Bankr.N.D.Ill.2007) (Squires, J.); In re Luedtke, 337 B.R. 918, 919 (Bankr.E.D.Wis.2006).
Accordingly, final judgment is within the scope of the court’s authority.
BACKGROUND
The facts and procedural history of this matter are simple and undisputed. On October 29, 2013, the Debtor commenced the above-captioned case by filing a petition under chapter 13 of the Bankruptcy Code. Later that same day, the Debtor obtained the credit counseling described in section 109(h)(1) of the Bankruptcy Code, and later in the case filed a certificate of credit counseling evidencing the same.
The Trustee has taken the position that the Debtor’s credit counseling is untimely and thus dismissal is appropriate pursuant to 11 U.S.C. § 1307 and § 109(h). At a hearing on the matter in November of this year, the court expressed its concerns regarding the wording of section 109(h)(1). Though the Debtor failed to appear, given that the Debtor is pro se, the court determined to investigate further the issue. This Memorandum Decision is the result.
DISCUSSION
[T]he [Bankruptcy] Act must be liberally construed to give the debtor the full measure of the relief afforded by Congress ..., lest its benefits be frittered away by narrow formalistic interpretations which disregard the spirit and the letter of the Act.
Wright v. Union Cent. Life Ins. Co., 311 U.S. 273, 279, 61 S.Ct. 196, 85 L.Ed. 184 (1940).
The question of whether a debtor may avail itself of bankruptcy relief is the most fundamentally important question in all of bankruptcy. If the answer is “no,” then no other question matters. Only if the answer is “yes” does the court move on to issues such as equality of distribution to similarly situated creditors and the debt- or’s fresh start — the so-called “twin pillars of bankruptcy law.” R. Ginsberg & R. Martin, Ginsberg & MaRtin on BaNkruptcy, § 1.01[H] (5th ed. 2013).
Concurrent with this Memorandum Decision, Judge Steven W. Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan has issued his decision regarding the eligibility of the City of Detroit to be a debtor under chapter 9 of the Bankruptcy Code. That decision numbers more than 150 pages. Economies of scale govern and, as a result, this Memorandum Decision is far shorter. Nonetheless, each decision addresses section 109 of the Bankruptcy Code and the result of each decision is for the respective debtor, crucial.
With these overriding principles in mind, the court will begin its analysis of the issue at bar.
*327A. The Plain Language of Section 109(h)(1).
The Supreme Court has stated that “[t]he task of resolving [a] dispute over the meaning of [a statute] begins where all such inquiries must begin: with the language of the statute itself.” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); In re Randle, 358 B.R. 360, 362 (Bankr.N.D.Ill.2006) (Doyle, J.), aff'd, No. 07C631, 2007 WL 2668727 (N.D.Ill. July 20, 2007). Where the language of the statute is unambiguous, no further inquiry is necessary or appropriate. Sebelius v. Cloer, 659 U.S.-,-, 133 S.Ct. 1886, 1895, 185 L.Ed.2d 1003 (2013); In re Vecera, 430 B.R. 840, 842 (Bankr.S.D.Ind.2010) (citing Griffin v. Oceanic, Inc., 458 U.S. 564, 570, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)). Absent contrary definitions within the statute itself, words in a statute are presumed to have their “ordinary, contemporary, common meaning.” Pioneer Inv. Servs. v. Brunswick Assocs., 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (citing Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979)).
Our inquiry begins, therefore, with the statute itself.
Section 109(h)(1) reads, in pertinent part:1
[A]n individual may not be a debtor under this title unless such individual has, during the 180-day period ending on the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency ... an individual or group briefing ... that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.
11 U.S.C. § 109(h)(1) (emphasis added). As discussed below, section 109(h) is a *328relatively new provision of the Bankruptcy Code seeking to have debtors obtain credit counseling as a condition to bankruptcy relief. It is one of two such requirements in chapter 13; the second being a condition to receiving its discharge that the debtor, “after filing of the petition,” complete a personal financial management course. 11 U.S.C. § 1328(g)(1).
The language emphasized above clearly states that a debtor has 180 days to receive credit counseling, and that 180-day period ends on “the date of filing of the petition.” 11 U.S.C. § 109(h)(1). It is this phrase that creates the problem before the court.
There are those who advocate reading section 109(h)(1) as a precondition to filing a petition (hence, commencing a case). Such persons advocate a reading of the emphasized phrase akin to “ending on the date and time of the filing of the petition” or “ending with the filing of the petition” or “ending at the moment of filing.” Had Congress chosen any of those phrases, such a reading would make sense.
However, such a reading is not consistent with the plain language of the term “date.” Black’s Law Dictionary defines “date” as “[t]he day when an event happened or will happen....” Black’s Law DICTIONARY 452 (9th ed. 2009). Moreover, Black’s Law Dictionary defines “day” as “[a]ny 24-hour period; the time it takes the earth to revolve once on its axis.... ” Id. at 453.
The Supreme Court has, in the context of determining calculation of time periods for tax assessments following filing of returns, concluded that both days and dates envision indivisible time periods (either as a single point in time or as viewed as an indivisible entirety). Burnet v. Willingham Loan & Trust Co., 282 U.S. 437, 439, 51 S.Ct. 185, 75 L.Ed. 448 (1931). As the Court stated, “[t]he fiction that a day has no parts is a figurative recognition of the fact that people do not trouble themselves without reason about a nicer division of time.” Id. at 440, 51 S.Ct. 185; see also Richardson v. Ford, 14 Ill. 332, 333 (Ill. 1853) (“Where an act is to be done on a particular day, the party has the whole of that day in which to perform it.”).
The language of section 109(h)(1) is expressed in plain terms. The 180-day period of a debtor to receive credit counseling includes the date of the filing of the petition. No finer distinction is included in the statute, and thus, the court is bound to apply the clear and unambiguous language of the statute pursuant to its terms. As the Debtor in this case obtained his credit counseling on the date of the filing of his bankruptcy petition, that credit counseling — though taken after the filing of the petition — satisfies the express terms of section 109(h)(1). As such, the Debtor is entitled to be a debtor and on these grounds the Trustee’s Motion is not well taken.
B. Counterarguments and Contrary Case Law.
Given the court’s conclusion as stated above, further discussion is, perhaps, unwarranted. However, as the court has discussed certain of the counterarguments in footnote 1 above and there exists at least one case that has held the opposite of today’s determination, the court feels compelled to address some additional arguments that have been or could have been made.
1. Congressional Intent
Perhaps the strongest argument in favor of dismissing a case where credit counseling is obtained on the date of the petition but after the petition is filed is found in the history of the statute. In partial reliance on that history, another bankruptcy court *329has analyzed the statute under facts nearly identical to those at bar and concluded that dismissal is appropriate. See In re Soohyun Koo, No. 12-00121, 2012 WL 692578 (Bankr.D.D.C. Mar. 2, 2012); see also In re Francisco, 390 B.R. 700, 703-04 (10th Cir. BAP 2008) (holding that under pre-amendment section 109(h), the term date must mean the precise moment of filing).
It is true that the reports accompanying the Bankruptcy Abuse and Consumer Protection Act of 2005 identify the need to require “debtors to receive credit counseling before they can be eligible for bankruptcy relief so they will make an informed choice about bankruptcy, its alternatives, and consequences.” H.R.Rep. No. 109-31(1), at 2 (April 8, 2005), as reprinted in 2005 U.S.C.C.A.N. 88, 89. Such materials further state that participation “before filing for bankruptcy relief’ is anticipated, and that the purpose is to afford debtors “an opportunity to learn about the consequences of bankruptcy ... before they decide to file for bankruptcy relief.” Id. at 18,104.
As stated by Judge Squires of this court, Congress intended to discourage the practice of hastily filing bankruptcy petitions by “forcing debtors to ‘obtain their required counseling at a point in time far enough in advance of filing that they would at least be educated as to the consequences of bankruptcy.’ ” Gossett, 369 B.R. at 371 (interpreting pre-amendment section 109(h)(1)).
Be that as it may, the court cannot conclude that the language of the text as presently drafted is ambiguous. The Koo court found no such ambiguity, despite its analysis and partial reliance on legislative history. The Francisco court found ambiguity in the pre-amendment text, but only, it appears, extrinsic ambiguity. Francisco, 390 B.R. at 703-04 (citing other uses of the term “date” in the Bankruptcy Code where it appears Congress intended instead to mean “moment of filing”). As the court has been cautioned, however, “judicial surgery” of the kind entertained when seeking to remedy external ambiguity is not warranted when a plausible and unambiguous internal reading is available. In re Draiman, 714 F.3d 462, 466 (7th Cir.2013).
Without such a conclusion, the clear language of the statute controls, regardless of Congress’s intent. United States v. Lorenzetti, 467 U.S. 167, 178, 104 S.Ct. 2284, 81 L.Ed.2d 134 (1984) (“However useful ... statements of congressional intent may be in resolving ambiguities in the statutory scheme, they are not a license to ignore the plain meaning of a specific statutory provision.”).
2. The Tense of the Verb
The Koo court did, prior to entertaining the legislative history, analyze the structure of the statute. In so doing, as noted above, the court did not find ambiguity. In fact, the Koo court found that use of past tense in the statute supported its reading that credit counseling is a precondition to filing. Soohyun Koo, 2012 WL 692578, at *2. The opinion states,
Section 109(h)(1) requires that the debt- or “has ... received” credit counseling (instead of requiring that the debtor “receives” credit counseling) during the 180-day period ending on the date of filing of the petition. The statute’s use of past tense contemplates credit counseling obtained before the moment at which eligibility is tested, the moment of filing of the petition.
Id. (emphasis in original). The statute is not in the past tense (“received”), however. It is in the present perfect (“has received”). R. Huddleston & G.K. Pullum, *330The CaMbridge Grammar of the ENGlish Language 143 (2002). Unlike the simple past tense, which generally points to single occurrences in the past that are completed, the present perfect may be used to denote both past and present time. The present perfect is concerned “with a time-span beginning in the past and extending up to now. It is not used in contexts where the ‘now’ component of this is explicitly or implicitly excluded.” Id.
Even though it might appear that the use of the present perfect supports the court’s conclusion, such support is not necessary as neither of the past or the present perfect would make the statute ambiguous. Regardless of whether Congress had used the past or the present perfect, when considered in light of the defined period within which the action must have occurred, the result is the same. Either tense would suffice, as it is the period defined by Congress that provides the crucial meaning, not the tense.
As noted above, the plain language of that period includes all of the day on which the petition is filed. There is no ambiguity there.
3. The Other Provisions of Section 109(h)
A closer examination of the other subsections of section 109(h) shows that Congress, in implementing the credit counseling provisions contained therein, did not effectuate a consistent scheme of prepetition counseling.
Section 109(h)(4) sets forth an exemption to the credit counseling requirement that applies to those unable to receive credit counseling due to “incapacity, disability, or active military duty in a military combat zone.” 11 U.S.C. § 109(h)(4). That is, in and of itself, not inconsistent with a reading that section 109(h)(1) requires prepetition credit counseling.
Section 109(h)(3), which provides for a temporary abatement of the credit counseling requirements, is however inconsistent with such a reading. In this section, Congress states that “the requirements of paragraph (1) shall not apply” if a debtor can certify satisfactorily to the court that “exigent circumstances” exist meriting a waiver and that the debtor requested credit counseling but was unable to obtain said services within a seven-day period beginning on the date of the request. 11 U.S.C. § 109(h)(3)(A). Though described as an exemption, section 109(h)(3) actually creates a temporary abatement. The debtor receiving relief under section 109(h)(3) must still complete the credit counseling, albeit after the filing of the petition. The abatement ends in 30 days (or 45 if extended by the court for cause), or on the debtor having completed credit counseling, if earlier. 11 U.S.C. § 109(h)(3)(B).
If Congress solely intended debtors to obtain credit counseling so as to make pre-bankruptcy decisions, section 109(h)(3) serves no purpose. The stated goal could not possibly furthered by section 109(h)(3), and only section 109(h)(1) and (h)(4) would be appropriate. Congress must have seen value in postpetition credit counseling, or section 109(h)(3) would not exist.
Further, the wording of section 109(h)(3) is inconsistent with a strict reading of section 109(h)(1). Section 109(h)(3) states that the abatement shall “cease to apply ... on the date on which the debtor meets the requirement of [section 109(h)(1) ].” Without the benefit of a time machine, a debtor could never comply with a prepetition requirement postpetition, and debtors afforded the abatement would still have their cases dismissed, albeit slightly later in time. The section 109(h)(3) temporary abatement would simply be a stay of execution. Section 109(h)(3) clearly requires *331some flexibility as to timing in section 109(h)(1) or the latter would be meaningless.2
While together sections 109(h)(1), (3) & (4) do reflect a clear intention that most individuals receive credit counseling, taken together, that is all they reflect.
4. Recent Amendments to Section 109(h)(1)
In 2010, Congress amended the language of section 109(h)(1). Prior to amendment, phrase in question read “preceding the date of the filing of the petition.” This language, however, erred in the opposite direction of the present language. The express wording of the pre-amendment section dictated that a debtor complete the credit counseling requirement, at the latest, the day before the filing of the petition. Gossett, 369 B.R. at 371. Debtors who obtained credit counseling on the day of the petition were found to be ineligible. As noted above, such a reading was, however, not inconsistent with Congress’s presumed goal of “forcing debtors to ‘obtain their required counseling at a point in time far enough in advance of filing that they would at least be educated as to the consequences of bankruptcy.’ ” Id. (quoting In re Cole, 347 B.R. 70, 77 (Bankr.E.D.Tenn.2006)).
Yet Congress clearly disagreed, and amended section 109(h)(1) to its present language. Such amendment appears to have been for the express purpose of defeating holdings such as Gossett.
The existence of the amendment actually weakens the congressional intent argument, however. Under cases such as Gos-sett, a period of contemplation following the taking of the credit counseling was mandatory. Congress expressly amended away any such period of contemplation in 2010. Even under the more restrictive reading of “date” as the moment of filing of the petition, no period of contemplation need exist under the present statute. One debtor might file a petition a mere instant after obtaining the counseling, with no time for contemplation having occurred, while another debtor might file the petition an instant after. How are such debtors substantively different? Reading section 109(h) restrictively would separate two nearly identical debtors on nothing other than a technicality. No policy goal would be achieved.
It is, of course, possible that Congress intended to bar the second such debtor from the protections of bankruptcy on a mere technicality. But the existence of such a possibility puts paid to any argument that Congress’s intent should govern. No clear congressional intent exists post the 2010 amendments, and such intent could not in any case override the clear language of the statute. There is no justification for going beyond the clear language of the statute, and likewise no reason to muddle that clear language with fabricated constructs of timing. Pioneer, 507 U.S. at 388, 113 S.Ct. 1489; Burnet, 282 U.S. at 440, 51 S.Ct. 185.
The existence of the amendment is also notable as it is clear that, in so amending *332the statute, Congress was aware of possible misreadings of the timing. In making the amendment, Congress could have chosen more precise wording. Either “ending on the date and time of the filing of the petition” or “ending with the filing of the petition” or “ending at the moment of filing” would have furthered Congress’s presumed intent. Congress, in drafting the companion counseling section noted earlier, did in fact choose such precise language. In establishing the time period for obtaining postpetition counseling, Congress expressly stated that such period begins “after filing of the petition.” 11 U.S.C. § 1328(g)(1). Congress used similar phrasing in section 109(h)(8). In neither case did Congress choose the broader phrase “date of the petition.”
Congress showed in each case that it is not constrained from using more precise language. But Congress did not choose language of such precision in section 109(h)(1).
The existence of the 2010 amendment serves to underscore that, in light of the importance of the right to avail oneself of bankruptcy relief, Wright, 311 U.S. at 279, 61 S.Ct. 196 reading Congress’s plain, unambiguous choice of language in section 109(h)(1) as something other than plain for the mere sake of effectuating Congress’s presumed intent, would be incorrect.
5. The Petition Form
It could also be argued that the existing bankruptcy petition form also supports the reading of section 109(h)(1) as permitting only prepetition credit counseling.
It is true that the existing form does not contemplate a circumstance where a debt- or does not have credit counseling but will obtain it without seeking the waiver provided in 109(h)(3) after filing the petition. It is also true, therefore, that the plain language of section 109(h)(3) is at odds with the petition form.
While that is unfortunate, it points to an issue with the form, not the statute. Bankruptcy “forms, rules, treatise excerpts, and policy considerations ... must be read in light of the Bankruptcy Code provisions that govern ..., and must yield to those provisions in the event of a conflict.” Schwab v. Reilly, 560 U.S. 770, 779 n. 5, 130 S.Ct. 2652, 2660 n. 5, 177 L.Ed.2d 234 (2010).
CONCLUSION
For all of the foregoing reasons, the court finds that the Debtor has complied with 11 U.S.C. § 109(h)(1). For that reason, the Motion is not well taken and should be denied. A separate order to that effect will be entered by the court.
ORDER
This matter comes before the court on the Motion to Dismiss Case for Ineligibility (the “Motion”) to determine eligibility of a debtor under section 1307 of title 11 of the United States Code filed by Marilyn O. Marshall (the “Trustee ”) against debtor Charles Walker (the “Debtor”) in the above-captioned bankruptcy proceeding; the court having jurisdiction over the subject matter and the Trustee having appeared and the Debtor being absent at the hearing that occurred on November 18, 2013; the court having considered the Motion, the relevant filings, the statutory language and the arguments presented by the Trustee having appeared; and court having issued a Memorandum Decision on this same date wherein the court found that the Motion is not well taken;
NOW, THEREFORE, IT IS HEREBY ORDERED:
The Motion is DENIED.
. Section 109(h) itself is captioned “Who may be a debtor.” Controlling law dictates "that the title of a statute and the heading of a section cannot limit the plain meaning of the text.” Brotherhood of R.R. Trainmen v. Baltimore & O.R. Co., 331 U.S. 519, 528-29, 67 S.Ct. 1387, 91 L.Ed. 1646 (1947). Nonetheless, it has been suggested that this heading defines the purpose of the section and should be used to interpret the text therein. It is further suggested that, as is set forth in more detail infra in considering the legislative history, such purpose is to set forth pre-condi-tions to filing a case, i.e. conditions that must be met in order for a case to be commenced. Put another way, section 109(h) of the Bankruptcy Code is said to define the eligibility to become a debtor. Read in conjunction with section 301 of the Bankruptcy Code, these suggestions are understandable. See 11 U.S.C. § 301(a). Nonetheless, section 109 requirements are not jurisdictional and do not bar at the courthouse steps a party who is purportedly ineligible. Hamilton Creek Met. Dist. v. Bondholders Colorado Bondshares (In re Hamilton Creek Met. Dist.), 143 F.3d 1381, 1385 n. 2 (10th Cir.1998); Montgomery v. Ryan (In re Montgomery), 37 F.3d 413, 415 n. 5 (8th Cir.1994); Promenade Nat'l Bank v. Phillips (In re Phillips), 844 F.2d 230, 235 n. 2 (5th Cir.1988).
Cases commenced by such parties are not nullities. In re Ross, 338 B.R. 134, 138-39 (Bankr.N.D.Ga.2006); In re Flores, 291 B.R. 44, 52 (Bankr.S.D.N.Y.2003). While such cases may later be dismissed on eligibility grounds, during the pendency of the case, the automatic stay and other essential protections apply, and should the case be dismissed, a subsequent case will be affected thereby. See, e.g., 11 U.S.C. § 362(c)(3) & (4). Whether a petition is filed the minute before or the minute after credit counseling is obtained will always be heard at a later date in the case so commenced, at which point the criteria of eligibility will either have been satisfied or not. Put another way, while such conditions might define who may remain a debtor once considered by the court, they do not define who may become a debtor. For these reasons, the court sees no principled reason to ignore the plain language of the statute's text in favor of its heading.
. Even the timing of section 109(h)(3) is problematic. Section 109(h)(3) appears to only apply when a debtor is only able to obtain credit counseling within seven days after making the request. But what if the debtor makes the request the morning of a filing? How does that seven-day period calculate in such instances? Presume the counseling is available the next day (postpetition), which is within seven days. Is the debtor therefore excluded from section 109(h)(3) relief as the strict requirements of section 109(h)(3)(ii) are not met, but such debtor is unable to take the credit counseling per section 109(h)(1)? Again, some flexibility is required here, lest debtors be denied the essential assistance offered by bankruptcy on a technicality. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496566/ | SHODEEN, Bankruptcy Judge.
The Debtors, James Allen Carter, Jr. and Leigh Emory Carter, appeal from the Bankruptcy Court’s1 order entered on April 22, 2013 denying the Debtors’ Motion for Sanctions against First National Bank of Crossett. For the reasons that follow, we AFFIRM.
BACKGROUND
Jim A. Carter, Jr. Logging, LLC (the “LLC”) was formed with James Allen Carter (“Carter”) as its sole member. First National Bank of Crossett (the “Bank”) entered into two loans with the LLC dated October 22, 2009 and September 21, 2012. Each of these loans was secured by logging equipment owned by the LLC, and personally guaranteed by Carter. On October 24, 2012, Carter, as the only signato*335ry, executed a document identified as an Assignment2 which stated:
For valuable consideration, receipt of which is hereby acknowledged, Jim A. Carter, Jr., member, and Jim A Carter Logging, LLC, by Jim A. Carter, Jr., the sole member, sells, transfers, assigns and conveys to Jim A. Carter, Jr., his heirs and assigns, all of the right, title, and interest of assignors in and to the following property: all interests and assets of Jim A. Carter Logging, LLC.
The Bank was not informed of this transaction nor provided a copy of the Assignment at this time. The following day, Carter filed a joint chapter 13 petition with his spouse, which was later dismissed for failure to file a listing of creditors. A second chapter 13 petition was filed on November 2, 2012. On this same date, naming only the LLC as a defendant, the Bank commenced a state court action to recover the collateral subject to its secured loans.
The Ashley County Clerk of Court provided notice of the replevin suit and the time period to object to the issuance of an order requiring delivery of the identified equipment to both the LLC and Carter as its registered agent. No objections were filed. The right to immediate possession of the equipment was granted under an Order of Delivery issued on November 14, 2012. On November 16, 2012, Carter filed, and served upon the Bank, a Motion requesting that the Order of Delivery be stayed which included copies of the Assignment and Notice of Commencement of his bankruptcy case. After conducting a telephonic hearing on Carter’s stay request, the Ashley County Circuit Judge directed the Sheriff to pick up the equipment and retain the items pending further order.
Carter then filed a Motion for Contempt in his bankruptcy case and requested an emergency hearing. The Bankruptcy Court ordered the equipment returned to Carter, and specifically reserved ruling on whether the stay violation was willful. Within the established time period, a Motion for Sanctions was filed seeking compensatory and punitive damages for the Bank’s willful violation of the automatic stay. On April 16, 2013, at the conclusion of the hearing3 on this Motion, the Bankruptcy Court ruled that there was no willful violation of the stay, and that Carter failed to establish his claim for damages. The Debtors appeal this ruling.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact 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 on sanctions is reviewed for an abuse of discretion. Garden v. Cent. Neb. Housing Corp., 719 F.3d 899, 906 (8th Cir.2013) (citing Schwartz v. Kujawa (In re Kujawa), 270 F.3d 578, 581 (8th Cir.2001)). 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 *336F.3d 647, 651 (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. v. Sparks (In re Apex Oil Co.), 406 F.3d 538, 541 (8th Cir.2005) (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
Effective upon the filing of a bankruptcy petition is the fundamental right afforded to debtors by the automatic stay which stops collection actions by creditors on pre-petition obligations. 11 U.S.C. § 362(a) (2012). “[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. section 362(k) (2012). A debtor seeking such sanctions must demonstrate, by a preponderance of the evidence, that a creditor acted willfully in violation of the stay and that an injury resulted from that conduct. Frankel v. Strayer (In re Frankel), 391 B.R. 266, 271 (Bankr.M.D.Pa.2008); In re Cedar Falls Hotel Properties. Ltd. P’ship, 102 B.R. 1009, 1014 (Bankr.N.D.Iowa 1989).
To be willful, a creditor must take deliberate action “with the knowledge” that a bankruptcy petition has been filed. Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773, 775 (8th Cir.1989); In re Cullen, 329 B.R. 52, 57 (Bankr.N.D.Iowa 2005). A willful violation does not require a finding of specific intent, Associated Credit Servs. v. Campion (In re Campion), 294 B.R. 313, 316 (9th Cir. BAP 2003). “[A]n act is deemed to be a willful violation if the violator knew of the automatic stay and intentionally committed the act regardless of whether the violator specifically intended to violate the stay.” Preston v. GMPQ, LLC (In re Preston), 395 B.R. 658, 663 (Bankr.W.D.Mo.2008) (citing Jove Eng’g, Inc. v. IRS, 92 F.3d 1539, 1555 (11th Cir.1996)).
Carter argues that the Bankruptcy Court’s decision is erroneous because the Bank clearly had notice of the Debtors’ bankruptcy filing prior to the time the repossession occurred. See Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773, 775 (8th Cir.1989) (a violation is willful if a creditor acts deliberately with knowledge of the bankruptcy). He further asserts that the Bank’s refusal to return the equipment until ordered to do so establishes a continuing willful violation. These arguments are not persuasive.
Carter’s argument is misplaced. Although the evidence suggests that the Bank may have been aware of Carter’s personal bankruptcy filing, there is no evidence that the Bank had knowledge of the Assignment and the purported transfer of the LLC’s assets to him. The replevin action filed by the Bank did not name Carter, individually, and sought only to repossess equipment owned by the LLC in which the Bank had a properly perfected security interest. Consequently, there can be no knowing or deliberate conduct attributed to the Bank in its conduct to enforce its lien against the collateral it believed was owned by the LLC. At issue here is not whether the Bank had knowledge of Carter’s personal bankruptcy filing; but rather, whether it knew that its collateral had been transferred from the LLC to Carter, personally, which it did not. Absent a showing that the Bank was aware of the Assignment, a willful stay violation cannot be found. At the hearings and in its brief, the Bank disputed whether the Assignment constituted a valid trans*337fer of the assets.4 Under this circumstance, its refusal to return the equipment until ordered to do so was neither unreasonable nor willful.
The Bank admitted that after it had knowledge of the Assignment and Carter’s bankruptcy filing, it sent a required UCC notice to Carter. The Bank sent the letter believing the Assignment was of no force and effect and was invalid. The notice involved a legal process to liquidate the collateral and apply the proceeds to its indebtedness. In Cash Am. Pawn, L.P. v. Murph, a creditor’s postpetition letter to the debtor did not intentionally violate the automatic stay because “it is not a violation of the automatic stay for a creditor to advise debtor’s counsel that he will take any action that he may legally take under the Bankruptcy Code.” 209 B.R. 419, 424 (E.D.Tex.1997) (quoting United States ex rel. Farmers Home Admin. v. Nelson, 969 F.2d 626, 630 (8th Cir.1992)). Here, the notice sent by the Bank was a letter advising Carter of his rights under the Uniform Commercial Code. Although this action violated the automatic stay, we agree with the Bankruptcy Court that any violation was technical and not willful in nature.
A finding that there has been a willful violation of the automatic stay is a prerequisite to an award of sanctions. Courts are unwilling to impose sanctions if the violation is merely technical. In re Reisen, No. 03-01999, 2004 WL 764628, at *6 (Bankr.N.D.Iowa Mar. 4, 2004). Accordingly, the legal notice provided to Carter does not warrant an award of damages. Although the Bankruptcy Court determined that there was no willful violation of the automatic stay by the Bank in the repossession of the equipment, it further held that Carter failed to meet his burden of proof to establish either compensatory or punitive damages. Because we agree that there was no willful violation, it is not necessary to address the issue of damages.
Based upon the record and the applicable legal standards, the Bankruptcy Court did not abuse its discretion when it denied the Motion for Sanctions. Accordingly, the Bankruptcy Court’s Order is affirmed.
. The Honorable James G. Mixon, United States Bankruptcy Judge for the Western District of Arkansas.
. As explained by the record, the apparent purpose of this transaction was to qualify the Carters for Chapter 13 relief, and to economically address the liabilities of both the LLC and Carter, individually by way of a single bankruptcy case.
. The Bankruptcy Court and parties agreed that the record from the emergency hearing conducted on November 19, 2012 would be included as evidence in the Motion for Sanctions.
. The Bankruptcy Court made no dispositive determination on this issue. Because our review is not dependent upon the validity of the Assignment, and would not change the outcome of our decision, it is not addressed in this appeal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496567/ | NAIL, Bankruptcy Judge.
Steve Conway appeals the April 8, 2013 order of the bankruptcy court1 denying a motion for relief from judgment under Fed.R.Bankr.P. 9024 and Fed.R.Civ.P. 60. Because Conway lacks standing to appeal the bankruptcy court’s order, we dismiss this appeal.
BACKGROUND
LorCon LLC # 1 (“LorCon”) invested in Heyl Partners Station Plaza (“Heyl Partners”) and Johns Folly Ocean Villas, LLC (“Johns Folly”), two real estate development ventures Debtor Richard Michael Heyl had promoted to Steve Conway, a principal of LorCon. In early 2007, when Heyl Partners ran into severe financial difficulties, Debtor presented LorCon with the option of transferring its interest from Heyl Partners to either Johns Folly or Madaford Gardens, LLC, or turning its investment into a loan to be paid back over time.2 LorCon opted to transfer its Heyl Partners investment into an additional investment in Johns Folly, with the transfer back-dated to the first of the year. Attendant to this deal, Debtor also promised to assign six months of a 20% member’s passive loss in 2007 from Heyl Partners to Conway and his wife personally, and he guaranteed to buy back, between January 2010 and May 2010, LorCon’s investment in Johns Folly, including subsequent capital calls. The value of LorCon’s transfer of its investment from Heyl Partners to Johns Folly was negotiated in large part based on Debtor’s representations concerning an asserted recent investment in Johns Folly by an apparent insider, Mary Beth Kinsella.
After the 2007 transfer of its interest from Heyl Partners to Johns Folly, Lor-Con also fulfilled two large capital calls by Johns Folly, further increasing its investment. Ultimately, the Johns Folly venture also failed.
After Debtor filed for relief under chapter 7 of the bankruptcy code, LorCon filed a proof of claim for $61,500 for its 2007 investment in Johns Folly and $18,000 for the two subsequent capital calls by Johns Folly, for a total claim of $79,500. LorCon and Conway also commenced an adversary proceeding seeking a determination by the *340bankruptcy court that LorCon’s claim against Debtor should be excepted from discharge for fraud pursuant to 11 U.S.C. § 523(a)(2)(A). Though not clearly delineated in the complaint’s prayer for relief, LorCon and Conway quantified LorCon’s damages at $61,500 for LorCon’s transfer of its investment from Heyl Partners to Johns Folly and $18,000 for LorCon’s two subsequent capital calls by Johns Folly, for a total claim of $79,500.3 They did not assign any damages to Debtor’s failure to transfer the passive losses from Heyl Partners to Conway and his wife personally or to the unfulfilled buyback guarantee.
Following a trial, the bankruptcy court entered findings and conclusions and an order, drawing limited distinction between LorCon and Conway. The bankruptcy court found Debtor had indeed made false representations about Kinsella’s investment in Johns Folly, but held “Conway has not proven that Debtor’s representations concerning the 20% passive loss or the guaranteed buy-back were false at the time that they were made[.]” The bankruptcy court concluded LorCon had not shown its losses-both the initial transfer of its interest from Heyl Partners to Johns Folly and its subsequent additional capital investments in Johns Folly-were the proximate result of Debtor’s false representations about Kinsella’s investment in Johns Folly. The bankruptcy court further concluded LorCon and Conway had not established damages, especially where Heyl Partners would have had no value if Lor-Con had kept its investment there. Finally, the bankruptcy court stated “there is no basis for this Court to conclude that had Debtor not made the false representation concerning [Kinsella, Conway] would have instead chosen the Madaford Gardens investment opportunity.” Neither LorCon nor Conway appealed the bankruptcy court’s order.
On February 11, 2018, LorCon and Conway filed a motion for relief from judgment, generally citing Fed.R.Bankr.P. 9024 and Fed.R.Civ.P. 60. In their motion, they alleged some testimony at trial was false, and they claimed they had newly discovered evidence regarding the financial condition of Johns Folly in 2007.4 Throughout the motion, they argued had Debtor not knowingly misrepresented the financial condition of Johns Folly, LorCon would have transferred its investment from Heyl Partners into Madaford Gardens, rather than into Johns Folly, and would not have paid the additional capital calls for Johns Folly. They opined the bankruptcy court on reconsideration would — without the fraudulent testimony, but with the newly discovered evidence— find the previously missing proximate cause element of § 523(a)(2)(A) and award damages of $79,500 for LorCon’s investments in Johns Folly. LorCon and Conway did not address either Debtor’s promise to transfer the passive losses to Conway and his wife personally or the buyback guarantee.
The bankruptcy court concluded LorCon and Conway were proceeding under Rule 60(b)(2) and denied the motion. The bankruptcy court found LorCon and Conway had not shown why a certain email from Debtor to Conway could not have been discovered before trial. The bankruptcy court also concluded even if the Heyl Part*341ners investment had been transferred into Madaford Gardens rather than into Johns Folly, the investment in Madaford Gardens would also be “virtually worthless today.”
LorCon and Conway timely appealed the bankruptcy court’s order denying their Rule 60 motion. LorCon’s attorney was permitted to withdraw, and LorCon was later dismissed from the appeal.
Conway proceeds in this appeal pro se, arguing the bankruptcy court erred in concluding Madaford Gardens has de minimis value, the bankruptcy court failed to consider an “out-of-pocket” measure of damages and all the alternative arguments for damages presented “in the Motion,” and the bankruptcy court failed to address the Rule 60 motion under subsections other than 60(b)(2). In his responsive brief, Debtor argues Conway’s Rule 60 motion only re-argued the theories LorCon and Conway had advanced at trial, and Debtor argues Conway did not demonstrate why the several documents he now wants considered had not been presented at trial. In his reply brief, Conway again argues the bankruptcy court’s denial of the Rule 60 motion should be reversed and the matter remanded because of errors made by the bankruptcy court. Except for a single reference to an exhibit attached to the Rule 60 motion, Conway’s reply brief does not meaningfully relate to that motion.
Two motions attendant to the appeal are also pending. Conway wants to supplement the record with several documents. Debtor wants us to strike certain portions of Conway’s appeal brief, and he does not want us to consider the several documents Conway wishes to add to the record.
STANDARD OF REVIEW
An order denying a motion for relief under Rule 60(b)5 is final and may be appealed. Sanders v. Clemco Indus., 862 F.2d 161, 164-65 n. 3 (8th Cir.1988). Generally, we review a bankruptcy court’s denial of relief under Rule 60(b) only for abuse of discretion. Kocher v. Dow Chemical Co., 132 F.3d 1225, 1229 (8th Cir.1997); Sanders, 862 F.2d at 169 (citing United States v. Young, 806 F.2d 805, 806 (8th Cir.1986) {per curiam)).
A court abuses its discretion when a relevant factor that should have been given significant weight is not considered; when an irrelevant or improper factor is considered and given significant weight; or when all proper factors and no improper ones are considered, but the court commits a clear error of judgment in weighing those factors.
City of Duluth v. Fond du Lac Band of Lake Superior Chippewa, 702 F.3d 1147, 1152 (8th Cir.2013). Because a Rule 60(b) motion cannot substitute for an appeal, Sanders, 862 F.2d at 169-70, 170 n. 16, an appeal from the denial of such a motion does not present the underlying judgment for our review. Id. at 169-70.
DISCUSSION
We must first examine our jurisdiction and determine whether Conway has standing to appeal the bankruptcy court’s denial of the Rule 60 motion. AgriProcessors, Inc. v. Iowa Quality Beef Supply Network, LLC (In re Tama Beef Packing, Inc.), 92 Fed.Appx. 368 (8th Cir. Feb. 6, 2004) (court has independent obligation to examine its jurisdiction); Peoples v. Radloff (In re Peoples), 494 B.R. 395, 397 (8th Cir. BAP 2013) (appellate panel must examine the appellant’s standing). *342“Appellate standing in bankruptcy cases is more limited than Article III standing or the prudential standing requirements associated therewith.” Sears v. U.S. Trustee (In re AFY), 734 F.3d 810, 819 (8th Cir. 2013) (quoting Harker v. Troutman (In re Troutman Enters., Inc.), 286 F.3d 359, 364 (6th Cir.2002)). “ ‘[T]he person aggrieved doctrine[ ] limits standing to persons with a financial stake in the bankruptcy court’s order,’ meaning they were ‘directly and adversely affected pecuniarily by the order.’ ” Id. (quoting Williams v. Marlar (In re Marlar), 252 B.R. 743, 748 (8th Cir. BAP 2000)).
Here, Conway does not possess a financial stake in the bankruptcy court’s order denying the Rule 60 motion. Though he was a plaintiff in the adversary proceeding, Conway does not possess a pecuniary interest that was directly and adversely affected by that particular order. United States v. Northshore Mining Co., 576 F.3d 840, 846-47 (8th Cir.2009). Whatever impact the bankruptcy court’s Rule 60 order had, it was felt only by LorCon, which has been dismissed from this appeal. The Rule 60 motion did not request any relief that would affect Conway directly, and thus, in denying that motion, the bankruptcy court did not adversely and directly affect Conway.
Finally, even though he is a member of LorCon, Conway may not assert LorCon’s interests on appeal. Mo.Rev. Stat. § 347.069;6 see Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 120 (Mo.2010) (“Separate [business] entities rise and fall on their own claims.... [E]ach entity must plead and prove its claims individually to be entitled to relief.”); United States v. Petters, 857 F.Supp.2d 841, 845 (D.Minn.2012) (law of jurisdiction that creates an alleged property right determines the validity of that interest); see also Rosenberg v. DVI Receivables, XIV, LLC, No. 12-CV-22275, 2012 WL 5198341, at *2 (S.D.Fla. Oct. 19, 2012) (shareholder standing doctrine may apply to members of a limited liability company).
A limited liability company ... “is a form of legal entity that has the attributes of both a corporation and a partnership but is not formally characterized as either.” A member ... is a person who has been admitted to the limited liability company as a member. A member’s interest in the company is personal property, and a “member has no interest in specific limited liability company property.” The limited liability company, not a member, is the proper party to enforce the limited liability company’s rights against third parties.
In re Bison Park Development, LLC, Bankr.No. 07-22754, 2011 WL 4498848, at *3 (Bankr.D.Kan.2011) (internal footnotes referencing applicable Missouri statutes on limited liability companies omitted). Here, Conway does not possess a separate and distinct injury arising from the bankruptcy court’s order denying the Rule 60 motion. Moreover, there is nothing in the record to *343suggest LorCon could not or would not advance its own rights on appeal. See Mo.Rev.Stat. § S47.171.7
CONCLUSION
Conway does not have standing to appeal the bankruptcy court’s denial of the Rule 60 motion. His appeal is therefore dismissed, and the attendant pending motions are denied as moot.
. The Honorable Kathy A. Surratt-States, Chief Judge, United States Bankruptcy Court for the Eastern District of Missouri.
. Conway argues on appeal Debtor did not offer the "loan” option.
. The appeal record is unclear on whether the funds for the capital calls came from LorCon or Conway, though the equity position was maintained by LorCon.
. The desultory nature of Conway's briefs make it difficult to distinguish his arguments on appeal regarding the bankruptcy court's ruling on the Rule 60 motion from his rehashing of the theories and arguments advanced at trial.
. Federal Rule of Bankruptcy Procedure 9024 makes Fed.R.Civ.P. 60 applicable in most bankruptcy proceedings.
. Section 347.069 of Mo.Rev.Stat. provides, in pertinent part:
A member, manager, employee, or agent of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object is to enforce such person’s right against or duty or liability to the limited liability company. Notwithstanding any provision of sections 347.010 to 347.187 to the contrary. any person, including a member, manager, employee or agent of a limited liability company, against whom a claim exists may be joined as a proper party to proceedings by or against a limited liability company to the extent the claim arises out of the transaction or occurrence that is the subject matter of the claim against the limited liability company.
. Section 347.171 of Mo.Rev.Stat. provides (emphasis added):
A member may bring an action in the right of the limited liability company to recover a judgment in its favor if all of the following conditions are met:
(1) The plaintiff does not have the authority under the provisions of the operating agreement to cause the limited liability company to sue in its own right;
(2) The plaintiff has made demand on the authorized person or persons having the authority to cause the limited liability company to institute such action requesting that such persons cause the limited liability company to sue in its own right;
(3) The persons with such authority have refused to bring the action or, after adequate time to consider the demand, have failed to respond to such demand; and
(4) The plaintiff is a member of the limited liability company at the time of bringing the action, and was a member of the limited liability company at the time of the transaction of which he complains, or his status as a member of the limited liability company thereafter devolved upon him by operation of law or pursuant to the terms of the operating agreement from a person who was a member at such time. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496568/ | Chapter 7
MEMORANDUM DECISION DENYING THE DEBTOR’S DISCHARGE
Robert E. Grossman, United States Bankruptcy Judge
This matter is before the Court pursuant to an adversary proceeding commenced by Rockstone Capital, LLC (the “Plaintiff’)- against Keith Bub (the “Debt- or” or the “Defendant”) seeking to deny the Debtor’s discharge pursuant to 11 U.S.C. § 727(a)(4)(A). The Plaintiff, which is the Debtor’s largest creditor, has attempted without success to collect on a prepetition judgment against the Debtor for the last several years. It is undisputed that prepetition, the Debtor transferred three valuable vehicles from his name into his young son’s name, that he transferred his 1/3 interest in real property to an LLC owned by the Debtor. Debtor also admits that after he transferred the three vehicles to his son, he pledged the three vehicles as collateral to secure the debt of another wholly owned business of the Debtor. However, just prior to filing the petition, the Debtor transferred the vehicles back into his name and listed the three vehicles as assets of his bankruptcy estate. The Plaintiff seeks to have the Debtor’s discharge denied under 11 U.S.C. § 727(a)(4)(A) based on false statements made by the Debtor in the petition, schedules and statement of financial affairs. *349First, the Plaintiff claims that the Debtor falsely listed an ownership interest in the vehicles as of the date the petition was filed because the transfer of ownership from his minor son was not completed until post-petition. Second, the Debtor provided false and fraudulent values for the three vehicles in his schedules and falsely claimed a vehicle exemption in one of the vehicles in the hopes of buying one of the vehicles back from the estate for far less than it was actually worth. Third, the Plaintiff alleges that the Debtor falsely and fraudulently overstated his expenses and understated his income. The Plaintiff asserts that these false oaths were made in order to deceive the creditors and the Court regarding the Debtor’s true financial condition.
At trial, the Plaintiff placed great emphasis on the causes of action regarding the three vehicles to show a violation under 11 U.S.C. § 727(a)(4)(A). However, because the Debtor’s statements regarding the three vehicles were neither false nor fraudulent, this argument must fail. Conversely, the causes of action regarding the false and misleading representations in the Debtor’s petition and schedules relative to his income and expenses, which were the subject of minimal discussion during the trial but are fully set forth in the eviden-tiary record, do present a clear basis for the denial of the Debtor’s discharge. The Court has reviewed the entire record of this adversary proceeding, including the voluminous exhibits submitted by the Debtor at trial. As a result of the misstatements, including the Debtor’s failure to disclose all of the income he derived from his wholly owned business, the Debt- or’s monthly income was understated by at least $1,800.00. The Debtor accomplished this by falsely representing in the statement of financial affairs that he used a personal credit card solely for business expenses, when in fact this credit card was used for business and personal expenses. The Debtor’s explanation that he relied on his accountant’s calculations to prepare Schedules I and J does not support his defense. Neither the total amount of income listed, nor the individual expenditures themselves, bear any relationship to the Debtor’s actual income and expenses, based on the Debtor’s own financial records. Furthermore, the Debtor’s explanation that he and his solely owned business are one and the same, so he had the right to run his personal expenses through the bank account for the business, does not absolve the Debtor in this case. Regardless of whether he used his solely owned business as his personal piggy bank, it is the Debtor’s failure to include as income all of the funds he took from this business for his own personal benefit, the fact that the Debtor’s listed income and expenses are not supported by the documentary evidence, along with his misrepresentation in the petition that the Debtor’s business had no assets, that warrant denial of the Debt- or’s discharge. Based on the foregoing, the Debtor’s discharge is denied pursuant to 11 U.S.C. § 727(a)(4)(A).
PROCEDURAL HISTORY
On November 22, 2011 (the “Petition Date”), the Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code, and listed it as a no-asset case. Kenneth Kirschenbaum, Esq. was appointed as trustee of the case (“Trustee”). The first meeting of creditors was held on December 21, 2011, and adjourned to January 10, 2012. On December 22, 2011, the Trustee filed a notice of discovery of assets in the Debtor’s case. On April 19, 2012, the Plaintiff filed the complaint. On May 23, 2012, the Debtor filed an answer with a counterclaim seeking sanctions against the Plaintiff pursuant to Fed. R. Bankr.P. 9011. On June 6, 2012, the Plaintiff filed a *350reply to the counterclaim. On November 7, 2012, a final pretrial order was entered fixing a trial date of February 12, 2013. On February 4, 2013, the parties filed a joint pretrial memorandum. According to the joint pretrial memorandum, the Plaintiff withdrew the sixth cause of action seeking to deny the Debtor’s discharge pursuant to Bankruptcy Code § 727(a)(5), leaving the first through fifth causes of action seeking to deny the Debtor’s discharge pursuant to Bankruptcy Code § 727(a)(4)(A). A trial on the remaining five causes of action was held on February 12, 2013, and all of the exhibits of the Plaintiff and the Defendant were admitted into the record without objection. Upon conclusion of trial, the matter was marked submitted.
FACTS
The Plaintiff is a creditor of the Debtor pursuant to a judgment entered in New York State Supreme Court, Suffolk County on May 27, 2009, in the amount of $632,466.80. The debt arose in connection with a loan made by the Plaintiff to one of the Debtor’s former businesses, which loan the Debtor had guaranteed. The Debtor owned and operated several businesses over his professional career related to computer consulting for small businesses. Transcript of trial, February 27, 2013 (“Trial Tr.”), p. 41-43. As of the Petition Date, the Debtor’s sole source of income is derived from The Storage Guys, Inc. (“The Storage Guys”), of which he owns 100% of the shares. The Storage Guys is a computer consulting business.
According to Schedule B of the petition, the Debtor owned three Dodge Viper automobiles as of the Petition Date: a 2003 model with a listed valued of $34,691.00, a 1996 model with a listed value of $17,339.00, and a 1994 model with a listed value of $13,359.00 (collectively, the “Vipers”). In Schedule C of the petition, the Debtor claimed an exemption in the 1996 Viper in the aggregate amount of $15,230.56. The Debtor listed the Vipers as encumbered by a judgment lien held by Jaylyn Sales, Inc. (“Jaylyn”) in the amount of $195,000, which lien was listed as “disputed.” Post-petition, the Debtor amended Schedule D to reflect that Jaylyn only had a disputed warehouseman’s lien on the Vipers in the amount of $2,086.91, and the reference to the $195,000 judgment lien was deleted from Schedule D.
On Schedule B, the Debtor listed a 100% ownership interest in County Road 32 LLC, with an “unknown” value. County Road 32 LLC is the 1/3 owner of a condominium (“Gainesville Condo”) in Gaines-ville, Florida.1 The Debtor also disclosed on Schedule D that he is obligated to Wells Fargo Home Mortgage in the amount of $124,472.40. The Wells Fargo obligation is secured by a mortgage on the Gaines-ville Condo, which property the Debtor values at $100,000.2 The Debtor’s older daughter and her fiancé live at the Gaines-ville Condo, and do not pay rent. On Schedule J of the petition, the Debtor listed a rent or home mortgage payment expense in the amount of $550.00 per month. The Debtor also listed an expense in the monthly amount of $135.00 for the Gaines-ville Condo maintenance fee.
On Schedule B of the petition, the Debt- or listed his 100% stock interest in The Storage Guys. In the petition, the Debtor *351described the Storage Guys as having no assets, and valued his stock interest at $0. In the Statement of Financial Affairs, the Debtor listed a credit card, which he claimed was used solely for business expenses, and was paid by The Storage Guys directly.
On Schedule I of the petition, the Debt- or listed monthly income in the amount of $3,837.24, which is generated from his employment by The Storage Guys, and listed a monthly contribution towards household expenses in the amount of $1,100 from Susan Lane, the Debtor’s current girlfriend, with whom he lives. The Debtor also listed a monthly health insurance expense in the amount of $661.00, and a monthly electricity and heating expense in the amount of $385.00.
The Vipers
At trial, the Debtor testified that the 1996 Viper was purchased new for $72,157.16. Trial Tr., p. 89. In December, 2007, the Debtor transferred the Vipers into his son’s name, who was one at the time. Trial Tr., p. 55-56. The Debtor testified that he was in the midst of a divorce in 2007, and he transferred the Vipers to his one year old son upon the advice of his divorce attorney. In 2008, when the Debtor no longer had title to the Vipers, the Debtor obtained insurance for the Vipers for an aggregate value of $140,000. (Plaintiffs Ex. 5). The 1996 Viper was valued at $50,000 according to the 2008 auto insurance policy. (Plaintiffs Ex. 5). On December 12, 2007, notwithstanding the fact that the Debtor no longer owned the Vipers, the Debtor pledged the Vipers as collateral for a loan made by Jaylyn to The Storage Guys in the amount of $195,000. (Plaintiffs Ex. 13). The loan was memorialized in a written note. (Plaintiffs Ex. 13). The security interest granted to Jaylyn in the Vipers was never perfected because it was never noted on the certificates of title to any of the Vipers. However, Jaylyn did retain possession of the certificates of title to the Vipers. Trial Tr., p. 70. The Debtor testified that he used approximately $110,000 of the loan proceeds to pay his obligations under the divorce settlement with his ex-wife, and the remainder was retained for use by The Storage Guys. Trial Tr., p. 62. On November 10, 2011, title to the Vipers was transferred from the Debtor’s son back to the Debtor. Trial Tr., p. 72. (Plaintiffs Ex. 18). The Debtor received the titles for the Vehicles from the Department of Motor Vehicles on December 1, 2011.
During his testimony, the Debtor admitted that he failed to disclose his transfer of the Vipers to his son in a deposition conducted prepetition. According to the Debtor, he did not consider the transfer of the Vipers to his son to fall within the definition of “disposing of’ these assets. Trial Tr., p. 84-85.
Prior to listing the value of the Vipers in Schedule B of the petition, the Debtor consulted the Edmunds website and the Kelley Blue Book website to determine the value of the Vipers. The Edmunds website listed a value range for the 1996 Viper at $17,339.00 as a trade-in, and $19,409.00 for a private party sale. (Plaintiffs Ex. 21). The Kelley Blue Book website listed a value range of $36,636.00 to $39,386.00 for a private party sale, depending on the condition of the vehicle. (Plaintiffs Ex. 22). The Debtor testified that he gave his attorney the information from both websites. Trial Tr., p. 103-104. The Debtor also acknowledged that in response to the Plaintiffs request for information on the value of the Vipers, counsel to the Debtor submitted a letter to counsel to the Plaintiff, indicating that the 1996 Viper had a value of $17,339.00 pursuant to the Ed-munds website, and that the Kelley Blue Book did not provide valuations for the *352Vipers. (Defendant’s Ex. A). Trial Tr., p. 101. The Debtor had no explanation for why the letter contained the incorrect reference to the Kelley Blue Book valuations. According to the Debtor, he had no expectation that the Trustee would accept the value the Debtor ascribed to any of the assets listed in the petition. Trial Tr., p. 134. The Debtor also acknowledged that contrary to the information on the petition as originally filed, Jaylyn never sued the Debtor and had no judgment against the Debtor for moneys owed on the loan between Jaylyn and The Storage Guys. Trial Tr., p. 122. The Debtor made an offer to the Trustee to purchase the estate’s interest in the 1996 Viper for $1500 plus waiver of the claimed exemption, which offer was rejected. The Trustee eventually sold the Vipers for the aggregate price of $103,500.00. The purchase price for the 1996 Viper was $37,900.00.
The Gainesville Condo Expenses
In Schedule J of the petition, the Debtor listed an expense in the amount of $550.00 under the category of “rent” or a “home mortgage payment”. The Debtor admitted at trial that this was not a rental or mortgage expense he incurred, but claimed it was his monthly contribution towards a mortgage obligation due on the Gainesville Condo. Trial Tr., p. 112. The Debtor’s daughter and her fiancé live in the Gaines-ville Condo, and the Debtor testified that he made the payments in lieu of repaying arrears owed in connection with unpaid child support. Trial Tr., p. 113. The Debtor testified that he stopped making these payments around the time the petition was filed because he could no longer afford to make them. Trial Tr., p. 120. The Debtor has not amended Schedule J to correct the nature of this expense, or deleted it as an expense because he has not paid since the Petition Date. The Debtor did not introduce any exhibits to support his contention that the payments were made in lieu of a valid unpaid support obligation. In fact, there is no documentary evidence to support a monthly rental or mortgage expense in this amount.
The bank records of the Debtor and his business, The Storage Guys, reflect that for approximately one year prior to the Petition Date, monthly transfers in the amount of $1,100.00 were made from the TD Bank account ending in numbers 7986 maintained in the name of The Storage Guys (“The Storage Guys Bank Account”) to the Debtor’s personal bank account held at TD Bank, ending in numbers 8009 (“Debtor Bank Account”) each month. (Defendant’s Ex. E). Each month, an electronic payment in the amount of $1,093.97 was made from the Debtor Bank Account to Wells Fargo Home Mortgage, which is the mortgagee of the Gainesville Condo property. (Defendant’s Exs. A, E). Neither the Debtor Bank Account nor The Storage Guys Bank Account reflect a monthly payment or debit in the amount of $550.00. This documentary evidence contradicts the Debtor’s testimony and supports the conclusion that the Debtor was paying the entire monthly mortgage on the Gainesville Condo with funds generated from The Storage Guys for the entire year prior to the Petition Date.
The Storage Guys
At trial, the Debtor testified that he listed his 100% stock ownership in The Storage Guys in the petition and valued the stock at $0 on Schedule B. He added the words “no assets” to this disclosure because as of the Petition Date, The Storage Guys had no “net” assets. Trial Tr., p. 110, 111. The Debtor came to this conclusion by averaging the debts of The Storage Guys with the amount of funds in The Storage Guys Bank Account. The Storage Guys was indebted to Chase Manhattan Bank in the approximate amount of *353$19,000 as of the Petition Date. The Debt- or had personally guaranteed the obligation to Chase Manhattan Bank, and listed this debt in Schedule F of the petition. Trial Tr., p. 153. The Debtor also acknowledged that as of the Petition Date, The Storage Guys Bank Account reflected a balance of approximately $19,000.00. Trial Tr., p. 110.
According to no. 3 to the Debtor’s Statement of Financial Affairs, the Debtor listed a Chase (Southwest.com) credit card (“Chase Southwest Card”) in his name, and disclosed that $15,516.54 in payments were made to the Chase Southwest Card account over the 90 days prior to the Petition Date. According to the notes in the Statement of Financial Affairs, the payments were made “with funds from business, for business debts.”
Contrary to the notes in the Statement of Financial Affairs regarding the nature of the charges, the exhibits produced by the Debtor at trial reflect that a significant number of the charges were for personal items. (Defendant’s Ex. A). For example, each month, there is a recurring charge in the amount of $500.00 for an entity named “Natural Image Long Island,” which is an expense for personal grooming, and numerous charges from supermarkets, pharmacies, dry cleaning establishments and other retail stores unrelated to the business of The Storage Guys. (Defendant’s Ex. A). Based on an informal and conservative review of the expenses charged on the Chase Southwest Card for the ninety days prior to the Petition Date, an average of $2594.00 per month was charged for personal items unrelated to the business of The Storage Guys. (Defendant’s Ex. A).3 The Debtor is correct that the charges for the Chase Southwest Card were paid from The Storage Guys bank account.
At various times, the Debtor testified at trial that he believed he was one and the same as The Storage Guys, and that The Storage Guys paid the Debtor’s personal expenses in lieu of salary:
Q. Okay. So when the company pays the electric bill, you sort of think that’s yourself paying it because you are the company?
A. Correct.
Trial Tr., p. 119.
Q. Okay. It’s true though, is it not sir, that your company, The Storage Guys, in fact paid that electric bill?
A. Yes.
Q. So the statement, at least insofar as the portion that’s attributable to electric is that you’re paying this as an individual expense is incorrect, because it’s paid by your company?
A.. Well, since I’m the one hundred percent shareholder in my company, it is my company. And when I need money to pay bills that’s what I use. Because I don’t take a salary.
Trial Tr., p. 116.
When discussing the $195,000 loan from Jaylyn to The Storage Guys, and explaining why the Debtor pledged The Vipers as collateral for a loan to The Storage Guys, the Debtor testified as follows:
A. I’m not sure I understand. I mean I know The Storage Guys took the loan out. But I am The Storage Guys, so although I didn’t sign any [loan documents in the Debtor’s personal capacity], a personal guarantee or anything I just—
*354Q. So all the assets of The Storage Guys took are included in your petition as well?
A. Yeah. Whatever is there, yeah. It was under the business entity, I believe. Q. Does The Storage Guys earn, generate any money a month?
A. Yeah, they did. It did.
Q. How much money did they generate a month?
A. I think our sales are like one hundred thousand for the year, so average, a little less than ten thousand dollars in sales.
Q. Was that income included in your schedules?
A. I believe the net. That was the gross income, not the net. I mean, the net is in there.
Trial Tr., p. 141.
Income and Expenses
As set forth above, the Debtor testified that the electric bill for his residence is paid by The Storage Guys. The Storage Guys Bank Account statements reflect monthly debits for the Debtor’s home electricity bill, in amounts varying from $125.33 to $261.21. (Plaintiffs Ex. 6). The Debtor also acknowledged that his monthly health insurance in the amount of $661.00 is paid from The Storage Guys Bank Account. Trial Tr., p. 120. The Debtor listed both of these items as expenses he paid from his monthly income listed in the amount of $3,837.24 on Schedule I. According to the Debtor’s testimony, the Debtor’s monthly income listed in Schedule I included these expenses paid by The Storage Guys. Trial Tr., p. 190. The Debtor explained that his monthly income was calculated by his accountant, based on the transfers made by The Storage Guys to the Debtor, and on behalf of the Debtor. Trial Tr., p. 190.
The Debtor testified that his accountant calculated the Debtor’s income and expenses over a period of time, based on his books and records, and divided the number by the number of months reviewed, to come up with the amounts listed in the schedules to the petition. Trial Tr., p. 190. The Debtor acknowledged that in the two months prior to the Petition Date, The Storage Guys paid $7,500.00 to the Debt- or’s bankruptcy counsel, and approximately $6,840.00 to the Debtor’s son as a wedding gift. Trial Tr., p. 189-190. The Debtor further testified that he did not know for certain whether these transfers by The Storage Guys were included in the calculations of the Debtor’s income made by his accountant. Trial Tr., p. 190. The bank statements for The Storage Guys Bank Account reveal that during 2011, The Storage Guys transferred $1100.00 per month into the Debtor’s personal bank account. (Plaintiffs Ex. 6). If this amount were added to the insurance and utility expenses paid by The Storage Guys on behalf of the Debtor, and if the payments made to the Debtor’s bankruptcy counsel and to the Debtor’s son were amortized over twelve months, the average monthly “salary” the Debtor realized from The Storage Guys would equal $3,060.00. While this number is not far off from the Debtor’s claimed income in Schedule I, this does not include the personal expenses charged on the Chase Southwest Card which averaged $2,594.00 per month at a minimum. The total of these two numbers far exceed the monthly income listed on the Debtor’s Schedule I. This total also exceeds the annual salary the Debtor listed in question 1 of the Statement of Financial Affairs by over $3,000.00 per month.
DISCUSSION
Legal Standard for Denial of Discharge pursuant to 11 U.S.C. § 727(a)(4)(A)
It is well-settled law that the denial of a debtor’s discharge is a drastic *355remedy that must be construed strictly in favor of the debtor. State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1310 (2d Cir.1996). “The reasons for denying a discharge to a bankruptcy must be real and substantial, not merely technical and conjectural.” Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997). However, a discharge under section 727 is a privilege, not a right, and may only be granted to the honest debtor. Congress Talcott Corp. v. Sicari (In re Sicari), 187 B.R. 861, 880 (Bankr.S.D.N.Y.1994). The plaintiff bears the burden of establishing each of the elements of section 727 by a preponderance of the evidence. See Minsky v. Silverstein (In re Silverstein), 151 B.R. 657, 660 (Bankr.E.D.N.Y.1993); see alsoFed. R. Bankr.P. 4005.
11 U.S.C. § 727(a)(4)(A) provides:
The court shall grant the debtor a discharge, unless—
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account.
Under this section, the Plaintiff must prove by a preponderance of the evidence that: (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 ease. Carlucci & Legum v. Murray (In re Murray), 249 B.R. 223, 228 (E.D.N.Y.2000).
A materially false statement made or omitted as part of the bankruptcy petition, schedules, or at an examination or during the proceeding itself may constitute a false statement under oath for purposes of § 727(a)(4)(A). New World Restaurant Group, Inc. v. Abramov (In re Abramov), 329 B.R. 125, 132 (E.D.N.Y.2005). A debt- or’s prepetition conduct, even if it caused harm to creditors, cannot give rise to a claim under this subsection. The statute specifies that the false oaths must be made in or in connection with the debtor’s bankruptcy case. Giasante & Cobb, LLC v. Singh (In re Singh), 433 B.R. 139, 156 (Bankr.E.D.Pa.2010) (The debtor’s use of a fictitious address prepetition did not constitute grounds to bar the debtor’s discharge, regardless of the harm it caused to creditors of the debtor).
The burden of showing actual fraudulent intent lies with the party objecting to the debtor’s discharge. Pergament v. Smorto (In re Smorto), No. 07-CV-2727 (JFB), 2008 WL 699502, at *4 (E.D.N.Y. Mar. 12, 2008). It is not enough under section 727(a)(4)(A) that a debtor is merely careless in the preparation of documents to be filed with the court, or in his testimony in connection with the case. The omission must rise to the level of showing fraudulent intent. Painewebber, Inc. v. Gollomp (In re Gollomp), 198 B.R. 433, 437 (S.D.N.Y.1996). This intent can be proven by either (1) evidence of a debtor’s actual intent to deceive or (2) indicia of his reckless indifference to the truth. Adler v. Lisa Ng and Charming Trading Co. (In re Adler), 395 B.R. 827, 843 (E.D.N.Y.2008); Sholdra v. Chilmark Fin. LLP (In re Sholdra), 249 F.3d 380, 383 (5th Cir.2001), cert. denied, 534 U.S. 1042, 122 S.Ct. 619, 151 L.Ed.2d 541 (2001). Proof of “an actual intent to deceive” can come from the familiar badges of fraud which are instances of conduct, such as secreting proceeds, transferring property to family members and concealing relevant facts, that often point to fraud. Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582 (2d Cir.1983), Martin v. Key Bank of New York (In re Martin), 208 B.R. 799, 806 (N.D.N.Y.1998) (citing United States v. Coppola, 85 F.3d 1015, 1021 (2d Cir.1996)).
*356The second means of proving fraudulent intent — “reckless indifference to the truth” or “a cavalier disregard of the truth” — is unique to § 727(a)(4)(A). Stamat v. Neary, 635 F.3d 974, 982 (7th Cir.2011); Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 695 (5th Cir.2009). To prove intent under this reckless disregard standard, courts consider the following three non-exclusive factors: (a) “the serious nature of the information sought and the necessary attention to detail and accuracy in answering,” Wisell v. Wisell (In re Wisell), No. 2:06-CV-167-WKS, 2007 WL 2463268, at *2, 2007 U.S. Dist. LEXIS 64011, at *8 (D.Vt. Aug. 28, 2007) (internal quotation marks omitted) (citing Sanderson v. Ptasinski (In re Ptasinski), 290 B.R. 16, 22-23 (Bankr.W.D.N.Y.2003)); (b) a debtor’s “lack of financial sophistication” as evidenced by his or her professional background, Pergament v. Derise (In re Derise), No. 07-CV-3083 (JFB), 2008 WL 850253, at *9, 2008 U.S. Dist. LEXIS 91853, at *27-28 (E.D.N.Y. Mar. 27, 2008); and (c) whether a debtor repeatedly blamed recurrent errors on carelessness or failed to take advantage of an opportunity to clarify or correct inconsistencies, e.g., Cadle Co. v. Mitchell (In re Mitchell), 102 Fed.Appx. 860, 862-63, 863 n.3 (5th Cir.2004); Aetna Ins. Co. v. Nazarian (In re Nazarian), 18 B.R. 143, 147 (Bankr.D.Md.1982) (“[N]o carelessness could excuse the Debtor’s failure to amend his schedules promptly when he had the leisure to do so.”).
Finally, the omissions and/or misstatements by a debtor must be material. However, “any matter bearing on the discovery of estate property or the disposition of the debtor’s property is material for purposes of § 727(a)(4)(A).” New World Restaurant Group, Inc. v. Abramov, 329 B.R. at 134. The Court of Appeals for the Second Circuit has held that whether the inclusion of the assets would have increased the value of the debtor’s estate is not determinative of whether the omission is material. In re Robinson, 506 F.2d 1184, 1188 (2d Cir.1974). “The recalcitrant debtor may not escape a section 727(a)(4)(A) denial of discharge by asserting that the admittedly omitted or falsely stated information concerned a worthless business relationship or holding; such a defense is specious.” Chalik v. Moorefield, 748 F.2d 616, 618 (citing Diorio v. Kreisler-Borg Constr. Co., 407 F.2d 1330 (2d Cir.1969)).
“Once the [plaintiff] has produced persuasive evidence of a false statement, the burden shifts to the debtor to come forward with evidence to prove that it was not an intentional misrepresentation or provide some other credible explanation.” See Perlera v. Gardner (In re Gardner), 384 B.R. 654, 662-63 (Bankr.S.D.N.Y.2008) (citations omitted). “While the burden of persuasion rests at all times on the creditor objecting to discharge, it is axiomatic that the debtor cannot prevail if he fails to offer credible evidence after the creditor makes a prima facie case.” Palmer v. Downey (In re Downey), 242 B.R. 5, 14, 15 (Bankr.D.Idaho.1999) (other citations omitted).
“ ‘Courts may consider the debtor’s education, business experience, and reliance on counsel when evaluating the debtor’s knowledge of a false statement, but the debtor is not exonerated by pleading that he or she relied on patently improper advice of counsel.’ ” Wachovia Bank, N.A. v. Spitko (In re Spitko), 357 B.R. 272, 313 (Bankr.E.D.Pa.2006) (quoting In re Maletta, 159 B.R. 108, 112 (Bankr.D.Conn.1993)). Although the courts do not uniformly endorse the use of this defense for purposes of § 727(a)(4)(A), advice of counsel may sometimes “provide an excuse for an inaccurate or false oath,” *357albeit not a fraudulent one. Georges v. Georges (In re Georges), 138 Fed.Appx. 471, 472 (3d Cir.2005) (quoting In re Topper, 229 F.2d 691, 692 (3d Cir.1956)). Advice of counsel, however, will not serve as a defense when “it is transparently plain that the property should be scheduled.” Dubrowsky v. Perlbinder (In re Dubrowsky), 244 B.R.560, 573 (E.D.N.Y.2000). It will also not save a debtor who has failed to produce “the serious information sought” and to show “the attention to detail and accuracy in answering” expected of a similarly situated person. In re Wisely 2007 WL 2463268 at *2, 2007 U.S. Dist. LEXIS 64011 at *8.
Analysis
The Plaintiff alleges that the Debtor is not entitled to a discharge due to numerous false oaths in his petition regarding his ownership interest in the Vipers, his valuation of the Vipers, his claimed exemption in the 1996 Viper, the assets of The Storage Guys, and his income and expenses. The Court shall examine each of these allegations in order to determine whether the Plaintiff has made a prima facie case, and if so, whether the Debtor’s explanations successfully rebutted the Plaintiffs case.
Second Cause of Action
Pursuant to the second cause of action, the Plaintiff seeks to bar the Debt- or’s discharge due to his allegedly false statements regarding ownership of the Vipers as of the Petition Date. According to the Plaintiff, the Debtor falsely claimed he owned the Vipers despite the fact that he had no legal right to transfer the Vipers to himself once a restraining notice was served on the Debtor’s girlfriend prepetition. Whether or not the Plaintiff believes the Debtor had a right to transfer the Vipers back into his name prepetition, the Debtor accurately disclosed his ownership interest in the Vipers as of the Petition Date. This disclosure was based on the prepetition transfer of the Vipers from the Debtor’s son to the Debtor immediately prior to the Petition Date.
Under New York law, an entity is the owner of a motor vehicle upon the submission of an application to the Department of Motor Vehicles for transfer of title. NYS Vehicle and Traffic Law. §§ 2113 and 2116. (McKinney 2013). Section 2113(c) provides that transfer of title is completed when “provisions of this section and section [2116] have been complied with.” NYS Vehicle and Traffic Law. §§ 2113. Section 2116 requires that an application for a certificate of title be accompanied by the required fee and delivered to the commissioner of motor vehicles. The Debtor complied with these provisions prior to the Petition Date. While the Debtor’s conduct in transferring the Vipers to his son pre-petition is hardly model conduct, neither his initial transfer nor the re-transfer are actionable under § 727(a)(4)(A). The Debtor’s disclosure in the schedules that he owned the Vipers was proper and correctly reflected the facts. Therefore, the second cause of action is dismissed.
First Cause of Action
According to the Plaintiff, Debtor falsely claimed a vehicle exemption in the amount of $15,230.56 in the 1996 Viper despite the fact that he did not use the 1996 Viper for transportation, he had pledged the 1996 Viper to a creditor, and he did not have possession or control of the 1996 Viper as of the Petition Date. However, none of these factors are relevant when determining whether a claimed vehicle exemption is false or fraudulent. The date of the petition governs when determining exemptions, and whether the 1996 Viper was in his possession has no bearing on this is*358sue.4
Under the Bankruptcy Code, property of the estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1) (emphasis added). As the Court of Appeals for the Second Circuit confirmed, “[t]he Code broadly defines ‘all legal or equitable interests of the debtor in property’ at the commencement of the case as property of the debtor’s estate in bankruptcy.” Regan v. Ross, 691 F.2d 81, 83 (2d Cir.1982). Thus, the time used to determine what assets are included as property of the estate is the date the petition is filed.5 Once property becomes part of the bankruptcy estate, the debtor may claim that certain interests in property are exempt from the debtor’s estate. 11 U.S.C. § 522. CFCU Community Credit Union v. Hayward, 552 F.3d 253, 258 (2d Cir.2009). Because the Debt- or was entitled to claim an exemption to the 1996 Viper pursuant to Bankruptcy Code § 522, his conduct was neither false nor fraudulent.
The Plaintiff also asserts that the Debt- or’s valuation for the 1996 Viper was false and fraudulent. The valuation is identical to the Edmunds trade-in value for the vehicle, but not the Kelley Blue Book valuation, which is substantially higher. According to the Plaintiff, the Debtor’s failure to report to the Trustee the Kelley Blue Book valuation for the 1996 Viper, and the Debtor’s offer to the Trustee to purchase the 1996 Viper for $1,500.00 plus waiver of his claimed exemption was false and made in bad faith. The Debtor also falsely represented that there was no Kelley Blue Book valuation for the 1996 Viper, which representation was included in a letter sent by the Debtor’s counsel to the Trustee.
With respect to the Debtor’s valuation of the 1996 Viper, the Court finds that the failure to factor in the Edmunds valuation was not false or fraudulent. The Debtor had obtained valuations from two reputable sources, and had used the lower valuation in the Schedules. The fact that the Kelley Blue Book valuation proved to be more accurate than the Edmunds valuation does not prove the Plaintiffs case. The Debtor did not “make up” a valuation and it was appropriate to rely on either valuation. The Debtor’s testimony at trial that he turned over both the Edmunds and the Kelley Blue Book valuations for the 1996 Viper is troubling because the Debt- or’s counsel represented in a letter to the Trustee and at trial that he never received a Kelley Blue Book valuation from the Debtor. Nonetheless, the 1996 Viper was disclosed in the Schedules and a valuation based on a reputable source was given. Therefore, the Court does not find that the circumstances surrounding the valuation of the 1996 Viper resulted in a false or fraudulent oath. Likewise, the Debtor’s offer to purchase the 1996 Viper is not actionable under § 727(a)(4)(A). The offer does not constitute a false statement under oath by the Debtor. As a result, the first cause of action is dismissed for failure to prove a prima facie case under § 727(a)(4)(A).
Third Cause of Action
The third cause of action is based on alleged false statements regarding the *359Debtor’s estimated monthly expenses. According to the Plaintiff, the Debtor’s inclusion of monthly mortgage expenses of $550.00 and a condominium maintenance fee in the amount of $185.00 were false as they were not his own living expenses, and he was no longer incurring them as of the Petition Date. Further, the Debtor’s claimed expense of $385.00 per month for utilities was false because The Storage Guys actually paid for approximately $200.00 of this expense, and the Debtor’s claimed expense for $661.00 per month for health insurance was false for the same reason. As a result, the Debtor’s expenses were overstated by an amount in excess of $1,731.00 per month. The Debtor admits that the claimed mortgage expense in the amount of $550.00 was not his mortgage expense, nor was the condominium maintenance fee in the amount of $135.00. According to the Debtor, he made these payments on a monthly basis in lieu of curing arrears that had accrued in prior support obligations to his first wife. The information contained in monthly statements from the Debtor Bank Account does not support the Debtor’s representation because there is no reflection of a monthly debit or withdrawal in the amount of $550.00. The statements from the Debtor Bank Account and The Storage Guys Bank Account reveal that $1,100.00 was transferred from The Storage Guys Bank Account to the Debtor Bank Account each month, and an automatic payment was made from the Debtor Bank Account to Wells Fargo Home Mortgage each month in the amount of $1,093.97. None of this was disclosed by the Debtor in his schedules or in his testimony. The Debtor’s explanation that he was helping his first wife by paying half of the mortgage obligation on the Gaines-ville Condo where his daughter lived is false. As a result of this arrangement, the Debtor was using his personal funds to satisfy the entire monthly mortgage obligation on the Gainesville Condo, which the Debtor no longer owned, but for which the Debtor remained jointly obligated on the note to Wells Fargo Home Mortgage.
The Debtor’s motive for understating the “mortgage expense” and the false explanation that it was in lieu of making up arrears on domestic relations obligations is not clear to the Court. However, it is not necessary for the Court to determine why he deceived the Court and the creditors, only to determine whether he has done so. The failure to correctly list this monthly expense is false, and created a false picture of the Debtor’s financial circumstances. The only conclusion the Court can draw from this arrangement is that the Debtor intentionally failed to disclose that he was paying the note secured by the mortgage on the Gainesville Condo in full, despite the fact that he no longer held an ownership interest in the Gainesville Condo. For these reasons, the Debtor has failed to rebut or adequately explain the listing of the $550.00 expense on his schedule.
Fourth Cause of Action
The Debtor also made false oaths regarding his income. The Debtor claims his accountant calculated his monthly income at $3,837.24 based on the Debt- or’s books and records. The Debtor did not receive a periodic salary from The Storage Guys but instead used funds from The Storage Guys bank account to pay his personal expenses. While using a business bank account to pay personal expenses does not constitute grounds to deny a debtor’s discharge, falsely under-representing, the amount of funds used for personal expenses does give rise to a claim under § 727(a)(4)(A). The Debtor falsely represented in the Statement of Financial Affairs that the Chase Southwest Credit Card was used solely for expenses in*360curred by The Storage Guys. As discussed above, the statements for the one year prior to the Petition Date reflect that the Chase Southwest Credit Card contains numerous charges for non-business items, such as personal grooming, dry cleaning, food, and entertainment. When averaged out over three months prior to the Petition Date, the Debtor used the Chase Southwest Credit Card for his personal expenses in the amount of at least $2594.00 per month. This amount, when added to the $3,060 per month in income the Debtor averaged based on the monthly mortgage payment, the monthly expenses paid by The Storage Guys on the Debtor’s behalf and the additional expenses for legal fees and gifts, exceeds the claimed monthly income by over $1,800.00 per month.
The Debtor’s explanation for the income and expenses listed in Schedule I and J are twofold. First, the Debtor repeated time and again that he used The Storage Guys Bank Account for his personal expenses because he did not draw a traditional salary. Second, the Debtor testified that he relied on his accountant to determine his income. What is missing from these explanations is that the Debtor failed to report as income the expenses he charged on the Chase Southwest Credit Card. It also does not explain the Debt- or’s false representation in the Statement of Financial Affairs that the Chase Southwest Credit Card was used solely for business purposes. As the sole user of this credit card, he is charged with being aware of how this credit card was used, and that many of the items he charged were not related to his business. The Debtor knew that the income listed in Schedule I was false, and covered it up by making the false representation regarding the use of the Chase Southwest Credit Card. The Court concludes that these false statements were made with the intent to deceive the creditors and the Court.
When all of these misstatements are pieced together, and the documentary evidence is reviewed, a picture of the Debt- or’s overall scheme emerges. The Debtor used his own personal bank account to pay the mortgage payment for the Gainesville Condo, which he no longer had an ownership interest, and did not use the Debtor Bank Account for many other personal expenses. The Debtor used The Storage Guys Bank Account to fund the mortgage payment, and to pay a few regular monthly personal expenses. The Debtor also used a credit card to charge the rest of his personal expenses, and paid this card from The Storage Guys Account. The end result is that the Debtor’s testimony that he included all of his income from The Storage Guys in his petition and schedules was false. It is apparent that the Debtor used The Storage Guys to hide his true income and expenses to deceive the creditors and the Court. This failure to disclose all of his income for no justifiable purpose warrants denial of the Debtor’s discharge.
Fifth Cause of Action
According to the Plaintiff, the Debtor’s listing of the liabilities of The Storage Guys in his petition, and not the $19,000 in the bank account for The Storage Guys, constitutes grounds to deny the Debtor’s discharge as well The Debtor admits to stating in Schedule B that The Storage Guys had no assets. His explanation for this representation is that because The Storage Guys owed a debt to Chase bank in the approximate amount of $19,000.00, The Storage Guys had no “net assets.” However, this excuse does not ring true. The Debtor testified at trial that he and The Storage Guys were one and the same. Therefore, the assets and liabilities of The Storage Guys were his own assets and liabilities. In order to be consistent, the Debtor had to list both, and *361he did not. If this were the only questionable statement in the petition, perhaps the Debtor’s explanation would persuade the Court to find that the Debtor did not have the requisite intent to deceive the Court. However, this is one in a series of false statements which, standing together, show a pattern of deceptive behavior on the part of the Debtor. As courts have recognized, evidence of “a pattern of wrongful behavior” presents a more compelling case of intent to defraud than does an isolated instance of an omission by a debtor. I.R.S. and U.S.T. v. Garland (In re Garland), 385 B.R. 280, 295 (Bankr.E.D.Okla.2008) (citing Freelife, Internat’l LLC v. Butler (In re Butler), 377 B.R. 895, 916 (Bankr.D.Utah.2006) (other citations omitted)). Such is the case with this Debtor. In addition, the Debtor’s testimony was evasive and lacked credibility, as it was contradicted by his own exhibits. This is not the honest debtor who deserves a fresh start. As a result of the outcome of this adversary proceeding, the Debtor’s counterclaim seeking sanctions against the Plaintiff under Fed. R. Bankr.P. 9011 is dismissed.
CONCLUSION
Based on the Debtor’s false and fraudulent statements regarding his income and expenses, with the intent to deceive the creditors and the Court, the Debtor’s discharge is denied pursuant to 11 U.S.C. § 727(a)(4)(A). Judgment shall be entered in favor of the Plaintiff on the Third, Fourth and Fifth Causes of Action, and the First and Second Causes of Action shall be dismissed. The Counterclaim shall be dismissed as well.
. The Gainesville Condo is jointly owned by Country Road 32, LLC, Barbara Anzalone (the Debtor's first wife) and Joshua Bub, the Debtor’s adult son from his first marriage.
. Although the Debtor no longer had an ownership interest in the Gainesville Condo, which secures the obligation to Wells Fargo Home Mortgage, the Debtor, along with Barbara Anzalone, are obligors on the note.
. This estimate of charges solely for the personal benefit of the Debtor does not include significant charges for goods or services provided by Direct Marine Fuel. While the Debt- or did not testify regarding the nature of this expense, it does not appear to be a legitimate business expense.
. There appears to be an outstanding motion by the Trustee objecting to the Debtor's claimed exemption to the 1996 Viper [dkt 45]. The Trustee’s objection is based on issues not raised in this adversary proceeding. This decision does not affect the Trustee's objections to the Debtor’s claimed exemption to the 1996 Viper.
. There are exceptions for certain types of property not relevant to this case. See 11 U.S.C. § 541(a)(5). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496569/ | Chapter 7
MEMORANDUM DECISION DENYING MOTION FOR RELIEF BASED ON VIOLATION OF THE AUTOMATIC STAY
STUART M. BERNSTEIN, United States Bankruptcy Judge:
The Movants Irit Eluz, Yoram Firon, Amit Mantsur, Erez Meltzer, Leo Malamud, Sabih Saylan, Revital Degani, Daniel Vaknin, and Menachem Morag are former officers and directors of the debtor Ampal-American Israel Corporation (“Ampal”). In addition, the Movant Yosef A. Maiman is the principal shareholder and was or is the Chairman of the Board and President and Chief Executive Officer of Ampal. Their motion seeks damages based on a violation of the automatic stay relating to a demand for payment made upon them by Ofer Shapira, an attorney for certain bondholders of Ampal. They also ask the Court to enforce the automatic stay, grant them standing to the extent necessary to enforce the automatic stay on behalf of the estate, and direct the chapter 7 trustee to discharge Shapira as attorney for Ampal’s non-debtor subsidiaries.
The Movants’ request for prospective relief to enforce the automatic stay has been rendered moot by subsequent events. As explained below, the Movants have failed to demonstrate that they have standing to seek damages, and even if they have standing, they have failed to show that they are entitled to any damages. Finally, their request that the trustee discharge Shapira is premature. Accordingly, their motion is denied.
FACTS
Ampal is a New York corporation that was primarily engaged in the acquisition of interests in businesses located in the State of Israel or that were Israel-related. In re Ampal-American Israel Corp., No. 12-13689, 2013 WL 1400346, at *1 (Bankr.S.D.N.Y. Apr. 5, 2013). Its assets consist mainly of its interests in non-debtor, foreign subsidiaries. Ampal filed a chapter 11 petition in this Court on August 29, 2012, and at all relevant times, its principal non-affiliate debt consisted of three series of debentures, A, B and C, in the approximate aggregate sum of $234 million. The following chart is taken directly from the information listed in the schedules and identifies the trustees of each series of debentures and the amount that Ampal claimed it owed with respect to each series: 1
*366[[Image here]]
According to Schedule H, there are no co-debtors liable with Ampal for the debenture obligations. (See Schedule H — Co-debtors, dated Oct. 12, 2012 (ECF Doc. # 87).)
On September 25, 2012, the United States Trustee appointed an Official Committee of Unsecured Creditors (the “Committee”) consisting of Hermetic, Reznik and Mishmeret. (Appointment of Official Committee of Unsecured Creditors, dated Sept. 25, 2012 (ECF Doc. #27).) The chapter 11 case was marked by strife between the Committee on the one hand and Ampal’s officers and directors, including Maiman, on the other. See Ampal, 2013 WL 1400346, at *1-4. This discord led to the appointment of a chapter 11 trustee. Id. at *7. After a brief stewardship, the chapter 11 trustee moved to convert the case to chapter 7, and the motion was granted. (Order Converting Chapter 11 Case to Chapter 7 and for Related Relief, dated May 2, 2013 (ECF Doc. #258).) The members of the creditors committee duly elected Alex Spizz to act as chapter 7 trustee. (See United States Trustees’ Report of Undisputed Election of Chapter 7 Trustee, dated May 29, 2013, at 3-4 (ECF Doc. # 275).) Shapira, an Israeli attorney who represented Hermetic and Mishmeret at the election, voted his clients’ proxies in favor of Spizz. (Id. at 3.)
Spizz thereafter sought authority to retain Shapira & Co. Advocates, Shapira’s law firm, as special counsel to represent the estate’s interests in Israel nunc pro tunc to the date of his election. (See Chapter 7 Trustee’s Application for Retention of Shapira & Co. Advocates as Special Counsel to Trustee Pursuant to 11 U.S.C. § 327(e), Effective as of May 20, 2013, dated June 24, 2013 (ECF Doc. # 291).) Maiman and the controlling shareholders objected, arguing, inter alia, that Shapira’s concurrent representation of Hermetic and Mishmeret, two of the estate’s largest creditors, was adverse to the estate. (See Objection of Yosef A Maiman and the Controlling Shareholders to Chapter 7 Trustee’s Application to Retain Shapira & Co. Advocates as Special Counsel to Trustee Pursuant to 11 U.S.C. § 327(e), dated July 1, 2013, at ¶¶6-9 (ECF Doc. # 303).) At the July 11, 2013 hearing, and following a colloquy with the Court, Spizz withdrew his application with a view toward exercising Ampal’s rights as shareholder to cause the non-debtor subsidiaries to hire Shapira.
A. The October 4 Letter
On October 4, 2013, Shapira wrote a letter (the “October 4 Letter”) to the Movants in his capacity as attorney for Hermetic and Mishmeret that caused the current dispute. (Motion of Yosef A. Maiman, Irit Eluz, Yoram Firon, Amit Mantsur, Erez Meltzer, Leo Malamud, Sabih Saylan, Revital Degani, Daniel Vaknin, and Menachem Morag (I) to Enforce the Automatic Stay and, if Necessary, Confer Standing on the Movants *367Relating Thereto and (II) to Award Damages for Willful Stay Violations by the Debenture Parties and Shapira & Co. Advocates, dated Oct. 22, 2013 (the “Motion”), at Ex. B-2 (ECF Doc. #352).) The letter charged that the Movants had breached their fiduciary duties, committed waste and mismanaged Ampal and its subsidiaries by, among other things, approving loans to Maiman and his affiliates that damaged the “Company,”2 disposing of assets, using their positions to obtain personal benefits to the detriment of the Company and its creditors, negligently supervising and mismanaging the Companies’ tax matters, filing chapter 11 without any settlement plan or reasonable purpose, presenting unreasonable arguments in chapter 11, deepening the Company’s insolvency and improperly distributing funds. The letter concluded with a demand for payment or security for payment:
You are hereby required to pay our clients, immediately, the entire debts of the Company towards our clients or, alternatively, to immediately provide us with proper securities in order to guarantee full coverage of any sum that the Company does not pay our clients as part of the Company’s liquidation proceedings.
(Id.)
The October 4 Letter provoked a response. An attorney representing several of the Movants sent an email to Spizz that protested the October 4, 2013 Letter, and confirmed a discussion in which his clients demanded that Spizz (1) notify Shapira that his letter violated the automatic stay, (2) insist that Shapira withdraw the letter and cease efforts to assert the claims iden-tilled in his letter and (3) terminate Shapi-ra’s retention as attorney for the Ampal subsidiaries.3 (Motion, Ex. C (email dated Oct. 14, 2013 1:22 PM).) Spizz responded that Shapira wrote the letter to preserve claims under Ampal’s D & O policies, he had not taken any action other than writing the letter and had not violated the automatic stay and Spizz had no intention of allowing the bondholders or others to prosecute claims that belonged to the estate. (Id., Ex. C (email dated Oct. 14, 2013 1:38 PM).)
B. This Motion
Not satisfied with Spizz’s response, the Movants filed this motion. Hermetic and the Movants subsequently entered into a stipulation pursuant to which Hermetic withdrew the October 4 Letter as to Hermetic and acknowledged that the causes of action set forth in the letter were property of Ampal’s estate. (Stipulation and Agreed Order, dated Nov. 18, 2013, at ¶ 1 (ECF Doc. # 375).) The stipulation resolved all of the issues raised by the motion as between the Movants and Hermetic. (Id. at ¶ 3.)
Spizz, Mishmeret and Shapira filed oppositions, and argued that the Movants lack standing to seek to enforce the automatic stay or recover damages under 11 U.S.C. § 362(k). (Chapter 7 Trustee’s Opposition to Motion of Yosef A. Maiman, Irit Eluz, Yoram Firon, Amit Mantsur, Erez Meltzer, Leo Malamud, Sabih Say-lan, Revital Degani, Daniel Vaknin, and Menachem Morag (I) to Enforce the Automatic Stay and, if Necessary, Confer Standing on the Movants Relating Thereto and (II) to Award Damages for Willful *368Stay Violations by the Debenture Parties and Shapira & Co. Advocates, Nov. 7, 2013 (“Spizz Opposition ”), at ¶¶ 5-14, 20-22) (ECF Doc. #362); Objection of Mishmer-et-Trust Company Services Ltd and Sha-pira & Co. to Motion to (I) Enforce the Automatic Stay and, if Necessary, Confer Standing on the Movants Relating Thereto and (II) to Award Damages for Willful Stay Violations, dated Nov. 8, 2013 (“Mishmeret Opposition ”), ¶¶ 12-14 (ECF Doc. # 364). Spizz also maintained that the October 4 Letter did not seek to exercise control over property of the estate, and did not, therefore, violate automatic stay, (Spizz Opposition at ¶¶ 17-18), the Movants had failed to prove damages under Bankruptcy Code § 362(k), (id. at ¶¶ 23-30), and since the nondebtor subsidiaries rather than the estate employed Shapira, there was no basis for the Court to direct Spizz to terminate Shapira. (Id. at ¶¶ 32.)
Mishmeret and Shapira also contended that the October 4 Letter was not intended to assert estate claims as opposed to claims personal to Mishmeret, and even if the demand touched upon estate claims, it did not cause any injury to the estate. (Mishmeret Objection at ¶¶ 6-10.) Finally, like Spizz, Mishmeret argued that the Court should not compel Spizz to terminate Shapira because Shapira was retained by the non-debtor affiliates, (id. at ¶ 15), and moreover, disqualification is a harsh remedy and the Movants had failed to show a basis for disqualifying Shapira. (Id. at ¶¶ 16-17.)
The Court conducted a hearing on the motion on November 14, 2013. Counsel for Mishmeret and Shapira reiterated during oral argument that Mishmeret did not intend to assert claims that belonged to the estate, (Transcript of hearing, held Nov. 14, 2013, at 21, 23 (“Tr.”) (ECF Doc. #374)), and agreed not to pursue those claims. (Id. at 25.) I deem Mishmeret’s and Shapira’s concession to constitute a withdrawal of the October 4 Letter to the extent it demanded payment or security for a claims that belong to the estate. In addition, at the end of the hearing, the Court directed Mishmeret and Shapira not to interfere with property of the estate or assert estate claims. (Id. at 33-34.)
The request for prospective relief to enforce the automatic stay has been rendered moot by Mishmeret’s and Shapira’s concession and the Court’s direction.4 This leaves for consideration the Movants’ request for damages and a direction that Spizz discharge Shapira.
DISCUSSION
A. Standing
The party invoking federal jurisdiction bears the burden of establishing its standing. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). “[T]he question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues. This inqui*369ry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise.” Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). Constitutional, or Article III standing, imports justiciability: whether the plaintiff has made out a case or controversy between himself and the defendant within the meaning of Art. III. Id. To qualify for standing under Article III, “a claimant must present an injury that is concrete, particularized, and actual or imminent; fairly traceable to the defendant’s challenged behavior; and likely to be redressed by a favorable ruling.” Davis v. Fed. Election Comm’n, 554 U.S. 724, 733, 128 S.Ct. 2759, 171 L.Ed.2d 737 (2008).
In addition, the litigant must demonstrate prudential standing. “[P]rudential standing encompasses ‘the general prohibition on a litigant’s raising another person’s legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in the representative branches, and the requirement that a plaintiffs complaint fall within the zone of interests protected by the law invoked.’ ” Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 12, 124 S.Ct. 2301, 159 L.Ed.2d 98 (2004) (quoting Allen v. Wright, 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984)); accord. Devlin v. Scardelletti, 536 U.S. 1, 7, 122 S.Ct. 2005, 153 L.Ed.2d 27 (2002). Prudential limitations on standing are especially important in bankruptcy proceedings which often involve numerous parties who may seek to assert the rights of third parties for their own benefit. Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 644 (2d Cir.1988) (“The prudential concerns limiting third-party standing are particularly relevant in the bankruptcy context. Bankruptcy proceedings regularly involve numerous parties, each of whom might find it personally expedient to assert the rights of another party even though that other party is present in the proceedings and is capable of representing himself.”)
The Movants have demonstrated Article III standing. “All they need show in order to demonstrate an Article III case or controversy is ... some probability of a tangible benefit from winning the suit.” Tucker v. United States Dep’t of Commerce, 958 F.2d 1411, 1415 (7th Cir.1992). The Movants claim they suffered actual injury because they were forced to incur legal fees and expenses in response to the October 4 Letter, including the prosecution of this motion. Their injury is directly traceable to Mishmeret’s and Shapira’s actions and their injury will be redressed by a favorable ruling if the Court awards damages.
Prudential standing is a tougher question because the Movants must show that their claim falls within the zone of interests protected by the automatic stay and they are asserting their own rights.5 The automatic stay is plainly intended to protect the debtor and property of the estate, see H.R. Rep. No. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6297, but it also protects creditors against the acts of a creditor who attempts to jump the line and seize property of the estate to satisfy its claim:
The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor’s property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an *370orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor’s assets prevents that.
Id; S. Rep. No. 95-989, at 49 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5835; see Ostano Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206, 207 (2d Cir.1986) (“Since the purpose of the stay is to protect creditors as well as the debtor, the debtor may not waive the automatic stay.”) Thus, any violation of the automatic stay that impairs a creditors distribution falls within the zone of interests protected by the automatic stay.
In addition, Bankruptcy Code § 362(k)(l) (formerly § 362(h))6 confers a private right to sue for damages on behalf of an individual injured by a willful violation of the automatic stay. The opposition maintains that § 362(k) only applies to individual debtors, but the plain language of the provision also applies to individual creditors. St. Paul Fire & Marine Ins. Co. v. Labuzan, 579 F.3d 533, 543 (5th Cir.2009) (“Accordingly, based on § 362(k)’s plain language, the above-discussed congressional purpose of § 362(k) to provide both debtor and creditor protection, and the weight of authority finding creditor-standing, we hold debtors and creditors are entities whose grievances fall ‘within the zone of interests’ protected by § 362(k).”); Homer Nat’l Bank v. Namie, 96 B.R. 652, 655 (W.D.La.1989) (“If Congress intended to limit the remedies in § 362(h) to debtors it could have done so by the simple expedient of replacing the term ‘individual’ with ‘debtor.’ Congress chose not to do so, and this court is unwilling to impose limitations not supported by the statutory language, jurisprudence, or legislative history.”); In re Int’l Forex of Cal., Inc., 247 B.R. 284, 291 (Bankr.S.D.Cal.2000) (“Based on the weight of authority on this issue, this Court finds that the Creditors have standing under § 362(h) to seek damages for alleged stay violations.”); In re Prairie Trunk Ry., 112 B.R. 924, 929 (Bankr.N.D.Ill.1990) (“The weight of persuasive case authority is that only a debtor or creditor may attack any acts in violation of the automatic stay.” (internal quotation marks omitted)); cf. Maritime Asbestosis Legal Clinic v. LTV Steel Co. (In re Chateaugay Corp.), 920 F.2d 183, 186-87 (2d Cir.1990) (concluding that Bankruptcy Code § 362(h) cannot be invoked by a corporate debtor and is limited to debtors who are natural persons). Non-individuals and those individuals who seek non-monetary relief still have recourse under the bankruptcy court’s civil contempt power, Barnett Bank of Se. Ga., N.A. v. Trust Co. Bank of Se. Ga., N.A. (In re Ring), 178 B.R. 570, 576 (Bankr.S.D.Ga.1995), although § 362(k) does not require a finding of maliciousness or bad faith and is less stringent than the standard for holding a person in civil contempt.7 In re Chateaugay Corp., 920 F.2d at 186; Crysen/Montenay Energy Co. v. Essen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1104-05 (2d Cir.1990).
The Movants are individuals, they allege damages resulting from a violation of the automatic stay, and § 362(k)(l) appears to grant them standing. Neverthe*371less, § 362(k)(l) is subject to two limitations. First, the creditor seeking relief must allege an injury in his capacity as a creditor of the estate rather than in some other capacity. Eakin v. Goffe, Inc. (In re 110 Beaver St. P’ship), 355 Fed.Appx. 432, 439 n. 9 (1st Cir.2009) (To have standing under § 362(k), “the creditor must be able to allege an injury as a creditor from the violation of the automatic stay.”); Labuzan, 579 F.3d at 545 (“[W]e hold: pursuant to § 362(k), the Labuzans, as pre-petition creditors of CTL, have standing to assert a claim against St. Paul. Accordingly, to the extent the Labuzans’ claims are based on their status as owners/equity holders of CTL, § 362(k) cannot be invoked.” (emphasis in original)); cf. Siskin v. Complete Aircraft Servs., Inc. (In re Siskin), 231 B.R. 514, 519 (Bankr.E.D.N.Y.1999) (debtor’s spouse, who was not a creditor of the estate and was forced to satisfy a claim asserted in violation of the automatic stay, had no standing under Bankruptcy Code § 362(h) to seek damages from violator); Metro. Life Ins. Co. v. Alside Supply Ctr. (In re Clemmer), 178 B.R. 160, 165 (Bankr.E.D.Tenn.1995) (concluding that non-creditor garnishee lacked standing to seek relief under Bankruptcy Code § 362(h)); In re Prairie Trunk Ry., 112 B.R. at 927 (purchaser of debtor’s assets lacked standing under Bankruptcy Code § 362(h) to claim that secured creditor’s seizure of collateral in violation of the automatic stay was void).8 In other words, the fact that someone is a pre-petition creditor is not a foot in the door that allows the creditor to recover damages for injuries suffered to its non-creditor interests.
Second, the creditor must assert a claim for his own direct injury and not a claim that belongs to the estate. See Labuzan, 579 F.3d at 545. “If a claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim.” See St. Paul Fire & Marine Ins. Co. v. PepsiCo., Inc., 884 F.2d 688, 701 (2d Cir.1989).
The typical example of a claim that satisfies these prudential limitations involves a violation of the stay that impairs a pre-petition secured creditor’s interest in specific property of the estate.9 A recent decision by Chief Judge Morris, In re Killmer, 501 B.R. 208 (Bankr.S.D.N.Y. 2013), is instructive. There, Beneficial Home Service Corporation (“Beneficial”) held a security interest in the debtor’s property. While the bankruptcy case was open, the debtor’s property was sold at a tax sale conducted in violation of the automatic stay and title was transferred to the purchaser. The tax sale cut off Beneficial’s lien. Beneficial subsequently commenced a foreclosure action and moved to re-open the now-closed bankruptcy case to assert that the tax sale violated the automatic stay, and was void.
Chief Judge Morris granted the motion over the objection of the tax sale purchas*372er. After observing that the automatic stay “ensures that ... all creditors will be ‘treated in an organized and equitable fashion,’ ” 501 B.R. at 212 (quoting Barclays Bank of N.Y. v. Saypol (In re Saypol), 31 B.R. 796, 799 (Bankr.S.D.N.Y.1983)), the Court addressed the question of Beneficial’s standing:
The situation that is alleged to have occurred here is the type of scenario that Congress intended to prevent. Since the automatic stay is meant to prevent creditors from racing to the courthouse to the detriment of other creditors, the Court sees no reason why a creditor who has been harmed by a stay violation should not be able to seek redress for its injury.
501 B.R. at 212, 2013 WL 6038838, at *3; see also United States v. Miller, No. Civ.A.5:02-CV-0168-C, 2003 WL 23109906, at *6 (N.D.Tex. Dec. 22, 2003) (the United States, a secured creditor, had standing to challenge the validity of a post-petition tax sale made in violation of the automatic stay); Litton Loan Servicing, L.P. v. Rockdale Cnty., Ga., Am. Lien Fund, L.P. (In re Howard), 391 B.R. 511, 515 (Bankr.N.D.Ga.2008) (assignee of debt secured by debtors’ residence had standing to invoke automatic stay, and to seek determination that tax sale was void); In re Ring, 178 B.R. at 577, 581 (junior secured creditor whose lien was impaired by foreclosure sale conducted by senior secured creditor in violation of the stay had standing to seek compensation for its damages as a civil contempt and for a declaration that the foreclosure sale was void); No-rn,ie, 96 B.R. at 655 (affirming an award of damages under § 362(h) in favor of a secured creditor whose collateral was seized and sold in violation of the automatic stay).10
Here, the Movants have failed to demonstrate their standing to assert a claim under 11 U.S.C. § 362(k)(l). First, although the Court speculated that they might have indemnification claims under New York law, they did not offer evidence to show that they hold claims against the estate. In fact, they did not allege much less show that they are creditors.
Second, they have failed to show that the injuries they allege fall within the zone of interests protected by the automatic stay. Clearly, the successful assertion of an estate claim by Mishmeret would cause a generalized injury to the estate and an indirect injury to all creditors by possibly reducing the pool of assets available for distribution. Every creditor could assert the same claim. Hence, only the trustee *373has authority to assert the claim, and this rule no doubt caused the Movants to ask for standing to the extent necessary to enforce the estate’s rights. This, however, is not the injury that the Movants allege.
In this regard, the Court asked Maiman’s counsel what damages had been caused by the October 4 Letter. He responded:
Well, Your Honor, I think that the damages that we have — the truth is that we don’t know what the damages will be if this letter is not withdrawn. And the reason is that we can’t let the letter with a hundred-million-dollar demand, or I guess now with series A withdrawing it’s [sic] forty-million-dollar demand, just stay out there. We’re going to have to respond. We’re going to have to take action. Right.
(Tr. at 14:18-25.) In short, the Movants have or will be damaged not because they will receive a smaller distribution on their claims but because they must defend against the demand for payment. As noted, the automatic stay was designed to protect pre-petition creditors’ from a grabbing creditor whose acts adversely affected their distribution; it was not designed to protect potential defendants who also happen to be creditors of the estate. Cf. In re Sturman, No. 10 Civ. 6725(RJS), 2011 WL 4472412, at *4 (S.D.N.Y. Sept. 27, 2011) (reputational injury allegedly suffered by the trustee as a result of acts in violation of the automatic stay “are too far removed from the types of harm that usually fall upon debtors and property as a result of interference with bankruptcy estates and proceedings.”) Moreover, if any of the Movants are not creditors, they will still suffer precisely the same injury as the Movants that are creditors, a sure sign that the injury is unrelated to any Mov-ant’s status as a creditor. Nor have the Movants cited any authority to support their underlying contention that an individual sued by a third party in violation of the automatic stay is entitled to recover his attorneys’ fees under 11 U.S.C. § 362(k)(l), a contention which, if accepted, would significantly alter the American Rule that each litigant must bear its own legal fees and expenses.
Accordingly, the Court concludes that the Movants have failed to demonstrate standing to recover their legal fees and expenses under 11 U.S.C. § 362(k)(l).
B. The Merits of the Claim
Assuming that the Movants have demonstrated standing, they must prove that Mishmeret and Shapira willfully violated the automatic stay and the violation proximately caused their damages. See Bace v. Babitt, No. 11 Civ. 6065(PAC)(HBP), 2012 WL 2574750, at *3 (S.D.N.Y. July 3, 2012); Sturman, 2011 WL 4472412, at *2. “Willful” in this context means “any deliberate act taken in violation of the stay, which the violator knows to be in existence.” Crysen/Montenay Energy Co., 902 F.2d at 1105; accord Sturman, 2011 WL 4472412, at *2. A “specific intent to violate the stay is not required; instead, ‘general intent in taking actions which have the effect of violating the automatic stay is sufficient to warrant damages.” Sturman, 2011 WL 4472412, at *2 (quoting In re Dominguez, 312 B.R. 499, 508 (Bankr.S.D.N.Y.2004)).
The Movants have demonstrated that Mishmeret and Shapira violated the stay by demanding payment on account of an estate claim. If a cause of action is property of the estate, any “act” by a creditor to assert that claim for its personal benefit violates 11 U.S.C. § 362(a)(3). McHale v. Alvarez (In re 1031 Tax Group, LLC), 397 B.R. 670, 682 (Bankr.S.D.N.Y.2003). State law determines whether claims belong to creditors *374or to the debtor prior to bankruptcy and to the estate after bankruptcy ensues. See Sobchack v. Am. Nat’l Bank & Trust Co. (In re Ionosphere Clubs, Inc.), 17 F.3d 600, 604 (2d Cir.1994); St. Paul Fire & Marine Ins. Co. v. PepsiCo., Inc., 884 F.2d at 700; Goldin v. Primavera Familienstiftung Tag Assocs. (In re Granite Partners, L.P.), 194 B.R. 318, 324-25 (Bankr.S.D.N.Y. 1996). Under New York law, claims for waste, mismanagement and breach of fiduciary duty belong to the corporation, Amfesco Indus., Inc. v. Greenblatt, 172 A.D.2d 261, 568 N.Y.S.2d 593, 596-97 (1991), and once bankruptcy ensues, become property of the estate that the trustee alone has standing to assert.11 Mediators, Inc. v. Manney (In re Mediators, Inc.), 105 F.3d 822, 826-27 (2d Cir.1997) (“We agree that a bankruptcy trustee, suing on behalf of the debtor under New York law, may pursue an action for breach of fiduciary duty against the debtor’s fiduciaries.”); Keene Corp. v. Coleman (In re Keene Corp.), 164 B.R. 844, 853 (Bankr.S.D.N.Y.1994) (“Section 720 of New York’s Business Corporation law expressly authorizes a corporation or bankruptcy trustee to sue the corporations officers and directors for breach of fiduciary duty, including misappropriation or diversion of assets.”).
Here, Shapira deliberately sent the October 4 Letter on behalf of Mishmeret at a time when they knew of the pendency of Ampal’s bankruptcy case. Mishmeret had served on the Committee during the chapter 11 and Shapira’s vote was instrumental in electing Spizz as trustee. The letter demanded immediate payment or security as compensation for claims sounding in breach of fiduciary duty, waste and mismanagement, claims that belonged to the estate.12 Accordingly, the Movants made a prima facie showing that Mishmeret and Shapira violated the automatic stay.
The Movants have failed, however, to identify any damages proximately caused by the stay violation other than their attorneys’ fees and legal expenses incurred in responding to the October 4 Letter and prosecuting this motion. {Motion at ¶ 34.) While § 362(k) is designed to discourage willful violations of the automatic stay, it does not permit recovery of unnecessary litigation costs. In re Prusan, 495 B.R. 203, 208 (Bankr.E.D.N.Y.2010) (quoting In re Robinson, 228 B.R. 75, 85 (Bankr.E.D.N.Y.1998) (internal quotation marks omitted)). “[A]n ‘excessively litigious approach’ to violations of the automatic stay that do not cause damages in an[d] of themselves must be guarded against.” Yarinsky v. Saratoga Springs Plastic Surgery, PC (In re Saratoga Springs Plastic Surgery, PC), No. 1:03CV896, 2005 WL 357207, at *5 n. 4 (N.D.N.Y. Feb. 11, 2005), aff'd, 172 Fed.Appx. 339 (2d Cir.2006); accord Sturman, 2011 WL 4472412, at *3, Prusan, 495 B.R. at 208; In re Beebe, 435 B.R. 95, 101 (Bankr.N.D.N.Y.2010) Accordingly, the Court may properly decline to award at*375torneys’ fees and costs incurred in connection with the prosecution of a willful stay violation where the only damages incurred by the injured party are the legal fees and costs incurred in bringing the motion. Sturman, 2011 WL 4472412, at *4; Beebe, 435 B.R. at 101.
The motion was an overreaction to the October 4 Letter, motivated by Movants’ concern about being sued, and not about the size of the estate or their share of it. Before they brought the motion, Spizz advised counsel for some of the Movants that he believed that Shapira sent the October 4 Letter to preserve D & 0 insurance coverage, Shapira’s clients had not taken any other action and Spizz would not allow the bondholders to prosecute claims that belonged to Ampal’s estate. In fact, Mish-meret did not take any action against the Movants or otherwise affect their rights, and the letter did not harm the estate. The legal fees and expenses that the Mov-ants incurred in first demanding that Spizz take action and then taking action themselves were unnecessary, and in the absence of any other actual damages, do not merit an award.
The Movants are also not entitled to recover punitive damages. To recover punitive damages, a movant must show that he suffered actual damages, Prusan, 495 B.R. at 207, and the violator acted maliciously or in bad faith. Crysen/Montenay Energy Co., 902 F.2d at 1105. As just stated, the Movants did not suffer any actual damages and their motion does not support a suggestion much less a finding of malice or bad faith.
C. Discharging Shapira
Finally, the Movants ask the Court to direct Spizz to terminate Shapira’s representation of the non-debtor subsidiaries. Spizz retained Shapira to represent Ampal’s non-debtor subsidiaries in his capacity as trustee of Ampal, their sole shareholder. Spizz followed this route after he applied to retain Shapira as special counsel to the estate, met with vigorous opposition and withdrew the application at the Court’s suggestion. In addition, the retention by the subsidiaries instead of Ampal made sense. The subsidiaries rather than Ampal needed the representation, they rather than Ampal were going to pay Shapira’s bills and Spizz could get the benefit of Shapira’s representation without the cost by speaking to him at any time. Nevertheless, the October 4 Letter resurrected the concerns of conflict that triggered Maiman’s earlier objection to Shapi-ra’s retention.
At oral argument, the Court also expressed a concern that Shapira faced a conflict. The estate and Mishmeret each have an interest in the D & O insurance proceeds, a finite fund. Shapira might seek to recover those proceeds for Mish-meret at the expense of the estate. Furthermore, as discussed earlier, Shapira cast the votes that elected Shapira, Spizz immediately sought to retain Shapira nunc pro tune to the date of his election, and this might have created the impression that Spizz had already taken sides in the disputes between Mishmeret/Shapira and the Movants. In same vein, the Spizz Opposition opposed the Movants’ claim for damages, an issue that concerned Mish-meret and Shapira but not the estate.
Thus far, Shapira has not taken any steps to collect the D & O insurance proceeds on Mishmeret’s behalf, and any conflict is potential and hypothetical. The Court can reconsider this conclusion should the situation change and an actual conflict arise.
In conclusion, the Movants’ motion is denied. Settle order on notice.
. The schedules state that each of the debts is contingent and unliquidated.
. The context of the letter indicates that "Company” referred to Ampal, and "Companies” referred to Ampal, Ampal Israel Ltd. and Merhav-Ampal Group Ltd.
. The email referred to the author's October 11, 2013 letter which was not provided to the Court.
. The Movants’ request for standing to the extent necessary to enforce the automatic stay is similarly moot. The Court can confer standing on an estate representative (usually the unsecured creditors’ committee in a chapter 11 case) where the debtor in possession unjustifiably fails to bring the action or assert the right. Unsecured Creditors Comm. of Debtor STN Enters., Inc. v. Noyes (In re STN Enters.), 779 F.2d 901, 904 (2d Cir.1985). The Court may also confer standing with the consent of the trustee provided the delegation of standing is in the best interest of the estate and necessary and beneficial. Commodore Int’l Ltd. v. Gould (In re Commodore Int’l Ltd.), 262 F.3d 96, 98 (2d Cir.2001). Since there is no further need for prospective relief, the request for standing to procure that relief is also unnecessary.
. The parties’ dispute does not implicate the rule that bars the adjudication of generalized grievances more appropriately left to the representative branches.
. Section 362(k)(l) states:
Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages. Originally designated as § 362(h), the section was redesignated as § 362(k)(l) under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, § 305, 119 Stat. 23 (2005).
. The Movants have not invoked the Court's contempt power.
. In Meoli v. Huntington Nat'l Bank (In re Teleservices Group, Inc.), 463 B.R. 28 (Bankr.W.D.Mich.2012), the court concluded that a defendant facing double liability based on an avoidance action brought by the trustee and an unfair enrichment action brought by a creditor in violation of the automatic stay had standing to enjoin the creditor's suit because it "clearly risks additional loss if both lawsuits proceed unabated.” Id. at 32. The court did not discuss the standing of a non-creditor to invoke the automatic stay.
. This is not necessarily the only situation in which a creditor can assert a claim based upon the violation of the automatic stay. See Labuzan, 579 F.3d at 545 (declining to hold the only secured creditors have standing under Bankruptcy Code § 362(k) to challenge automatic stay violations).
. The creditor’s standing to challenge the validity of a post-petition lien or transfer that impairs its collateral may face a separate hurdle. Under 11 U.S.C. § 549(a), the trustee is granted the exclusive authority to avoid an unauthorized post-petition transfer. See City of Farmers Branch v. Pointer (In re Pointer), 952 F.2d 82, 87-88 (5th Cir.1992). This power is subject to a statute of repose, 11 U.S.C. § 549(d), and § 549(c) protects certain good faith transferees that pay value. Yet an act in violation of the automatic stay is void, 48th St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 431 (2d Cir.1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988), and it is unnecessary to avoid the transfer. See In re Killmer, 501 B.R. at 212 (”[A]n act entered in violation of the stay is void whether or not a party makes a motion to declare it so.”). For this reason, one bankruptcy court has concluded that even non-creditor third parties have standing to seek a declaration that an action in violation of the stay is void. Rehabilitated Inner City Hous., LLC v. Mayor and City Council of Balt. City (In re Lesick), Adv. Proc. 05-10075, 2006 WL 2083655, at *5 (Bankr.D.D.C. July 19, 2006) ("transferee of estate property had standing to seek a declaration that a tax sale made in violation of the automatic stay that impaired its title was void.”) As the Movants are not challenging a post-petition transfer and are seeking damages rather than avoidance, it is unnecessary to consider this question.
. The trustee’s standing may devolve upon others if the trustee abandons the claim, Pub. Sch. Teachers' Pension & Ret. Fund v. Ambac Fin. Group, Inc. (In re Ambac Fin. Group, Inc.), 487 Fed.Appx. 663, 665 (2d Cir.2012), or the Court authorizes an estate representative to prosecute the claim. See STN Enters., 779 F.2d at 904. Neither has occurred in this case.
. Mishmeret argues that the October 4 Letter was not intended to assert estate claims, but intent to violate the stay is immaterial. Furthermore, while it is possible that the October 4 Letter also asserted direct claims, it nonetheless violated the automatic stay to the extent it also asserted estate claims. It would have been simple enough to put a disclaimer in the letter that it was not asserting estate claims and/or particularize the direct claims that it was asserting. Mishmeret, in this regard, has not identified the source of those claims under Israeli law aside from a passing reference to Israeli law in a footnote. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496571/ | Chapter 11
MEMORANDUM DECISION GRANTING MICHIGAN STATE HOUSING DEVELOPMENT AUTHORITY’S PARTIAL MOTION FOR SUMMARY JUDGMENT
JAMES M. PECK, United States Bankruptcy Judge
Introduction
Lehman in its heyday structured and engaged in a dizzying array of sophisticated financial transactions using swaps, re-pos and other qualified financial contracts. As a consequence of that vast and varied prepetition activity in the derivatives markets, these bankruptcy cases have turned out to be a proving ground for interpreting, applying and testing the boundaries of the safe harbor provisions of the United States Bankruptcy Code (the “Bankruptcy Code”). The questions presented typically have involved financial contracts that qualify for special treatment under these sections of the Bankruptcy Code in which a Lehman affiliate — very often Lehman Brothers Special Financing Inc. (“LBSF”) — has filed for bankruptcy relief, thereby defaulting under terms of an ISDA master agreement.
This decision is the latest to consider the scope of the safe harbor for liquidating, terminating and accelerating swap agreements. In particular, the Court must consider what it really means for a non-defaulting swap counterparty to have the unlimited contractual right to liquidate a swap agreement and whether that protected right properly extends to the contractually prescribed procedures for calculating amounts due and owing from one counter-party to another. The question goes to the heart of this safe harbor: if the exercise of a contractual right to cause the liquidation of a swap agreement is protected, are the contractually specified means for conducting that liquidation so connected to the very concept of liquidation that they are also protected?
LBSF says no, arguing that the less favorable procedures triggered by a bankruptcy default are ineffective ipso facto alterations of a debtor’s rights, and so do not fall within the safe harbor. Michigan State Housing Development Authority (“MSHDA”) and the International Swaps and Derivatives Association, Inc. (“ISDA”) (in an amicus brief) say yes, arguing that the protected right to liquidate cannot be viewed as an isolated right and necessarily includes those contractual provisions that provide needed guidance for liquidating and closing out the swap agreement. This dispute regarding scope is central to the meaning and purpose of this safe harbor.
The question is whether a contractual term calling for certain liquidation procedures in bankruptcy that are more favorable from the point of view of the non-defaulting party should be exempt from the rule that generally outlaws such ipso facto provisions. In this instance, there is economic significance to the answer because the specified liquidation methodology, if subject to the safe harbor protection for liquidating swap agreements, results in a reduction in the amount payable to LBSF as the defaulting counterparty. MSHDA closed out its swap years ago by following the liquidation protocol of the swap agreement and paying LBSF the amount that it calculated was due as a result of a bankruptcy default. LBSF contests that calculation and now seeks to recover a substantial deficiency by referring to another method for liquidating collateral that otherwise would apply if its own bankruptcy filing were disregarded.
*386Analyzing these issues calls for consideration of the literal meaning of the word “liquidation” consistent with the purposes that underlie the safe harbor for liquidating swap agreements. As explained in this decision, the Court has concluded that the protected right to liquidate must include a way to execute the liquidation in order to infuse the safe harbored right with meaning. The concept of an unlimited right to liquidate a swap agreement is incomplete without reference to the methodology that the parties have chosen in their contract for conducting the liquidation. That common sense construction of the safe harbor comports with the ordinary and customary meaning of the word “liquidate” (to liquidate is to convert an asset to cash by following a set of prescribed procedures) and allows the parties, without needless delay or uncertainty, to determine the amounts payable to terminate their swap agreement with clarity and finality.
This right of the non-defaulting party to rely Upon contractual norms for disposing of collateral is an integrated aspect of what it means to cause the liquidation of a swap agreement and necessarily is protected by the language of Section 560 of the Bankruptcy Code. To rule otherwise (in the manner urged by LBSF) would strip away the defining characteristics of a contractual right to liquidation that by statute may not be limited in any manner. The non-defaulting party would be artificially relegated to the bare ability to cause a liquidation without reference to the related provisions of the swap agreement that enable counterparties to achieve a predictable, agreed resolution of their respective contractual obligations.
The approach advocated by LBSF would separate the right to liquidate from the designated contractual methods for carrying out the liquidation, safe harboring the first while prohibiting the second. Such a bifurcated construction would unduly restrict the meaning of the word “liquidation” as used in Section 560, thereby diminishing the effectiveness of this safe harbor in protecting the financial markets, promoting finality in the closing out of swap exposures and mitigating systemic risk. The protected right to cause the liquidation of a swap agreement must extend beyond the mere capacity to commence a liquidation in a vacuum and must embrace those related terms of the swap agreement that explain the liquidation protocol to be followed when one party goes into bankruptcy. These may be ipso facto provisions, but they are exempt by statute and permitted.
At an earlier stage in these bankruptcy cases, the Court decided that the safe harbor provisions of Section 560 of the Bankruptcy Code do not extend to a bargained for change in the priority of distributions between LBSF as swap counterparty and certain investors in notes issued by a special purpose vehicle. That dispute dealt with the issue of whether a so-called “flip clause” triggered by a bankruptcy default is an ineffective ipso facto provision.
The Court found that the language of Section 560 is expressly limited to the specified rights to cause the liquidation, termination or acceleration of a swap agreement and does not authorize non-defaulting parties to swap agreements to improve their standing in a waterfall and obtain higher priority distributions upon the occurrence of a bankruptcy default. That conclusion reached in Lehman Bros. Special Fin. Inc. v. BNY Corporate Tr. Servs. Ltd. (In re Lehman Bros. Holdings Inc.), 422 B.R. 407 (Bankr.S.D.N.Y.2010) (“BNY Trustee”) was ratified and followed in Lehman Bros. Special Fin. Inc. v. Ballyrock ABS CDO 2007-1 Ltd. et al. (In re Lehman Bros. Holdings Inc.), 452 B.R. 31 (Bankr.S.D.N.Y.2011) (“Ballyrock”).
*387The current dispute prompts renewed attention to the language of Section 560 and touches again on an ipso facto provision in a qualified financial contract that is a source of economic harm to the debtor associated with the very act of filing for bankruptcy. Despite the superficial similarity of the issues, the earlier determinations made with respect to impermissible changes to distribution priorities are not controlling. Here the question is more nuanced and closer to the statutory core of Section 560, leading to an examination of whether the methodology for conducting an indisputably exempt liquidation is also exempt. This time the scheme of Section 560 — namely protection of the “safe harbored” right to cause a liquidation — is directly implicated in the analysis. And this is where the position of LBSF begins to crumble.
Notwithstanding the argument of LBSF that a liquidation methodology triggered by bankruptcy that generates a smaller termination payment for the defaulting party is comparable to a “flip clause,” the Court concludes otherwise. There is a significant difference between the reordering of priorities within a hierarchy of distributions (an ipso facto contractual term that is not mentioned in Section 560) and selecting which method to use when disposing and valuing collateral in connection with liquidating a terminated swap agreement. The choice of an accepted and contractually specified method to liquidate, even if it produces a less desirable result from the point of view of the debtor, is consistent with full implementation of the exemption that is codified in Section 560. This provision of the swap agreement is a contractual right to cause the liquidation (i.e., to liquidate), and accordingly is squarely within the safe harbor, not outside of it.
Accordingly, and for the reasons stated in greater detail in this decision, the alternative approach to liquidation of collateral used by MSHDA is effective even though it is contained in an ipso facto provision because that alternative is protected by the safe harbor of Section 560 and, as a consequence, is not subject to Section 365(e)(1).
Background
The Swap Transactions
The underlying facts are largely undisputed.1 MSHDA and Lehman Brothers Derivative Products Inc. (a subsidiary of LBHI) (“LBDP”) entered into an ISDA master agreement (the “Master Agreement”2) and accompanying schedule (the “Schedule”3) on May 10, 2000. Lehman Facts, ¶ 2; MSHDA Facts, ¶ 5.4 From the date the parties entered into the Master Agreement and Schedule through July 10, 2008, LBDP and MSHDA entered into twenty interest-rate swap transactions. MSHDA Facts, ¶6.5
*388The Master Agreement listed certain “Events of Default and Termination Events” that would result in the termination of these swap transactions. See, e.g., Master Agreement, § 5; Schedule, Part 1(g). Upon the occurrence of an Event of Default or Termination Event, the non-defaulting party had the right to designate an early termination date for outstanding transactions. MSHDA Facts, ¶ 10. Pursuant to the Master Agreement and Schedule, the parties would then calculate the amounts owed under the outstanding transactions using an agreed upon methodology; here, the parties selected “Market Quotation” and the “Second Method” to calculate amounts owed (the “Settlement Amount”). MSHDA Facts, ¶ 10; Master Agreement, § 6(e); Schedule, Part 1(f). Second Method simply refers to a process in which the “out of money” party pays the “in the money” party regardless of which party has defaulted. Market Quotation is the method for calculating the Settlement Amount on the basis of quotations from “Reference Market-makers6.” Master Agreement, § 12.
In addition to the “Events of Default and Termination Events” listed in the Master Agreement, the Schedule included certain “Trigger Events” which constituted additional termination events. Schedule, Part 1(g). Importantly, Part l(g)(ii)(3) of the Schedule contemplated that the bankruptcy of LBHI — LBDP’s parent — was a Trigger Event. Schedule, Part l(g)(ii)(3). Moreover, termination as a result of a Trigger Event altered the methodology by which the non-defaulting party would calculate the amounts owed. Instead of the Market Quotation method contemplated under the Master Agreement, the Schedule provided that the Settlement Amount would be calculated using the “Mid-Market” method for termination caused by a Trigger Event. MSHDA Facts, ¶ 13; Schedule, Part l(i)(2). Under the Mid-Market method, the Settlement Amount is calculated by “using Market Rates and Volatilities7 and by polling the Dealer Group8 as required, to be the mid-market value of the Transaction as of the close of *389business (New York time) on the Early Termination Date.” Schedule, Part l(i)(2).
On September 15, 2008, LBHI filed for relief under chapter 11 of the Bankruptcy Code, and this was a Trigger Event in the Schedule. MSHDA Facts, ¶ 14. However, rather than terminating the outstanding transactions in accordance with the applicable provisions of the Schedule, LBDP and MSHDA entered into an assignment and amendment agreement, dated September 16, 2008 (the “Assignment Agreement”9), with LBSF — at the time, a non-debtor — in which all of LBDP’s rights and obligations under the Master Agreement and Schedule with respect to outstanding transactions were assigned to LBSF. Lehman Facts, ¶ 13. The Assignment Agreement also amended the method used to calculate the Settlement Amount upon termination of the transactions. Specifically, paragraph 2 of the Assignment Agreement (the “Liquidation Paragraph”) provided as follows:
Upon the termination of the [Master Agreement and Schedule], as assigned and amended pursuant to the terms hereof, and notwithstanding any other provision hereof or thereof, any Settlement Amount payable by [MSHDA] shall be determined by LBSF pursuant to Part l(i)(2) of the Schedule [ (Mid-Market method) ] ... unless an Event of Default described in Section 5(a)(i) [ (non-payment) ] or Section 5(a)(vii) [ (bankruptcy) ] of the [Master Agreement] has occurred with respect to LBSF as the Defaulting Party, in which event the Settlement Amount shall be determined pursuant to Section 6 of the Agreement [ (Market Quotation method) ] as if LBSF is the Defaulting Party.
Assignment Agreement, ¶ 2. In essence, the Liquidation Paragraph provided that calculation of the Settlement Amount would be performed using the Mid-Market method, unless termination were due to the non-payment or bankruptcy of LBSF, in which case the Market Quotation method would be used. Id.
On October 3, 2008, LBSF commenced its own chapter 11 case.10 MSHDA subsequently sent a letter to LBSF on November 5, 2008 declaring an Event of Default under the Master Agreement and specifying November 5, 2008 as the early termination date. MSHDA Facts, ¶ 21. In accordance with the terms of the Assignment Agreement (and the Liquidation Paragraph in particular) MSHDA determined that it owed $36,346,426 to LBSF on account of the terminated transactions and paid that amount to LBSF. Lehman Facts, ¶¶ 18-19. LBSF alleges that had MSHDA calculated the Settlement Amount under the Mid-Market method instead of the Market Quotation method, the amount owed by MSHDA would total $59,401,-019 — approximately $23 million more than the amount paid. Lehman Facts, ¶¶ 17, 20. Thus, this dispute is all about the method — Mid-Market or Market Quotation — that properly should be used in calculating the Settlement Amount.
Procedural History
On November 16, 2009, MSHDA filed this adversary proceeding against LBHI, LBSF, and LBDP to recover approximately $2.4 million in funds transferred from MSHDA’s bond trustee to LBDP. See Adversary Compl., Nov. 16, 2009, Adversary Proceeding ECF No. 1. The Lehman defendants answered the complaint *390on January 13, 2010 and asserted counterclaims against MSHDA alleging breach of contract and unjust enrichment as a result of MSHDA’s improper valuation of the Settlement Amount under the Master Agreement and Schedule. See Answer and Affirmative Defenses of the Defs. and Countercl. of LBSF, Jan. 13, 2010, Adversary Proceeding ECF No. 8. MSHDA filed its answer to LBSF’s counterclaims on January 22, 2010. See MSHDA’s Answer and Affirmative Defenses to Coun-tercl., Jan. 22, 2010, Adversary Proceeding ECF No. 10. The parties then engaged in mediation pursuant to a previously approved mediation protocol for resolving derivative disputes in the Lehman cases. See Stipulations and Orders Staying Adversary Proceeding, March 12, 2010 and June 17, 2010, Adversary Proceeding ECF Nos. 11 and 12. The mediation failed to resolve the dispute.
Thereafter, LBSF sought leave to amend its counterclaim to assert that the Liquidation Paragraph should be invalidated as an impermissible ipso facto clause under the Bankruptcy Code. With leave of Court, LBSF filed its amended counterclaim on January 18, 2011 [Adversary Proceeding ECF No. 18] and MSHDA filed its answer to LBSF’s amended counterclaim on January 31, 2011 [Adversary Proceeding ECF No. 20]. MSHDA then moved to withdraw the reference. See MSHDA’s Mot. to Withdraw the Reference, May 17, 2011, Adversary Proceeding ECF No. 23. The District Court denied MSHDA’s request by order dated September 14, 2011 [Adversary Proceeding ECF No. 26].
MSHDA filed its motion for partial summary judgment premised on the theory that the Liquidation Paragraph, although an ipso facto provision, is protected under the safe harbor of Section 560 of the Bankruptcy Code exempting contractual rights to liquidate, terminate, or accelerate a swap agreement. See MSHDA’s Partial Mot. for Summ. J., March 27, 2012, Adversary Proceeding ECF No. 31 (the “Motion”). MSHDA submits that the Liquidation Paragraph fits squarely within the plain language of Section 560. MSHDA also attempts to distinguish this Court’s prior decision in BNY Trustee, which held that a provision subordinating Lehman’s rights to certain collateral upon a bankruptcy filing did not meet the requirements of Section 560 and was thus an unenforceable ipso facto clause, and argues that the Liquidation Paragraph is different because it deals directly with a subject matter addressed by Section 560. BNY Trustee, 422 B.R. at 421.
LBSF opposed the Motion and cross-moved for partial summary judgment on June 8, 2012. See LBSF’s Cross-Mot. for Partial Summ. J., June 8, 2012, Adversary Proceeding ECF No. 34. LBSF argues that the Liquidation Paragraph is a classic ipso facto clause under Sections 365(e)(1) and 541(c)(1)(B) of the Bankruptcy Code. According to LBSF, the safe harbor provided by Section 560 is limited and the Liquidation Paragraph is ancillary to the rights specifically enumerated in the statute.11
ISDA, as a non-party amicus curiae, filed a brief in support of the Motion on August 20, 2012. Br. of Amicus Curiae ISDA, Aug. 20, 2012, Adversary Proceeding ECF No. 44. Agreeing with MSHDA, ISDA argues that a liquidation methodology is precisely within the safe harbor provided by Section 560 and that such *391contractually specified procedures are important to market stability.
MSHDA replied in further support of the Motion and opposed LBSF’s cross-motion on August 21, 2012 [Adversary Proceeding ECF No. 45], and LBSF replied in further support of its cross-motion on October 24, 2012 [Adversary Proceeding ECF No. 51].12
A hearing on the Motion took place on September 18, 201313, and the Court took this matter under advisement.14
Standard
Summary judgment is appropriate when there is “no genuine dispute as to any material fact,” and the moving party is entitled to “judgment as a matter of law.” Fed.R.Civ.P. 56(a); see NML Capital v. Republic of Argentina, 621 F.3d 230, 236 (2d Cir.2010) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Redd v. Wright, 597 F.3d 532, 535-36 (2d Cir.2010)). The Court must view the facts in favor of the non-moving party and resolve ambiguities and draw inferences against the moving party. See NetJets Aviation, Inc. v. LHC Commc’ns, LLC, 537 F.3d 168, 178 (2d Cir.2008) (citing Liberty Lobby, 477 U.S. at 255, 106 S.Ct. 2505; Coach Leatherware Co. v. AnnTaylor, Inc., 933 F.2d 162, 167 (2d Cir.1991)). In determining whether to grant a motion for summary judgment, the Court is not to “weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Cioffi v. Averill Park Cent. Sch. Dist. Bd. of Educ., 444 F.3d 158, 162 (2d Cir.2006) (quoting Liberty Lobby, 477 U.S. at 249, 106 S.Ct. 2505 (internal quotation marks omitted)). The facts with respect to this dispute, for the most part, are undisputed, and the Court discusses in the following section the applicability of Section 560 to the Liquidation Paragraph as a matter of law.15
Discussion
The question before the Court is a subtle one and involves a parsing of the language and purpose of Section 560. Before delving into the exercise and in order to provide needed context, it is necessary to examine those provisions of the Bankruptcy Code — Sections 365(e)(1) and 541(c)(1) — that invalidate so called ipso facto contractual provisions.
Bankruptcy Code’s Anti-Tpso Facto Provisions
Section 365(e)(1) of the Bankruptcy Code renders unenforceable those provisions that purport to terminate or modify a *392contractual term when a party files for bankruptcy and provides that:
Notwithstanding a provision in an execu-tory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract or lease that is conditioned on — (A) the insolvency or financial condition of the debtor at any time before the closing of the case; (B) the commencement of a case under this title; or (C) the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement.
11 U.S.C. § 365(e)(1). Similarly, Section 541(c)(1) of the Bankruptcy Code protects the interest of the estate in the debt- or’s property. See 11 U.S.C. § 541(c)(1). “It is now axiomatic that ipso facto clauses are, as a general matter, unenforceable.” BNY Trustee, 422 B.R. at 415 (citation omitted); see also Ballyrock, 452 B.R. at 89 (citation omitted).
Plainly, the Liquidation Paragraph is an ipso facto clause and provides that the bankruptcy of LBSF is an event which determines the choice of the method to be used in calculating the Settlement Amount in bankruptcy — here, the Market Quotation method. The Court next considers whether, despite its ipso facto characteristics, the Liquidation Paragraph fits within the exemption of Section 560.
The Liquidation Paragraph is Covered by the Section 560 Safe Harbor
A swap agreement is a financial contract that qualifies for the exception to the ipso facto rule. As defined by the Court of Appeals for the Ninth Circuit in Thrifty Oil Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n, a swap is defined as
... a contract between two parties ... to exchange (“swap”) cash flows at specified intervals, calculated by reference to an index. Parties can swap payments based on a number of indices including interest rates, currency rates and security or commodity prices.
Thrifty Oil Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n, 322 F.3d 1039, 1042 (9th Cir.2003).
Congress has enacted exceptions to the general rule disallowing ipso facto clauses for swaps and certain other types of financial contracts to address volatility in the financial markets which “can change significantly in a matter of days, or even hours....” H.R.Rep. No. 101-484, at 2 (1990), reprinted in 1990 U.S.C.C.A.N. 223, 224. “[A] non-bankrupt party to ongoing securities and other financial transactions could face heavy losses unless the transactions are resolved promptly and with finality.” Id.
The safe harbor for swap transactions is codified in Section 560 of the Bankruptcy Code and provides in pertinent part:
Contractual right to liquidate terminate, or accelerate a swap agreement: The exercise of any contractual right of any swap participant or financial participant to cause the liquidation, termination, or acceleration of one or more swap agreements because of a condition of the kind specified in section 365(e)(1) of this title or to offset or net out any termination values or payment amounts arising under or in connection with the termination, liquidation, or acceleration of one or more swap agreements shall not be stayed, avoided, or otherwise limited by operation of any provision of this title or by order of a court or *393administrative agency in any proceeding under this title....
11 U.S.C. § 560 (emphasis added).16
“It is well established that when the statute’s language is plain, the sole function of the courts ... is to enforce it according to its terms.” Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (internal citations and quotation marks omitted). A court “must interpret a statute as it is, not as it might be, since “courts must presume that a legislature says in a statute what it means and means in a statute what it says.” ” Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210, 216 (2d Cir.2008) (quoting Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992)). If possible, a Court reviewing a statute must give effect to every clause and word of a statute. Williams v. Taylor, 529 U.S. 362, 404, 120 S.Ct. 1495, 146 L.Ed.2d 389 (2000) (citations omitted).
Looking at the plain language of Section 560, the methodology set forth in the Liquidation Paragraph naturally fits within this safe harbor. It is undisputed that MSHDA is a swap participant and that the Master Agreement and Schedule, as amended by the Assignment Agreement, constitute a swap agreement. Going to the substance of Section 560, the statute protects the “exercise of any contractual right ... to cause the liquidation....” 11 U.S.C. § 560.
The word “liquidation,” in the context of Section 560 means, according to the dictionary definition, the act of determining by agreement the exact amount of something that otherwise would be uncertain.17 The Court may refer to the common meaning and ordinary usage of undefined terms in a statute. Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979) (“[UJnless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning”) Referring to the ordinary meaning of “liquidation” leads to the conclusion that the right to cause the liquidation of a swap agreement must mean the right to determine the exact amount due and payable under the swap agreement. The amount can only be fixed by following the liquidation methodology specified in the swap agreement.
Section 560 expressly exempts the “exercise of any contractual right” to liquidate. 11 U.S.C. § 560. That contractual right, in this instance, is spelled out in the Liquidation Paragraph. That paragraph lays out the methods for calculating the Settlement Amount in the event of termination of the swap agreement, stating that the Market Quotation method is to be used if termination is caused by the bankruptcy of, or non-payment by, LBSF and that the Mid-Market method is to be followed in other circumstances. That choice of the method is an essential part of being able to carry out the act of liquidation. The method employed in the act of liquidation is what allows the non-defaulting party to determine the Settlement Amount.
*394Liquidation and the methodology for carrying out the liquidation are linked concepts: to liquidate is to obtain values prescribed by contract. Using the Market Quotation method to calculate the Settlement Amount is a necessary part of the exercise by MSHDA of its “contractual right” to “cause the liquidation” of the swap agreement with LBSF.
LBSF urges the Court to adopt a much narrower reading of Section 560 and draws a distinction between the act of “termination, liquidation, or acceleration” and the method chosen for calculating a Settlement Amount. According to LBSF, only the acts are safe harbored and other rights, such as how to calculate the amount due, are ancillary rights and are not protected.
LBSF’s distorts and truncates the meaning of Section 560. Its tightly constricted interpretation is unpersuasive for a number of reasons. First, LBSF does not give enough weight to the phrase “the exercise of any contractual right” which connects with the phrase “to cause the liquidation, termination, or acceleration” in Section 560. Read together, the act of liquidation, termination, or acceleration must be performed in accordance with a contractual provision in the swap agreement. Here, the Liquidation Paragraph specifies what that right entails. Unless the act of liquidation is performed in accordance with some agreed method, the right to liquidate is disconnected and loses all practical meaning.
Second, although LBSF vigorously opposes the use of the Market Quotation method to calculate damages, it fails to explain why a commercially acceptable method chosen by the parties themselves should not be respected or to demonstrate why it is appropriate to use the alternative Mid-Market method. The methods produce different results, but both methods are contractually approved methods for valuing collateral. The result — whether it produces more or less value for the debt- or — should not be decisive in considering how to apply the safe harbor. The liquidation method, regardless of amounts realized, is fully “baked” into the very concept of what it means to liquidate.
Third, allowing a non-debtor counterparty to use the contractual method of liquidation promotes the systemic goals of the safe harbor — to provide stability and certainty to the markets upon the insolvency of a counterparty and to enable the parties themselves to liquidate collateral in a contractually prescribed manner. The current litigation is an example of the delay, expense and uncertainty that results when there is doubt surrounding the enforceability of contractual terms.
BNY Trustee, Ballyrock, and Calpine Do Not Mandate a Different Outcome
LBSF relies heavily on the proposition that non-enumerated rights are merely ancillary to the safe harbored rights to liquidate, terminate, and accelerate. LBSF cites to three decisions, all from this Court, and two of which are prior Lehman decisions — (i) BNY Trustee, (ii) Ballyrock, and (iii) Calpine Energy Servs., L.P. v. Reliant Energy Elec. Solutions, L.L.C. (In re Calpine Corp.), 2009 WL 1578282, Adversary Proceeding No. 08-1251 (Bankr.S.D.N.Y. May 7, 2009). These cases are all distinguishable.
In BNY Trustee, this Court held that a “flip-clause” which subordinated Lehman’s rights to certain collateral upon Lehman’s default was an unenforceable ipso facto clause and not protected by Section 560. BNY Trustee, 422 B.R. at 421. The Court provided two rationales for this holding: (i) the flip-clause arose out of a supplemental agreement which did not comprise part of the swap agreement, and (ii) the flip-clause fell outside of the safe harbor of Section 560 because it did not deal ex*395pressly with liquidation, termination, or acceleration. Id. Neither of these rationales is applicable here. The Liquidation Paragraph of the Assignment Agreement is part of the swap agreement at issue. LBSF does not argue to the contrary. More importantly, the Liquidation Paragraph, unlike the flip-clause in BNY Trustee, deals directly with a safe harbored right — the liquidation of swap agreements. The very act of liquidating and the method for doing so are tightly intertwined to the point that liquidation without a defining methodology is impossible to perform. Simply put, to liquidate is to calculate the Settlement Amount under the terms of the swap agreement.
Similarly, in Ballyrock, the Court held that a contractual provision purporting to substantially lower Lehman’s priority of payment within a payment waterfall was outside the protection of Section 560. Bal-lyrock, 452 B.R. at 40. As the Court observed:
Such a mandated elimination of a substantive right to receive funds that existed prior to the bankruptcy of LBHI should not be entitled to any protection under safe harbor provisions that, by their express terms, are limited exclusively to preserving the right to liquidate, terminate and accelerate a qualifying financial contract.
Id. Ballyrock, like BNY Trustee, is also distinguishable from the current dispute because it deals with a provision altering priority of payment and not a provision strictly dealing with liquidation, termination, or acceleration.
Finally, the Calpine court, in dealing with comparable protections for commodities and forward contracts (11 U.S.C. § 556), held that a clause requiring a defaulting party to provide a written explanation for disputing the non-defaulting party’s calculation of a Settlement Amount within two days of receipt was not entitled to safe harbor protection. Calpine, 2009 WL 1578282, at *6-7. Unlike the Liquidation Paragraph, the provision in Calpine was merely “incidental or ancillary” to the rights protected by the safe harbors. Id.
“Incidental” and “ancillary” are descriptive words that can influence the characterization of an act as falling either inside or outside the protected zone of the safe harbors. They are words that tend to distance a particular act from that zone, and the greater the distance, the more attenuated the ability to claim any immunity from the ipso facto bar to enforceability. Here, the Settlement Amount can be determined only by utilizing one contractual methodology for determining value. These concepts (liquidation and liquidation methodology) are so closely connected to one another that they flow together and become virtually inseparable.
Conclusion
Words in a statute are to be given their ordinary meaning. Lamie, 540 U.S. at 584, 124 S.Ct. 1023 (citations omitted). When dealing with a swap agreement, the exercise by a swap participant (here MSHDA) of a contractual right to cause a liquidation of the swap agreement in question is a unified concept because the act of causing a liquidation calls for the collection of market data in a particular manner from specified sources to obtain pricing information. For that reason, the plain meaning of this safe harbor protects both the act of liquidating and the manner for carrying it out. The act of causing liquidation and the methodology converge to the point of being one and the same.
Accordingly, the procedures followed by MSHDA in determining the Settlement Amount are protected by the safe harbor of Section 560, and the Court grants *396MSHDA’s Motion for Summary Judgment to the extent set forth in this decision.
SO ORDERED.
. Pursuant to Rule 7056-1 of the Local Bankruptcy Rules For The Southern District of New York, both MSHDA on the one hand and Lehman Brothers Holdings Inc. ("LBHI”) and LBSF on the other hand filed separate statements of undisputed facts. See ECF Nos. 31 and 37. Reference to the MSHDA statement of undisputed facts will be cited as "MSHDA Facts, ¶_” and reference to the Lehman statement of undisputed facts will be cited as "Lehman Facts, ¶_".
. Motion (defined below) Ex. 2.
. Motion Ex. 3.
. Although LBSF (another subsidiary of LBHI) was LBHI's primary domestic derivatives trading entity, LBDP was a trading entity with a triple-A credit rating created to transact with counterparties that required a higher credit rating. Lehman Facts, ¶¶ 2-4.
. Each of the twenty swap transactions were also subject to transaction specific confirmations with provided additional terms for each transaction. Id.
. Reference Market-makers is defined in the Master Agreement as "four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city.” Master Agreement, § 12.
. Market Rates and Volatilities is defined as, "in the case of interest rates and volatilities, the interest rates and volatilities obtained from the Telerate and Reuters screens where practicable and from polling the Dealer Group and, in the case of foreign exchange rates and volatilities and other pricing parameters, the foreign exchange rates and volatilities and other pricing parameters obtained from polling the Dealer Group. In each case, for all rates, volatilities or other parameters obtained, at least five members of the Dealer Group shall be polled, the highest and lowest of such returns (including, in the case of interest rates and volatilities, the rates and volatilities obtained from the Telerate and Reuters screens, if any) shall be discarded and the simple mathematical average of the remaining values shall be used to perform the applicable determination.” Schedule, Part IQ).
.Dealer Group is defined as "the following entities and such other entities as may be selected by [LBDP] from time to time: J.P. Morgan, Citibank, N.A., Barclays Bank PLC, Bankers Trust Company, Merrill Lynch Capital Services, Inc., The Chase Manhattan Bank, Deutsche Bank, National Westminster Bank PLC, Banque Nationale de Paris, Hong Kong and Shanghai Bank, the Sumitomo Bank Ltd., Bank of Tokyo-Mitsubishi Bank Limited, Westpac Bank Corp., Goldman, Sachs & Co. and Banque Paribas.” Schedule, Part l(j).
. Motion Ex. 5.
. For purposes of this decision, the Court is not assigning legal significance to the fact that the Liquidation Paragraph was crafted after LB Hi's chapter 11 filing at a time when the likelihood of LBSF's filing was greater and perhaps even expected.
. The Official Committee of Unsecured Creditors of LBHI (the "Lehman Committee”) filed a joinder to LBSF's cross-motion and opposition to the Motion. Adversary Proceeding ECF No. 39.
. The Lehman Committee filed a joinder to LBSF’s reply on the same day [Adversary Proceeding ECF No. 52].
. Between the conclusion of summary judgment briefing and the hearing, the parties again, in compliance with a recommendation by the Court at a March 21, 2012 status conference, attempted to mediate the matter. The second mediation also was unsuccessful. These attempts to resolve this dispute by agreement account for the long delay between briefing and argument.
. Transcript of hearing available at Adversary Proceeding ECF No. 57.
.MSHDA’s Motion and LBSF’s cross-motion also included arguments regarding summary judgment on breach of contract and unjust enrichment claims. During the hearing, counsel for LBSF argued that summary judgment with respect to those issues was not appropriate as LBSF has not been afforded an opportunity to conduct discovery on those claims. Motion Hr'g Tr. 93:15-94:17, Sept. 18, 2013. Counsel for MSHDA responded that the main issue that it would like the Court to resolve is the scope of Section 560, after which the parties may be able to work through the remaining issues themselves. Id. at 113:8-114:2. This opinion is limited to the application of Section 560 to relevant provisions of the swap agreement.
. Section 560 was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to include protection for the contractual right to cause the “liquidation” and "acceleration” of one or more swap agreements in addition to the previously protected right to cause the "termination” of swap agreements.
. The definition reads as follows: “1. The act of determining by agreement or by litigation the exact amount of something (as a debt or damages) that before was uncertain. 2. The act of settling a debt by payment or other satisfaction. 3. The act or process of converting assets into cash, esp. to settle debts.” Black's Law Dictionary (9th ed. 2009). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496572/ | Chapter 11
MEMORANDUM OPINION AND ORDER GRANTING KOPF’S MOTION TO DISMISS THIRD-PARTY COMPLAINT
MARTIN GLENN, United States Bankruptcy Judge
Pending before the Court is Jacob M. Kopfs (“Kopf’) Motion to Dismiss Plaintiffs Complaint Pursuant to Fed.R.Civ.P. 12(b)(6) (the “Motion,” Adv. Pro. No. 13-01105, ECF Doc. # 17).1 Kopf was the president and sole shareholder of JMK Construction Group, Ltd. (“JMK”), the chapter 11 debtor in Bankruptcy Case No. 10-13968. Through the Motion, Kopf seeks dismissal, under Federal Rule of Civil Procedure 12(b)(6), of the claims asserted against him as third-party defendant in the Answer of Queens Borough Public Library, Counter-Claims Against Joel Shafferman, the Liquidating Trustee of JMK Construction Group, Ltd. and *402Third-Party Complaint Against Jacob M. Kopf (the “Third-Party Complaint,” ECF Doc. #8), filed by The Queens Borough Public Library (“QBPL” or the “Library”). QBPL filed an opposition to the Motion (the “Opposition,” ECF Doc. # 25). Kopf filed the Surreply in Support of Jacob M. Kopfs Motion to Dismiss Plaintiffs Complaint Pursuant to Fed.R.Civ.P. 12(b)(6) (the “Reply,” ECF Doc. # 27). The Court held a hearing on October 29, 2013.
For the reasons that follow, the Court GRANTS the Motion. All of the Third-Party Claims (defined below) are DISMISSED without prejudice, and QBPL is granted leave to amend.
I. BACKGROUND2
A. QBPL and JMK/Kopf
Beginning in 2006, QBPL and JMK entered into a series of contracts (collectively, the “Contracts”) for the provision of services related to certain Library construction projects (the “Library Projects”). (Third-Party Compl. ¶¶ 18-55.) Although three distinct types of contracts collectively composed the Contracts at issue in this case, JMK’s duties under each type of Contract were generally similar. (See id. ¶¶ 30-55.) Each Contract required JMK to supervise the quality and ensure completion of the subcontractors’ work, and provide the Library with signed representations of the quality and progress of the subcontractors’ work.3 (Id. ¶¶ 30-43.) The Library relied on JMK’s representations in issuing payment for work purportedly performed by the subcontractors. (Id. ¶¶ 61, 71-73,137-140.)
The Contracts differed primarily in their payment structures. Under one set of contracts (the “Master Agreement Contracts”), JMK contracted directly with the subcontractors and received a flat fee plus a percentage of the amounts paid to the subcontractors. (Id. ¶¶ 34, 41.) Under another set of contracts (the “Stand Alone Contracts”), JMK contracted directly with the subcontractors and was paid a flat fee. (Id. ¶¶ 47-48.) Under the last type of contract (the “Pass-Through Contracts”), the subcontractors contracted directly with the Library, and JMK was paid a percentage of the total construction cost. (Id. ¶¶ 51-55.)
B. Bankruptcy Case and Adversary Proceeding
On December 10, 2007, Air China Limited (“Air China”) filed a lawsuit against several defendants including JMK and Kopf, asserting various claims, including conversion and unjust enrichment. (Id. ¶ 78.) On or around July 14, 2010, a jury found JMK and Kopf liable for conversion and unjust enrichment, finding in particular that Kopf had unjustly enriched himself by more than $180,000 and had wrongfully converted $364,000 (the “Air China Judgment”). (Id. ¶ 79.) The total award rendered against JMK and Kopf amounted to $1,473,406.89, including $750,000 in punitive damages and $177,406.89 in prejudgment interest. (Id.) On July 23, 2010 (the “Petition Date”), JMK filed a voluntary petition for protection under chapter 11 of the Bankruptcy Code, commencing Bankruptcy Case No. 10-13968.4
*403On October 23, 2012, this Court entered an Order (the “Confirmation Order,” ECF No. 10-18968 Doc. # 213) confirming the Debtor’s Second Amended Chapter 11 Plan of Liquidation (the “Plan,” ECF No. 10-13968 Doc. # 185). In return for certain payments by Kopf to fund the Plan, the Plan included a release of the estate’s claims against Kopf; any claims Kopf might have against JMK were discharged. QBPL did not object to the Plan or to the release of the estate’s claims against Kopf.5
On January 4, 2012, QBPL filed a proof of claim in the case “asserting an undetermined amount of damages, including, but not limited to, the mitigation damages incurred attempting to finish the projects that Debtor failed or otherwise refused to complete, or completed in an unprofessional and non-workmanlike manner or had abandoned altogether.”6 (Third-Party Compl. ¶ 99.)
A trust was created pursuant to the confirmed Plan, and Joel Shafferman (who had been counsel to the Creditors’ Committee) was appointed as the liquidating trustee (the “Liquidating Trustee”). The Liquidating Trustee filed this Adversary Proceeding against QBPL on January 24, *4042013. (See Adversary Complaint, ECF Doc. #1.) The Liquidating Trustee seeks a judgment against QBPL in an amount not less than $395,000 for payments allegedly owed to JMK under the Contracts, and for the turnover of trust fund money. The claims against QBPL include breach of contract and unjust enrichment.
C. The Third-Party Complaint
The Library filed an answer that included counterclaims against Shafferman (in his capacity as Trustee of the Liquidating Trust) and the third-party claims against Kopf. In its answer, QBPL asserts the following causes of action against the Liquidating Trustee and JMK: breach of contract (Counts I — III); negligent performance of contract (Count IV); conversion (Count V); fraud (Count VII); and unjust enrichment (Count VIII). In addition, QBPL asserts the following counts directly against Kopf as third-party defendant: conversion (Count VI); unjust enrichment (Count IX); and for declaratory judgment that Kopf is liable for the debts of JMK under theories of alter ego liability (Count X) and piercing the corporate veil (Count XI) (collectively, the “Third-Party Claims”). The Liquidating Trustee filed an answer to the counterclaims. Kopf moved to dismiss the Third-Party Claims.
II. DISCUSSION
The issues raised in the Motion require the court to evaluate the sufficiency of the four claims against Kopf as third-party defendant. For each of the Third-Party Claims, the Court must first determine whether QBPL has standing to bring the claim. If this question is answered in the affirmative — and only then — the Court must determine whether the claim is sufficiently pled to survive a motion to dismiss. In undertaking this two part analysis, the Court will address the Third-Party Claims in pairs, first discussing the veil-piercing and alter ego claims, followed by the conversion and unjust enrichment claims.
A. QBPL’s Veil-Piercing and Alter Ego Claims
1. Standing
Before deciding whether the Third-Party Claims state plausible claims for relief, the Court must consider whether QBPL has standing to bring the claims, or whether the claims against Kopf belonged to the Debtor’s estate and were released under the Plan. “To determine standing, the Court must look to the underlying wrongs as pleaded in the complaint and whether the plaintiff alleges a particularized injury.” McHale v. Alvarez (In re 1031 Tax Grp., LLC), 397 B.R. 670, 679 (Bankr.S.D.N.Y.2008) (citations omitted).
a. Creditors May Only Bring Claims Alleging Direct, Particularized Harm,
“If the cause of action belongs to the estate, the trustee has exclusive standing to assert it; conversely, if the cause of action belongs solely to the ... creditors, the trustee has no standing to assert it.” In re Granite Partners, L.P., 194 B.R. 318, 324-25 (Bankr.S.D.N.Y.1996); see also Picard v. JPMorgan Chase & Co., 460 B.R. 84, 96 (S.D.N.Y.2011), aff'd, 721 F.3d 54 (2d Cir.2013) (stating that “the Trustee only has standing to pursue claims of the Debtor.”). “When the trustee has standing to sue, the automatic stay prevents creditors or shareholders from asserting the claim notwithstanding that outside of bankruptcy, they have a right to do so.” Granite Partners, 194 B.R. at 325. Because the Court has already confirmed a Plan, it is the plan injunction and release— not the automatic stay — that bars creditors from bringing suits that are derivative and belong to the estate. (See Plan Art. *40510.1) To determine which claims are derivative and belong to the estate, and which claims are direct and belong to creditors, the Court looks to state law. 1031 Tax Grp., 397 B.R. at 679; see also Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1344-50 (7th Cir.1987) (analyzing state law to determine whether claims were property of the estate). JMK was incorporated in New York; the parties agree that New York law governs.
b. QBPL Has Standing to Bring the Veil-Piercing and Alter Ego Claims to the Extent They Allege Direct, Particularized Harm
In Counts X and XI, QBPL seeks a declaratory judgment that Kopf is liable for the debts of JMK under theories of alter ego liability and piercing the corporate veil. In New York, these two theories are evaluated together; alter ego liability is one basis for piercing the corporate veil. See, e.g., Gosconcert v. Hillyer, 158 B.R. 24, 28 (S.D.N.Y.1993). “[P]iercing the corporate veil does not constitute an independent cause of action .... Instead, the alter ego doctrine is a theory of liability generally invoked to disregard the corporate entity to find the owners liable for the debts of the corporation.” First Keystone Consultants, Inc. v. Schlesinger Elec. Contractors, Inc., 871 F.Supp.2d 103, 124 (E.D.N.Y.2012) (internal quotation marks and citations omitted).
“A creditor has standing to bring an alter-ego claim when the harm alleged in support of the claim is personal to them; a creditor lacks standing to bring such a claim when the harm alleged is general.” In re Cabrini Med. Ctr., 489 B.R. 7, 17 (S.D.N.Y.2012) (citation omitted). Conversely, a bankruptcy trustee only has standing to bring an alter ego claim when the claim is brought on behalf of the debtor corporation. See Picard, 460 B.R. at 96-97 (“We do not question the right of a trustee in bankruptcy to maintain a ‘veil piercing’ suit on behalf of the bankrupt corporation, but the qualification ‘on behalf must be stressed.” (quoting Steinberg v. Buczynski, 40 F.3d 890, 892-93 (7th Cir.1994))).
“In assessing whether the ‘action accrues individually, to a claimant or generally to the corporation, a court must look to the injury for which relief is sought and consider whether it is peculiar and personal to the claimant or general and common to the corporation and creditors.’ ” In re Cabrini Med. Ctr., No. 09-14398, 2012 WL 2254386, at *7 (Bankr. S.D.N.Y. June 15, 2012) (quoting Koch, 831 F.2d at 1339), aff'd, 489 B.R. 7 (S.D.N.Y.2012). “A claim is general ‘if [there is] ... no particularized injury arising from it, and [it] could be brought by any creditor of the debtor_’” Cabrini, 489 B.R. at 17 (quoting St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.1989)). “A claim is personal to the creditor ‘[w]hen a third party has injured not the bankrupt corporation itself but a creditor of that corporation....’” Id. (quoting Picard, 460 B.R. at 89). “The injury cannot be ‘a secondary effect from the harm done to [the corporation].’ ” Cabrini, 2012 WL 2254386, at *7 (quoting St. Paul, 884 F.2d at 704). Here, the Court must look at the specific injury asserted as the basis of QBPL’s veil-piercing claims to determine whether the causes of action, as alleged, accrue individually to QBPL.
Under New York law, “a court may pierce the corporate veil and find an individual liable for the debts of the corporation ‘where 1) the owner exercised complete domination over the corporation with respect to the transaction at issue, and 2) such domination was used to commit a fraud or wrong that injured the party *406seeking to pierce the veil.’ ” Fin. One, Inc. v. Timeless Apparel, Inc., No. 09 Civ. 9397, 2011 WL 1345030, at *4 (S.D.N.Y. Mar. 29, 2011) (quoting MAG Portfolio Consult, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 63 (2d Cir.2001)). The N.Y. Court of Appeals has explained the rule as follows:
While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business, such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required. The party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.
Morris v. New York State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157, 1161 (1993) (citations omitted) (emphasis added); see also Thrift Drug, Inc. v. Universal Prescription Adm’rs, 131 F.3d 95, 97 (2d Cir.1997).
Under this rule, any claim asserted by QBPL against Kopf based on piercing the corporate veil or alter ego liability must allege that Kopf used his control over JMK to commit a wrongful or unjust act specifically directed to QBPL. In evaluating the proper plaintiff to bring that claim, the Court must look at the wrongful actions allegedly committed by Kopf. If those actions harmed JMK generally, and QBPL and others suffered injury as a result, then the trustee would be the only proper party to assert the veil-piercing action. But if Kopfs wrongful actions were directed to QBPL, and caused particularized injury to QBPL, then QBPL has standing to bring the action. See Pergament v. Yerushalmi (In re Yerushalmi), 487 B.R. 98, 105 (Bankr.E.D.N.Y.2012) (stating that the trustee is the proper party to assert the claim “(a) if the alter ego claim could have been asserted by the Debtor pre-petition, and (b) if the claim does not involve a direct injury to a particular creditor”) (citing St. Paul, 884 F.2d at 704-05).
Judge Gropper’s analysis in Cabrini affirmed by the district court, is instructive. See Cabrini 2012 WL 2254386, at *7-9. In Cabrini, certain creditors of the debtor sought relief from the automatic stay to name the debtor as a defendant in state court litigation against an entity referred to as the N.Y. Missionary Sisters, which allegedly controlled the debtor. Id. at *1. The N.Y. Missionary Sisters opposed the relief, claiming that any alter ego claims against it belonged to the estate and had either been released or were barred by the plan injunction. Id. at *6. Judge Gropper began his analysis by looking to the underlying state court complaint to see if the creditors asserted causes of action that were particular to them and whether any recovery on their alter ego theory would not inure to the benefit of other creditors. Id. at *8. The court found that the creditors had not alleged that the N.Y. Missionary Sisters “wronged them directly rather than by virtue of their alleged control of [the debtor],” or that the N.Y. Missionary Sisters had “directly converted the funds” belonging to the creditors. Id. Judge Gropper therefore held that the creditors lacked particularized claims for alter ego liability and were barred from bringing those claims, which belonged to the estate. Id. at *7-9.
While Judge Gropper’s analysis is instructive, the facts of this case appear distinguishable. Here, the alter ego claims asserted by QBPL allege, albeit in conclusory fashion, direct injury to QBPL, *407distinct from any general harm to other creditors. By alleging that any actions taken by JMK were actually actions taken by Kopf, QBPL seeks to hold Kopf liable for its underlying claims against JMK— breach of contract, conversion, fraud and unjust enrichment — each of which conceivably represent a direct injury to QBPL, and could not have been brought by the Liquidating Trustee. For example, in paragraph 156 of the Third-Party Complaint, QBPL alleges:
Kopfs actions, which were perpetrated through Debtor, caused QBPL significant damages, including but not limited to damages from: (1) the unperformed work that was alleged to have been performed under the Agreements; (2) the subpar and non-workmanlike quality of the work that was performed under the Agreements; (3) the fines imposed upon QBPL under the New York City building code due to Kopf/Debtor’s breach of the Agreements; and (4) the loss of funds caused by Kopf/Debtor’s misappropriation and/or conversion of funds held by and/or under the control of Kopf/Debtor.
(Third-Party Compl. ¶ 156.)
These allegations describe direct, particularized hai’m to QBPL, and create standing for QBPL to bring the claims, even though QBPL fails to plead Kopfs personal actions that caused that harm. To illustrate, QBPL’s alter ego claim based on conversion seeks to hold Kopf liable not for his own conversion of funds entrusted to JMK, but for JMK’s alleged conversion of funds. Where a creditor seeks to assert an alter ego claim against a corporation’s principal based on that principal’s conversion of corporate assets, the harm is general — funds taken from the corporation, to the detriment of all creditors — and the claim (unless it was settled and released as occurred here as part of the confirmed Plan) belongs solely to the trustee.7 See, e.g., Gosconcert, 158 B.R. at 28-29. But here, QBPL alleges that JMK converted funds belonging to QBPL, and seeks to hold Kopf liable for that conversion because Kopf used his total control over JMK to cause JMK to convert the funds.8 Similarly, at least some breach of contract claims against JMK assert particular harm to QBPL, e.g., QBPL’s claims for damages based on the imposition of fines under the building code. QBPL has standing to bring those claims, despite QBPL’s failure to plead the wrongful acts by Kopf directed at QBPL that resulted in this injury. But other breach of contract claims, e.g, claims for damages due to general lack of performance by JMK as to all of its contracts, do not allege particular harms and do not create standing. See id. at 29.
The Court finds that QBPL has standing to bring the claims for alter ego liability and piercing the corporate veil seeking to hold Kopf liable for JMK’s debts for injuries particular to QBPL. For those claims to be successful, QBPL must plead and prove that Kopf used his control of JMK to *408commit the acts that caused the injuries particular to QBPL. Thus, even though QBPL may have standing to assert the alter ego claims, to survive a motion to dismiss, the Third-Party Complaint must make at least “some showing of a wrongful or unjust act [by Kopf] toward” QBPL. See Morris, 603 N.Y.S.2d 807, 623 N.E.2d at 1161. As the Court will discuss in depth below, the Court holds that QBPL has failed to comply with the federal pleading standards and has failed state a plausible claim for piercing the corporate veil and alter ego liability.
2. Failure to State a Claim
a. To Survive a Motion to Dismiss, a Cause of Action Must Allege Sufficient Facts to State a Plausible Claim for Relief
Rule 12(b)(6) allows a party to move to dismiss a cause of action for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 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.Civ.P. 8(a)(2). To survive a motion to dismiss pursuant to Rule 12(b)(6), “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) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Bankruptcy Rule 7012 makes Rule 12(b)(6) applicable to adversary proceedings.
Courts deciding motions to dismiss must accept all factual allegations as true and draw all reasonable inferences in favor of the non-moving party. See Hilaturas Miel, S.L. v. Republic of Iraq, 573 F.Supp.2d 781, 797 (S.D.N.Y.2008). The Court must limit its review to facts and allegations contained in (1) the complaint, (2) documents either incorporated into the complaint by reference or attached as exhibits, and (3) matters of which the court may take judicial notice. See Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir.2004); Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002). Courts may also consider documents not attached to the complaint or incorporated by reference, but “upon which the complaint solely relies and which [are] integral to the complaint.” Roth v. Jennings, 489 F.3d 499, 509 (2d Cir.2007) (internal quotation marks omitted; emphasis in original) (quoting Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir.1991)); see also Kalin v. Xanboo, Inc., No. 04 Civ. 5931(RJS), 2009 WL 928280, at *4 (S.D.N.Y. Mar. 30, 2009); Grubin v. Rattet (In re Food Mgmt. Grp.), 380 B.R. 677, 690 (Bankr.S.D.N.Y.2008) (concluding that court may consider documents that have “not been incorporated by reference where the complaint relies heavily upon its terms and effect, which renders the document integral to the complaint”) (internal quotation marks omitted).
In reviewing a Rule 12(b)(6) motion, the Court’s objective is not to determine whether the claimant will succeed in her claim, but instead whether the claimant is entitled to support her claim by offering evidence. Hilaturas, 573 F.Supp.2d at 797. Following the Supreme Court’s decision in Ashcroft v. Iqbal, courts use a two-prong approach when considering a motion to dismiss. See, e.g., Weston v. Optima Commc’ns Sys., Inc., No. 09 Civ. 3732(DC), 2009 WL 3200653, at *2 (S.D.N.Y. Oct. 7, 2009) (acknowledging a “two-pronged” approach to deciding motions to dismiss); S. III. Laborers’ and Emp’rs Health and Welfare Fund v. Pfizer, Inc., No. 08 CV 5175(KMW), 2009 WL 3151807, at *3 (S.D.N.Y. Sept. 30, 2009) (same); Inst. for Dev. of Earth Awareness *409v. People for the Ethical Treatment of Animals, No. 08 Civ. 6195(PKC), 2009 WL 2850230, at *3 (S.D.N.Y. Aug. 28, 2009) (same). First, the court must accept all factual allegations in the complaint as true, discounting legal conclusions clothed in factual garb. See Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; 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.
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.” 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 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). Meeting the plausibility standard requires a complaint to plead facts that show “more than a sheer possibility that a defendant has acted unlawfully.” Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). A complaint that only pleads facts that are “merely consistent with a defendant’s liability” does not meet the plausibility requirement. Id. (internal quotation marks omitted). “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.” Id. (internal quotation marks omitted). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
b. QBPL Failed to State Plausible Claims for Relief for Piercing the Corporate Veil and Alter Ego Liability
Under New York law, whether to pierce the corporate veil is a fact specific inquiry and cannot be reduced to a definitive rule. Morris, 603 N.Y.S.2d 807, 623 N.E.2d at 1160-61. “Generally, however, piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury.” Id. As to the first prong of this test, New York courts consider multiple factors in determining whether domination and control of the corporation existed, including:
(1) disregard of corporate formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors, and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the degree of discretion shown by the allegedly dominated corporation; (7) whether the dealings between the entities are at arms length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of the corporation’s debts by the dominating entity, and (10) intermingling of property between the entities.
Freeman v. Complex Computing Co., 119 F.3d 1044, 1053 (2d Cir.1997).
QBPL made broad assertions about Kopf s alleged control of JMK. For example, QBPL states that “Kopf exercised unchecked domination and control over [JMK] through his role as President and sole shareholder, including but not limited to making decisions with respect to the transfer of funds between [JMK] and himself and determining how [JMK] would allocate funds under its control or otherwise in its possession.” (Third-Party Compl. ¶ 74.) The Third-Party Complaint also alleges that “[u]pon information and *410belief, [JMK] failed to observe proper corporate formalities and completely disregarded its corporate identity, including but not limited to the intermingling of [JMK]’s funds and Kopfs personal funds, such that [JMK] had no identity separate from that of Kopf, its President and sole shareholder.” (Id. ¶75.)
These statements rise only slightly above the level of ritual incantation of domination and control by Kopf, if at all. Kopfs ownership of JMK, standing alone, is not enough to satisfy the domination component of an alter ego claim. See Bellomo v. Pennsylvania Life Co., 488 F.Supp. 744, 745 (S.D.N.Y.1980) (“Control through 100% stock ownership does not in itself constitute a subsidiary the alter ego of the parent.”). QBPL must show that Kopf actually exercised control over JMK, specifically with respect to the QBPL Contracts or QBPL’s funds. See Network Enters., Inc. v. Reality Racing, Inc., No. 09 Civ. 4664, 2010 WL 3529237, at *5 (S.D.N.Y. Aug. 24, 2010) (“The Court con siders not whether Defendants exhibited behavior at any time that might indicate domination and control, but whether they exhibited such behavior with respect to the transaction at issue.” (internal quotation marks omitted)). Asserting generally that Kopf committed wrongful acts directed against QBPL by “intermingling of Debt- or’s funds and Kopfs personal funds” is not enough. This allegation might help support a claim by JMK against Kopf for wrongfully diverting corporate property, but it does not establish a direct claim by QBPL against Kopf. Therefore, the Court seriously doubts whether the facts alleged in the Third-Party Complaint are sufficient to allow it to reasonably infer that Kopf exercised complete domination over JMK in relation to QBPL. See Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; see also Network Enters., 2010 WL 3529237, at *6 (dismissing veil piercing claim because “there [was] nothing in the complaint to indicate that Defendants exercised any more control over [the corporation] than would be expected of the directors or shareholders of any corporation”).
But the Court need not rely on the domination component of New York’s veil-piercing test alone. Even if the Court assumes that QBPL sufficiently established Kopfs domination of JMK as to the transactions at issue, the Third-Party Complaint falls well short of alleging facts to allow the Court to reasonably infer that Kopf used his control over JMK to commit a fraud or other wrong that resulted in loss or injury to QBPL. See Freeman, 119 F.3d at 1053; Morris, 603 N.Y.S.2d 807, 623 N.E.2d at 1161. For example, the Third-Party Complaint alleges:
Kopf used his domination and control over [JMK] to perpetrate his wrongful and other inequitable acts on [JMK’s] customers while protecting his own personal assets and for his own personal gain at the expense of QBPL. Kopfs actions in this respect included, but were not limited to, using [JMK] to misrepresent that certain work had been performed, the workmanship and quality with respect to the work that had been performed, the manner in which the Debtor used funds remitted to or otherwise placed under its control for subcontractor payment for QBPL, and [JMK’s] compliance with the terms of the Agreements.
(Third Party Compl. ¶ 76.)
These allegations are the types of “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclu-sory statements,” that are insufficient to survive a motion to dismiss. Iqbal, 556 U.S. at 679, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Absent from the Third-Party Complaint are any facts or allegations relating to specific acts committed by Kopf himself which *411caused harm to QBPL — as opposed to actions taken by JMK.9 There are no allegations that Kopf himself misrepresented to QBPL that certain work had been performed or that subcontractors had been properly paid.10 To be sure, QBPL “need not include ‘heightened fact pleading of specifics’ to survive a Rule 12(b)(6) motion, but the ‘[fjactual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all of the allegations in the complaint are true.’ ” Network Enters., 2010 WL 3529237, at *3 (quoting Twombly, 550 U.S. at 555, 570, 127 S.Ct. 1955). “[T]his standard ‘demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.’” Id. (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937). The Court finds the Third-Party Complaint lacking in this regard. Therefore, QBPL has failed to sufficiently state plausible claims for relief based on piecing the corporate veil and alter ago liability. Counts X and XI of the Third-Party Complaint are dismissed without prejudice, and the Court grants QBPL leave to amend.
B. QBPL’s Conversion and Unjust Enrichment Claims
1. Standing
a. QBPL Lacks Standing to Bring Actions to Recover N.Y. Lien Law Article 3-A Trust Funds
As with QBPL’s claims for piercing the corporate veil and alter ego liability, the Court must begin again by deciding whether QBPL has standing to assert the conversion and unjust enrichment claims. Kopf argues that QBPL lacks standing to bring a conversion claim based on the funds in question because money paid to JMK for services rendered by subcontractors was “trust fund” money under New York Lien Law §§ 70-79a (“Article 3-A”), and thus can only be recovered by the beneficiaries of the trust — the subcontractors.
“Article 3-A is a New York State statute designed to protect subcontractors, tax collectors, and parties who expend labor or extend financing in construction projects, by impressing with a trust any funds paid to a contractor or received by an owner in connection with an improvement of real property in the state.” Interworks Sys., Inc. v. Merch. Fin. Corp., 604 F.3d 692, 695 (2d Cir.2010). “An Article 3-A trust arises automatically by operation of law when fees are paid to the contractor or received by the owner in connection with an improvement of real property.” Id. (citing N.Y. Lien Law § 71(5)). Only beneficiaries of an Article 3-A trust may sue to enforce the trust. N.Y. Lien Law § 77(1). QBPL, as project owner, is not a beneficiary of the trust and therefore lacks standing to bring an action for the return of trust funds. See id. §§ 71(2), 77; see also Broadway Houston *412Mack Dev. LLC v. Kohl, 22 Misc.3d 1001, 870 N.Y.S.2d 748, 754 (N.Y.Sup.Ct.2008) (stating that “[a]n owner is not a beneficiary enumerated under Lien law § 71(2)” and, absent subrogation, is not entitled to recover trust funds), aff'd, 71 A.D.3d 937, 897 N.Y.S.2d 505 (2010).
QBPL argues that Article 3-A does not protect money paid over to JMK because the work QBPL paid for was never completed. This assertion is incorrect; an Article 3-A trust “arises automatically” the moment funds are paid over. Inter-works, 604 F.3d at 695. Further, “[a]s a matter of statutory construction and under [New York] precedents, even before funds are ‘due or earned,’ they become assets of an Article 3-A trust.” RLI Ins. Co. v. New York State Dep’t of Labor, 97 N.Y.2d 256, 740 N.Y.S.2d 272, 766 N.E.2d 934, 938 (2002). Therefore, the moment QBPL gave money to JMK for payment to subcontractors, that money became part of an Article 3-A trust fund, and QBPL, as owner, lacks standing to bring suit to recover those funds.11
The Court notes, however, that only funds given to JMK for the purpose of paying subcontractors became Article 3-A trust money. To the extent QBPL paid JMK directly for services rendered by JMK (e.g., in the Pass-Through Contracts), that money was not Article 3-A trust fund money, and QBPL would have standing to bring a claim against Kopf for conversion of those funds. But as the Court will discuss more fully below, QBPL has failed to specifically identify which funds it seeks to recover — a fatal flaw in QBPL’s conversion claim pleading — making it impossible for the Court to determine at this time whether it has standing to bring the conversion claim at all. Therefore, the Court cannot rule at this time whether Article 3-A deprives QBPL completely of standing to bring a conversion claim against Kopf. But if QBPL amends the Third-Party Complaint to assert a conversion claim with sufficient particularity, its ability to bring that claim will be limited to those funds paid for the benefit of JMK rather than subcontractors.
b. QBPL Has Standing to Assert Claims for Conversion and Unjust Enrichment of Funds Paid for the Benefit of JMK Because They Allege a Direct, Particularized Harm
Kopf also argues that QBPL lacks standing to bring claims for conversion and unjust enrichment because these claims allege general harm and belong to the estate. Kopf asks the Court to look to the substance of the claims, rather than the labels QBPL places on them. He asserts that doing so would reveal that these claims are actually fraudulent conveyance claims belonging to the JMK estate. The Court, however, looks at the claims as QBPL pleads them. 1031 Tax Grp., 397 *413B.R. at 679. By its very definition, a claim for conversion requires the claimant to establish a “superior right of possession” to the allegedly converted funds. Meese v. Miller, 79 A.D.2d 237, 436 N.Y.S.2d 496, 500 (1981) (citation omitted). Similarly, a claim for unjust enrichment must “allege that defendant received something of value which belongs to the plaintiff.” Bazak Int’l Corp. v. Tarrant Apparel Grp., 347 F.Supp.2d 1, 4 (S.D.N.Y.2004) (citations and quotation omitted). These claims, if sufficiently pled, would establish a direct, particular harm to QBPL. Therefore, QBPL is not barred by the plan injunction and release from bringing claims for conversion and unjust enrichment; QBPL has standing to bring these claims.
2. Failure to State a Claim
a. QBPL Failed to State a Plausible Claim for Conversion
Kopf argues that QBPL’s conversion claim should be dismissed for failure to state a claim because (1) QBPL did not sufficiently plead the acts that constituted the conversion; (2) QBPL made no demand for the return of the funds; (3) QBPL’s claim is actually contractual in nature; and (4) QBPL failed to specifically identify the funds allegedly converted by Kopf. The Court agrees with Kopf only as to the last of these arguments.
“According to New York law, ‘[cjonversion is the unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner’s rights.’ ” Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 403-04 (2d Cir.2006) (quoting Vigilant Ins. Co. of Am. v. Hous. Auth., 87 N.Y.2d 36, 637 N.Y.S.2d 342, 660 N.E.2d 1121, 1126 (1995)).
To withstand a motion to dismiss in a conversion claim, a plaintiff must allege:
“(1) the property subject to conversion is a specific identifiable thing; (2) plaintiff had ownership, possession or control over the property before its conversion; and (3) defendant exercised an unauthorized dominion over the thing in question, to the alteration of its condition or to the exclusion of the plaintiffs rights.”
Kirschner v. Bennett, 648 F.Supp.2d 525, 540 (S.D.N.Y.2009) (quoting Moses v. Martin, 360 F.Supp.2d 533, 541 (S.D.N.Y.2004)).
Contrary to Kopf s arguments, at this stage of the proceedings, QBPL is not required to state exactly the acts committed by Kopf that constituted conversion. Rather, it is enough to plead “sufficient facts to establish a plausible inference that [Kopf] played some role in the conversion.” Segal v. Bitar, No. 11-4521, 2012 WL 273609, at *9 (S.D.N.Y. Jan. 30, 2012) (quotations omitted). Here, the fact that Kopf was the controlling member of JMK is enough to satisfy this burden.
Additionally, the Court rejects Kopf s argument that QBPL was required to make a demand for the return of the funds before bringing its conversion claim. “New York law does not ... always require that a demand be made and be met by a refusal to make out a claim of conversion. Instead, a demand is necessary only where the property is held lawfully by the defendant.” Leveraged Leasing Admin. Corp. v. PacifiCorp Capital, Inc., 87 F.3d 44, 49 (2d Cir.1996). “[W]here the defendant holds the property unlawfully— where, for example, he stole the property — no demand and refusal are necessary to render the defendant liable.” Id. (internal quotation marks omitted). Insofar as QBPL asserts a claim for conversion against Kopf for funds it paid over to JMK, Kopf had no lawful right to possess any JMK funds and therefore no demand was required.
*414The Court also disagrees with Kopf that QBPL’s claim is essentially contractual and is therefore not proper as a conversion claim. New York case law is clear that “an action for conversion cannot be validly maintained where damages are merely being sought for breach of contract.” Peters Griffin Woodward, Inc. v. WCSC, Inc., 88 A.D.2d 883, 452 N.Y.S.2d 599, 600 (1982). Thus, “[a] plaintiff must allege acts that are unlawful or wrongful, rather than mere violations of contractual rights, to state a claim for conversion.” Calcutti v. SBU, Inc., 223 F.Supp.2d 517, 523 (S.D.N.Y.2002). But QBPL’s claims against Kopf cannot possibly be contractual — there was never any contract between Kopf and QBPL. Because QBPL alleges that Kopf unlawfully took funds from JMK, it is entitled to bring a conversion claim against Kopf.
The Court agrees, however, that QBPL has failed to state a plausible claim for relief for conversion because it has not specifically identified the funds allegedly converted by Kopf. “[I]t is well settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.” Id. (internal citations and quotations omitted). “If the allegedly converted money is incapable of being described or identified in the same manner as a specific chattel, such as when a customer of a bank deposits funds into an account at the bank, it is not the proper subject of a conversion action.” Id. (internal citations and quotations omitted); see also T.D. Bank, N.A. v. JP Morgan Chase Bank, N.A., No. 10-2843, 2010 WL 4038826, at *7 (E.D.N.Y. Oct. 14, 2010) (“Under New York law, ‘money can be the subject of a conversion action when it can be identified and segregated as a chattel can be.’ ” (quoting Payne v. White, 101 A.D.2d 975, 477 N.Y.S.2d 456, 458 (1984))).
In the Third-Party Complaint, QBPL seeks damages for conversion “in an amount not less than $423,963.21.” (Third-Party Compl. at 44.) Nowhere in the Third-Party Complaint does QBPL identify specific funds converted by Kopf, or explain which funds Kopf converted out of the more than $10 million QBPL paid to JMK. As explained above, a claim for conversion of money will fail where the money is not “specifically identifiable and segregated.” Mfrs. Hanover Trust Co. v. Chem. Bank, 160 A.D.2d 113, 559 N.Y.S.2d 704, 712 (1990); see also Global View Ltd. Venture Capital v. Great Cent. Basin Exploration, L.L.C., 288 F.Supp.2d 473, 480 (S.D.N.Y.2003) (dismissing cause of action for conversion where “complaint merely refer[red] to unspecified monies and assets ... in an amount in excess of $75,000” and where there was “no indication of an identifiable fund or otherwise segregated amount, nor ... any description of the alleged transfer or transfers from which the Court could infer a specifically identified fund of money”). QBPL has failed to satisfy its burden of specifically identifying the funds in question and has therefore failed to state a plausible claim for conversion.
QBPL’s reliance on the Second Circuit’s decision affirming the Air China Judgment rendered against Kopf is misplaced. See Air China, Ltd. v. Kopf, 473 Fed.Appx. 45 (2d Cir.2012). QBPL relies on Air China for the proposition that the fact that it turned over funds to corporate defendant JMK for a specific purpose is enough to support its conversion claim, with no requirement for specific identification. This is not an accurate reading of the Air China holding. The Second Circuit held in Air China that “New York law supports the view that where money is turned over *415by a plaintiff to a corporate defendant to be used for a specific purpose for the benefit of the plaintiff, but is not used for that purpose, an action for conversion may be maintained against the converters.” Air China, 473 Fed.Appx. at 50 (internal quotation marks omitted). But holding that those facts would support a claim for conversion does not dispense with a plaintiffs requirement to plead conversion of specific funds. The Air China court was not addressing the standards for a conversion claim at all; it was merely explaining that a conversion action may be brought against corporate officers and agents who commit conversion.
For these reasons, QBPL has failed to state a claim for conversion. Therefore, Count VI of the Third-Party Complaint is dismissed without prejudice, with leave to amend to supply the required specificity.12
b. QBPL Failed to State a Plausible Claim for Unjust Enrichment
Count IX of the Third-Party Complaint asserts a claim against Kopf for unjust enrichment. Under New York law,
[a]n unjust enrichment claim is rooted in the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. Thus, in order to adequately plead such a claim, the plaintiff must allege that (1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.
Georgia Malone & Co., Inc. v. Rieder, 19 N.Y.3d 511, 950 N.Y.S.2d 333, 973 N.E.2d 743, 746 (2012) (internal quotations omitted). “A complaint does not state a cause of action in unjust enrichment if it fails to allege that defendant received something of value which belongs to the plaintiff.” Bazak, 347 F.Supp.2d at 4 (citations and quotation omitted). For the same reasons discussed in connection with QBPL’s conversion claim, the Court finds that QBPL has inadequately stated a plausible claim for unjust enrichment. “The essence of a claim for unjust enrichment is that one party has parted with money or a benefit that has been received by another at the expense of the first party.” Id. (citation omitted). Because QBPL did not identify which funds Kopf allegedly took from JMK, QBPL has not provided the Court with sufficient facts to reasonably infer that Kopf received something that belonged to QBPL. Therefore, Count IX is dismissed without prejudice, and QBPL is granted leave to amend.
III. CONCLUSION
For all of the foregoing reasons, the Court GRANTS the Motion. Counts VI, IX, X, and XI of the Complaint are DISMISSED without prejudice, and the Court grants QBPL leave to amend within thirty (30) days from the date of this Order.
IT IS SO ORDERED.
. Unless otherwise noted, all references to the docket are to Adv. Pro. No. 13-01105.
. Most of the facts come from the Third-Party Complaint and are taken as true when considering a motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. There are no allegations in the Third-Party Complaint that Kopf signed any written representations regarding the quality and progress of the subcontractors.
.On September 14, 2010, Kopf filed a personal chapter 11 bankruptcy case. (ECF No. 10-14847, Doc. # 1.) Kopf also appealed the Air China Judgment. The bankruptcy auto*403matic stay initially prevented Air China from executing on the judgment. After Kopf successfully raised the money for an appeal bond, he voluntarily dismissed his chapter 11 case on October 25, 2011. (ECF No. 10-14847, Doc. # 109.) QBPL never filed a claim in Kopf’s individual bankruptcy case. (Motion at 3 n.l.)
. Kopf contributed money to the Plan in exchange for a release of any and all derivative claims held by or on behalf of JMK and its estate. (See Plan Art. 10.3; Confirmation Order ¶ G.) That release does not apply to any direct claims held by QBPL; only derivative claims held by or on behalf of the estate were released. QBPL, a creditor of the estate, participated in the plan confirmation process and never filed an objection to the Plan.
. The Debtor objected to QBPL’s claim, but because of the claims and counterclaims asserted in the Adversary Complaint and in the Third-Party Complaint, the Liquidating Trustee and QBPL agreed that all of the issues would be addressed in the adversary proceeding; therefore, the claim objection was withdrawn. The claims and counterclaims between the Liquidation Trustee and QBPL necessarily will be resolved as part of the claims-allowance process. Therefore, the Court has constitutional authority to enter final orders and judgment resolving all of the disputes between the Liquidation Trustee and QBPL; QBPL’s consent to the entry of judgment on those matters is unnecessary.
QBPL alleges in paragraph 15 of the Third-Party Complaint that the “Court does not have authority to exercise jurisdiction over Kopf and the third-party claims against Kopf under the Supreme Court's ruling in Stem v. Marshall.” Paragraph 16 states that "QBPL does not consent to entry of a judgment on the QBPL Complaint.” QBPL is wrong to the extent that it argues that the Court does not have jurisdiction over QBPL's third-party claims against Kopf. Related-to jurisdiction does not appear to exist over the post-confirmation Third-Party Complaint against Kopf under 28 U.S.C. § 1334; the third-party claims should not have a conceivable effect on the estate since Kopf's claims against JMK are discharged. But the Court may exercise supplemental jurisdiction under 28 U.S.C. § 1367 (supplying jurisdiction “over all other claims in the action within such original jurisdiction over all other claims that are so related to claims in the action ... that they form part of the same case or controversy"). While not free from doubt, there is authority, including in the Second Circuit, that bankruptcy courts may exercise supplemental jurisdiction. See, e.g., In re Pegasus Gold Corp., 394 F.3d 1189, 1195 (9th Cir.2005); Lionel Corp. v. Civale & Trovato, Inc. (In re Lionel Corp.), 29 F.3d 88, 92 (2d Cir.1994). Jurisdiction over the third-party claims, however, does not necessarily mean that the bankruptcy court may enter final orders or judgment with respect to the claims. The Court need not address the issue now since the order granting the Motion is an interlocutory order. See O'Toole v. McTaggart (In re Trinsum Group, Inc.), 467 B.R. 734, 739-42 (Bankr. S.D.N.Y.2012).
. Paragraph 76 of the Third-Party Complaint alleges that "[u]pon information and belief, Kopf used his domination and control over Debtor to perpetrate his wrongful acts on Debtors' customers while protecting his own personal assets and for his personal gain at the expense of QBPL.” (Emphasis added.) This allegation is consistent with a claim by a trustee for generalized harm injuring all creditors, and not a direct claim by QBPL.
. Paragraphs 69 and 70 of the Third-Party Complaint allege that Kopf transferred funds from the Debtor “which funds were to be used for the purpose of paying subcontractors for work performed on the JMK Projects....” As explained in Section II.B.l.a., infra, QBPL lacks standing to bring claims to recover funds that QBPL paid to JMK that should have been used to pay subcontractors.
. The only allegation made in the Complaint that could be construed as satisfying this requirement is the vague statement that ‘‘[i]n October 2010, Kopf was involved in further deception of QBPL, directing his attorney to talk with QBPL about new work for [JMK]." (Third-Party Compl. ¶ 87.) This allegation relates to postpetition conduct trying to persuade QBPL to allow JMK to continue to perform under the Contracts. It has nothing to do with any prepetition causes of action alleged in the Third-Party Complaint.
. The only specific allegations about JMK's misrepresentations to QBPL are contained in paragraph 85 of the Third-Party Complaint, referring to a postpetition meeting on August 24, 2010, at which two JMK employees, John Romero and Dan Hubert, allegedly represented that the bankruptcy would have no effect on the work Debtor was required to perform under the Contracts. The Debtor's postpetition work is not the basis for the claims against Kopf.
. This rule is not inherently inequitable; while an owner may not bring suit to recover Article 3-A trust funds, unpaid subcontractors also cannot enforce mechanic's liens against the owner’s property, to the extent the owner paid the general contractor. "It is well settled that the rights of a subcontractor are derivative of the rights of the general contractor and that a subcontractor’s lien ‘must be satisfied out of funds due and owing from the owner to the general contractor’ at the time the lien is filed." 104 Contractors, Inc. v. R.T. Golf Assocs., L.P., 270 A.D.2d 817, 705 N.Y.S.2d 752, 754 (2000) (quoting DiVeronica Bros. v. Basset, 213 A.D.2d 936, 624 N.Y.S.2d 296, 297 (1995)). Thus, "[u]nder New York law, a subcontractor must establish that there is money due to a general contractor from an owner based on a primary contract, for the subcontractor to recover under a mechanic’s lien against the owner.” Rure Assocs., Inc. v. DiNardi Const. Corp., 917 F.2d 1332, 1335 (2d Cir.1990).
. Additionally, as the Court already discussed, to the extent funds QBPL paid to JMK became part of an Article 3-A trust fund, QBPL would have no superior right to those funds and a claim for conversion of those funds would fail for that reason as well. See Meese, 436 N.Y.S.2d at 500 (stating that claim *416for conversion requires a superior right to the funds in question). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496573/ | CHAPTER 11
(Re: D.I. 47, 61, 111)
MEMORANDUM REGARDING PLAINTIFF’S MOTION FOR RECONSIDERATION, MOTION TO COMPEL DISCOVERY, AND REQUEST FOR JUDICIAL NOTICE2
BY: KEVIN J. CAREY, UNITED STATES BANKRUPTCY JUDGE
Background
Molly S. White and Ralph N. White (the “Whites”) filed the above-captioned adversary proceeding against the Debtors by filing a complaint to determine discharge-ability of debt (the “Complaint”), which contains twelve counts3 arising out of a *419consumer mortgage loan transaction between debtor New Century Mortgage Corporation (“NCMC”) and the Whites that closed on July 26, 2006 (the “Mortgage Loan”).4
On December 15, 2010, the New Century Liquidating Trust (the “Trust”), by and through Alan M. Jacobs, the New Century Liquidating Trustee (the “Trustee”), moved to dismiss the Complaint (the “Motion to Dismiss”) (Adv. D.I. 10). By Memorandum and Order dated June 7, 2011, I granted the Motion to Dismiss, in part, by dismissing Counts II, VIII and XII of the Complaint for lack of subject matter jurisdiction. The remainder of the Motion to Dismiss was denied. (D.I. 59 and D.I. 60). White v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), 450 B.R. 504 (Bankr.D.Del.2011) (the “Dismissal Decision”).
Count II of the Complaint sought rescission of the Mortgage for violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq. (“TILA”). Count VIII of the Complaint sought declaratory judgment that the Debtors’ actions were fraudulent and violated the Bankruptcy Code and Florida’s Uniform Fraudulent Transfer Act, thereby permitting the Mortgage to be cancelled. Count XII of the Complaint, entitled “Equitable Tolling,” sought “rescission of the loan and the cancellation of the security interest... .”5 The Trustee moved to dismiss Counts II, VIII and XII for lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1), made applicable to this proceeding pursuant to Fed. R.Bankr.P. 7012.
In the Dismissal Decision, I determined that the Rule 12(b)(1) motion presented a factual challenge to jurisdiction. New Century, 450 B.R. at 509. When reviewing a factual challenge to jurisdiction, a court may consider evidence outside the pleadings, including affidavits, depositions and testimony, to resolve any factual issues bearing on jurisdiction. Gould Elec. Inc. v. United States, 220 F.3d 169, 176 (3d Cir.2000) holding modified on other grounds by Simon v. United States, 341 F.3d 193, 204 (3d Cir.2003); Walker v. United States, Civ. No. 11-866, 2013 WL 5890270, *3 (D.Del. Oct. 31, 2013). The court “is not confined to the allegations of the complaint, and the presumption of truthfulness does not attach to the allegations in the complaint.” Walker, 2013 WL 5890270, *3 quoting Shahin v. Delaware Dept. Of Fin., Civ. No. 10-188-LPS, 2012 WL 1133730, *3 (D.Del. Mar. 30, 2012).
When deciding the subject matter jurisdiction challenge, I considered: (i) allega*420tions in the Complaint that the Debtors transferred their interest in the Note and Mortgage on March 8, 2007, less than a month prior to the Debtors’ chapter 11 bankruptcy filing; and (ii) a Declaration by Donna Walker attached to the Trustee’s Motion to Dismiss, and a supplemental declaration by Donna Walker (together, the “Walker Declarations”), stating that the Trustees’ records showed that the Debtors transferred their interest in the Note and Mortgage to Morgan Stanley Capital Inc. (“Morgan Stanley”) on September 21, 2006. New Century, 450 B.R. at 509. I then concluded:
Whether the Mortgage Loan was transferred on September 26, 2006 or March 8, 2007, both sides agree that the Debtors transferred the Mortgage Loan pri- or to the bankruptcy filing. Accordingly, the Debtors had no interest in the Mortgage Loan as of the petition date and the Mortgage Loan was not property of the estate. 11 U.S.C. § 541.
[S]ince the Debtors transferred their interest in the Mortgage Loan prepetition, the Debtors did not, at the time of the bankruptcy filing, and do not now, have any interest in the Note or Mortgage; hence, this Court is without subject matter jurisdiction to order rescission or cancellation of the Mortgage Loan, now held by an unrelated third party. Moreover, any modification or adjustment to the Mortgage Loan would have no effect or impact on the Debtors’ estate or the Liquidating Trust. See Scott v. Aegis Mortgage Corp. (In re Aegis Mortgage Corp.), 2008 WL 2150120, *5 (Bankr.D.Del. May 22, 2008) (A declaration as to the rights of parties under a mortgage that was transferred prior to the bankruptcy filing will not alter the debtors’ rights, liabilities, options or freedom of action because the debtors are no longer a party to it.). See also In re Resorts Int’l, Inc., 372 F.3d 154, 168-69 (3d Cir.2004) (Post-confirmation, a bankruptcy court’s jurisdiction is limited to matters in which “there is a close nexus to the bankruptcy plan or a proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.”).
New Century, 450 B.R. at 510.
The Whites filed a motion for reconsideration of the Dismissal Decision, arguing that, despite the allegations they included in their Complaint, the Court should consider certain evidence that directly contradicts those allegations and the statements in the Walker Declarations and should conclude that the Debtors did not transfer their interest in the Mortgage Loan prior to filing bankruptcy (the “Motion for Reconsideration”) (D.I. 61). Intertwined with the Motion for Reconsideration are other motions and pleadings filed by the Whites, including a Motion to Compel Discovery (D.I. 47) and a Request for Judicial Notice (D.I. Ill), which also assert that the Debtors did not transfer their interest in the Mortgage Loan pre-petition.
For the reasons set forth below, the Whites’ Motion to Compel Discovery and Motion for Reconsideration will be denied and the Request for Judicial Notice will be granted in part and denied in part.
Discussion
(1) The Motion for Reconsideration— Introduction
Federal Rule of Bankruptcy Procedure 9023, which incorporates Fed. R.Civ.P. 59, governs motions for reconsideration. Fed.R.Civ.P. 59(e). A motion to alter or amend a judgment under Rule 59(e) must be grounded on (1) an intervening change in controlling law; (2) the availability of new evidence; or (3) the need to *421correct a clear error of law or prevent manifest injustice. Max’s Seafood Cafe v. Quinteros, 176 F.3d 669, 677 (3d Cir.1999). A motion for reconsideration should not be used to reargue the facts or applicable law. Official Comm. of Unsecured Creditors v. Catholic Diocese of Wilmington, Inc. (In re Catholic Diocese of Wilmington, Inc.), 437 B.R. 488, 490 (Bankr.D.Del.2010). “Motions for reconsideration should be granted sparingly because of the interests in finality and conservation of scarce judicial resources.” Pennsylvania Ins. Guar. Ass’n v. Trabosh, 812 F.Supp. 522, 524 (E.D.Pa.1992).
The crux of the Whites’ argument for reconsideration of the Dismissal Decision is that the Court overlooked available evidence and should consider new evidence demonstrating that the Debtors did not transfer their interest in the Whites’ Mortgage Loan prior to filing bankruptcy. The Whites argue that their Mortgage Loan is an asset of the Debtors’ bankruptcy estate, and this Court has jurisdiction to consider the Rescission and Cancellation Claims. To support their argument, the Whites rely (at least in part) on the Motion to Compel Discovery and the Request for Judicial Notice. Therefore, I will consider those motions before the Motion for Reconsideration.
(2) The Motion to Compel Discovery
While the Trustee’s Motion to Dismiss was pending, the parties continued with discovery related to the Whites’ Complaint. The Whites filed a Motion to Compel Discovery (D.I. 47), arguing that the Trustee failed to respond properly and asserted unreasonable objections to their discovery requests. The Trustee filed a response opposing the Motion to Compel Discovery (D.I. 56). At a hearing May 23, 2012, Mr. White stated that he was seeking only one document — a power of attorney from the Debtors to Countrywide Home Loans, Incorporated (“Countrywide”) (Tr. 5/23/2012, D.I. 94, at 19:17-24).6 The balance of the Whites’ requests in the Motion to Compel Discovery were withdrawn. (Id. at 22:4-10). The Trustee agreed to “double-check” his files and turn over to the Whites any power of attorney from the Debtors to Countrywide that could be located. (Id. at 19:25-21:24).
On June 1, 2012, the Trustee filed a “Certification of Counsel Regarding Plaintiffs Motion to Compel Discovery” (D.I. 96) (the “COC”), stating that the Trustee searched his files and provided the Whites with two powers of attorney between the Debtors and Countrywide (the “Countrywide Powers of Attorney”). The Trustee also noted that it had not provided those documents in response to the Whites’ original document request because the original request sought a power of attorney applicable to the Whites’ Mortgage Loan, and the Trustee could not determine whether the Countrywide Powers of Attorney were related in any way to the Whites’ Mortgage Loan. The Whites filed an objection to the COC (D.I. 100), arguing that the COC did not adequately explain why the *422Countrywide Powers of Attorney were not produced earlier and that the Trustee did not discuss whether any attempt was made to locate a power of attorney to Countrywide signed by Holly Etlin, as suggested by the Whites.7 The Whites also argue that the evidence (ie., the Walker Declarations and the Countrywide Powers of Attorney) is contradictory. The Whites, alleging that the Trustee may be withholding documents, asked the Court not to deny the Motion to Compel Discovery based upon the COC.
Upon consideration of the foregoing, I conclude that the Whites’ Motion to Compel Discovery should be denied. The Trustee has complied fully and reasonably with the Whites’ request. I am satisfied with the Trustee’s certifications regarding the sufficiency of his search efforts in connection with the original document request and Mr. White’s request made at the May 23, 2012 hearing for any Countrywide powers of attorney.
(3) The Request for Judicial Notice
On August 23, 2012, the Whites filed a Request for Judicial Notice Pursuant to Federal Rules of Evidence 201 (the “Request for Judicial Notice”) in both this adversary case and the main bankruptcy case. (D.I. Ill, Main Case D.I. 11011). The Whites asked this Court to take judicial notice of certain case law and treatises, documents filed with the Clerk of the Court’s Office in Volusia County, Florida, publications of the National Bureau of Economic Research, a filing with the Security and Exchange Commission, “findings of fact” in the Dismissal Decision, the Trustee’s response to the Whites’ Requests for Admissions, documents filed in the main bankruptcy case, and testimony of the Trustee and Debtors’ counsel offered at hearings on various motions in the main bankruptcy case. The Trustee filed a response to the Request for Judicial Notice (Main Case D.I. 11021) (the “JN Response”), objecting to many of the Whites’ requests.8
*423Rule 201(b) of the Federal Rules of Evidence provides that: “[t]he court may judicially notice a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b). Rule 201(c)(2) provides that the court “must take judicial notice if a party requests it and the court is supplied with the necessary information.” Fed.R.Evid. 201(c)(2).
The Whites’ Request for Judicial Notice will be granted, in part, and denied, in part, as follows:
(i) I will not take judicial notice of the case law attached as Exhibits A, B, and C to the Request for Judicial Notice, or to the citation to 4 Collier on Bankruptcy § 524.02, since the case law and treatise are not “facts,” however, I will consider the Whites’ citations to those sources;
(ii) I will take judicial notice of the documents filed in the Clerk of the Court’s Office, Volusia County, Florida, attached as Exhibits D, E, and F to the Request for Judicial Notice (and also filed at D.I. 78 and D.I. 89), to the extent the documents show that filings were made in Volu-sia County, Florida, but not for the truth of the averments within those documents. Southern Cross Overseas Agencies, Inc. v. Wah Kwong Shipping Group, Ltd., 181 F.3d 410, 426-27 n.7 (3d Cir.1999) (“Recently, courts and commentators have paid more attention to the distinction between judicially noticing the existence of prior proceedings and judicially noticing the truth of the facts averred in those proceedings.It has been suggested that the appropriate analogy is the hearsay rule which allows an out-of-court statement to be admitted into evidence for purposes other than establishing the truth of the statement.”); O’Boyle v. Braverman, 337 Fed.Appx. 162, 164-65 (3d Cir.2009) (deciding that a district court could take judicial notice of state court filings in resolving a Rule 12(b)(6) motion for the purpose of determining the date on which the prior litigation was dismissed, as the existence of the filings was not subject to reasonable dispute);
(iii)I will not take judicial notice of the internet articles cited by the Whites which, generally, discuss the Debtors or the “subprime crisis.” A court may take judicial notice of the publication of certain articles, for example, to indicate what was available in the public realm at a particular time (See Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital Management, L.P., 435 F.3d 396, 401 n. 15 (3d Cir.2006)), but, here, the Whites provide no reason to support their request for judicial notice of the articles. The facts to be gleaned from these articles are not facts that can be “accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed. R.Evid. 201(b);
*424(iv) I will take judicial notice that the Whites filed a Reply at D.I. 108, but not for the truth of the averments within that filing;
(v) I will not take judicial notice of D.I. 79, which is a filing with the Securities and Exchange Commission (“SEC”), accompanied by an Attestation of the SEC’s Records Officer. A court may take judicial notice of a properly authenticated public disclosure document filed with the SEC. In re NAHC, Inc. Securities Litigation, 306 F.3d 1314, 1331 (3d Cir. 2002) citing Oran v. Stafford, 226 F.3d 275, 289 (3d Cir.2000). However, the copy filed at D.I. 79 is incomplete, since it is missing Article II (pages 54-59).
(vi) I will take judicial notice of the Dismissal Decision, filings in the main bankruptcy case, admissions by the Trustee in discovery related to this adversary, and testimony of the Debtors’ counsel and the Trustee from evidentiary hearings in the main bankruptcy case, but I will not take judicial notice of the Whites’ paraphrasing of the testimony, admissions, the content of the Dismissal Decision, or the filings as set forth in the Request for Judicial Notice; and
(vii) I will not take judicial notice of the “Additional Public Records” referred to as a “list of all filers in the New Century Bankruptcy Case” in PACER, because the Whites have not provided the necessary information or explanation of their request.
(4) Motion for Reconsideration of the Dismissal Decision
With the foregoing resolved, I now return to the Motion for Reconsideration. After the Motion to Compel was filed, the Whites filed a “Letter to the Court” (the “Letter”) (D.I. 99) further explaining their position that the Debtors’ interest in the Mortgage Loan was not transferred pre-petition.9 The Trustee filed a response refuting the assertions in the Letter (the “Response”) (D.I. 103). The Whites filed a reply to the Trustee’s Response (“Reply”) (D.I. 108). I will consider the Letter, Response and Reply to be supplemental briefing on the Motion for Reconsideration.10
In deciding to dismiss the Rescission and Cancellation Claims for lack of subject matter jurisdiction, I relied upon allegations made by the Whites in their Complaint and upon the Walker Declarations filed by the Trustee and determined that the Debtors’ interest in the Mortgage Loan was transferred pre-petition. In the Motion for Reconsideration, the Whites argue that: (i) the Walker Declarations are unreliable for lack of personal knowledge or as hearsay; and (ii) new evidence contradicts the Complaint’s allegations and the Walker Declarations regarding the timing of the Debtors’ transfer of the Mortgage Loan.
(a) The Walker Declarations
In their response to the Trustee’s Motion to Dismiss, the Whites argued *425that the Walker Declarations should be stricken. The Whites’ Motion for Reconsideration again argues against the Court’s consideration of the Walker Declarations, asserting that the declarations were not based on personal knowledge or contained hearsay. However, a motion for reconsideration cannot be used to relitigate issues that the Court has already decided, nor should parties make additional arguments that should have been made before judgment. Smith v. City of Chester, 155 F.R.D. 95, 97 (E.D.Pa.1994). The Whites’ request to re-litigate the sufficiency of the Walker Declarations is denied.11
(b) The Examiner’s Report
The Whites also look to various sources, some provided during discovery, as evidence that the Debtors did not transfer their interest in the Mortgage Loan pre-bankruptcy. The Whites rely on certain findings in the Final Report of Michael J. Missal Bankruptcy Court Examiner, dated February 29, 2008, (main case D.I. 5518), about the number of loans that investors refused to accept from the Debtors because the loan files lacked the necessary documents. (See D.I. 65 at 5).12 For example, the Whites cite to a chart in the *426Examiner’s Report showing that September 2006, which was the month the Debtors assert that the Whites’ Mortgage Loan was transferred, had the highest “kick out rate” of loans in 2006, when measured by value ($978,959,226.00) (Id. citing Examiner Report at 162).13 The general statements in the Examiner’s Report about the high kick-out rates in 2006 does not indicate that any specific information in the Debtors’ books and records about the transfer of White’s Mortgage Loan is incorrect.
(c) The State Court Filings
The Whites also rely on state court filings as evidence that the Mortgage Loan was not transferred pre-bankruptcy. First, the Whites point to a complaint was filed in the Circuit Court for Volusia County, Florida (the “State Court”) by Deutsche Bank National Trust Company as Trustee for Morgan Stanley ABS Capital I Inc. Trust 2006-NC5, Mortgage Pass-Through Certificates, Series 2006-NC5 (“Deutsche Bank”) against the Whites, which asserted two claims: (i) reestablishment of the lost promissory note; and (ii) mortgage foreclosure (the “Mortgage Foreclosure Complaint”).14 The Whites argue that the copy of the Note attached to the Mortgage Foreclosure Complaint, filed more than a year after the Debtors’ bankruptcy petitions, did not have an appropriate endorsement evidencing any transfer. Exhibit C to the Whites’ Motion for Reconsideration is a copy of the original Note that was filed by Deutsche Bank in the State Court proceeding on August 30, 2010, which included a “stamped endorsement” signed (but undated) by “Steve Nagy, V.P. Records Management” on behalf of NCMC. The Whites argue that the August 30, 2010 filing is evidence that the Note was not transferred by the Debtors until 2010, ie., years after the bankruptcy filing.
The Whites also assert that the Assignment of Mortgage, assigning the Whites’ Mortgage to Deutsche Bank by Countrywide, as “attorney-in-fact” for NCMC, was executed on November 8, 2011, and filed with the Volusia County Clerk of Court’s Office on November 23, 2011, thus proving that transfer did not occur until more than four years after the Debtors filed bankruptcy. (See D.I. 78, D.I. 89).15
*427The post-petition State Court Filings describe actions taken by third parties — i. e., Morgan Stanley, Deutsche Bank or Countrywide — to document their asserted rights with respect to the Mortgage Loan. The dates of the State Court Filings do not provide evidence of the date the Debtors transferred their interest in the Mortgage Loan and, therefore, do not change my conclusion that Debtors transferred their interest in the Whites’ Mortgage Loan pre-petition.
The Whites also argue that the State Court Filings provide evidence of flaws in the chain of assignment of the Note and Mortgage from NCMC to the Deutsche Bank. The Whites claim that the Morgan Stanley ABS Capital I Inc. Trust 2006-NC5, Mortgage Pass-Through Certificates, Series 2006-NC5 (the “Trust”) was not a valid trust under New York law that could take delivery of the Mortgage Loan at the time of the Debtors’ transfer. (D.I. 108). The Whites further question the authority of Countrywide to act as attorney-in-fact for NCMC. (Id.). Any challenges to the rights and claims of the third parties, or to the validity or effectiveness of the third parties’ filings, must be addressed by a court with appropriate jurisdiction over those third parties.
The Trustee points out, however, that the State Court already determined that Deutsche Bank is the proper holder of the Mortgage Loan by granting Summary Final Judgment of Foreclosure in favor of Deutsche Bank on January 11, 2012, and specifically finding that “[t]he original promissory note [was] presented and delivered to the Court.” (D.I. 103, Ex. B).16 By Order dated January 26, 2012, the State Court denied the Whites’ Motion for Reconsideration and Motion to Vacate Order of Summary Judgment, in which the Whites argued that Deutsche Bank did not prove that it owned the Note and Mortgage as of the date the Mortgage Foreclosure Complaint was filed. (D.I. 103, Ex. C).
“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.” Youssef v. Dept. of Health and Senior Serv., 524 Fed.Appx. 788 (3d Cir.2013) quoting Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). Florida courts have recognized that “[c]ollateral estoppel is a complete defense to the relitigation of an issue when there is an identity of parties or their privies, an identity of issues and an actual litigation thereof in the first suit.” Southeastern Fidelity Ins. Co. v. Rice, 515 So.2d 240, 242 (Fla.4th Dist.Ct.App.1987). When deciding whether there was an “identity of parties or their privies,” the Rice Court determined that “privity is defined as ‘mutual or successive relationships to the same right of property, or such an identification of interest of one person with another as to represent the same legal right.’ ” Id. quoting Black’s Law Dictionary 1079 (5th ed. 1979). Here, the Florida State Court has already decided that a valid transfer of the Mortgage Loan occurred. The Debtors and Deutsche Bank meet the “identity of parties” requirement by their successive relationship to the same property, ie., the Mortgage Loan. Accordingly, the Whites’ current claims as to the invalidity of the *428Debtors’1 transfer of the Mortgage Loan are barred by collateral estoppel.
The Whites argue that the Mortgage Foreclosure Complaint was filed in violation of the automatic stay and, therefore, the Summary Final Judgment of Foreclosure is void ab initio. The automatic stay bars actions against a debtor, a debtor’s property or property of the estate. 11 U.S.C. § 362(a). Deutsche Bank filed the Mortgage Foreclosure Complaint against the Whites to enforce its rights under the Note and Mortgage. There is no basis for finding that the automatic stay arising from the Debtors’ bankruptcy filing was applicable to the Mortgage Foreclosure Complaint.
Neither the Debtors nor the Trustee have claimed any interest in the Whites’ Mortgage Loan. Quite to the contrary, the Trustee has disavowed — consistently — any property interest in the Whites’ Mortgage Loan. The Whites have not provided any “new evidence” to alter my conclusion that the Debtors transferred their interest in the Mortgage Loan prepetition. The Whites’ Rescission and Cancellation Claims implicate only the rights of third parties who are not before this Court. As I have written previously with respect to other pro se claimants in this case:
To the extent the Plaintiff seeks further relief regarding the validity of assignments and the enforceability of the note or deed of trust, she must address these claims in an appropriate forum with the participation of the entity or entities now claiming an interest in or ownership of the note and deed of trust. Such claims involve the rights and interests of third parties not currently before the Court, and the outcome of any dispute between or among those parties will not have any effect upon the Debtors’ bankruptcy estate. Therefore, the Bankruptcy Court currently does not have jurisdiction over such disputes. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) (“The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.... An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.”).
Carr v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), Adv. No. 09-52251, 2011 WL 6097910, *3 (Bankr.D.Del. Dec. 7, 2011) (footnotes omitted).17
(d) Motion for Reconsideration Conclusion
After consideration of the evidence and arguments presented by the Whites, I conclude that they have not demonstrated a valid basis to reconsider dismissal of the *429Rescission and Cancellation Claims. The Motion for Reconsideration will be denied.
Conclusion
For the reasons set forth above, the Motion to Compel Discovery will be denied, the Request for Judicial Notice will be granted, in part, and denied, in part, and the Motion for Reconsideration will be denied. An appropriate order follows.
. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding pursuant to 28 U.S.C. 157(b)(1) and (b)(2)(B) and (I).
. The twelve counts in the Complaint are: (i) violation of RESPA, 12 U.S.C. § 2601 et seq. and HUD’s Regulation X (24 C.F.R. § 3500), (ii) Rescission of Mortgage — Truth-in-Lending Act, (iii) Violation of Florida Deceptive and Unfair Trade Practices Act § 501.201 et seq., (iv) Fraud, (v) Second Violation of Florida Deceptive and Unfair Trade Practices Act, (vi) Aiding and Abetting Breach of Fiduciary Duty, (vii) Fraud by Concealment, (viii) De*419claratory Judgment, (ix) Civil Conspiracy, Fla. Stat. § 895.01-895.06, (x) Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c), (xi) Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(d), and (xii)Equitable Tolling.
. Attached as Exhibit B to the Complaint is a copy of an Adjustable Rate Note, in which the Whites promise to pay the original principal amount of $272,500.00 to NCMC (the "Note”). Attached as Exhibit A to the Complaint is a copy of a Mortgage, in which the Whites grant a mortgage lien against their real property located in Volusia County, Florida in favor of NCMC to secure repayment of the Note (the "Mortgage”).
Although the Note and Mortgage appear to be signed by the Whites, the Complaint states that "Nothing in this Complaint should be construed that Plaintiffs [the Whites] concedes to or otherwise acknowledges [sic ] that the signatures on any documents referenced or attached hereto to be authentic and those belonging to the Plaintiffs. The Plaintiffs specifically deny such signatures and reserves [sic] the right to review.” Complaint, ¶ 14.
. The Whites' Motion for Reconsideration limits its request for reconsideration of the dismissal of Count II and Count VIII. Count II and Count VIII will be referred to herein as the "Rescission and Cancellation Claims.”
. The apparent basis for Mr. White’s request for a power of attorney between the Debtors and Countrywide is based upon the certified copy of an Assignment of Mortgage filed with the Volusia County Clerk of Court’s Office in Daytona Beach, Florida, in which the Assign- or (described as "New Century Mortgage Corporation by Countrywide Home Loans, Inc. (CWI), Attorney-in-fact”) transferred to the Assignee ("Deutsche Bank National Trust Company as Trustee for Morgan Stanley ABS Capital I Inc. Trust 2006-NC5, Mortgage Pass-Through Certificates, Series 2006-NC5”) all right, title and interest in the Mortgage dated July 26, 2006 from Ralph N. White and Molly S. White to Assignor. (D.I. 89). The Assignment of Mortgage was executed on November 8, 2011 and filed on November 23, 2011.
. Holly Etlin was appointed as the President, Chief Executive Officer and Chief Restructuring Officer of NCMC on June 8, 2007. (Declaration of Holly Felder Etlin in Support of the Second Amended Joint Chapter 11 Plan of Liquidation of the Debtors and the Official Committee of Unsecured Creditors Dated as of April 23, 2008, ¶ 3, Main Case D.I. 6407). *423Because the Request for Judicial Notice filed in the adversary is identical to the Request for Judicial Notice filed in the main case, and the Trustee filed a timely response to the Request for Judicial Notice in the main case, I will not consider the Whites' CNO. I will consider the Request for Judicial Notice (and the JN Response) as related to the Motion for Reconsideration, since it was filed in this adversary proceeding.
. In the JN Response, the Trustee asserted that the Whites’ Request for Judicial Notice did not indicate whether it related to the matters under advisement in the adversary proceeding (i.e., the Motion for Reconsideration and the Motion to Compel Discovery) or the Trustee's Motion for Entry of an Order to Determine that the Debtors have Complied with the Order Establishing Bar Dates for Filing Proofs of Claim and Approving Form, Manner and Sufficiency of Notice Thereof (Main CaseD.I. 10824) (the "Constructive Notice Motion”). The Trustee objected to the Request for Judicial Notice because (i) it was untimely if considered with respect to the Constructive Notice Motion, since the eviden-tiary hearing was held and the record was closed three months prior to the filing of the Request for Judicial Notice, and (ii) several of the items included in the Request for Judicial Notice are not appropriate for Judicial Notice. The Whites filed a Reply to the JN Response (Main Case D.I. 11025).
I have already issued a decision with respect to the Trustee's Constructive Notice Motion (Main Case D.I.s 11233, 11234), therefore any request for judicial notice or objection thereto applicable to the Constructive Notice Motion in the main bankruptcy case are moot. In re New Century TRS Holdings, Inc., No. 07-10416, 2013 WL 4671734 (Bankr.D.Del. August 30, 2013).
The Whites filed a certification of no objection to the Request for Judicial Notice in the adversary proceeding (the "CNO”) (D.I. 114), because the Trustee’s response to the Request for Judicial Notice was filed in the main case, but not this adversary proceeding. The Trustee filed an objection to the CNO (D.I. 115), which was followed by the Whites' filing of an objection to the Trustee’s response (D.I. 117).
. A copy of the Whites' “Letter to the Court” was also filed as D.I. 101.
. The Letter also raises objections to the Trustee's COC filed with respect to the Motion to Compel Discovery. Nothing in the Letter, Response and Reply changes my conclusion that the record before me demonstrates that the Trustee and his counsel acted reasonably and in good faith in responding to the Whites’ discovery requests, specifically with respect to the powers of attorney.
. However, I note that the Whites have not cast any doubt on the reliability of the Walker Declarations, In the Walker Declarations, Ms. Walker declared, under penalty of perjury, that she was employed in the Accounting Department of NCMC from 1998 to 2007, and was a Vice President during the latter stage of her time there. (D.I. 11). Starting in 2007, Ms. Walker stated that she worked as a consultant for the Debtors and, thereafter, for the Liquidating Trustee. (Id.). She stated her familiarity with the Debtors’ books and record-keeping procedures, and provided the details of her review of the Debtors’ books and records with respect to the Debtors' transfer of the Whites Mortgage Loan. (Id.). The Whites contend that Ms. Walker's Declarations fail to state that "she was personally involved with the input of data nor does she indicate in any way that she personally witnessed this information as declared in her declarations.” (Motion for Reconsideration, p. 7, ¶ 3).
Courts have held that "personal knowledge can come from [a] review of the contents of files and records." Sia v. BAC Home Loans Servicing (In re Sia), 2013 WL 4547312, *5 (Bankr.D.N.J. Aug. 27, 2013) quoting Washington Cent. Railroad Co., Inc. v. Nat’l Mediation Board, 830 F.Supp. 1343, 1353 (E.D.Wash.1993). A custodian of records “or another qualified witness” may testify about business records to fall within an exception to the rule against hearsay. Fed.R.Evid. 803(6)(D), "A qualified witness is someone ‘with knowledge of the procedure governing the creation and maintenance of the type of record sought to be admitted.’ ” Sia, 2013 WL 4547312 at *6 quoting U.S. v. Dominguez, 835 F.2d 694, 698 (7th Cir.1987). "A qualified witness 'need not have personally participated in the creation of the document nor know who actually recorded the information.’ " Id. Further, “a witness is qualified to lay the foundation for business records if she is familiar with the record-keeping procedures of the organization.” Id. citing Dyno Const. Co. v. McWane, Inc., 198 F.3d 567, 576 (6th Cir.1999).
When a court evaluates the merits of a jurisdictional challenge, a court may consider evidence outside the pleadings, including affidavits, depositions and testimony, to resolve any factual issues bearing on jurisdiction. Gould Elec., 220 F.3d at 176; Walker, 2013 WL 5890270 at *3. The plaintiff has the burden of proving that jurisdiction exists. Mortensen v. First Fed. Sav. & Loan Assoc., 549 F.2d 884, 891 (3d Cir.1977). The Whites have failed to meet this burden for the Rescission and Cancellation Claims. Further, the Whites have demonstrated neither that the Walker Declarations are invalid nor that my reliance on them was misplaced. Ms. Walker’s experience with the Debtors and knowledge of their record-keeping procedures makes her at least a qualified witness (if not a custodian of records) whose statements in support of the Trustee’s Motion to Dismiss were reliable. Moreover, her statements are consistent with the Trustee’s evidence throughout this bankruptcy case about the Debtors’ books and records and the transfers of mortgage loans.
. The Whites also allege that the Trustee is acting in bad faith when relying on certain documents, such as a Purchase Price and *426Terms Agreement (the "PPTA”) dated May 24, 2006 between the Debtors and Morgan Stanley in responding to the Whites' Letter, (D.I. 103, Ex. A). The Whites argue that the Trustee is or should be aware that the PPTA is fabricated based upon an opinion letter by counsel for NC Capital Corporation, dated November 28, 2006, which states, in part, that "I have not examined the actual Mortgage Notes, the endorsement thereof, the Mortgages, the Assignments or the other documents in the Mortgage Files relating to the Mortgage Loans (collectively, the "Mortgage Documents”), and I express no opinion concerning the conformity of any of the Mortgage Documents to the requirements of the Agreements." Nothing in that statement of counsel supports the Whites' assertion that the Trustee or Debtors' counsel was "clearly was aware of the fraudulent nature of the documents...." (D.I. 108, ¶ 37, ¶ 38, Ex. E). The Whites have taken the language in the letter out of context. Allegations of bad faith based upon the November 28, 2006 letter are wholly unsupported.
. The Examiner's Report describes “kick-outs” as loans that the Debtors sought to sell to investors in the secondary market that were rejected by those investors due to defective appraisals, incorrect credit reports and missing documentation. Examiner Report, p. 109.
. The Whites attached a certified copy of the Mortgage Foreclosure Complaint, with exhibits, as Exhibit A to the Motion for Reconsideration.
. The Mortgage Foreclosure Complaint, including its exhibits, Deutsche Bank's filing of the Original Promissory Note, and the Assign*427ment of Mortgage shall be referred to herein as the "State Court Filings.”
. Upon presentation of the original promissory note, Count I of the Mortgage Foreclosure Complaint (requesting re-establishment of the lost promissory note) was deemed moot. Id., ¶3.
. This decision denied a motion for reconsideration filed by Ms. Carr regarding a decision entered on May 10, 2011. Carr v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), No. 09-52251, 2011 WL 1792544 (Bankr.D.Del. May 30, 2011). Ms. Carr also filed a second motion for reconsideration that was denied, Carr v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), 2012 WL 38974 (Bankr.D.Del. Jan. 9, 2012). Thereafter, Ms. Carr filed an appeal and the United States District Court for the District of Delaware affirmed the May 10, 2011 decision. Carr v. Jacobs (In re New Century TRS Holdings, Inc.), 2013 WL 1196605 (D.Del. Mar. 25, 2013) reconsid. denied 2013 WL 1680472 (D.Del. Apr. 17, 2013) aff'd - Fed.Appx. -, 2013 WL 5944049 (3d Cir. Nov. 7, 2013). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496574/ | OPINION
ERIC L. FRANK, Chief Judge.
I. INTRODUCTION
Earlier this year, the Supreme Court issued its decision in Bullock v. BankChampaign, N.A., — U.S. -, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013), resolving an issue of bankruptcy law that divided the lower courts for close to 100 years. That issue was whether 11 U.S.C. § 523(a)(4), which provides that a debt “for ... defalcation while acting in a fiduciary capacity” is nondischargeable in a chapter 7 case, requires any level of scienter (and if so, what degree of scienter).
In Bullock, the Court held that “defalcation” under § 523(a)(4) requires a heightened level of scienter. For a debt to be nondischargeable under § 523(a)(4), the Debtor’s conduct must either (1) “involve bad faith, moral turpitude, or other immoral conduct;” or (2) must have been “reckless,” i.e., involving a conscious disregard or a willful blindness to a substantial and unjustifiable risk that the conduct violated the debtor’s fiduciary duty. 133 S.Ct. at 1757.
This adversary proceeding is the first nondischargeability determination in this court since Bullock was decided. It arises from a family dispute regarding the management of the guardianship estate of an incapacitated 60 year old woman, Alice Brown (“Ms. Brown”). The plaintiff is David Fogg (“the Plaintiff’), who is Ms. Brown’s brother, and her current, court-appointed guardian. The Defendant is Lorie Pearl (“the Debtor”), the debtor in this bankruptcy case. The Debtor is Ms. Brown’s daughter (and the Plaintiffs niece). The Debtor served as her mother’s guardian before the state court removed her and appointed the Plaintiff as her replacement.
The Plaintiff claims that, during the period of the Debtor’s guardianship, the Debtor breached her fiduciary duties and that the breach constituted a “defalcation” under 11 U.S.C. § 523(a)(4), rendering the resulting debt nondischargeable. The debt at issue consists of a $58,396.42 “surcharge” imposed by the state court (“the Surcharge”), plus claims for an additional surcharge that had not yet been requested by the Plaintiff prior to the Debtor’s bankruptcy filing (“the Claimed Additional Surcharge”).
Based on the evidence presented at trial of this adversary proceeding, I conclude that the Plaintiff has proven that the debts arising from the losses suffered by Ms. Brown’s guardianship estate during the Debtor’s tenure as guardian — both the debt already determined by the state court *433and the claimed debt pending when the Debtor filed this bankruptcy case — together constitute a debt for defalcation that is nondischargeable under 11 U.S.C. § 523(a)(4).1
II. PROCEDURAL HISTORY
On February 16, 2012, the Debtor filed a chapter 7 bankruptcy petition. (N.T. at 61-62). On May 11, 2011, the Plaintiff initiated this adversary proceeding by filing a complaint pursuant to 11 U.S.C. §§ 523(a)(4) and (6) seeking a determination that the Surcharge and the Claimed Additional Surcharge are excepted from the Debtor’s discharge. The Debtor’s chapter 7 discharge was granted on November 7, 2013.
Trial of this adversary proceeding was held and concluded on February 22, 2013. Three (3) witnesses testified: (1) the Debt- or, (2) the Plaintiff, and (3) Richard Ma-gee, Jr. (the Plaintiffs counsel in the state court guardianship proceedings).
After the trial, I placed the matter in suspense pending the outcome of the U.S. Supreme Court’s decision in Bullock v. Bank-Champaign, N.A. On May 20, 2013, shortly after the Supreme Court’s announcement of its decision in Bullock, I entered an order removing this proceeding from the suspense docket and establishing a briefing schedule. Briefing was completed on June 19, 2013.
III. FINDINGS OF FACT
I make the following findings of fact based upon the testimonial and documentary evidence presented at trial and the undisputed facts set forth in the parties’ Joint Pretrial Statement.
The Parties
1. The Debtor is Ms. Brown’s daughter. (Joint Pretrial Statement ¶ 6).
2. The Plaintiff is Ms. Brown’s brother and the Debtor’s uncle. (Id. ¶ 7).
Pearl’s Appointment as Guardian of Ms. Brown’s Estate
3. Ms. Brown was born on November 16,1946. (Id. ¶ 5)
4. In the fall of 2006, the Debtor came to learn that Ms. Brown’s mental health was deteriorating. (Notes of Testimony (“N.T.”) at 83).
5. The Debtor also came to learn that Ms. Brown owed approximately $50,000.00 in back taxes and that her residence, 124 Rodney Circle in Bryn Mawr, Pennsylvania (“the Rodney Circle Property”) had been sold in a tax sale for $130,000.00. (Id. at 83, 85).
6. In the fall of 2006, the Rodney Circle Property was in very poor condition. It was moldy and had no heat, air conditioning or running water. (Id. at 83).
7. At some point after discovering the existence of her mother’s housing crisis, the Debtor met with family members to discuss the situation. Those family members included the Plaintiff, the Plaintiffs spouse, Ms. Brown’s sister (the Debtor’s aunt) and the Debtor’s brother.2 (Id. at 84).
*4348. At the meeting, the family agreed that the Debtor would seek appointment as her mother’s guardian and that they (the family) would try to save the house. (Id. at 84-85).
9. On November 27, 2006, the Debtor filed a Petition for Adjudication of Incapacity and for an Appointment of Plenary Guardian of the Person and Estate for Alice Brown in the Delaware County Court of Common Pleas of Pennsylvania (“the C.P. Court”). (Ex. Fogg-1).
10. The Debtor’s aunt paid the attorney’s fees for the petition to set aside the sale. (N.T. at 87).
11. The Debtor paid the attorney’s fees for the petition to appoint her as guardian. (Id.).
12. On January 22, 2007, the C.P. Court found Alice Brown to be an incapacitated person, who could not manage her personal or financial affairs and appointed the Debtor as the plenary guardian of Alice Brown’s person and her estate (“the Estate”). (Ex. Fogg-2).
18. Upon her appointment, the Debtor received a description from the Orphan’s Court of the rules and duties for conducting the guardianship (“the Orphan’s Court Rules”). (N.T. at 63; Ex. Fogg-19 at 1).
14.At the time of the Debtor’s appointment as guardian, the Orphan’s Court Rules provided, in relevant part, that:
a. the guardian of the Estate must manage the assets using the “standard of reasonable prudence” and that “risky investments are not permitted, unless specifically authorized by the Court.”
b. court permission is required before selling real estate or using principal;
c. an Inventory with the Court must be filed within ninety (90) days of the appointment setting forth, to the best of her ability, the assets of the Incapacitated Person;
d. an annual report must first be filed within six (6) months of the appointment and, thereafter, one (1) year after the first annual report. The Orphan’s Court provides a form for the annual report, which requires a detailed description of the current principal of the estate and how it is invested, the income and expenses of the principal and/or income and the needs of the incapacitated person for which the guardian provided for financially since the date of the last report or date of appointment.
e. the guardian is a fiduciary and must exercise “prudent judgment in the management of the Estate of the Incapacitated Person for his benefit only and to avoid conflicts of interest or decisions which may benefit yourself.”
(Ex. Fogg-19).
15. The Debtor was represented by counsel in the proceedings that resulted in her appointment as her mother’s plenary guardian. (N.T. at 63).
16. The Debtor’s counsel advised her that she needed to follow the Orphans’ Court Rules. (Id. at 63).
17. The Debtor “tried” to familiarize herself with the Orphan’s Court Rules, but implied, in her testimony, that her obligations to her own immediate family may have hindered her.3 Ultimately though, she testified: “I did, to the best of my ability, understand what I was to do.... *435[w]hat my responsibilities were.” (Id. at 67).
18. The Debtor admitted, however, that she did not know that she was required to obtain permission from the court before selling real estate. (Id. at 67-68).
19. The Debtor’s counsel also advised her to keep a journal of her mother’s income and expenses in matters involving her mother’s estate. (Id.).
20. The Debtor testified that she maintained the journal for approximately 20-21 months (nearly the entire tenure of her guardianship), but later lost it. (Id. at 68-66).4
The Rodney Circle and Oakdale Properties
21. After her appointment, the Debtor paid the outstanding taxes and was successful in setting aside the tax sale of the Rodney Circle Property. (Id. at 99).5
22. However, due to the poor living conditions at the Rodney Circle property, in the summer of 2007, the Debtor and her husband moved Ms. Brown out of the property so that they could prepare it for sale. (Id. at 85; Ex. F-18, ¶ ll).6
23. On June 17, 2007, to provide a place for Ms. Brown to reside, the Debtor and her husband purchased, and titled in their own names, the property located at 16 Oakdale Avenue in Norristown, Pennsylvania for $227,000.00 purchase price (“the Oakdale Property”). (Ex. F18, ¶¶ 11-12; N.T. at 86).7
24. To pay for the Oakdale Property, the Debtor and her husband refinanced their own home to obtain the down payment of approximately $54,000.00, and took out a $180,000.00 mortgage loan against the Oakdale Property. (N.T. at 85; Ex. F-18, ¶ 12).
25. The monthly debt service on the second mortgage on their residence and the purchase money mortgage on the Oak-dale Property totaled approximately $2,150.00 per month. (N.T. at 91).8
26. Generally, Ms. Brown lived alone at the Oakdale Property, but from time to time, the Debtor’s two older stepchildren, who were in college, resided in the property. (Id.).
*43627. On June 22, 2007, the Debtor filed a petition seeking court permission to sell the Rodney Circle Property. (Ex. F-18, ¶ 8). The State Court granted the petition by a decree dated January 18, 2008. (Id. ¶ 9).
28. On January 31, 2008, the Debtor sold the Rodney Circle Property for $358,134.18. (Id. ¶ 10). The sale of the Rodney Circle Property effectively created the Estate.
29. From the time Ms. Brown moved into the Oakdale Property until the sale of the Rodney Circle Property (roughly June 2007 through January 2008), the Debtor paid for all of her mother’s expenses because there were no estate funds to pay for her daily needs. (N.T. at 87).9
30. The Debtor used some of the proceeds from the sale of the Rodney Street Property to reimburse her aunt, and herself and her husband for the expenses they advanced in setting aside the tax sale of the property and preparing it for sale. (NT. at 90).
31. After the sale of the Rodney Street Property, the Estate paid Ms. Brown’s ongoing living expenses such as rent, groceries and utilities. (Id. at 90-91).
32. The Debtor included, as part of the Ms. Brown’s living expenses, a payment to herself of $2,000.00 per month for rent and utilities for the Oakdale Property. That amount corresponded to most of the mortgage debt service on the property. (Id. at 91; Ex. Fogg-18, ¶ 31-32).
33. The Plaintiff did not file a report with the C.P. Court in 2008, the year Ms. Brown’s estate realized the $353,134.18 in net proceeds from the sale of the Rodney Circle Property. (Ex. Fogg-18, ¶ 48).
The Acquisition of the Florida Townhouse
34. On April 22, 2009, using Estate funds, the Debtor purchased a three bedroom/three bathroom town home located at 2389 Silver Palm Drive, Kissimmee, Florida for $159,000.00. (“the Florida Townhouse”). (Joint Pretrial Statement ¶ 13).
35. Although the funds used to purchase the Florida Townhouse came from the Estate, the Debtor titled the property in her own name. (Id. at 103-104; Ex. Fogg-18, ¶ 15-16).10
36. Although she did not title the Florida Townhouse in Ms. Brown’s name, the Debtor sought to justify the purchase of the Florida Townhouse as an investment for the Estate.11 She testified that she made this investment decision based on advice from friends and her own internet research. She believed the stock market was too volatile and she did not consider other forms of investment. (N.T. at 74; Ex. Fogg-18, ¶ 24).
37. The Debtor did not consult with an attorney, accountant, or other professional before purchasing the Florida Townhouse. She did consult with relatives and, to her recollection, no one raised any objection. In other words, there was consensus among the family to purchase the townhouse in Florida. The Plaintiff was not included in those discussions. (Id. at 96-97; 104-05).
*43788. After purchasing the Florida Townhouse, the Debtor spent an additional $42,000.00 of Estate funds to redecorate and refurnish the property. (Ex. Fogg-18, ¶ 17).
39. The purchase of the Florida Townhouse and the subsequent renovation cost the Estate roughly $202,000.00. (Id. ¶ 23).
40. The Debtor did not obtain court approval to purchase the Florida Townhouse using funds from the Estate because she thought she did not need it. (Id. at 98; Ex. Fogg-8, ¶ 22).
41. The Debtor believed the Florida Townhouse would eventually generate income for her mother. Her intention was to subsidize Ms. Brown’s income from Social Security with rental income from the Florida Townhouse. (N.T. at 92; Ex. Fogg-18, ¶ 18).
42. The Debtor made one (1) visit with her family for two (2) days to the Florida Townhouse. (N.T. at 93-94).12
43. Ms. Brown never visited the Florida property. (Joint Pretrial Statement ¶ 17).
44. The Debtor received a total of $870.00 in rental income from the Florida Townhouse. That income, went directly back into the property to pay a management company’s expenses. The Florida property’s sporadic rental income did not meet its costs. (N.T. at 93).
45. Between April 2009 and October 2011, the Florida Townhouse depreciated in value.
The Removal of the Debtor as Guardian
46. On November 13, 2009, the Plaintiff, filed a Petition for Review seeking a “clarification of the proceeds from the sale” of the Rodney Circle Property. (N.T. at 6).
47. On December 23, 2009, the C.P. Court issued a decree, effectuating the parties’ agreement that the Debtor remain as guardian of Ms. Brown’s “person,” but appointing the Plaintiff as successor guardian of the Estate (“the December 23, 2009 Decree”). (Ex. Fogg-4).13
48. On March 26, 2010 the Debtor transfer title of the Florida Townhouse to Alice Brown. (Ex. Fogg-5).
49. On October 27, 2010, the C.P. Court removed the Debtor and appointed the Plaintiff as the guardian of Ms. Brown’s “person.” (Ex. Fogg-6).
50. The C.P. Court also issued an opinion that same day (“the October 27, 2010 *438Opinion”) in which it found, inter alia, that the Debtor:
1. failed to file a report in the year that the Estate of Alice Brown realized $353,000.00 from the sale of the Rodney Circle Property, (Ex. Fogg-18, ¶ 49);
2. almost completely dissipated all of Alice Brown’s Estate during her tenure as guardian, (Ex. Fogg-18, ¶ 50); and
3. failed to petition the court prior to making most, if not all of her disbursements from the Estate, (Ex. Fogg-18, ¶ 51).
51.In the October 27, 2010 Opinion, the C.P. Court also concluded, inter alia, that the Debtor:
1. violated her fiduciary duty of care as set forth in 20 Pa.C.S.A. § 7212. (Ex. Fogg-18, ¶ B.3.A.);
2. violated the Prudent Investor Rule as set forth in 20 Pa.C.S.A. § 7203. (Ex. Fogg-18, ¶ B.3.B.).;
3. failed to obtain the court’s permission prior to making substantial and significant invasions of the Estate of Alice Brown in violation of 20 Pa. C.S.A. § 5536(A). (Ex. Fogg-18, $B.3.C.); and
4.failed to file annual reports in violation of 20 Pa.C.S.A. § 5521(C). (Ex. Fogg-18, ¶ B.3.D.).
The Surcharge Assessed by the C.P. Court
52. On March 10, 2010, the Debtor filed a Petition for Allowance of Compensation and Reimbursement to Guardian and Acknowledgment of Certain Surcharges (“the Petition for Allowance”). (Ex. Fogg-1).
53. On December 8, 2010, the court issued its decision on the Petition for Allowance, in which it:
a. disallowed approximately $70,000.00 of the approximately $170,000.00 in expense allowances claimed by the Debtor; and
b. “surcharged” the Debtor the sum of $58,396.42 (“the Surcharge”).14
54. The Surcharge did not include any loss the Estate suffered due to the purchase of the Florida Townhouse because at the time the Surcharge was issued, the Florida Townhouse had been sold. (N.T. at 35-36).
55. The C.P. Court calculated the Surcharge against the Debtor as follows:
$366,523.41 Total Income15 (5.572.94) balance in Estate Account $360,950.47 expenditures from Estate
$360,950.47 ($159,500.00) ($42,500.00) ($100.554.05) $58,396.42 expenditures from Estate purchase of Florida Townhouse purchase of furnishings for Florida Townhouse allowances/credits SURCHARGE
*43956. The C.P. Court apportioned the Surcharge as follows: $22,437.00 against the Debtor and her husband, and the remaining $35,959.42 against the Debtor solely.
57. The Debtor appealed the December 8, 2010 Decree to the Superior Court.
58. On October 17, 2011, the Superior Court affirmed the CP Court’s Surcharge order against the Debtor but reversed the order insofar as it assessed the surcharge against the Debtor’s husband. (Ex. Fogg-10).
Sale of the Florida Property
59. In March, 2010, the Plaintiff obtained an appraisal of the Florida Townhouse, which concluded that the property had depreciated in value to $145,00.00. (Ex. Fogg — 18, ¶ 27).
60. In October, 2011, the Plaintiff filed a petition to sell the Florida Townhouse and its furnishings for a total purchase price of $132,500.00. (Ex. Fogg — 9, Fogg — 12; N.T. at 59).
61. The sale of the Florida Townhouse closed on October 31, 2011, with the Estate receiving net proceeds of $117,914.60. (Ex. Fogg — 13).
IV. DISCUSSION
A. Dischargeability Generally
One of the Bankruptcy Code’s central purposes is to permit honest debtors to reorder their financial affairs and obtain a “fresh start,” unburdened by the weight of preexisting debt. See, e.g., In re Cohn, 54 F.3d 1108, 1113 (3d Cir.1995); In re Marques, 358 B.R. 188, 193 (Bankr. E.D.Pa.2006). Exceptions to discharge are construed strictly against creditors and liberally in favor of debtors. Cohn, 54 F.3d at 1113; In re Glunk, 455 B.R. 399, 415 (Bankr.E.D.Pa.2011). A creditor objecting to the dischargeability of an indebtedness bears the burden of proof. Cohn, 54 F.3d at 1113; In re Kates, 485 B.R. 86, 100 (Bankr.E.D.Pa.2012). The creditor must establish the elements under § 523(a) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Kates, 485 B.R. at 100 (citations omitted).
B. 11 U.S.C. § 523(a)(4) Exception to Discharge
1.
Section 523(a)(4) excepts from discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4).
Section 523(a)(4) is divided into three (3) parts. The first part is the “fiduciary prong” and it requires the creditor to establish that the debtor (1) was in a fiduciary relationship with the creditor, and (2) committed fraud or defalcation within the scope of that fiduciary relationship. The second and third parts do not require proof of an existing fiduciary relationship, but rather, proof that the debtor committed embezzlement or larceny, as those terms are defined by federal common law.
In re Bell, 498 B.R. 463, 477 (Bankr.E.D.Pa.2013) (citations omitted).
*440Embezzlement and larceny are not at issue in this adversary proceeding. The Plaintiff limits his nondischargeability claim to the fiduciary prong of § 523(a)(4).
Under the fiduciary prong of § 523(a)(4), a plaintiff must prove that (1) the debtor was acting in a fiduciary capacity; and (2) while acting in that capacity, the debtor engaged in fraud or defalcation. E.g., In re Tyson, 450 B.R. 514 (Bankr.E.D.Pa.2011).
Not surprisingly, considering the nature of the Debtor’s role as the guardian of the Estate of her incapacitated mother, the Debtor does not dispute that she was acting in a fiduciary capacity in the almost two (2) year period when she served as guardian. For the Plaintiffs part, he does not assert that the Debtor’s conduct rose to the level of fraud. Thus, the only issue in this proceeding is whether the Surcharge imposed by the C.P. Court and the Plaintiffs unresolved Claimed Additional Surcharge (relating to the acquisition of the Florida Townhouse) constitute a defalcation within the meaning of § 523(a)(4).
2.
Defalcation under 11 U.S.C. § 523(a)(4) is a “failure to account for funds entrusted to a fiduciary.” In re Roemmele, 2011 WL 4804833, at *5 (Bankr.E.D.Pa.2011) (citations omitted). As stated at the outset of this Opinion, in Bullock, the Supreme Court resolved a long-standing split of authority regarding the scienter level required to establish a defalcation under § 523(a)(4).16 The Court held that defalcation requires a level of scienter “involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.” 133 S.Ct. at 1757. The Court explained that
where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to violate a fiduciary duty. That risk “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.”
Id. (emphasis in original).
I read Bullock to create two (2) scienter levels that may constitute a nondischargeable defalcation under § 523(a)(4). In one (1) category is a defalcation involving “bad faith, moral turpitude, or other immoral conduct,” (such as self dealing). In a second category is a defalcation requiring something less: “recklessness,” which the Court described *441as a conscious disregard of, or a willful blindness to, a substantial and unjustifiable risk.
The second type of nondischargeable defalcation set out in Bullock, is tailored for conduct that falls between “mere” negligence and a specific intent to injure. Delineating the boundaries of this thin territory between negligent conduct and intentionally wrongful conduct requires a somewhat nuanced analysis, involving both qualitative and quantitative considerations.
Qualitatively speaking, Bullock makes clear that the “recklessness” required to constitute defalcation under § 523(a)(4) is not merely a heightened form of negligence, at least insofar as negligence involves a standard of conduct that is measured objectively, i.e., based on the behavioral norms of a “reasonable person.” Rather, the recklessness required for defalcation under § 523(a)(4) requires consideration of the debtor’s subjective state of mind. This is clear from the Court’s remand of the case on the ground that the Court of Appeals (erroneously) applied a “standard of objective recklessness.” 133 S.Ct. at 1761.
Equally significant in this regard is the Supreme Court’s incorporation of the recklessness standard set forth in the Model Penal Code. The Model Penal Code states:
A person acts recklessly ... when he consciously disregards a substantial and unjustifiable risk that the material element exists or will result from his conduct. The risk must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.
Model Penal Code § 2.02.
Bullock’s reference to § 2.02 of the Model Penal Code suggests that the § 523(a)(4) recklessness determination is a hybrid of the subjective and objective. The court must consider the debtor’s actual knowledge and circumstances (i.e., the subjective) and then decide whether the related conduct constituted a gross deviation from legal standards of conduct (i.e., the objective).
Quantitatively, the Supreme Court’s favorable citation of two (2) federal appeals court decisions, (In re Baylis, 313 F.3d 9 (1st Cir.2002) and In re Hyman, 502 F.3d 61 (2d Cir.2007)), indicates that the deviation from the appropriate, objective standard of conduct must be substantial.17
In Baylis, the court stated that for an act to be deemed defalcation within the meaning of § 523(a)(4), “it must be a serious one” and the plaintiff must show that the debtor’s actions “were so egregious that they come close to the level that would be required to prove fraud, embezzlement, or larceny.” 313 F.3d at 19, 20. In Hyman, the court followed Baylis and further explained: “§ 523(a)(4) requires a showing of conscious misbehavior or extreme recklessness — a showing akin to the showing required for scienter in the securities law context.” 502 F.3d at 68.
In the securities law context, our Court of Appeals has defined recklessness as “[h]ighly unreasonable (conduct), involving not merely simple, or even inexcusable negligence, but an extreme departure *442from the standards of ordinary care ... which presents a danger ... that is either known to the defendant or is so obvious that the actor must have been aware of it.” U.S. S.E.C. v. Infinity Group Co., 212 F.3d 180, 192 (3d Cir.2000) (emphasis added) (quoting McLean v. Alexander, 599 F.2d 1190, 1197 (3d Cir.1979)).
With these principles in mind, I now consider the conduct at issue in this case.
C. Evaluation of the Debtor’s Conduct 1.
The conduct giving rise to the Plaintiffs defalcation claim falls into two (2) factual categories: (1) the Debtor’s expenditure of Estate funds on Ms. Brown’s day-to-day needs (i.e., the Surcharge of $58,396.42); and (2) the Estate’s loss caused by the acquisition of the Florida Townhouse {i.e., the Claimed Additional Surcharge of approximately $84,000.00).18 The Plaintiff contends that the Debtor breached her fiduciary duty with respect to both claims and that the Estate’s losses constitute non-dischargeable defalcations under 11 U.S.C. § 523(a)(4).
The Plaintiff relies heavily on the rulings of the C.P. Court and, unquestionably, the C.P. Court ruled that the Debtor breached her fiduciary duties. However, not all breaches of fiduciary duties rise to the level of a defalcation under § 523(a)(4). Indeed, in Pennsylvania, a fiduciary is held to the legal standard of “reasonable care” in making investment and management decisions. 20 Pa.C.S. § 7212; see also In re Scheidmantel, 868 A.2d 464, 482-83 (Pa.Super.Ct.2005) (discussing cases decided pri- or to effective date of 20 Pa.C.S. § 7212).
With respect to the Surcharge imposed by the C.P. Court, there has been a judicial determination that the Debtor failed to exercise reasonable care. This negligence standard falls below the recklessness scienter required for a finding of defalcation under § 523(a)(4). Therefore, the C.P. Court decision imposing the Surcharge is conclusive on the subject whether the Surcharge is a valid debt,19 but is not conclusive on the issue of nondischargeability.20 With respect to the Surcharge, as well as the unresolved Claimed Additional Surcharge, based on the evidentiary record presented in this court, I must evaluate the Debtor’s decision making and management of the Estate under the recklessness standard set out Bullock.
2.
In considering the Debtor’s degree of culpability, I am mindful of the origins of the fiduciary relationship between Ms. Brown and the Debtor.
At the outset of the fiduciary relationship, Ms. Brown was in dire straits. The Rodney Circle Property arguably was uninhabitable. Even worse, it already had *443been lost in a tax sale. Upon discovering her mother’s desperate situation, the Debt- or consulted other immediate family members and, with some financial assistance, accepted the considerable responsibility of serving as her care provider and financial guardian. The Debtor then succeeded in her first important task: redeeming the Rodney Circle Property and saving the substantial equity in the property.
Thereafter, the Debtor moved her mother out of Rodney Circle Property and into the Oakdale Property. This could not have been easy. The Debtor makes a modest living and has six (6) children, at least one (1) with special needs. No doubt, the demands of managing the needs of her immediate family were great, creating substantial pressure on the Debtor and her husband. Despite this, they managed to finance the purchase of the Oakdale Property in order to carry out what they understood to be Ms. Brown’s desire — to live independently. They also succeeded in repairing the Rodney Circle Property and preparing it for marketing. These latter efforts created the Estate. Without the sale, Ms. Brown would have had nothing.
The Debtor’s initial efforts as guardian should not go unrecognized or unappreciated. Her intentions appeared to be genuine. Her efforts resulted in a great success. However, there is much more to this case.
3.
After she managed to create a sizeable Estate, the Debtor’s subsequent management of those Estate’s funds is extremely troubling.
The Debtor expended more than $160,000.00 of Ms. Brown’s entire reserve (approximately $366,000.00) in less than two (2) years and then, virtually the entire remaining balance on an illiquid real estate venture. The $160,000.00 in cash disbursements represented almost 44% of the entire value of the Estate. When one considers that Ms. Brown was only in her mid-60’s, that there is no evidence that she was in poor physical health, and that Ms. Brown’s income was extremely modest (Social Security of less than $600 per month), the 44% reduction in Ms. Brown’s entire financial “cushion” in such a short period is alarming. For the Debtor then to purchase the Florida Townhouse, virtually depleting all of Ms. Brown’s cash resources, in the hope that it would generate net rental income, appears to be an extreme departure from a reasonable, prudent management of the Estate. The Debtor’s procedural failure to obtain court approval for the purchase of the Florida Townhouse and her commingling of assets by titling the Florida Townhouse in her own name rather than her mother’s adds to the chasm between her conduct and the standard of care to which she was obliged to adhere when she agreed to serve as her mother’s guardian.21 The cavernous gap between the Debtor’s legal duty and her actual conduct is sufficiently extreme and obvious as to warrant the conclusion that either she was aware of, or she willfully blinded herself to, the impropriety of her conduct. This satisfies the recklessness standard for defalcation in 11 U.S.C. § 523(a)(4).
4.
The conclusion that the Debtor’s breach of her fiduciary duty rose to the level of a defalcation within the meaning of § 523(a)(4) is supported not only by the overview of her management of the Estate set out above, but also by a closer inspec*444tion of some of the actual expenditures the Debtor made in connection with her mother’s day-to-day care. In the Debtor’s Petition for Allowance, she requested reimbursement from the Estate for $172,658.66, but was granted only $101,000.00 (approximately) by the C.P. Court. A substantial amount of disallowed expense reimbursements could be characterized as a form of self-dealing.
a.
The Debtor requested nearly $80,000.00 for compensation for hours she and her husband spent in rendering personal services to Ms. Brown and the Estate. The C.P. Court reduced the allowance to $17,736.00 because it found the proposed hourly rate for each of them excessive. For example, the Debtor requested $25 per hour for 858 hours of “living assistance.” As stated by the C.P. Court, “[the Debtor] did not demonstrate any particular experience or training to support her claim for compensation at a rate of $25.00,” and reduced it to $10.00 per hour. She also requested the same hourly rate for 62 hours ($1,550.00) that she spent moving her mother to the Oakdale Property, which the CP Court found to be “a gross overstatement in both hours spent and compensation per hour.” The Debtor further requested $50.00 per hour for 96 hours of her husband’s labor readying the Rodney Circle Property for sale and moving Ms. Brown to the Oakdale Property. The State Court reduced the hourly rate by half to $25.00 per hour.
Of course, it was not inappropriate for the Debtor to request some reimbursement for the work she and her husband provided. Undoubtedly, it took a great deal of time and effort to repair the Rodney Circle Property and to put Ms. Brown’s daily life in order, and the Debtor may have been replacing lost income for the time she expended fulfilling her duties as a fiduciary. Further, I recognize that the appropriate rate of reimbursement in a situation like this may be imprecise. On the one hand, adult children regularly spend time assisting their elderly parents without any expectation of compensation or reimbursement;22 on the other hand, when that assistance is legally formalized in a guardianship, some reimbursement can be appropriate.
The Debtor presented no testimony explaining how subjectively, she navigated between the roles of a daughter concerned about her mother’s welfare and the “arms-length” guardian providing services for a fee. Nor did she explain how she determined the rate of reimbursement that the C.P. Court found to be inflated. Left only with the list of disallowed expenses determined by the C.P. Court, I can only conclude that, after the Estate was created and as time went on, the Debtor’s intentions evolved and her moral compass wobbled. Her initial, admirable goal of assisting her dependent mother transformed into a sense that she was entitled to share in some of the fruits of the Estate that her efforts created.
This theme — that the Debtor managed the Estate for her own convenience and purposes — pervades the various disallowed expense reimbursements and represents a significant shortfall in the Debtor’s conduct as a fiduciary. This improper conduct is sufficiently obvious and occurred with enough frequency that if the Debtor was not aware of her improprieties, it could only be because she wilfully turned a blind eye. In this regard, the Debtor’s *445state of mind rises to the level of recklessness sufficient to constitute a defalcation under 11 U.S.C. § 523(a)(4). In reaching this conclusion, I have considered not only the disallowance of a substantial portion of the $30,000.00 personal services reimbursements request, but the other disal-lowances set out below.
b.
The C.P. Court found that the rent the Debtor charged her mother to live in the Oakdale Property was excessive. The Debtor testified that she paid herself approximately $2,000.00 per month for rent and utilities from the Estate for her mother to live in the Oakdale Property, although she requested reimbursement for only $1,560.00 per month. (See Ex. Fogg-7, ¶ 12). The C.P. Court allowed only $1,210.00 per month.
While the C.P. Court’s disallowance was based on the Debtor’s failure to present evidence of the fair rental market value of a comparable property, I find this expenditure of Estate funds indicative of the Debt- or’s scienter in two (2) distinct ways.
First, the gap between the actual invasion of the Estate and the amount for which the Debtor requested reimbursement is unexplained. If, when the time came to account to the C.P. Court, the Debtor could not even attempt to justify the full amount that she drew from the Estate, what does that say about her state of mind when she actually was drawing down the funds? I infer that it suggests that she was not mindful at all of her duties as a guardian, and that the rent she authorized her mother to pay had more to do with reimbursing her for most of the debt service on the Oakdale Property, rather than attempting to use her mother’s limited resources prudently to provide her with the housing that she needed.
Similarly, the Debtor provided no explanation why she would have her mother expend $2,000.00 per month for rent and utilities when her monthly income was $600.00. While this may be only a specific instance of the overall depletion of the Estate, a subject discussed earlier, it has independent significance. Not only does it appear to be an imprudent expenditure, but it is one that benefitted the Debtor and her husband, by largely servicing the mortgage debt on the second residential property that they owned.
c.
The C.P. Court disallowed other expenses that are indicative of the Debtor’s mismanagement or, at worst, self-dealing: (1) a Dumpster purchase ($590.00); and (2) PECO Bills ($2,709.46).
The C.P. Court disallowed the $590.00 for the dumpster because there was evidence that it was delivered to 3131 Mill Road — the Debtor’s personal property. For the same reason, the C.P. Court allowed the PECO Bill expense in the amount of only $783.28 because $1,926.18 was charged to a different account with the 3131 Mill Road address. At the trial of this proceeding, I received no testimony regarding these specific expenses.
Even if I were to give the Debtor the benefit of the doubt — that those requested expenses were included inadvertently in her Petition for Allowance due to her own neglectful organization — her failure to comply with the basic fiduciary duty of maintaining proper accounts was extreme. She requested approximately $10,900.00 for reimbursement for groceries, cash and other expenditures from January 1,' 2006 through December 31, 2009, suggesting she spent approximately $60 per week from 2006-2007 and $80 per week from 2008-2009. However, the Debtor produced no receipts for the time period from January 2006 through June 2007 and only substantiated through some receipts, a fig*446ure of $80.00 per week for late 2009 through May 2010.
Similarly, the Debtor requested reimbursement another $7,800.00 for cash advances she made to Ms. Brown for a three (8) year period. She claimed $25.00 per week for January 2006 through December 2007 and then approximately $50.00 per week for the two (2) year period beginning in January of 2008. Again, she produced not one ATM receipt and the request appears duplicative of the $10,900.00 she requested for reimbursement for “groceries, cash and other expenditures.”
d.
Another illustration of the large and obvious divide between the standards of conduct for a fiduciary and the Debtor’s actual conduct is the Debtor’s commingling of assets. In few instances, the Debtor wrote checks from the Estate to herself (for cash) or for her own personal expenses. For example, the Debtor wrote a check for $2,195.83 for her home mortgage, as well as for $180.00 for her son’s camp, out of the Estate account. The Debtor explained that in the case of the mortgage payment, she waived one (1) month of her mother’s rent and did not charge the Estate, although the check she wrote was even greater than the inflated rent she was charging her mother. (N.T. at 107). She sought to justify the check for her son’s summer camp expense by explaining that she did not have her own, personal checkbook at the time and that she later reimbursed the Estate. The Debtor may rationalize these actions as having been done purely for convenience, rather than to harm the Estate, but that also is the point. Her actions were for her own benefit, not the Estate’s, and were obviously improper.
5.
Finally, the Florida Townhouse purchase provides a final, powerful illustration how the Debtor’s failure to fulfill her fiduciary obligations to her mother was far more serious than “mere” negligence.
Separate and apart from the reasonableness of depleting almost the entire balance of the Estate funds to make the purchase in the first place, the Debtor titled the Florida property in her own name. I cannot understand why the Debtor did this. At best, titling the Florida Townhouse in her own name was a commingling of assets. At worst, it was a giant step toward conversion of her mother’s assets. At trial, she stated only that she planned to transfer title to her mother at some indeterminate point in the future. That is no explanation for titling the property in her own name. It is merely a rebuttal to the obvious suspicion that she was converting her mother’s assets. While I am not prepared to make such a finding on this record, nonetheless, without some reasonable explanation, the Debtor’s deviation from accepted standards of conduct is immense. Thus, even if the Debtor did not engage in this act in bad faith or with immoral intentions, and even if she was not consciously aware of the impropriety of the act, it was the product of willful blindness. It was reckless and sufficient to satisfy the scien-ter requirement of 11 U.S.C. § 523(a)(4).
The reckless nature of the conduct is reinforced by the $42,000.00 furniture expenditure. Given the parties’ station in life, the limited size of the Estate and the existence of less expensive alternatives for furnishing a rental unit, it is difficult to see how an expenditure of that amount falls anywhere near the standard of reasonableness.23
*447V. CONCLUSION
For the reasons stated above, I conclude that the Debtor committed defalcation, within the meaning of 11 U.S.C. § 523(a)(4) while acting in a fiduciary capacity (and in breaching that fiduciary duty) as the plenary guardian to Ms. Brown
The Debtor depleted her mother’s accounts. She wrote checks out to cash for herself and engaged in transactions that unduly benefitted herself. She commingled Estate assets with her own. She did little to track the flow of Estate money and failed to maintain adequate records of her activities. She failed to file mandated reports with the C.P. Court. Overall, her conduct involved an extreme departure from the negligence standard to which fiduciaries are held, and bordered on out- and-out self dealing. In this course of this conduct, the Debtor, at a minimum, blinded herself to a substantial and unjustifiable risk that her conduct would violate her fiduciary duty to manage the Estate assets faithfully and prudently.
This case presents an excellent illustration of the “recklessness” scienter level described by the Supreme Court in Bullock. On the whole, the record does not support a finding that the Debtor acted in bad faith, immorally or with a clear intent to steal from her mother’s Estate. Nor is the evidence overwhelming that she subjectively and consciously understood that all of her actions fell short of her legal duties as guardian. But given the number of shortcomings in her management of the Estate and the degree to which she fell short in carrying out her duties, the evidence strongly supports the finding that the Debtor acted recklessly while serving as her mother’s financial guardian.
For these reasons, the Surcharge in the amount of $58,396.42 and the Claimed Additional Surcharge are debts that arose from the Debtor’s defalcation while acting in a fiduciary capacity. These debts are nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
An appropriate order follows.
ORDER
AND NOW, after trial of the above adversary proceeding, and for the reasons stated in the accompanying Opinion, it is hereby ORDERED and DETERMINED that the debts for: (a) the $58,396.42 “surcharge” imposed by the Court of Common Pleas, Delaware County in Case No. 06-852 and (b) the additional surcharge claimed by the Plaintiff, arising from the purchase of the property referred to in the Opinion as “the Florida Townhouse,” are nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
. The Plaintiff also claimed that the debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(6). In light of my determination that the debt is nondischargeable under § 523(a)(4), I need not reach the § 523(a)(6) issue.
. In response to a question asking him whether he discussed Ms. Brown’s situation with the Debtor and other family members, the Plaintiff testified vaguely (in the passive voice) that Ms. Brown’s situation "was discussed.” (N.T. at 55). He later testified that he was not involved in recovering the Rodney Circle Property; he couldn't recall whether he was at any family discussion. (Id. at 56). I find that he was involved in the discussion, but did not participate actively in the family’s efforts to set aside the tax sale.
. The Debtor explained that she has one child with severe cerebral palsy and another child who suffers from seizures. (N.T. at 98).
. The Debtor had no records on her computer and did not start a new journal after she misplaced the original journal because she was already "in court” and was, or was about to be, removed as guardian. (N.T. at 65-66). She testified that she attempted to reconstruct the original journal, but claimed that she did not know where the reconstruction was at the time of trial. (N.T. at 66-67). That said, she testified that she believed the journal was not critical because the checks drawn on the Estate account were written in duplicate; so, she had copies of them. (N.T. at 66).
. The Debtor laid out a portion of the unpaid taxes (approximately $13,000.00) and then paid the balance after the sale of the Rodney Street Property. (N.T. at 100). The Debtor took a loan out on her credit card for the $13,000.00 and was later reimbursed from the Estate. (N.T. at 100).
. To repair and restore the Rodney Circle Property, the Debtor and her husband arranged for the following work to be done: electrical, plumbing, drywall, mold removal and interior and exterior painting. (N.T. at 88).
. The Oakdale Property is single family home that is approximately 2000 square feet with a half of an acre of land and located in a desirable neighborhood. The downstairs has one bedroom, a kitchen, a living room and a dining room. The upstairs has a loft. (N.T. at 87; Ex F-18, ¶ 11).
. The Debtor testified that the $180,000.00 mortgage on the property had a monthly payment of $1,650.00 and the second mortgage of $54,000.00 she took out on her home for the down payment on the Oakdale Property had a monthly payment of $500.00. (N.T. at 91).
. It appears that Ms. Brown’s sole source of income in that time period was $593.00 per month in Social Security benefits. (Ex. Fogg-18 at ¶ 13).
. The Debtor offered no explanation why titled a property purchased with Estate funds in her own name. She stated that she was "going to put it in her name,” but did not know why she "just didn’t do it initially.” (N.T. at 104).
.The Debtor called the Florida Townhouse “Alice’s Wonderland” in honor of her mother. (N.T. at 15, 95).
. This issue was contested. The Plaintiff characterized the visit as a leisure vacation, implying that the Debtor purchased the property for her own use and enjoyment and the C.P. Court made the finding that she and her family used the Florida Townhouse for their own vacation (see Ex. Fogg-18, ¶ 21). In this court, the Debtor explained that the purpose of the one visit for a couple days, with her small children, was to do some renovation work. In ruling in this proceeding, I do not resolve this particular factual issue, as I find other facts to be determinative of the nondis-chargeability issue.
. The December 23, 2009 Decree also required that the Debtor:
(1) execute all necessary documents to transfer the Florida Townhouse to Alice Brown;
(2) provide the Plaintiff and the court with a complete, informal accounting of her actions as guardian of Ms. Brown's estate, including receipts and expenditures; and
(3) immediately provide the Plaintiff with information regarding any assets, including bank and credit union accounts held by Ms. Brown either jointly or solely in her name.
(Ex. Fogg-4).
. It is not entirely clear why the amount disallowed by the C.P. Court (approximately $70,000.00) exceeds the amount of the Surcharge $58,396.42. I surmise that the higher amount includes claimed expenses disallowed by the C.P. Court which not been yet disbursed to the Debtor from Estate funds before she was removed as guardian.
. The C.P. Court found that the Estate totaled $366,523.41 derived from
*439(1) proceeds in the amount of $353,134.18 from the sale of the Rodney Circle Property on January 31, 2009;
(2) $12,519.23 in income from January 1, 2007 until December 31, 2009; and
(3)$870 in rental income from the Florida Townhouse.
. Prior to Bullock, at one end of the spectrum were cases that held that an innocent mistake resulting from a failure to fully account for funds handled in a fiduciary capacity constitute defalcation. At the other end were cases holding that the fiduciary’s conduct must be reckless. In the middle, were cases holding that a fiduciary’s negligence would give rise to a defalcation. Tyson, 450 B.R. at 524-525 (Bankr.E.D.Pa.2011) (citing cases). In Tyson, I rejected the "innocent mistake” line of cases, but found it unnecessary to decide between the other two (2) lines of cases in order to decide the case then before the court.
. I observe that it is likely that the qualitative and quantitative aspects of recklessness under § 523(a)(4) are likely to work in tandem in court decisions: the greater the deviation from the standard of conduct, the more likely the court will find that the debtor consciously disregarded his duties or wilfully blinded himself to those duties.
. I calculate this approximation by subtracting the $117,000.00 net proceeds on re-sale from the sum of the original purchase price ($159,000.00) and the cost of the furnishings ($42,000.00).
. For a debt to be nondischargeable pursuant to 11 U.S.C. § 523(a), the plaintiff must establish two (2) elements: (a) that a valid debt exists, and (b) the debt must satisfy all the requirements under one of the subsections of § 523(a). See, e.g., In re August, 448 B.R. 331, 346-47 (Bankr.E.D.Pa.2011).
.See Kates, 485 B.R. at 103 (if plaintiff prevailed in prior litigation in establishing a claim under a legal standard for scienter less rigorous than that required for nondischarge-ability under the Bankruptcy Code, the prior court determination is not preclusive on the issue of nondischargeability); see also In re Styer, 2013 WL 6234621, at *6-7 (Bankr. E.D.Pa. Dec. 2, 2013) (applying same principle).
. The inferences I draw from the Florida Townhouse transaction are discussed further in Part IV.C.5, infra.
. Here, certain expense reimbursements disallowed as excessive were for basic services that the Debtor provided to her mother (e.g., driving her places, going to the grocery store) — services that many would do without any expectation of compensation.
. It also raises suspicions that the "investment” in the Florida Townhouse was not made merely to generate income for the Estate, but rather for the Debtor's benefit. I make no finding that the Debtor intended to use the Florida Townhouse for herself and her *447family. Indeed, if her sole transgression in the guardianship related to the Florida Townhouse transaction, I might not perceive her conduct as reckless. However, in the context of her overall mismanagement of the Estate, the excessive furniture expenditure appears to be a further example of her reckless failure to fulfill her fiduciary duty. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496575/ | MEMORANDUM OPINION
REBECCA B. CONNELLY, Bankruptcy Judge.
At Roanoke in said District this 30th day of October, 2012:
On September'll, 2012, the Court held a hearing on the Chapter 7 Trustee’s (the “Trustee”) Objection to Claim #8-1 of Daniel Porter. After considering the evidence provided at the hearing and the arguments of the parties, the Court makes the following findings of fact and conclusions of law.
Background
Nittany Enterprises, Inc., the Debtor herein, (“Debtor” and sometimes “Nitta-ny”) was a franchisee of DirectBuy, a national buying organization that offers its members access to “confidential inside prices” from over seven hundred manufacturers of home furnishings and home goods. The Debtor operated a showroom in Roanoke that allowed members to view various products available for purchase through catalogs located in the Debtor’s showroom. If purchased, the manufacturer shipped these products directly to the customer; Debtor did not maintain an inventory, other than display products in its showroom. After experiencing months of financial difficulty, Nittany Enterprises closed its doors the first week of February, 2011. On April 8, 2011, Nittany Enterprises filed a voluntary petition under Chapter 7 of Title 11, United States Code (the “Bankruptcy Code” or the “Code”).
Daniel Porter (the “Claimant”) and his wife entered into a membership agreement with the Debtor on November 29, 2008 (the “Agreement”). After Nittany filed its Chapter 7 case, the Claimant timely filed a proof of claim in the amount of $6,000, which he asserts is entitled to priority treatment under the Code.1 Mr. Porter states the basis for his claim is “I paid 6,000.00 for services and received nothing.”2 He explained during the hearing *451on this matter that he paid $500.00 toward the $5,000.00 membership fee and financed the rest through Beta Finance Company, Inc. (“Beta”), a corporate subsidiary of DirectBuy. The $6,000.00 claim, according to Mr. Porter, consists of the $500.00 he paid towards the membership fee and approximately $5,500.00 he paid in principal and interest to Beta towards the financing of his membership.3 The Trustee objects to the Claimant’s proof of claim on five grounds. First, the Trustee asserts that the Debtor did not breach the Agreement prior to the commencement of the case and the rejection of the Agreement did not constitute a breach thereof. Additionally, the Trustee asserts that there is no provision in the Agreement that requires the Debtor to maintain its franchise in Roanoke, Virginia. As such, there is no duty owed by the Debtor under the Agreement that was and is not being fulfilled as it relates to the Claimant.
Second, assuming a breach has occurred, the Trustee asserts that the Claimant has not suffered damages that would give rise to a claim, let alone a claim for $6,000.00. In support of this assertion, the Trustee points to the DirectBuy website that allows members to shop for the same products, at the same prices offered in the local showrooms. The fact that the Claimant purchased his membership to shop in the local showroom and prefers to shop there does not limit the Claimant from exercising his ability to shop through the Direct-Buy website. The breach of the Agreement, therefore, does not entitle the Claimant to a claim equal to the purchase price, if anything at all.
Third, assuming a breach has occurred, the Trustee asserts that the Claimant is not entitled to priority status under section 507(a)(7) because the $500 paid by the Claimant is not a deposit within the meaning of that provision.4 The Trustee asserts that by signing the Agreement, the Claimant agreed to pay the purchase price and was vested with the full benefits of membership from that moment onward. According to the Trustee, the $500 “Member Downpayment” and monthly payments made to Beta, who financed the purchase price, are not deposits because they were not partial payments that established a right to receive goods or services upon the completion of the payments.5 As such, the Claimant has not made a deposit and his claim is, therefore, not entitled to the priority status afforded claims falling under section 507(a)(7).
Fourth, assuming a breach has occurred and that breach gives rise to a priority claim under section 507(a)(7), the $6,000.00 listed in the proof of claim exceeds the $2,600.00 limit permitted by section 507(a)(7). The Trustee asserts therefore that the Claimant could only be entitled to priority status to the extent of $2,600.00.
Fifth, the Trustee asserts that the Claimant has failed to sign his proof of claim.
In support of these arguments, the Trustee provided this Court with Trustee’s Exhibit 1, the Agreement, and Trustee’s *452Exhibit 2, a DirectBuy Membership Guide, as well as the testimony of Brock Wilson, the Debtor’s former President and owner. Mr. Wilson testified as to the Exhibits presented by the Trustee, as well as the membership process, benefits of the membership, and the relationship between the Debtor and its franchisor, DirectBuy.
In response to the Trustee’s evidence, the Claimant put forth an argument relying on the language contained in a financing agreement he entered with Beta to finance the purchase of his membership with the Debtor.6 Claimant entered this document into evidence as Claimant’s Exhibit l.7 The thrust of Claimant’s argument was that the language contained in the financing agreement referenced only one center and contained no mention of any ability to shop online or in other locations. As such, a reading within the four corners of the finance agreement leads to the conclusion that the only thing sold to the Claimant was an opportunity to shop at the Debtor’s location, not at another location or through the franchisor’s website.
In addition to addressing the Trustee’s arguments as to the validity of his claim, the Claimant asserted that the value of his claim was worth $6,000.00 because he purchased the right to enter the Debtor’s showroom and purchase goods through the Debtor on any day during the three-year membership. According to the Claimant, that right did not depend on whether it was exercised on day 1 or day 1,094 and, as such, he is entitled to a full refund, including the interest that accrued as a result of the financing.
Discussion
This Court has subject matter jurisdiction over this controversy under 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). Specifically this proceeding deals entirely with the allowance of an unsecured claim against the bankruptcy estate of Nittany Enterprises, Inc.
This Court recently considered objections filed by the Trustee to similar claims filed by different claimants in this same case.8 In those matters, this Court found that no breach of contract existed between Debtor and the alleged creditors because nothing in the Membership Agreement signed by the parties required Debtor to maintain a showroom in Roanoke.9 The Trustee asserts that this claim is like those previously disallowed by this Court and, therefore, Mr. Porter’s claim should be disallowed on the same grounds. The Court disagrees and finds that Mr. Porter’s claim may be allowed in part.
When a proof of claim is properly filed, it is prima facie evidence of the claim’s validity and amount. In re Harford Sands Inc., 372 F.3d 637, 640 (4th Cir.2004); Fed. R. Bankr.P. 3001(f). Once filed, the burden of rebutting the presumptive effect of the proof of claim falls on the party objecting to the proof of claim. The objecting party must provide evidence that negates at least one fact necessary to the claim’s legal sufficiency. Id. Finally, the *453burden of persuasion shifts back to the proponent of the claim if the objecting party is able to meet his burden. At this stage, the proponent is required to prove the validity and amount of its claim by a preponderance of the evidence. If the proponent is unable to meet this burden, the claim will be disallowed. Id.
In a Chapter 7 case, a proof of claim is properly filed when it is filed by a party listed under section 501 of the Bankruptcy Code within the time period outlined in Bankruptcy Rule 3002(c). In this case, the Claimant alleges that he is entitled to payment as the result of the Debt- or’s purported breach of contract. The Court finds that the Claimant has alleged a valid claim, as defined by section 101(5)(A)10 and is, therefore, a creditor of the Debtor under section 101(10)(A)11 of the code. As a creditor of this Debtor, Mr. Porter is a permissible party under section 501(a) entitled to file a proof of claim. He filed his proof of claim on June 8, 2011; twenty-seven days after the initial section 341 meeting, and well within the ninety-day period proscribed by Bankruptcy Rule 3002(e). Based on the foregoing, the Court finds that the Claimant’s proof of claim was properly filed and is prima facie evidence of the claim’s validity and amount. Harford Sands, 372 F.3d at 640.
Having found that Claimant’s proof of claim is presumptively valid, the focus of the inquiry turns to whether the Trustee has provided sufficient evidence to rebut the presumptive validity of the proof of claim or its amount and/or priority. The Trustee raised two arguments as to the validity of the proof of claim and three arguments as to the amount and priority of the claim. As to validity, the Court finds that the Trustee did not carry his burden in rebutting the presumptive validity of the proof of claim, but did carry his burden as to the amount of the claim and its priority status.
Validity of the Claim
As this Court stated in its earlier ruling on the Trustee’s previous objections, the Court is confined to the four corners of the Agreement, unless ambiguity permits admission of parol evidence to aid in interpreting the terms of the Agreement.12 The Agreement entered into by the Nittany and Mr. Porter in this case is materially different from the agreements this Court previously considered.13 Whereas the agreements previously considered by this Court expressly incorporated membership guides and benefit summaries, the Agreement at issue in this case makes no reference to such documents. Trustee’s Exhibit 1 at 1 In re Nittany Enterprises, Inc. (Bankr.W.D.Va. Sept. 11, 2012) (No. 11-70779). In fact, the only benefit expressly outlined in the Agreement is the “right to order carpeting, furniture, appliances and merchandise for members’ personal use or as bona fide gifts through said Center.” Id. (emphasis added). Fur*454ther, the Agreement defines “said Center” as “the DirectBuy buying center owned and operated by the below named corporation,” which is specified in the agreement as Nittany Enterprises, Inc. Id. Lastly, the Agreement contains an integration clause, which states, “The Center is only obligated to arrange benefits as described in this Membership Agreement. No oral promises or statements not contained in this Membership Agreement shall bind or obligate the Center.” Id. The effect of such a clause is to make Trustee’s Exhibit 2 and the relevant testimony by Mr. Wilson parole evidence, which can only be admitted to interpret an ambiguity in the agreement. As the Court finds that no ambiguity exists in this Agreement, the benefits referred to in the Membership Guide and by Mr. Wilson are not incorporated into the Agreement between the Claimant and the Debtor.
Based on the foregoing, the Agreement at issue here prevents this Court from finding, as it did previously, that there is no contractual provision that vests in the Claimant a right to shop exclusively at the Debtor’s showroom in Roanoke, since the only benefit expressly contemplated by the Agreement was the right to shop at the Debtor’s showroom in Roanoke. That contractual right was infringed by the closing of the Debtor’s showroom in Roanoke. Because the Trustee did not provide evidence that negates a necessary element to this breach of contract claim, the Trustee’s first argument fails to rebut the presumptive validity of Mr. Porter’s proof of claim.
In the alternative, the Trustee argues that the Claimant has failed to sign his proof of claim and, therefore, the Claimant has failed to file a valid proof of claim. The Court finds such an argument unpersuasive on the facts of this case.
The purpose of Official Form 10 is to permit debtors and their creditors to know who has asserted a claim against the debtor and in what amount. Fuller v. Internal Revenue Service, 204 B.R. 894, 897 (Bankr.W.D.Pa.1997). In accordance with this purpose, Bankruptcy Rule 3001(a) requires only that a proof of claim conform substantially to the Official Form. Rule 3001 provides no further guidance as to what constitutes substantial conformation, yet the Trustee asks this Court to find that the Claimant’s signature is a necessary element to a finding that the proof of claim conformed substantially to Official Form 10.
A signature on a proof of claim is not required by either the Bankruptcy Code or the Bankruptcy Rules. In re Shabazz, 206 B.R. 116, 123 (Bankr.E.D.Va.1996). Furthermore, the failure to sign the form does not insulate the filer from penalties for filing a fraudulent claim. Id.; see also In re O’Dell, 251 B.R. 602 (Bankr.N.D.Ala.2000). The Court concludes that the absence of a signature, without other deficiencies, will not render a proof of claim in violation of Rule 3001; an unsigned proof of claim may conform substantially to the Official Form. In determining substantial compliance with the Form, the court will rely upon the purpose of Official Form 10.
In this case, the Claimant’s proof of claim provides the Claimant’s name, address, and telephone number. The proof of claim further provides an amount, the basis for the claim, as well as the nature and type of claim asserted. Based on the foregoing information, the Debtor, its creditors, and other interested parties knew who the Claimant was, how to contact him, the type and amount of the claim, as well as whether such a claim may be objectionable. Therefore, the Claimant’s proof of claim achieved the purpose underlying Official Form 10. As such, this Court finds that the Claimant’s proof of *455claim, despite its lack of a signature, substantially conformed to the Official Form as required by Bankruptcy Rule 3001(a). The Trustee’s second argument fails to rebut the presumptive validity of the Claimant’s proof of claim.
Amount and Priority of Claim
In addition to the validity of the claim, the Trustee has objected to the priority status and amount of the proof of claim filed by the Claimant. Based on the evidence presented by the Trustee, the Court finds that the Trustee has met his burden and has rebutted the presumptive validity of the claim’s status and amount for the following reasons.
As to the claim’s priority status under section 507(a)(7), the Trustee argues that the $500 paid by the Claimant to the Debt- or is not a “deposit” and is, therefore, not entitled to priority status under section 507(a)(7). Since characterization of the payment as a “deposit” is necessary to find that the claim has priority, the Trustee need only provide evidence sufficient to negate the characterization of the payment as a deposit in order to overcome his burden.
This Court has previously defined a “deposit” under section 507(a)(7) to be a “tendering of a consideration in order to purchase or rent specific property or services with the expectation that such consideration will be applied toward the purchase or rental of property or services, or be returned if either the property or services are not delivered or if the condition precedent for return of the consideration is fulfilled by the depositor.” Wolfe v. Abbey, 203 B.R. 61, 64 (Bankr.W.D.Va.1996) (interpreting what is now 11 U.S.C. § 507(a)(7)). Although not expressly stated in this definition, the term “deposit” connotes a temporal relationship between the time consideration is given and the time the right to use or possess is vested in the individual giving the consideration. In re Palmas del Mar Country Club, 443 B.R. 569, 575 (Bankr.D.P.R.2010) (surveying section 507(a)(7) cases). The temporal aspect is important because it is what allows section 507(a)(7) to encompass deposits that are a fractional payment, as well as deposits for the full payment amount. It is this temporal relationship that distinguishes consideration tendered as a deposit from consideration tendered as a mere payment for goods or services.
At the hearing, the Trustee provided multiple forms of evidence that showed the $500.00 paid by the Claimant on November 29, 2008 was not a deposit within the meaning of section 507(a)(7). First, Trustee’s Exhibit 1, the Agreement, showed that there was no expectation that membership fees would be refunded under any circumstances. The relevant portion reads, “Members understand this program is not sold on a trial basis and that no refund of membership fees will be made.”14 As such, the consideration was not tendered “with the expectation that such consideration will ... be returned if either the property or services are not delivered or if the condition precedent for return of the consideration is fulfilled by the depositor.” Wolfe, 203 B.R. at 64.
Second, the Trustee’s witness, Mr. Wilson, testified as to how members were signed up, how the financing of the membership worked, as well as the financial relationship between Nittany and Beta. According to Mr. Wilson, individuals purchasing a membership from Nittany had *456the option to pay the full price in cash, finance the purchase price, or some combination of the two. In almost all circumstances, the Debtor received the full purchase price at the time the membership agreement was signed.15 Once the membership agreement was signed and the payment scheme arranged, individuals were able to use their membership in Debtor’s business with no limitation.
Based on the evidence and testimony presented by the Trustee, the Court finds that the Trustee provided sufficient evidence to show that the Claimant’s right to use the membership vested immediately. The Agreement between the parties is void of any language conditioning the vesting of membership rights on the Claimant’s payment of the full membership price. Furthermore, the testimony of Mr. Wilson explained that the benefits a member had upon the signing of the agreement did not depend on whether the purchase price was financed or paid in cash. Thus, the $500 paid by Claimant to the Debtor would not constitute a deposit under section 507(a)(7). The Trustee met his burden of production and shifted the burden of persuasion to the Claimant for the priority status of his claim.
The Court finds that the Claimant has failed to meet his burden of persuading this Court that the $500.00 he paid to the Debtor qualifies as a deposit under section 507(a)(7). At the hearing, Claimant attempted to find language in- the Beta financing agreement that referred to the $500.00 as a “deposit.” There was no such language in the agreement. Although the terminology of the payment in the contract is not necessarily controlling, the Claimant also failed to provide any evidence that would contradict the declarations in the contract that the $500.00 was not refundable or that his rights under the Agreement did not vest automatically. The Claimant’s eonclusory statements and references to the $500.00 as a deposit are not sufficient. This Court finds therefore that the Claimant has a general unsecured claim. Mr. Porter failed to show that his claim is entitled to priority status under section 507(a)(7).
As to the claim’s amount, the Trustee has argued that the $6,000.00 the Claimant seeks is not his quantum of damages. In fact, the Trustee has gone so far as to say that the Claimant has suffered no damages at all because the Claimant was able to use his membership at the franchisor’s other locations, as well as on its website. The latter argument is unpersuasive given our earlier finding that such benefits were not a part of the Agreement between Nittany and Mr. Porter. The Court finds, however, that the Trustee has produced evidence sufficient for a finding that $6,000.00 is an excessive claim.
During the hearing, the Trustee provided evidence as to the purchase price of the membership, $4,960.00, the price paid for the renewal option, $30.00, the terms of the membership, three years, as well as the date for when the Agreement was entered into and the date the Debtor closed its doors for business, November 29, 2008 and February 2011, respectively. Furthermore, the Trustee asserted that the Claimant’s rights under the Agreement were not infringed until the last year of his membership. Based on the evidence presented by the Trustee, the Claimant *457was entitled to claim at most $4,990.00 for a breach of the Agreement. Based on this evidence, the Court finds that the Trustee has met his burden, and the Claimant must show why his $6,000.00 claim is not excessive.
At the hearing, Mr. Porter testified as to the amount he paid for the membership, as well as the amount he paid Beta to finance the membership. He provided the Court with records of his account with Beta through June 2011. As of February 2011, Mr. Porter still owed Beta approximately $1,445.89 in principal and interest for his membership in the Debtor’s establishment.16 In addition, Mr. Porter insisted that his rights under the Agreement were not dependant on when he exercised them and, therefore, the amount of his damages were the same whether the Debtor breached the agreement on day 1 or day 1,094.17
Mr. Porter has failed to carry his burden of persuasion as to the total amount of his claim. Although the Claimant is correct that he was as entitled to use his membership on day 1,094 as he was on day 1, he is incorrect to believe that a breach of his three year membership in year three entitles him to a full refund of the membership fee, plus the interest he paid to finance the purchase. The purchase price was $4,960.00. How the Claimant decided to finance the transaction was of his own choosing. The Claimant has failed to provide any evidence or case law that would persuade the Court to allow him to include in his claim the approximately $1,010.00 he paid in interest to finance the transaction.
After considering all the evidence, the Court does find, however, that the Claimant has suffered some pecuniary loss as a result of the Debtor’s breach. In re Terry, 262 B.R. 657, 662 (Bankr.E.D.Va.2001) (awarding Claimant damages despite its failure to persuade the court that its claim was not excessive). First, the Claimant is entitled to receive the $80.00 he paid for the option to renew his membership in the Debtor’s center. The closing of the Debt- or’s center was a breach of the option and the consideration paid should be returned to the Debtor. Second, the Agreement was breached with approximately 302 days remaining on the 1,095 day membership. The number of lost days represents 28% of the entire membership term. Because the Court has found that Mr. Porter’s particular agreement provided him with the right to purchase goods in the Roanoke store, and that this right was breached when Nittany closed its doors, the Court believes it is appropriate to quantify the 302 day, or 28%, loss of the purchasing opportunity. The Court finds that the value of the loss represents a pro-rated amount of the membership purchase price. See Nichols Construction Corp. v. Virginia Machine Tool Co. LLC, 276 Va. 81, 661 S.E.2d 467, 472 (2008) (finding that a plaintiff need not establish damages with mathematical certainty, rather he/she must furnish evidence to permit the trier of fact to make a probable estimate of the contract damages sustained) (citing Estate of Taylor v. Flair Property Assocs., 448 S.E.2d 413 (Va.1994)).18 The Claimant is owed $1,367.96, which equates to approximately *45828% of the $4,960 purchase price.19 The Court finds that the Claimant has a general unsecured claim in the amount of $1,897.96 and the remaining balance of the Claimant’s claim is disallowed.
The Court will contemporaneously issue an Order in accordance with the above decision.
. Claimant’s proof of claim failed to state the Code section he relies upon in asserting his priority status. The Chapter 7 Trustee has challenged Claimant's assertion under section 507(a)(7) and the Court believes this to be the section upon which the Claimant intended to rely.
. See Claim # 8-1 dated June 8, 2011, In re Nittany Enterprises, Inc. (Bankr.W.D.Va.) (No. 11-70779).
. Transcript of Record at 30, In re Nittany Enterprises, Inc. (Bankr.W.D.Va) (No. 11-70779) (ECF No. 177).
. 11 U.S.C. § 507(a)(7) states, “The following expenses and claims have priority in the following order: Seventh, allowed unsecured claims of individuals, to the extent of $2,600 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.”
.Trustee's Objection to Claim No. 8-1 at ¶ 9, Jan. 4, 2012, ECF No. 148.
. The Claimant represented to the Court that the only signed document he possessed was the financing agreement with Beta. He apparently did not have a copy of and/or did not remember signing the Agreement.
. During the hearing, the Court incorrectly referred to the Claimant and his exhibit as Debtor and Debtor's Exhibit 1, respectively.
. See Trustee's Objection to Claim No. 1-1, Jan. 4, 2012, ECF No. 149; Trustee's Objection to Claim No. 28, Oct. 10, 2011, ECF No. 25.
. In re Nittany Enterprises, Inc. at 6-7 (Bankr. W.D.Va. July 6, 2012) (No. 11-70779) (ECF No. 170).
. 11 U.S.C. § 101(5)(A) states, "The term ‘claim’ means — right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
. 11 U.S.C. § 101(10)(A) states, “The term 'creditor' means — entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.”
. In re Nittany Enterprises, Inc. at 5 (Bankr.W.D. Va. July 6, 2012) (No. 11-70779) (ECF No. 170).
. Id. at 5 ("The Membership Agreement explicitly incorporates the ‘DirectBuy Membership Guide’ into the contractual agreement of the parties.”).
. Trustee’s Exhibit 1 at 1 In re Nittany Enterprises, Inc. (Bankr. W.D. Va. Sept. 11, 2012) (No. 11-70779).
. Mr. Wilson indicated that, in limited situations, Beta would not provide the Debtor with the membership fee until Beta received its payment from the member. This occurred when the member was deemed to have a higher credit risk. According to Mr. Wilson, the delivery of payment did not affect the vesting of an individual member’s rights under the membership agreement.
. Claimant's Exhibit 1 at 6 In re Nittany Enterprises, Inc. (Bankr. W.D. Va. Sept. 11, 2012) (No. 11-70779).
. Transcript of Record at 29, In re Nittany Enterprises, Inc. (Bankr. W.D. Va.) (No. 11-70779) (ECFNo. 177).
.Unlike the case of Sunrise Continuing Care v. Wright, 277 Va. 148, 671 S.E.2d 132 (2009) cited by the Trustee, in this case, Mr. Porter is not seeking a return of the purchase price paid simply because he is unhappy with the services received, but rather because the contract with Nittany cannot be fulfilled.
. The $1,367.96 is equal to a pro-rated amount of the purchase price. In numeric terms, $1,367.96 = (302/1095) x $4,960. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496576/ | MEMORANDUM DECISION
REBECCA B. CONNELLY, Bankruptcy Judge.
Lisa Knight is a creditor of the debtor in this case. Ms. Knight filed this adversary proceeding to determine whether her debt is excepted from discharge under Bankruptcy Code section 523(a)(6). The parties stipulated to the facts1 and submitted briefs. Both sides waived oral argument and the Court took the matter under advisement.
*461
I. Discussion
A. The Setting
On May 1, 2010, the Rockingham County General District Court (Rockingham General District Court) entered a judgment in favor of Lisa Knight against the debtor in the amount of $14,890. Ms. Knight enforced her judgment by obtaining orders from the Rockingham General District Court directing the debtor to turn over tax refunds to Ms. Knight in partial satisfaction of the judgment debt. On November 30, 2010, the Rockingham General District Court ordered that the plaintiff have execution against the debtor in amount of $16,468 by levy against the debtor’s 2010 state and federal income tax refunds. The Rockingham General District Court’s order cited Virginia Code § 8.01-507 as the basis for the relief. The order contained the following language: “[The debtor] is advised to turn said property over to counsel for plaintiff. Failure to do so may result in [the debtor] being found in contempt of court and being fined, imprisoned, or both.” The debtor received a 2010 federal income tax refund of $1,684 after the entry of the November 30 order, but did not turn over this refund to the plaintiff. The debtor did not receive a 2010 state income tax refund. The parties fail to mention what if any specific consequences occurred from the debtor’s failure to submit the 2010 tax refund to Ms. Knight, other than that a second order was entered on January 10, 2012, nearly identical to the November 13, 2010 order. On January 10, 2012, the Rockingham General District Court ordered that the plaintiff have execution against the debtor in the amount of $17,507 by levy against the debtor’s 2011 state and federal income tax refunds. This order again cited Virginia Code § 8.01-507 as the basis for the relief. This second order contained the identical language: “[The debtor] is advised to turn said property over to counsel for [plaintiff]. Failure to do so may result in [the debtor] being found in contempt of court and being fined, imprisoned, or both.” The debtor received a 2011 federal tax refund in the amount of $2,812 after the entry of the January 10, 2012 order, but did not turn over this refund to the plaintiff. The debt- or did not receive a state income tax refund for 2011.
Ms. Knight argues that the November 30, 2010 and January 10, 2012 orders created a lien on the tax refunds which conferred a property interest in the tax refunds. Plaintiff further contends that the debtor intentionally did not turn over the refund checks and that by doing so, converted the tax refunds, making the amount of the tax refunds a non-dischargable debt under 11 U.S.C. § 523(a)(6). The debtor argues that the levy orders were advisory and that because the debtor was not in possession of the funds at the time the orders were issued, turn over of the refunds was impossible. Because the refunds did not exist at the time of the order, she did not convert property of the plaintiff.
B. The Court’s Authority
The question for this court is whether Monica Eppard, who filed Chapter 7 bankruptcy in this court, may discharge her debt to Lisa Knight, or whether the debt is excepted from discharge under Bankruptcy Code section 523(a)(6). The issue is a question of bankruptcy law, 11 U.S.C. § 523(a)(6), over which this court has subject matter jurisdiction matter. 28 U.S.C. § 1334. It is a core proceeding. 28 U.S.C. § 157. Pursuant to the Western District of Virginia District Court Order of *462Reference,2 this court heard the matter, and pursuant to Federal Rule of Bankruptcy Procedure 7052, the court makes the following findings of fact and conclusions of law.
II. Findings of Fact
A. The Injury
Ms. Knight has a judgment against the Debtor. She was unsuccessful in collecting the judgment prior to March 1. 2012. On March 1, 2012, Ms. Eppard filed a Chapter 7 bankruptcy petition, thus staying Ms. Knight from collection. Ms. Knight will be permanently enjoined from collection unless the debt is excepted from discharge. Ms. Knight pleads that she has suffered financial harm because she has a state court order directing the debtor to turn over the debtor’s tax refunds to pay toward the judgment, yet the debtor failed to do so. The amount of the judgment, therefore has not changed yet had Ms. Eppard complied with the state court order and paid her tax refund to her judgment creditor, Ms. Knight would have received some satisfaction on her judgment; the balance under the judgment would have been reduced. Thus the injury is Ms. Knight’s inability to collect approximately $1684 and $2812 and apply these funds to the outstanding indebtedness. Ms. Knight pleads that she has a property interest in the future tax refunds of the debtor by virtue of the state court order. She does not plead that the state court order was delivered to the sheriff, or that if it had been, the sheriff could have seized the property.3 Absent delivery to the sheriff or physical possession of the tax refund check, the court finds that Ms. Knight did not have a lien on the future tax refund and accordingly did not have a property interest in the tax refund4 such that the failure to collect it constitutes conversion of the creditor’s property or injury to the creditor’s property. Michie’s Enforcement of Judgments and Liens in Virginia §§ 2.2, 3.2; International Fidelity Ins. Co. v. Ashland Lumber Co., 250 Va. 507, 463 S.E.2d 664 (Va.1995) (a writ of fieri facias creates a lien in favor of in favor of judgment creditor only to the extent that the judgment debtor has a possessory interest in the intangible property subject to the writ.) AdvanceMe, Inc. v. Shaker Corp., 79 Va. Cir. 171 (Va.Cir.Ct.2009) (“in order for property of the debtor to be subject to an order of conveyance under § 8.01-507, the property must be in possession of or under the control of the debtor or his debtor or his bailee”). While Virginia Code section 8.01-507 is the tool by which a sheriff can direct “turn over” of property to satisfy a judgment, see id., when the property is not in the hands of the debtor, the only practical method to enforce such order is through garnishment. See In re Wilkinson, 196 B.R. 311, 315 (Bankr.E.D.Va.1996). The result, however, remains: the general district court order did not effectuate or convey to Lisa Knight a property interest in the future tax refunds of Monica Eppard. See id., citing United States f/u/o Global Bldg Supply, Inc. v. *463Harkins Builders, Inc., 45 F.3d 830, 833-34 (4th Cir.1995) (the writ commands the officer to collect the money judgment from the goods and chattels of the judgment debtor but when the property is in the hands of a third person, the lien of execution may be enforced through garnishment proceeding ... through garnishment, the judgment creditor does not replace the judgment debtor as owner of the property, but merely has the right to hold the garnishee liable for the value of that property). This court finds that Ms. Knight did not have a lien on the future tax refunds.5
Ms. Knight did, however, have an expectation that Ms. Eppard would use her tax refund, once received, to pay Ms. Knight, and indeed Ms. Eppard was ordered specifically to do so by the Rocking-ham General District Court. Ms. Eppard violated the General District Court order by failing to use the tax refund to pay Ms. Knight. Violation of the state court collection order subjects Ms. Eppard to sanctions but was not in this case conversion of property or injury to property.
B. The Intent
The stipulation is silent as to the debt- or’s state of mind. The parties agree that the debtor failed to comply with a state court order. The parties do not agree whether the debtor’s stipulation that she failed to comply with the state court order is sufficient to find intent for purposes of section 523(a)(6). The debtor argues in her brief that she could not have intended to harm or cause injury to property of the creditor because she did not believe the creditor had a property interest in the tax refund. The creditor argues that the debtor’s intent to spend the tax refund and not pay its value to the creditor is sufficient to find intent to cause injury.
The joint stipulation of facts does not provide enough circumstantial evidence for the court to draw a conclusion as to the debtor’s state of mind. The court finds that the debtor violated the Rockingham General District Court orders by not providing the value of her 2010 and 2011 income tax refunds to her judgment creditor but for the reasons set forth below does not conclude that this transgression created a non-dischargeable debt to the judgment creditor.
III. Conclusions of Law
A. Exception to Discharge Under 11 U.S.C. 523(a)(6)
1. Injury to Property
A debt “for willful and malicious injury by the debtor” to another or the property of another is non-dischargable. 11 U.S.C. § 523(a)(6). Conversion is an injury under section 523(a)(6). Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151, 79 L.Ed. 393 (1934). A plaintiff alleging conversion must have a property interest in the converted property and be entitled to immediate possession of the same. Economopoulos v. Kolaitis, 259 Va. 806, 814, 528 S.E.2d 714, 719 (2000); Kubota Tractor Corp. v. Strack, 2007 WL 517492 (E.D.Va.2007), rev’d on other grounds, In re Strack, 524 F.3d 493 (4th Cir.2008); see In re Dunlap, 458 B.R. 301 (Bankr.E.D.Va.2011). In order for a plaintiff to prevail under section 523(a)(6), the plaintiff must first show at the outset that it has a property interest in the items allegedly converted. See Dunlap, 458 B.R. at 344. Unless the plaintiff owns an interest in the property, whether as collateral or through an outright sale, there can *464be no violation under section 523(a)(6). In re Price, 313 B.R. 805, 809 (Bankr.E.D.Ark.2004).
This court has found that Ms. Knight did not have a property interest in the future tax refunds. The court therefore concludes that the debtor’s use of the tax refunds is not conversion of the creditor’s property and is not a non-disehargeable debt under Bankruptcy Code section 523(a)(6).
Even if the judgment creditor had a property interest in the future tax refunds, the court further concludes, for the reasons set forth herein, that the conduct in this case does not render the value of the tax refunds a non-dischargeable debt.
2. Wilful and Malicious Injury by the Debtor
a) Wilfulness
The Supreme Court has ruled that for a debt to declared non-dischargable under section 523(a)(6), a wilful injury, not just a wilful act, is required. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). When the Supreme Court affirmed the Eighth Circuit in Geiger v. Kawaauhau (In re Geiger) ,6 the Court left unanswered whether a debtor must specifically intend to cause the injury alleged or if the debtor’s intentional wrongful act which caused the alleged injury is sufficient. Johnson v. Davis (In re Davis), 262 B.R. 663, 670 (Bankr.E.D.Va.2001). The Fourth Circuit’s answer, in the unpublished decision Parsons v. Parks (In re Parks),7 to whether a debtor’s conduct meets a finding of willfulness for purposes of section 523(a)(6) is “whether the debtor acted with substantial certainty that harm would result or a subjective motive to cause harm.” Parks, 91 Fed.Appx. at 819; see Ocean Equity Group, Inc. v. Wooten (In re Wooten), 423 B.R. 108 (Bankr.E.D.Va.2010): Haas v. Trammell (In re Haas) 388 B.R. 182, 186-87 (Bankr.E.D.Va.2008). Hence, to qualify as willful for purposes of section 523(a)(6), the debtor must: 1) commit an intentional tort, not a negligent or reckless tort8, and 2) the intentional tort must be conduct substantially certain to result in injury or be motivated by a desire to inflict injury. See Haas, 388 B.R. at 186-87, citing Miller, 156 F.3d at 603. The court is cognizant that “a debtor in a section 523(a)(6) case is unlikely to admit that he or she intended to cause injury, or that he or she was substantially certain that injury would result.” Call Fed. Credit Union v. Sweeney (In re Sweeney), 264 B.R. 866, 872 (Bankr.W.D.Ky.2001). Courts faced with *465this quandary have attempted to solve the issue by allowing state of mind to be established through circumstantial evidence. Id. see also Beckett v. Bundick (In re Bundick), 308 B.R. 90, 110 (Bankr.E.D.Va.2003). This court agrees that discerning a party’s state of mind is difficult, but that state of mind can be established through circumstantial evidence.
b) Maliciousness
Simply a willful act intended to inflict injury is not sufficient to except a debt from discharge under section 523(a)(6). The conduct must be wilful and malicious. 11 U.S.C. § 523(a)(6) (emphasis added); Davis, 262 B.R. at 670. Maliciousness requires action without just cause or excuse. Wooten, 423 B.R. at 130. As Judge Tice explained, “In bankruptcy, a debtor may act with malice without bearing any subjective ill will toward plaintiff creditor or any specific intent to injure same.... The Fourth Circuit defines malice as an act causing injury without just cause or excuse.” Davis, 262 B.R. at 670, [internal citations omitted], citing In re Powers, 227 B.R. 73 (Bankr.E.D.Va.1998); see Wooten, 423 B.R. at 130-131; In re Walker, 416 B.R. 449, 468 (Bankr.W.D.N.C.2009). This definition of maliciousness for purposes of section 5253(a)(6) is consistent with the United States Supreme Court’s reasoning in Davis v. Aetna Acceptance Co. 293 U.S. 328, 332, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (“there may be a conversion which is innocent, or technical” and thus no willful and malicious injury had been perpetrated). Davis involved a financial tort. The debtor, Davis, and Aetna, a secured lender, had executed loans that financed the debtor’s auto sales business. Id. at 330-331, 55 S.Ct. 151. The loans were secured by automobiles purchased by the debtor and contained a provision that sale of the collateral required the lender’s approval. Id. Yet, the parties course of dealing involved numerous occasions in which the debtor sold the collateral without express approval of the lender. Id. This lead the Supreme Court to find that no “wilful and malicious injury” had been perpetrated, despite finding that the debtor had unlawfully converted the secured lender’s collateral. Id. at 334-335, 55 S.Ct. 151. In essence, the Supreme Court found that the debtor had a justification or excuse for committing the tort because the debtor’s previous course of dealing with the lender provided the debt- or a good faith reason to believe that his actions were not wrongful.
In this case, the record of stipulated facts does not support a finding that the debtor’s failure to pay the creditor the value of her tax refunds was undertaken by the debtor with an intent to injure the plaintiff or with a belief that the failure to turn over the refunds was substantially certain to injure the plaintiff. Absent sufficient facts to support a finding that the debtor intended to spend a refund that she knew did not belong to her, without justification or cause, the court cannot find that the violation of the Rockingham General District Court order constitutes willful and malicious injury to property excepting the debt from discharge under section 523(a)(6). Furthermore, the fact that an entire year passed after the first general district court order was entered without any consequences from the debtor’s failure to comply9 raises a question as to whether the debtor believed that her conduct was not wrongful.
*466
IV. Conclusion
The plaintiff did not have a property-interest in the debtor’s tax refunds therefore the debtor’s failure to pay her tax refunds to her judgment creditor was not conversion of the creditor’s property. However, even if the debtor’s failure to turn over her tax refunds was an act of conversion, the record of stipulated facts does not support a finding that this failure was undertaken by the debtor with an intent to injure the plaintiff or with a belief that the failure to turn over the refunds was substantially certain to injure the plaintiff. The joint stipulation of facts does not provide enough circumstantial evidence for the court to draw a conclusion as to the debtor’s state of mind and thus entitle the plaintiff to judgment. Accordingly, the court finds that plaintiff failed to prove that debtor’s actions constituted willful and malicious injury to her property under 11 U.S.C. § 523(a)(6).
. See ECF No. 7; Stipulation of Monica Renee Eppard and Lisa L. Knight, August 2, 2012.
. See Order of Reference December 6, 1994; and Western District of Virginia District Court Local Rule 3.
. The stipulation provides that the debtor was not in possession of the tax refund at the time either state court order was issued.
. Absent waiver by the United States of its sovereign immunity, neither this court nor the state court could enter an order that has the effect of exercising control over a tax refund not yet in the hands of a taxpayer; or that would direct the IRS to assess the taxpayer's liability, process a refund and forward the refund to someone other than the taxpayer or the taxpayer’s agent. See SEC v. Lane, et. al, 2011 U.S. Dist. LEXIS 2011 (M.D.Fla.2011); Simon v. Wendell Montgomery, 54 F.Supp.2d 673 (M.D.La.1999).
. See order entered in In re Monica Renee Eppard, 12-50275 granting motion to avoid lien on grounds no lien existed.
. 113 F.3d 848, 852 (8th Cir.1997) (citing the Restatement (Second) of Torts § 8A, comment a, at 15 (1965)).
. 91 Fed.Appx. 817 (4th Cir.2003) (per curium) (citing Miller v. J.D. Abrams, (In re Miller), 156 F.3d 598, 603 (5th Cir.1998)).
. Debts arising from injuries as a result of "reckless or negligent” behavior "do not fall within the compass of section 523(a)(6).” Geiger, 523 U.S. at 64, 118 S.Ct. 974. The Court explained that a broader interpretation of section 523(a)(6) would result in exceptions from discharge for debts arising from "[e]very traffic accident” and every "knowing breach of contract" and that this would be "incompa-tibie with the well-known guide that exceptions to discharge should be confined to those plainly expressed.” Id. at 62, 118 S.Ct. 974 (internal quotations and citations omitted). For a debt to be non-dischargable under section 523(a)(6), the debt must arise from an intentional tort committed by the debtor. See Id. at 60 and 61, 118 S.Ct. 974 (citing with approval the finding of the Eighth Circuit Court of Appeals' en banc opinion that exception to discharge under § 523(a)(6) is limited to debts based on intentional torts); see also Johnson v. Davis (In re Davis), 262 B.R. 663 (Bankr.E.D.Va.2001). Consequently, a debt arising from a negligent or reckless tort is dischargable under section 523(a)(6). Id.
. The record is devoid of any consequences for the debtor’s failure to comply with the November 30, 2010 order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496577/ | MEMORANDUM DECISION SUSTAINING DEBTOR’S OBJECTION TO CLAIM 8-1
REBECCA B. CONNELLY, Bankruptcy Judge.
On February 6, 2013, the Court held a hearing on Leslie Ludwig (the “Debtor”)’s objection to the priority status of claim number 8 held by Renee M. Miller, the Debtor’s former spouse. The Debtor asserts that Ms. Miller’s claim is not entitled to priority status because the debt stems from a property settlement agreement between the parties pursuant to their divorce in 2004. Ms. Miller has alleges that her claim is entitled to priority status because the debt owed is based on a domestic support obligation that is in the nature of alimony, support, or maintenance under 11 U.S.C. (the “Bankruptcy Code”) § 507(a)(1)(A). After considering the evidence provided at the hearing and the arguments of the parties, the Court took the matter under advisement. Based on that evidence, the Court makes the following findings of fact and conclusions of law.
Findings of Fact
The Debtor and Ms. Miller were married on June 20, 1987. During the marriage, the couple had two children, Lesley Renee and Savannah Lynn. On November 1, 2003, the couple separated. Shortly after the separation, the couple entered into a Separation and Property Settlement Agreement (the “Agreement”), that attempted to dispose of issues such as custo*468dy, support and assignment of debts. The Agreement specifically assigned certain joint, marital debts to the Debtor. It is Ms. Miller’s position that this arrangement was how she chose to receive her support from the Debtor following their separation. Following a year of continuous separation, Ms. Miller was granted a divorce a vincula matrimonii on November 23, 2004. The divorce decree ratified and incorporated the Agreement. Following the divorce, the Debtor failed to pay the debts assigned to him under the Agreement. Based on the evidence presented at the hearing, Ms. Miller paid these debts and subsequently obtained a judgment from the Circuit Court of Shenandoah County against the Debtor for non-payment of his obligations under the Agreement. The Circuit Court Order was entered on February 17, 2010 for judgment in the amount of $8,908.04 with interest and additional fees and costs of $450.00. This Order required the Debt- or to pay Ms. Miller $250.00 per month until the judgment was paid in full. According to statements made by Ms. Miller at the hearing, the Debtor made payments totaling $1,500.00 on this judgment. Mr. Ludwig filed his Chapter 13 petition on August 31, 2012. As of the petition date, the Debtor owed approximately $12,220.82 on the judgment to Ms. Miller. The Debt- or has since remarried.
Conclusions of Law
Section 507(a)(1)(A) of the Bankruptcy Code provides that allowed unsecured claims for domestic support obligations owed to a former spouse as of the petition date are entitled to first priority. The question before the Court is whether Ms. Miller’s claim is for a domestic support obligation.
The Bankruptcy Code defines a domestic support obligation as a debt that is owed to or recoverable by a former spouse in the nature of alimony, maintenance, or support of such former spouse, established prior to the filing of the bankruptcy case, and that has not been assigned to a nongovernmental entity. 11 U.S.C. § 101(14A). As this Court has determined previously, an obligation must satisfy the requirements of Code section 101(14A) to be given priority treatment as a domestic support obligation. See In re Cooke, 455 B.R. 503, 505 (Bankr.W.D.Va.2011). As the party seeking priority, Ms. Miller has the burden of persuading this Court that her obligation meets the requirements of section 101(14A). In re Harford Sands Inc., 372 F.3d 637, 640 (4th Cir.2004) (finding that the claimant bears the burden to proof as to validity and amount of the claim once the debtor has rebutted the presumption); In re Austin, 271 B.R. 97, 105 (Bankr.E.D.Va.2001)1 (finding that former spouse, who was objecting to confirmation of debtor’s Chapter 13 plan on the ground that said plan failed to pay her claim in full, bore the burden of proving that claim at issue is actually in the nature of alimony, maintenance, or support) (citing Tilley v. Jessee, 789 F.2d 1074, 1077 (4th Cir.1986)). In making this determination, the critical question the Court must answer is whether the parties intended the obligation as alimony, support, or maintenance at the time the sepa*469ration agreement was entered. Tilley, 789 F.2d at 1078 n. 4; In re Monsour, 372 B.R. 272, 281 (Bankr.W.D.Va.2007); Austin, 271 B.R. at 105. If the intent of the parties was that the obligation was merely a division of property, then the obligation is not a domestic support obligation.
In determining whether the parties intended the obligation to be in the nature of alimony, support, or maintenance, courts have looked at four factors for guidance: (1) the language and substance of the agreement; (2) the relative financial position of the parties when they entered the agreement; (8) the function of the obligation within the agreement; and (4) evidence of overbearing at the time of the agreement. Compare Austin, 271 B.R. at 106; and Mirea, 2012 WL 3042239 at *6; with Monsour, 372 B.R. at 281 (applying three of the four factors). Based on the evidence, arguments and record in the case, the Court is unable to effectively weigh factors (2) and (4). In particular, the Court has no information regarding the parties’ relative financial positions at the time they entered the Agreement. Furthermore, the Court has no information suggesting evidence of overbearing or that would contradict the parties’ assertion in paragraph XV of the Agreement that the parties entered the Agreement voluntarily and without fraud, misrepresentation, duress, or undue influence. As such, factors (1) and (3) are all that remain before the Court for analysis.
With regard to the language and substance of the agreement, courts have considered the following criteria: labels; details regarding the payments; the context; and finally, what is left out of the agreement. Specifically, labels are significant, but not dispositive; the method, manner, and recipient of the payments are important; context is illustrative; and what is missing can be as important as what is included. Austin, 271 B.R. at 106-7 (citing cases).
In the instant case, the debt owed Ms. Miller arose from Debtor’s failure to meet his obligations under paragraph V of the Agreement entitled, “Existing Debts of the Parties.”2 Under that provision of the Agreement, Debtor was responsible for paying certain joint debts. Debtor was not to pay Ms. Miller, but rather make monthly payments directly to the creditors. The Debtor was assigned five joint debts. Of the five debts expressly assigned to the Debtor, three of the debts relate to a 2004 Ford truck. These debts also appear in the section entitled, “Division of Property.” The other two debts are joint credit card obligations on a Visa and a MasterCard. Ms. Miller was assigned the remainder of the joint debts; however, most of those debts appear to be related to the contemporaneous assignment of the marital residence and a 2003 Nissan Maxima to Ms. Miller. In addition to the terms of the “Existing Debts” provision, the rest of the agreement is illustrative. The “Division of Property” provision is the longest provision within the Agreement. The parties waived spousal support on two separate occasions, and waived child support. Throughout the Agreement, each benefit is coupled with a corresponding obligation. The Agreement in its entirety lacks any provision in which one spouse receives a benefit without incurring a detriment. In addition, the Agreement *470lacks any provision for the other’s general welfare.
With regard to the function of the obligation within the Agreement, courts have generally looked to see if the obligation serves to provide for the common necessities of the other spouse. Monsour, 372 B.R. at 282; Mirea, 2012 WL 3042239 at *7. In making this determination, courts have considered whether the obligation is for past or future obligations, whether it allocates joint debts, or whether it divides property. Austin, 271 B.R. at 108 (citing cases).
The underlying obligation in the instant case is based on joint obligations the parties had at the time of their divorce. As such, the Debtor’s obligation was to pay for past debts the couple owed. Furthermore, paragraph VI of the Agreement, entitled “Future Debts,” provided that all future debts would be incurred by the parties individually. In addition, the majority of the debts assigned the Debtor related to property that was subject to the “Division of Property” section of the Agreement. All these factors suggest that the purpose of the obligation was not to provide common necessities for Ms. Miller, but rather, to provide the parties with an equitable division of the marital debts. Ms. Miller’s own words suggest this is the case. In her response to Debtor’s objection to claim, Ms. Miller wrote, “I chose to have [the Debtor] pay his portion of our marital debt instead of collecting child support or spousal support.” Response to Objection of Claim, In re Ludwig, No. 12-51167 (Bankr.W.D.Va. August 31, 2012), EOF No. 34. In light of the language and substance of the Agreement, coupled with the lack of supportive purpose, the Court finds that the obligation, and the Agreement as a whole, exhibits a quid-pro-quo characteristic that is more akin to a property settlement and not in the nature of alimony, support, or maintenance. As the Court finds that the obligation is not in the nature of alimony, support, or maintenance, Ms. Miller has failed to establish the necessary elements of a domestic support obligation under 11 U.S.C. § 101(14A). Therefore, Ms. Miller’s claim is not for a domestic support obligation and, thus, is not entitled to priority status under 11 U.S.C. § 507(a)(1)(A). The Court will issue a corresponding order in accordance with the above decision.
. Although the passage of the 2005 BAPCPA Amendments altered the structure of 11 U.S.C. § 507(a)(1)(A) and added 11 U.S.C. § 101(14A) to the Bankruptcy Code, the cases interpreting the definition of domestic support obligation all looked at whether the underlying obligation was in the nature of alimony, support, or maintenance. As the 2005 BAPCPA Amendments incorporated this into the definition of domestic support obligation in section 101(14A), these earlier cases are still applicable and relevant today. See In re Krueger, 457 B.R. 465, 474 (Bankr.D.S.C.2011); In re Mirea, 2012 WL 3042239, *6 n. 4 (Bankr.E.D.Va.2012).
. That section reads, “Each party agrees to be solely responsible for outstanding debts incurred in his or her name alone. Husband shall be responsible for payments on 2004 Ford F250 Pickup Truck, Providian Visa Card payments, Providian Master Card payments, and for automobile insurance and personal property taxes for the above vehicle.” See Claim 8-1, In re Ludwig, No. 12-51167 (Bankr. W.D. Va. August 31, 2012). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496578/ | MEMORANDUM OPINION
REBECCA B. CONNELLY, Bankruptcy Judge.
On May 3, 2013, the Court held a hearing on Amber Erbschloe’s (the “Debtor”) complaint seeking discharge of her student loan debt under 11 U.S.C. § 523(a)(8). The parties agreed that in order for the Debtor’s loans to be discharged under section 523(a)(8), the Debtor must establish by a preponderance of the evidence that the repayment of her student loans would be an undue hardship. The Debtor testified and presented several pieces of evidence, as well as the expert testimony of Dr. Miller, in support of her position that repayment of her student loans would be an undue hardship. The United States Department of Education (the “Defendant” or the “Government”) presented no evidence to the Court and argued that the Debtor had failed to establish all three prongs of the .Brunner Test. The Court took the matter under advisement and now makes the following findings of fact and conclusions of law.
Findings of Fact
In 2007, the Debtor borrowed approximately $17,000 through the William D. Ford Direct Student Loan program while attending Virginia Polytechnic Institute and State University (“Virginia Tech”). Transcript of Oral Argument at 13, Erbschloe v. Dep’t of Educ., No. 12-07013 (Bankr.W.D.Va. May 3, 2013) ECF No. 47 [hereinafter Transcript]. Since graduating from Virginia Tech in 2009 with a bachelor’s degree in studio art, the principal and accrued interest on the Debtor’s student loans has grown to approximately $19,300. Id. While still in college, the Debtor made multiple payments on her student loans totaling approximately $372.27. Id. at 17 and 42-43. After graduation, however, the Debtor has been unable to make payments on her loans; yet the loans are not in default and have not accrued fees or penalties. When the Debtor realized she was unable to make her monthly payments on her loans, she contacted the loan servicer and explained her financial situation and that she needed some form of relief. Id. at 43. The servicer only provided her with information regarding a one-month forbearance option. Id. Once the Debtor received the paperwork for the forbearance, she completed it, submitted it, and was granted forbearance from her student loan payments for one month. Id. The Department of Education, although it had the opportunity to do so then, never provided the Debtor with any information regarding alternative repayment plans.1 Id.
*475It is uncontested that the Debtor was the victim of a horrific attack and sexual assault in 2002 that left her with severe injuries, both mental and physical. It is further uncontested that shortly after the Debtor’s ordeal, two of the Debtor’s close friends were attacked, sexually assaulted, and murdered in separate and unrelated attacks. The similarity and result of those attacks has hindered the Debtor’s ability to recover from and added to the stress of her own trauma. As a result of these attacks, the Debtor suffers from post-traumatic stress disorder. Transcript at 77.
In addition to the Debtor’s mental trauma, the Debtor has been diagnosed with a “snapping scapula,” which causes the Debtor pain and discomfort in her shoulder, neck, and upper back. Transcript at 27-29. Although the Debtor did not present any evidence directly linking the onset of her snapping scapula with the brutal attack in 2002, the Debtor’s injury did not present with symptoms until after the Debtor received the student loan at issue in this case. The Debtor’s injury prevents her from engaging in heavy lifting and strenuous activities. Id. at 29. The inability to lift heavy objects and engage in physically demanding activities precludes the Debtor from pursuing a career in the field of art installation because it prevents her from constructing the large scale, heavy sculptures for which the field is known.2 Id. The snapping scapula also precludes her from other fields of employment that would put strain on her shoulder.
At the time of the trial, the Debtor had obtained employment working for a local auto shop as a service writer, which involves answering phones, making appointments, and ordering parts. Transcript at 61. The Debtor testified that her hours per week varied depending on whether or not she was needed, but that she generally worked between twenty five and forty hours per week. Id. At an hourly rate of $9.00, the Debtor makes between $225.00 and $360.00 per week or $900.00 and $1,400.00 per month before taxes; about $175.00 to $280.00 per week or $700.00 to $1,120.00 per month after taxes. Id. The Debtor claims to work thirty hours per week on average, which would give the Debtor net monthly income of approximately $840.00. Id. at 61. The Debtor currently lives in Giles County with her boyfriend and has the following monthly expenses: rent of $230.00, utilities of $175.00, food of $200.00, clothing of $25.00, books and entertainment of $19.00, medical of $58.33, and auto insurance of $45.00.3 Transcript at 38^1; and 66. Debtor’s total monthly expenses, not including payments on her loan, are $752.33.4
*476Discussion
This Court has subject matter jurisdiction over this controversy under 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) because the complaint requests that the Court determine the dischargeability of the Debtor’s student loans under 11 U.S.C. § 523(a)(8). It is uncontested that the loan issued by the Government to the Debtor falls within section 523(a)(8). The only question before the Court is whether requiring the Debtor to repay her student loan by denying discharge of the debt would inflict an undue hardship on the Debtor.
Dischargeability under Section 523(a)(8)
The Bankruptcy Code provides that government-issued student loan debt can be discharged only if a debtor can show that the failure to discharge the debt would impose an “undue hardship” on the debtor. 11 U.S.C. § 523(a)(8). The term “undue hardship,” however, is not defined in the Code. Courts have found that in enacting section 523(a)(8) Congress attempted to create a heightened discharge-ability standard through the use of the term “undue” that requires more than the general hardships found in most bankruptcy cases. Educational Credit Management Corp. v. Frushour, 433 F.3d 393, 399 (4th Cir.2005). The reasoning behind such a heightened standard was to protect the integrity of the student loan program, maintain its fiscal strength, and prevent debtors from easily passing student loan debts on to the taxpayers. Id. at 400.
The Brunner Test
In the early years of section 523(a)(8), courts wrestled to pinpoint exactly what a debtor was required to show in order to prove that an undue hardship existed. From those early tests, the Brunner Test, adopted by the Second Circuit, has emerged as the majority approach for determining whether an undue hardship exists.5 The Fourth Circuit has adopted the Brunner Test in the Chapter 7 context and it is the test this Court is bound to apply in this case. Frushour, 433 F.3d at 400. In Brunner, the Second Circuit found that the debtor needed to satisfy three factors in order to satisfy the “undue hardship” requirement;
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debt- or has made good faith efforts to repay the loans.
Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir.1987). The burden facing a debtor seeking an undue hardship discharge under section 523(a)(8) and Brunner is a difficult one. Id. at 399. The debtor must show “more than the usual hardship that accompanies bankruptcy.” Id. In order to do this, courts have found that the debtor *477carries the burden of establishing all three of the Brunner prongs by a preponderance of the evidence. Id. at 400; Frushour, 433 F.3d at 400. If the debtor fails to establish any of the three Brunner prongs, then the debtor cannot succeed and the Court must deny the debtor’s request to discharge his student loan debt.
Can the Debtor Maintain a Minimal Standard of Living if Forced to Repay the Loan?
The Fourth Circuit has yet to analyze what a debtor is required to show to satisfy Brunner’s first prong in the Chapter 7 context. See Spence v. Educational Credit Management Corp., 541 F.3d 538 (4th Cir.2008) (determined by Brunner factors two and three); Educational Credit Management Corp. v. Mosko, 515 F.3d 319 (4th Cir.2008) (determined by the third Brunner factor); and Frushour, 433 F.3d 393 (determined by Brunner factors two and three). What has been said is that the Brunner Test requires a case-by-case approach to determine if expenses are or are not essential for maintaining a minimal standard of living. Frushour, 433 F.3d at 400. Other courts, however, have found that if “a family earns a modest income and the family budget, which shows no unnecessary or frivolous expenditures, is still unbalanced, a hardship exists from which a debtor may be discharged of his student loan obligations.” In re Correll, 105 B.R. 302, 306 (Bankr.W.D.Pa.1989).6 The Court finds this interpretation consistent with the language of the first prong of the Brunner Test, which requires a court to review the debtor’s current income and expenses and determine whether a minimal standard of living is possible if forced to repay the student loans. See Brunner, 831 F.2d at 396(“(1) that the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans.”). Furthermore, the Court finds that the Correll standard is consistent with the case-by-case approach adopted by the Fourth Circuit in Frushour.
With this standard in mind, the Court must look at the Debtor’s current income and expenses and determine whether the Debtor’s current budget, if reasonable and necessary, allows for a minimal standard of living. The Debtor averages approximately $840.00 per month in take-home pay. Transcript at 61. At trial, the Debtor testified to having several monthly expenses, but did not provide average monthly amounts for all of them. For those expenses for which the Debtor provided average amounts, the Debtor has at least $752.33 in monthly expenses. Transcript at 38-41; and 66. She failed to testify as to an amount for her monthly prescription, gas, and automobile maintenance expenses. See generally Transcript. The Debtor, however, did provide the Court with thirteen bank statements dating from July 2011 to August 2012. Over that thirteen month period, the Debtor’s bank statements show that she spent approximately $1,165.51 on prescription drugs from Walgreens and RiteAid or approximately $89.65 per month. Plaintiffs Exhibit 11, Erbschloe v. Dep’t of Educ., No. 12-07013 (Mar. 7, 2012) ECF No. 37; Transcript at 40. Those same statements show that the Debtor spent approximately $1,697.32 on gas from various sources or approximately $130.56 per month. Plaintiffs Exhibit 11, Erbschloe, No. 12-07013 (Mar. 7, 2012) ECF No. 37; Transcript at *47841. Furthermore, the statements show that the Debtor paid New River Nissan approximately $260.38 on vehicle maintenance or approximately $20.03 per month. Plaintiffs Exhibit 11, Erbsehloe, No. 12-07013 (Mar. 7, 2012) ECF No. 37. When the Court considers the Debtor’s additional, pro-rated expenses for prescriptions, gas, and automobile maintenance, the Debtor’s monthly expenses total approximately $992.57. The Court finds that the Debtor’s monthly budget is reasonable and necessary. The expenses to which the Debtor testified are not extravagant, nor were they out of the ordinary. The Government questioned the Debtor’s monthly Netflix charge of $9.00. Under the facts of this case, the Court finds that the Net-flix charge is not unreasonable. The Debt- or does not have cable or satellite television, both of which can be very expensive and significantly greater than the Netflix expense. Instead, the Debtor has chosen a less expensive, fairly modest approach to monthly entertainment. As the Debtor’s monthly budgeted expenses are reasonable, yet still exceed her average monthly income, the Debtor’s budget does not allow her to maintain a minimal standard of living. Therefore, the Court finds that the Debtor has established by a preponderance of the evidence the first prong of the Brunner Test.
Do Additional Circumstances Exist that Indicate the Debtor’s State of Affairs Are Likely to Persist for a Significant Portion of the Repayment Period?
The second prong of the Brunner Test is the heart of the test because it “most clearly reflects the congressional imperative that the debtor’s hardship must be more than the normal hardship that accompanies any bankruptcy.” Frushour, 433 F.3d at 401. As the Frushour Court explained it, “[t]he second factor is [] a demanding requirement and necessitates that a certainty of hopelessness exists that the debtor will not be able to repay the student loans. Only a debtor with rare circumstances will satisfy this factor.” Id. (internal citations and quotations omitted). The Fourth Circuit has identified “illness, disability, a lack of useable job skills, or the existence of a large number of dependents” as rare circumstances that may satisfy Brunner’s second prong. Id. (quoting Oyler v. Educ. Credit Mgmt. Corp., 397 F.3d 382, 386 (6th Cir.2005)) (internal quotations omitted). In Frushour, the Fourth Circuit concluded that the debtor failed to establish Brunner’s second factor after considering: (1) the debtor’s mental and physical health; (2) education; (3) professional licenses; (4) breadth of employment history; (5) previous employment income versus current income; and (6) the lack of effort to find and the inability to provide a reason for not finding higher paying employment. Frushour, 433 F.3d at 401-2; see also Spence, 541 F.3d at 544 (finding that a low-paying job does not in itself create undue hardship, especially when the debtor likes the job and has not actively sought higher-paying employment after previously earning higher wages). Unlike the first and third prongs, Brunner’s second prong is prospective. It requires the Court to consider the Debtor’s past and present and project whether her condition is such that repayment of her loan, at some future time prior to the conclusion of the loan’s repayment period, appears to be certainly hopeless because of her current difficulty.
After considering the Debtor’s current condition and all that surrounds it, the Court finds that the Debtor has not established that a certainty of hopelessness exists such that she will not be able to repay her student loan. What the Debtor has experienced and the continuing mental anguish associated with her past traumas *479is certainly horrific and something no person should ever have to experience. But as horrific and brutal as the Debtor’s past has been or as bad as the current pain she experiences with her shoulder injury is, she was unable to show by a preponderance of the evidence how these factors suggest that her current financial difficulty is likely to persist for a significant portion of the repayment period.
It is true that the Debtor’s snapping scapula condition prevents her from pursuing the profession for which she is trained or any other physically demanding career path; however, the snapping scapula and accompanying shoulder pain does not cause, nor render, insufficient income from which to pay the student loan. The Debt- or did not show that employment in a job that does not require lifting her arm over her shoulder necessarily bars the Debtor from increasing her income. Furthermore, the Debtor failed to show how her snapping scapula condition foreclosed the possibility of taking other jobs or pursuing other careers for which she is qualified that would allow her to better her financial condition to the point where repayment of her student loans is an option. In fact, by the Debtor’s own testimony, she has already taken steps in that direction by transitioning from the food services industry to an entry-level administrative position. That job shows the Court three things. First, the Debtor is employable outside her chosen profession in a position that has some upward mobility. As the Court noted previously, the Debtor has a degree in studio art from Virginia Tech. Despite the focus of her degree, the Debt- or has obtained entry-level employment in a different field, with a new set of job skills that may allow her to transition into a different position with a new employer for higher pay, better hours, and potentially benefits. Second, the Debtor is able to find work that does not strain her shoulder or cause her excessive pain. According to the Debtor, one of the reasons she took this new job was to minimize the amount of physical use of her shoulder. Transcript at 63. The Debtor’s ability to find work that is not hindered by her shoulder injury is promising for the Debtor’s future prospeets. That she took it upon herself to find a new job that does not require her to strain her shoulder shows the Court that the Debtor is responsible, resourceful, and determined to change her financial condition despite her injury. Third, this new job provides the Debtor with increased income. If the Debtor averages thirty hours per week at $9.00 per hour, she would have an annual adjusted gross income (“AGI”) of approximately $14,040. That would be an increase from her 2011 AGI of $8,663 and her 2010 AGI of $6,132. See Plaintiffs Exhibit 13-B, Erbschloe v. Dep’t of Educ., No. 12-07013 (Mar. 7, 2012) ECF No. 37; and Plaintiffs Exhibit 13-C, Erbschloe v. Dep’t of Educ., No. 12-07013 (Mar. 7, 2012) ECF No. 37. After graduating from college in 2009, the Debt- or has had a slow, but steady increase in annual income despite her physical and mental hardships. At no time has the Debtor shown this Court that her injury or current administrative position precludes her from making a living in the future sufficient to repay her student loans.
In addition to the information concerning the Debtor’s new job, the Debtor presented the expert testimony of Dr. Robert Miller, a clinical psychologist in Blacks-burg, Virginia. Dr. Miller performed a diagnostic interview and psychological evaluation on the Debtor on August 1, 2012. In Dr. Miller’s expert opinion, the Debtor currently suffers from chronic Post Traumatic Stress Disorder (“PTSD”) stemming from the brutal assaults of the Debtor, as well as the assault and murder of her two friends. Transcript at 77. *480While such a condition potentially could be debilitating to one’s ability to find work and function within a work environment, the Debtor has been able to hold steady employment since graduating from college. Furthermore, Dr. Miller testified:
[The Debtor] is a remarkable young woman. She has resilience in ways and I mentioned in my report that the prognosis I think could be actually fairly good for her if some relief could come in her life for her to actually take some time to deal with what has happened to her. She is smart. She is not a person that is readily seeking disability. She wants to work.
Transcript at 79-80. The Court agrees with Dr. Miller’s assessment of the Debtor and it is because of this assessment that the Court does not believe the Debtor’s circumstances display the hopelessness required by the second prong of the Brun-ner Test. The Debtor, therefore, has failed to establish the second prong of the Brun-ner Test by a preponderance of the evidence. Without establishing all three prongs of the Brunner Test, the Debtor has not met her burden and is, therefore, not entitled to an undue hardship discharge under section 523(a)(8) at this time. See Frushour, 438 F.3d at 399; Velarde v. Educ. Credit Mgmt. (In re Velarde), 2009 WL 2614688, *4 (Bankr.E.D.Va.2009); Cosner v. Dept. of Educ. (In re Cosner), 313 B.R. 690, 693 (Bankr.N.D.W.V.2004). Because the Debtor has failed to establish the existence of the second prong of the Brunner Test, the Court does not reach the question of whether the Debtor made a good faith effort to repay her student loan. See Frushour, 433 F.3d at 400 (declining to decide whether the debtor met the first prong because the debtor failed to carry her burden as to the other prongs of the Brunner Test).
Undue Hardship and Partial Discharge of Indebtedness
Over the past twenty five years, the Brunner Test has grown to be almost synonymous with the phrase “undue hardship,” as that phrase is used in the student loan context. As the test has grown in popularity over the years, however, the rational underlying the three prong approach has become less prudential in the wake of amendments to the Bankruptcy Code and the addition of new repayment programs offered by the Federal Government to student loan borrowers. When the test was first articulated by the Southern District of New York in 1985 and later adopted in whole by the Second Circuit in 1987, federal student loans were generally dischargeable under section 523(a)(8) after five years' of repayment, but required a showing of “undue hardship” to discharge student loans prior to the five-year mark. See 11 U.S.C. § 523(a)(8) (West 1985). At that time, Congress had yet to create an income based repayment plan or any alternative repayment plans allowing borrowers to extend their repayment periods beyond the standard ten year repayment period. See Omnibus Budget Reconciliation Act of 1993, H.R. 2264,103rd Cong. (1993) (added income contingent repayment plan); Higher Education Amendments of 1998, H.R. 6, 105th Cong. (1998) (added Extended Repayment); and College Cost Reduction and Access Act, H.R. 2669, 110th Cong. (2007) (added income-based repayment). Given this landscape, the Southern District of New York created a three-prong test to determine when one might obtain a “discharge of student loans in bankruptcy pri- or to five years after they first come due.” In re Brunner, 46 B.R. 752, 756 (S.D.N.Y.1985). In doing so, they attempted to fold Congress’s reasoning for allowing borrowers to discharge their student loan debt after five years into a workable definition of “undue hardship” that still maintained *481Congress’s intent that the repayment of student loans be a “very difficult burden to shake without actually paying them off’ prior to five years. Id. at 755-56 (relying on Report of the Commission on the Bankruptcy Laws of the United States, House Doc. No. 93-187, Pt. I, 93d Cong., 1st Sess. (1973)). What resulted from the Southern District of New York’s efforts was a prospective test that projected the Debtor’s state of affairs for a significant portion of the repayment period, which at that time would have been some period less than ten years. Given the dischargeability of student loans after five years, the relatively short repayment period for student loans, and the relative inflexibility of repayment terms and periods, the Brunner Test was designed as a means to gauge a debtor’s ability to repay in the immediate, short-term future.
Today, however, courts must apply the Brunner Test within the context of income-based and extended repayment plans that allow borrowers to extend their repayment periods .for twenty or more years, all the while making monthly payments as low as $0. As such, courts are taking a test that was designed to look at a debtor’s short term ability to repay fixed amounts and applying it to determine whether a debtor’s circumstances may change at some time in the next twenty or more years.7 Furthermore, under some of these repayment plans, whatever remains due and owing at the end of the repayment period is forgiven by the Government. See, e.g., 20 U.S.C. § 1098e(b)(7). With such options available to debtors, it is often difficult for courts to reconcile how making payments as small as $0 per month on a debt that may ultimately be forgiven can impose an undue hardship on a debtor. What is lost in this inquiry is that the Code does not ask whether minimal installment payments would be an undue hardship on the debtor, but rather whether the repayment of the debt would be an undue hardship on the debtor if forced to repay it. While the Brunner Test dictates that courts answer the question prospectively for immediate discharge of a sum certain, partial and delayed discharge allows courts to answer the question definitively by setting parameters in certain cases that, if met, establish the existence of an undue hardship and trigger discharge of the unpaid portion of the student loan debt. It is this approach that we consider when determining whether we may grant Debtor’s alternative request for a partial discharge of her student loan indebtedness. See Complaint at ¶ 26, Erbschloe v. Dep’t of Educ., No. 12-07013 (Bankr.W.D.Va. Mar. 7, 2012) ECF No. 1.
Partial Discharge of Student Loan Indebtedness
Although several Circuit Courts have addressed whether partial discharge is permissible under section 523(a)(8), the Fourth Circuit has yet to answer that question. Section 523(a)(8) does not distinguish between full discharge or partial discharge; rather, section 523(a)(8) refers generally to discharge. See 11 U.S.C. § 523(a)(8) (“A discharge under ... this title does not discharge an individual debt- or from any debt — unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor....”). The plain language of the Code, however, does not foreclose the possibility of a partial discharge. See In re Mart, 272 B.R. 181 (W.D.Va.2002). Instead, section 523(a)(8) creates a rule that precludes discharge, unless excepting “such debt” from discharge would result in an undue hardship. Thus, it is the connec*482tion between “such debt” and “undue hardship” that controls the discharge; not whether the amount discharged represents the entire debt or such part of it as imposes the undue hardship. As such, the Court finds that section 523(a)(8) allows a Court to discharge some portion of the Debtor’s student loans if the failure to do so would cause the Debtor an undue hardship. Mort, 272 B.R.. at 185 (finding that section 523(a)(8) is not an all or nothing provision and that the discharge of any debt under section 523(a)(8) must be conditioned upon a finding of undue hardship).
Although the Fourth Circuit has not explicitly held that partial discharges are permissible under section 523(a)(8),8 the District Court for the Western District of Virginia has definitely held such. In In re Mort, Judge Jones held that a partial discharge of student loan debt was permissible under section 523(a)(8) provided that such discharge was conditioned on a finding of undue hardship and not the bankruptcy court’s equitable powers under section 105. Mort, 272 B.R. at 185. The court in Mort found that the “better approach is to permit a partial discharge only to the extent that it would be an undue hardship for that part of the loan obligation not to be discharged.” Id. In its ruling, however, the court did not elaborate on a test for undue hardship in the partial discharge context. What Judge Jones did hold was that the failure to show a good faith effort to repay one’s student loan obligations will preclude a hardship discharge of any portion of the student loan debt. Id.
Pursuant to the holding in Mort, we must consider whether the Debtor has made a good faith effort to repay her student loans. After review of the record, the Court finds that the Debtor has made a good faith effort to repay her loans. The Debtor made several payments on her student loan when not required to do so. Transcript at 42^43. Furthermore, the Debtor has made efforts to maximize her income, at times working three jobs, and reduce her expenses by splitting them with her boyfriend. Id. at 42, 38-40. Finally, when the Debtor was facing financial difficulties, she contacted the Government to seek assistance with her repayment terms. Id. at 43. At that time, the Government only offered the Debtor a one-month forbearance, which the Debtor pursued and obtained. At no time did the Government offer the Debtor any information on alternative repayment plans and could not even say at trial with any certainty what such a plan might look like. Id. These facts lead the Court to believe'that the Debtor has made a good faith effort to repay her student loans and is not merely trying to avoid repaying her obligations to the Government by filing bankruptcy.
In the first part of this opinion, the Court found that the Debtor failed to establish by a preponderance of the evidence that the Debtor’s current financial hardship is likely to persist for a significant portion of her repayment period. Im*483plicit in this prospective conclusion is that although the Debtor is currently below 150 percent of the poverty line, the Court does not believe her current inability to maintain a minimum standard of living will persist or impede her from making a greater living in the future and, ultimately, pay back her student loans. In the meantime, the Government has suggested that the Debtor may qualify for the Income-Based Repayment Plan (“IBRP”), which allows certain borrowers to extend the repayment period for their student loans to twenty-five years and potentially pay less per month than they would under the standard repayment plan option. 20 U.S.C. § 1098e. As the Debtor is currently unmarried and has annual income below 150 percent of the poverty line, the Court finds that the Debtor has a “partial financial hardship,” qualifies for the IBRP, and would have monthly payments of $0 for as long as her current financial situation persists. Id. at § 1098e(a)(3) and (b)(1). In the event that the Court is correct about the Debtor’s ability to improve her financial condition in the years to come and, thus, eliminate her partial financial hardship, the Debtor can elect to stay in the IBRP for the duration of the repayment period and her monthly payments will not exceed the amount she is currently required to pay under the standard repayment period. Id. at § 1098e(b)(6). At the end of the twenty five year repayment period, any amount due and owing on the student loan is forgiven by the Department of Education.9 Id. at § 1098e(b)(7).
To the extent that the Debtor qualifies for and does participate in the IBRP, the Court finds that any balance due and owing at the end of the twenty five-year repayment period represents the portion of the Debtor’s student loan that would impose an undue hardship on the Debtor and is hereby discharged prior to its forgiveness under section 1098e(b)(7).10 In re Grove, 323 B.R. 216 (Bankr.N.D.Ohio 2005). If the Debtor’s hardship continues for the next twenty five years to the extent that she is unable to repay her student loans, then the hardship is greater than those hardships facing the average debtor. Frushour, 433 F.3d at 399. By conditioning discharge of the Debtor’s student loans remaining after twenty five years on her pursuing the IBRP and fulfilling her obligations under that plan, the Court ultimately removes, in the partial discharge context, the prospective nature of the *484Brunner Test’s undue hardship determination. In doing so, the Court recognizes that the Debtor cannot currently maintain a minimal standard of living if forced to repay the student loan, the Debtor’s income is currently below 150 percent of the poverty line, the Debtor has made a good faith effort to repay her loans, and will have to continue to make a good faith effort to repay those loans over the next twenty five years in order to ultimately receive a discharge of her student loans. By taking a wait and see approach, the Court is not required to make an arbitrary estimate of what may be an appropriate amount to partially discharge, the Government is provided with the maximum amount of time to collect on its loan, and the Debtor is effectively granted a fresh start by avoiding the imputation of income from the Government’s forgiveness of the Debtor’s student loan debt. The Court finds that this approach in a partial discharge inquiry is consistent with the three-prong approach taken by the court in Brunner and Congress’s intention that student loans be “a very difficult burden to shake without actually paying them off.” In re Brunner, 46 B.R. at 756.
Conclusion
The Debtor has failed to provide the Court with sufficient information to find by a preponderance of the evidence that circumstances exist suggesting that the Debt- or’s current financial hardship is likely to persist for a significant portion of the repayment period of the student loan. As such, the Debtor has failed to establish the second prong of the Brunner Test and is not entitled to an immediate discharge of her student loans. The Debtor, however, has established current and significant financial hardship, as well as her good faith effort to repay her student loan. Furthermore, the Court has found that the Debtor qualifies for the Income Based Repayment Plan. Given these circumstances, if the Debtor enrolls in the IBRP, fulfills her obligations under that Plan, and still has an amount due and owing at the end of the repayment period, the Court finds that the amount due and owing at the end of the repayment period is an undue hardship under section 523(a)(8) and is hereby discharged prior to any forgiveness granted by the Government pursuant to 20 U.S.C. § 1098e(b)(7). The Court will enter a separate, contemporaneous order consistent with this opinion.
Copies of this memorandum opinion are directed to be sent to the Debtor, Amber Erbschloe, 141 Rogers Road, Ripplemead, VA 24150-3026; Debtor’s counsel, Steven Dennison Smith, S.D. Smith Esquire, PLLC, 125 N. Main Street, #500-353, Blacksburg, VA 24060; the Defendant, United States Department of Education, c/o Chad Keller, Litigation Support, 50 Beale Street, Suite 8629, San Francisco, CA 94105; Defendant’s counsel, Sara Bugbee Winn, U.S. Attorney’s Office, PO Box 1709, Roanoke, VA 24008-1709; and the Chapter 7 Trustee, George I Vogel, PO Box 18188, Roanoke, VA 24014.
. In fact, the Government did not broach the subject of alternative repayment plans with the Debtor until the week of the trial after the Court held a pre-trial conference call with the parties. Even at trial, the Government was unable to state with any degree of certainty what the terms of such a repayment plan would look like. See generally Transcript of *475Oral Argument at 90-91, Erbschloe, No. 12-07013 (Bankr.W.D.Va. May 3, 2013) ECF No. 47 thereinafter Transcript]. During the Debt- or’s testimony, she appeared as though she may have been willing to consider such an option had one been provided to her when she received her forbearance; however, when asked what she could afford to pay per month, the Debtor replied, "nothing.” Transcript at 60.
.Although the Debtor has a degree in Fine Arts, she has shown considerable promise in the field of art installation. Ms. Erbschloe's work has been featured in local newspapers, is on permanent display in the Taubman Museum of Modem Art, and received an award for best in show at the XYZ Gallery in Blacks-burg, Virginia. Transcript at 30.
. At trial, the Debtor testified that she splits certain expenses equally with her boyfriend. For such expenses, the Court has only considered the Debtor’s one-half share of said expenses for purposes of calculating the Debt- or’s total monthly expenses.
. The Debtor mentioned additional expenses — prescription, gas, and transportation — but never provided monthly figures for said expenses. Transcript at 40-41, 50.
. See Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir.1987); Pennsylvania Higher Education Assistance Agency v. Faish, 72 F.3d 298 (3rd Cir.1996); Frushour, 433 F.3d 393 (4th Cir.2005); U.S. v. Gerhardt, 348 F.3d 89 (5th Cir.2003); Oyler v. Educational Credit Management Corporation, 397 F.3d 382 (6th Cir.2005); Matter of Roberson, 999 F.2d 1132 (7th Cir.1993); United Student Aid Funds, Inc. v. Pena, 155 F.3d 1108 (9th Cir.1998); Educational Credit Management Corp. v. Polleys, 356 F.3d 1302 (10th Cir.2004); and Hemar Insurance Corporation of America v. Cox, 338 F.3d 1238 (11th Cir.2003).
. In re Correll was cited approvingly by the Fourth Circuit in Lokey v. Educ. Credit Mgmt. Corp., 98 Fed.Appx. 938, 940-41 (4th Cir. 2004), and Floyd v. Educ. Credit Mgmt. Corp., 54 Fed.Appx. 124, 125 (4th Cir.2002).
. This Court is no different. We are bound by the Fourth Circuit to apply the Brunner Test in all section 523(a)(8) cases. See Frushour, 433 F.3d 393.
. The Fourth Circuit has released the unpublished opinion of Floyd v. Educational Credit Management Corp., 54 Fed.Appx. 124 (4th Cir.2002) in which the court held that the bankruptcy court’s findings that a debtor was entitled to a partial discharge of his student loan debt were not clearly erroneous. In Floyd, the bankruptcy court made particular findings that led it to conclude that a sum certain was an undue hardship for the debtor to repay. Floyd, 54 Fed.Appx. at 125. In doing so, the bankruptcy court adhered to the Brun-ner Test although the Fourth Circuit had yet to adopt it. Id. In reversing the District Court, the Fourth Circuit did not approve or endorse the approach taken by the bankruptcy court. Instead, the Fourth Circuit merely held that the bankruptcy court had not committed clear error. Floyd did not address a partial discharge of a potential uncertain sum.
. The amount forgiven at the end of the repayment period, however, would constitute imputed income and saddle the Debtor with a new debt, due and owing to the Government immediately. 34 C.F.R. § 685.209(c)(4)(iv); 26 U.S.C. § 61 (a)( 12). This fact may be considered in determining whether to grant partial, but delayed discharge of a debtor’s student loan debt. Grove, 323 B.R. at 229-31. In doing so, the court recognizes the potential that a debtor may pay more in discharge of indebtedness income after twenty five years of making $0 monthly payments than he would if he simply paid the principal on his student loan in one lump sum. Id. As such, the "forgiveness” of a debtor’s student loan at the end of the IBRP becomes new debt that is due immediately and, accordingly, is not a true discharge or fresh start.
. In making this finding, the Court applies the Brunner Test. The Court has previously concluded that the debtor has met the first prong of the Brunner Test. The second prong of the Brunner Test, the requirement to project, becomes inapplicable because at the end of the twenty five year repayment term, the Debtor was either able to repay the entirety of her obligation or the remaining portion was an undue hardship; there is no need at the end of twenty five years for the Court to project whether facts exist showing that the Debtor's hardship is likely to persist for a significant portion of the repayment period because the repayment period has been exhausted. Finally, the Court has concluded that the Debtor has sufficiently shown a good faith effort to repay the loans and, thus, has met the third part of the Brunner Test. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496580/ | ORDER DIRECTING FREDDIE L. FULSON, JAMES A. LOWE AND ROBERT C. SANDERS TO APPEAR AND SHOW CAUSE WHY THEY SHOULD NOT BE HELD IN CIVIL CONTEMPT
JOHN E. HOFFMAN, JR., Bankruptcy Judge.
The Chapter 7 trustee of the bankruptcy estate of Nicole Gas Production, Ltd. (“Debtor” or “NGP”), Frederick L. Ransier (“Trustee”), has filed a motion (“Motion”) (Doc. 119) requesting that the Court enter an order directing Freddie L. Ful-son, Robert C. Sanders and James A. Lowe (collectively, “Fulson Parties”) to “appear and show cause as to why each should not be held in civil contempt and sanctioned for violating the automatic stay and attacking the jurisdiction and orders of this Court.” Mot. at 10. In addition, the Trustee requests that the Court, if it holds the Fulson Parties in contempt, also award him reasonable attorneys’ fees and costs associated with prosecuting the Motion. See id. at ll.1 As explained below, the Fulson Parties violated the automatic stay by filing a state court complaint asserting a cause of action that is property of the Debtor’s bankruptcy estate (“Complaint”).2 The Court, therefore, directs the Fulson Parties to appear and show cause why they should not be held in civil contempt for violating the automatic stay. The Court’s Authority to Hold the Ful-son Parties in Civil Contempt
Bankruptcy courts have the authority to enforce the automatic stay3 by levy*510ing sanctions against parties who take actions in violation of the stay. Section 362(k)(l) of the Bankruptcy Code provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k)(l) (emphasis added). There is a split of authority on the question of whether a trustee is an “individual” for purposes of § 362(k)(l). Compare Havelock v. Taxel (In re Pace), 67 F.3d 187, 193 (9th Cir.1995) (holding that the Chapter 7 trustee was not an “individual” for purposes of § 362(h)),4 and Rushton v. Bank of Utah (In re C.W. Mining Co.), 477 B.R. 176, 194 (10th Cir. BAP 2012) (“Based on the well-established precedent of this Court and other circuits, and the plain language of § 362(k), the Court concludes that a trustee acting on behalf of the estate, which is an artificial entity, cannot recover damages under § 362(k) for a violation of the automatic stay”), with Martino v. First Nat’l Bank of Harvey (In re Garofalo’s Finer Foods, Inc.), 186 B.R. 414, 439 (N.D.Ill.1995) (“[I]n the absence of clear language to the contrary, this court declines to apply the narrow definition of ‘individual’ adopted by the bankruptcy court and the Ninth Circuit and instead finds that a chapter 7 trustee is an ‘individual’ for the purposes of section 362[k]”), and Bohn v. Howard (In re Howard), 428 B.R. 335, 339 (Bankr.W.D.Pa.2010) (“[Tjhis Court concludes that the Trustee does have standing to prosecute a motion and/or complaint for damages pursuant to 11 U.S.C. § 362(k) because it seems unlikely that Congress intended to exclude bankruptcy trustees from the protections afforded by Section 362 of the Bankruptcy Code.”), aff'd sub nom. United Bank, Inc. v. Howard (In re Howard), No. 2:10cv962, 2011 WL 578777 (W.D.Pa. Feb. 9, 2011). The Court need not weigh in on this issue, however, because it has a second source of authority to levy sanctions for violations of the automatic stay — its general equitable powers under § 105(a) of the Bankruptcy Code, which provides that the Court “may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). See Pace, 67 F.3d. at 193 (“It is clear that, even though a trustee does not qualify as an ‘individual’ for purposes of section 362[k], a trustee can recover damages in the form of costs and attorney’s fees under section 105(a) as a sanction for ordinary civil contempt.”). Here, the Trustee relies on § 105(a), rather than § 362(k)(l), in seeking the imposition of sanctions. See Mot. at 1; Tr’s Reply in Supp. of Mot. (Doc. 125) at 5-6.
Sixth Circuit case law holds that “[a] litigant may be held in contempt if his adversary shows by clear and convincing evidence that he violate[d] a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts with knowledge of the court’s order.” N.L.R.B. v. Cincinnati Bronze, Inc., 829 F.2d 585, 591 (6th Cir.1987) (internal quotation marks omitted).5 “[T]he automatic stay is exactly the kind of *511definite and specific order of the court contemplated by the Sixth Circuit.” Elder-Beerman Stores Corp. v. Thomasville Furniture Indus., Inc. (In re Elder-Beerman Stores Corp.), 197 B.R. 629, 633 (Bankr.S.D.Ohio 1996) (internal quotation marks omitted). “The party alleging contempt must show that the defendant had knowledge that the [automatic] stay was in effect and nonetheless took an action in violation of the stay.” TLB Equip., LLC v. Quality Car & Track Leasing, Inc. (In re TLB Equip., LLC), 479 B.R. 464, 480 (Bankr.S.D.Ohio 2012).
Proceedings Before the Court
Long before the Complaint was filed, Fulson and Sanders had knowledge of the automatic stay in the Debtor’s bankruptcy case, which was initiated by the filing of an involuntary Chapter 7 petition on March 23, 2009 (“Petition Date”). The petitioning creditors (collectively, “Petitioning Creditors”) were Kemper Casualty Insurance Company, the Commonwealth of Pennsylvania, Midwest Business Capital and Larry J. McClatchey, the Chapter 11 trustee in the case of Nicole Energy Services, Inc. (“NES”). Proceeding pro se, Fulson filed a motion seeking dismissal of the involuntary petition and the imposition of sanctions against the Petitioning Creditors. See Doc. 9. That motion was stricken, see Doc. 14, because as a non-lawyer Fulson was not entitled to respond to the involuntary petition on behalf of the Debtor, a limited liability company. See Local Bankruptcy Rule 1074-l(a) and 9011-2(b). The Debtor failed to respond to the involuntary petition, and the Court entered an order for relief. See Doc. 16. Fulson filed a motion for reconsideration of the order for relief (Doc. 19), but the Court entered an order denying that motion, finding that Fulson did not set forth any ground for relief under Federal Rule of Civil Procedure 59(e). See Order Denying Motions for Reconsideration of Orders for Relief (Doc. 30) at 5. Fulson then filed a motion for summary judgment (Doc. 32), arguing that, because the Petitioning Creditors’ claims were subject to a bona fide dispute, it was improper for them to commence the involuntary case. Having resolved all pri- or motions and objections that were pending before it, and there being nothing left to decide as a matter of law, the Court denied the motion for summary judgment. See Doc. 43.
The Trustee filed a notice of the need to file proofs of claim and served the notice on, among others, Fulson and Sanders, see Doc. 57, who filed proofs of claim against the Debtor’s estate.
Property of the Debtor’s estate included potential claims against Columbia Gas Transmission Corporation (“TCO”). The Trustee filed a motion under Rule 9019(a) of the Federal Rules of Bankruptcy Procedure seeking authority to compromise claims of the Debtor against TCO. In that motion, the Trustee proposed to accept a cash payment of $250,000 in exchange for complete releases of any and all claims of the Debtor against TCO and its affiliated entities. See Doc. 62. Fulson and Sanders filed objections to the motion to compromise, see Docs. 63, 64, 65, and the Court denied the motion, finding, among other things, that the motion did “not contain an estimate of the amount or range of amounts that [the Trustee] might receive if he were to pursue claims against TCO, making it impossible for the Court to determine whether the proposed settlements are within the range of reasonableness.” Doc. 87 at 10.
The Trustee filed a second motion to compromise (“Second Compromise Motion”) (Doc. 104). “The material terms of the compromise are that TCO will pay the bankruptcy estate $250,000.00 in exchange *512for a full, final and complete dismissal and release of any and all claims of NGP against TCO, and its affiliated entities, and in turn, TCO will dismiss any and all claims that it has against NGP.” Doc. 104 ¶ 34. Fulson filed an objection to the Second Compromise Motion (Doc. Ill), as did Sanders (Doc. 112), and the Trustee filed a response in support of the Motion. See Doc. 118. The Second Compromise Motion remains pending.
The Complaint
On January 24, 2013, Lowe, as counsel, and Sanders, as of counsel, filed the Complaint in the Court of Common Pleas of Franklin County, Ohio (“State Court”) against defendants TCO, Columbia Gas of Ohio, Inc., Columbia Gas of Pennsylvania, Inc. and Columbia Gas of Kentucky, Inc. (collectively, “Columbia Entities”) on behalf of Fulson as plaintiff. As discussed above, Fulson and Sanders had knowledge of the pendency of the Debtor’s bankruptcy case and the automatic stay well before the Complaint was filed. The Complaint demonstrates that Lowe also had knowledge of NGP’s bankruptcy case at the time the Complaint was filed. See Compl. ¶¶ 102-08. The Fulson Parties did not, however, provide the Trustee with notice of the filing of the State Complaint. See Mot. at 6. Furthermore, by filing the Complaint, the Fulson Parties violated the automatic stay. In the complaint, Fulson seeks damages allegedly sustained as a result of the Columbia Entities’s alleged violations of the Ohio Revised Code §§ 2923.31-2923.36 (West 2013), the Ohio Corrupt Practices Act (“OCPA”). See Compl. ¶ 6. The OCPA “was modeled on the federal Racketeer Influenced and Corrupt Organizations Act ... [and] has been denominated Ohio’s RICO statute.” State v. Allen, No. 11AP-1130, 2013 WL 596377, at *1 n. 1 (Ohio Ct.App. Feb. 14, 2013) (internal quotation marks omitted). Alleging that the Columbia Entities committed violations of the OCPA, Fulson asserts claims for damages “in his capacity as the 100% owner of NES and NGP.” Compl. ¶ 125. The Court will refer to these claims as the “Ohio RICO Claims.”
The Ohio RICO Claims arose prior to the Petition Date of March 23, 2009 and include 13 predicate acts. Those acts include using interstate mail and wire communications for allegedly fraudulent purposes from December 1, 1999 to September 2002, see Compl. ¶ 124(l)-(4), dates that preceded the Petition Date. The Complaint also alleges other acts that occurred prior to the Petition Date — “fraudulently forcing] NES into involuntary bankruptcy on November 14, 2003[,]” Compl. ¶ 124(5); “unlawfully soliciting] third-parties to join as bankruptcy petitioners from November 2003 through January 2004[,]” Compl. ¶ 124(6); “fraudulently maintaining] the NES involuntary bankruptcy from November 14, 2003 to November 5, 2012[,]” Compl. ¶ 124(7);6 “seeking] the appointment of a Chapter 11 Trustee in the NES bankruptcy[,]” Compl. ¶ 124(8); “from October 2006 through April 2008 ... unlawfully blocking] NES from redress for [other] predicate acts ... by purchasing NES’s damage claims against TCO,” *513Compl. ¶ 124(9); “from September 1, 2002 through April 7, 2004 ... fraudulently crediting] NGP with only one-third of the gas delivered by NGP into the TCO system,” Compl. ¶ 124(10); “using interstate mail and wire communications from September 1, 2002 through April 7, 2004 to fraudulently misappropriate two-third of the gas delivered by NGP into the TCO system,” Compl. ¶ 124(11); “using interstate mail and wire communications from September 1, 2002 to the present to fraudulently seize and ‘escrow1 gas delivered by NES into the TCO system[,]” Compl. ¶ 124(12);7 and “using interstate and mail and wire communications in February and March of 2009 to unlawfully solicit third-parties to file a Chapter 7 involuntary bankruptcy petition against NGP....” Compl. ¶ 124(13). In sum, the Ohio RICO Claims arose entirely prior to the Petition Date.
As already noted, Fulson asserts a claim for damages under the OCPA “in his capacity as the 100% owner of NES and NGP.” Compl. ¶ 125. The Court need not and does not reach the issue whether the Ohio RICO Claims have any merit or the issue whether, as the Trustee contends, Fulson lacked an equity interest in the Debtor.8 Assuming for the sake of this order that Fulson had an equity interest in the Debtor (either directly or indirectly), it is clear that an OCPA claim of an equity holder in his or her capacity as an equity holder is derivative of the claim of the company that allegedly was harmed — here, NGP. Cf. Warren v. Mfrs. Nat’l Bank of Detroit, 759 F.2d 542, 544 (6th Cir.1985) (holding in the context of a claim brought under the federal Racketeer Influenced and Corrupt Organizations Act (“Federal RICO Act”) that “[a]n action to redress injuries to a corporation cannot be maintained by a shareholder in his own name but must be brought in the name of the corporation [because] [t]he shareholder’s rights are merely derivative and can be asserted only through the corporation”) (quoting Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir.1981)). As of the Petition Date, therefore, the Ohio RICO Claims belonged to the Debtor. Property of a debtor’s bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Thus, pre-petition causes of action of a Chapter 7 debtor are property of the debtor’s estate. See Parker v. Goodman (In re Parker), 499 F.3d 616, 624 (6th Cir.2007) (“As ‘legal and equitable interests,’ causes of action that belong to the debtor constitute property of the estate under § 541(a)(1).”). The Chapter 7 trustee has the exclusive right to assert those claims. See Stevenson v. J.C. Bradford & Co. (In re Cannon), 277 F.3d 838, 853 (6th Cir.2002) (holding that a Chapter 7 trustee has the exclusive right to assert causes of action belonging to the debtor).
The Fulson Parties argue that Fulson may assert claims under the OCPA because that statute, unlike the Federal RICO Act, provides standing to persons *514who are injured either “ ‘directly or indirectly’ ” by violations of the OCPA. Surre-ply at 1 (quoting Ohio Rev.Code § 2923.34(E)). It is not entirely clear what the term “indirectly” means in the context of the OCPA, and at least one Ohio court has held that a derivative interest is insufficient to support a claim under the Ohio RICO Act. See Cleveland v. JP Morgan Chase Bank, N.A., No. 98656, 2013 WL 1183332, at *4, 9 (Ohio Ct.App. Mar. 21, 2013) (dismissing a claim under the OCPA because it alleged “an injury derivative of the injury inflicted on others”).
In any event, the Fulson Parties’ argument that Fulson is permitted to pursue litigation in State Court for the difference between what he believes NGP would recover in that litigation and the amount that the Trustee would receive on behalf of the Debtor’s estate if the Second Compromise Motion is approved is inconsistent with controlling Sixth Circuit law. If Ohio RICO Claims exist at all under the facts set forth in the Complaint, then the Debtor indisputably had — and thus the Trustee has — the right to assert them, and the Ohio RICO Claims accordingly are the exclusive property of the Debtor’s bankruptcy estate. See Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th Cir.1997) (“[I]f the debtor could have raised a state claim at the commencement of the bankruptcy case, then that claim is the exclusive property of the bankruptcy estate and cannot be asserted by a creditor.”).
In Van Dresser Corp., Daniel M. Honig-man, a shareholder and creditor of the debtor, Van Dresser Corp. (“Van Dresser”), filed a lawsuit in state court, alleging that Comerica Bank and other defendants “caused him to lose $1,125,000 by wrongfully taking $2.7 million from Van Dresser subsidiaries, thereby forcing Van Dresser to default on loans for which the plaintiff was the guarantor or cosigner.” Id. at 946. Comerica removed the case to the bankruptcy court, which granted Comeri-ca’s motion to dismiss Mr. Honigman’s complaint. See id. “The district court affirmed, holding that Honigman’s claim was derivative, that it was the exclusive property of [Van Dresser’s bankruptcy estate], and that therefore, he had no standing to sue.” Id. The Sixth Circuit began its analysis with the principles discussed above that “the interests of the debtor in property include causes of action” and that “[a] debtor’s appointed trustee has the exclusive right to assert the debtor’s claim.” Id. (internal quotation marks omitted). The court pointed out that “if Honigman’s state claims could have been brought by Van Dresser or its subsidiaries on [the date Van Dresser commenced its bankruptcy case], then the plaintiff is barred from pursing them now.” Id. The Sixth Circuit concluded that he was so barred and that Mr. Honigman was limited to recovering the amount, if any, that he was entitled to receive from the settlement between Comerica and the other defendants and the trustee for Van Dresser’s bankruptcy estate. See Van Dresser Corp., 128 F.3d at 949.9
The Bankruptcy Code provides that the filing of a bankruptcy petition, including an involuntary petition, “operates as a stay, applicable to all entities, of — any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the es*515tate....” 11 U.S.C. § 362(a)(3). Accordingly, it is a violation of the automatic stay for an entity other than the trustee to assert a claim belonging to a Chapter 7 estate. See Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff), 429 B.R. 423, 430 (Bankr.S.D.N.Y.2010) (“The Florida Plaintiffs violated the stay by usurping causes of action belonging to the estate under sections 362(a)(3) and 541 of the Code.”). The Fulson Parties, therefore, violated the automatic stay by bringing the Ohio RICO Claims.
The Fulson Parties make several additional arguments in support of their position that they should not be held liable for violating the automatic stay, but none of those arguments is well taken. First, the Fulson Parties contend that they “carefully considered whether the filing of the [Complaint] would violate the automatic stay in this case and concluded, in good faith, that it would not.” Resp. to Mot. (Doc. 122) at 1. That may well be true, but a “[g]ood faith [belief] is not a defense in civil contempt proceedings.” Gnesys, Inc. v. Greene, 437 F.3d 482, 493 (6th Cir.2005). See also TWM Mfg. Co. v. Dura Corp., 722 F.2d 1261, 1273 (6th Cir.1983) (“[A]dvice of counsel and good faith conduct do not relieve from liability for a civil contempt, although they may affect the extent of the penalty.”) (internal quotation marks omitted).
Second, the Fulson Parties contend that “[t]he damages sought by Fulson are damages to him individually, not damages to the NGP estate.” Resp. to Mot. at 1. Yet the Fulson Parties themselves state that Fulson has a claim under the Ohio RICO Act “[a]s a person with an ownership interest in NGP....” Surreply (Doc. 132) at 2. As discussed above, therefore, this claim is derivative of any claim NGP might have against the Columbia Entities.
Finally, the Fulson Parties argue that they should not be held in contempt because they “have filed an amended RICO complaint that seeks damages arising only from the NES contracts.” Resp. to Mot. at 2. Even if this were true, it would not change the fact that the Trustee incurred attorneys’ fees and costs as a result of the filing of the Complaint. One of the primary purposes of holding a party in civil contempt is to compensate the affected party for injuries caused by the contempt. See TWM Mfg., 722 F.2d at 1273 (“Although civil contempt may serve incidentally to vindicate the court’s authority, its primary purposes are to compel obedience to a court order and compensate for injuries caused by noncompliance. The award of attorney’s fees and expenses to a successful movant may be appropriate in a civil contempt proceeding.”) (citations and internal quotation marks omitted). Further, the amended Complaint seeks to impose liability on the Columbia Entities for, among other things, allegedly “using interstate mail and wire communications to fraudulently force NES into involuntary bankruptcy on November 14, 2003 based on fraudulent creditor claims and for the purpose of fraudulently blocking the NGP from legal redress for predicate acts (1)-(i), in violation of 18 U.S.C. 1341 (mail fraud), 18 U.S.C. 1343 (wire fraud) and Ohio Rev.Code 2913.05 (telecommunications fraud)_” Am. Compl. ¶ 107(5). Thus, the Fulson Parties’ representation that the amended Complaint (Doc. 124) seeks remedies only with respect to NES contracts is simply not true.
In light of the foregoing, the Fulson Parties shall appear and show cause why they should not be held in civil contempt and sanctioned for violating the automatic stay. The show cause hearing will be held on December 9, 2013 at 9:30 a.m. in Courtroom A, United *516States Bankruptcy Court, 170 N. High Street, Columbus, OH 43215.
IT IS SO ORDERED.
. The Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2).
. A copy of the Complaint is attached as Exhibit 1 to the Motion. tor collection efforts and safeguards property of the bankruptcy estate. See 11 U.S.C. § 362(a). Among other things, § 362(a) stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3).
.The filing of a bankruptcy petition triggers an automatic stay that puts a halt to all credi-
. Section 362(h) was renumbered as § 362(k)(l) with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
. The issuance of a show cause order does not shift the burden of proof from the movant, but instead "acts as notice to the relevant party by informing the party what conduct is alleged to be sanctionable, and allows the party an opportunity to respond[J” Cook v. Am. S.S. Co., 134 F.3d 771, 776 (6th Cir.1998). ‘‘[B]y presenting evidence and arguments why sanctions should not be imposed, the party has the opportunity to 'persuade' the court that sanctions are not warranted.” Id.
. Despite the reference to the date of November 5, 2012, this predicate act occurred before the Petition Date. Although the Columbia Entities were petitioning creditors in the NES bankruptcy, the case became a voluntary Chapter 11 case and an agreed order with NES regarding the appointment of a trustee was entered on August 18, 2004, see Case No. 03-67484, Doc. 155, with the appointment approved by an order entered on October 8, 2004. See Case No. 03-67484, Doc. 162. There is no basis for alleging that the Columbia Entities were “maintaining” the NES bankruptcy after the appointment of the NES trustee, which occurred prior to the Petition Date in the NGP case.
. Although the predicate act of "using interstate mail and wire communications from September 1, 2002 to the present to fraudulently seize and ‘escrow’ gas delivered by NES into the TCO system!,]" Compl. ¶ 124(12) (emphasis added), might at first blush appear to relate in part to events occurring after the Petition Date, the Complaint itself states that NES "ceased operations in September of 2002[,]” Compl. ¶ 50, and that NGP "went out of business" in April 2004. Compl. ¶ 101. Accordingly, no gas was seized from NES or NGP after April 2004.
. The discussion of the Ohio RICO Claims in this order should not be construed to suggest that the Court believes that the Ohio RICO Claims have any merit.
. As noted above, Fulson and Sanders have filed objections to the Second Motion to Compromise, with their standing to do so apparently based on the proofs of claim they have filed. The Trustee has filed objections to tirase claims, and contemporaneously with this order the Court is entering orders to show cause as to why the Trustee’s objections should not be sustained. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496581/ | MEMORANDUM DECISION
TIMOTHY A. BARNES, Bankruptcy Judge.
The matter before the court arises out of two complaints filed by Brian T. Sullivan (“Sullivan ”), each seeking a determination of dischargeability of debt under 11 U.S.C. § 523(a)(2)(A): (1) against debtor Michele A. Glenn (“Michele ”) in adversary case no. Ilap01455 (the “Michele Adversary ”): and (2) against debtor Michael R. Glenn, Jr. (“Michael,” and together with *522Michele, “Debtors ” or the “Glenns ”) in adversary case no. 13ap00687 (the “Michael Adversary,” and together with the Michele Adversary, the “Adversary Proceedings ”). The Adversary Proceedings were consolidated for trial and simultaneously tried before the court in a four-day trial. For the reasons set forth herein, the court holds that the debt is dischargeable by each of the Debtors.
This Memorandum Decision constitutes the court’s findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules ”). Separate Orders will be entered pursuant to Bankruptcy Rule 9021.
JURISDICTION
The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “Bankruptcy Code ”). 28 U.S.C. § 1834(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). A proceeding for determination of the dis-changeability of a particular debt arises in a case under title 11 and is specified as a core proceeding. 28 U.S.C. § 157(b)(2)(I); Birriel v. Odeh (In re Odeh), 431 B.R. 807, 810 (Bankr.N.D.Ill.2010) (Wedoff, J.); Baermann v. Ryan (In re Ryan), 408 B.R. 143, 151 (Bankr.N.D.Ill.2009) (Squires, J.).
Accordingly, final judgment is within the scope of the court’s authority.
PROCEDURAL HISTORY
In considering the relief sought by Sullivan, the court has considered the evidence and argument presented by the parties at the four-day trial that took place from July 15, 2013 through July 18, 2013 (the “Trial”).1 has reviewed the complaint in the Michele Adversary and the complaint in the Michael Adversary (together, the “Complaints ”), the attached exhibits submitted in conjunction therewith, and has reviewed and found each of the following of particular relevance:
(1) Michele’s Answer to Complaint of Brian T. Sullivan To Determine Nondischargeability of Debt against Michele A. Glenn [Michele Adv. Dkt. No. 12];
(2) Michael’s Answer to Complaint of Brian T. Sullivan To Determine Nondischargeability of Debt against Michael R. Glenn, Jr. [Michael Adv. Dkt. No. 5];
(3) Agreed Motion To Consolidate for Trial [Michele Adv. Dkt. No. 75; Michael Adv. Dkt. No. 12];
(4) Order Directing Simultaneous Trial of Two Related Adversary Proceedings [Michele Adv. Dkt. No. 76; Michael Adv. Dkt. No. 15];
*523(5) Amended Final Pretrial Order Governing Nondischargeability Complaint [Michele Adv. Dkt. No. 78];
(6) Joint Pretrial Statement [Michele Adv. Dkt. No. 79];
(7) Debtors’ Motion To Amend Pretrial Statement [Michele Adv. Dkt. No. 81; Michael Adv. Dkt. No. 16];
(8) Sullivan’s Response and Objection to Debtors’ Motion To Amend Pretrial Statement [Michele Adv. Dkt. No. 88];
(9) Orders Authorizing Debtors To Amend Pretrial Statement [Michele Adv. Dkt. No. 84; Michael Adv. Dkt. No. 17];
(10) Debtors’ Proposed Findings of Fact and Conclusions of Law [Michele Adv. Dkt. No. 88; Michael Adv. Dkt. No. 18]; and
(11) Sullivan’s Proposed Findings of Fact and Conclusions of Law [Michele Adv. Dkt. No. 89; Michael Adv. Dkt. No. 20].
The court has considered the procedural history and previous court filings in the Michele Adversary, including:
(1) Michele’s Motion for Summary Judgment and related filings [Michele Adv. Dkt. Nos. 31, 32, 35, and 49];
(2) Response to Michele’s Motion for Summary Judgment and related filings [Michele Adv. Dkt. Nos. 56 and 57];
(3) Sullivan’s Motion for Partial Summary Judgment [Michele Adv. Dkt. No. 37];
(4) Response to Sullivan’s Motion for Partial Summary Judgment and related filings [Michele Adv. Dkt. Nos. 51, 53, and 61];
(5) Reply to Sullivan’s Motion for Partial Summary Judgment [Michele Adv. Dkt. No. 60];
(6) Order Denying the Motion of Sullivan for Partial Summary Judgment [Michele Adv. Dkt. No. 69]; and
(7) Order Denying the Motion of Michele for Summary Judgment [Michele Adv. Dkt. No. 70].
Though the foregoing items do not constitute an exhaustive list of the filings in the Adversary Proceedings, the court has taken judicial notice of the contents of the dockets in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. Mar. 8, 1993); Inskeep v. Grosso (In re Fin. Partners), 116 B.R. 629, 635 (Bankr.N.D.Ill.1989) (Sonderby, J.) (authorizing a bankruptcy court to take judicial notice of its own docket).
BACKGROUND
This case involves the failure of the Glenns’ real estate business around 2007, when many such businesses were beginning to fail, and a loan that would prove to be an unsuccessful investment for Sullivan.
Michael and Michele Glenn are husband and wife and previously owned several entities that engaged in real estate development. In the fall of 2007, Michael sought a short-term loan for the business. He engaged the services of Karen Chung (“Chung”), who had previously procured loans for his business, to obtain a $250,000 loan. Chung approached Sullivan, her friend and someone with whom she had some business dealings, and eventually convinced him to provide the loan (the “Sullivan Loan ”).
Prior to making the loan, Sullivan met with Michael, Chung and Chung’s employee, Adrian Lopez (“Lopez ”). Michele did not attend the meeting. The central issue in this case concerns representations that were made at the meeting specifically in relation to a $1 million line of credit for the Debtors’ companies, ostensibly to be ob*524tained from LaSalle Bank (the “LaSalle Loan ”). The Sullivan Loan may be characterized as a “bridge loan” — one intended to finance the Glenns’ business until the LaSalle Loan was finalized, and which would be repaid from the LaSalle Loan itself. At the meeting, Chung and Lopez assured Sullivan that they had secured the LaSalle Loan, subject only to finalizing certain details. As separately established in Chung’s bankruptcy case, Chung’s representation regarding the existence of the LaSalle Loan was false. It was established in Chung’s case that she committed fraud in obtaining the Sullivan Loan, which has not been repaid.
The issues also turn in part on a promissory note Sullivan required Michael, Michele and Chung to sign in connection with the Sullivan Loan, thereby agreeing to be personally liable on the loan. While Sullivan received a note bearing the signature of all three parties, Michele contends that the signature purported to be hers on the note is not authentic and not authorized.
In the Adversary Proceedings, Sullivan seeks a determination that the Sullivan Loan is not dischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code because the debt was procured through fraud, false representation and false pretenses. There are essentially three issues before the court: (1) whether Chung’s fraud should be imputed to the Debtors; (2) whether either of the Debtors independently committed fraud in connection with the loan; and (3) if Michael committed fraud or has Chung’s fraud imputed to him, whether such fraud should be imputed to Michele.
FINDINGS OF FACT2
From the review and consideration of the procedural background, as well as the evidence presented at the Trial, the court determines the salient facts to be as follows, and so finds that:
A. The Glenns and the Glenn Companies Business
(1) The Glenns, who have been married to each other since 1990, previously owned a real estate development and investment business (the “Glenn Companies Business”), which was comprised of several limited liability companies that owned and developed real estate primarily in Illinois and Indiana (the “Glenn Companies ”). The Glenn Companies Business ultimately failed in approximately 2010 due to an excessive debt load and rapidly declining commercial real estate values.
(2) The Glenn Companies included 5M Investment Group, LLC (“5M”), which was the main investment vehicle for all of the real estate properties under development by the Glenn Companies Business. As of November 1, 2007, 5M was owned by Michael, Michele and their three children, with Michele owning 24%, Michael owning 4% and their children owning the remainder in equal shares. Michael was the only managing member in 5M and as such he controlled 5M as well as the entire Glenn Companies Business.3
(3) At the time the Sullivan Loan was made, Michele was studying to be a *525nurse. There is no credible evidence that Michele was involved in any aspect of the day-to-day management of the Glenn Companies Business or in fact had any knowledge of the real estate business generally, or as it pertained to the Glenn Companies Business.
B. The Glenn Companies and Nomadic Consulting
(4) At all relevant times, Chung was the president and a director of Nomadic Consulting Inc. (“Nomadic Consulting ”), a corporation solely owned by Chung. Among other things, Nomadic Consulting helped its clients obtain financing.
(5) For several years, Chung had an agreement with the Glenn Companies whereby Chung would arrange debt or equity financing for certain Glenn Companies’ projects. This arrangement was originally negotiated between Chung and Michael, and over the years, the two worked directly with each other in managing and maintaining this arrangement. Chung’s role was to find individual and institutional parties willing to loan money to or invest in Glenn Companies’ projects, and in return, the Glenn Companies would pay Chung a finders’ fee for successfully arranging such financing. From time to time, through and including November of 2007, acting on behalf of certain of the Glenn Companies, Michael engaged the services of Nomadic Consulting to procure funding for the Glenn Companies.
(6) Michele did not personally have a relationship with Nomadic Consulting. While Chung and Michele spoke several times on a social basis, the two did not discuss the business relations between the Glenn Companies and Nomadic Consulting.
(7) Nomadic Consulting and the Glenn Companies entered into written engagement agreements in connection with some of the engagements by which Nomadic Consulting was retained to procure funding for the Glenn Companies. The form of engagement agreement used by Nomadic Consulting was drafted by Sullivan while he performed legal services for Nomadic Consulting.
(8) With respect to the Glenn Companies’ engagement of Nomadic Consulting to procure the Sullivan Loan, the Debtors produced an unexecuted copy of the form engagement agreement. DX9.
(9) The unexecuted copy of the form engagement agreement and all prior agreements between the parties contain the following paragraph:
Relationship to Client. Nomadic’s relationship with Client and its role with respect to the Services is that of an independent contractor. Nothing herein is intended to create, or shall be construed as creating a fiduciary relationship between Nomadic and Client. Client agrees that Nomadic is engaged only by Client, and that Client’s engagement of Nomadic, and Nomadic’ (sic) Services are not being provided for, or on behalf of, nor are they intended to confer any rights (beneficial or otherwise) upon the directors, officers, employees, agents, lenders or shareholders of Client. Nomadic is not acting in the role of, and its Services specifically exclude those of a “broker,” “dealer”, “underwriter”, “investment advisor”, “loan broker,” “business broker”, “real estate broker”, or “real estate *526agent”, as these terms are defined under applicable state and federal laws.
PX 25; DX 9.
(10) Nomadic Consulting typically-earned a ten percent finder’s fee for arranging financing for the Glenn Companies. Chung’s fee for procuring the Sullivan Loan was $25,000; however, the fee was never paid.
C. The Sullivan Loan and Representations Made in Connection Therewith
(11) In the fall of 2007, Michael engaged Nomadic Consulting to procure funding for the Glenn Companies. Chung approached Sullivan to see if he would be willing to make a short-term loan in the amount of $250,000 to Michael for use in the Glenn Companies Business. She explained to Sullivan that she had recently arranged bank financing for the Glenn Companies from LaSalle Bank, the proceeds of which would be available -within a few weeks upon final approval, and would be sufficient to pay off the proposed loan from Sullivan.
(12) On October 31, 2007, Sullivan met with Michael, Chung and Lopez at Nomadic Consulting’s office. This was the first time that Sullivan and Michael had met. The following representations were made at the meeting:
a.Lopez represented that he and Chung had recently arranged and obtained approval of the LaSalle Loan, a $1 million line of credit from LaSalle Bank for the Glenn Companies Business, and that the only remaining step needed to draw on the funds was the execution of loan agreements and other documents, which LaSalle Bank was then in the process of preparing. Lopez also said that funds from the LaSalle Loan were expected to be available in a few weeks, which would be sufficient to repay the proposed bridge loan from Sullivan;
b. Michael represented that the Glenn Companies needed the Sullivan Loan and would use a portion of the $250,000 to finish grading and asphalt paving work, which needed to be done before cold weather set in, and also in order for certain development property to be ready for refinancing or sale by early spring of 2008. Michael explained that the remaining portion of the Sullivan Loan would be used as working capital in the Glenn Companies Business; and
c. Michael offered and agreed to pay Sullivan an interest rate of $5,000 per week on the Sullivan Loan for what was represented to be a two or three-week loan.
(13) At the meeting, Sullivan stated that he would only make the loan on the condition that both Michael and Michele obligate themselves to repay the loan and execute a promissory note to that effect. Michael agreed to this condition and told Sullivan that he would arrange to have Michele sign and execute the promissory note for the loan.
(14) At the meeting, Sullivan asked for the status of the LaSalle Loan. Lopez stepped out of the meeting room, purportedly to make a phone call to La-Salle Bank. He then came back and told Sullivan in Michael’s presence that he had just spoken with a representative from LaSalle Bank who confirmed that the $1 million LaSalle Loan had been approved. Sullivan *527then spoke with Chung, who confirmed that the LaSalle Loan was approved. Sullivan told Chung that as a condition of making the loan, she too would be required to execute a promissory note and agree to be a principal obligor on the loan, to which she agreed.
(15) In reliance on the foregoing, and in consideration of the execution of the Glenn Note by Michael, the executed note from Chung and Sullivan’s belief that Michele also executed the Glenn Note, Sullivan made the Sullivan Loan, the terms of which required repayment within 15 days. Although the Sullivan Loan was made to Michael individually, Sullivan and Michael agreed that the proceeds of the loan would be used in the Glenn Companies Business.
(16) The parties did not create any loan documentation and the signed promissory notes therefore stand as the sole documents controlling the Sullivan Loan. Given this lack of loan documentation, the parties disagree over who was actually the borrower of the Sullivan Loan: Michael claims that it was the Glenn Companies, while Sullivan claims that it was Michael. Given the existence of the promissory notes, it is unnecessary for the court to resolve this disagreement. The purpose of the Sullivan Loan was clearly for the Glenn Companies, but the promissory notes make the obligors thereunder liable for it.
(17) Accordingly, on November 1, 2007, Sullivan electronically transferred $250,000 to a 5M bank account designated by Michael. At that time, the 5M account had an overdrawn balance of $244,569.25 in its bank account, and the entirety of the Sullivan Loan was immediately applied to cover this overdraft. However, as Michael credibly testified, and as evidenced by Defendant’s Exhibit 1, 5M had recently closed on a real estate transaction from which it was to receive $345,587.55, and the closing proceeds were intended to be used to cover the overdraft in the bank account. Michael explained that because Sullivan transferred $250,000 into the 5M account before 5M received its closing proceeds, Sullivan’s loan proceeds were the first to become available to cover the overdraft. The November 2007 bank statement of 5M shows that when the closing proceeds actually became available the following day, 5M had a balance of $351,008.30 in working capital. See DX 1.
(18) The Sullivan Loan was not repaid in 2-3 weeks as anticipated. There was a fair amount of back and forth between the parties about how this would be fixed, but ultimately the loan was not repaid, even in part.
(19) In December 2007 or early January 2008, contrary to the representations they made to Sullivan at the October 31, 2007 meeting, Chung and Lopez told Sullivan that the LaSalle Loan had not been approved by LaSalle Bank.
(20) In the fall of 2009, Sullivan learned from LaSalle Bank that neither Chung nor Lopez had ever applied for a line of credit with LaSalle Bank for the Glenn Companies. Thus, the representations that Chung and Lopez made to Sullivan at the meeting regarding LaSalle Bank’s approval of the line of credit were false. Michael learned of these misrepresentations through Sullivan after Sullivan made the discovery.
(21) The Sullivan Loan and Chung’s promissory note were the subject of *528an adversary proceeding filed by Sullivan against Chung in Chung’s bankruptcy case in this District (Bankr.No. 08bkl5443). Sullivan filed a complaint against Chung on September 12, 2008, objecting to her discharge of liability for four loans Sullivan made to her and others, one of which was the Sullivan Loan, on the basis that the loans were procured by her fraud (the “Chung Adversary ”) ' (Adv. No. 08ap00739). On May 18, 2010, after a three-day trial, Judge Doyle of this court ruled in favor of Sullivan, finding that the four loans, including the Sullivan Loan, were nondischargeable as to Chung pursuant to section 523(a)(2)(A) because they were procured through Chung’s fraud. PX 15 (copy of trial transcript dated May 18, 2010, p. 54). Specifically, Judge Doyle determined that Chung made false representations with the intent to deceive that induced Sullivan to make the Sullivan Loan. Id. Judge Doyle made no findings with respect to the Glenns’ participation in such fraud. However, she indicated that based on the facts before her, she believed that Michael and Sullivan were both deceived by Chung regarding the existence of the LaSalle Loan. PX 15 (p. 51).
D. Execution of the Glenn Note
(22)On November 1, 2007, Sullivan sent Michael an email with an attached promissory note, instructing Michael and his wife to each sign the note. PX 23. Approximately 25 minutes later, an email containing the executed Glenn Note and wiring instructions for the Sullivan Loan was sent to Sullivan from Michael’s email account. Id. The email was sent from a computer at Michael’s office in Illinois.
(23) Prior to the Trial, Michael asserted that his signature on the Glenn Note was his own but that Michele’s signature on the note was not actually hers and that he did not know who signed her name. At the Trial, however, he testified that he did not think that he signed and emailed the Glenn Note because at the time the email was sent, he was in Portage, Indiana, which is a long distance from his office and would appear to make it physically impossible for him to have sent the email. He further testified that he did not know who sent the email, but that it is highly likely that he directed someone at his office to do so. He stated, however, that he does not contest the validity of the signature of his name on the Glenn Note.
(24) Michael’s testimony regarding the circumstances surrounding the sending of the email containing the executed Glenn Note was entirely lacking in credibility. His purported inability to recall any details regarding the sending of the email from his own account is simply not credible. Based on the totality of the circumstances, the court finds that either Michael sent the email or it was sent for him at his direction. In either case, Michael is responsible for the delivery of the Glenn Note to Sullivan via that email.
(25) Michele testified on May 9, 2011, at her first Meeting of Creditors in her bankruptcy case, that the signature on the last page of the Glenn Note above the printed name “Michele A. Glenn” is not hers and that she does not know who signed her name. This was the first time that Sullivan heard Michele deny *529that she signed the Glenn Note. She similarly testified at the Trial. Michael also testified at the Trial that the signature on the Glenn Note is not Michele’s and that he did not know who signed her name on the note. The issue of Michele’s signature on the Glenn Note will be further discussed below.
APPLICABLE LAW
The party seeking to establish an exception to the discharge of a debt bears the burden of proof. Goldberg Secs., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992); Zamora v. Jacobs (In re Jacobs), 448 B.R. 453 (Bankr.N.D.Ill.2011) (Sonderby, J.). A creditor must meet this burden by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re McFarland, 84 F.3d 943, 946 (7th Cir.1996), cert. denied, 519 U.S. 931, 117 S.Ct. 302, 136 L.Ed.2d 220 (1996). To further the policy of providing a debtor a fresh start, exceptions to the discharge of a debt are to be construed strictly against a creditor and liberally in favor of a debtor. See In re Crosswhite, 148 F.3d 879, 881 (7th Cir.1998); Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir.1994).
Section 523 enumerates specific, limited exceptions to the dischargeability of debts. Section 523(a)(2)(A) provides, in relevant part, that an individual debtor is not discharged 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 debt- or’s or an insider’s financial condition. ...
11 U.S.C. § 523(a)(2)(A).
First, a plaintiff must establish that the debtor owes him a debt. See Zirkel v. Tomlinson (In re Tomlinson), Nos. 96 B 27172, 96 A 1539, 1999 WL 294879, at *7 (Bankr.N.D.Ill. May 10, 1999) (Katz, J.). Second, a plaintiff must show that the debt falls within one of the specified grounds under section 523(a)(2)(A). Wachovia Sec., LLC v. Jahelka (In re Jahelka), 442 B.R. 663, 668 (Bankr.N.D.Ill.2010) (Goldgar, J.). Three separate grounds for holding a debt to be nondischargeable are included under section 523(a)(2)(A): false pretenses, false representation and actual fraud. Id.; see also Deady v. Hanson (In re Hanson), 432 B.R. 758 (Bankr.N.D.Ill.2010) (Squires, J.); Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr.N.D.Ill.2001) (Goldgar, J.).
The Complaints allege claims under section 523(a)(2)(A) based on false representations, false pretenses and actual fraud under different theories of liability. The complaint in the Michele Adversary contains four counts, each pled in the alternative. Count I alleges that the debt was obtained by false statements, false pretenses and actual fraud of Chung and Lopez as Michele’s purported agents. Count II alleges that Michele gave express or implied authority to her husband or another third party to execute the Glenn Note on her behalf. Count III states that Michele ratified her agreement to the Sullivan Loan and the Glenn Note, or is otherwise estopped from disaffirming such agreement.4 Count IV alleges that Mi*530chael committed fraud and that as a purported agent of Michele, his fraudulent actions should be imputed to her. The complaint in the Michael Adversary contains two counts: Count I seeks to hold the Sullivan Loan nondischargeable on the ground that it was obtained by false statements, false pretenses and actual fraud of Chung and Lopez as Michael’s purported agents, and Count II alleges that the Sullivan Loan was obtained by the false statements, false pretenses and actual fraud of Michael.
A. False representation and false pretenses
To except a debt from discharge under section 523(a)(2)(A) based on false pretenses or a false representation, the creditor must establish the following elements: (1) the debtor made a false representation or omission of fact; (2) which the debtor (a) knew was false or made with reckless disregard for its truth and (b) made with an intent to deceive; and (3) upon which the creditor justifiably relied. Reeves v. Davis (In re Davis), 638 F.3d 549, 553 (7th Cir.2011); see also Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir.2010); In re Bero, 110 F.3d 462, 465 (7th Cir.1997); Jahelka, 442 B.R. at 668-69. A creditor must establish all three elements to support a finding of false pretense or false representation. Ryan, 408 B.R. at 156; see also Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 700 (Bankr.N.D.Ill.2002) (Squires, J.). Failure to establish any one fact is outcome determinative. Hanson, 432 B.R. at 771 (citing Jairath, 259 B.R. at 314).
Under section 523(a)(2)(A), a false representation is an express misrepresentation that can be demonstrated either by a spoken or written statement or through conduct. See Scarpello, 272 B.R. at 700; In re Philopulos, 313 B.R. 271, 281 (Bankr.N.D.Ill.2004) (Schmetterer, J.); New Austin Roosevelt Currency Exch., Inc. v. Sanchez (In re Sanchez), 277 B.R. 904, 908 (Bankr.N.D.Ill.2002) (Schmetterer, J.). As a spoken or written statement is not required for a false representation, “[a] debtor’s silence regarding a material fact can constitute a false representation under § 523(a)(2)(A).” Hanson, 432 B.R. at 772 (internal quotation omitted); see also Scarpello, 272 B.R. at 700. “A debt- or’s failure to disclose pertinent information may be a false representation where the circumstances imply a specific set of facts and disclosure is necessary to correct what would otherwise be a false impression.” Ryan, 408 B.R. at 157 (citing Trizna & Lepri v. Malcolm (In re Malcolm), 145 B.R. 259, 263 (Bankr.N.D.Ill.1992) (Wedoff, J.)).
In contrast, “[Qalse pretenses in the context of section 523(a)(2)(A) include implied misrepresentations or conduct intended to create or foster a false impression.” Media House Productions, Inc. v. Amari (In re Amari), 483 B.R. 836, 846 (Bankr.N.D.Ill.2012) (Schmetterer, J.) (citing Sterna v. Paneras (In re Paneras), 195 B.R. 395, 406 (Bankr.N.D.Ill.1996) (Squires, J.)). The implication arises when a debtor, with the intent to mislead a creditor, engages in “a series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, ... or understanding of a transaction, in which [the] creditor is wrongfully induced by [the] debtor to transfer property or extend *531credit to the debtor ....” Paneras, 195 B.R. at 406 (internal quotations omitted); see also Amari, 483 B.R. at 846.
A false pretense does not necessarily require overt misrepresentations. Paneras, 195 B.R. at 406. “Instead, omissions or a failure to disclose on the part of the debtor can constitute misrepresentations where the circumstances are such that omissions or failure to disclose create a false impression which is known by the debtor.” Id.; see also Hanson, 432 B.R. at 771 (finding that a false pretense is “established or fostered willfully, knowingly and by design; it is not the result of inadvertence”).
An element common to a false representation and false pretenses is reliance. The United States Supreme Court has clarified that section 523(a)(2)(A) requires only a showing of “justifiable” reliance. See Field v. Mans, 516 U.S. 59, 73-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995); see also Mayer v. Spanel Int’l Ltd., 51 F.3d 670, 673 (7th Cir.1995). Justifiable reliance is a less demanding standard than reasonable reliance and “does not mean that [the creditor’s] conduct must conform to the standard of the reasonable man.” Paneras, 195 B.R. at 406 (quoting Field, 516 U.S. at 71, 116 S.Ct. 437). Rather, justifiable reliance “requires only that the creditor did not ‘blindly [rely] upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.’ ” Ojeda, 599 F.3d at 717 (quoting Field, 516 U.S. at 71, 116 S.Ct. 437).
Whether a party justifiably relies on a misrepresentation is “determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff.” Id.; see also Bombardier Capital, Inc. v. Dobek (In re Dobek), 278 B.R. 496, 508 (Bankr.N.D.Ill.2002) (Schmetterer, J.). “[A] person is justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’ ” Mercantile Bank v. Canovas, 237 B.R. 423, 429 (Bank.N.D.Ill.1998) (Lefkow, J.) (quoting Field, 516 U.S. at 70, 116 S.Ct. 437). “However, a plaintiff may not bury his head in the sand and willfully ignore obvious falsehoods.” Johnston v. Campbell (In re Campbell), 372 B.R. 886, 892 (Bankr.C.D.Ill.2007) (internal quotations omitted).
Several courts in this Circuit have determined that “[t]o satisfy the reliance element of § 523(a)(2)(A), the creditor must show that the debtor made a material misrepresentation that was the cause-in-fact of the debt that the creditor wants excepted from discharge.” Scarpello, 272 B.R. at 700; see also In re Mayer, 51 F.3d 670, 676 (7th Cir.1995) (“reliance means the conjunction of a material misrepresentation with causation in fact”); Hanson, 432 B.R. at 773. Accordingly, these courts have required the plaintiff to show that the debtor’s conduct proximately caused the plaintiffs loss, thus making proximate cause an additional requirement under section 523(a)(2)(A). See In re Luster, 50 Fed.Appx. 781, 784 (7th Cir.2002); In re Tomlinson, 1999 WL 294879, at *7; Microtech Int’l v. Horwitz (In re Horwitz), 100 B.R. 395, 397-398 (Bankr.N.D.Ill.1989) (Katz, J.).
B. Actual Fraud
A different analysis is used when a creditor alleges actual fraud. In order to except a debt from discharge on the basis of actual fraud, a creditor must establish that (1) a fraud occurred, (2) the debtor intended to defraud, and (3) the fraud created the debt that is the subject of the discharge dispute. Jahelka, 442 *532B.R. at 669; see also Ryan, 408 B.R. at 157; Scarpello, 272 B.R. at 701; Jairath, 259 B.R. 308, 314. The fraud exception to the dischargeability of debts in bankruptcy does not reach constructive frauds, only actual ones. McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir.2000); see also Ryan, 408 B.R. at 157.
Unlike false pretenses and false representations, “actual fraud” does not require proof of a misrepresentation or reliance. McClellan, 217 F.3d at 892; see also Jahelka, 442 B.R. at 669; Hanson, 432 B.R. at 771. While there is no definite rule defining fraud, “it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.” McClellan, 217 F.3d at 893 (internal quotations omitted).
C.Intent
Scienter, or intent to deceive, is also a required element under section 523(a)(2)(A) whether the claim is for a false representation, false pretenses, or actual fraud. Mayer v. Spanel Int'l Ltd. (In re Mayer), 51 F.3d 670, 673 (7th Cir.1995), cert. denied, 516 U.S. 1008, 116 S.Ct. 563, 133 L.Ed.2d 488 (1995); Pearson v. Howard (In re Howard), 339 B.R. 913, 919 (Bankr.N.D.Ill.2006) (Schwartz, J.). Intent to deceive is measured by the debtor’s subjective intention at the time of the representations or other purportedly fraudulent conduct. See Scarpello, 272 B.R. at 700; see also CFC Wireforms v. Monroe (In re Monroe), 304 B.R. 349, 356 (Bankr. N.D.Ill.2004) (Schmetterer, J.). Subsequent acts of fraud or omissions do not demonstrate that the debtor had the requisite intent at the time the representations were made. Standard Bank & Trust Co. v. Iaquinta (In re Iaquinta), 95 B.R. 576, 578 (Bankr.N.D.Ill.1989) (Squires, J.).
An intent to deceive may be established through direct evidence or inference. Monroe, 304 B.R. at 356 (citing In re Sheridan, 57 F.3d 627 (7th Cir.1995)). Because direct proof of fraudulent intent is often unavailable, fraudulent intent “may be determined from the totality of the circumstances of a case and may be inferred when the facts and circumstances present a picture of deceptive conduct on the debtor’s part.” Cent. Credit Union of Ill. v. Logan (In re Logan), 327 B.R. 907, 911 (Bankr.N.D.Ill.2005) (Cox, J.) (internal quotations omitted); see also Hanson, 432 B.R. at 773. Thus, “[w]here a person knowingly or recklessly makes false representations which the person knows or should know will induce another to act, the finder of fact may logically infer an intent to deceive.” Jairath, 259 B.R. at 315.
D.Statements Relating to Financial Condition
Even in cases where all of the foregoing can be established, section 523(a)(2)(A) provides a safe harbor for statements relating to a debtor’s or an insider’s financial condition. 11 U.S.C. § 523(a)(2)(A). Specifically, this section provides that “a statement respecting the debtor’s or an insider’s financial condition” does not give rise to a finding of nondischargeability thereunder. Id. When read in conjunction with section 523(a)(2)(B), it is clear that such statements are only safe harbored if not in writing. Statements in writing are not safe harbored. 11 U.S.C. § 523(a)(2)(B); see also Bednarsz v. Brzakala (In re Brzakala), 305 B.R. 705, 709 (Bankr.N.D.Ill.2004) (Goldgar, J.).
Thus, any oral statements made by a debtor concerning the debtor’s or an insider’s financial condition do not form a basis for nondischargeability. See Amari, 483 B.R. at 848-49; see also In re Bryson, 187 B.R. 939, 960 (Bankr.N.D.Ill.1995) (Schmetterer, J.) (“[I]t is improper to ap*533ply § 523(a)(2)(A) to false pretenses regarding a debtor’s own or an insider’s financial condition”).
In Stelmokas v. Kodzius, the Seventh Circuit Court of Appeals noted “that a majority of the bankruptcy courts in this circuit have opted for the narrow construction” of what constitutes a statement respecting the debtor’s financial condition under section 523(a)(2)(A), but did not decide the issue. 460 Fed.Appx. 600, 604 (7th Cir.2012) (citing cases). The narrow view is that the “statement must paint a picture about the debtor’s overall financial health, while the broad view encompasses statements of that nature along with any other that conveys significant information about debtor’s finances.” Id. at 603. The narrow construction limits the safe harbor to, for example, “statements concerning a debtor’s (or insider’s) overall net worth or earning capacity, or statements describing the overall economic condition of the entity.” Goldberg & Assocs., Ltd. v. Holstein (In re Holstein), 272 B.R. 463, 481 (Bankr.N.D.Ill.2001) (Sonderby, J.). Another circuit has further reasoned that because oral communication “is often informal and spontaneous ... it is logical to give more leeway (and more dischargeability) to a debtor who errs in stating his or her overall position orally....” Cadwell v. Joelson, 427 F.3d 700, 707 (10th Cir.2005).
DISCUSSION
None of the parties have raised the issue of whether this court has constitutional authority to enter a final judgment on all counts of the Complaints in light of the United States Supreme Court’s decision in Stern v. Marshall, 564 U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). This court has an independent duty to determine whether it has such authority. Rutkowski v. Adas (In re Adas), 488 B.R. 358, 379 (Bankr.N.D.Ill.2013) (Hollis, J.).
All of the counts in the Complaints are based on section 523(a)(2)(A) of the Bankruptcy Code. Section 523 is unequivocally a bankruptcy cause of action. While such actions may turn on state law, determining the scope of the debtor’s discharge is a fundamental part of the bankruptcy process. See Deitz v. Ford (In re Deitz), 469 B.R. 11, 20 (9th Cir. BAP 2012). As observed by one bankruptcy court, “there can be little doubt that [a bankruptcy court], as an Article I tribunal, has the constitutional authority to hear and finally determine what claims are non-dischargea-ble in a bankruptcy case.” Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 312 (Bankr.N.D.Tex.2011); see also Deitz, 469 B.R. at 20; White Eagle, Inc. v. Boricich (In re Boricich), 464 B.R. 335, 337 (Bankr. N.D.Ill.2011) (Schmetterer, J.).
Thus, even in light of the Seventh Circuit’s later opinions regarding Stem, see Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir.2013) and Ortiz v. Aurora Health Care, Inc. (In re Ortiz), 665 F.3d 906 (7th Cir.2011), the court concludes that it has constitutional authority to enter a final judgment in the Adversary Proceedings.
A. The Debtors’ Liability on the Sullivan Loan
Before determining the issue of dis-chargeability, it must first be established that the Glenns in fact owe the underlying obligation. In other words, there must first be a debt to discharge. With respect to Michael, this conclusion is simple, as the parties do not dispute that he is liable on the Sullivan Loan. With respect to Michele, on the other hand, the parties disagree as to whether she is liable on the debt, as the Debtors contend that Michele was not a party to the transaction, did not sign the Glenn Note or authorize anyone to sign on her behalf, and did not ratify *534her purported signature on the Glenn Note. Other than through execution of the Glenn Note, Sullivan has advanced no theory under which Michele might be obligated to the transaction.
Sullivan has provided ample evidence refuting Michele’s claim that she did not sign the Glenn Note. Sullivan produced several notarized documents in connection with the Glenn Companies bearing Michele’s signature. See PX 49 (quit claim deed); PX 50 (specific power of attorney from Michele to Michael); PX 59 (specific power of attorney from Michele to Michael); PX 60 (specific power of attorney from Michele to Michael); PX 61 (warranty deed), PX 62 (limited power of attorney from Michele to Michael) (collectively, the “Notarized Documents ”). These documents are of significance here because Michele’s signature on the Glenn Note appears to be similar to the signature on the Notarized Documents. Sullivan called two notaries public — Lisa M. Unzueta and Robert Romero — who testified that while they could not recall notarizing the documents bearing their signatures as notaries public, their signatures on such documents were authentic and that they would not have notarized a document containing a signature that was not made by the individual whose signature was being witnessed. Michele, however, testified that the signature bearing her name on the Notarized Documents was not hers, and that she did not know who signed her name on those documents.
At the Trial, the Debtors sought to counter Sullivan’s notarial evidence through Michele’s and Michael’s direct testimony in relation to the execution of the Glenn Note by testifying that Michele’s signature on the Glenn Note is not authentic. Sullivan objected, arguing that Illinois law provides that notarized documents preclude a challenge to the authenticity of the signature thereon by an interested party to the transaction. See Resolution Trust Corp. v. Hardisty, 269 Ill.App.3d 613, 207 Ill.Dec. 62, 646 N.E.2d 628, 631 (1995). The court allowed the presentation of the evidence, subject to a later ruling on Sullivan’s objection, on which it reserved judgment. The court now sustains Sullivan’s objection in that regard.
In Illinois, the act of notarization tends to prove the authenticity of the witness’ signature. In re Koziol, 236 Ill.App.3d 478, 177 Ill.Dec. 279, 603 N.E.2d 60, 63 (1992). The certificate of acknowledgment by a notary is “prima facie proof of the execution of the instrument.” Krueger v. Dorr, 22 Ill.App.2d 513, 161 N.E.2d 433, 440 (1959). Where an instrument has been acknowledged by a notary, it may not be impeached except for fraud and imposition, and it is the party seeking to impeach such an acknowledgement that must do so by providing clear and convincing evidence .coming from a disinterested witness. Hardisty, 207 Ill.Dec. 62, 646 N.E.2d at 631.
The testimony of the Glenns, who are interested parties, is unsupported otherwise and does not overcome acknowledgment of the notaries on any of the notarized documents by clear and convincing evidence. Absent such testimony, there is no credible evidence of fraud or imposition as there is no evidence that anyone else other than Michele signed her name on these documents. Based on the foregoing, the court finds that the notarizations on the Notarized Documents prove the authenticity of Michele’s signature on such documents.
Even absent such a ruling, the court has little difficulty concluding that Michele’s signature on the Sullivan Loan is either Michele’s authentic signature or was signed at her behest. In this regard, neither Michele’s testimony that she did not *535sign the Glenn Note nor Michael’s testimony with respect to the delivery of the Glenn Note was credible. Further, (1) the signature on the Notarized Documents bears a noticeable similarity to the signature on the Glenn Note; (2) Michele represented that, at her husband’s request, she previously signed promissory notes as a guarantor for loans provided to the Glenn Companies; and (3) Michele failed to deny that she signed the Glenn Note until the time of her 341 meeting in May 2011. Based on the foregoing, the court finds that the signature on the Glenn Note belongs to Michele.5
Even if the court were to conclude that Michele’s signature on the Glenn Note is not actually hers, based on the relevant facts, the court would conclude that her husband (or someone acting at the request of Michele or her husband) signed the note under her express or implied authority. The email containing the Glenn Note was sent from Michael’s email account, which indicates that Michael was involved in securing Michele’s signature on the Glenn Note. As discussed above, Michael’s testimony regarding the circumstances governing that email’s sending was entirely lacking in credibility. The Glenns testified that in the past, Michael signed his wife’s name on documents. Under such circumstances, if Michael signed Michele’s name on the Glenn Note (or directed someone else to sign her name), his actions would have been made with Michele’s actual or implied authorization. There is simply no credible evidence that suggests that Michele’s signature on the Glenn Note is a forgery. Sullivan has established that Michele’s purported signature on the Glenn Note is legally hers, thus making her liable on the debt.6
B. Dischargeability of the Sullivan Loan as to the Debtors
As noted above, having established that there is in fact a debt of each Debtor which might indeed be • discharged, the court must now ask if such debt should be determined to be nondischargeable. Given that Sullivan predicates his Complaints on section 523(a)(2), this means that the court must find the existence of false pretenses, false representation(s), or actual fraud, 11 U.S.C. § 523(a)(2)(A), and find that such fraud is attributable directly or indirectly to the Debtors. See Jahelka, 442 B.R. at 668.
1. Imputation of the Chung Fraud
There is no dispute that the Sullivan Loan was procured through the fraud of Karen Chung, as this has been stipulated to by the parties and determined by Judge Doyle in the Chung Adversary. The question remains, however, whether that fraud should be imputed to the Glenns, and/or whether there exists an independent fraud to which the Glenns should be held accountable. The court will discuss each of Sullivan’s theories in this regard, in turn.
Sullivan contends that because it has been established that the Sullivan Loan *536was procured through the fraud of Chung, the loan is also nondischargeable as to the Debtors pursuant to section 523(a)(2)(A) without requiring any proof that either of the Debtors themselves committed or were complicit in the fraud in obtaining the loan. Sullivan purports to base this argument on the plain language of section 523(a)(2)(A), which he contends only requires that the debt be that of the debtor, not that the fraud be committed by the debtor himself. Although the court has already addressed and rejected this statutory construction argument in denying Sullivan’s Motion for Partial Summary Judgment in the Michele Adversary, it will be briefly discussed again here.
Courts in this Circuit have observed that section 523(a)(2) “does not except from discharge every debt somehow connected with a fraud.” Jahelka, 442 B.R. at 669; see also Schatz v. Livermore (In re Livermore), Nos. 12 B 30720, 12 A 1689, 2013 WL 1316549, at *6 (Bankr.N.D.Ill. Apr. 3, 2013) (Goldgar, J.); WISH Acquisition, LLC v. Salvino (In re Salvino), 373 B.R. 578, 588 (Bankr.N.D.Ill.2007) (Wedoff, J.) (citing In re Rountree, 478 F.3d 215, 219 (4th Cir.2007) (finding that “[a] plain reading of [§ 523(a)(2)(A) ] demonstrates that Congress excepted from discharge not simply any debt incurred as a result of fraud but only debts in which the debtor used fraudulent means to obtain money. ...”) (emphasis added)).
In similar fashion, the Ninth Circuit has recently determined that the exception to discharge in section 523(a)(19) applies only to debtors who have themselves violated the securities laws that caused the debt. In re Sherman, 658 F.3d 1009, 1014-15 (9th Cir.2011). In making that determination, the panel observed that in ensuring that the “honest but unfortunate debtor” receives a fresh start, exceptions to discharge of a debt under section 523(a)(2)(A) and (a)(4) are applied only in those cases where the debtor committed the fraud.7 Id. The court sees no principled reason to treat section 523(a)(2) any differently than the Ninth Circuit treated section 523(a)(19). The Ninth Circuit’s analysis itself makes clear the parallels between section 523(a)(2)(A) and (a)(19). Further, existing law in this Circuit in this regard runs contrary to Sullivan’s interpretation.
Sullivan argues that a debt created by one party’s fraud makes the same debt nondischargeable as to all those liable for the debt. Such an approach is contrary to the Seventh Circuit’s tests for discharge-ability under section 523(a)(2)(A). Taken to its extremes, Sullivan’s argument would act as an absolute rule, barring discharge despite a debtor’s innocence relating to the fraud. As discussed above, however, the standards established in this Circuit do not limit the determination to testing whether the debt was procured through fraud in general alone; rather, the requirement under section 523(a)(2)(A) is that the debtor himself acted with the requisite intent in procuring the debt by false pretenses, false representation, or actual fraud. *537Thus, the court rejects Sullivan’s narrow reading of the statute.
There is in fact ample case law concerning dischargeability of debt procured through a third party’s fraud, rather than that of the debtor, but that case law also puts paid to Sullivan’s argument. Under that body of law, courts have found the debt nondischargeable as to an innocent debtor if the plaintiff establishes that the fraudulent acts of a partner or agent of the debtor can be imputed to the debtor. See, e.g., Casablanca Lofts LLC v. Abrham, 436 B.R. 530, 537 (N.D.Ill.2010) (imputing the fraud of a partner to the debtor); Love v. Smith (In re Smith), 98 B.R. 423, 426 (Bankr.C.D.Ill.1989) (imputing the fraud of an agent to the debtor). Sullivan’s interpretation of the statute would render this Circuit’s law regarding the application of agency and partnership principles in the context of section 523(a)(2)(A) meaningless, as under his theory, all fraud-related debt would be nondischargeable as to any innocent debtor.
Stated another way, what Sullivan wishes this court to adopt is a bright-line rule that a debt arising out of fraud is nondischargeable as to any party obligated on the debt, regardless of that party’s complicity in the fraud. A party’s innocence would be irrelevant. Not only does such a rule violate the fundamental precept of bankruptcy, to afford relief to the “honest but unfortunate debtor,” Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934); see also Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007); Grogan, 498 U.S. at 284 n. 11, 111 S.Ct. 654; Jendusa-Nicolai v. Larsen, 677 F.3d 320, 324 (7th Cir.2012); Stamat v. Neary, 635 F.3d 974, 978 (7th Cir.2011), but it runs contrary to the established case law in this arena noted above. This court has been unable to find a single court that has strictly applied section 523(a)(2) to a debtor found innocent of the fraud in question.
In Stamat, the Seventh Circuit noted in the context of section 727 that “[t]he Bankruptcy Code provides that a bankruptcy court ‘shall grant the debtor a discharge,’ but then lists several exceptions that deny the privilege of discharge to dishonest debtors.” Id. at 978. This same principle has been relied on by the Seventh Circuit in considering exceptions to discharge under section 523. In re Hudgens, 149 Fed.Appx. 480, 483 (7th Cir.2005).
The Supreme Court in Grogan inquired as to the nature of the fraud exception in section 523, and after examining its prior inquiry in Brown v. Felsen, 442 U.S. 127, 129-130, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), concluded that Congress’ change of the term “judgment” to “liability” in section 523 was to include in the exception from discharge not just those debts for which a judgment of fraud had been obtained against the debtor, but to not allow “debtors facing fraud judgments to have those judgments discharged.” Grogan, 498 U.S. at 290, 111 S.Ct. 654. In other words, Congress expanded the fraud exception from entered judgments alone to circumstances in which a judgment would be entered but had not yet been entered. Implicit in this conclusion is that it is the debtor who must face the fraud judgment, not simply some third party on a debt for which the debtor is also obligated. The Supreme Court made this clear when it referred to such debtors as the “perpetrators of fraud.” Id. at 279, 287, 111 S.Ct. 654.
If the court were to conclude that an innocent debtor — one against whom a judgment would not be entered — is somehow now captured by section 523, that would be an extraordinary expansion of the scope of section 523 over that evi*538denced by the legislative history and the Supreme Court’s analysis thereof, as well as extant case law to date.
This comports with the basic standards as well. As noted above, it is undisputed that a factor of nondischargeability under section 523(a)(2) is intent to deceive. As the Seventh Circuit in Hudgens made clear, absence of such an intent to deceive is a bar to finding a debt nondischargeable. Hudgens, 149 Fed.Appx. at 487. It is entirely possible, as this case demonstrates, that there can be two parties obligated on a debt — one of whom has requisite intent and one of whom lacks it. Without another reason to hold the party without intent hable for the fraud, the absence of intent must defeat a section 523(a)(2) claim.
It is therefore this court’s conclusion that, should it find Michael or Michele innocent of the fraud in question and should it find no other reason to hold either or both of the Debtors to that fraud, the debt in question is dischargeable as to the innocent debtor.
The court therefore rejects Sullivan’s “plain meaning” argument and will apply the well-established standards for dis-chargeability of debt. This does not suggest that Chung’s fraud is irrelevant, as a creditor can rely on agency principles to impute an agent’s fraud to a debtor. This theory alleged by Sullivan is discussed below.
2. Alleged Fraud of Michael Glenn
In Count II of the complaint in the Michael Adversary, Sullivan argues that Michael directly committed fraud, which renders the Sullivan Loan nondischargeable in his bankruptcy case. In Count IV of the complaint in the Michele Adversary, Sullivan contends that Michael’s alleged fraud should be imputed to Michele, thereby making the loan nondischargeable in her bankruptcy case as well. Sullivan alleges three instances of fraud by Michael: (i) Michael represented the signature of Michele on the Glenn Note as being authentic when it was in fact forged; (ii) Michael knew or should have known that the LaSalle Loan did not exist but failed to correct the misrepresentations of Chung and Lopez; and (iii) Michael failed to disclose the intended use of the loan proceeds. The burden is on Sullivan to show that Michael directly or indirectly committed the fraud. Sullivan has failed to meet that burden.
a. The Alleged Forgery
As to Michele’s signature, Sullivan makes two opposing arguments. In the complaint in the Michele Adversary, Sullivan contends that Michele’s signature on the Glenn Note is either hers or was made by an authorized representative. In contrast, the complaint in the Michael Adversary asserts that Michele’s signature is a forgery and constitutes part of the claim under section 523(a)(2)(A). The parties have stipulated that Michele’s signature on the Glenn Note was a condition precedent to the Sullivan Loan, and the court finds that by emailing the note bearing his signature and that of his wife to Sullivan, Michael represented that both signatures were valid. Because the court has already concluded that the signature on the Glenn Note belongs to Michele, Sullivan prevails on his argument that Michele’s signature is legally hers, which forecloses his forgery claim.
While the Debtors apparently attempted to mislead the court with respect to the authenticity (or the authorization) of Michele’s signature on the Glenn Note, such actions occurred years after the execution of the Glenn Note and the representations made in connection therewith, and are thus not relevant to the determination of dis-chargeability. See Iaquinta, 95 B.R. at *539578 (subsequent acts of fraud do not demonstrate that a debtor had the requisite intent to deceive at the time the representation was made).
Thus, Sullivan has not shown and cannot as a matter of law show that Michael falsely represented the signature of Michele on the Glenn Note as being legally hers.
b. Michael’s Alleged Knowledge that the LaSalle Loan Did Not Exist
Second, Sullivan argues that Michael knew or must have known that the LaSalle Loan did not exist at the time that Sullivan made the loan because the financial condition of the Glenn Companies was such that it would have been impossible to obtain a $1 million line of credit on behalf of the Glenn Companies. Sullivan contends therefore that Michael should have corrected Chung and Lopez when they claimed that LaSalle Bank had approved the fictitious line of credit.
In support of this contention, Sullivan points to his reliance on the existence of the LaSalle Loan. Indeed, at the October 2007 meeting, Sullivan spent little time discussing the financial condition of Michael or his companies, and seemed to be primarily concerned with whether the La-Salle Loan was approved. In response, Michael testified that he believed Chung when she claimed that she was successful in obtaining a line of credit for his business. He claims that he did not learn that the line of credit had not been approved until January of 2008, and that in the fall of 2009, he was shocked when he learned from Sullivan that at the time of the October 2007 meeting Chung had not even applied for the line of credit.
The problem with Sullivan’s argument in this regard is that it is based entirely on conjecture. There is simply no evidence that Michael was aware of Chung’s lie or even had reason to suspect that the line of credit was not obtained.
Contrary to its finding as to the testimony regarding Michele’s signature on the Glenn Note, the court finds Michael’s testimony regarding his lack of knowledge of Chung’s fraud to be credible. Chung was previously successful in procuring loans for the Glenn Companies and even agreed to be personally liable on the Sullivan Loan, which Michael reasonably assumed she would not have done had the line of credit not been approved. Chung was friends with Sullivan and had worked with Michael for a number of years in procuring loans for his business — and there is no indication that she had previously lied to Michael or Sullivan.
Sullivan contends that Michael must have known that the LaSalle Loan did not exist because the Glenn Companies faced a “dire” financial condition. This argument is unpersuasive. Sullivan has not demonstrated that the financial condition of the Glenn Companies was so dire that a $1 million line of credit was inconceivable. The evidence merely showed that, as with countless other real estate companies at this time, the Glenn Companies were experiencing what appeared to be cash flow problems. The Debtors demonstrated that the Glenn Companies had a history of such financing, including that obtained on occasion through Chung’s efforts. Though the use of such expensive, short term financing to overcome cash flow issues is of dubious business sense, its use is not conclusive of fraud. Where it otherwise, the entire payday loan industry would be criminal.
Further, while the court finds that Michael did not make any misrepresentations concerning the financial condition of his companies, as discussed above, any statements or omissions relating to the financial condition of Michael or his companies *540would be “explicitly exempt from the operation of section 523(a)(2)(A).” Piekarczyk v. Nantz (In re Nantz), 44 B.R. 543, 545 (Bankr.N.D.Ill.1984) (Eisen, J.); see also Bryson, 187 B.R. at 960. In addition, Sullivan misses the obvious point that a bridge loan — in this case putatively for two weeks — is most certainly to address cash flow issues. There is no other plausible short-term need that would necessitate such very expensive, short-term financing. Thus, the court does not find it of consequence that Michael did not inform Sullivan that in the fall of 2007 the Glenn Companies Business as a whole was having cash flow problems. That conclusion is tautologized from the nature of the transaction.
Under these circumstances, the court cannot conclude that Michael was aware or should have been aware of the lies of Chung and Lopez regarding the LaSalle Loan. Thus, he could not have corrected Chung or Lopez when they lied about obtaining the LaSalle Loan. Sullivan has therefore failed to show that Michael knew, or that he should have known, that the LaSalle Loan did not exist at the time of the October 2007 meeting. The court concludes that like Sullivan, Michael was deceived by Chung and Lopez.
c. Use of Loan Proceeds
Finally, Sullivan argues that Michael defrauded him by failing to disclose the intended use of the Sullivan Loan proceeds, and that he would not have loaned the money to Michael if he knew that it would not be used in construction work. The parties have stipulated that Michael stated at the October 31, 2007 meeting that his companies needed the loan for working capital, and that a portion of the loan would be used to finish grading and asphalt paving work. Sullivan now appears to allege, however, that the main purpose of the loan was for asphalt work, and argues that the loan was actually used to repay existing debt of 5M. At the Trial, Michael testified that he represented to Sullivan that he needed the loan for working capital, denying that he ever represented the main purpose of the loan to be for asphalt work. Sullivan’s shift in emphasis runs contrary to his prior stipulation.
It is evident that the parties did not discuss the purpose of the loan with much specificity during their one and only brief meeting, but the parties have stipulated that it was intended to be used for working capital and some asphalt work. While the actual use of the entirety of the loan proceeds is not clear from the factual record, the court is satisfied by Michael’s credible testimony that it was indeed used for working capital, with a portion going toward asphalt work. Thus, the loan was used for the stated purpose. Moreover, it is clear that the parties had a general understanding that the loan would be used in the business operations of one or more of the Glenn Companies, and that is how the loan was in fact used.
Even if Michael had spent the loan proceeds on a project other than the one'he proposed at the October 2007 meeting, this alone would not persuade the court that a misrepresentation occurred. For such a misrepresentation to have occurred, a promise must be made with the present intent not to perform, and Sullivan has failed to show that such intent exists here. See Chriswell v. Alomari (In re Aloman), 486 B.R. 904, 912 (Bankr.N.D.Ill.2013) (Schmetterer, J.). There is simply no showing that Michael lied about the intended use of the loan proceeds or that Sullivan relied on a representation that the loan would be used for specific construction work.
As noted above, Sullivan makes much ado about the Sullivan Loan proceeds be*541ing used to cover an overdraft in the account in which they were placed. The testimony was that the Sullivan Loan covered the overdraft for just one day, because the Sullivan Loan proceeds were deposited into the bank account one day before $345,587.55 in proceeds from the closing of a real estate transaction were deposited into the same account, and it is these closing proceeds that were intended to cover the overdraft. Money is fungible, In re Sheridan, 57 F.3d 627, 636 (7th Cir.1995), and it matters little that the exact money transferred by Sullivan was not immediately used for the stated purposes. The evidence shows that Michael made use of the Sullivan Loan in the required manner; thus, the overdraft issue is inconsequential.
Altogether, Sullivan has failed to establish the existence of deceit, trickery, false representation, or omission of fact by Michael, and his claim would fail on this basis alone as failure to establish any element of a section 523(a)(2)(A) claim warrants denial of the claim. However, there is also no sufficient showing of a requisite intent by either of the Debtors to deceive Sullivan, nor can intent be inferred based on the totality of the circumstances. The uncon-troverted evidence is that both Sullivan and Michael were deceived by Chung with respect to the existence of the LaSalle Loan, which Michael and Sullivan believed would be available to repay the Sullivan Loan.
With respect to the fraud prong of section 523(a)(2)(A), while it is established that Chung committed fraud and that this fraud created the debt at issue, Sullivan did not show that the Debtors participated in the fraud, intended to defraud Sullivan, or that they were even aware of Chung’s fraud. Similarly, the elements for false representation and false pretenses are lacking here. The Debtors did not make a false representation or omission of fact which they knew was false (or made with reckless disregard for its truth), with an intent to deceive, upon which Sullivan justifiably relied. Under these circumstances, the court finds that the Glenns did not obtain the Sullivan Loan through a false representation, false pretenses, or actual fraud under section 523(a)(2)(A) of the Bankruptcy Code.
In sum, the court finds that Sullivan has not established by a preponderance of the evidence that Michael or Michele obtained the Sullivan Loan from him by means of fraud, false pretenses, or a false representation.
3. Agency Theory of Liability
While the court finds that neither Debt- or committed fraud directly or indirectly, this finding does not preclude Sullivan’s agency theory of liability, which would render the debt nondischargeable if Sullivan can establish the existence of an agency relationship linking the Debtors to Chung or Nomadic Consulting. Sullivan argues that Chung was an agent of both of the Debtors, and that Michael was an agent of Michele. The court must independently consider these claims.
An agency is a “consensual fiduciary relationship between two legal entities whereby the principal has the right to control the conduct of the agent and the agent has the power to effect the legal relations of the principal.” In re Stoecker, 202 B.R. 429, 456 (Bankr.N.D.Ill.1996) (Squires, J.), aff'd Case No. 97 C 414, 1998 WL 641363 (N.D.Ill. Sept. 11, 1998), rev’d on other grounds by 179 F.3d 546 (7th Cir.1999), aff'd sub nom. Raleigh v. Ill. Dept. of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000), (citing Greenfield Direct Response, Inc. v. ADCO List Management (In re Greenfield Direct Response, Inc.), 171 B.R. 848, 855 (Bankr.N.D.Ill.1994) (citations omitted)).
*542The determination of whether any party was an agent with respect to a transaction is a matter of state, not bankruptcy law. In re Englewood Community Hosp. Corp., 117 B.R. 352, 359 (Bankr.N.D.Ill.1990) (Squires, J.); see also Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (stating that property interests are created and defined by state law unless a federal interest requires a different result).8
The Illinois courts have recently spoken to the nature of agency under Illinois law, as follows:
In any agency relationship, the principal can be legally bound by action taken by the agent where the principal confers actual authority on the agent. Actual authority may be express or implied. Express authority is directly granted to the agent in express terms by the principal and extends only to the powers the principal confers upon the agent. Such authority may be granted through a written contract, a power of attorney or a court-ordered guardianship. Implied authority, on the other hand, is actual authority circumstantially proved. It arises when the conduct of the principal, reasonably interpreted, causes the agent to believe that the principal desires him to act on the principal’s behalf.
Curto v. Illini Manors, Inc., 405 Ill.App.3d 888, 346 Ill.Dec. 229, 940 N.E.2d 229 (2010) (internal citations omitted). Absent express or implied authority (also referred to as actual or apparent authority), the principal may also be liable if the principal ratifies the agent’s actions. Stoecker, 202 B.R. at 456 (citing Anetsberger v. Metropolitan Life Ins. Co., 14 F.3d 1226, 1234 (7th Cir.1994)).
The foregoing presumes, of course, thát a principal/agent relationship exists, which the Glenns contest. This places the burden squarely on Sullivan, as, under Illinois law, “ ‘[t]he burden of proving the existence of an agency relationship and the scope of authority is on the party seeking to charge the alleged principal.’ ” Daniels v. Corrigan, 382 Ill.App.3d 66, 320 Ill.Dec. 124, 886 N.E.2d 1193, 1204 (2010) (quoting Anderson v. Boy Scouts of America, Inc., 226 Ill.App.3d 440, 168 Ill.Dec. 492, 589 N.E.2d 892 (1992)); see also Powell v. Dean Foods Co., — Ill.Dec. -, — N.E.2d-,-, 2013 WL 3296568, at *31 (2013).
The key consideration in determining whether an agency relationship exists is whether the principal had the right to control the activities of the agent. Stoecker, 202 B.R. at 456 (citing Oberlin v. Marlin Am. Corp., 596 F.2d 1322, 1326 (7th Cir.1979)). Although existence of an agency relationship is a question of fact, it may be inferred from facts of a particular case. Id. (citing Greenfield, 171 B.R. at 855); Lawlor v. North Am. Corp. of Ill., 368 Ill.Dec. 1, 14, 983 N.E.2d 414 (2012) (“The determination of whether a person is an agent or independent contractor rests upon the facts and circumstances of each case.”); Pekin Ins. Co. v. Equilon Enters. LLC, 366 Ill.Dec. 780, 792, 980 N.E.2d 1139 (2012).
An agency relationship can be inferred from circumstantial evidence, including the situation occupied by the par*543ties, their acts and other relevant circumstances. Stoecker, 202 B.R. at 456 (citing City of Evanston v. Piotrowicz, 20 Ill.2d 512, 518, 170 N.E.2d 569 (Ill. 1960)). “[T]he cardinal consideration is whether that person retains the right to control the manner of doing the work.” Lawlor, 368 Ill.Dec. at 14, 983 N.E.2d 414 (internal quotation omitted).
However, when a question exists whether a person is an agent or an independent contractor — as is the case with Chung — “[e]ourts should also consider the following ... :(1) the question of hiring; (2) the right to discharge; (3) the manner of direction of the servant; (4) the right to terminate the relationship; and (5) the character of the supervision of the work done.” Id.
The Illinois courts have described an independent contractor as follows:
An independent contractor is one who agrees to produce a certain result but who, during the actual execution of the work, is not under the control of the person for whom the work is done. An independent contractor may use his or her own discretion in matters that were not specified or in the details of the work. However, just because someone is an independent contractor will not bar vicarious liability, if he or she is also an agent of the principal. There is no precise formula for determining when a person’s status as an independent contractor is negated by his or her status as an agent.
Pekin, 366 Ill.Dec. at 792, 980 N.E.2d 1139 (citations omitted).
a. Chung as Michael or Michele’s Agent
What is notably absent from the foregoing discussion is the matter on which the parties spent an inordinate amount of time at trial: the form of written agreement, if any, between the parties. Much time was spent on the nature of the parties’ relationships based upon a putative, unsigned engagement agreement between Nomadic Consulting and the Glenn Companies (the actual record could not be located).9 Given the extensive attention paid to this issue by Sullivan, it is worth considering for the moment the question of the agreement’s alleged content and putative effect.
As adduced through the testimony of Michael, Chung and Sullivan, had there been a signed agreement, such agreement would state that Chung is an independent contractor. Chung testified that she used agreements containing the independent contractor language routinely and expected that she used just such a form of the agreement with Michael or the Glenn Companies. She explained that this was her practice and that she had done so on other transactions with the Glenn Companies. Michael testified that any agreement entered into by the parties would in fact contain such independent contractor language. Chung’s and Michael’s testimony was credible in this regard. The court therefore has no reason to doubt such testimony, and accepts it as true.
Sullivan, it happens, testified that he is the original draftsperson of the form engagement agreement used by Chung — at a time when the relationship between Sullivan and Chung remained good, of course. This, in fact, is where much of the parties’ time was misspent. Sullivan attempted to use his role as the original draftsperson to persuade the court how to interpret the provision (should, of course, such an agree*544ment containing the provision have existed and governed the engagement). Sullivan explained that his use of the term independent contractor was not meant to exclude that Chung could, in fact, later become an agent instead. He repeatedly emphasized that, should the nature of the work performed become more substantive, Chung would cease being an independent contractor and become instead an agent. For this reason, he testified, he did not expressly disclaim agency.
Sullivan appears to be advancing a theory under which he, as the original draft-sperson but a non-party to the transaction, can dictate the effect of the provision. The Glenns appear to be advancing the theory that any ambiguity in the provision should be read against Sullivan, as the drafter of the provision. In this regard, much of the time spent on this agreement by both of the parties was wasted, as both of the parties are mistaken in their understanding of Illinois agency law.
First, Sullivan misunderstands what it takes to be an agent under Illinois law. As noted above, it is the nature of control that most directly defines whether a relationship is that of principal and agent. Oberlin, 596 F.2d at 1326; see also Stoecker, 202 B.R. at 456; Lawlor, 368 Ill.Dec. at 14, 983 N.E.2d 414. Absent that, it is the hiring, firing, direction, termination and supervision that bears on the investigation. Lawlor, 368 Ill.Dec. at 14, 983 N.E.2d 414. Nothing in the foregoing analysis of Illinois law stands for the proposition that the labels used in an agreement are relevant.10 The central point of the cases cited above is that the agency determination is one not governed by form but by substance. Further, no testimony was adduced by Sullivan that he presumed Chung was an agent because he knew the nature of the agreement. Sullivan never connected his presumptions relating to the agreement to his belief regarding Chung’s role.
Second, to the extent probative at all, Sullivan’s argument regarding Illinois agency law puts paid to his argument regarding the use of this provision. Sullivan testified that an independent contractor ceases being an independent contract and would instead be an agent if the nature of the work changes. Thus, under Sullivan’s stated understanding, a party is either an independent contractor or an agent, and the triggering factor is the nature of the actions performed. Through his testimony, Sullivan made clear that the roles are mutually exclusive in his mind. Given such understanding, Sullivan’s use of the term “independent contractor” in the agreement excludes agency. Were such labels persuasive, such a clear label would lend to the Glenns’ point, not Sullivan’s.
Third, and following closely on the heels of the preceding point, Sullivan’s testimony regarding his motivation for drafting this provision was simply not credible. The term independent contractor appears to be used in the agreement precisely for the *545purpose of disclaiming agency. Not only was Sullivan’s claimed motivation at odds with his espoused understanding, Sullivan’s whole demeanor changed when addressing this point. While generally Sullivan was quite engaging and credible, at this point he was not. His testimony had the appearance of being contrived for the purpose of litigation, after-the-fact reasoning done to support the position he is taking in this matter. The court discounts it as such.
Last, notwithstanding Sullivan’s motivation for drafting this provision, there is little effect of Sullivan’s contrivance, as neither party is correct if they believe Sullivan, who is not a party to the engagement agreement, is afforded any presumptions regarding the drafting of the independent contract provision. This is not a matter of contract interpretation between parties, and no presumptions arise.
As previously noted, neither position need be adopted here, as the contents or interpretation of the engagement agreement provision is not controlling. The court accepts that the intention of the engagement letter, by its express terms, was to create an independent contractor relationship. The language of the agreement is plain and unequivocal in this regard.
That said, an independent contractor is not excluded from becoming an agent. Lawlor, 368 Ill.Dec. at 14, 983 N.E.2d 414 (“That someone is an independent contractor, however, does not bar the attachment of vicarious liability for his actions if he is also an agent.”) (emphasis added). Law-lor makes clear that it is not the nature of the purported agent’s actions that are the subject of the inquiry. An agent and an independent contractor may be indistinguishable at this level. Instead, it is the nature of the relationship of and interactions between the alleged agent and principal that must be examined.
In this instance, Sullivan paid very little attention at the Trial and in his pleadings addressing the relationship of and interactions between Chung and Michael. As the party bearing the burden of proof, Dean Foods, — Ill.Dec.-, — N.E.2d-, 2013 WL 3296568, at *31, Sullivan must do more. No evidence was adduced regarding how Chung was hired, when she could be discharged and the right to terminate the relationship. The draft engagement agreement that was produced addresses some of this, but to the extent that the unsigned agreement is in any way relevant, the relevant parameters contained within it are not inconsistent with the agreement’s express designation of Chung as an independent contractor.
Of course, the engagement agreement is unsigned, so it is actually of little probative value except as to what form of agreement the parties may have entered into.11 There was some testimony from Chung and Michael regarding the level of direction and character of supervision Chung was to receive, but not enough for the court to conclude that Chung was an agent of the Debtors, rather than an independent contractor. It is not enough that Michael was present during the performance of some of Chung’s duties and had therefore the ability to observe and supervise Chung. It is the actual supervision that is at issue. Sullivan has failed to show that Michael in fact supervised Chung in the performance of these duties in a manner consistent with his theory of agency.
*546In fact, the bulk of the testimony regarding the Lawlor factors adduced at trial was that Chung was not the Glenns’ agent. See Lawlor, 368 Ill.Dec. 1, 14, 983 N.E.2d 414. Michael’s counsel was clearly well versed in the application of Illinois law to this issue, and targeted his questioning of Michael accordingly. Michael testified in response to very direct questioning that he did not direct, control or supervise any aspect of Chung’s performance of her services. Michael’s testimony was consistent and unwavering in this respect. Michael repeatedly disclaimed any control over Chung’s actions. Michael appeared to sincerely believe that Chung could have controlled all aspects of the financing with LaSalle Bank up to signature without his participation. Michael’s testimony regarding his relationship with Chung never faltered, and had all the hallmarks of reliability that other aspects of his testimony, discussed above, lacked.
As to Michele, Sullivan failed to connect her directly to Chung in any way, let alone a meaningful way. No evidence was introduced as to any agency relationship between Chung and Michele. Michele had no business dealings with Chung and she was apparently not a party to the missing engagement agreement. Michele appeared to have only known Chung on a very limited social basis. Under Illinois law, it is not the nature of the task to be performed that defines agency. It is how the agent is engaged and fired and how the agent is directed and supervised. Lawlor, 368 Ill.Dec. 1, 14, 983 N.E.2d 414. Nothing in this regard points to any such factors, as they pertain to Michele and Chung. As the party seeking to ascribe an agency relationship to Chung and Michele, Sullivan bears the burden of proof, and has failed to carry that burden.
For these reasons, the court cannot conclude that Sullivan, as the party seeking to bind the Glenns to the acts of Chung, has carried his burden. Chung was not Michael’s or Michele’s agent in this transaction.
b. Michael as Michele’s Agent
As to an agency relationship between Michele and Michael, it first must be noted that, having failed to establish an agency relationship between Michael and Chung, Sullivan’s attempt to connect Michele to Chung through Michael as Michele’s alleged agent is futile. Further, as Sullivan has failed to show that Michael directly committed any fraudulent act, again, attempting to establish an agency relationship between Michael and Michele is also pointless. What remains is the possibility that an agency relationship bears on whether Michael (or someone at his behest) signed Michele’s name to the Glenn Note on her behalf.
As discussed above, the court has every reason to believe that this may have occurred, as it had occurred in previous transactions. Having, however, already determined that the signature is legally Michele’s, but that the circumstances of Michele’s signature do not independently constitute grounds for a finding of nondischargeability, there remains no reason to pursue this further.12
4. Partnership Theory of Liability
Sullivan also contends that Michael’s alleged fraud should be imputed to Michele on a partnership theory. For the *547same reasons stated above with respect to Michael as Michele’s agent, there is little point to this inquiry. There is simply no fraud committed by Michael or for which Michael must be held accountable to which Michele would be connected if this theory were successful. As Michael did not commit fraud, there is no fraud to be imputed to Michele.13
CONCLUSION
As noted above, Counts II and III of the complaint in the Michele Adversary are dismissed for failure to state a claim pursuant to FRBP 7012(b) and FRCP 12(b)(6). As to the remaining counts and for the foregoing reasons, Sullivan has not proven his cause of action under section 523(a)(2)(A) and each of the Debtors’ debt on the Sullivan Loan is therefore fully dischargeable. Accordingly, judgment will be entered in favor of Michele on Counts I and IV of the complaint in the Michele Adversary and in favor of Michael on Counts I and II of the complaint in the Michael Adversary.
Separate Orders will be issued concurrent with this Memorandum Decision.
ORDER
This matter comes before the court on the complaint (the “Complaint”) to determine dischargeability of debt under section 523(a)(2)(A) of title 11 of the United States Code filed by Brian T. Sullivan (“Sullivan”) against debtor Michele A. Glenn (the “Debtor*’) [Docket No. 1] in the above-captioned adversary proceeding; the court having jurisdiction over the subject matter and all necessary parties appearing at the four-day trial that took place from July 15, 2013 through July 18, 2013 (the “Trial”)', the court having considered the testimony and the evidence presented by all parties and the arguments of all parties in their filings and at the Trial; and in accordance with the Memorandum Decision of the court in this matter issued on November 15, 2013, wherein the court found that Sullivan has not proven his cause of action;
NOW, THEREFORE, IT IS HEREBY ORDERED:
(1) That judgment is entered in favor of the Debtor on Counts I and IV of the Complaint;
(2) That Counts II and III of the Complaint are dismissed pursuant to Fed.R.Bankr.P. 7012(b) and Fed. R.Civ.P. 12(b)(6); and
(3) That the debt owed by the Debtor to Sullivan is dischargeable.
ORDER
This matter comes before the court on the complaint (the “Complaint”) to determine dischargeability of debt under section *548523(a)(2)(A) of title 11 of the United States Code filed by Brian T. Sullivan (“Sullivan”) against debtor Michael R. Glenn, Jr. (the “Debtor”) [Docket No. 1] in the above-captioned adversary proceeding; the court having jurisdiction over the subject matter and all necessary parties appearing at the four-day trial that took place from July 15, 2018 through July 18, 2013 (the “Trial”)-, the court having considered the testimony and the evidence presented by all parties and the arguments of all parties in their filings and at the Trial; and in accordance with the Memorandum Decision of the court in this matter issued on November 15, 2013, wherein the court found that Sullivan has not proven his cause of action;
NOW, THEREFORE, IT IS HEREBY ORDERED:
(1) That judgment is entered in favor of the Debtor on Counts I and II of the Complaint; and
(2) That the debt owed by the Debtor to Sullivan is dischargeable.
. At the Trial, Michael adopted all defenses set forth by Michele in the Michele Adversary as if they had been presented in the Michael Adversary.
. To the extent that any of the findings of fact constitute conclusions of law, they are adopted as such, and to the extent that any of the conclusions of law constitute findings of fact, they are adopted as such.
. The Glenn Companies Business included companies in addition to 5M. However, such companies are not relevant to this case and the court need not make findings of fact relating to such companies.
. Counts II and III of the complaint in the Michele Adversary are inadequately pled and fail to state a claim upon which relief may be granted. Such counts seem to exist to raise alternate theories under which Michele might be considered liable on the Sullivan Loan. Such liability is an element of a nondis-chargeability action, to be sure, and, despite its treatment of Counts II and III, pursuant to FRBP 7056 and FRCP 56(g), the court consid*530ers Sullivan's theories in considering Count I. However, Sullivan makes no claim in Counts II and III, such as a request for declaratory judgment, upon which this court could grant relief. The court therefore dismisses Counts II and III of the complaint in the Michele Adversary pursuant to FRBP 7012(b) and FRCP 12(b)(6).
. During his closing argument at the conclusion of the Trial, Sullivan stated for the first time that Michele probably did not execute the Glenn Note. As is discussed infra, Sullivan’s beliefs regarding the nature of this transaction do not have bearing on the court’s determination.
. Sullivan has also made much of Michele's stake in 5M and the Glenn Companies Business so as to, presumably, show that Michele benefited from the Sullivan Loan. The court accepts that Michele, through her ownership stake in the businesses for which the loan was obtained, has benefited from the transaction. As she is directly obligated on the Sullivan Loan by way of the Glenn Note, no further inquiry in this regard is necessary.
. The Sherman court provided the following example, which is similar to the facts of the case at bar, in explaining the rationale of its decision: "Suppose ... that a bank loaned money to an innocent person under the express condition that the loan be guaranteed by a third party who had greater assets. If the third party lies about his assets in order to qualify to be the guarantor, then the borrower will have, in effect, obtained 'money ... by ... false pretenses, a false representation, or actual fraud,’ even if she did not know or have reason to know about the guarantor’s misconduct. If she is subsequently unable to repay her loan and is driven to bankruptcy, we think it would contravene the ‘fresh start’ purposes of the system to deny her a discharge on the basis of a third party’s misconduct.” Id. This court agrees.
. In cases where none of the parties argues for application of a particular state's law, the law of the forum state is presumptively applied. Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 882 (7th Cir.1992). Here, neither party has argued for application of a particular state’s law, and each appears through citation and argument to presume that Illinois law applies. Illinois also appears to be the situs of the salient events in question. For these reasons, the court accepts that Illinois law governs this matter.
. Michael Glenn’s testimony indicated that at some point prior to this litigation, a large portion of his business records had been lost when a storage unit where the documents were contained was auctioned.
. Of course, those labels may have bearing on the contractor's agent's authority as this is a question that can be shaped in part by third parties’ perceptions, which in turn may be shaped by the contents of an agreement which such parties had seen. Curto, 346 Ill.Dec. at 233, 940 N.E.2d 229. But this is not a dispute that turns on Chung's authority to act. While Sullivan has contended that Chung was acting with Michael's authority when she misrepresented the existence of the LaSalle Loan to Sullivan, that is only partially true. The court accepts that Chung was within her authority — either as an independent contractor or agent — to make representations to Sullivan regarding her loan efforts on behalf of Michael. The court concludes, however, that she exceeded her authority when she chose to lie about those efforts. That lie does not have bearing on Chung's authority, which in turn is not indicative of Chung's status as either an independent contractor or an agent.
. Equally lacking in probative value is Sullivan’s attempt to procure in direct testimony an admission from Michael that Chung was Michael’s agent. What constitutes an agent for the purposes of ascribing vicarious liability is a legal conclusion. As such, it is for the court to determine. Whether Michael, as a layperson, did or did not consider Chung to be his agent has no legal weight in this context.
. The traditional agency tests of agency vs. independent contractor still apply with respect to the purported agency between Michael and Michele. ‘‘[T]he status of husband and wife does not establish an agency relationship between the parties; mere proof of marriage does not prove that the wife was the husband's agent or servant.” Galvan v. Allied Ins. Co., No. 2-12-0525, 2013 WL 1850793, at *8 (Ill.App. 2nd Dist. Apr. 30, 2013) (citing Sumner v. Griswold, 338 Ill.App. 190, 197, 86 N.E.2d 844 (1949)).
. Even were this theoiy viable, Sullivan has failed to carry his burden of establishing that a partnership exists. In Illinois, a partnership is "an association of two or more persons to carry on as co-owners a business for profit.” 805 ILCS 205/6(1). To establish a partnership, a party asserting a partnership must show that the parties (1) joined together to carry on a trade or venture for their common benefit, (2) with each contributing property or services to the enterprise, and (3) having a community of interest in the profits. See Maloney v. Pihera, 215 Ill.App.3d 30, 158 Ill.Dec. 194, 573 N.E.2d 1379 (1991). Whether Michael and Michele were partners in the real estate development business they owned is therefore a question of their intention to be determined from the surrounding facts and circumstances. Sullivan argues that the Glenns are partners because they have an agreement or an intention to share profits of the Glenn Companies Business regardless of their percentage ownership interests in the Glenn Companies. Little, if any, evidence was produced with respect to this claim. The Glenn Companies are comprised of limited liability companies, and without evidence to the contrary, the Debtors are owners of these companies, and not partners. As Michael did not commit fraud, his alleged fraud cannot be imputed to Michele. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496583/ | MEMORANDUM OPINION ON UNITED STATES TRUSTEE’S & FIRST MERITBANK’S MOTIONS TO DISMISS BANKRUPTCY CASE
JACK B. SCHMETTERER, Bankruptcy Judge.
The debtors filed for bankruptcy relief under chapter 7. The United States Trustee (“the UST”) and FirstMerit Bank, N.A. (“FirstMerit”) filed motions to dismiss the case as an abuse of chapter 7 under § 707(b). Movants assert both that Debtors had primarily consumer debt, and that a presumption of abuse arises under § 707(b)(2). Debtor argues that Debtors do not have primarily consumer debt, and that § 707(b) does not apply.
After the matter was briefed by all parties, Debtor was found to have primarily consumer debts in an oral ruling announced on November 14, 2013, a ruling that is supplemented below. At the hearing on November 14, 2013, Debtors were invited to file further briefing with regard to the issue of the presumption of abuse under § 707(b)(2). Debtors’ counsel declined the invitation. He stated in open *555court that he was happy to rest on the UST and FirstMerit briefs on that issue. Thus, any further briefing by Debtors on the presumption of abuse calculation was waived. As to the relevant facts on both issues, counsel invited the court to review the exhibits appended by moving parties, but declined to identify or brief portions thereof that he relied on. More on that below.
For reasons stated below, Debtors bankruptcy case must be dismissed as an abuse under § 707(b) unless converted to one under Chapter 13.
Undisputed Facts
As discussed below, the facts alleged in paragraphs 1-47 of FirstMerit’s are deemed admitted. Thus, the following facts are undisputed.
According to the allegations in First-Merit’s Motion to Dismiss as admitted, Debtors reside at 1926 N. 75th Avenue in Elmwood Park, Illinois, (the “Elmwood Park Property”) which is encumbered by mortgages in favor of CitiMortgage for $187,622.77 and FirstMerit for $196,814.72. The Terzos also maintain a second home located at 16800 E. El Lago Blvd, Unit 2027 in Fountain Hills, Arizona (the “El Lago Property”), encumbered by a mortgage in favor of Nationstar for $264,842. Terzos purchased the El Lago Property for personal use, intending to use it as a winter home. They have never rented the El Lago property, nor derived any business income from the El Lago Property.
The Terzos also formerly owned real property located at 1930 N. Harlem Avenue, Unit 706 in Elmwood Park, Illinois (the “Harlem Property”), which they used as a rental property. The Harlem Property was encumbered by a mortgage in favor of FirstMerit. On June 6, 2011, FirstMer-it instituted a foreclosure action against the property, which resulted in a foreclosure sale and a deficiency judgment in favor of FirstMerit for $107,145.51, which has since grown to $110,488. The Terzos also used to own real property located at 16107 East Emerald Drive, # 208 in Fountain Hills, Arizona, (the Emerald Property) which they used as a rental property. The Emerald Property was encumbered by a mortgage in favor of Wells Fargo. Wells Fargo foreclosed in 2011, and wrote off the deficiency. Thus, Debtors currently owe nothing on the mortgage debt relating to the Emerald Property.
The Debtors also owe $23,000 to Nissan Motor Finance for a 2010 Nissan Maxima, and $25,000 to Wells Fargo for a 2010 Chevy Equinox. The Debtors also owe the Harlem homeowners association $243.34, and the Emerald Property homeowners association $188. The Debtors also owe credit card debt totaling $33,302.
Relevant to the Means Test Calculation, Debtors’ Amended Chapter 7 Statement of Current Monthly Income and Means-Test Calculation (“Debtors’ Means Test Calculation”) discloses gross wages, salary, tips, bonuses, overtime, commissions of $1,278.33, pension and retirement income of $2,132.23, and under income from all other sources, a pension from the Village of Elmwood Park was listed for $4,564.82 for a total current monthly income of $7975.38. Debtors’ Schedule I discloses a net employment income of $1,148.89, Social Security income of $2,665.00, pension income of $2,010.00 and other income specified “Village Pension” of $6,000.00.
Other undisputed facts appear in the Discussion below.
Discussion
Jurisdiction
Jurisdiction lies over this motion under 28 U.S.C. § 1334. It is referred here by Internal Procedure 15(a) of the District Court for the Northern District of *556Illinois. These motions seek dismissal of the bankruptcy case under § 707, and is therefore “a proceeding arising under title 11”. 28 U.S.C. § 157(a). A motion to dismiss a case “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).
Debtor has primarily consumer debts
In order to dismiss a case for abuse under § 707(b), the debtor must have debts that are “primarily consumer debts.”
Debtors were ordered to file an Answer to allegations contained in paragraphs 1 through 47 of FirstMerit’s Motion to Dismiss. Rule 9014 F.R.Bankr.P. provides, “The court may at any stage in a particular matter direct that one or more of the other rules in part VII shall apply.” Rule 7008(b)(1) F.R.Bankr.P. provides that “In responding to a pleading, a party must: (A) state in short and plain terms its defenses to each claim asserted against it; and (B) admit or deny the allegations asserted against it by an opposing party.” Rule 7008(b)(6) F.R.BankrJP. provides, “An allegation — other than one relating to the amount of damages — is admitted if a responsive pleading is required and the allegation is not denied.” Debtors did not file an Answer as ordered and therefore made no denials. Thus, paragraphs 1 through 47 from the FirstMerit Motion are deemed admitted.
Debtors’ counsel responded to the UST and FirstMerit’s motions by arguing that Mr. Terzo’s deposition testimony at his Rule 2004 examination was inaccurate, and that Mrs. Terzo has more complete information about the Debtors’ intentions regarding the El Lago property. He did not specify what parts of the depositions were referred to and did not file an affidavit by Mrs. Terzo as to her contentions. In a highly analogous context, the Seventh Circuit has held that in response to a summary judgment motion, a party may not create an issue of fact by contradicting an earlier deposition by a current affidavit. Gates v. Caterpillar, 513 F.3d 680, 688 n. 5 (7th Cir.2008). “Where deposition and affidavit are in conflict, the affidavit is to be disregarded unless it is demonstrable that the statement in the deposition was mistaken, perhaps because the question was phrased in a confusing manner or because a lapse of memory is in the circumstances a plausible explanation for the discrepancy.” Russell v. Acme-Evans Co., 51 F.3d 64, 67 (7th Cir.1995). Here, no such contention was made.
In the alternative, counsel for Debtors at the November 14th hearing invited the court to read the entirety of FirstMerit’s exhibits attached to its motion, and Mr. Terzo’s deposition in particular, because he said that the allegations in FirstMerit’s motion are not supported by its exhibits. Counsel for Debtors did not specify what portions he was referring to or identify those parts supporting his argument. However, “[cjourts are entitled to assistance from counsel, and an invitation to search without guidance is no more useful than a litigant’s request to a district court at the summary judgment stage to paw through the assembled discovery material. Judges are not like pigs, hunting for truffles buried in the record.” Albrechtsen v. Bd. Of Regents of Univ. of Wisconsin Sys., 309 F.3d 433, 436 (7th Cir.2002).
Debtors had the opportunity to contest FirstMerit’s allegations by an Answer but declined to do so. They are bound by that choice.
Section 707(b) only applies when a debtor’s debts are “primarily consumer debts.” § 101(8) defines “consumer debt” as debt incurred “for personal, family, or *557household purpose.” This is to be contrasted with debt incurred for a business venture or with a profit motive. In re Sekendur, 384 B.R. 609, 618 (Bankr. N.D.I11.2005) (internal quotation omitted). Furthermore, the word “primarily” has generally been construed as meaning at the very least a majority. Id.
FirstMerit asserted the following classifications of Debtors’ debts. It treated the Nissan Maxima, Chevy Equinox, and credit card debt as consumer debts without any supporting factual allegations that the debts were incurred for personal, family, or household purpose rather than with a profit motive. However, Debtors have not contended that those debts are anything other than consumer debts. Thus, the Debtors’ debts may be classified as follows:
Source of Debt Consumer Debt Lender Amount
Elmwood Park Property CitiMortgage 137,622.77
Elmwood Park Property FirstMerit 196,814.72
El Lago Property Nationstar 264,842.00
Nissan Maxima Wells Fargo 23,000.00
Chevy Equinox Wells Fargo 26,000.00
Credit Card Debt (various) 33,302,00
Total: 680,581.49
Source of Debt Non-Consumer Debt Lender Amount
Harlem Property Deficiency FirstMerit 110,448.00
Emerald Property Homeowners’ Association 188.00
Harlem Property Homeowners’ Association 243.34
Total: 110,879.34
The Debtors have more than six times as much consumer debt as non-consumer debt. Thus, their debts are primarily consumer debts.
A presumption of abuse arises under § 707(b)(2)
A presumption of abuse arises when certain criteria enumerated in § 707(b)(2) are satisfied. Section 707(b)(2)(A) of the Bankruptcy Code (Title 11 U.S.C.) provides that a filing would be presumed abusive if “the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv) multiplied by 60 is not less than ... $12,475.” This framework is incorporated into the Official Form 22A and is commonly known as the “Means Test.”
The first step in the Means Test is calculation of current monthly income, which is defined as “the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ... [prior to the bankruptcy case filing date] ... but excludes benefits received under the Social Security Act.” § 101(10A).
Here, Debtors’ Amended Chapter 7 Statement of Current Monthly Income and Means-Test Calculation (“Debtors’ Means Test Calculation”) discloses gross wages, salary, tips, bonuses, overtime, commissions of $1,278.33, pension and retirement income of $2,132.23, and under income from all other sources, Pension Village of Elmwood Park for $4,564.82 for a total current monthly income of $7975.38. Debtors’ Schedule I discloses a *558net employment income of $1,148.89, Social Security income of $2,665.00, and pension income of $2,010.00 and other income specified “Village Pension” of $6,000.00. The discrepancy in reporting a pension apparently results because Debtors claim part of the pension income to be exempt. However, pensions are included the calculation even if they are otherwise exempt because the definition of “current monthly income” is specifically defined as income received “from all sources.” In re Briggs, 440 B.R. 490, 495 (Bankr.N.D.Ohio 2010). Thus, $1435.18, the difference between $6,000 and $4,564.82, will be added to Debtors’ total current monthly income, resulting in a total current monthly income of $9,410.56.
According to the Debtors’ Means Test Calculation, the total of all deductions allowed under § 707(b)(2) is $7,887.13. As a result, the monthly disposable income should be $1,523.43, not $88.25. The 60-month disposable income under would be $91,405.80, not $5,295.00. $91,405.80 is “not less than” $12,475. Thus, the presumption of abuse arises.
Because the upward adjustment to Debtors’ current monthly income is more than enough to give rise to the presumption of abuse, there is no need to determine whether Debtors properly deducted the expenses relating to the El Lago Property. Further, once the presumption of abuse arises, it “may only be rebutted by demonstrating special circumstances.” § 707(b)(2)(B)(i). No special circumstances have been asserted by Debtors, much less demonstrated. As a result, a presumption of abuse has arisen under § 707(b)(2) which has not been rebutted by the Debtors.
Conclusion
Therefore, Debtors’ Chapter 7 bankruptcy case will be dismissed unless they convert the case to one under Chapter 13.
ORDER ON UNITED STATES TRUSTEE’S & FIRST MERITBANK’S MOTIONS TO DISMISS
For reasons stated in the Memorandum Opinion, it is hereby ordered that:
Debtors’ Chapter 7 bankruptcy case will be dismissed unless converted to one under Chapter 13. This matter is set on December —, 2013 at 10:30 to dismiss the case unless it is converted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496586/ | Chapter 7
Memorandum Opinion and Order Denying as Moot Debtor’s Motion to Order Trustee to Abandon Debtor’s Trust Interest
Janice Miller Karlin, United States Bankruptcy Judge
The Court has heard evidence on the main issue in this case, which is whether a debtor’s interest in a revocable trust that contains a spendthrift clause is a part of the bankruptcy estate upon the debtor’s filing a petition in bankruptcy. On March 10, 2004, Gary Robben (“Debtor”) filed a Chapter 7 petition. After administering other assets, the Chapter 7 Trustee filed a final accounting1 in December 2007, and Debtor’s case was closed shortly thereafter.2 In his schedules and Statement of Financial Affairs, Debtor did not disclose that he was a named beneficiary of a revocable trust, the Restated Robben Family Trust, which (if not earlier revoked by his mother, the settlor) would entitle him to certain property upon her death. Debtor’s mother died — some 6 years after Debtor filed bankruptcy — and he has reopened his bankruptcy to seek an order requiring the Chapter 7 trustee (“Trustee”) to officially abandon whatever interest the bankruptcy estate might have had in the Restated Robben Family Trust. Because the Court finds the trust contains a valid spendthrift provision under Kansas law, Debtor’s interest in the trust was not property of the estate. The Court therefore denies Debt- or’s motion as moot because the Trustee had (and has) no interest in the Restated Robben Family Trust to abandon.
I. Findings of Fact
Debtor was named a beneficiary of the Robben Family Trust when his parents established it in 1991. The Robben Family Trust was a revocable trust established for the benefit of Debtor’s parents, Bertha and Norbert B. Robben, during their lives, with the remainder to be distributed to Debtor and his two siblings, Paul Robben and Mary Ann Ruff. He subsequently became a trustee of the trust after his father’s death, and this trust contained no spendthrift clause.3
Debtor was also named as a beneficiary and trustee of the Bertha Robben Trust, an irrevocable trust his mother created in 1997 for the sole benefit of her children, grandchildren, and sons- and daughters-in-law. Debtor’s motion to abandon does not relate to that trust.4
During his tenure as trustee, Debtor pledged assets of the Robben Family *575Trust in violation of his fiduciary duties as a trustee. Debtor and his family also took larger distributions than they were due from the Bertha Robben Trust. In early December 2003, Debtor revealed these actions to the other trust beneficiaries, including his mother, and also formally resigned as co-Trustee of the Bertha Robben Trust. Debtor was also replaced as co-Trustee of the Robben Family Trust upon its amendment the next month (on January 22, 2004).
Debtor’s resignation and the publication of his failures as a trustee to the rest of the beneficiaries brought on a host of trust-related activity. On January, 12, 2004, for example, Debtor and his siblings entered into an agreement entitled “Rob-ben Family Memo of Agreement,” agreeing that Paul Robben would become the trustee of the Restated Robben Family Trust (with his mother serving as co-trustee), among other things. In addition, the Bertha Robben Trust was terminated, purportedly effective March 10, 2004.
Effective January 22, 2004, Bertha Rob-ben also restated the Robben Family Trust, creating the Restated Robben Family Trust (hereafter “Trust”). As relevant here, the restatement changed the trustee from Debtor to Paul Robben, retained Debtor as the beneficiary of a one-third interest in all trust assets, and added a spendthrift provision not present in the original trust. The Restated Robben Family Trust spendthrift provision states:
To the extent permitted by law, none of the beneficiaries hereunder shall have any power to dispose of or to charge by way of anticipation or otherwise any interest given to such beneficiary; all sums payable to any beneficiary hereunder shall be free and clear of debts, contracts, alienations and anticipations of such beneficiary, and of all liabilities for levies and attachments and proceedings of any kind, at law or in equity.5
Both the original and the Restated Robben Family Trust granted Bertha Robben the right to amend her trust until her death. The Restated Robben Family Trust also included a second provision that could have resulted in Debtor never receiving any Trust assets: it provided that Debtor’s share would be divested and distributed to his siblings should he predecease his mother.
In addition to the Robben Family Memo of Agreement and the restatement of the Robben Family Trust, the parties executed the Robben Family Settlement Agreement (“Settlement Agreement”). The Settlement Agreement was ultimately signed by all interested family members, both individually and by Paul and Bertha as trustees of the two trusts. Bertha Robben and Debtor signed the Settlement Agreement on January 22, 2004. Mary Ann Ruff signed the Settlement Agreement February 20, 2004, and Paul Robben signed March 1, 2004. The exact date the remaining beneficiaries signed the agreement is unclear, but that date is not relevant to this decision.6
Under the Settlement Agreement, all parties acknowledged that Debtor had performed actions inconsistent with the trust terms. Notwithstanding those action, however, the parties agreed:
*576[t]hat all Parties to this Family Settlement Agreement hereby relinquish any claim in any capacity they might have against Gary L. Robben individually and/or as Trustee and/or otherwise regarding any and all matters discussed herein.7
Finally, Bertha Robben also amended her will, executing a new Last Will and Testament, also dated January 22, 2004. This will essentially poured her assets over to the restated trust and incorporated that trust’s provisions.
When Debtor filed his Chapter 7 petition on March 10, 2004, he did not disclose on Schedule B his future or contingent interest in the Trust. The Trustee now claims he should have revealed his interest in the Trust by affirmatively describing the Trust in response to Question 18 [“equitable or future interests, life estates, and rights or powers exercisable for the benefit of the debtor other than those listed in Schedule of Real Property”] and Question 19 [“contingent and noncontingent interests in estate or a decedent, death benefit plan, life insurance policy, or trust”]. In addition, he did not list his mother or the Trust as creditors, although he did list his siblings and the other adult beneficiaries as possible unsecured creditors in Schedule F, all on advice of bankruptcy counsel.8
Although Debtor received his discharge on August 6, 2004, the Trustee kept the estate open and administered assets unrelated to the Trust until late 2007. The only asset in question here — Debtor’s interest in the Restated Robben Family Trust — was specifically noted as Ref. # 21 in the Trustee’s final (and interim) accounting, and the Trustee testified at trial that she was generally aware of the existence of both trusts throughout her administration of the estate. When she sought to be discharged of her responsibilities, she certified that “this estate has been fully administered pursuant to the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the District of Kansas Bankruptcy Rules. A Trustee’s Final Report has been filed and proper disbursements completed. No funds or assets of the estate remain.”9 Previously, on July 8. 2004, the Trustee had also approved an order finding that the “Trustee’s interest or right to the collateral [pledged to Gold Bank, which included certain interests of Gary Robben in the Robben Family Trust] is abandoned.”10
The present controversy began after Bertha Robben died on January 28, 2010, almost 6 full years after Debtor filed his bankruptcy petition and 3 years after the Trustee had elected not to seek additional information to help her decide whether to pursue Debtor’s interest in the identified trusts, if any. Bertha never revoked the Trust, and after she died, Paul Robben, as trustee, agreed with his sister, Mary Ann, to divide the remaining Restated Robben Family Trust assets between themselves, making no distribution to Debtor. Paul Robben testified he, as trustee, based this action on his understanding of the terms of the Trust, although Debtor argues the Trust instead required distribution of one-third of Trust assets to each of the three siblings.
In 2011, Debtor asked his siblings for an accounting of the Trust assets. When they did not provide it, he filed suit in state court seeking to remove them as co-trustees of the Trust. The state court *577dismissed his action on his siblings’ motion to dismiss, finding that because he had not disclosed the Trust as an asset in his bankruptcy, the bankruptcy trustee had not expressly abandoned her interest in the Trust and thus Debtor lacked standing to bring the action. The decision noted that the case was “not about the argument that eventually will prevail in bankruptcy court, but allowing that forum the first opportunity to consider whether the equitable right to property first comes within the bankruptcy estate.”11 The decision ended with the prediction that some party would likely seek to reopen the bankruptcy case so this Court could make that determination.
Soon thereafter, Debtor moved to open the Chapter 7 case pursuant to 11 U.S.C. § 350(b), which motion was granted.12 After the case was reopened, Debtor filed a motion seeking an order directing the Trustee to abandon any interest in the Trust pursuant to § 554(b)13 “to the extent such interest may constitute an asset of the estate.”14 He further argues the interest was never part of his bankruptcy estate. Both the Trustee and Mary Ann Ruff and Paul Robben objected to his motion for abandonment.15
II. Conclusions of Law
Debtor argues his interest in the Restated Robben Family Trust did not constitute property of his bankruptcy estate created when he filed his Chapter 7 Petition because the Trust contained a spendthrift provision, preventing its inclusion in the estate under 11 U.S.C. § 541(c)(2).16 Under § 541(a)(1), a bankruptcy estate is created upon a debtor’s filing for bankruptcy, and the bankruptcy estate includes, “[ejxcept as provided in ... (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.” Section 541(c)(2) provides “a restriction on the transfer of a beneficial interest of the debt- or in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title,” and the Tenth Circuit BAP has interpreted § 541(c)(2) to mean that a debtor’s beneficial interest in a spendthrift trust is entirely excluded from the bankruptcy estate.17
The Sixth Circuit BAP has held that “[d]ebtors bear the burden of demonstrating that all the requirements of § 541(c)(2) have been met before the property in question can be effectively excluded from the estate.”18 This Court adopted the same standard in In re McDonald,19 stating that
[t]o exclude property from the bankruptcy estate under § 541(c)(2), Debtors must satisfy three criteria. First, they must show that they have a beneficial *578interest in a trust. Second, they must show that there is a restriction on the transfer of that interest. Third, they must show that the restriction is enforceable under nonbankruptcy law.20
This Court has previously had the opportunity to consider the parameters of the § 541(c)(2) exclusion for spendthrift trusts in In re Roth?21 In Roth, the debtor contended that because the trust contained language preventing the voluntary or involuntary alienation by a beneficiary of the trust assets, that it was a spendthrift trust, and that such trusts are excluded from the bankruptcy estate under § 541(c)(2).
Roth noted that spendthrift trusts have long been held valid under Kansas law. In addition, the decision noted that “[a]n examination of the legislative history of § 541(c)(2) indicates that Congress meant to exclude from the estate those assets of ‘spendthrift trusts’ traditionally beyond the reach of creditors under State trust law.”
Thus, as it was in Roth, a resolution of this initial issue turns on whether the Trust qualifies as a “spendthrift trust.” If so, the Debtor s interest in the trust is immune from creditors’ claims as an asset of the estate under § 541(a)(1). Whether an asset is estate property is determined by examining the nature of the asset on the date the bankruptcy petition was filed.22 Although federal law identifies the property interests that are to be included in a debtor’s bankruptcy estate, such property interests themselves are created and defined by state law.23 Thus, in this case, if the Trust was a valid spendthrift trust under Kansas law, then the Trust never became part of the bankruptcy estate.
Under Kansas law, a spendthrift trust is a trust with a provision that “secure[s] the fund against [a beneficiary’s] improvidence or incapacity. Provisions against alienation of the trust fund by the voluntary act of the beneficiary or by his creditors are its usual incidents.”24 As noted in Roth, “because of the provisions of this ... spendthrift clause, neither [the debtor’s] creditors nor transferees had any right to rely upon the Trust for satisfaction of their claims.”25
There are no magic words required to create a spendthrift trust under Kansas law; “a spendthrift trust is created when ‘the trustor clearly manifests] the intention not only to create a trust, but to create it with the spendthrift effect.’”26 “The intent need not be stated in express terms but may come from construction of the trust instrument as a whole.”27 A court’s inference of such intent need only be made with reasonable certainty.28
The spendthrift provision in the instant Trust unequivocally strips “the beneficiaries [of] any power to dispose of or to *579charge by way of anticipation or otherwise any interest given to such beneficiary” and requires that “all sums payable to any beneficiary hereunder shall be free and clear of debts, contracts, alienations and anticipations of such beneficiary.”29 This language contains the usual incidents of a spendthrift trust and requires a finding that the Restated Robben Family Trust was intended to be a spendthrift trust. No party seriously argues otherwise.
The Trustee nevertheless makes four counter arguments why the spendthrift provision should not be enforced.30 First, she argues that, because the Trust provides for Debtor’s one third interest to pass to him in trust upon his mother’s death, the trust effectively contains a provision that allows a beneficiary to control and withdraw the entire principal for his own benefit while serving as his own trustee, rendering the restraint on the transfer invalid. While the Trustee is correct that, after the interest passed to Debtor, it would no longer be protected by the spendthrift provision, this fact has no effect on the validity of the spendthrift provision while Debtor’s mother was alive, as she was when Debtor filed his bankruptcy petition (and for six more years).
Second, the Trustee highlights certain provisions of the Trust related to age-based restrictions on transfer that would only become effective after Debtor’s mother died and argues that these provisions rendered the spendthrift provisions unenforceable. This argument shares the same defect as the Trustee’s first argument, and further fails because the provision applies only to the children of Debtor, Mary Ann Ruff, and Paul Robben, not to the siblings or Debtor, himself.
Third, the Trustee argues that the spendthrift provision does not apply because the assets have now been dispersed, again, over 6 years after the bankruptcy was filed. This argument similarly fails because — as the Tenth Circuit BAP has confirmed — whether an asset is estate property is determined by examining the nature of the asset on the date the bankruptcy petition was filed, not at some later time.31
The Trustee’s fourth argument is that Debtor invalidated the spendthrift provisions when he exercised control over then existing trust assets by pledging some of those assets to secure a personal loan to Gold Bank in 2008, prior to filing bankruptcy. But this argument overlooks an important fact — there was no spendthrift provision in the original Robben Family Trust from which he pledged assets. As a result, Debtor’s actions in *580pledging trust assets as trustee, before the spendthrift provision was added and before Debtor was concomitantly removed as trustee, do not invalidate the later-added spendthrift provision.
The Trustee appears to allege that because Debtor earlier abused his discretion as trustee and failed to comply with any standard for distribution, he should not now be able to use as a shield the spendthrift provision his mother apparently intentionally inserted into the Restated Trust in 2004. But as noted, this argument overlooks the sequence of events in this case. Here, the spendthrift provision that the Trustee argues was invalidated by pre-bankruptcy dealings with Gold Bank was added in 2004 at the same time Debtor was removed as trustee of the Restated Robben Family Trust. As a result, Debtor’s actions pledging trust assets as trustee did not violate any spendthrift provision. Those actions, therefore, do not invalidate the later-added spendthrift provision, and there was no evidence at trial that Debtor ever pledged assets of the Restated Robben Family Trust after he was removed as trustee. It was the apparent intent of the settlor, Bertha Rob-ben, that from January 22, 2004 forward, Debtor no longer be able to use her assets to pay his creditors. It is her intention that this Court is now required to enforce.
Finally, the Trustee argues that, regardless of the spendthrift provision, Debtor is judicially estopped from now claiming an interest in the Restated Robben Family Trust assets. This argument is based on her contention that Debtor’s decision not to clearly disclose his interest in this Trust somehow proves that he believed he had no interest in the Trust. She argues that his “denial” of an interest in the Trust contradicts his later state court action against his siblings where he sought an accounting and inventory of the Restated Robben Family Trust assets.
Three factors typically inform a court’s decision whether to apply the doctrine of judicial estoppel: (1) whether the party’s subsequent position is clearly inconsistent with its former position; (2) whether the suspect party succeeded in persuading a court to accept that party’s former position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled; and (3) whether the party seeking to assert an inconsistent position would gain an unfair advantage in the litigation if not estopped.32 But Debtor does not meet even the first criteria; Debtor’s position that the interest now has value is not inconsistent with his argument that it was not part of the estate, or had no value to the estate in 2004 when Debtor entered bankruptcy (some six years before his mother died and his interest became choate).
In addition to echoing the theories advanced by the Trustee, Mary Ann Ruff and Paul Robben also contend that § 541(c)(2) does not exclude Debtor’s interest in the Trust from the bankruptcy estate, but rather only prevents the Trustee from forcing distributions from the estate to pay creditors. They cite no case law in support of this position, and such interpretation contravenes both Tenth Circuit BAP precedent33 and this Court’s holding in In re Roth.34
These counter arguments are unavailing. Having reviewed the language in the Trust *581and the facts of the case at the time Debt- or filed his bankruptcy petition, the Court finds that Debtor had a beneficial interest in the Restated Robben Family Trust when he filed bankruptcy, the Restated Robben Family Trust restricts him from transferring that beneficial interest, and the restriction is a facially valid spendthrift provision under Kansas law. As a result, Debtor satisfies the three criteria required to exclude property from the bankruptcy estate under § 541(c)(2). The parties cannot successfully contest these criteria, and the Court finds no other fact in this case that differentiates it from In re Roth. Debtor’s interest in the Restated Robben Family Trust was never a part of the bankruptcy estate.
Because Debtor’s interest in the Restated Robben Family Trust did not become part of the bankruptcy estate, Debt- or’s motion seeking for the Trustee to abandon that asset is denied, as moot.
It is so ordered.
. Doc.50.
. Doc. 51.
. Creditors' Trial Ex. A.
.See Pretrial Order, Doc. 116 and Creditors' Trial Ex. C.
. Debtor’s Trial Ex. 2, at 8. Unfortunately, the copy of this Trust provided by Creditors in their Exhibit G omitted this relevant page 8, without explanation.
. Whether or not the Settlement Agreement was signed by all the parties before Debtor entered bankruptcy does not affect the Court's reasoning on the key issue before it, which deals exclusively with the Restated Robben Family Trust. No one disputes that Trust was executed before he filed bankruptcy.
. Debtor Trial Ex. 3, at 8.
. The only description of their claim was “Consideration: Trust Deficiency.”
. Doc. 50.
. Doc. 18, p.7.
. Trustee Ex. KK, p.8.
. Doc. 56.
. Doc. 61.
. Id.
. Doc. 68.
. Debtor also argues that his interest was of inconsequential value and should therefore be abandoned by the Trustee; because the Court agrees with Debtor’s first argument, it does not reach his alternative argument.
. See Case v. Hilgers (In re Hilgers), 371 B.R. 465, 468 (10th Cir. BAP 2007) ("Section 541(c)(2) of the Bankruptcy Code excludes from property of the estate a debtor's beneficial interest in a spendthrift trust.”).
. Rhiel v. Adams (In re Adams), 302 B.R. 535, 540 (6th Cir. BAP 2003).
. In re McDonald, 353 B.R. 287, 293 (Bankr.D.Kan.2006).
. Id. (citing In re Adams, 302 B.R. at 540).
. 289 B.R. 161, 165 (Bankr.D.Kan.2003).
. In re Hilgers, 371 B.R. at 468 (holding "to determine whether the Debtor’s interests in the Trusts were excluded from his estate, we must analyze the nature of that interest, under applicable state law, as of the time of his bankruptcy filing.”).
. In re Roth 289 B.R. at 165 (internal citations omitted).
. Matter of Sowers' Estate, 1 Kan.App.2d 675, 680, 574 P.2d 224 (1977).
. In re Roth, 289 B.R. at 165.
. In re Semmel, Case No. 01-14433, 2003 WL 23838130, at *3 (Bankr.D Kan. Feb. 27, 2003) (quoting Matter of Sowers' Estate, 1 Kan.App.2d at 680, 574 P.2d 224).
. Matter of Sowers' Estate, 1 Kan.App.2d at 680, 574 P.2d 224.
. Id.
. Debtor’s Trial Ex. 2, at 8.
. At oral argument, Trustee suggested that, absent a spendthrift provision, a debtor’s equitable interest in a revocable trust is part of the bankruptcy estate and must be disclosed. For this argument, Trustee relies on Redmond v. Kester, 284 Kan. 209, 159 P.3d 1004 (2007), wherein the Kansas Supreme Court held that a trust beneficiary possesses an equitable interest in the real estate held by the trust. Likewise, she argued that if a debtor happens to know he or she is listed as a beneficiary in a will, that the debtor is also required to list that interest in question 18 or 19 of Schedule B. Because the Court determines that the Restated Robben Family Trust contained a valid spendthrift provision, the Court does not address what property interests the debtor held that the bankruptcy estate might have possessed or that the Debtor would be required to disclose, absent the spendthrift provision.
.In re Roth, 289 B.R. at 165 (holding that “[w]hether an asset is estate property is determined by examining the nature of the asset on the date the bankruptcy petition was filed”) (internal citations omitted), cited favorably for this proposition in In re Hilgers, 371 B.R. at 468 n. 8.
. Queen v. TA Operating, LLC, 734 F.3d 1081, 1087-88 (10th Cir.2013).
. In re Hilgers, 371 B.R. at 468 (“Section 541(c)(2) of the Bankruptcy Code excludes from property of the estate a debtor's beneficial interest in a spendthrift Trust.”).
. 289 B.R. at 165. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496587/ | *584
MEMORANDUM OPINION
C. MICHAEL STILSON, Bankruptcy Judge.
This adversary proceeding came before the court on August 14, 2013, for trial on the Complaint filed by Vision Bank and SE Property Holding LLC (“Plaintiffs”). Thomas W. Powe, Jr., appeared on behalf of Douglas Jeffery Harless, Sr. (“Debtor”); Richard M. Gaal appeared on behalf of Plaintiffs. After reviewing the evidence and the arguments of the parties, this court SUSTAINS Plaintiffs’ objection to dischargeability pursuant to 11 U.S.C. § 523(a)(6) as to $3,996.54 of the debt owed to Plaintiffs.
JURISDICTION
The district court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. § 1334(a) & (b). Jurisdiction is referred to the bankruptcy courts by the General Order of Reference of the United States District Court for the Northern District of Alabama, signed July 16, 1984, as Amended July 17, 1984 pursuant to 28 U.S.C. § 157(a). The bankruptcy court may enter an appropriate order and judgment pursuant to 28 U.S.C. § 157(b)(1).
FINDINGS OF FACT
Debtor built a house on Ono Island in Baldwin County, Alabama (“Ono Island Property”). The Ono Island Property is located in an exclusive gated community in the Gulf Shores area of Alabama.1 Debtor and his wife, Paula H. Harless, were the joint owners of the Ono Island Property, which was their beach house, not their primary residence. Debtor’s former construction business, Harless Development Company, Inc., was the owner of a parcel of property located in Baldwin County, Alabama known as the Magnolias Subdivision. Both the Ono Island Property and the Magnolias Subdivision were subject to one or more mortgages held by Plaintiff Vision Bank.
On June 28, 2010, Plaintiff Vision Bank filed a Complaint in the United States District Court for the Southern District of Alabama seeking a judgment as to certain promissory notes executed by and/or guaranteed by Debtor, Debtor’s wife, and Debtor’s former business.2
On or about July 22, 2010, Plaintiff Vision Bank conducted a foreclosure sale as to its mortgage(s) on the Magnolias Subdivision.
On September 2, 2010, Plaintiff Vision Bank conducted a foreclosure sale as to its mortgage(s) on the Ono Island Property. (Plaintiffs’ Exhibit 5).
On September 14, 2010, Debtor, Debt- or’s wife, and Debtor’s former business filed their Amended Answer and Counterclaim alleging, among other things, unlawful foreclosure as to both the Magnolias Subdivision and the Ono Island Property.
On September 20, 2010, Plaintiff Vision Bank filed a Second Amended Complaint seeking an order of ejectment as to the Ono Island Property.
On August 5, 2011, after numerous further pleadings and happenings,3 the United States District Court for the Southern *585District of Alabama granted summary judgment to Plaintiffs.
On August 19, 2011, Plaintiffs filed a motion in the United States District Court for the Southern District of Alabama for a writ of assistance to have Debtor ejected from the Ono Island Property. That same day, Debtor filed a voluntary bankruptcy petition pursuant to Chapter 7 of the United States Bankruptcy Code. (Bk.Doc. 1). Debtor’s bankruptcy schedules reflect approximately $2.5 million in unsecured debt. Approximately $2.0 million of the unsecured debt is owed to Plaintiff Vision Bank.
On' August 23, 2011, Plaintiffs filed a Motion for Relief from Stay to Proceed with Enforcement of Ejectment Action Against Debtor. (Bk.Doc. 20). Plaintiffs requested an expedited hearing. (Bk.Doc. 21).
On August 29, 2011, Michael Randolph Powell, an inspector/employee of Plaintiff SE Property Holding, LLC, drove to the Ono Island Property. He pulled into the driveway and then almost immediately turned around and left. He did not get out of his vehicle and did not see Debtor. After traveling to and inspecting other properties, Mr. Powell returned to his office, which was located at Plaintiff Vision Bank’s Foley Branch. Sometime after his return to the office, Mr. Powell was contacted by the receptionist, who informed him that someone was in the lobby claiming they had hit his car. When Mr. Powell came downstairs, the gentleman claiming to have hit his car asked if they could go outside to talk. Once outside, the gentleman got very close to Mr. Powell, informed Mr. Powell that he was Douglas Harless, informed Mr. Powell that he saw Mr. Powell drive onto the Ono Island Property, and asked if Mr. Powell had seen everything Mr. Powell needed to see. Debtor then got into his vehicle and drove away. It became clear at that point that Debtor had not hit Mr. Powell’s car, and that the story was merely a ruse to get Mr. Powell to come downstairs. Mr. Powell testified that he felt intimidated and threatened by Debtor’s actions. Although Debtor disputed that his actions were intimidating or threatening, he did not dispute that the conversation took place. Debtor testified that he was at the Ono Island Property preparing to move out when he saw a car pull into his driveway. He further testified that he became concerned that a thief was checking out the house to later rob it. While facially plausible, Debtor’s explanation does not explain how he happened to discover Mr. Powell’s car at the bank parking lot or why Debtor did not call the police.
On September 6, 2011, the Motion for Relief from Stay was heard by this court. At such hearing, Debtor consented to the Motion and announced that he had vacated the Ono Island Property.
On September 8, 2011, Plaintiffs took possession of the Ono Island Property.
On November 22, 2011, Plaintiffs filed the Complaint in this court alleging that Debtor inflicted damage to the Ono Island Property willfully, intentionally, and maliciously. Specifically, Plaintiffs allege that:
• Debtor removed light fixtures from the ground floor patio.
• Debtor damaged the siding of the house by hitting it with a hammer or similar object.
• Debtor removed bolts from stair railings.
• Debtor removed post caps from wharf.
• Debtor removed boat house door.
• Debtor cut boat lift wires.
• Debtor removed skimmer covers from pool area.
*586• Debtor removed or damaged pool equipment.
• Debtor removed porch light fixtures.
• Debtor allowed termite infestation.
• Debtor damaged locks, windows, doors and cabinets.
• Debtor cut speaker wires.
• Debtor removed inside light fixtures.
• Debtor removed light bulbs from interior of house.
• Debtor removed cabinet hardware and window hardware from some windows.
• Debtor damaged interior carpet.
• Debtor removed second floor balcony lights and ceiling fans.
• Debtor removed first floor balcony lights.
• Debtor removed exterior speakers.
• Debtor removed garage door sensors.
• Debtor cut sensor wires.
• Debtor removed batteries from thermostat.
• Debtor deposited a pile of feces in the middle of the living area of the house.
The court will review the facts surrounding the various claims of damage asserted by Plaintiffs:
• Removal of lights, ceiling fans, speakers and light bulbs. The photographs submitted by Plaintiffs show that the outside light fixtures, ceiling fans, exterior speakers, the interior light fixtures and light bulbs were removed sometime between August 9, 2011, and September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000001 & 000008 & 000011 & 000012 & 000013 & 000014 & 000015 & 000016). Debt- or admitted that he removed these items but asserted that he had a right to remove them as he had installed them after the house was constructed. He testified that he still has the fixtures in storage.
• Cutting of speaker wires. The photographs submitted by Plaintiffs show that the outdoor speaker wires on the 2nd floor balcony were cut sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000013). The photographs also show that some first floor speaker wires were cut short sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000010). Debtor admits that he removed the speakers that were attached to the wires.
• Removal of garage door sensors and the cutting of the sensor wires. The photographs submitted by Plaintiffs show that the garage door sensors were removed and the wires cut sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000017). Mr. Powell testified that he saw some of the garage door equipment in the bay on one of his numerous trips to the Ono Island Property. Debtor denied that he removed the garage door equipment and speculated that the garage door equipment was damaged when the garage was flooded. Debt- or’s testimony is inconsistent with the time line established by Mr. Powell’s testimony. This court found the testimony of Mr. Powell more credible.
• Damage to siding. The photographs submitted by Plaintiffs show the damage to the siding sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000002 & 000006 & 000007). The damage consists of multiple small, circular dents. Plaintiffs speculate that the dents were made by a hammer, but there is no evidence of this. There is also no evidence of when the damage occurred or under what circumstances.
• Removal of bolts from stair railings. The photographs submitted by Plain*587tiffs show that the stair railings were loose sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000002). Plaintiffs speculate that Debtor removed - the bolts from the stair railings and that is why the stair railings are loose. However, an examination of the photographic evidence contradicts this. First, the photograph shows that the stair railings are held in place by screws, not bolts, which is consistent with Debt- or’s testimony at trial. Second, the screws are visible in the photograph, so they were not removed as alleged by Plaintiffs. There is no evidence that Debtor loosened the screws.
• Removal of post caps from wharf. The photographs submitted by Plaintiffs show that the post caps were removed from the wharf sometime between August 9, 2011, and September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000003). This is inconsistent with Debtor’s testimony that he believed the post caps were blown away during a storm. Given that the post caps were removed during a time period when the relationship between Debtor and Plaintiffs was contentious, it seems more likely that Debtor removed the post caps himself.
• Removal of the boat house door. The photographs submitted by Plaintiffs show that the boat house door was missing on September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000003). The caption states that the boat house door was there on August 9, 2011, but there was no photographic evidence of this assertion. However, Mr. Powell testified that to the best of his recollection the boat house door was in place on August 9, 2011. Debtor could not recall what happened to the boat house door, but speculated that it was torn up during Ivan, a strong hurricane that hit Mobile in 2004. Debtor testified that the door was put back in place sometime after Ivan, and that he did not remove the door after it was replaced. This is inconsistent with the time line established by Mr. Powell’s testimony. This court found the testimony of Mr. Powell more credible.
• Cutting wires to boat lift. The photographs submitted by Plaintiffs show that the wires to the boat lift were cut sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000004). Debtor testified that the pier and boat house were damaged in 2004 during a storm. The storm was so strong that the pier was damaged and the electrical conduit running to the boat house was torn out of the ground. The pier was replaced, but the electricity was never rerun to the boat house. Debt- or further testified that he had not had a boat at the Ono Island Property since 2004 and therefore had not used the boat house to store his boat since 2004. Debtor’s testimony was credible: There would be no reason for Debtor to cut the wires to the boat lift since the boat lift was not receiving electricity.
• Removal of skimmer covers from swimming pool area. The photographs submitted by Plaintiffs show that the skimmer covers were removed from the swimming pool area sometime between August 23, 2011, and September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000005). Debtor testified that he did not know what happened to the skimmer covers between those two dates. Given that the skimmer covers were removed during a time period when the relationship between Debtor and Plaintiffs was deteriorating, it seems more like*588ly that Debtor removed the skimmer covers himself.
• Removal of and/or damage to pool equipment. The photographs submitted by Plaintiffs show that some of the pool equipment was removed and/or damaged sometime before August 23, 2011, while Debtor was still in possession of the Ono Island Property. (Plaintiffs’ Exhibit 1, SEPH 000006). SEPH 000006 is a picture of the pool equipment on August 23, 2011.4 It shows an empty place between two pieces of equipment, as well as PVC pipes which have been cut off. Debtor testified that the equipment on the right in the photograph is the pool heater. The equipment on the far left is the filter system. The Polaris cleaning equipment used to be located in the middle. It was the Debtor’s testimony that the Polaris cleaning system did not work and was removed by the pool maintenance company in the past. The pool was used without the automatic cleaner and cleaned manually until the pump gave out in the summer of 2010. Again Debtor testified that he did not have the money to replace the pump and did not use the pool in the summer of 2011. Photographs of the pool clearly show the build-up of algae. Plaintiffs presented no evidence that contradicted Debtor’s accounts of events, and the court found the Debt- or’s testimony credible.
Plaintiffs presented testimony that there were two sago palms found in the bottom of the pool when the pool was drained on September 19, 2011. (Plaintiffs’ Exhibit 2, Invoice # 9281).5 On August 9, 2011, there were two sago palms next to the pool. (Plaintiffs’ Exhibit 1, SEPH 000026). The palms were still there on August 23, 2011. (Plaintiffs’ Exhibit 1, SEPH 000005). Debtor offered three photographs in support of his testimony that the sago palms shown by the pool at the Ono Island Property are now located in front of his son’s office in Tuscaloosa, and that they were not thrown into the pool at the Ono Island Property. (Debtor’s Exhibits 10, 11, & 12). This court finds the Debtor’s testimony credible.6
• Allowance of termite infestation. The photographs submitted by Plaintiffs show that there was termite damage to the Ono Island Property as of September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000009). Plaintiffs assert that Debtor allowed the termite bond to expire out of spite and that such expiration resulted in termite damage. Debtor admits that he allowed the termite bond to expire, but denies the motivation espoused by Plaintiffs. Debtor testified that he allowed the termite bond to lapse when he could no longer afford to pay the premiums. There is no evidence as to when the termite bond expired, but Debtor’s financial difficulties started in 2008. Debtor’s schedules reflect that he could not pay his 2008 federal income taxes and that creditors began suing him as early as 2009. This is consistent with the Defendant’s testimony that he did not have the money to continue maintaining the termite *589bond, and the court finds this testimony credible.
• Damage to locks, windows, doors and cabinets. The photographs submitted by Plaintiffs show that a door lock was broken on two different doors sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000009 & 000010). The photographs also show that a top bolt to a French door was damaged prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000017). The photographs also show that a cabinet door was broken off prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000009). There were no photographs of any damage to the windows other than the missing hand cranks which are addressed in a separate section.
• Removal of cabinet hardware and window hardware. The photographs submitted by Plaintiffs show that numerous cabinet hardware and window hardware were removed sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000011 & 000012). The missing window hardware are window cranks which open the windows by rolling the windows out. Debtor testified that the windows could not be opened due to the plantation shutters on the outside of the house.7 It was his testimony that he was not sure that the handles were ever put on the windows to begin with, but if they were, they were probably removed to allow the shades on the window to work. The court found this explanation credible.
The same cannot be said concerning the missing cabinet hardware. The two bathroom cabinets shown in SEPH 000011 and SEPH 000012 have no pulls on the drawers and doors. While normal wear and tear could result in some pulls being missing since the house was constructed in 2001, normal wear and tear could not result in every single pull being missing. It is much more likely that Debtor removed the cabinet pulls himself.
• Damage to interior carpet and hardwood floors. The photographs submitted by Plaintiffs show that the carpet was pulled up at the seams in bedroom 1, bedroom 2, and bedroom 3 sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000011 & 000012). Debtor described the carpet as being made of a grass-like material, which was installed in the house when it was originally constructed. He also testified that there was a leak in the upstairs bathroom which caused the carpet to get wet and to begin to unravel. It was his testimony that this occurred in 2005 at a time when his daughter was ill and the leak was not discovered until it came through on the first floor of the house.
Plaintiffs submitted a photograph showing that the floor receptacle covers were removed sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000010). Debtor testified that the first floor flooring was pine wood, but that he was not aware of any damage to the floor. Invoice # F0003787 from W & W Flooring and Design does show the hardwood floors and carpet were refinished and replaced September 7, 2012, approximately a year after the Defendant moved out of the house at a time when *590the bank was preparing to sell the house.
• Removal of battery from thermostat. The photographs submitted by Plaintiffs show that the battery was removed from the thermostat sometime prior to September 12, 2011. (Plaintiffs’ Exhibit 1, SEPH 000018).
In addition to the photographs depicting the damage to the Ono Island Property, Plaintiffs also submitted invoices totaling $26,456.17 for actual costs that it incurred for repairs to the Ono Island Property. They were admitted into evidence collectively as Plaintiffs’ Exhibit 2. A summary follows:
Name Nature of repairs Invoice # Date Amount
$1,360 This was to replace the missing boathouse door, fill and paint the alleged hammer holes in the exteri- or of the house and replace 2 garage door openers. Infinity Repairs 263 1-30-12
$100 The Plaintiffs claim $100 for replacing the batteries in the smoke detectors at the Ono Island house. Infinity Repairs 377 7-8-12
$860 For replacing an entry door to the garage, along with hardware and repairing trim board and replacing sheetrock, all of which appears to be outside work. Infinity Repairs 397 7-30-12
$367.17 To replace 2 window crank handles, 2 dead bolt mortices and 2 door locks. Glass Systems of Alabama 921 8-21-12
$3,596.74 Replacement of light fixtures, ceiling fans and light bulbs. Mathes of Alabama 154007-00 10-5-12
$12,576 Refinishing hardwood floors, installing hardwood floors and removing carpet W & W Flooring & Design F0003787 9-7-12
Replacing 9 spotlight bulbs in the Ono Island kitchen Infinity Repairs 177 9-22-11 O
$2,100 Repair of exterior wood, claimed to have to been caused by either termite damage or rot. This included the reattachment of the loose handrail. Infinity Repairs 171 9-18-11
$2,130 Replace the caps on the pilings, as well as repair an archway and install shoe molding after new flooring had been installed in the upstairs bedrooms. Infinity Repairs 458 10-15-12
$2,179.45 For what was described as getting the swimming pool back up to appropriate conditions, including cleaning the pool and replacing pool hardware. Included in this invoice is cleaning, chemicals, and related pool supplies necessary to get the pool operational again. Gold Coast Pools & Spa 9281 9-19-11
$591.81 Installing a new filtering system on the pool Gold Coast Pools & Spa 9282 9-21-11
*591Gold Coast Pools 10281 10-15-12 $455 & Spa Draining the pool and looking for a leak in the pool. This was approximately a year after the Defendant had left the property.
Debtor admits that he removed various items of personal property from the Ono Island Property including light bulbs, light covers, ceiling fans, and stereo speakers. However, Debtor asserts that he believed he had the right to remove them because they were his personal property that he installed over the years. Debtor denies that he inflicted any damage to the Ono Island Property willfully and maliciously and denies claims that he caused or was aware of the other items of damage claimed by Plaintiffs.
CONCLUSIONS OF LAW
Plaintiffs seek a determination that the $26,456.17 spent on repairing the Ono Island Property should be declared nondis-chargeable pursuant to 11 U.S.C. § 523(a)(6).
The plaintiff bears the burden of proof in a nondischargeability cause of action and must prove each element by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). To establish a prima facie case under § 523(a)(6), Plaintiffs must establish by a preponderance of the evidence that: (1) there is a debt owed to Plaintiffs; (2) the debt owed is one for willful injury; and (3) the debt owed is one for malicious injury. See 11 U.S.C. § 523(a)(6).
This court will first address whether Plaintiffs have met their burden of proving that the damage done to the Ono Island Property was willful. “The word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998) (emphasis in original). Therefore, only acts committed with the “actual intent to cause injury” are willful. See id. “[D]ebts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Id. at 64, 978, 118 S.Ct. 974. See also Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir.2012) (quoting Hope v. Walker (In re Walker), 48 F.3d 1161, 1163 (11th Cir.1995)) (stating that “proof of ‘willfulness’ requires ‘a showing of an intentional or deliberate act, which is not done merely in reckless disregard of the rights of another.’”). Plaintiffs provided photographs of the damage to the Ono Island Property. (AP Doc. 41). Debtor does not deny the existence of the damage. He denies that he caused some of the damage, and further denies that any damage he caused was inflicted willfully and maliciously. A detailed accounting of the damage to the Ono Island Property and the Debtor’s explanation for the damage follows:
• Removal of lights, ceiling fans, speakers and light bulbs. The photographs submitted by Plaintiffs show that the outside light fixtures, ceiling fans, exterior speakers, the interior light fixtures and light bulbs were removed sometime between August 9, 2011, and September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000001 & 000008 & 000011 & 000012 & 000013 & 000014 & 000015 & 000016). Debt- or admitted that he removed these items, but asserted that they were his that he had installed after the house was constructed and that he had a *592right to remove these. He testified that he still has them in storage. Debtor had no right to remove the lights, ceiling fans, speakers, and lightbulbs because they constitute fixtures under Alabama law:
When doubt arises as to whether or not a certain piece of property is a fixture, this doubt must be decided by the circumstances of each individual case, as they may be influenced by certain cardinal rules which have now become criteria for the decision of the question. If the article in question meets the requirements of these rules, its character as a fixture is determined. These rules, as gathered from the adjudicated cases, have been succinctly stated as follows: (1) Actual annexation to the realty or to something appurtenant thereto; (2) appropriateness to the use or purposes of that part of the realty with which it is connected; (3) the intention of the party making the annexation of making permanent attachment to the freehold. This intention of the party making the annexation is inferred (a) from the nature of the article annexed; (b) the relation of the party making the annexation; (c) the structure and mode of annexation; (d) the purposes and uses for which the annexation has been made.
Langston v. State [96 Ala. 44], 11 So. 334, 335 (Ala.1892). Per the requirements set forth in Langston, the light fixtures, ceiling fans, and speakers were fixtures as they were attached to the real property via wires, they were necessary for the enjoyment of the property, and Debtor intended the annexation to be permanent. See, e.g., Farmers & Merchants Bank v. Sawyer [26 Ala.App. 520], 163 So. 657, (Ala.Ct.App.1935) (holding that light fixtures were fixtures under Alabama law). The fact that debtor replaced the fixtures with cheaper versions shows that he knew a house is expected to come equipped with fixtures.
Contrary to his assertions, this court finds that Debtor was aware that the lights, ceiling fans, and speakers were fixtures under Alabama law and was aware that he had no legal right to remove them from the Ono Island Property. Debtor was in the construction/development business for over 20 years, and knew that light fixtures and ceiling fans normally move with the real estate. Debtor knew he was taking Plaintiffs personal property when he removed the fixtures Given that the relationship between Debtor and Plaintiffs was deteriorating during the time period that the light fixtures were removed, this court finds that implicit in Debtors actions was an intent to cause injury to Plaintiffs without just cause or excuse. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs when Debtor removed the fixtures from the Ono Island Property.
• Cutting of speaker wires. The photographs submitted by Plaintiffs show that the outdoor speaker wires on the 2nd floor balcony were cut sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000013). The photographs also show that some first floor speaker wires were cut short sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000010). Debtor admitted that he removed the speakers. As a result, this court finds that he cut the wires short when he removed them. Debtor was in the construction/development business for over 20 years and would know that *593cutting speaker wires short would cause damage. Given that the relationship between Plaintiffs and Debtor was deteriorating when the speakers were removed and the speaker wires cut, this court finds that implicit in Debtor’s actions was an intent to cause injury to Plaintiffs without just cause or excuse. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs when Debtor cut the speaker wires at the Ono Island Property.
• Removal of garage door sensors and the cutting of the sensor wires. The photographs submitted by Plaintiffs show that the garage door sensors were removed and the wires cut sometime prior to December 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000017). Mr. Powell testified that he saw some of the garage door equipment in the bay. Debtor denied that he removed the garage door equipment and speculated that the garage door equipment was damaged when the garage was flooded. This is inconsistent with the time line established by Mr. Powell’s testimony. This court found the testimony of Mr. Powell more credible and finds that Debtor removed the garage door sensors and cut the sensor wires shortly before moving out of the Ono Island Property. Given that the relationship between Plaintiffs and Debtor was deteriorating when the garage door sensors were removed and the sensor wires were cut, this court finds that implicit in Debtor’s actions was an intent to cause injury to Plaintiffs without just cause or excuse. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs when Debt- or removed the garage door sensors and cut the sensor wires at the Ono Island Property.
• Damage to siding. The photographs submitted by Plaintiffs show the damage to the siding occurred sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000002 & 000006 & 000007). The damage consists of multiple small, circular dents. Plaintiffs speculate that the dents were made by a hammer, but there is no evidence of this. There is also no evidence of when the damage occurred or under what circumstances. In short, there is no evidence that Debtor damaged the exterior siding. Therefore, Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by damaging the siding at the Ono Island Property.
• Removal of bolts from stair railings. The photographs submitted by Plaintiffs show that the stair railings are loose. (Plaintiffs’ Exhibit 1, SEPH 000002). Plaintiffs speculate that Debtor removed bolts from the stair railings and that is why the stair railings are loose. However, an examination of the photographic evidence contradicts this. First, the photograph shows that the stair railings are held in place by screws, not bolts, which is consistent with Debtor’s testimony at trial. Second, the screws are visible in the photograph, so they were not removed as alleged by Plaintiffs. There is no evidence that Debtor loosened the screws. Therefore, Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by removing the bolts from the stair railings at the Ono Island Property.
• Removal of post caps from wharf. The photographs submitted by Plaintiffs show that the post caps were removed from the wharf sometime between August 9, 2011, and September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000003). This is inconsistent with Debtor’s testimony that he believed *594the post caps were blown away during a storm. Given that the post caps were removed during a time period when the relationship between Debtor and Plaintiff Vision Bank was deteriorating, it seems more likely that Debt- or removed the post caps himself. As such, this court finds that implicit in Debtor’s actions was an intent to cause injury to Plaintiffs without just cause or excuse. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs when Debtor removed the post caps from the wharf at the Ono Island Property.
• Removal of the boat house door. The photographs submitted by Plaintiffs show that the boat house door was missing on September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000003). The caption states that the boat house door was there on August 9, 2011, but there was no photographic evidence of this assertion. However, Mr. Powell testified that to the best of his recollection the boat house door was in place on August 9, 2011. Debtor could not recall what happened to the boat house door, but speculated that it was torn up during Ivan, a strong hurricane that hit Mobile in 2004. Debtor testified that the door was put back in place sometime after Ivan, and that he did not remove the door after it was replaced. This is inconsistent with the time line established by Mr. Powell’s testimony. This court found the testimony of Mr. Powell more credible and finds that the boat house door was removed sometime between August 9, 2011 and September 9, 2011. Given that the relationship between Plaintiffs and Debtor was deteriorating when the boat house door was removed, this court finds that implicit in Debtor’s actions was an intent to cause injury to Plaintiffs without just cause or excuse. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs when Debtor removed the boat house door at the Ono Island Property.
• Cutting wires to boat lift. The photographs submitted by Plaintiffs show that the wires to the boat lift were cut sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000004). Debtor testified that the pier and boat house were damaged in 2004 during a storm. The storm was so strong that the pier was damaged and the electrical conduit running to the boat house was torn out of the ground. The pier was replaced, but the electricity was never rerun to the boat house. Debt- or further testified that he had not had a boat at the Ono Island Property since 2004 and therefore had not used it to store his boat. Debtor’s testimony was credible: There would be no reason for Debtor to cut the wires to the boat lift since the boat lift was not receiving electricity. Plaintiffs failed to prove that Debtor caused the damage alleged. Therefore, Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by cutting the wires to the boat lift at the Ono Island Property.
• Removal of skimmer covers from swimming pool area. The photographs submitted by Plaintiffs show that the skimmer covers were removed from the swimming pool area sometime between August 23, 2011, and September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000005). Debtor testified that he did not know what happened to the skimmer covers between those two dates. This court did not find Debtor’s testimony about the skimmer covers credible, and finds that Debtor removed the skimmer *595covers. Given that the relationship between Plaintiffs and Debtor was deteriorating when the skimmer covers were removed, this court finds that implicit in Debtor’s actions was an intent to cause injury to Plaintiffs without just cause or excuse. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs when Debt- or removed the skimmer covers from the swimming pool area at the Ono Island Property.
• Removal of and/or damage to pool equipment. The photographs submitted by Plaintiffs show that some of the pool equipment was removed and/or damaged sometime before August 28, 2011, while Debtor was still in possession of the Ono Island Property. (Plaintiffs’ Exhibit 1, SEPH 000006). SEPH 000006 is a picture of the pool equipment on August 23, 2011.8 It shows an empty place between two pieces of equipment, as well as PVC pipes which have been cut off. Debtor testified that the equipment on the right in the photograph is the pool heater. The equipment on the far left is the filter system. The Polaris cleaning equipment used to be located in the middle. It was the Debtor’s testimony that the Polaris cleaning system did not work and was removed by the pool maintenance company in the past. The pool was used -without the automatic cleaner and cleaned manually until the pump gave out in the summer of 2010. Again Debtor testified that he did not have the money to replace the pump, and cleaned the pool manually as long as he could. Photographs of the pool clearly show the build-up of algae as early as August 23, 2011, which indicates that the pool was not being cleaned properly for quite some time. The court found the Debtor’s testimony credible and Plaintiffs presented no evidence to contradict Debtor’s account of events. As such, this court finds that the pool equipment was removed because it no longer worked and not because Debtor had any desire to cause injury to Plaintiffs. This court further finds that Debtor did not replace the pool equipment because he could not afford to, not because he had any desire to cause injury to Plaintiffs. Recall that Debtor’s financial difficulties started in 2008. Debtor’s schedules reflect that he could not pay his 2008 federal income taxes and that creditors began suing him as early as 2009.
Numerous courts have found that failure to maintain collateral is not enough to prove a willful and malicious injury pursuant to 11 U.S.C. § 523(a)(6). Cutler v. Lazzara (In re Lazzara), 287 B.R. 714, 723-24 (Bankr.N.D.Ill.2002) (listing cases). “In this regard, persons intending to cause harm do not normally do so by passive acts, such as failing to properly clean and maintain another’s property.” Knowles v. McGuckin (In re McGuckin), 418 B.R. 251, 256 (Bankr.N.D.Ohio 2009). This court agrees with those court. Failure to maintain the pool and pool equipment is the type of damage that occurs over a long period of time and resulted from passive acts, not overt acts. There is no evidence that the damage occurred during a time when the relationship between Debtor and Plaintiffs was deteriorating because of the foreclosure and forcible ejectment lawsuits. In the absence of any evidence of the damage caused by overt acts or that *596Debtor acted with intent to harm the Ono Island Property, Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by failing to maintain the pool and pool equipment.
The Plaintiffs presented testimony that there were two sago palms found in the bottom of the pool when the pool was drained on September 19, 2011. (Plaintiffs’ Exhibit 2, Invoice # 9281).9 On August 9, 2011, there were two sago palms next to the pool. (Plaintiffs’ Exhibit 1, SEPH 000026). The palms were still there on August' 23, 2011. (Plaintiffs’ Exhibit 1, SEPH 000005). Debtor offered three photographs in support of his testimony that those sago palms are now located in front of his son’s office in Tuscaloosa, and that they were not thrown into the pool at the Ono Island Property. (Debtor’s Exhibits 10, 11, & 12). This court found the Debtor’s testimony credible.10 As a result, this court finds that Debtor did not throw two sago palms into the pool. Therefore, Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by throwing two sago palms into the pool at the Ono Island Property.
• Allowance of termite infestation. The photographs submitted by Plaintiffs show that there was some termite damage to the Ono Island Property as of September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000009). Plaintiffs assert that Debtor allowed the termite bond to expire out of spite and that such expiration resulted in termite damage. Debtor admits that he allowed the termite bond to expire, but denies the motivation espoused by Plaintiffs. Debtor testified that he allowed the termite bond to lapse when he could no longer afford to pay the premiums. There is no evidence as to when the termite bond expired, but Debtor’s financial difficulties started in 2008. Debtor’s schedules reflect that he could not pay his 2008 federal income taxes and that creditors began suing him as early as 2009. This is consistent with the Defendant’s testimony that he did not have the money to continue maintaining the termite bond, and the court finds this testimony credible. As with the failure to maintain the pool and pool equipment, termite damage resulting from the lapse of a termite bond is the type of damage that occurs over a long period of time and was caused by passive acts, not overt acts. There is no evidence that the termite bond lapsed during a time when the relationship between Debtor and Plaintiffs was deteriorating. Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by failing to maintain the termite bond.
• Damage to locks, windows, doors and cabinets. The photographs submitted by Plaintiffs show that a door lock was broken on two different doors sometime prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000009 & 000010). The photographs also show that a top bolt to a French door was damaged prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000017). The photographs also show that a cabinet door was broken off prior to September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000009). There were no photographs of any damage *597to the windows other than the missing hand cranks which are addressed in a separate section. Debtor did not provide any explanation as to how the locks and cabinet door became damaged. The damage to the locks and the cabinet door are overt acts, not passive acts. Given that Debtor willfully injured Plaintiffs by removing light fixtures and ceiling fans, cutting speaker wires, removing post caps from the wharf, removing the boat house door, and removing skimmer covers from the pool area, this court finds that in the absence of a credible explanation Debtor also damaged the door locks and broke off the cabinet door with an intent to injure Plaintiffs. Plaintiffs proved that Debtor willfully injured Plaintiffs by damaging the locks and removing the cabinet door.
• Removal of cabinet hardware and window hardware. The photographs submitted by Plaintiffs show that numerous cabinet hardware and window hardware were removed sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000011 & 000012). The missing window hardware are window cranks which open the windows by rolling the windows out. Debtor testified that the windows could not be opened due to the plantation shutters on the outside of the house.11 It was his testimony that he was not sure that the handles were ever put on the windows to begin with, but if they had been, they were probably removed so that the shades on the windows could work. This is a credible explanation concerning the window cranks. As a result, this court finds that Debtor did not remove the window cranks with an intent to injure Plaintiffs. Therefore, Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by removing the window cranks.
The same cannot be said concerning the missing cabinet hardware. The two bathroom cabinets shown in SEPH 000011 and SEPH 000012 have no pulls on the drawers and doors. While normal wear and tear could result in some pulls being missing since the house was constructed in 2001, normal wear and tear could not result in every single pull being missing. Given that Debtor willfully injured Plaintiffs by removing light fixtures and ceiling fans, cutting speaker wires, removing post caps from the wharf, removing the boat house door, removing skimmer covers from the pool area, damaging locks, and removing a cabinet door, it is much more likely than not that Debtor removed the cabinet pulls himself. As a result, this court finds that Debtor willfully injured Plaintiffs by removing all the cabinet hardware. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs by removing the cabinet hardware.
• Damage to interior carpet and hardwood floors. The photographs submitted by Plaintiffs show that the carpet was pulled up at the seams in bedroom 1, bedroom 2, and bedroom 3 sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000011 & 000012). Debtor described the carpet as being made of a grass-like material, which was installed in the house when it was originally constructed. He also testified that there was a leak in the *598upstairs bathroom which caused the carpet to get wet and to begin to unravel. It was his testimony that this occurred in 2005 at a time when his daughter was ill and the leak was not discovered until it came through on the first floor of the house. Debtor did not replace the carpet. As with the failure to maintain the pool and pool equipment as well as the failure to maintain the termite bond, the pulling up of carpet at the seams after water saturation is the type of damage that occurs over a long period of time and resulted from passive acts, not overt acts. There is no evidence that the water saturation of the carpet occurred during a time when the relationship between Debtor and Plaintiffs was deteriorating because of the foreclosure and forcible ejectment lawsuits. Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by failing replace the carpet.
Plaintiffs submitted a photograph showing that the floor receptacle covers were removed sometime before September 9, 2011. (Plaintiffs’ Exhibit 1, SEPH 000010). Debtor testified that the first floor flooring was pine wood, but that he was not aware of any damage to the floor. Debtor did not provide any explanation as to why the floor receptacle covers were removed. The removal of the receptacle covers was an overt act, not a passive act. Given that Debtor willfully injured Plaintiffs by removing light fixtures and ceiling fans, cutting speaker wires, removing post caps from the wharf, removing the boat house door, removing skimmer covers from the pool area, damaging locks, and removing a cabinet door, this court finds that in the absence of a credible explanation Debtor also removed the floor receptacle covers with an intent to-injure Plaintiffs. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs by removing the floor receptacle covers.
• Removal of battery from thermostat. The photographs submitted by Plaintiffs show that the battery was removed from the thermostat sometime prior to December 12, 2011. (Plaintiffs’ Exhibit 1, SEPH 000018). Debt- or did not provide any explanation as to why the battery was removed from the thermostat. The removal of the battery was an overt act, not a passive act. Given that Debtor willfully injured Plaintiffs by removing light fixtures and ceiling fans, cutting speaker wires, removing post caps from the wharf, removing the boat house door, removing skimmer covers from the pool area, damaging locks, removing a cabinet door, and removing the floor receptacle covers, this court finds that in the absence of a credible explanation Debtor also removed the battery from the thermostat with an intent to injure Plaintiffs. Therefore, Plaintiffs proved that Debtor willfully injured Plaintiffs by removing the battery from the thermostat.
• Allowance of water damage. The photographs submitted by Plaintiffs did not show the water damage, but Plaintiffs are seeking the recovery of $860 for the cost of replacing an entry door to the garage, along with hardware and trim board, as well as the cost of replacing sheetrock. The testimony was that the items had to be replaced because they were damaged when water entered the Ono Island Property. As with the failure to maintain the pool and pool equipment, the failure to maintain the termite bond, and the failure to replace the upstairs carpet, water damage is the *599type of damage that occurs over a long period of time and was caused by passive acts, not overt acts. There is no evidence that the water damage occurred during a time when the relationship between Debtor and Plaintiffs was deteriorating. Plaintiffs failed to prove that Debtor willfully injured Plaintiffs by failing to stop the water leak.
The court will next address whether Debtor maliciously injured Plaintiffs. “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.’ ” In re Walker, 48 F.3d at 1164 (quoting Lee v. Ikner (In re Ikner), 883 F.2d 986, 991 (11th Cir.1989)). This court previously found that Debtor willfully injured Plaintiffs by removing light fixtures and ceiling fans, cutting speaker wires, removing post caps from the wharf, removing the boat house door, removing skimmer covers from the pool area, damaging locks, removing a cabinet door, removing the floor receptacle covers, and removing the battery from the thermostat. All of these acts occurred during a time period when the relationship between Debtor and Plaintiffs was deteriorating. Plaintiffs had foreclosed on the Magnolias Development and the Ono Island Property during a time period when Debtor was experiencing great financial difficulty. Debtor decided to fight the foreclosure and remained in possession of the Ono Island Property until shortly after Plaintiffs filed a forceful ejectment proceeding against Debtor. In addition, Debtor was in the construction/development business for over 20 years. He knew that he was acting in violation of Plaintiffs’ property rights. Given the acrimonious nature of the relationship between the parties, and the fact that Debtor knew he was violating Plaintiffs’ property rights, this court finds that Debtor maliciously injured Plaintiffs when he removed light fixtures and ceiling fans, cut speaker wires, removed post caps from the wharf, removed the boat house door, removed skimmer covers from the pool area, damaged locks, removed a cabinet door, removed the floor receptacle covers, and removed the battery from the thermostat at the Ono Island Property. See Aliant Bank v. Gautney (In re Gawtney), No. 12-80071-JAC-7, 2013 WL 414452, at *3 (Bankr.N.D.Ala. Jan. 31, 2013) (finding that the debtors were aware that the removal of fixtures was a violation of the plaintiffs property rights and that “the nature of the acts committed by the debtors implied a sufficient degree of malice for purposes of § 523(a)(6)”).
Finally, the court will address whether Plaintiffs proved that Debtor owes them a debt for a willful and malicious injury. Plaintiffs rely on a collection of invoices submitted into evidence as Plaintiffs’ Exhibit 2 to prove the costs incurred to fix the damage done to the Ono Island Property. A discussion of the invoices relating to the damage inflicted by Debtor willfully and maliciously follows.
• Removal of lights, ceiling fans, speakers and light bulbs. Plaintiffs’ Exhibit 2 includes an invoice dated October 5, 2012, for replacement of light fixtures and ceiling fans, as well as light bulbs. The total invoice was for $3,596.74. The cost for the replacement fixtures is not out of line. Plaintiffs’ Exhibit 2 also includes an invoice dated September 22, 2011, for the replacement of 9 spotlight bulbs in the kitchen. The total invoice was for $140.00. There was no invoice for the replacement of the speakers that Debtor removed. Plaintiffs are entitled to recover the full amount of both invoices.
*600• Cutting of speaker wires. Although Debtor damaged the speaker wires willfully and maliciously, Plaintiffs did not prove the damages associated with the repair of the speaker wires. None of the invoices admitted collectively as Plaintiffs’ Exhibit 2 included an invoice for repair of the speaker wires. In addition, there was no testimony concerning how much it would cost to fix the speaker wires. Plaintiffs are not entitled to recover any money for the cutting of the speaker wires.
• Removal of garage door sensors and the cutting of the sensor wires/Removal of boat house door. Plaintiffs’ Exhibit 2 includes an invoice from Infinity Repairs dated January 30, 2012, in the amount of $1,360 for the replacement of 2 garage door openers, the replacement of the missing boathouse door, and the filling and painting of hammer holes on the exterior of the house. The invoice does not itemize the costs of these different repairs, so this court cannot separate out the cost of the repairs. In addition, there was no testimony concerning the itemization of any cost. Because this court found that the damage to the siding of the Ono Island Property was not done willfully and maliciously, Plaintiffs are not entitled to recover any money for the repair of the hammer holes on the siding. In the absence of itemization, this court cannot subtract out the cost of the repair to the siding. Therefore, Plaintiffs failed to prove the amount that they are entitled to for the replacement of the two garage door openers, and the replacement of the boathouse door.
• Removal of post caps from wharf. Plaintiffs’ Exhibit 2 includes an invoice from Infinity Repairs dated October 15, 2012, in the amount of $2,130, for the replacement of the post caps, the repair of an archway and the installation of shoe molding after new flooring was installed in the upstairs bedrooms. The invoice does not itemize the costs of these different repairs, so this court cannot separate out the cost of the repairs. In addition, there was no testimony concerning the itemization of any cost. Because this court found that the damage to the upstairs carpet at the Ono Island Property was not done willfully and maliciously, Plaintiffs are not entitled to recover any money for the installation of shoe molding. In the absence of itemization, this court cannot subtract out the cost of the installation of the shoe molding. Therefore, Plaintiffs failed to prove the amount that they are entitled to for the replacement of the post caps from the wharf.
• Removal of skimmer covers from swimming pool area. Plaintiffs Exhibit 2 includes an invoice from Gold Coast Pools & Spas, LLC dated September 19, 2011, in the amount of $2,179.45. This invoices includes the cost of 2 skimmer lids, as well as the cost of replacing pool equipment and chemically treating the pool. This court previously found that Debtor willfully and maliciously removed the skimmer covers from the pool area. This court also previously found that Debtor did not willfully and maliciously injure Plaintiffs by failing to replace other pool equipment or by failing to clean and treat the pool. Therefore, Plaintiffs are only entitled to recover the cost of replacing the skimmer lids. The invoice is itemized and shows that the cost of the 2 skimmer lids is $27.30. The sales tax is *601$2.73.12 Plaintiffs proved that they are entitled to recover $30.03 for the cost of the skimmer lids.
• Damage to locks, windows, doors and cabinets. Plaintiffs’ Exhibit 2 includes an invoice from Glass Systems of Alabama dated August 21, 2012, in the amount of $367.17 for the replacement of 2 window cranks, 2 dead bolt mortices, and 2 door locks. The court previously found that Debt- or broke the locks willfully and maliciously, but did not remove the window cranks willfully and maliciously. Therefore, Plaintiffs are only entitled to recover damages for the replacement of the broken locks. The invoice itemizes the costs as follows: $34.00 for the window cranks; $170.88 for the deadbolt mortices; $38.00 for the door locks; $100.00 for labor; and $24.29 for sales tax. Based upon this invoice, Plaintiffs are entitled to recover $170.88 for the deadbolt mortices; $38.00 for the door locks; and $20.89 in sales tax.13 The labor is not itemized; in the absence of itemization, this court cannot determine what portion of the labor cost was incurred in replacing the window cranks and what portion was incurred in replacing the deadbolt mortices and door locks. Plaintiffs proved that they are entitled to recover $229.77 for the cost of the deadbolt mortices and door locks.
Although Debtor removed the cabinet door willfully and maliciously, Plaintiffs did not prove the damages associated with the removal of the cabinet door. None of the invoices admitted collectively as Plaintiffs’ Exhibit 2 included an invoice for the replacement of the cabinet door. In addition, there was no testimony concerning how much it would cost to replace the cabinet door. Plaintiffs are not entitled to recover any money for the removal of the cabinet door.
• Removal of cabinet hardware. Although Debtor removed the cabinet hardware willfully and maliciously, Plaintiffs did not prove the damages associated with the removal of the cabinet hardware. None of the invoices admitted collectively as Plaintiffs’ Exhibit 2 included an invoice for the replacement of the cabinet hardware. In addition, there was no testimony concerning how much it would cost to replace the cabinet hardware. Plaintiffs are not entitled to recover any money for the removal of the cabinet hardware.
• Removal of battery from thermostat. Although Debtor removed the battery from the thermostat willfully and maliciously, Plaintiffs did not prove the damages associated with the removal of the battery. None of the invoices admitted collectively as Plaintiffs’ Exhibit 2 included an invoice for the replacement of the battery from the thermostat.14 In addition, there was no testimony concerning how much it would cost to replace the battery. Plaintiffs are not entitled to recover any money for the removal of the battery from the thermostat.
*602Plaintiffs have shown that they are entitled to recover $3,996.54 for the cost to repair damages willfully and maliciously caused by Debtor to the Ono Island Property.
CONCLUSION
Plaintiffs proved that Debtor willfully and maliciously injured Plaintiffs by removing light fixtures and ceiling fans, cutting speaker wires, removing post caps from the wharf, removing the boat house door, removing skimmer covers from the pool area, damaging locks, removing a cabinet door, removing the floor receptacle covers, and removing the battery from the thermostat at the Ono Island Property. Plaintiffs further proved that they are entitled to recover $3,996.54 for the cost to repair the damages willfully and maliciously inflicted by Debtor at the Ono Island Property. Therefore, this court finds that $3,996.54 of the debt owed to Plaintiffs is nondischargeable pursuant to 11 U.S.C. § 523(a)(6).
DONE and ORDERED.
. Debtor and his wife were residents of Tuscaloosa, Alabama when the Ono Island Property was built and continue to reside in Tuscaloosa.
. Debtor owned a construction business, Harless Development Company, Inc., and it appears that his business was a casualty of the 2008 real estate collapse.
.By this point Plaintiff Vision Bank had executed a deed conveying its interest in the Ono Island Property to Plaintiff SE Property Holding, LLC.
. SEPH 000027 is a duplicate of SEPH 000006.
. Invoice #9281 was dated September 19, 2011.
.It should be noted that the sago palms in Plaintiffs’ photographs appear to be in the same pots as the sago palms shown in Debt- or's photographs.
. The plantation shutters are shown in some of the photographs submitted as Plaintiffs’ Exhibit l.
. SEPH 000027 is a duplicate of SEPH 000006.
. Invoice #9281 was dated September 19, 2011.
. It should be noted that the sago palms in Plaintiffs' photographs appear to be in the same pots as the sago palms shown in Debt- or's photographs.
. The plantation shutters are shown in some of the photographs submitted as Plaintiffs' Exhibit 1.
. The sales tax was calculated by multiplying $27.30 by 0.10. The sales tax in Alabama is 10%.
. Sales tax was calculated by adding $170.88 and $38.00, and multiplying the total by .10. The sales tax in Alabama is 10%.
.Plaintiffs’ Exhibit 2 includes an invoice from Infinity Repairs dated July 8, 2012, in the amount of $100 for the replacement of batteries in the smoke detectors. None of the invoices include a charge for replacing the battery in the thermostat. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496859/ | ORDER
JAMES R. SACCA, Bankruptcy Judge.
This case presents an issue that has divided bankruptcy courts: how much — if any — of a Chapter 7 Trustee’s fees are allowable when the case is converted before it is fully administered. Courts have issued a variety of rulings on this issue, all of which seem to make some sense, but none of which seems completely correct either — at least not in the underlying reasoning.1 Here, this case was converted from Chapter 7 to Chapter 13 after the Chapter 7 Trustee had performed substantial services related to investigating and liquidating assets but before he had made any disbursements to creditors. The question before the Court is how much compensation he is entitled to, if any.
Background
The Debtor commenced this case by filing a Chapter 7 petition on May 14, 2011. C. Brooks Thurmond III was appointed Chapter 7 Trustee. He investigated certain transfers and some of the Debtor’s assets and ultimately focused on liquidating two assets: a 12.5% interest in Texas Birmingham Investment Group, Ltd. (the “Partnership Interest”) and a condominium in Panama City, Florida (the “Condominium”). The Debtor valued each of these assets at $10,000.00 on her Schedule of Assets.
*4The Chapter 7 Trustee filed a Motion to Sell the Partnership Interest, which the Debtor opposed. After holding an eviden-tiary hearing, the Court entered an order granting the Chapter 7 Trustee’s Motion to Sell the Partnership Interest on April 23, 2013. [Doc. 62]. Between this sale and distributions he had received from the partnership, he collected approximately $91,062.50 on behalf of the bankruptcy estate.
The Chapter 7 Trustee also obtained a contract to sell the Condominium, and on October 23, 2013, he filed a Motion to Sell the Condominium, in which he asserted that the net proceeds of that sale would be approximately $56,123.00. [Doc. 67]. A few weeks later — before the Court heard arguments on this Motion to Sell the Condominium — the Debtor filed a motion to convert her Chapter 7 case to Chapter 13 case pursuant to 11 U.S.C. § 706(a). [Doc. 71]. After a hearing on this motion to convert, the Court entered an order converting this case to Chapter 13 (the “Conversion Order”). [Doc. 79]. To prevent possible prejudice to creditors, the Court also specified in the Conversion Order that the Chapter 7 Trustee should disburse any fees and expenses approved by the Court and then turn over the balance to the Chapter 13 Trustee, rather than the Debt- or. The Conversion Order also provided that should the Debtor fail to confirm and complete a Chapter 13 plan, this case would be converted back to one under Chapter 7 so that the Chapter 7 Trustee could continue liquidating assets.
Shortly after entry of the Conversion Order, the Chapter 7 Trustee filed an Application for Compensation (the “Trustee Application”). [Doc. 81]. In the Trustee Application, the Chapter 7 Trustee asserts that he has collected $91,062.50 on behalf of the estate and that he will not disburse any of these funds to the Debtor. He asserts that he provided services worth $19,995.00 but recognizes Congress has capped the fees a bankruptcy trustee can receive and contends he is entitled to $7,803.13 in fees (based on the amount he actually received for the Partnership Interest, calculated using the formula in 11 U.S.C. § 326(a)), plus $105.11 for expenses.
The Chapter 7 Trustee also filed an Application for Compensation for the Attorney for the Chapter 7 Trustee (the “Attorney Application”). [Doc. 82]. In the Attorney Application, the Chapter 7 Trustee (who served as his own attorney) sought $26,520.00 in fees and $503.64 for expenses.
The Court conducted a hearing on the Trustee Application and the Attorney Application (and certain other fee applications) on January 7, 2014.2 At the hearing, the Debtor’s counsel objected to the Trustee Application, initially arguing that the Chapter 7 Trustee should not receive any commission (except for $60 he will receive out of the filing fee) because he would not be disbursing any funds to creditors, but he later acknowledged that the Chapter 7 Trustee should receive a commission on the amounts he disburses to administrative claimants, but not on what he turns over to the Chapter 13 Trustee. The Chapter 7 Trustee argued that the disbursements he makes to administrative claimants and the Chapter 13 Trustee should be considered when calculating the cap on his fees and cited several cases in support of his position.
*5Section 326(a): Limits on Individual Trustee Compensation
The Bankruptcy Code is unclear regarding how a Chapter 7 Trustee should be compensated when a case is converted. Section 326(a) provides that in a Chapter 7 or 11 case, “the court may allow reasonable compensation under section 380 ... for the trustee’s services.” 11 U.S.C. § 326(a). Section 330 authorizes the Court to award the trustee “reasonable compensation for actual, necessary services rendered ... and reimbursement for actual, necessary expenses.” 11 U.S.C. §§ 330(a)(1). Section 326(a) goes on to specify when this reasonable compensation is due to the trustee: it is “payable after the trustee renders such services.” 11 U.S.C. § 326(a).
Section 326(a) then adds a wrinkle — a cap on the amount of fees a Chapter 7 Trustee may be awarded' — -that has perplexed courts dealing with conversion situations since the enactment of the Bankruptcy Code. This section provides that trustee compensation is “not to exceed” specified percentages3 “upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor.” 11 U.S.C. § 326(a). The Code is silent regarding how to calculate this cap when a case has been converted, as opposed to a fully administered Chapter 7 case. This silence has led to a variety of irreconcilable reported court decisions, which are based on as many as six different discernible theories. See In re Silvus, 329 B.R. 193 (Bankr.E.D.Va.2005) (expounding the six theories and the cases that rely on them). More simply, these cases tend to fall into three main categories: some cases hold that the amount payable is zero when the trustee has made no disbursements; others hold that the cap simply does not apply to a case that is no longer a case under Chapter 7; still others hold that the cap applies but it is calculated based on funds distributed by any trustee after conversion to Chapter 13.
The first line of cases has been described as “perhaps the harshest” because these cases rely on the “plain language” of § 326(a) to conclude that a Chapter 7 Trustee is entitled to zero compensation beyond what is provided for in § 330(b)4 when a case is converted to Chapter 13 before he disburses any funds. In re Pivinski, 366 B.R. 285, 289 (Bankr.D.Del.2007); see, e.g., In re Fischer, 210 B.R. 467, 469 (Bankr.D.Minn.1997) (concluding that a “Chapter 7 trustee’s fees are limited by the plain language of section 326(a) to a percentage of moneys Chapter 7 trustees disburse, even in cases that convert to Chapter 13”); Silvus, 329 B.R. at 214-15 (concluding that “the language of Section *6326(a) is clear and unambiguous” and that “without any disbursements or money turned over to any parties in interest, there can be no calculation of compensation”). The Court finds this fine of cases problematic because the statutory scheme is not clear and unambiguous. Within § 326(a) itself, Congress has provided that a court may award “reasonable compensation” — language it echoes in § 330 — and that this compensation is “payable after the trustee renders such services.” 11 U.S.C. § 326(a). It is difficult to believe Congress intended zero compensation to be reasonable where the trustee has expended significant effort and rendered valuable services marshaling assets on behalf of the estate — which will lead to a dividend for unsecured creditors that would not have been available but for the Chapter 7 Trustee’s efforts — only to be frustrated by a conversion to Chapter 13.
Equally problematic are those cases that hold the § 326(a) compensation cap does not apply in a conversion situation at all. Some of these courts focus on the language in § 326(a) that specifies the subsection applies to “a case under chapter 7 or 11,” and they conclude that since a converted ease is no longer under Chapter 7, § 326(a) is inapplicable. See, e.g., In re Colburn, 231 B.R. 778, 782 (Bankr.D.Or.1999) (concluding that “by its terms, read literally, § 326(a) simply does not apply to preclude trustee compensation” in cases converted from Chapter 7 to Chapter 13). Many other courts have concluded that the compensation cap should only apply in fully administered cases and rely on a quantum meruit theory to award trustee compensation where he has performed substantial services but has not distributed any funds. See, e.g., In re Pivinski, 366 B.R. 285 (Bankr.D.Del.2007); In re Moore, 235 B.R. 414 (Bankr.W.D.Ky.1999); In re Berry, 166 B.R. 932 (Bankr.D.Or.1994); Matter of Stabler, 75 B.R. 135 (Bankr.M.D.Fla.1987); Matter of Parameswaran, 64 B.R. 341 (Bankr.S.D.N.Y.1986). The difficulty with the reasoning underlying these cases is that it seems to ignore the language of the Code which evidences that Congress intended to place limits on trustee compensation, and it does not seem right to ignore that congressional intent.
Courts in the third category of cases do not presume the compensation cap following conversion to be zero or infinity, but instead conclude that the cap can be calculated based on disbursements made after conversion. Some of these courts focus on the language in § 326(a) that specifies the cap is to be calculated “upon all moneys disbursed or turned over in the case by the trustee to parties in interest other than the debtor” and conclude that “the trustee” could also refer to the Chapter 13 Trustee, so any disbursements he or she makes should apply toward calculating the cap on the Chapter 7 Trustee’s fees. See, e.g., In re Hages, 252 B.R. 789, 794 (Bankr.N.D.Cal.2000) (reasoning “it is entirely appropriate to impute the moneys that will be distributed by the chapter 13 trustee to the chapter 7 trustee for purposes of computing the maximum fee the chapter 7 trustee can charge”); In re Rodriguez, 240 B.R. 912, 914 (Bankr.D.Colo.1999) (reasoning “the reference to ‘trustee’ in the last sentence of section 326(a) must be read as a generic reference to the composite ‘trustee’ and to the aggregate distributions made in the case by the composite ‘trustee’ ”). At least one other case has reached a similar result by reasoning that even if a Chapter 7 Trustee collects funds and then returns them to the debtor, this disbursement “though indirect, eventually finds its way to the creditors.” In re Schneider, 15 B.R. 744, 745 (Bankr.D.Kan.1981). The difficulty with the reasoning in these cases is that § 326(a) provides that *7the cap is applied to distributions made by the trustee who is to be compensated — and not a subsequent trustee — while Schneider seems to ignore the explicit language in § 326(a) requiring that the distributions to which the cap applies must be made to parties in interest “other than the debtor.”
Here, the Chapter 7 Trustee has been authorized to make disbursements of $91,062.50 to parties in interest other than the Debtor (unlike Schneider, where the money was to be returned to the debtor). In the Conversion Order, the Court authorized the Chapter 7 Trustee to disburse funds to parties who had incurred fees and expenses approved by the Court and to disburse the balance to the Chapter 13 Trustee. It seems clear that parties who have performed services on behalf of the estate are “parties in interest” and that the Chapter 13 Trustee is also a party in interest here because he has standing to be heard on issues in the case and he will disburse money to creditors. Accordingly, the compensation to be awarded to the Chapter 7 Trustee here cannot exceed $7,803.13, which is the amount derived from the formula in § 326(a) applied to $91,062.50 (the total amount he will distribute to parties in interest).
Section 326(c): Is There a Limit on Fees for Multiple Trustees in Different Chapters?
Because the Chapter 13 Trustee may be administering money turned over to him by the Chapter 7 Trustee here, another issue that must be examined is whether there is a limit on the fee that can be awarded to multiple trustees who administer the same estate. Congress has provided in § 326(c) that when multiple trustees serve in a case, “the aggregate compensation of such persons for such service may not exceed the maximum compensation prescribed for a single trustee by subsection (a) or (b) of this section, as the case may be.” 11 U.S.C. § 326(c). This provision was designed to prevent a perceived problem of “double-dipping” under the old Bankruptcy Act where a receiver and the succeeding trustee could get maximum compensation for liquidating the same assets. In re Colburn, 231 B.R. 778, 783 (Bankr.D.Or.1999) (citing H. Rept. No. 95-595 to accompany H.R. 8200, 95th Cong., 1st Sess. (1977) at pp. 327, 328, 1978 U.S.C.C.A.N. 5963, pp. 6284). But again Congress does not seem to have expressly addressed the situation where a Chapter 7 case is converted to one under Chapter 13. As discussed above, § 326(a) provides a cap in a Chapter 7 or 11 case based on disbursements, whereas § 326(b) provides a cap for cases under Chapter 12 or 13 “not to exceed five percent upon all payments under the plan.” 11 U.S.C. § 326(b).
To fill this statutory void, courts have once again taken differing approaches. Some courts interpret § 326(c) as only providing an aggregate cap on fees for trustees operating under the same chapter. See, e.g., In re Yale Min. Corp., 59 B.R. 302, 305 (Bankr.W.D.Va.1986) (reasoning that “§ 326(c) seeks to limit compensation in situations where two or more individuals serve as Chapter 7 Trustees” and does not apply to a situation where trustees serve under different chapters); Colburn, 231 B.R. at 783 (reasoning that it would be inappropriate to apply the § 326(c) limit where a Chapter 7 case is converted to Chapter 13 because “the functions of Chapter 7 and Chapter 13 trustees are fundamentally different”); In re Hages, 252 B.R. 789, 798 (Bankr.N.D.Cal.2000) (reasoning that “section 326(c) applies only where more than one person serves as trustee in the ‘case under chapter 7’ (or chapter 11, 12 or 13)”).
Other courts disagree and hold that because there is only one case, the § 326(c) *8aggregate limit applies to all trustees serving in that case, regardless of chapter. See, e.g., In re Rodriguez, 240 B.R. 912, 915 (Bankr.D.Colo.1999) (concluding that the § 326(c) aggregate cap applies to all trustees in a case, regardless of the chapter they serve under, because “there is only one bankruptcy ‘case’ that is commenced by the filing of an original petition”). And at least one court found that the aggregate cap applies and decided to split the difference, awarding to the Chapter 7 trustee and the Chapter 13 trustee half of the maximum fee they could receive under § 326(a) and § 326(b), respectively. In re Schneider, 15 B.R. 744, 746 (Bankr.D.Kan.1981).
After considering these different lines of reasoning, this Court concludes that § 326(c) does not specifically apply to a case that has been converted from Chapter 7 to 13. It appears the term “case” in that subsection treats the Chapter 7 or 11 “case” in § 326(a) and the Chapter 12 or 13 “case” in § 326(b) as being distinct from one another for the limited purposes of calculating a trustee fee. This could have been an oversight or it could be because a Chapter 7 or 11 trustee is compensated differently than a Chapter 12 or 13 trustee and they perform different functions. Nevertheless, even though the limits set forth in § 326(c) may not formally apply in the situation before the Court, this Court believes the maximum amount allowable under § 326(a) is a helpful guide in determining what is reasonable in this situation because, after all, the Chapter 7 Trustee is only entitled to reasonable compensation.
Here, it would be reasonable for the Chapter 7 Trustee to receive less than the maximum allowable under § 326(a) at this time because he will not have to review claims, disburse funds, or close the estate — matters which he would otherwise have had to do to receive the full commission if this case had remained under Chapter 7. On the other hand, the Chapter 13 Trustee should get his full commission if he disburses this money pursuant to a plan because he will have done everything he otherwise would have to do in a Chapter 13 case to earn that commission.5 Also, if this case is converted back to Chapter 7, the Chapter 13 Trustee would not receive a commission on any funds that he turns back over to the Chapter 7 Trustee because the money would not be disbursed under a plan. In that event, the Chapter 7 Trustee could be paid the balance of what his fee would otherwise have been had the case never been converted.
Therefore, the Court holds that the Chapter 7 Trustee shall receive a commission of $4,903.13 ($7,803.13 minus the Chapter 13 Trustee’s potential commission of $2,900), plus reimbursement of expenses of $105.11, subject to the right of the Chapter 7 Trustee to receive the balance of his maximum potential commission if the money is returned to him and he administers it. In other words, for now, the Court will authorize payment to the Chapter 7 Trustee of the maximum allowed under § 326(a) minus 5% of any amount he turns over to the Chapter 13 Trustee. Should this case re-convert to Chapter 7, the Court will consider awarding further fees to the Chapter 7 Trustee at that time.
Conclusion
For the reasons stated above, it is hereby
ORDERED that the Trustee Application is GRANTED as modified by the terms explained above. The Chapter 7 Trustee is authorized to pay the amounts *9awarded herein and, after all other administrative expenses of the Chapter 7 estate are paid, he is directed to turn over the balance of the amounts he is holding to Adam Goodman, the Chapter 13 Trustee who is administering the Debtor’s Chapter 13 case.
. The Court notes that many of these cases seem to turn on their particular facts, specifically how much work the trustee has actually done and how fair or unfair it would be to allow or deprive him of compensation.
. Concurrently with this Order, the Court is entering an order approving the Attorney Application, in which the Court is allowing fees in the amount of $23,800.00 and expenses of $503.64 — for a total award of $24,303.64— and in which the Court is authorizing the Chapter 7 Trustee to disburse these funds to his law firm.
. The cap is calculated as follows: "25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debtor, but including holders of secured claims.” 11 U.S.C. § 326(a).
. Section 330(b) provides that a Chapter 7 Trustee shall receive $60, payable from the filing fee. It seems clear to this Court that this amount was intended as a minimum that a trustee would be paid for administering a no-asset case. See In re Colburn, 231 B.R. 778, 783 (Bankr.D.Or.1999) (“[T]he legislative history indicates that § 330(b) was designed to provide a minimum compensation for trustees in no asset cases where the administrative functions of the trustee would be negligible.”) (citing S. Rept. No. 95-989 to accompany S. 2266, 95th Cong., 2d Sess. (1978) at pp. 40, 41, U.S.Code Cong. & Admin.News 1978, p. 5826-27).
. The Court estimates the Chapter 13 Trustee's potential commission on these funds, if he disburses them pursuant to a plan, to be about $2,900.00. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496860/ | ORDER GRANTING MOTION FOR DEFAULT JUDGMENT
MARGARET H. MURPHY, Bankruptcy Judge.
Plaintiff filed a complaint initiating this adversary proceeding October 23, 2013. No response was filed, and Plaintiff requested entry of default January 6, 2014 *10(Doc. No. 6). On January 13, 2013, Plaintiff filed a Motion for Default Judgment (Doc. No. 7) (the “Motion”). Plaintiff now seeks default judgment. For the reasons set forth below, the Motion will be granted.
Plaintiffs undisputed allegations show that Debtor’s debt to Plaintiff — specifically, a $9,745.50 judgement entered in the Magistrate Court of DeKalb County, Georgia — arose from “malicious and willful theft by the defendant.” Plaintiff asserts that Debtor stole an engagement ring from Plaintiff.
Under 11 U.S.C. § 523(a)(6), debts arising from “willful and malicious injury” are excepted from § 727 discharge. “A debtor is responsible for a ‘willful’ injury when he or she commits an intentional act ... which is substantially likely to cause injury.” Hope v. Walker, 48 F.3d 1161, 1165 (11th Cir.1995). Loss of property is among the types of “injury” contemplated by § 523(a)(6). Cf. In re Wolfson, 56 F.3d 52, 54 (11th Cir.1995) (“Willful and malicious injury includes willful and malicious conversionf.]”)
Debtor also requests costs and fees associated with bringing this proceeding. Under the “American Rule” each party to a legal proceeding is generally responsible for his or her own fees and expenses. Johnson v. Florida, 348 F.3d 1334, 1350 (11th Cir.2003). Generally, statutory authority is required for departure from the American Rule. Id. Plaintiff has not pointed to any such authority excepting this proceeding from the American Rule. Accordingly, it is hereby
ORDERED that Plaintiffs motion for default judgment is granted: the $9,745.50 judgement entered in the Magistrate Court of DeKalb County, Georgia is non-dischargeable under § 523(a)(6). It is further
ORDERED that each party is responsible for its own fees and costs associated with this proceeding.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496861/ | ORDER
MARGARET H. MURPHY, Bankruptcy Judge.
Debtor filed a Chapter 11 petition initiating this case February 3, 2014. On the petition, Debtor indicated that it is a “Health Care Business” for which a patient care ombudsman might be appointed under 11 U.S.C. § 333. On February 27, 2014, Debtor filed a Motion for Order Finding and Ordering that Appointment of Patient Care Ombudsman is not Necessary (Doc. No. 34) (the “Motion”). In determining whether an ombudsman is needed, courts have weighed nine non-exclusive factors:
(1) the cause of the bankruptcy;
(2) the presence and role of licensing or supervising entities;
(3) the debtor’s past history of patient care;
(4) the ability of the patients to protect their rights;
(5) the level of dependency of the patients on the facility;
(6) the likelihood of tension between the interests of the patient and the debt- or;
(7) the potential injury to the patients if the debtor drastically reduced its level of patient care;
(8) the presence and sufficiency of internal safeguards to ensure the appropriate level of care; and
(9) the impact of the cost of the ombudsman on the likelihood of a successful reorganization.
In re Alternate Family Care, 377 B.R., 754, 758 (Bankr.S.D.Fla.2007); In re Flagship Franchises of Minnesota, LLC, 484 B.R. 759 (Bankr.D.Minn.2013) (quoting Alternate Family Care and collecting cases).
Generally, the first factor weighs against the appointment of an ombudsman when the cause of Debtor’s bankruptcy is something other than deficiencies, or allegations of deficiencies, in patient care. See, Alternate Family Care, 377 B.R. at 759 (that the bankruptcy was precipitated by a fire at Debtor’s facility, rather than patient care or privacy matters, weighed against appointment of an ombudsman); In re The Total Woman Healthcare Center P.C., 2006 WL 3708164 (Bankr.M.D.Ga., *12December 14, 2006) (J. Hershner) (declining to appoint an ombudsman because the debtor’s liabilities arose from taxes rather than deficient patient care). Nothing in the record indicates that Debtor’s bankruptcy was predicated by deficiencies in patient care, and the Motion asserts that “No claims have been made against Debt- or’s malpractice insurance” and “Debtor is unaware of any professional malpractice claims, or incidents that could result in claims, against anyone associated with Debtor.” For the same reasons, the third factor appears to weigh in favor of granting Debtor’s Motion.
Factors four and five also weigh against the appointment of an ombudsman. Alternate Family Care involved a foster care and placement agency which provided psychiatric, residential treatment services to emotionally disturbed children. The court in that case concluded that children are generally presumed to be unable to preserve and protect their own interests, and that presumption is particularly appropriate in the case of children with emotional and psychological issues; thus, in that case, the fourth factor weighed in favor of appointing an ombudsman. Alternate Family Care, 377 B.R. at 760; see, also, Flagship Franchises of Minnesota, 484 B.R. 759 (debtor’s patients could not protect their own interests where debtor specialized in care of chronically ill and vulnerable adults, such as those with Alzheimer’s, Parkinson’s, and brain injuries). Similarly, the fifth factor, as applied to the facts of Alternate Family Care and Flagship Franchises, weighed in favor of a patient care ombudsman because the patients are unable to protect their own interests. Though Debtor appears to be a pediatric care facility, it is an outpatient facility; nothing in this case suggests that Debtor’s patients or their guardians are unable to protect their own interests.
The sixth factor — whether the interests of Debtor and its patients are likely to be in tension — can be evaluated by asking whether a decline in patient care would help Debtor’s reorganization. In Alternate Family Care, no such tension existed because a decline in patient care would injure the facility’s reputation and, consequently, would reduce Debtor’s referrals and revenue. 377 B.R. at 760. Similarly, in Flagship Franchises of Minnesota, the Court found no tension because, “Without the high standard of care, clients would not use the services and Debtor would lose its licenses.” 484 B.R. at 764. For the same reasons, Debtor’s incentives in this case appear to align with the interests of Debt- or’s patients.
As noted by the court in In re Denali Family Services, 2013 WL 1755481 at *3 (Bankr.D.Alaska, April 24, 2013), the seventh factor “will almost always support the appointment of an ombudsman.” In Denali the court noted that the potential for harm resulting from a drastically reduced level of care is mitigated where other options for treatment are available. Nothing on the record suggests Debtor provides a different type of service than any of the many other pediatric care services in the area. Moreover, the Motion indicates that Debtor maintains comprehensive malpractice insurance.
Neither the Motion nor Debtor’s Schedules speak directly to factor two- — the presence and role of supervising entities— or factor eight — whether internal safeguards exist to ensure the appropriate level of care. Factor nine — whether the costs associated with the appointment of an ombudsman impacts the likelihood of Debt- or’s reorganization — is difficult to weigh so early in the case. While Debtor has not presented any evidence of the potential cost of an ombudsman or Debtor’s ability *13to pay for an ombudsman, this factor typically weighs against an appointment under § 333. In re Denali Family Services, 2013 WL 1755481 at *4. Rather than looking at factor nine in isolation, cost of an ombudsman should be weighed against the value of an ombudsman. Id. (Finding the cost outweighed the value where other safeguards made an ombudsman redundant). Considering the other factors weigh against appointment of an ombudsman, it appears the costs would likely outweigh the benefits of an ombudsman. Accordingly, it is hereby
ORDERED that the Motion is granted; subject to subsequent motion by the United States Trustee or other party in interest under Fed. R. Bankr.P.2007.2(b), no patient care ombudsman will be appointed at this time.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496863/ | BAILEY, Bankruptcy Judge.
These appeals arise out of an adversary proceeding wherein Noreen Wiseovitch Rentas, chapter 7 trustee (the “trustee”), sought (1) a determination that the debtors had a 78.54 percent interest in the sale proceeds of certain properties of a probate estate, and (2) an order directing the turnover of such funds, which have been consigned to the probate court. The bankruptcy court entered summary judgment in favor of the trustee, and two sets of defendants, Maria Mercedes Molina González and Manuel A. González Alvarado (“Appellants Maria and Manuel”), and Sandra E. Molina-González and Josefa M. González-Vega (“Appellants Sandra and Josefa”), appealed. For the reasons set forth below, we REVERSE the bankruptcy court’s judgment directing the Clerk of the Puerto Rico Court of First Instance, Superior Court of Bayamón (the “CFI”),2 *35to turn over the proceeds, and we REMAND for the entry of an order dismissing any remaining demands for relief for lack of jurisdiction.
BACKGROUND
In December 2004, Elíseo Morales Garcia and Maribel Mena Meléndez (the “Debtors”) filed a petition under chapter 11 of the Bankruptcy Code.3 In May 2009, the case was converted to chapter 7, and the trustee was appointed.
The appellants are heirs of the estate of three siblings, Maria Josefa, Maria de las Mercedes, and Jose Antonio González Rodriguez (the “González Estate”). Prior to the bankruptcy filing, twenty-one heirs of the González Estate (including all of the appellants) executed public deeds authorized by Notary Public Olga Shepard de Mari to sell to the Debtors their respective shares in the González Estate, amounting to 78.54 percent of the total shares.4 The González Estate was comprised of three parcels of real property in Vega Baja, Puerto Rico (the “Properties”). The Gon-zález Estate was probated before the CFI and on June 14, 2000, the court entered a judgment which identified the assets and all of the heirs and their respective shares of the González Estate.5 The Debtors were not identified in the judgment. In May 2002, the CFI ordered that the Properties be sold through public auction, and after extensive litigation,6 the Properties were sold on December 20, 2004, 11 days after the Debtors’ bankruptcy filing. Francisco Almeida and Wanda Cruz Quiles (collectively, “Almeida”) paid $3,665,000.00 for the Properties, and the sale proceeds *36were deposited with the CFI.7
After their bankruptcy filing, the Debtors sought to stay proceedings in both the CFI and the PR Court of Appeals, and they requested that the CFI declare the public sale to be null and void as it violated the automatic stay. On December 16, 2004, the PR Court of Appeals entered an order stating that it was, “as a cautionary measure to safeguard [its] jurisdiction,” staying “any execution of judgment in favor of [the Debtors]” until further court order. On January 13, 2005, the CFI ordered that in light of the Debtors’ bankruptcy filing, all proceedings after the filing date, including the sale, were null and void; and the CFI further ordered that the sale proceeds be returned.
Thereafter, on February 9, 2005, the PR Court of Appeals issued a judgment in which it “revoked” the January 13, 2005 decision of the CFI declaring that the sale was null and void and remanded the case to the CFI for a determination of whether the Debtors rightfully owned any shares in the undivided González Estate. In its decision, the PR Court of Appeals noted that the only rightful owners of the undivided González Estate were the heirs already recognized in the judgment of June 14, 2000, unless it was established that one or more of them assigned his or her shares to a third party. The court further noted that “the record [did] not show which, if any, of the heirs recognized in the judgment of June 14, 2000, assigned or sold their rights and proportional shares to a third party,” and, therefore, that it was not possible to conclude whether the Debtors had any shares in the undivided González Estate, particularly in light of the fact that the Debtors still owed more than $1,500,000.00 on the promissory notes. As a result, the PR Court of Appeals “annulled” the part of the CFI’s May 9, 2002 order that recognized “a credit equivalent to 78.54 percent of the minimum price of the property to be auctioned,” and the part of the CFI’s December 2, 2004 order that made a similar reference. The PR Court of Appeals also determined that even if the Debtors were entitled to 78.54 percent of the sale proceeds of the Properties, they had an interest in the proceeds, not the Properties themselves because only the division of the González Estate would confer upon the heirs title over the estate assets. The PR Court of Appeals also stated that the action involved the liquidation of the Properties, and the only parties with standing were the recognized heirs and the creditors of the González Estate (not the creditors of particular heirs).
Thereafter, on April 26, 2005, the Debtors filed an adversary proceeding (“Adv. Pro. No. 05-00102”) seeking a determination that the public sale of the Properties during their bankruptcy case violated the automatic stay, an order declaring the sale null and void, and damages for the alleged stay violations.8 Both Almeida and Real Anon, Inc. moved to dismiss on the ground that the Properties were not property of the Debtors’ estate and, therefore, were not subject to the automatic stay.
On October 18, 2007, the bankruptcy court entered an Opinion and Order dismissing Adv. Pro. 05-00102 for failure to state a claim. The bankruptcy court de*37termined that awning a share of the undivided González Estate was not equivalent to owning a share of the Properties, and, therefore, the Properties were not property of the Debtors’ estate, and the sale did not violate the stay. In making its decision, the bankruptcy court stated:
As a general rule when a person dies, the person’s rights and liabilities are transmitted to the heirs. 31 L.P.R.A. § 2081. “The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death.” 31 L.P.R.A. § 2090. If there is more than one heir to the inheritance, a hereditary community is created. Sociedad Legal de Gananciales v. Registrador de la Propiedad, 151 D.P.R. 315, 317 (2000) (citations omitted). The object of the hereditary community is the estate as a whole, and not each asset, right or liability in particular. Kogan v. Registrador, 125 D.P.R. 636, 650 (1990). Therefore what each heir is entitled to is a right over the estate as a whole ..., not over the particular assets. Id. at 652. This is called a hereditary right in the abstract which implies that until a division is ... effectuated, the heirs may not claim a right over any particular asset. Id. It is the division of the estate that concludes the hereditary community and only through the division of the estate heirs may become exclusive title holders of its assets. Id. at 318; Gutierrez v. Registrador, 114 D.P.R. 850, 857 (1983). . . .
In light of the aforestated, and considering the allegations made in the complaint as true, Plaintiffs own 78.54% of the hereditary participations in the Gonzalez family hereditary estate but said participations do not grant them a legal or equitable interest in the Subject Properties. Therefore, the Subject Properties are not property of the estate and the public auction held on December 20, 200[4] was not subject to the automatic stay provision of the Bankruptcy Code upon Plaintiffs’ bankruptcy filing.
Consequently, the bankruptcy court dismissed the proceeding pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief could be granted. The Debtors appealed to the Panel, and the Panel transferred the appeal to the U.S. District Court for the District of Puerto Rico. On February 4, 2008, the district court entered an order dismissing the appeal with prejudice.9
On October 29, 2010, the trustee filed the subject adversary complaint against 21 of the heirs of the González Estate,10 including the appellants, alleging that the Debtors had purchased each of the named defendant-heirs’ shares in the González Estate, and seeking a determination that the bankruptcy estate owned 78.54 percent of the proceeds from the sale of the Properties, or approximately $2,878,491.00 plus accrued interest. The trustee also requested an order directing the Clerk of the CFI to transfer the funds to the bankruptcy estate.11
*38On October 3, 2011, Héctor and René Torres Dávila (the “Torres Defendants”), two other defendant-heirs who are not parties to these appeals, filed a motion to dismiss the adversary proceeding alleging that (1) the courts in Puerto Rico had assumed jurisdiction over the controversy which the trustee sought to litigate in the bankruptcy court, (2) before the commencement of the adversary proceeding, the validity of the sale contracts through which the Debtors allegedly acquired 78.54 percent of the shares of the González Estate had been challenged before the CFI and the PR Court of Appeals, and (3) the bankruptcy court lacked subject matter jurisdiction pursuant to Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), because “claims that are keyed only to state law rights or privileges are to be left to the state courts to decide.” The Torres Defendants further argued that, because the courts in Puerto Rico had assumed jurisdiction over the validity of the contracts controversy, the adversary proceeding was non-core pursuant to 28 U.S.C. § 157(b)(2), and Stem precluded the court from entertaining it since it was purely a matter of state law with no federal claims or issues involved. The trustee opposed the motion to dismiss, asserting that the bankruptcy court had subject matter jurisdiction to entertain this core turnover proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
On March 26, 2012, the bankruptcy court entered an Opinion and Order (the “Order Denying Dismissal”) denying the Torres Defendants’ motion to dismiss, ruling as follows:
The instant case does not involve a counterclaim nor is it solely based on state law: it involves a request by the Trustee for the turnover of property that allegedly belongs to the bankruptcy estate under 11 U.S.C. §§ 541 & 542. As discussed below, that is one of the most fundamental core procedures in bankruptcy cases that stems from federal law. The Stem doctrine does not impair this court’s subject-matter jurisdiction over property of the bankruptcy estate.
Wiscovitch-Rentas v. González Claudio (In re Morales Garcia), 471 B.R. 324, 329 (Bankr.D.P.R.2012). The bankruptcy court went on to state that:
In the case at bar, the Torres Defendants allege lack of subject-matter jurisdiction because “the Courts of Puerto Rico have assumed jurisdiction over the controversy which the plaintiff wishes to litigate in Bankruptcy Court”.... However, the Torres Defendants have not placed this court in a position to even evaluate which controversies or allegations have been brought before the PR Courts. Moreover, the PR Court of Appeals already ruled that [the bankruptcy] court has “exclusive jurisdiction to determine what is property of the bankruptcy estate”. See the Opinion & Order issued in Adv. Proc. 05-00102, Docket No. 145, p. 17. This court finds that a turnover action is a fundamental bankruptcy matter that “stems from the bankruptcy itself’ and “would necessarily be resolved in the claims allowance process” because it intricately hinges on the proper constitution of the bankruptcy estate. Stern v. Marshall, 131 S.Ct. at 2618. As ruled in Braunstein v. McCabe, a turnover proceeding “invokes the [bankruptcy] court’s most basic equitable powers to gather and manage the property of ... the estate.” 571 F.3d [108] at 122 [(1st Cir.2009)]. There*39fore, this court has subject-matter jurisdiction to entertain the instant core adversary proceeding and can ultimately issue a final determination on its merits in accordance with Stern v. Marshall.
Id. at 330. The Order Denying Dismissal was not appealed.
On May 3, 2012, the trustee filed a motion for summary judgment. In the motion, the trustee argued that the Debtors duly acquired the defendant-heirs’ shares in the González Estate and that the sum of those shares amounted to 78.54 percent of the González Estate. She also averred that the Properties were sold at public auction for $3,665,000.00 and, accordingly, 78.54 percent of the sale proceeds constituted property of the bankruptcy estate. She argued that these facts were undisputed and that she was entitled to judgment as a matter of law.
On May 21, 2012, Appellants María and Manuel filed an opposition to the motion for summary judgment, arguing that the PR Court of Appeals annulled the alleged sales and the deeds whereby the Debtors acquired 78.54 percent of the shares of the González Estate when it ruled as follows:
Even in the case that [the Debtors] show that they really substitute 78.54% of the heirs, specifying for the record the names and co-share percentages, the auction process does not affect them because from the very beginning what they were entitled to is a proportional share of the auction proceeds since they could never acquire in that manner, nor have they acquired, any concrete share in rem of any of the three properties described. González Santiago v. González Caruso, Case No. KLCE200401584 at p. 205, 2005 PR App. LEXIS 385 at *28, 2005 WL 808015 at *11.
The trustee filed a response, asserting that the Debtors paid $1,570,808.89 (part in money, part in promissory notes) to purchase 78.54 percent of the shares in the González Estate from certain heirs, and because they duly purchased those shares pursuant to public deeds, the Debtors owned and could have sold their shares to any person for any price.
Appellants Sandra and Josefa also filed oppositions to the motion for summary judgment, claiming that the PR Court of Appeals annulled and voided the sales and deeds whereby the Debtors purchased their shares in the González Estate, and that the deeds on which the Debtors based their claims were null and void according to Puerto Rico law. The trustee opposed those motions, arguing, among other things, that these parties had never appeared in the proceeding and had not filed an answer to the complaint. She also argued that the bankruptcy court had already determined that the Debtors owned 78.54 percent of the González Estate (citing to the Order Denying Dismissal).
On September 4, 2012, the bankruptcy court held a hearing on the trustee’s motion for summary judgment and the oppositions thereto. It is unclear what transpired at that hearing as there is no transcript in the record, but the court’s minute entry provided as follows:
The issue of whether or not the debtors’ purchase of the hereditary rights is valid has not been decided by the state court or this court. Trustee granted 45 days to supplement motion for summary judgment and reply to defendants’ arguments in dkt # 184 [Torres Defendants’ opposition and cross-motion for summary judgment]. Defendants are granted 30 days thereafter to reply.
On October 29, 2012, the trustee filed a supplement to her motion for summary judgment. She argued, among other things, that a valid contract existed between the named defendant-heirs and the *40Debtors under Puerto Rico law as the named defendant-heirs consented to sell their shares to the Debtors by executing the deeds, and there was legitimate cause and consideration (being 10 percent of the purchase price and promissory notes for the remaining 90 percent) in those transactions.12 Thus, the trustee argued, she was entitled to a declaratory judgment ruling that the Debtors owned 78.54 percent of the shares of the González Estate, and because the Properties were converted into money through the public auction, the bankruptcy estate was entitled to 78.54 percent of those proceeds.
On December 14, 2012, the bankruptcy court issued an Opinion and Order granting summary judgment in favor of the trustee. See Wiscovitch-Rentas v. González Claudio (In re Morales Garcia), 484 B.R. 1 (Bankr.D.P.R.2012). In its decision, the bankruptcy court determined that the following facts were uncontested:
1. The González Estate consisted of the Properties.
2. The Debtors acquired from the named defendant-heirs their “respective hereditary shares on each of the ... Properties” by virtue of deeds executed before Notary Public Olga M. Shepard de Mari.
3. On December 2, 2004, the CFI issued an order to sell the Properties at public auction. Pursuant to that order, the Properties were sold at a public auction for $3,665,000.00.
4. The proceeds from the public auction were consigned to the CFI.
5.The Debtors defaulted on payments on the unsecured promissory notes that they gave to the defendant-heirs.
Id. at 7-9.
The bankruptcy court then found that, because it was undisputed that the Debtors and twenty-one heirs in the González Estate executed public deeds to sell to Debtors their shares in the González Estate and because the total of those shares amounted to 78.54 percent, the Debtors had duly purchased 78.54 percent of the shares in the González Estate. In making this finding, the bankruptcy court specifically rejected the arguments raised by both sets of appellants that the PR Court of Appeals annulled and voided the sales and deeds in its February 9, 2005 decision. According to the bankruptcy court, the PR Court of Appeals only considered the option agreements13 entered between the Debtors and certain heirs in the González Estate, and remanded to the CFI to determine whether the Debtors “really acquired an option right over 78.54 percent of the shares and rights of the [Properties], whether they exercised the option in time and whether the necessary consideration for the subsequent sale of the estate shares and rights on the undivided estate took place.” Thus, the bankruptcy court ruled that the PR Court of Appeals had not determined that the purchase agreements between the Debtors and twenty-one heirs of the González Estate were null and void.
Based on the foregoing, the bankruptcy court held as follows:
*41[T]his Court finds that the Debtors duly purchased 78.54% of the [shares] of the González Estate and because the Debtors acquired said shares pre-petition, they are now part of the bankruptcy estate pursuant to Section 541 of the Bankruptcy Code. And since the [ ] Properties were sold at public auction and the proceeds are consigned at the PR [Probate Court], the bankruptcy estate is entitled to retrieve the equivalent of 78.54% of those proceeds.
Id. at 14. The bankruptcy court then entered summary judgment in favor of the trustee and ordered the Clerk of the CFI to issue a check payable to the trustee in the amount of 78.54 percent of the amount of the consigned proceeds of the public auction.
Thereafter, Appellants Maria and Manuel filed both a motion for reconsideration, which the bankruptcy court denied, and a timely notice of appeal. On January 29, 2013, after the expiration of the appeal period, Appellants Sandra and Josefa filed a motion requesting an extension of time and leave to file a notice of appeal, arguing that that they had not been notified of the judgment despite their appearances in the case. The bankruptcy court granted their motion.
APPELLATE JURISDICTION
A bankruptcy appellate panel is “duty-bound” to determine its jurisdiction before proceeding to the merits even if not raised by the litigants. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.) 226 B.R. 724, 725 (1st Cir. BAP 1998). A panel may hear appeals from “final judgments, orders, and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)].” Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998).
A. Finality
“An order granting summary judgment, where no counts remain, is a final order.” DeGiacomo v. Traverse (In re Traverse), 485 B.R. 815, 817 (1st Cir. BAP 2013) (citation omitted). Thus, these appeals are from a final order.
B. Timeliness
It is well settled that the time limits established for filing a notice of appeal are “mandatory and jurisdictional.” Yamaha Motor Corp. v. Perry Hollow Mgmt. Co., Inc. (In re Perry Hollow Mgmt. Co., Inc.), 297 F.3d 34, 38 (1st Cir.2002) (citations omitted). The Panel does not have jurisdiction over an appeal if the notice of appeal was not timely filed. See Colomba v. Solomon (In re Colomba), 257 B.R. 368, 369 (1st Cir. BAP 2001).
Pursuant to Bankruptcy Rules 8001(a) and 8002(a), an appellant must file an appeal within 14 days after the entry of the judgment, order, or decree of the bankruptcy court. Under Bankruptcy Rule 8002(b), however, if any party timely files a motion to reconsider, the appeal period is tolled as to all parties. See Fed. R. Bankr.P. 8002(b) (“If any party makes a timely motion [for reconsideration], the time for appeal for all parties runs from the entry of the order disposing of the last such motion outstanding.”) (emphasis added). To be timely, a motion for reconsideration must be filed “no later than 14 days after entry of judgment.” Fed. R. Bankr.P. 9023.
In this case, the bankruptcy court entered the subject judgment on December 14, 2012. On December 26, 2012, Appellants Maria and Manuel timely filed a motion for reconsideration, which tolled the *42appeal period as to all parties. Fed. R. Bankr.P. 8002(b). The bankruptcy court entered an order denying reconsideration on December 27, 2012. As a result, the appeal deadline was January 10, 2013. Appellants Manuel and Maria timely filed their notice of appeal on December 26, 2012.
Appellants Sandra and Josefa did not file a notice of appeal before the January 10, 2013 deadline. Instead, on January 29, 2013, they filed a motion to extend the time to file the notice of appeal, together with a notice of appeal, arguing that then-failure to timely file the notice of appeal was due to excusable neglect as they had not been properly notified of the judgment. Pursuant to Bankruptcy Rule 8002(c)(2), a party seeking an extension of the appeal period must file a motion within the appeal period (in this case, by January 10, 2013), except that a bankruptcy court may grant a motion filed within 21 days after the appeal period expires if the movant demonstrates excusable neglect. Fed. R. Bankr.P. 8002(c)(2). Appellants Sandra and Josefa filed their motion to extend within the 21-day “excusable neglect” period, and, in an order dated February 14, 2013, the bankruptcy court granted the motion. The order was not appealed, and it became final.14 Thus, there are no timeliness issues with respect to Appellants Sandra and Josefa’s notice of appeal.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. See Lessard v. Wilton-Lyndeborough Coop. Sch. Dist., 592 F.3d 267, 269 (1st Cir.2010). The Panel reviews an order granting summary judgment de novo. See Soto-Rios v. Banco Popular de Puerto Rico, 662 F.3d 112, 115 (1st Cir.2011); In re Traverse, 485 B.R. at 817.
DISCUSSION
As noted above, the bankruptcy court, in granting the trustee’s summary judgment motion, did essentially two things: (1) it determined that the Debtors had duly acquired a 78.54 percent share of the Gonzá-lez Estate and that, because they purchased that share before the bankruptcy filing, the share constituted property of the bankruptcy estate; and (2) it ordered the Clerk of the CFI to turn over to the trustee 78.54 percent of the consigned proceeds of the sale of the Properties. We conclude that the bankruptcy court erred on the merits in granting summary judgment for turnover under. § 542(a). We further conclude that, insofar as the trustee’s complaint is a demand for an order requiring a distribution of assets from a probate estate that are in the jurisdiction and indeed possession of the CFI, acting as a probate court, the matter falls within the probate exception to federal jurisdiction, and the bankruptcy judge erred by exercising jurisdiction over it. We address each issue in turn.
I. Turnover under § 542(a).
A turnover proceeding is one to compel the debtor or a third party to deliver to the trustee property that belongs to the bankruptcy estate. As noted above, turnover proceedings arise under the Bankruptcy Code, specifically under § 542(a). They therefore fall 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). *43Also, by statutory definition, they are core proceedings. See 28 U.S.C. § 157(b)(2)(E). They therefore are also among those proceedings as to which a bankruptcy judge is statutorily authorized to enter final judgment. See 28 U.S.C. § 157(b)(1).
Though the bankruptcy judge had authority under 28 U.S.C. § 157(b)(1) to enter a final judgment on the turnover count, we nonetheless find error in the merits of the judgment entered. The obligation of turnover applies only to “property that the trustee may use, sell, or lease under section 368 of this title.” 11 U.S.C. § 542(a). The property that a trustee may use, sell, or lease under § 363 is property of the bankruptcy estate. 11 U.S.C. § 363(b)(1) and (c)(1) (permitting trustee to use, sell, or lease “property of the estate”). In relevant part, property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Here, as the bankruptcy court correctly determined in another proceeding in this case, because the assets of the probate or “hereditary” estate — first in the form of real property and now in the form of the proceeds thereof — have never been distributed and have remained at all times in the possession of the CFI, they have never ceased to be part of the probate estate.15 As of the commencement of the bankruptcy case (and even today), the funds were not property of the Debtors, and therefore they have never become property of their bankruptcy estate. At most, the Debtors owned a right to distribution of a fraction of the hereditary estate; until the funds are distributed, the Debtors and their bankruptcy estate have no property interest in the funds themselves. Therefore, the funds in question are not property of the bankruptcy estate and may not be recovered through § 542(a).
II. Distribution of the Probate Estate on Other Grounds
This is not to say that the trustee has no right to distribution of the funds, only that the right (if it exists at all) is not in the nature of turnover under § 542(a). The trustee’s complaint simply demands that the bankruptcy court order the CFI to distribute to the trustee 78.54 percent of the consigned proceeds of the sale of the Properties. Though we have ruled that the trustee was not entitled to that relief under § 542(a), the trustee may yet be entitled to the requested distribution on other grounds. Insofar as the bankruptcy court’s decision was an adjudication of the demand for an order of distribution on a *44basis other than § 542(a), we conclude that the probate exception to federal jurisdiction deprived the bankruptcy court of subject matter jurisdiction to adjudicate it.
The probate exception is a judicially created doctrine that limits federal jurisdiction. Marshall v. Marshall, 547 U.S. 293, 308, 126 S.Ct. 1735, 164 L.Ed.2d 480 (2006); see also Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296, 90 L.Ed. 256 (1946). The probate exception is the principle that “a federal court has no jurisdiction to probate a will or administer an estate.” Markham, 326 U.S. at 494, 66 S.Ct. 296. Markham is the Supreme Court’s “most ... pathmarking pronouncement on the probate exception.” Marshall, 547 U.S. at 308, 126 S.Ct. 1735. In Marshall, the Supreme Court clarified ambiguity in Markham and in the scope of the exception:
We read Markham’s enigmatic words ... to proscribe “disturbing] or affecting] the possession of property in the custody of a state court.” ... [T]he probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent’s estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court. But it does not bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction
Marshall, 547 U.S. at 311-12, 126 S.Ct. 1735. The probate exception prevents federal courts from exercising in rem jurisdiction over a res when a state court is simultaneously doing the same. See id. at 311, 126 S.Ct. 1735; see also Nickless v. Kessler (In re Berman), 352 B.R. 533, 543 (Bankr.D.Mass.2006). Therefore, federal courts may not exercise jurisdiction to dispose of property that is in the custody of a state probate court. See Three Keys, Ltd. v. SR Util. Holding Co., 540 F.3d 220, 227 (3d Cir.2008) (“It is clear after Marshall that unless a federal court is endeavoring to (1) probate or annul a will, (2) administer a decedent’s estate, or (3) assume in rem jurisdiction over property that is in the custody of the probate court, the probate exception does not apply.”); Lefkowitz v. Bank of N.Y., 528 F.3d 102, 107 (2d Cir.2007) (“Following Marshall we must now hold that so long as a plaintiff is not seeking to have the federal court administer a probate matter or exercise control over a res in the custody of a state court, if jurisdiction otherwise lies, then the federal court may, indeed must, exercise it.”).
Here, the trustee’s complaint, in seeking an order requiring the CFI to distribute the funds in its jurisdiction and possession, asks the bankruptcy court to dispose of — or at least endeavor to dispose of — property in the custody of the CFI, serving here as a probate court. The funds in question, the proceeds from sale of the Properties, are in the in rem jurisdiction and custody of the CFI. Under the probate exception, their distribution is the CFI’s exclusive preserve. Indeed, only the CFI has comprehensive jurisdiction over all claims against those assets. Though expressing no opinion on Puerto Rican law on the subject, it is hard to imagine how a distribution can or should be made without regard for the extent of the probate estate’s assets and the extent of the competing claims with varying priorities. See Dulce v. Dulce, 233 F.3d 143, 148 (2d Cir.2000) (the probate exception was not implicated where the federal court would determine the amount of a claim against the probate estate but not “[w]hether the plaintiffs share would actually result in his receipt of money, and how much,” matters which “would depend on the probate court’s findings as to the extent of the estate’s assets and the extent of *45the competing claims with varying priorities”). Therefore, to the extent that the trustee’s complaint demanded that the bankruptcy court order the CFI to distribute proceeds on a basis other than § 542(a) of the Bankruptcy Code, the complaint fell within the probate exception, and the bankruptcy court erred in adjudicating it.16
CONCLUSION
For the reasons set forth above, we REVERSE the bankruptcy court’s judgment directing the Clerk of the CFI to turn over the proceeds and REMAND for the entry of an order consistent with this opinion, dismissing any remaining demands for relief for lack of jurisdiction.
. The Puerto Rico Superior Court is a "Court of First Instance” and a court of "original *35general jurisdiction.” See P.R. Laws Ann. tit. 4, § 25a. In Puerto Rico, courts of general jurisdiction handle estate administration, and, therefore, probate matters are assigned to the Puerto Rico Superior Court. Tartak v. Del Palacio, Case No. 09-1730(DRD), 2010 WL 3960572, at *6 (D.P.R. Sept. 30, 2010).
. Unless expressly stated otherwise, all references to "Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. § 101, et seq. All references to "Bankruptcy Rules” shall be to the Federal Rules of Bankruptcy Procedure.
. It is undisputed that the Debtors paid 10 percent of the agreed upon price as a down payment, and executed unsecured promissory notes for the remaining 90 percent (more than $1,500,000.00). It is also undisputed that the Debtors failed to pay the remaining 90 percent of the purchase price.
. Some of the heirs of the González Estate filed a Motion for Issuance of Summary and/or Default Judgment against the other heirs, alleging that the only controversy that existed with respect to the González Estate was whether the decision of the majority of the co-heirs to dissolve the hereditary community of the estate (through the sale of the Properties and the distribution pursuant to Puerto Rico law of the sale proceeds), was binding as to all of the heirs. After identifying all of the heirs and assets of the González Estate, the CFI concluded that because, under Puerto Rico law, none of the heirs were obligated to remain in the hereditary community, the González Estate could be divided and the assets of the estate could be liquidated.
.In an order dated May 9, 2002, the CFI ordered that the Properties be sold at public auction for a minimum purchase price of $2,000,000.00. The court also determined that the Debtors had "a credit equivalent to 78.54% of the minimum price of the property to be auctioned....” The Properties were subsequently reappraised (as ordered by the CFI in an order dated February 6, 2004), and on August 27, 2004, the CFI again ordered the sale of the Properties through public auction (at an increased minimum purchase price of $3,664,000.00). Upon reconsideration and request for authorization to conduct a private sale, on December 2, 2004, the CFI upheld the May 9, 2002 order and ordered that the Properties be sold at public auction. The González Estate appealed that decision to the Puerto Rico Court of Appeals, Bayamón Judicial Region ("PR Court of Appeals”).
. Four months later, Almeida sold the Properties to Real Anon, Inc. for $5,900,000.00.
. They filed the adversary complaint (as amended) against Hon. Luisa Colom Garcia (Judge of the CFI), thirty-six of the heirs of the González Estate (including the appellants), Almeida (the party who purchased the Properties at the public auction). Real Anon, Inc. (the corporation that purchased the Properties from Almeida), and RG Premier Bank of Puerto Rico (the banking institution that financed the sales).
.Although there is nothing in the record before us from which we can determine the basis for the district court’s dismissal of the appeal, a review of the district court docket indicates that the Debtors voluntarily dismissed the appeal. See Maher v. Hyde, 272 F.3d 83, 86 n. 3 (1st Cir.2001); Kowalski v. Gagne, 914 F.2d 299, 305 (1st Cir.1990) (“It is well-accepted that federal courts may take judicial notice of proceedings in other courts if those proceedings have relevance to the matters at hand.”).
. Not all of the heirs of the González Estate were named as defendants in the adversary proceeding, just those whose shares the Debtors allegedly purchased.
. Although the trustee did not set forth separate counts in her complaint, in her request for relief she sought: (1) a "determination” *38that the Debtors had a 78.54 percent interest in the sale proceeds of the Properties; and (2) an order directing the CFI to turn over 78.54 percent of the sale proceeds to the bankruptcy estate.
. Under Puerto Rico law, a valid contract exists between two parties when the following three conditions exist: (1) the consent of the contracting parties; (2) a definite object which may be the subject of the contract; and (3) the cause of the obligation which may be established. See Article 1213 of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31, § 3391; see also Bianchi-Montana v. Crucci-Silva, 720 F.Supp.2d 159, 164 (D.P.R.2010).
. It is unclear from the record why the PR Court of Appeals made a reference to option agreements and not the public deeds referenced on page 3 above.
. In an order dated April 5, 2013, the Panel acknowledged that the bankruptcy court’s February 14, 2013 order was final and that the trustee could not challenge the timeliness of Appellants Sandra and Josefa’s appeal.
. Specifically, the bankruptcy judge concluded that the Debtors’ ownership of 78.54 percent of the shares in the González Estate would not grant them a legal or equitable interest in the Subject Properties, and therefore the Properties are not property of the bankruptcy estate. The bankruptcy judge based this conclusion on the following analysis of Puerto Rican law, which analysis we adopt:
If there is more than one heir to the inheritance, a hereditary community is created. Sociedad Legal de Gananciales v. Registrador de la Propiedad, 151 D.P.R. 315, 317 (2000) (citations omitted). The object of the hereditary community is the estate as a whole, and not each asset, right or liability in particular. Kogan v. Registrador, 125 D.P.R. 636, 650 (1990). Therefore what each heir is entitled to is a right over the estate as a whole ..., not over the particular assets. Id. at 652. This is called a hereditary right in the abstract which implies that until a division is ... effectuated, the heirs may not claim a right over any particular asset. Id. It is the division of the estate that concludes the hereditary community and only through the division of the estate heirs may become exclusive title holders of its assets. Id. at 318; Gutierrez v. Registrador, 114 D.P.R. 850, 857 (1983).
. Having determined that the trustee was not, in any event, entitled to relief under § 542(a), we deem it unnecessary to determine whether the probate exception removed even a demand under that subsection from the bankruptcy court's jurisdiction. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496864/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the Motion to Reopen filed by Antonios Dalezios (the “Debtor”) pursuant to which he seeks to reopen his case for the purposes of listing Elizabeth and Harrison Kelton (col*56lectively, the “Keltons” or the “Creditors”) as creditors and obtaining a determination that any debt he owes them is dischargea-ble. The Creditors opposed the Motion. The Court heard the matter on January 28, 2014 and directed the parties to file supplemental memoranda.
The Debtor filed a supplemental memorandum. The Creditors, however, filed a “Conditional Assent to Motion to Reopen,” in which they stated that they had advised the Debtor that they had not sought, and were not going to seek, to except their claim from discharge. In addition, they indicated that they wished to obtain recovery from the Residential Contractor’s Guaranty Fund (the “Fund”), established pursuant to Mass. Gen. Laws ch. 142A, § 5.
The material facts necessary to resolve the Motion to Reopen, except where noted below, are not in dispute, and neither the Debtor nor the Creditors requested an evidentiary hearing. The Court now makes the following findings of fact and rulings of law.
II. FACTS
The Debtor filed a voluntary Chapter 7 petition on July 29, 2010. He did not list the Keltons on his schedules of liabilities. The Court entered the discharge order on November 2, 2010. Approximately two months later, the Chapter 7 Trustee filed a Report of No Distribution. On February 24, 2011, the Debtor’s case was closed.
On December 20, 2013, the Debtor filed his Motion to Reopen. He attached to his Motion a copy of a complaint filed by the Keltons, on or about June 25, 2013, in the Massachusetts Superior Court, Department of the Trial Court, a copy of a home improvement contract from “Antony’s Services” for a remodeling job at the Keltons’ residence in the sum of $33,000, and a copy of a Memorandum of Decision and Order, dated December 2, 2013, issued by the Superior Court. See Kelton v. Anthony’s Handyman Servs., No. 13-2636, Slip op. (Dec. 2, 2013).1
The Creditors objected to the Motion to Reopen referencing the Superior Court action, as well as a previously filed complaint against the Debtor in the Newton District Court in February of 2013, which they voluntarily dismissed. The Debtor maintained that the complaint was dismissed because the damages claimed by the Kel-tons exceeded the jurisdictional limits of district courts, see Mass. Gen. Laws ch. 218, § 19. The Creditors, however, maintained that they dismissed the action after learning of the Debtor’s bankruptcy discharge and that they advised him to file a motion to reopen at that time. They stated:
It would be inequitable to allow the Debtor to reopen the case now when the Debtor was told to reopen or the Kel-tons would refile suit. The Debtor not only refused to do so, but after the complaint was filed, he filed a baseless motion to dismiss based on the bankruptcy discharge thereby forcing the Keltons unnecessarily to spend thousands of dollars.
Further arguing that the Debtor was aware of their claims when he filed bankruptcy in 2008 and raising the doctrine of laches due to the delay and expense occasioned by the Debtor’s failure to move to reopen his bankruptcy case until after the Superior Court case was filed, the Credi*57tors added: “[r]eopening is for the debtor who honestly forgot a creditor, not a tactical move when all else fails.”
The Superior Court in its decision addressed the Newton District Court complaint filed by the Keltons and the Debtor’s failure to move to reopen his bankruptcy case in early 2013. The Superior Court stated:
Plaintiffs voluntarily withdrew the District Court complaint without prejudice while counsel investigated the issue of whether the bankruptcy discharge barred the claim. At the conclusion of that investigation, Plaintiffs notified Defendants that they intended to re-file in Superior Court unless Defendants asked the Bankruptcy Court to reopen the bankruptcy and discharge Plaintiffs’ claim. Defendants did not respond, and Plaintiffs then filed this lawsuit.”
Kelton v. Anthony’s Handyman Servs., No. 13-2636, Slip op. at 5 (Dec. 2, 2013).
In their Superior Court complaint, the Keltons set forth two counts, one under Mass. Gen. Laws ch. 142A, § 17, which sets forth 17 prohibited acts by contractors and subcontractors, and one for breach of contract. They sought damages in excess of $30,000. The Debtor moved to dismiss the complaint based upon his bankruptcy discharge. The Superior Court’s Memorandum of Decision concerned the merits of the motion to dismiss. After setting forth the facts and the standard for dismissal under Mass. R. Civ. P. 12(b)(6), the Superior Court stated:
Defendants contend that Plaintiffs’ claims are barred because of Dalezios’s bankruptcy discharge in November 2010. Plaintiffs argue that their claims are not discharged because Dalezios did not inform the Bankruptcy Court of Plaintiffs’ claim, and Plaintiffs did not have notice or actual knowledge of the bankruptcy proceedings. Generally, a debt is not discharged if the debtor did not list the creditor’s claim, and the creditor was not notified of the opportunity to participate in the bankruptcy proceeding. Colonial Sur. Co. v. Weizman, 564 F.3d 526, 530 (1st Cir.2009).
In Colonial, the First Circuit held that unlisted debts are not discharged in Chapter 7 no asset bankruptcies. Id. at 531-532. In so doing, the First Circuit expressly rejected the “no harm, no foul” approach to no asset bankruptcies taken by certain other Circuit Courts of Appeal. Under that view, a creditor whose debt was not listed in a no asset bankruptcy suffers no prejudice, because that debt would have been discharged had it been properly listed. In disagreeing with this approach, the First Circuit expressly declined to follow, among other cases, the only case on which Defendants here rely, In re Madaj, 149 F.3d 467 (6th Cir.1998). Colonial, 564 F.3d at 532 n. 5. I adopt the position of the First Circuit, and therefore find that Plaintiffs’ unlisted claims were not discharged in bankruptcy, and are not barred.
Slip op. at 3. The Superior Court then considered the nature of the Keltons’ claims for breach of contract, including allegations of defective and shoddy work, concluding those claims sounded in tort, not contract, and were barred by the applicable statute of limitations. The court also determined that the Keltons’ claims under Mass. Gen. Laws ch. 142A, § 17, and Mass. Gen. Laws ch. 93A, sounded in tort and were barred by the applicable statute of limitations. With respect to claims that the Debtor only completed half of the work, but received excess compensation, the Superior Court concluded that those were contract claims that were not barred by the applicable statute of limitations and would be allowed to proceed.
*58As noted, the Debtor raised his bankruptcy discharge as a defense in support of dismissal of the Keltons’ complaint in the Superior Court. He was partially successful in having some of the Keltons’ claims dismissed, but not on the ground he asserted. He now turns to this Court, seeking to reopen his case to obtain a determination that the contract claims advanced by the Keltons, which survived as a result of the Superior Court’s application of Colonial Sur. Co. v. Weizman, 564 F.3d at 532, and its statute of limitations analysis, should be discharged by order of this Court upon reopening of his case. He asserts that the omission of the Creditors’ claim was innocent and that there would be no prejudice to the Creditors, citing Colonial Sur. Co. v. Weizman, 564 F.3d at 532. The Debtor also argues that he did not wait an unreasonable amount of time to seek to reopen his bankruptcy case. Aware that the Keltons seek to obtain reimbursement from the Fund, the Debtor responded that a prerequisite to reimbursement is a judgment against the contractor for a violation of Mass. Gen. Laws ch. 142A. The Debtor stated: “[i]n this case, it is impossible for the Creditors to obtain a judgment against the Debtor for violating 142A [sic] due to the fact that the Superior Court already dismissed all tort claims, and specifically the c. 142A claims made by the creditors.”2 The Creditors, however, asserted in their Objection to the Motion to Reopen that the Debtor had “ample notice of their potential claim as he was terminated in a heated discussion with the Keltons about his work that they thought was defective, which was followed by an exchange of letters.” The Creditors did not attach any of the letters to their Objection.
III. DISCUSSION
Section 350(b) of the Bankruptcy Code provides that “[a] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). “The decision to reopen should be made on a case-by-case basis based on the particular circumstances and equities of a case, and should be left to the sole discretion of bankruptcy court.” Diaz-Nieves v. Irizarry (In re Irizarry), No. 06:10-bk-188876-KS J, 2012 WL 592886 at *1 (Bankr.M.D.Fla. Feb. 17, 2012) (footnote omitted). See also Mass. Dept. of Revenue v. Crocker (In re Crocker), 362 B.R. 49, 53 (1st Cir. BAP 2007) (citing In re McGuire, 299 B.R. 53, 55 (Bankr.D.R.1.2003)). The moving party bears the burden of demonstrating sufficient cause to reopen. As the First Circuit stated in Colonial Sur. Co. v. Weizman,
*59It is true that an unnotified creditor is not entirely helpless even after the bankruptcy proceeding is long over: the discovery of overlooked assets and the opportunity to prove fraud can be grounds for reopening the bankruptcy. But so, too, can a debtor move to reopen to list a debt where the failure to give notice was innocent and can be shown to have caused no harm; consistent with Stark [In re Stark, 717 F.2d 322 (7th Cir.1983)], we conclude that in such a case the debtor would be entitled to such relief. Yet the burden of doing so is fairly upon the debtor who failed to give notice — or so Congress seems to have thought.
564 F.3d at 532. See also Rodney v. Arias (In re Arias), 469 B.R. 133 (Bankr.D.Mass.2012) (citing In re Corbett, 425 B.R. 51, 53 (Bankr.D.N.H.2010)). In Corbett, the court required the debtor to submit a verified motion or an affidavit in support of reopening a case because “[djebtors cannot simply recite a generic explanation that the omission was innocent without some further factual detail” and that explanation “can probably be countered by anything that makes it inequitable to grant such relief.” 425 B.R. at 53 (citing Weizman, 564 F.3d at 532).
Courts generally consider a number of factors in determining whether to reopen a case:
the length of time that the case was closed ...; whether a nonbankruptcy forum, such as state court, has the ability to determine the issue sought to be posed by the debtor ...; whether prior litigation in bankruptcy court implicitly determined that the state court would be the appropriate forum to determine the rights, post bankruptcy, of the parties; whether any parties would be prejudiced were the case reopened or not reopened; the extent of the benefit which the debt- or seeks to achieve by reopening; and whether it is clear at the outset that the debtor would not be entitled to any relief after the case were reopened.
In re Crocker, 362 B.R. at 53 (citations omitted). The court in Crocker observed that courts have exercised their discretion not to reopen a bankruptcy case where there was a pending case in a non-bankruptcy forum with jurisdiction to hear the dispute. Id. at 53-54 (citing Otto, 311 B.R. 43, 47 (Bankr.E.D.Pa.2004); In re Tinsley, 98 B.R. 791 (Bankr.S.D.Ohio 1989); In re E.A. Adams, Inc., 29 B.R. 227 (Bankr.D.R.I.1983); In re Hepburn, 27 B.R. 135 (Bankr.E.D.N.Y.1983)). Notably, the Superior Court has concurrent jurisdiction with this court to determine the discharge-ability of debts. Several circuit courts have observed that “courts have interpreted 28 U.S.C. § 1334(b) as granting concurrent jurisdiction to state courts to determine the nondischargeability of debts.” Hamilton v. Hamilton (In re Hamilton), 540 F.3d 367, 373 (6th Cir.2008). See also Eden v. Robert A. Chapski, Ltd., 405 F.3d 582, 586 (7th Cir.2005) (explaining that “state courts have concurrent jurisdiction with the bankruptcy courts to determine whether or not a debt is dischargeable in bankruptcy”).
In their respective filings with the Court, neither the Debtor nor the Creditors focused on the Superior Court’s determination that the Creditors’ claims were not discharged based upon its consideration of the Weizman standard. Accordingly, this Court concludes that the Debt- or, in essence, is seeking reconsideration of the Superior Court’s decision, in reliance on Weizman, that the Creditors’ claims were not discharged. It is evident to this Court that the Superior Court carefully reviewed the decision of the First Circuit in Weizman and determined that the *60Debtor failed to satisfy his burden, particularly where the First Circuit observed:
Nothing in the language or history of the 1978 revision of section 523(a)(3) indicates that Congress aimed to carve out no asset bankruptcies from what we perceive to be a general rule that listing the creditor is a condition of discharge. The qualifying phrase about timely filing recognizes that notice may be given late in the bankruptcy-proceeding day but still in time for the creditor to participate in the bankruptcy proceeding. Here, the bankruptcy proceeding was completed with no notice to Colonial.
That the debtor claims to have no distributable assets might make one think that the creditor is not harmed by the lack of notice and so the Ninth Circuit reading is just a shortcut to a no harm, no foul outcome. But no asset claims are easy to make; a creditor might want notice precisely to argue that there are assets even though the debtor asserts otherwise.
564 F.3d at 532.
As a result of the Superior Court’s determination that certain of the Keltons’ breach of contract claims have not been discharged, two issues arise: 1) What effect should be accorded the Superior Court’s determination of nondischargeability in light of the Keltons’ statement that they do not intend to assert claims under 11 U.S.C. § 523(c)? 3 and 2) If this Court were to review the Superior Court’s determination, whether it should conclude that the Debtor established both that his omission of the Keltons’ claims was innocent and the absence of “anything that makes it inequitable to grant such relief’? Weiz-man, 564 F.3d at 532. See also In re Mammola, No. 90-12851-JNF, 2009 WL 4938202 (Bankr.D.Mass. Dec. 14, 2009).
The Superior Court’s order was not final. Therefore, neither collateral estoppel, see Trenwick Am. Reins. Corp. v. Swasey (In re Swasey), 488 B.R. 22, 33 (Bankr.D.Mass.2013) (collateral estoppel under Massachusetts law requires final judgment on the merits), nor the Rooker-Feldman doctrine, see Field v. Hughes-Birch (In re Hughes-Birch), 499 B.R. 134, 149 (Bankr.D.Mass.2013); In re Balser, No. 10-17292-JNF, 2013 WL 4409187 (Bankr.D. Mass. July 23, 2013),4 apply to *61preclude reconsideration of whether the Debtor satisfied the Weizman standard.
Based upon the existing record, the Court concludes that there is a factual issue as to whether the Debtor’s failure to list the Creditors was innocent. With respect to the equities, the Court concludes that undisputed facts establish that the Keltons were prejudiced by the lack of notice of the Debtor’s Chapter 7 case and the Debtor’s subsequent conduct after the filing of the Newton District Court action. They did not have the opportunity to explore whether the Debtor’s Chapter 7 case was legitimately a “no asset” case, and they did not have an opportunity to assert exceptions to discharge under 11 U.S.C. § 523(a) prior to the expiration of the applicable statute of limitations with respect to their claims under Mass. Gen. Laws ch. 142A, § 17. When the Keltons commenced their action against the Debtor in the Newton District Court, they afforded him an opportunity to move to reopen his bankruptcy case at that time. The Debtor did not do so, electing to make the argument he now makes in this Court to the Superior Court first. He lost, yet now he seeks relief from this Court after causing the Keltons to incur needless additional legal fees. The expense associated with the commencement of the Superior Court case in which the Debtor raised his discharge as a defense and lost caused prejudice to the Keltons.
The Keltons, however, have expressly stated that they do not intend to seek a determination as to the dischargeability of any debt which the Debtor may owe them in the event that the case were to be reopened. Their sole goal, and one that they are unlikely to attain, is to obtain reimbursement from the Fund. Accordingly, were this Court to deny the Debtor’s Motion, it would, in effect, sanction the nondischargeability of a debt that would otherwise be dischargeable under 11 U.S.C. § 523(a)(3)(A).5
*62Thus, the Court finds that resolution of the Motion to Reopen turns on the question of whether the Debtor’s failure to list the Creditors was “innocent” and the equities of the case. The Debtor maintained that because he had not heard from the Creditors between April 18, 2008 and July-29, 2010, his failure to list them was innocent. The Keltons, however, maintained that the termination of the Debtor as their contractor was acrimonious and he should have been aware of their potential claims. Because the Debtor did not file a verified Motion to Reopen or an affidavit in support of his motion, his assertion that his omission of the Creditors was innocent is not dispositive of the issue and the Keltons established prejudice. Accordingly, the Court concludes, as did the Superior Court, that the Debtor failed to satisfy his burden under Weizman. In addition, the Debtor waited approximately 33 months after his case was closed and approximately ten months after the Keltons dismissed the Newton District Court complaint to move to reopen. Although advised to move to reopen his bankruptcy case by the Keltons, he gambled that the Superior Court, a court with concurrent jurisdiction, would dismiss the Keltons’ complaint in its entirety based upon his bankruptcy discharge, causing prejudice to the Keltons. See In re Crocker, 362 B.R. at 53.
IV. CONCLUSION
In view of the foregoing, the Court shall enter an order denying the Motion to Reopen. By the Court,
. It appears that the Debtor, who disclosed his occupation as a self-employed handyman on Schedule I-Current Income of Individual Debtor(s), utilized a number of trade names. He did not indicate that he did business as either Antony’s Services or Anthony's Handyman Services on his petition.
. The Residential Contractor’s Guaranty Fund is intended "to compensate owners for actual losses incurred by them as a result of registered contractor or subcontractor conduct” which a court has found to be "work performed in a poor or an unworkmanlike manner or which is a common law violation or a violation of any statute or regulation designed for the protection of consumers.” Mass Gen. Laws ch. 142A, § 5. In order to collect from the Fund, a homeowner must demonstrate that he has exhausted all customary and reasonable efforts to collect the judgment, and has found that the contractor has filed for bankruptcy, fled the jurisdiction, or the homeowner is otherwise unable to collect the judgment. Id. According to 57 Joel Lewin and Charles E. Schaub, Jr., Mass. Practice, Construction Law, § 5:23 (2102),
[A] homeowner "may make a claim to the guaranty fund only if he or she has: (1) brought a court or arbitration proceeding; (2) obtained a judgment or arbitration award; and (3) exhausted all customary and reasonable efforts to collect the judgment or award.”
The homeowner must file a claim with the guaranty fund within six months of obtaining a judgment or arbitration award. Mass. Gen. Laws ch. 142A, § 7.
. Section 523(c)(1) provides:
Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.
11 U.S.C. § 523(c)(1). Section 523(a)(3)(B) provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit — ...
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dis-chargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request... .
11 U.S.C. § 523(a)(3)(B).
. In Balser, this Court observed:
The Rooker-Feldman doctrine bars "cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Indus. *61Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). 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) (citing Book v. Mortgage Elec. Registration Systems, 608 F.Supp.2d 277, 288 (D.Conn.2009), and Hoblock v. Albany County Bd. of Elections, 422 F.3d 77, 84 (2d Cir.2005)). See, e.g., New Eng. Power & Marine, Inc. v. Town of Tyngsborough (In re Middlesex Power Equip. & Marine, Inc.), 292 F.3d 61 (1st Cir.2002); Heghmann v. Indorf (In re Heghmann), 316 B.R. 395, 403 (1st Cir. BAP 2004); Xytest Corp. v. Mitchell (In re Mitchell), 255 B.R. 97, 106 (Bankr.D.Mass.2000). "Courts in the First Circuit interpreting the doctrine have held that it forecloses lower federal court jurisdiction where the issues in the case are 'inextricably intertwined' with questions previously adjudicated by a state court.” In re Schwartz, 409 B.R. at 247 (citations omitted). "A federal claim is ‘inextricably intertwined’ with state court claims ‘if the federal claim succeeds only to the extent that the state court wrongly decided the issues before it.' " Id. (quoting Sheehan v. Marr, 207 F.3d 35, 40 (1st Cir.2000), and citing Hill v. Town of Conway, 193 F.3d 33, 39 (1st Cir.1999)). Thus, the doctrine "precludes a federal action if the relief requested in the federal action 'would effectively reverse the state court decision or void its holding.’ " Schwartz, 409 B.R. at 247 (citations omitted).
Balser, 2013 WL 4409187 at *7 (footnote omitted).
. Section 523(a)(3)(A) provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual *62knowledge of the case in time for such timely filing....
11 U.S.C. § 523(a)(3)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496865/ | MEMORANDUM AND ORDER GRANTING MOTION TO DISMISS
(this relates to Doc. # 38)
DIANE FINKLE, Bankruptcy Judge.
Defendant Bank of America, N.A. seeks dismissal of this adversary proceeding brought by Plaintiff-Debtor Inez Travers for statutory damages, rescission of the Defendant’s mortgage against her residence, and attorney’s fees for alleged violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq. (“TILA”) and Regulation Z, 12 C.F.R. § 226.1.1 In ruling on *66the motion, I have considered the Plaintiffs Complaint for Declaratory Judgement [sic] Equitable Relief, Rescission, Recoupment, and Damages (Doc. # 1)2 (the “Complaint”), the Answer of Bank of America, N.A. (Doc. # 18) (the “Answer”), Bank of America, N.A.’s Motion to Dismiss (Doc. # 38) (the “Motion to Dismiss”), the Plaintiffs Objection to Motion to Dismiss (Doc. # 49) (the “Objection”), the Supplemental Memorandum of Law in Support of Bank of America, N.A.’s Motion to Dismiss (Doc. # 66) (the “Defendant’s Supplemental Memorandum”), and the Plaintiffs Supplemental Memorandum of Law (Doc. # 96) (the “Plaintiffs Supplemental Memorandum”). Among other grounds,3 the Defendant moves to dismiss the Complaint for lack of jurisdiction because there is no longer a bankruptcy estate, the Plaintiffs underlying bankruptcy case having been closed quite some time ago. After due consideration, I conclude that this Court no longer has subject matter jurisdiction over this matter. On that basis, this adversary proceeding should be dismissed.
1. STANDARD OF REVIEW
The Defendant moves for dismissal pursuant to Fed.R.Civ.P. 12(b)(1).4 Procedurally, this rule permits a party to assert lack of subject matter jurisdiction as a defense by way of a motion to dismiss. “The partfy] asserting jurisdiction, here the [P]laintiff[ ], [has] the burden of demonstrating the existence of federal jurisdiction.” Acosta-Ramirez v. Banco Popular de Puerto Rico, 712 F.3d 14, 20 (1st Cir.2013). The issue of subject matter juris diction should be resolved before addressing the merits of the action. See Morales Feliciano v. Rullan, 303 F.3d 1, 6 (1st Cir.2002) (“[T]he preferred — and often the obligatory — practice is that a court, when confronted with a colorable challenge to its subject-matter jurisdiction, should resolve that question before weighing the merits of a pending action.”).
In reviewing the Motion to Dismiss, I must accept as true all allegations contained within the Complaint. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see also Aversa v. United States, 99 F.3d 1200, 1209-10 (1st Cir.1996) (internal citations omitted) (“In ruling on a motion to dismiss for lack of subject matter jurisdiction under Fed.R.Civ.P. 12(b)(1), the district court must construe the complaint liberally, treating all well-pleaded facts as true and indulging all reasonable inferences in favor of the plaintiff. In addition, the court may consider whatever evidence has been submitted.... ”). Both the procedural history and factual background of this proceeding are pivotal to the resolution of the jurisdictional challenge raised by the Defendant.
II. PROCEDURAL AND FACTUAL BACKGROUND
A. The Mortgage Transaction
On July 24, 2007, the Defendant entered into a consumer credit transaction with the Plaintiff involving the Plaintiffs residence at 25 Cantara Street, West Warwick, *67Rhode Island (the “Property”), advancing funds to the Plaintiff in the principal amount of $198,000 and securing such advances with a first mortgage against the Property (the “Mortgage Transaction”). See Objection, Exhibit B at 34. The Plaintiff alleges that at the time of the closing on the Mortgage Transaction she did not receive an accurate Truth-in-Lending Disclosure Statement as required by TILA and its implementing regulation, Regulation Z. More specifically, the Plaintiff asserts that in violation of the statutory and regulatory requirements certain charges were not listed as finance charges on the Disclosure Statement, the calculation of the annual percentage rate was inaccurate, and she did not receive two copies of the statutory “Notice of Right to Cancel.”
Within three years of the Mortgage Transaction, the Plaintiff sent a notice of rescission on June 19, 2010 (the “Notice of Rescission”) to BAC Home Loans, Servicing, LP (“BAC”), the entity servicing the loan on behalf of the Defendant. BAC received the Notice of Rescission on June 22, 2010, and the Plaintiff alleges that on June 30, 2010, the Defendant refused to accede to her request to rescind the Mortgage Transaction and discharge the mortgage.5
B. The Bankruptcy Case
On June 30, 2011, the Plaintiff filed a petition under Chapter 13 of the Bankruptcy Code.6 On the same day she also filed the Complaint against the Defendant. Less than one month later the Plaintiffs case converted to Chapter 7, and the Plaintiff subsequently filed her bankruptcy schedules. On “Schedule A — Real Property,” the Plaintiff listed an interest in the Property in fee simple with a value of $165,500, and a secured claim against the Property in the amount of $183,050.7 On “Schedule B — Personal Property,” the Plaintiff listed the TILA claims against the Defendant in an “unknown” amount. On “Schedule C — Property Claimed as Exempt,” the Plaintiff elected the state statutory exemptions, claimed a homestead exemption in the amount of “$0,” and claimed an exemption in the TILA claims in an “unknown” amount. No objections to these claimed exemptions were filed. On September 1, 2011, the Chapter 7 Trustee filed a “Report of No Distribution” (the “No-Asset Report”), and on November 2, 2011, the Plaintiff received her discharge. The bankruptcy case was closed but this adversary proceeding remained open pending its resolution.
C. The Adversary Proceeding
The Complaint contains three specific counts for relief: Count I to enforce the Plaintiffs right to rescind the Mortgage Transaction under 15 U.S.C. § 1635(a) and to recover actual damages under 15 U.S.C. § 1640(a); Count II to recover an amount equal to twice the finance charge and the actual damages incurred, as well as attorney’s fees and costs, pursuant to 15 U.S.C. *68§ 1640(a); and Count III to disallow any proof of claim the Defendant might file.8
The Defendant filed the Motion to Dismiss on March 1, 2013,9 and the Plaintiff lodged her Objection on April 8, 2013. Following a hearing on June 19, 2013, I ordered the parties to file supplemental memoranda on the issue of retaining jurisdiction in the event jurisdiction existed on the date the action was commenced but subsequent events altered that jurisdiction. The Defendant’s Supplemental Memorandum was filed on August 27, 2013, and the Plaintiffs Supplemental Memorandum on November 18, 2013.
I did not act on the Motion to Dismiss in light of the Plaintiffs statements in her Supplemental Memorandum that she was currently participating in a trial loan modification with the Defendant towards a possible overall settlement of the action. During a conference with the parties on December 2, 2013, the Plaintiff explained that she would release her claims against the Defendant and voluntarily dismiss the adversary proceeding if offered a permanent loan modification in line with the trial plan at the conclusion of the trial plan period. On December 13, 2013, I approved the parties’ stipulation essentially staying the proceeding until conclusion of the trial plan in January 2014 (Doc. # 107). Things apparently went awry, and on February 4, 2014, the Defendant filed a status report advising that the Plaintiff had rejected the permanent loan modification offered and requesting a ruling on its pending Motion to Dismiss (Doc. # 109). That same day, the Plaintiff filed her own status report explaining her reasons for rejecting the Defendant’s offer (Doc. # 112). The Court then took the matter under advisement.
III. DISCUSSION
A. The Court’s Jurisdiction
In its Answer the Defendant admitted that this Court has jurisdiction over this adversary proceeding, and in her Objection the Plaintiff implies that the Defendant has therefore waived its jurisdictional challenge. This waiver argument fails because “parties cannot confer subject matter jurisdiction on a federal court by waiver or consent.” Quinn v. City of Boston, 325 F.3d 18, 26 (1st Cir.2003); see also Sheridan v. Michels (In re Sheridan), 362 F.3d 96, 100 (1st Cir.2004) (citing to Quinn). Moreover, “[a] litigant generally may raise a court’s lack of subject-matter jurisdiction at any time in the same civil action, even initially at the highest appellate instance.” Kontrick v. Ryan, 540 U.S. 443, 455, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) (citing Mansfield, C. & L.M.R. Co. v. Swan, 111 U.S. 379, 382, 4 S.Ct. 510, 28 L.Ed. 462 (1884)).
“The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.” Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). In one of the Supreme Court’s more recent landmark opinions in the bankruptcy are*69na, Stern v. Marshall, the Court summarized the three distinct types of matters falling within the bankruptcy courts’ jurisdiction:
[T]he district courts of the United States have “original and exclusive jurisdiction of all cases under title 11.” 28 U.S.C. § 1334(a). Congress has divided bankruptcy proceedings into three categories: those that “aris[e] under title 11”; those that “aris[e] in” a Title 11 case; and those that are “related to a case under title 11.” § 157(a). District courts may refer any or all such proceedings to the bankruptcy judges of their district, ibid., ....
— U.S. -, 131 S.Ct. 2594, 2603, 180 L.Ed.2d 475 (2011). The United States District Court for the District of Rhode Island has referred all cases arising under title 11 to this Court. See DRI LR Gen. 109(a).
Stern further clarifies that pursuant to 28 U.S.C. § 157(b)(1) and (c)(1), “[t]he manner in which a bankruptcy judge may act on a referred matter depends on the type of proceeding involved,” differentiating between core proceedings — proceedings arising under title 11 or arising in a case under title 11 — and non-core proceedings — proceedings otherwise related to a case under title 11. Stem, 131 S.Ct. at 2603-04. Subject to certain constitutional limitations that are not relevant here, a bankruptcy court may enter final orders and judgments in core proceedings. These “ ‘include, but are not limited to’ 16 different types of matters” set forth in 28 U.S.C. § 157(b)(2). Id. In matters that are non-core proceedings but are “related to” a bankruptcy case, unless the parties consent, a bankruptcy court may not enter a final judgment and instead must submit proposed findings of fact and conclusions of law to the district court for de novo review. Id. at 2604 (citing 28 U.S.C. § 157(c)(1)).
What type of jurisdiction, if any, a bankruptcy court has in a matter is an issue a court must determine before adjudicating the merits. “The bankruptcy judge shall determine, on the judge’s own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11.” 28 U.S.C. § 157(b)(3). I turn then to whether the Plaintiffs claims asserted in the Complaint constitute a core proceeding or alternatively, a non-core proceeding which nevertheless qualifies as a “related to” proceeding.
1. Core Proceedings
“Core proceedings involve rights created by the Bankruptcy Act; they depend on the Bankruptcy Act for their existence.” In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir.1991) (citing 28 U.S.C. § 157(b)(2); Gardner v. United States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir.1990)). The Plaintiff contends that this proceeding is a core proceeding within the scope of 28 U.S.C. § 157(b)(2)(K) involving the “determinations of the validity, extent, or priority of liens,” and that this provision allows this Court to determine the validity of her mortgage. See Objection at 4-6 (citing DiVittorio v. HSBC Bank USA, N.A. (In re DiVittorio), 670 F.3d 273 (1st Cir.2012); DeGiacomo v. Traverse (In re Traverse), 485 B.R. 815 (1st Cir. BAP 2013); Acevedo v. Wells Fargo Bank, N.A. (In re Acevedo), 476 B.R. 360 (Bankr.D.Mass.2012); Lima v. Conlon (In re Lima), Adversary No. 11-1010, 2012 WL 3070569 (Bankr. D.R.I. July 30, 2012)). Each of these cases, however, presents distinguishable facts. None of them involved an adversary proceeding in a closed Chapter 7 case *70in which the debtor claimed an exemption in the property and the claims in litigation, and in which the trustee had abandoned all of the estate’s assets to the debtor. And that is precisely the factual situation before me.
On similar facts, the bankruptcy court in Maxwell v. HSBC Mortg. Corp. held that a Chapter 7 plaintiffs adversary proceeding (involving non-TILA claims) was not a core proceeding because the Chapter 7 trustee had abandoned the real property to which the claims pertained. See Maxwell v. HSBC Mortg. Corp. (USA) (In re Maxwell), Adversary No. 12-5284, 2012 WL 3678609, at *2 (Bankr.N.D.Ga. Aug. 22, 2012). The court explained:
Though this proceeding does not invoke a substantive right created by bankruptcy law and could exist outside of bankruptcy, Plaintiff nevertheless claims that this case represents a core proceeding because, pursuant to 28 U.S.C. § 157(b)(2)(E), a core proceeding may be brought to determine the “validity, extent, or priority of liens.” However, this provision only encompasses proceedings to determine the validity, extent, or priority of liens on the estate’s or the debtor’s property. Cases have held that, to fall within the court’s jurisdiction, a plaintiffs claims must affect the estate, not just the debtor. Indeed, “[t]o the extent that the literal wording of some of the types of proceedings [listed in § 157(b) ] might conceivably seem to apply, it should be remembered that engrafted upon all of them is the overarching requirement that property of the estate under § 541 be involved.” Here, the property in question has been abandoned and is no longer part of the estate. Any resolution regarding the validity, priority, and extent of liens on the abandoned property will only affect the debtor; it will have no effect on the bankruptcy estate. It is thus evident that this action is not a core proceeding under 28 U.S.C. § 157(b).
Id. at *2 n. 2 (internal citations omitted). Contrary to the Plaintiffs assertions, this Court does not currently have subject matter jurisdiction over the Plaintiffs claims under to 28 U.S.C. § 157(b)(2)(K).
The Plaintiff also argues that the proceeding is core because her claims will have an impact on the assets of the estate. While the Plaintiff does not refer to any specific statutory provision to support her contention, the only other provision of this jurisdictional statute conceivably applicable is subsection (O), the “catch-all” provision. See 28 U.S.C. § 157(b)(2)(0). This subsection renders core “proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.” Id. Notably, the Plaintiff fails to cite any cases bolstering this attempted jurisdictional hook. The Defendant repels this attempt by relying on the ruling in Lacey v. BAC Home Loans Servicing, LP (In re Lacey), Adversary No. 10-1249, 2011 WL 5117767 (Bankr.D.Mass. Oct. 27, 2011). In Lacey, the court determined that the plaintiffs claim was non-core, explaining that even under 28 U.S.C. § 157(b)(2)(O) “a matter cannot be deemed to be core merely because the debtor holds a claim which, if successful, could increase the assets of the estate.... If this Court conferred core jurisdiction on that basis, ... virtually any claim which could increase the assets of the estate would entitle the bankruptcy court to ignore the constitutional proscription set forth in [Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)].” Id. at *5 (quoting Hayim v. Goetz (In re SOL, LLC), 419 B.R. 498, 506 (Bankr.S.D.Fla.2009); Marill Alarm Sys*71tems, Inc. v. Equity Funding Corp. (In re Marill Alarm Systems, Inc.), 81 B.R. 119, 123 n. 8 (S.D.Fla.1987)).
As a result of the Trustee’s abandonment of the claims in this adversary proceeding and the closing of the Chapter 7 case, any potential impact or monetary recovery that may result will inure solely to the Plaintiff’s benefit. Hence, it is clear that the claims asserted in the adversary proceeding are well outside the purview of 28 U.S.C. § 157(b)(2)(O).
In short, this adversary proceeding is not a core matter under 28 U.S.C. § 157(b)(2).
2. Non-Core Proceedings — “Related To” Jurisdiction
Next I must determine whether the Plaintiffs claims are matters “related to” a case under title 11. 28 U.S.C. § 157(a). While the First Circuit has described this jurisdictional underpinning as extensive, it is not without limitation:
The statutory grant of “related to” jurisdiction is quite broad. Congress deliberately allowed the cession of wide-ranging jurisdiction to the bankruptcy courts to enable them to deal efficiently and effectively with the entire universe of matters connected with bankruptcy estates. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Thus, bankruptcy courts ordinarily may exercise related to jurisdiction as long as the outcome of the litigation “potentially [could] have some effect on the bankruptcy estate, such as altering debtor’s rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankruptcy estate.” In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir.1991) (quoting In re Smith, 866 F.2d 576, 580 (3d Cir.1989)).
Bos. Reg’l Med. Ctr., Inc. v. Reynolds (In re Bos. Reg’l Med. Ctr., Inc.), 410 F.3d 100, 105 (1st Cir.2005).
When the Plaintiff commenced the adversary proceeding, the outcome of the TILA litigation would have affected her bankruptcy estate and “related to” jurisdiction vested in this Court. See Gardner, 913 F.2d at 1518 (“A bankruptcy court has jurisdiction over disputes regarding alleged property of the bankruptcy estate at the outset of the case.”). The Defendant correctly observes, however, that such jurisdiction is “temporal”; while the bankruptcy court may have exclusive jurisdiction over property as of the commencement of a debtor’s case, the bankruptcy court’s jurisdiction over such property ends when it is no longer property of the estate. See id.; Scarborough v. Angel Fire Resort Operations, LLC (In re Angel Fire Corp.), Adversary No. 11-1110-S, 2012 WL 5880675, at *7 (Bankr.D.N.M. Nov. 20, 2012); United States v. Fleet Nat’l Bank (In re Calore Express Co., Inc.), 288 B.R. 167, 169-70 (D.Mass.2002) (“[T]here are two dimensions on which to assess ‘related to’ jurisdiction: substantive and temporal. A matter may be unrelated to a bankruptcy estate because it substantively has no impact on that estate, or it may be unrelated because the estate does not exist anymore. Either way, if a given dispute is unrelated to a bankruptcy estate, a bankruptcy court ... has no subject-matter jurisdiction over that dispute.”).
The Defendant maintains that whatever jurisdiction this Court may have had over this adversary proceeding ceased once the TILA claims were abandoned by the Trustee and revested in the Debtor.10 See *72Defendant’s Supplemental Memorandum at 7-8 (citing Dewsnup v. Timm (In re Dewsnup), 908 F.2d 588, 591 (10th Cir.1990), aff'd, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992); DeVore v. Marshack (In re DeVore), 223 B.R. 193, 200 (9th Cir. BAP 1998); Oregon v. Lange (In re Lange), 120 B.R. 132, 135 (9th Cir. BAP 1990); Newkirk v. Wasden (In re Bray), 288 B.R. 305, 307 (Bankr.S.D.Ga.2001)). Additionally, relying on Harris v. HSBC Bank USA, N.A. (In re Harris), 450 B.R. 324 (Bankr.D.Mass.2011), the Defendant argues that as a result of the Plaintiffs homestead exemption, the Trustee’s abandonment of the claims, and the Plaintiffs discharge, “the outcome of the Plaintiffs Complaint will have no conceivable impact on her bankruptcy estate” and “related to” jurisdiction no longer exists. Motion to Dismiss at 11.
The Defendant accurately depicts the limits of this Court’s jurisdiction over this adversary proceeding. Jurisdiction of bankruptcy courts being temporal, the “related to” jurisdiction of this Court over the Property and the TILA claims evaporated upon the Trustee’s abandonment of the claims, the Debtor’s discharge, and the closure of the case. See Harris, 450 B.R. at 335 n. 46 (quoting VonGrabe v. Mecs (In re VonGrabe), 332 B.R. 40, 43-44 (Bankr.M.D.Fla.2005)) (“[Bjecause discharge had issued and [the] debtor’s prepetition claims were abandoned by the Chapter 7 trustee, the debtor was ‘revested with the right to pursue his assorted claims against the various defendants in a more appropriate forum.’ ”).
B. Discretionary Retention of Proceeding
My analysis does not end here though, because under certain circumstances I may exercise discretion to retain the proceeding and decide the matter on its merits. Obviously, the Plaintiff urges me to exercise such discretion and permit her to present her claims at trial. The Defendant concedes that “[d]espite the temporal nature of property of the estate and bankruptcy court jurisdiction over related to proceedings, the Bankruptcy Court has discretion to retain jurisdiction over cases where the underlying bankruptcy proceedings have been terminated, ie., the entering of the discharge or dismissal of the main bankruptcy case.” Defendant’s Supplemental Memorandum at 9. Not surprisingly, the Defendant insists that this is not a proceeding over which jurisdiction should be retained to adjudicate the merits.
The Bankruptcy Appellate Panel for the First Circuit recently discussed discretionary retention of jurisdiction by a bankruptcy court. “The dismissal of a bankruptcy case normally results in dismissal of related proceedings because federal jurisdiction is premised upon the nexus between the underlying bankruptcy case and the related proceedings.... This general rule is not without exceptions.” Melo v. GMAC Mortg., LLC (In re Melo), 496 B.R. 253, 256 (1st Cir. BAP 2013) (internal quotations marks and citations omitted) (quoting Hamilton v. Appolon (In re Hamilton), 399 B.R. 717, 720 (1st Cir. BAP 2009)). In Hamilton v. Appolon, the Panel remanded the matter to the bankruptcy court for a determination of whether the court should retain jurisdiction based upon several circuit court decisions affirming bankruptcy courts’ retention of jurisdiction over adversary proceedings in which the underly*73ing bankruptcy cases had been dismissed. Hamilton, 399 B.R. at 722 & n. 7.
On remand, Judge Feeney adopted the Second Circuit’s approach to determine whether she should retain jurisdiction of the adversary proceeding:
We join several other circuits in adopting the general rule that related ‘proceedings ordinarily should be dismissed following the termination of the underlying bankruptcy case. This general rule favors dismissal because a bankruptcy court’s jurisdiction over such related proceedings depends on the proceedings’ nexus to the underlying bankruptcy case. See In re Querner, 7 F.3d 1199, 1201-02 (5th Cir.1993); In re Morris, 950 F.2d 1531, 1533 (11th Cir.1992); In re Smith, 866 F.2d 576, 580 (3d Cir.1989). Notwithstanding this general rule, however, nothing in the Bankruptcy Code requires a bankruptcy court to dismiss related proceedings automatically following the termination of the underlying case. See, e.g., In re Querner, 7 F.3d at 1201-02; In re Carraher, 971 F.2d 327, 328 (9th Cir.1992) (per curiam); In re Morris, 950 F.2d at 1534; In re Roma Group, 137 B.R. 148, 150 (Bankr.S.D.N.Y.1992); In re Pocklington, 21 B.R. 199, 202 (Bankr.S.D.Cal.1982). Indeed, section 349 of the Bankruptcy Code authorizes bankruptcy courts to alter the normal effects of the dismissal of a bankruptcy case if cause is shown. See 11 U.S.C. § 349 (setting forth consequences of dismissal “unless the court, for cause, orders otherwise”). Accordingly, we hold that the dismissal of an underlying bankruptcy case does not automatically strip a federal court of jurisdiction over an adversary proceeding which was related to the bankruptcy case at the time of its commencement. The decision whether to retain jurisdiction should be left to the sound discretion of the bankruptcy court or the district court, depending on where the adversary proceeding is pending.
Hamilton v. Appolon (In re Hamilton), Adversary No. 07-1060, 2009 WL 2171097, at *6 (Bankr.D.Mass. July 15, 2009) (emphasis supplied) (quoting Porges v. Gruntal & Co., Inc. (In re Porges), 44 F.3d 159, 162 (2d Cir.1995)). Judge Feeney then applied the analysis used by federal courts regarding disposition of pendent state claims after dismissal of the federal law claims upon which the door to federal court jurisdiction had opened. See id. “[A] court must consider four factors in determining whether to continue to exercise jurisdiction: judicial economy, convenience to the parties, fairness and comity.” Porges, 44 F.3d at 162-163 (citing Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 n. 7, 108 S.Ct. 614, 98 L.Ed.2d 720 (1988); DiLaura v. Power Authority of New York, 982 F.2d 73, 80 (2d Cir.1992)). Following Judge Feeney’s lead, I will apply these four factors to determine if retention of the Plaintiffs adversary proceeding by this Court is appropriate.
1. Judicial Economy
The Seventh Circuit aptly portrays the procedural quagmire of an adversary proceeding once the underlying bankruptcy case has been dismissed:
[W]hen the bankruptcy proceeding is dismissed, the adversary claim (when based solely on state law) is like the cartoon character who remains momentarily suspended over a void, spinning his legs furiously, when the ground has been (quite literally) cut out from under him. So tenuous is the federal link that the court ought to have the power to relinquish jurisdiction over the adversary claim if no possible federal interest, including the interest in reducing the *74cost of the bankruptcy process, would be served by retention.
Chapman v. Currie Motors, Inc., 65 F.3d 78, 81-82 (7th Cir.1995). The Plaintiffs TILA claims, based on non-bankruptcy law, are so feebly linked to the underlying bankruptcy case that I am hard-pressed to find a sufficient bankruptcy interest that would justify this Court retaining jurisdiction over the adversary proceeding. I concur with the Defendant’s assessment that this proceeding is a “dispute of no interest to anyone except the two adversaries,” and it no longer implicates the objectives of the Bankruptcy Code to justify its continuation in this Court. Defendant’s Supplemental Memorandum at 10 (quoting Chapman, 65 F.3d at 82).
Furthermore, as the Defendant points out, “[i]n cases where the courts have retained post-dismissal jurisdiction, those courts have invested significant judicial resources in the related adversary proceedings,” citing to three cases in which the adversary proceedings were pending for four to six years. Id. at 10-11. Despite pending for nearly three years, this matter is far from the stage where the merits of the Plaintiffs claims can be addressed at trial. The parties have engaged in little if any pretrial discovery, and I have not invested significant resources on the matter — only some minor monitoring of the efforts of the parties to reach a settlement of the claims through a loan modification. There would be little waste of judicial resources if the Plaintiff were required to reassert her claims in a different judicial forum. Judicial economy does not weigh in favor of retaining jurisdiction over the Plaintiffs action.
2. Convenience to the Parties
Similarly, convenience to the parties as a factor weighs against the Plaintiff. Dismissing the adversary proceeding would result in only slight inconvenience to the parties, given the limited time expended in this case by the parties (outside of settlement efforts) and the ease of refiling the action in a non-bankruptcy judicial forum. See Defendant’s Supplemental Memorandum at 11 (citing Linkway Inv. Co., Inc. v. Olsen (In re Casamont Investors, Ltd.), 196 B.R. 517, 524 (9th Cir. BAP 1996)). The Plaintiff has not submitted any evidence to establish that dismissal of the proceeding would result in undue delay. To the contrary, greater delay may attend this proceeding if I retain jurisdiction to rule on the merits; initial jurisdiction having been grounded upon the “related to” jurisdictional prong, another layer of de novo judicial review by the district court would be required for the entry of a final judgment unless the Defendant consents to my issuing final findings of fact and conclusions of law in this litigation.
3. Comity
To evaluate this factor, I am directed to consider whether the claims arising in this litigation would be adjudicated best by another court to provide the litigants with “a surer-footed reading of applicable law.” United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). The Defendant emphasizes that there are no longer any bankruptcy-related issues left to decide in view of the dismissal of the underlying bankruptcy case — a point well made. See Defendant’s Supplemental Memorandum at 12-13. That the Plaintiffs claims are predicated upon the federal non-bankruptcy TILA statute is significant. The claims are not unique to bankruptcy and a bankruptcy court is no better equipped to adjudicate them than any other judicial forum. In fact, federal district courts routinely preside over actions in which these types of claims are raised. Consequently, comity does not weigh in favor of my retaining jurisdiction.
*754. Fairness
The final factor to consider is fairness, in this instance, to the Plaintiff if the proceeding is dismissed. This presents a more complex inquiry than the foregoing considerations because it implicates the statutes of limitations applicable to the Plaintiffs claims and the impact a dismissal would have in light of them. Looking to federal courts’ analogous analysis of pendent jurisdiction, “[t]he running of the statute of limitations on a pendent claim, precluding the filing of a separate suit in state court, is a salient factor to be evaluated when deciding whether to retain supplemental jurisdiction.” O’Connor v. Commonwealth Gas Co., 251 F.3d 262, 273 (1st Cir.2001) (quoting Rodriguez v. Doral Mortg. Corp., 57 F.3d 1168, 1175-77 (1st Cir.1995)); see also Pharo v. Smith, 625 F.2d 1226, 1227 (5th Cir.1980); Hamilton, 2009 WL 2171097, at *7.1 must, accordingly, take into account the statute of limitation provisions under TILA set forth in 15 U.S.C. §§ 1635(f) and 1640(e) which directly pertain to the Plaintiffs mortgage rescission and statutory damages claims,
a. The Rescission Limitation
TILA provides that “[a]n obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first_” 15 U.S.C. § 1635(f). “If the borrower does not receive adequate notice of the statutory right to rescind, the rescission period is extended for three years from the date of the closing. This three-year period is a rigid deadline.” Mantz v. Wells Fargo Bank, N.A., Civil Action No. 09-12010-JLT, 2011 WL 196915, at *3 (D.Mass. Jan. 19, 2011) (citing 12 C.F.R. § 226.15(a)(3); 15 U.S.C. § 1635(f)). The circuit courts disagree on whether this limitations provision is satisfied if a borrower serves a notice of rescission on the lender within such period, or whether it mandates that a borrower actually commence a civil action against the lender within this period.11 This split amongst the courts is derived in part from how they interpret the Supreme Court’s opinion in Beach v. Ocwen Fed. Bank, which held that TILA “permits no federal right to rescind, defensively or otherwise, after the [three]-year period of [15 U.S.C.] § 1635(f) has run.” 523 U.S. 410, 419, 118 S.Ct. 1408, 140 L.Ed.2d 566 (1998). The First Circuit has only discussed the issue in dicta,12 and the lower courts within this *76circuit are in similar disagreement.13
For the purposes of determining whether to retain jurisdiction, however, I need not reach the substantive issue of the timeliness of the Plaintiffs rescission claims. My focus is limited to whether the Plaintiff would suffer unfair prejudice as a result of dismissal, that is, whether the Plaintiff would suffer unfair prejudice if this substantive issue were to be decided in a different forum. I find she would not. The Plaintiff sent the Notice of Rescission within three years of the date of the Mortgage Transaction but did not file this adversary proceeding until after the three-year period had run. Regardless of the particular judicial forum in which the matter is heard, the risk to the Plaintiff on the rescission limitations issue remains unaltered and dismissal of this proceeding does not result in prejudice to the Plaintiff. The limitation period either expired prior to the initiation of this adversary proceeding or was satisfied pre-bankruptcy, depending on which side of this decisional divide a court lays.
b. The Statutory Damages Limitation
TILA also affords consumer borrowers a statutory right to damages for violations of 15 U.S.C. § 1635. See 15 U.S.C. § 1640(a). “Regarding the Plaintiffs statutory right to seek damages, [15 U.S.C. §] 1640(e) sets a one year period following the applicable loan transactions.” Vasquez v. Countrywide Home Loans, Inc. (In re Vasquez), Adversary No. 10-1020, 2011 WL 2671301, at *1 (Bankr.D.R.I. July 7, 2011); see also Belini v. Wash. Mut. Bank, FA, 412 F.3d 17, 25 (1st Cir.2005) (quoting 15 U.S.C. § 1640(e)) (“The statute of limitations for bringing an action under [15 U.S.C. §] 1640 ‘is one year from the date of the occurrence of the violation.’ ”). The Plaintiff is correct that the Defendant’s refusal to honor the Notice of Rescission constitutes an independent TILA violation, triggering anew the one-year period in which to commence an action under 15 U.S.C. § 1640(e). See Belini, 412 F.3d at 26 (“The ‘date of the occurrence of the violation,’ here, is at the earliest the [sic] date that [the lender] received the [plaintiffs’] notice of rescission; in truth, the date of the occurrence is likely twenty days later, when [the lender’s] time for responding to that notice expired.”).
The Plaintiff alleges, and the Defendant admits, that the Defendant effectively rejected the Notice of Rescission by June 30, 2010. Accepting this timeline for the narrow purpose of evaluating the fairness element, the limitations period in which to assert the statutory damages claims had not expired when the Complaint was filed but it will be time-barred if this adversary proceeding is dismissed.
Notwithstanding, I am not persuaded to retain jurisdiction based on this alone, the only one of the four factors that to some degree favors the Plaintiff. “[Although the potential statute of limitations bar is a necessary consideration, it is not the only consideration. It is not the function of a federal court to rescue a party from the danger of limitation by permitting the litigation of inappropriate matters *77in federal court. Quality Foods de Centro Am., S.A. v. Latin Am. Agribusiness Dev. Corp., S.A., 711 F.2d 989, 1000 (11th Cir.1983). The statutory damages afforded the Plaintiff under TILA at most do not exceed $2,000,14 a de minimus sum. Such an inconsequential sum, absent other persuasive reasons, should not become the proverbial “tail that wags the dog” on this retention issue.
Nor is the Plaintiff deprived of her ability to pursue the pivotal target of her claims — rescission of the entire loan transaction and discharge of the mortgage against her home, along with attorney’s fees incurred. See Vasquez, 2011 WL 2671301, at *1 (“If the Debtor prevails in his rescission claim under [15 U.S.C.] § 1635, the right to seek attorney’s fees for relief under that section is not limited by the one year limitation period.”). By the Plaintiffs own admissions in her status report, at a conference held on December 2, 2013, and in her Supplemental Memorandum, her claim for rescission, or alternatively the satisfactory modification of the mortgage loan, are her utmost priorities in this adversary proceeding.15 The potential loss of the inconsequential statutory damages claims does not warrant my exercising discretion to retain jurisdiction. It is not sufficiently compelling to overcome the general rule that once “related to” jurisdiction no longer exists, a bankruptcy court should dismiss the proceeding.
IV. CONCLUSION
This Court ceased to have jurisdiction over the Plaintiffs claims upon the Chapter 7 Trustee’s abandonment of those claims and the closing of the underlying bankruptcy case, after which there no longer was a bankruptcy estate. Retention of jurisdiction would be inappropriate based on the procedural history and particular facts of this proceeding. The Defendant’s Motion to Dismiss is GRANTED.
. John Doe also is named as a defendant to represent any other entity holding an interest in the mortgage or note executed by the Plaintiff. The only defendant who has participated *66ta the adversary proceeding has been Bank of America, N.A.
. All references herein to the docket are to the adversary proceeding docket, A.P. No. 11-01047, unless otherwise indicated.
. Alternatively, the Defendant requests entry of judgment on the pleadings. In light of my ruling on the jurisdictional issue which is dispositive of this matter, this alternative ground need not be addressed.
.Fed.R.Civ.P. 12(b) is applicable to adversary proceedings in bankruptcy cases pursuant to Fed. R. Bankr.P. 7012(b).
. It is unclear from the parties’ filings how the Defendant communicated its refusal to discharge the mortgage, i.e., whether the Defendant corresponded with the Plaintiff indicating its intent to enforce the Mortgage Transaction, or whether the Defendant simply had not taken affirmative steps to rescind the mortgage as contemplated by 15 U.S.C. § 1635(b). Either way, this is not determinative for purposes of my ruling.
. Unless expressly stated otherwise, all references to the Bankruptcy Code or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. § 101, et seq.
. The Court may take judicial notice of the bankruptcy docket. See In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 8 (1st Cir.1999).
. Count III is merely precautionary and the Plaintiff concedes that this count may be moot. As the Defendant has not filed a proof of claim, Count III is indeed moot.
. Although the Complaint was filed on June 30, 2011, a default was entered against the Defendant on August 10, 2011, followed by entry of a default judgment against the Defendant on September 9, 2011. The parties later filed a joint motion to vacate the default judgment on February 7, 2012, which was granted on February 27, 2012. The Defendant filed its Answer on February 10, 2012, and the parties filed their discovery plan on March 19, 2012. The discovery deadlines in that plan were extended several times at the request of the parties.
. 11 U.S.C. § 554(c) expressly provides: “Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of *72the closing of a case is abandoned to the debtor and administered for the purposes of section 350 of this title.”
. Compare Sherzer v. Homestar Mortg. Servs., 707 F.3d 255, 258 (3d Cir.2013) (holding that "the text of [15 U.S.C.] § 1635 and its implementing regulation (Regulation Z) supports the view that to timely rescind a loan agreement, an obligor need only send a valid notice of rescission”), and Gilbert v. Residential Funding LLC, 678 F.3d 271, 278 (4th Cir.2012) ("[T]he three-year limitation in 15 U.S.C. § 1635 concerns the extinguishment of the right of rescission and does not require borrowers to file a claim for the invocation of that right.”), with McOmie-Gray v. Bank of Am. Home Loans, 667 F.3d 1325, 1328 (9th Cir.2012) ("[U]nder the case law of this court and the Supreme Court, rescission suits must be brought within three years from the consummation of the loan, regardless [of] whether notice of rescission is delivered within that three-year period.”), and Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1188 (10th Cir.2012) ("[N]otice, by itself, is not sufficient to exercise (or preserve) a consumer’s right of rescission under TILA. The commencement of a lawsuit within the three-year TILA repose period was required.”).
. See McKenna v. Wells Fargo Bank, N.A., 693 F.3d 207, 211 (1st Cir.2012) (noting in dicta that a "federal TILA claim for rescission must be brought within three years of the transaction,” citing 15 U.S.C. § 1635(f)); Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 54 (1st Cir.2002) (holding that a notice of rescission, by itself, does not void the underlying mortgage transaction).
. Compare U.S. Bank Nat'l Ass'n v. James, Civil No. 09-84-P-S, 2009 WL 2448578, at *7 (D.Me. Aug. 9, 2009) ("[I]t is the exercise of the right of rescission that is limited to three years after the relevant date.... The operative act in exercising the right of rescission is notice to the creditor, not filing an action in court.”), with Mantz, 2011 WL 196915, at *4 (finding plaintiff's claim time-barred as it was filed two days after his rescission right expired).
. While the amount the Plaintiff seeks is $2,000, in actuality she may be entitled to only $1,000, which appears to have been the statutory cap in effect at the time of the Mortgage Transaction. Compare 15 U.S.C. § 1640(a)(2)(A)(i)-(ii), with Hummel v. Hall, 868 F.Supp.2d 543, 550 (W.D.Va.2012) (explaining that the Dodd-Frank Act increasing the statutory cap from $1,000 to $2,000 was not enacted until July 21, 2010, and the borrower, whose consumer credit transaction occurred prior to that date, was only entitled to a maximum of $1,000 in statutory damages). Here, both the date of the Mortgage Transaction (July 24, 2007) and the Defendant’s refusal to honor the Notice of Rescission (June 30, 2010) occurred before the Dodd-Frank Act became effective.
. See, e.g., Plaintiff's Supplemental Memorandum at 2 (requesting the Court defer its consideration of the Motion to Dismiss in light of the trial modification plan, and advising the Court that she would “dismiss [the adversary proceeding] unconditionally if the trial modification [was] made permanent under the same payment terms, without regard to any attorney fees”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496866/ | MEMORANDUM OF DECISION
Granting in Part and Denying in Part Plaintiff’s Motion for Partial Summary Judgment
COLLEEN A. BROWN, Bankruptcy Judge.
The Chapter 7 Trustee (the “Plaintiff’ or “Trustee”) has filed a motion for summary judgment seeking avoidance of certain alleged fraudulent transfers from Turner & Cook, Inc. (“T & C” or the “Debtor”) to Mark Fisher (the “Defendant” or “Mr. Fisher”) and recovery of transferred property. For the reasons set forth below, the Court finds no material facts are in dispute with respect to some of the alleged fraudulent transfers, and the estate is entitled to relief with respect to those transfers. To the extent the *105Trustee has demonstrated he is entitled to judgment as a matter of law with respect to the undisputed transfers, summary judgment is granted. Where there are facts in dispute or the Trustee has failed to meet his burden of demonstrating entitlement to relief, summary judgment is denied.
Jurisdiction
This Court has jurisdiction over this adversary proceeding 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. The Court declares the claims addressed by the instant summary judgment motion to be core matters under 28 U.S.C. § 157(b)(2)(F) and (H), over which this Court has constitutional authority to enter a final judgment. To the extent any of the claims in the Plaintiffs complaint are outside this Court’s constitutional authority pursuant to Stern v. Marshall, — U.S. -, 132 S.Ct. 56, 180 L.Ed.2d 924 (2011), the Plaintiff filed a statement indicating he consents to this Court entering a final judgment (doc. # 126), and due to the presence of disputed facts, those claims are not addressed by this decision.
Procedural History
The Debtor’s creditors filed an involuntary Chapter 7 petition against it on October 21, 2010, and the Court entered an order for relief on December 15, 2010 (ch. 7 # 10-11344, doc. ## 1, 14). On December 5, 2011, the Chapter 7 Trustee filed a complaint initiating this adversary proceeding (doc. # l).1 On June 1, 2012, the Trustee filed an amended complaint seeking a determination that the Debtor had made certain fraudulent transfers to the Defendant (doc. # 33). The Court entered a scheduling order on July 30, 2012, which gave the parties until March 4, 2013 to file all dispositive motions (doc. # 46). In December 2012, stipulations of dismissal were entered (doc. ## 65, 66) against two of the original defendants. Subsequently, the Court entered an order extending the due date for dispositive motions to May 8, 2013, based in part on Mr. Fisher’s delays in fulfilling discovery request (doc. # 52).
On November 15, 2012, however, the Trustee moved for entry of default against Defendant Fisher, for failure to respond to the amended complaint (doc. # 56). After a hearing held on the application on December 18, 2012, the Court granted Mr. Fisher’s request for an extension of time to respond to the amended complaint, and ordered him to respond by January 21, 2013 (doc. ## 64, 71). On January 23, 2013, Mr. Fisher moved for an extension of time to respond, citing his health condition and pro se status (doc. #74). After a hearing held on January 25, 2013, the Court ordered Mr. Fisher to provide evidence of his health condition and turn over certain discovery documents; it set a further hearing on the matter for February 19, 2014 (doc. # 77). The Court then granted additional extensions of time for Mr. Fisher to turn over the required documents and held continued hearings on the matter on March 26 and May 21, 2013 (doc. ## 88, 93). The Trustee filed a second amended complaint (the “Second Amended Complaint”) on May 16, 2013, to which the Defendant responded by cursorily denying the majority of the allegations (doc. ## 99, 113). The Court entered a resulting scheduling order setting further deadlines for the production of documents and requiring all dispositive motions to be filed by January 2, 2014 (doc. # 108).
*106Based on Mr. Fisher’s non-compliance with production of certain documents, the Court granted an additional and final extension of time in which to file dispositive motions (doc. ## 111, 122). The Trustee then filed a timely motion for summary judgment with memorandum of law, on January 30, 2014 (doc. # 131) (collectively, the “Motion”). Pursuant to the order entered February 4, 2014, Mr. Fisher’s response to the Motion was due February 21, 2014 (doc. # 140). In the order, the Court specifically informed the pro se Defendant that if he failed to respond to the Motion, and failed to file a motion setting forth cause for an extension of time to do so, by February 21, 2014, he risked having the Court enter a default judgment against him. On February 21, 2014, Mr. Fisher filed a motion for an extension of time to respond to the Motion, which the Trustee opposed (doc. ## 142, 143). The Court denied the request, concluding that Mr. Fisher’s last-minute request for a further extension of time was merely an attempt to escape judgment for another day, at the expense of the Debtor’s estate and its creditors (doc. # 144).
Accordingly, the Court treated the Motion as unopposed, and took the matter under advisement.
Undisputed Material Facts
Based upon the record in this case and adversary proceeding, and pursuant to Vt. LBR 7056-1(a)(3),2 the Court finds the following facts to be material and undisputed.
1. T & C was a residential construction company based in Jacksonville, Vermont. T & C focused on custom, “high end” home construction and historical renovations and restorations in New England. Statement of Undisputed Facts (“SUMF”) (doc. # 133), ¶ 1; Declaration of James Strattner (“Strattner Decl.”) (doc. # 134), ¶ 2.
2. T & C was managed by Mr. Fisher as director and vice president and James Strattner as director and president.3 SUMF, ¶2; Strattner Decl., ¶¶ 1-2.
3. In or around December 2001, T & C entered into a construction contract with Patrick and Carolyn Sullivan for construction of an approximately 10,000 square foot home in Sudbury, Massachusetts. T & C worked on the construction of the Sullivans’ home until February 2006, when T & C entered into a dispute concerning the construction and its costs. The Sullivans formally terminated T & C as contractor in the summer of 2006. SUMF, ¶ 3; Strattner Decl., ¶ 6.
4. On or around October 24, 2006, Anthony Lee — a forensic accountant hired by the Sullivans following T & C’s cessation of work on the Sullivans’ project — provided T & C with an accounting for the project, alleging adjustments and credits due to the owners in the amount of approximately $4.5 million (the *107“Lee Accounting”). SUMF, ¶ 4; Strattner Decl., ¶ 7.
5. In April 2007, T & C filed an arbitration demand as a result of a disagreement among the parties concerning the Lee Accounting. On May 17, 2007, the Sullivans submitted a counterclaim against T & C in the arbitration based, in part, on the Lee Accounting. On October 1, 2009, the arbitrators awarded the Sullivans $3,270,412, or 75% of their original claim. The arbitration award was confirmed by the Massachusetts Superior Court on March 9, 2010. SUMF, ¶ 5; Strattner Decl., ¶¶ 8-10.
6. From November 2006, after T & C was on notice of the Sullivans’ multimillion dollar claim, through the date of the involuntary petition against T & C in October 2010, T & C failed to carry any amount of liability for the Sullivans’ claim on its books. T & C’s net worth for this period, as reflected in the balance sheets, never exceeded $1.24 million, and was substantially less for a majority of the period. SUMF, ¶ 6; Strattner Decl., ¶¶ 14-15; doc. ##134-3 through 134-8 (exhs. 3(a) through 3(nnn)).
7. As of October 13, 2009, T & C had no active projects or employees. SUMF, ¶¶ 7-8; Strattner Decl., ¶¶ 11-12.
8. During the period October 2006 to December 2010, Mr. Fisher had credit card accounts with American Express (“AMEX”). T & C had no credit card account with AMEX. Declaration of Catherine A. Bazal, ¶ 2; SUMF, ¶ 10; Strattner Decl., ¶¶ 16-17.
9. As further detailed in the AMEX Statements and T & C’s own financial records, for the four-year period preceding this Court’s entry of an order for relief (November 2006-December 2010), T & C paid AMEX approximately $130,000 for charges made on Mr. Fisher’s AMEX credit cards. The vast majority of the payments to AMEX on account of Mr. Fisher’s credit card accounts originated from T & C’s account with Chittenden Bank, Bank Account ending in 0505 (the “505 Account”). SUMF, ¶ 11; Strattner Decl., ¶ 20.
10. Generally, the 505 Account was not used by T & C to pay T & C project related or overhead expenses, nor payroll. During this period, Mr. Fisher controlled the 505 Account. SUMF, ¶ 11; Stratt-ner Decl., ¶¶ 18-19.
11. The total of AMEX charges paid by the 505 account which are conclusively unrelated to T & C’s business is at least $76,526.91. SUMF, ¶ 12-14; Strattner Dec. ¶¶ 21-22.
12. In late 2008, Mr. Fisher installed a wood boiler in his home and T & C paid for the cost of the wood boiler and its installation. In the summer and fall of 2008, Mr. Fisher or his wife and T & C employee Stephanie Powers signed checks on T & C’s 505 Account, paying “Alan K. Hadley, Electrician” $1,487 and Crystal Rock Farm, a seller of wood boilers, $12,719.79. SUMF, ¶ 15; Strattner Decl., ¶ 23.
13. Neither Mr. Hadley nor Crystal Rock Farm was a project related or overhead vendor for T & C during this period and T & C received no benefit for the payments to Mr. Hadley and Crystal Rock Farm. SUMF, ¶ 16; Strattner Decl., ¶ 26.
*10814. None of the facts related to purchase or installation of the wood boiler serve as the basis for any count in the Second Amended Complaint. See doc. # 99.
15. After October 2009, when T & C no longer had any active projects and no source of income, Mr. Fisher caused T & C to pay Infiniti Financial Services $3,382.70 from the 505 Account for his luxury Infíniti. T & C received no benefit for these luxury car payments. SUMF, ¶¶ 17-18; Strattner Decl., ¶¶ 27-28.
16. Between October 2009 and March 2010, T & C transferred to Mr. Fisher its 2004 GMC Diesel 2500, 2002 Skytraek forklift, John Deere tractor, and 2003 Chevy Silverado. Mr. Fisher signed all related bills of sale both in his individual capacity as buyer, and in his corporate capacity, as Vice President of T & C, as seller. SUMF, ¶ 16; Stratt-ner Deck, ¶ 31; doc. # 81.
17. The total amount due under all bills of sale was $47,700. SUMF, ¶ 20; doc. # 81.
18. During the period October 2009 to April 2010, Mr. Fisher paid T & C a total of $32,150. However, $24,900 of this was credited to Mr. Fisher’s shareholder loan account, from which Mr. Fisher borrowed and repaid money. Thus, only $7,250 was actually paid by Mr. Fisher on the total amount due under the bills of sale. Accordingly, Mr. Fisher still owes $40,450 for the purchase of the vehicles and equipment. SUMF, ¶¶ 21-22; Strattner Deck, ¶¶ 29, 33-34.
19. In early 2010, Mr. Fisher consigned T & C’s Caterpillar 257B skidsteer, forks, bucket, backhoe, PB 15B sweeper and Harley M6 power rake to R.N. Johnson, Inc. (“RN Johnson”), a seller of new and used tractors and construction equipment. RN Johnson paid Mr. Fisher $10,056.67 for the sale of this equipment; T & C received no remuneration. Strattner Deck, ¶¶ 35-36; Declaration of Alan Johnson, ¶¶ 3-4.
Summary Judgment Standard
Summary judgment is proper if the record shows no genuine issue as to any material fact such that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56; Fed.R.Bankr.P. 7056; see also Bronx Household of Faith v. Bd. of Educ. of the City of New York, 492 F.3d 89, 96 (2d Cir.2007). The moving party bears the burden of showing that no genuine issue of material fact exists. See Vermont Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir.2004). A genuine issue exists only when “the evidence is such that a reasonable [trier of fact] could return a verdict for the non-moving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); see also Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In making its determination, the court’s sole function is to determine whether there is any material dispute of fact that requires a trial. Anderson, 477 U.S. at 249, 106 S.Ct. 2505; see also Palmieri v. Lynch, 392 F.3d 73, 82 (2d Cir.2004). In determining whether there is a genuine issue of material fact, a court must resolve all ambiguities, and draw all inferences, against the moving party. See Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of New Jersey, Inc., 448 F.3d 573, 579 (2d Cir.2006).
Discussion
Under both Vermont law and federal law, a constructive fraudulent *109transfer occurs when a debtor makes a transfer (i) without receiving a reasonably equivalent value in exchange for the transfer, (ii) at a time when (a) the debtor was insolvent or became insolvent as a result of the transfer, or (b) the debtor reasonably should have believed that it would incur debts beyond its ability to pay as they became due. 9 V.S.A. §§ 2288(a)(2), 2289(a); 11 U.S.C. § 548(a)(1)(B). A trustee may avoid and recover constructive fraudulent transfers made within four years of the petition date if acting pursuant to Vermont law, and within two years if acting pursuant to federal law. See 11 U.S.C. §§ 544(b), 548(a)(1); 9 V.S.A. §§ 2291, 2293(2).
In connection with the first element, reasonably equivalent value, courts consider: (i) the market value of what was transferred and received; (ii) whether the transaction took place at arm’s length; and (iii) the good faith of the transferee. See, e.g., In re Rothstein Rosenfeldt Adler, P.A., 483 B.R. 15, 21 (Bankr.S.D.Fla.2012); see also In re Fitzgerald, 237 B.R. 252, 264 (Bankr.D.Conn.1999) (stating that a court must consider all facts and circumstances surrounding the transfer). In deciding whether a debtor received “reasonably equivalent value” for an alleged fraudulent transfer, the court should consider both the direct and indirect benefits flowing to the debtor as a result of the exchange. In re Akanmu, 502 B.R. 124, 130 (Bankr.E.D.N.Y.2013).
Turning to the second element, insolvency, a debtor is insolvent if the sum of its debts is greater than the value of all of its assets, at a fair valuation. 9 V.S.A. § 2286(a); 11 U.S.C. § 101(32). Insolvency is a factual issue which must be resolved on a case by case basis. See In re Join-In International (U.S.A.) Ltd., 56 B.R. 555, 560 (Bankr.S.D.N.Y.1986). A court may rely on the balance sheets of the company in determining whether a debtor is insolvent. See In re Bayou Group, LLC, 439 B.R. 284, 332 (S.D.N.Y.2010). Contingent claims of an entity, including pending lawsuits, should be included in the insolvency calculation. See e.g., In re Sierra Steel, Inc., 96 B.R. 275, 279 (9th Cir. BAP 1989); In re Tronox Incorporated, 503 B.R. 239, 313 (Bankr.S.D.N.Y.2013); Collier on Bankruptcy, Sixteenth Ed. ¶ 101.32[5]. Thus, it is reversible error to exclude a potential liability from the insolvency calculation merely because the liability is contingent or because the debtor disputes the claim. See In re Sierra Steel, Inc., 96 B.R. at 279; see also In re Ollag Construction Equipment Corp., 578 F.2d 904, 909 (2d Cir.1978). In determining the proper amount of disputed or contingent liabilities to include in the insolvency calculation, courts should generally value contingent liabilities based upon the probability of the occurrence of the liability. See, e.g., In re Tronox Incorporated, 503 B.R. at 313; In re Davis, 169 B.R. 285, 302 (E.D.N.Y.1994). When a liability was contingent at the time of the challenged transfers but is reduced to judgment before the court’s insolvency determination, however, a court may permissibly use the judgment amount in valuing the contingent liability at the time of the transfers. See, e.g., In re Mama D'Angelo, Inc., 55 F.3d 552, 556 (10th Cir.1995) (stating that courts “may consider information originating subsequent to the transfer date if it tends to shed light on a fair and accurate assessment of the asset or liability as of the pertinent date ... [I]t is not improper hindsight for a court to attribute current circumstances which may be more correctly defined as current awareness or current discovery of the existence of a previous set of circumstances.”); S.E.C. v. Antar, 120 F.Supp.2d 431, 434, 443-44 (D.N.J.2000); In re W.R. Grace & Co., 281 B.R. 852, 869 *110(Bankr.D.Del.2002); In re Pilavis, 233 B.R. 1, 7-8 (Bankr.D.Mass.1999).
As an initial matter, although the Motion asserts that the Plaintiff is entitled to summary judgment on Counts Nine (relating to turnover, pursuant to 11 U.S.C. § 542, of the Debtor’s vehicles transferred to the Defendant) and Twenty (relating to the Debtor’s payment of the AMEX charges as actual fraudulent transfers) of the Second Amended Complaint, it provides no actual argument on these claims.4 Further, the SUMF alleges no facts in support of a claim of an actual fraud, and the Court finds that the relief requested in conjunction with the turnover claim is otherwise appropriate as a remedy on the constructive fraud claims discussed infra.5 Accordingly, the Court denies the Motion with respect to Counts Nine and Twenty of the Second Amended Complaint.
Conversely, the Motion provides ample argument with respect to the Debt- or’s payment of expenses relating to the purchase and installation of a wood boiler in the Defendant’s home. However, none of these facts serve as the basis for any count in the Second Amended Complaint. See doc. # 99. Since the Plaintiff may not amend his Second Amended Complaint through arguments made in his Motion, see Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir.1998), the Court must also deny the Motion with respect to any right to relief based on the Debtor’s payment of these expenses.
Amounts the Defendant failed to pay T & C for his purchase of company vehicles and equipment
Turning to the substance of the remaining counts, the Court first addresses the Trustee’s claims for recovery and avoidance with respect to T & C’s 2009 and 2010 transfer, to Mr. Fisher, of its 2004 GMC Diesel 2500, 2002 Skytrack forklift, John Deere tractor, and 2003 Chevy Silverado. Counts Eleven, Twelve, and Fourteen of the Second Amended Complaint allege that these transfers were constructively fraudulent under 9 V.S.A. §§ 2288(a)(2) and 2289, and 11 U.S.C. § 548(a)(1)(B).
All three of these claims for relief require a showing that the Debtor failed to receive reasonably equivalent value in exchange for the transfer of the property. See 9 V.S.A. §§ 2288(a)(2), 2289(a); 11 U.S.C. § 548(a)(1)(B). Here, the transactions did not take place at arms’ length. Instead, the Defendant transferred the property to himself in the capacity of both buyer and seller, at a time when the Debt- or’s financial situation was dire. Although the record contains no indication of the fair market value of the property, these factors alone suggest that even the agreed-upon purchase price was likely less than reasonably equivalent value. However, since the *111Trustee did not raise the issue of value, and there is no other basis for determining the value of the property in the record, the Court is willing to accept the amount due under the bills of sale as what would amount to reasonably equivalent value. The undisputed facts establish that the total due under all bills of sale was $47,700, and Mr. Fisher only paid $7,250 of this amount. SUMF, ¶ 20-22; Strattner Decl., ¶¶ 29, 33-34; doc. # 81. Accordingly, Mr. Fisher must pay the Debtor an additional $40,450 to give consideration equal to reasonably equivalent value for this property. Therefore, the Trustee has met his burden of proving the first element — the Defendant’s failure to pay reasonably equivalent value — as to the causes of action for avoidance and recovery of these property transfers.
The second element the Trustee must prove in order to prevail in the avoidance and recovery of the transfers under 9 V.S.A. § 2289(a) and 11 U.S.C. § 548(a)(1)(B), is that the Debtor was insolvent at the time of the transfers, or became insolvent as the result thereof, and knew or should have known it was incurring debts it would not be able to pay when due. The Court’s findings of undisputed material facts show that T & C’s net worth for the four-year period prior to the petition, as stated in its balance sheets, never exceeded $1.24 million. Furthermore, T & C failed to include any liability on these statements for the Sullivans’ claim. The Sullivans were ultimately awarded $3,270,412 on October 1, 2009, and all but one of the transfers (the John Deere tractor in the amount of $12,500) occurred after this date. See doc. # 81. Thus, the Debtor was conclusively insolvent at the time that it transferred the majority of this property. Moreover, even though the Sullivan liability was not reduced to judgment at the time the Debtor transferred the tractor, the Court concludes, pursuant to the Mama D’Angelo line of cases, that it is appropriate to value the Sullivan liability at $3,270,412 at least as of November 2006, when T & C received a copy of the Lee Accounting. Therefore, the Trustee has met his burden of proving the Debtor-transferor’s insolvency for purposes of Counts Twelve and Fourteen.
For the Trustee to establish the second element of proof under 9 V.S.A. § 2288(a)(2), he must show that the Debtor transferred the property when it reasonably should have been aware it was incurring debts it would not be able to pay as they became due. Here, the earliest transfer of the property occurred on October 4, 2009. At that time, the arbitrator had recently awarded the Sullivans a multi-million dollar award, and the Debtor’s balance sheets showed negative equity even without factoring in that liability. See doc. # 134-4 at 20. Further, the Debtor had only one active project at the time of the first transfer, that project was terminated less than one week later, and no new projects were ever initiated. Given these circumstances, the Court finds that a reasonable person would believe the Debtor should have been aware it was incurring debts that it could not timely pay. Therefore, the Trustee has met his burden of proving the second element of Count Eleven.
Finally, the Court looks to the timeliness of the claims. Since the transfers occurred within two years of the petition date, the Court finds the Trustee’s claims are timely under both state and federal law. See 11 U.S.C. § 548(a)(1); 9 V.S.A. § 2293(2). Accordingly, the Court finds that the Trustee is entitled to judgment as a matter of law on Counts Eleven, Twelve, and Fourteen of the Complaint, and the Trustee is entitled to avoidance of the *112transfers and recovery of the $40,450 that Mr. Fisher still owes for the purchase of the identified vehicles and equipment.
AMEX charges paid by T & C for the Defendant’s sole benefit
Count Twenty-One alleges that certain AMEX charges paid by T & C on behalf of the Defendant were constructively fraudulent under 9 V.S.A. § 2289. Count Twenty-Three alleges they were constructively fraudulent under 11 U.S.C. § 548(a)(1)(B). To prove the right to avoid and recover these transfers under each provision, the Trustee must demonstrate that: (1) the Debtor was insolvent at the time of, or became insolvent because of, the transfers; and (2) the Debtor received less than reasonably equivalent value in exchange for the transfers.
As discussed above, the Court finds that the Debtor was insolvent at least as of November 2006, when it received a copy of the Lee Accounting. Therefore, the Trustee has established the first element of these claims. Further, as stated in the undisputed material facts section, the Court finds that $76,526.91 of the AMEX charges paid by the 505 account from November 2006 onward were categorically unrelated to T & C’s business. SUMF, ¶ 12-14; Strattner Decl., ¶¶ 21-22. Thus, the Court finds that these charges were paid solely for the Defendant’s benefit, and that there was no direct benefit to the Debtor. If the record discloses that the Debtor reaped any indirect benefit from these transfers, the Court must take that benefit into consideration in discerning whether the Trustee has met his burden. However, the record is devoid of evidence that the Debtor enjoyed any benefit at all from these payments. While one could argue that the Debtor received the benefit of the Defendant’s continued service as the vice president of the company, that is unavailing as the Defendant was otherwise well-compensated for his employment. Thus, the AMEX charge payments were completely gratuitous, and the Court finds that any indirect benefit to the Debtor resulting from these payments was de minimis and less than reasonably equivalent value.
Lastly, the Court finds all payments were made within four years of commencement of this bankruptcy case. Thus, the Trustee’s claim is timely under state law, and he is entitled to judgment as a matter of law on Count Twenty-One. To timely avoid a claim under federal law, however, the fraudulent transfer must have occurred within two years pre-petition. Here, although many of the AMEX charges were likely paid within this period, the record is not clear as to what this amount is, and nothing in the record supports that the entire amount the Trustee seeks to recover was paid by the Debtor in the two years pre-petition. Accordingly, the Court must deny the Motion with respect to Count Twenty-Three.
Finance charges paid by T & C for Defendant’s luxury vehicle after T & C ceased business operations
Count Twenty-Seven alleges that transfers in the amount of $3,382.70 — paid by T & C for the Defendant’s luxury car payments after T & C no longer had any ongoing business — were constructively fraudulent under 9 V.S.A. § 2289. Count Twenty-Nine alleges they were constructively fraudulent under 11 U.S.C. § 548(a)(1)(B). Once again, to prove the right to avoid and recover these transfers under each statute, the Trustee must demonstrate that: (1) the Debtor was insolvent at the time of, or became insolvent because of, the transfers; and (2) the Debtor received less than reasonably equivalent value in exchange for the transfers.
*113As previously stated, the Court finds that the Debtor was insolvent for the entire four-year period prior to the filing of the bankruptcy petition, and the challenged payments occurred after October 2009, well within this four year period. As to whether the Debtor received reasonably equivalent value in exchange for the car payments, the Court finds that the Debtor received no direct benefit for the transfers, as Mr. Fisher was no longer performing any work on behalf of the Debtor when the Debtor had no active projects. Further, although it is conceivable the Defendant used the vehicle to, e.g., attempt to generate future business, the record contains no evidence to this effect. Moreover, the record contains no evidence to support that the Debtor received any indirect benefit from the car payments. To the contrary, the Trustee’s SUMF and Strattner’s declaration clearly state that T & C received no benefit for these luxury car payments, and Mr. Fisher never disputed this assertion. SUMF, ¶¶ 17-18; Strattner Decl., ¶¶27-28. Accordingly, the Court finds that the Debtor did not receive reasonably equivalent value for the payments. Finally, all of the transfers occurred within the lesser two year statute of limitations of § 548(a)(1)(B). Therefore, the Trustee is entitled to judgment as a matter of law on these causes of action, and to avoid and recover the transfers; the Court grants the Motion with respect to Counts Twenty-Seven and Twenty-Nine of the Second Amended Complaint.
Proceeds from the sale of T & C’s Caterpillar 257B Skidsteer and accessory equipment
Finally, the Trustee seeks to avoid the transfers and recover $10,056.67 — the amount the Defendant received for consignment of the Debtor’s Skidsteer and accessory equipment. Count Thirty-Five alleges that the transfers were constructively fraudulent under 9 V.S.A. § 2288(a)(2). Count Thirty-Six alleges that the transfers were constructively fraudulent under 9 V.S.A. § 2289. Count Thirty-Eight alleges they were constructively fraudulent under 11 U.S.C. § 548(a)(1)(B).
To obtain avoidance and recovery of the transfers under 9 V.S.A. § 2289(a) and 11 U.S.C. § 548(a)(1)(B), the Trustee must demonstrate that the Debtor was insolvent at the time of the transfers, or became insolvent as the result thereof. The Court has already determined that the Debtor was insolvent as of November 2006, and the Defendant did not consign the equipment until early 2010.
For the Trustee to avoid and recover the transfer under 9 V.S.A. § 2288(a)(2), he must show that the Debtor transferred the property when, if acting reasonably, it would have recognized that it was incurring debts it would not be able to pay as they became due. As stated in the discussion relating to avoidance of the vehicle transfers, above, by the time that the Defendant consigned this property, the arbitrator had already awarded the Sullivans a multi-million dollar award. Factoring in that liability, the Debtor’s liabilities exceeded its assets by approximately $2.5 million. See doc. # 134-4 at 10. Further, the Debtor had not had any active projects for a few months, and no new projects were then pending of ever initiated. Given these circumstances, the Court finds that any reasonable person would believe the Debtor should have realized that it was incurring debts it would not be able to pay when they became due.
These three claims for relief also require that the Trustee to prove the Debtor failed to receive reasonably equivalent value in exchange for the transfer of the property. See 9 V.S.A. §§ 2288(a)(2), 2289(a); 11 U.S.C. § 548(a)(1)(B). Here, *114the record is unequivocal that the Debtor received absolutely nothing in exchange for the transfers. See Strattner Decl., ¶¶ 35-36; Declaration of Alan Johnson, ¶¶ 3^4. Accordingly, the Court finds that the Debtor failed to receive reasonably equivalent value.
Finally, the Court must examine whether the transfers at issue in these causes of action were timely. Since the subject transfers of equipment occurred within two years of the petition date, the Trustee’s claims are timely under both state and federal law. See 11 U.S.C. § 548(a)(1); 9 V.S.A. § 2293(2). Therefore, the Trustee is entitled to judgment as a matter of law on these causes of actions, the subject transfers are avoidable, and the Court grants the Motion with respect to Counts Thirty-Five, Thirty-Six, and Thirty-Eight of the Second Amended Complaint.
Conclusion
For the foregoing reasons, the Court finds there are no material facts in dispute with respect to most of the claims asserted in the Motion, and the Plaintiff is entitled to judgment as a matter of law as to those in which he has met his burden of proof. Specifically, the Court declares the transfers to be fraudulent, and the transferred property to be recoverable, with respect to Counts Eleven, Twelve, Fourteen, Twenty-One, Twenty-Seven, Twenty-Nine, Thirty-Five, Thirty-Six, and Thirty-Eight of the Second Amended Complaint. The Court denies the Motion with respect to Counts Nine, Twenty, and Twenty-Three of the Second Amended Complaint. It also denies relief on the claim the Trustee asserts relating to the Debtor’s alleged purchase and installation of a wood boiler for the benefit of the Defendant, as the Trustee raised this for the first time in the Motion and did not assert it in the Second Amended Complaint.
This memorandum constitutes the Court’s findings of fact and conclusions of law.
. Unless otherwise noted, all citations to the record refer to AP # 11-1033, Canney v. Fisher & Strattner, LLC, et al.
. Vt. LBR 7056-l(a)(3) provides that "[t]he respondent is deemed to have admitted all facts in the movant’s statement of material undisputed facts except to the extent that party controverts them in a statement of disputed material facts.” Because the Defendant did not file any statement of disputed material facts, the Plaintiff's statement of undisputed material facts is accepted in its entirety for the purposes of the instant motion for summary judgment,
. Mr. Strattner is also a named defendant in this adversary proceeding. According to the Motion, the Plaintiff reached an agreement with him after mediation. However, the Plaintiff never moved to dismiss Mr. Strattner from the instant proceedings.
. The Motion also mentions in passing, in the introductory section, that the claims upon which the Trustee seeks relief fall into the categories of "breach of contract and fraudulent transfer claims” in the Second Amended Complaint. Count Thirty-Three of the Second Amended Complaint is one that seeks relief based on Mr. Fisher’s alleged breach of contract; however, the Motion neither specifically requests relief on this claim, nor provides any argument on the issue. Accordingly, the Court does not further discuss this cause of action.
. Moreover, the record does not support the granting of turnover of this property to Plaintiff, because property that has been fraudulently transferred does not become property of the estate until it is recovered, and turnover only applies to property of the estate. See In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir.1992); In re Teligent, Inc., 325 B.R. 134, 137 (Bankr.S.D.N.Y.2005). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496867/ | OPINION
MARY D. FRANCE, Chief Judge.
Before the Court is the motion of Hari Ram, Inc., (“Debtor”) for the use of cash collateral (the “Motion”). Debtor concedes that Magnolia Portfolio, LLC (“Magnolia”) holds a mortgage and is perfected by an assignment of rents and a UCC financing statement. Debtor asserts, however, that the hotel room revenues are property of the estate and that it has offered to provide adequate protection for Magnolia’s interest in Debtor’s assets. Conversely, Magnolia objects to Debtor’s use of its cash collateral because, either (1) Debtor’s interest in the hotel room revenues was terminated before the petition was filed or, alternatively, (2) Debtor is unable to adequately protect Magnolia’s security interest. For the reasons set forth below, the Court finds that even if Debtor retains an interest in the cash collateral, it is unable to provide adequate protection to Magnolia’s interests. Thus the motion to use cash collateral will be denied1
I. BACKGROUND
Debtor is the owner and operator of a hotel located at 350 Bent Creek Boulevard, Mechanicsburg, Pennsylvania, (the “Me-chanicsburg Hotel”). Magnolia was not the original lender, but acquired its position through an assignment by Orrstown Bank (“Orrstown”). In 2001, Debtor executed a promissory note in the principal amount of $2,669,000 secured by a mortgage (“First Mortgage”) and an assignment of rents (“First Rent Assignment”) (collectively “First Mortgage Documents”) to finance the construction of the Mechan-icsburg Hotel. The First Mortgage Documents were recorded in the Recorder of Deeds Office of Cumberland County, Pennsylvania. Debtor also executed a Commercial Security Agreement granting Orrstown a security interest in various personal property including furniture, fixtures, equipment, accounts receivable, inventory, general intangibles, rents, and “payments.” Ex. B3. The security interest in personal property was perfected by the filing of a UCC financing statement with the Commonwealth.2 Neither the First Mortgage Documents nor the Commercial Security Agreement includes provisions for the collateralization of future advances.
Under the terms of the First Mortgage, Debtor granted to Orrstown “right, title, and interest in and to the [Mechanicsburg Hotel], together with all ... improvements and fixtures ... equipment ... and other articles of personal property, and ... all present and future rents, revenues, in*118come, issues, royalties, profits and other benefits derived from the [Mechanicsburg Hotel].” Ex. M-2. Additionally, Debtor was required “to pay to Lender all amounts secured by [the First Mortgage Documents] as they become due, and ... strictly perform all of [Debtor’s] obligations under [the First Mortgage Documents].” Ex. M-2. The First Rent Assignment created a “continuing security interest in all of [Debtor’s] rights, title, and interest in and to the Rents from the [Mechanicsburg Hotel], under which “Rents” were defined as “all rents, revenues, income, issues, profits and proceeds from the [Mechanicsburg Hotel].... ” Ex. M-3. The First Rent Assignment provided that it was given “to secure (1) payment of the indebtedness and (2) performance of any and all obligations of [Debtor] under the Note, this assignment, and the related documents.” Ex. M-3. The First Rent Assignment authorized Debtor to control and manage the Mechanicsburg Hotel and to collect “the Rent,” but it also authorized Orrstown to “send notices to any and all tenants of the [Mechanicsburg Hotel] advising them of the [First Rent ]Assignment and directing all Rents to be paid directly to [Orrstown] or [Orrstown’s] agent.” Ex. M-3.
In 2008, Orrstown loaned $5,740,000 to Gurugovind, LLC, (“Gurugovind”) to construct a hotel in Enola, Pennsylvania (the “Enola Hotel”). Orrstown also made a second loan to Gurugovind of $640,000 on the same date. Both loans to Gurugovind were conditioned on the pledge of additional security by Debtor in the form of two mortgages on the Mechanicsburg Hotel (the “Gurugovind Mortgages”) and two further assignments of rent from the Me-chanicsburg Hotel (the “Gurugovind Rent Assignments”) (collectively, the “Gurugo-vind Documents”). The Gurugovind Mortgages included cross collateralization clauses, which state that the mortgages secure:
all obligations, debts and liabilities, plus interest thereon, of either [Debtor] or [Gurugovind] to [Orrstown], or any one or more of them, as well as all claims by [Orrstown] against [Gurugovind] or [Debtor] or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether [Gurugovind] or [Debtor] may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recover upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.
Exs. M-5, M-8. Although Debtor executed the Gurugovind Assignments as separate documents, the Gurugovind Mortgages also provided that Debtor agreed to assign to Orrstown all of its “right, title, and interest in and to all present and future leases of the Property and all Rents from the Property.” Exs. M-5, M-8. Under the terms of the Gurugovind Mortgages, rents are defined as “all present and future rents, revenues, income, issues, royalties, profits, and other benefits derived from the [Mechanicsburg Hotel].” Exs. M-5, M-8. Debtor did not execute the notes executed in connection with the financing of the Enola Hotel, but the Gurugovind Mortgages specify that “[Gurugovind] and [Debtor] shall pay to [Orrstown] all indebtedness secured by [the mortgages] as [they] become due.” Exs. M-5, M-8. “Indebtedness” is described as “all principal, interest, and other amounts, costs and ex*119penses payable” under the promissory notes executed in connection with the two 2008 loans. Exs. M-5, M-8.
It is unclear from the record whether Gurugovind defaulted on the loans before or after the First Mortgage Documents and the Gurugovind Documents were assigned to Magnolia, but on December 13, 2013, Magnolia sent a letter to Debtor asserting that it had defaulted “on a certain loan” and, therefore, Magnolia had elected to collect “proceeds” generated by the Mechanicsburg Hotel. Ex. M-12. In response to this demand for the payment of hotel room revenues, Debtor filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on December 24, 2013. Among other “first day” motions, Debtor sought permission to use Magnolia’s cash collateral. In support of the Motion, Debtor argued that hotel room revenues are personal property and not an interest in real property. In the alternative, Debtor asserted that even if hotel room revenues were determined to be an interest in real property, the Court should find that Debtor’s interest in the revenues was not terminated pre-petition and that the revenues are property of the estate. Additionally, Debtor asserted that it is only personally liable to Magnolia under the First Mortgage Documents, which were not in default, and is not personally liable under the Gurugovind Documents. The Court held an expedited hearing on December 30, 2013, after which it entered an interim order authorizing Debtor’s use of cash collateral with certain limitations. A final hearing was held on February 4, 2014.
At the final hearing, the parties stipulated that the primary issue was a legal one. Are the hotel revenues an interest in real property, like tenant rents, such that Magnolia’s notice to Debtor that all “proceeds” were to be remitted to Magnolia terminated Debtor’s interest in the hotel revenues before the petition was filed? Alternatively, are hotel revenues personal property that became property of the estate upon the filing of the petition? If the hotel room revenues were found to be property of the estate, then the parties agreed that the Court was required to determine whether Magnolia’s secured interest in cash collateral was adequately protected.
Both parties primarily relied on the exhibits admitted at the hearing in support of their respective positions. Debtor also presented the testimony of Gavin Patel (“Patel”), who testified that he supervises Debtor’s financial operations and, working with an accountant, prepared a forecast of Debtor’s operations through September 2014. Patel testified that Debtor would be able to service all debt listed in the projections and obtain a positive cash flow by the end of the period. The projections included the debt service on the First Mortgage, but did not include payment of the loans secured by the Gurugovind Mortgages. Because Debtor asserts that it is not personally obligated to Magnolia under the Gurugovind Documents, payments on the Gurugovind obligations were not included as expenses in the nine-month forecast. Debtor also asserted that the First Mortgage is not in default and has never been in default, which Magnolia did not dispute.
In the balance sheet attached to the petition, Debtor states that it has total assets of $2,911,049.72, total liabilities of $1,818,233.07, and total equity of $1,092,626.65. The obligation to Magnolia on the First Mortgage is listed at $1,428,045.38. On its income statement, Debtor reports net income for the period January through November 2013 of $260,490.36. At the hearing, Patel testified that in its forecasted statement of revenue and expenses for January through *120September 2014, Debtor anticipates net ordinary income of $114,149.74. After deducting debt service on the First Mortgage, and without factoring in payments on the Gurugovind Mortgages, Debtor’s net operating income reflects a loss of $39,419.71. Once expenses for depreciation and amortization are added back, Debtor projects a positive cash flow of $54,405 for the nine-month period. Patel testified that Debtor anticipates that it will experience negative cash flows through April 2014, but expects to have positive cash flows May through August 2014.
Magnolia argued that the financial projections did not accurately reflect Debtor’s obligations. It asserted that under the terms of the Gurugovind Mortgages, Guru-govind and Debtor “shall pay to the Lender all indebtedness secured by this Mortgage as it becomes due, and [Gurugovind] and [Debtor] shall strictly perform all [Gu-rugovind’s] and [Debtor’s] obligations under the Mortgage.” Ex. M-5, M-8. At the time of the final hearing, the outstanding balance on the two Gurugovind Mortgages was approximately $5.15 million.
II. DISCUSSION
A. Standards for use of cash collateral
Under § 363(c)(2), a debtor may not use cash collateral unless consent is obtained from creditors that have an interest in the collateral, or the bankruptcy court authorizes its use. If the creditor does not consent, cash collateral may be used by the debtor only to the extent that the court determines that the creditor’s interest in the collateral is adequately protected. 11 U.S.C. § 363(e). “Cash collateral” includes:
cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents ... and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in § 552(b), whether existing before or after the commencement of a bankruptcy case.
11 U.S.C. § 363(a). Adequate protection is not defined in the Bankruptcy Code, but § 361 provides three non-exclusive methods as examples: (1) periodic cash payments; (2) additional or replacement liens; or (3) other relief resulting in the “indubitable equivalent” of the secured creditor’s interest. 11 U.S.C. § 361. When devising a proposal for adequate protection of a secured creditor’s interest, the proponent “should as nearly as possible under the circumstances of the case provide the creditor with the value of his bargained for rights.” In re American Mariner Industries, Inc., 734 F.2d 426, 435 (9th Cir.1984), quoted In re Swedeland Development Group, Inc., 16 F.3d 552, 564 (3d Cir.1994). The burden of proof is on the debtor to demonstrate that the secured creditor is adequately protected for purposes of using its cash collateral. Id. § 363(p)(l).
Debtor proposes to use the hotel room revenues generated from the operation of the Mechanicsburg Hotel and to provide adequate protection through a replacement hen on future receipts. Before I can examine the adequacy of adequate protection being offered to Magnolia, I must determine whether the revenues are property of the estate under 11 U.S.C. § 541(c). Debtor asserts that the hotel room revenues are personal property, recognized by Magnolia as such, by the filing of a UCC financing statement. Magnolia counters that the UCC 1 was filed in an abundance of caution and that the revenues should be equated with “rents” and, thus, derived from real property. Magnolia asserts that under Pennsylvania law, Debtor’s interest *121in the hotel room revenues was terminated when Gurugovind defaulted on loans secured by the Mechanicsburg Hotel, and Magnolia responded by demanding that Debtor collect and remit the hotel revenues to Magnolia.
B. Are hotels revenues interests in real property?
If hotel revenues are equated with rents, the protections afforded to mortgagees under Pennsylvania law must be considered. Under Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 186 (1979), the U.S. Supreme Court held that a “mortgagee is afforded ... the same protection he would have under state law if no bankruptcy had ensued.” Id. at 56, 99 S.Ct. 914. The Third Circuit has held that when defining the relationship between a mortgagor and a mortgagee, Pennsylvania follows the title theory. Under this theory a mortgage is a transfer of a fee simple interest in real property to the creditor. Sovereign Bank v. Schwab, 414 F.3d 450, 453 n. 5 (3d Cir.2005) (“Pennsylvania follows the title theory whereby the mortgage is considered a conveyance in fee simple to the creditor.”) (citing Commerce Bank v. Mountain View Village, Inc., 5 F.3d 34, 38 (3d Cir.1993)). While the Third Circuit has placed Pennsylvania solidly in the “title theory” camp, the Supreme Court of Pennsylvania historically has adopted a more nuanced analysis. “Although in form an absolute conveyance of title, a mortgage is in reality only a security for the payment of money.” Girard Trust Co. v. City of Philadelphia, 87 A.2d 277, 369 Pa. 499 (1952). An examination of the decisions of the Pennsylvania appellate courts reveals that the Commonwealth is, in actuality, an intermediate theory state — a mortgage is both a grant of a security interest and a conveyance. See John J. Rapisardi, Elliot L Hurwitz, The Mortgagee’s Right to Rents After Default: An Unsettled Controversy, 6 J. Bank. L. & Prac. 331, App. (1997). In Pennsylvania, a mortgage has the dual function of transferring a property interest from the mortgagor to the mortgagee, while also serving as a lien between the mortgagor or mortgagee as to third parties. Pines v. Farrell, 577 Pa. 564, 573-74, 848 A.2d 94, 99-101 (2004). In Pines, the Pennsylvania Supreme Court held that in regard to the Commonwealth’s recording acts, documents related to mortgages (including assignments, satisfactions, and releases) are conveyances. But the Court suggested that its holding was limited and that the title theory would not necessarily apply in the context of bankruptcy or foreclosure. Id. at 575 n. 7, 848 A.2d 94.
In the Mountain View case, the Third Circuit adopted the title theory as to mortgages when considering the treatment of an assignment of rents in the context of a bankruptcy case. The debtor in Mountain View, the owner of an apartment complex, defaulted on mortgages held by two banks before it filed for bankruptcy. The mortgagees took possession of the property, notified the tenants to pay rents to them under an assignment of rents, and entered judgments in foreclosure against the owner. Only after the banks had been collecting the rents for more than ninety days did the debtor commence a bankruptcy case and seek turnover of the rents. The bankruptcy court ruled that the debtor retained an equitable interest in the rents, which became property of the estate and the creditor’s cash collateral. On appeal, the district court disagreed with the bankruptcy court’s analysis, finding that under Pennsylvania law, the banks held title to the rents. The Third Circuit affirmed the district court, holding that the debtor retained no equitable interest in the post-petition rents. The Circuit determined *122that the debtor’s rights were cut off when it defaulted on the loans and the banks began to collecting rents from the tenants. Mountain View, 5 F.3d at 38. Accordingly, the Third Circuit determined that Pennsylvania law enables a mortgagee to terminate the rights of a mortgagor in rents generated by the mortgaged property if the mortgagee takes actual or constructive possession of the real property and begins collecting the rents before a bankruptcy petition is filed.
In the within case, Magnolia determined that Debtor was in default under the terms of the Gurugovind Mortgages based upon the cross collateralization provisions of the Gurugovind Documents. It then sent a letter to Debtor declaring the default and demanding that the hotel revenues be forwarded to Magnolia. There is no evidence in the record that Debtor complied with this demand.
The question in the within case is whether like rents, the assignee of an assignment of rents may cut off the rights of the assignor in hotel room revenues by declaring a default in the underlying obligation and demanding that the revenues be collected by the assignor and turned over to the assignee. If a debtor’s interest in hotel revenues can be terminated under an assignment of rents, the debtor retains no rights in the receipts, they are not property of the estate and they would not constitute cash collateral.
The parties did not direct the Court to a case directly on point, and the Court has been unable to locate a case interpreting Pennsylvania law that answers this precise question.3 Courts in other jurisdictions are divided on the issue. In the decision of In re Old Colony, LLC, 476 B.R. 1 (Bankr.D.Mass.2012), the bankruptcy court reviewed cases on each side of the divide. As the court noted, the majority of courts have held that hotel revenues are personal property, not interests in real estate. Id. at 20. When examining state law, the courts in these cases reasoned that a hotel guest, who is a licensee, enjoys more limited rights in real property than is afforded to a tenant under a lease. Decisions holding that hotel revenues are personal property also emphasize that the rental of a hotel room, unlike a lease, typically encompasses a bundle of services. In re Old Colony at 20-21 (citing cases). The less substantial interest enjoyed by hotel guests have provided the basis for these courts to conclude that hotel revenues are accounts receivable or general intangibles and not interests in real property. In re Ocean Place Development, LLC, 447 B.R. 726, 732 (Bankr.D.N.J.2011); In re HT Pueblo Properties, LLC, 462 B.R. 812, 820 (Bankr.D.Col.2011); In re Oceanview/Virginia Beach Real Estate Associates, 116 B.R. 57, 59 (Bankr.E.D.Va.1990).
The Old Colony court determined that the minority position that room revenues are rents and, thus, an interest in real estate, was more persuasive. In re Old Colony, 476 B.R. at 21-23. The minority *123courts have concluded that “rent” is an expansive concept encompassing all consideration paid for the occupancy of real property. Id. at 22. Two of the decisions in the minority group are by circuit courts. See Fin. Sec. Assurance, Inc. v. Days Cal. Riverside Ltd. P’ship (In re Days Cal. Riverside Ltd. P’ship), 27 F.3d 374, 377 (9th Cir.1994); Matter of T-H New Orleans Ltd. Partnership, 10 F.3d 1099, 1105 (5th Cir.1993).4
In Days Cal., the Ninth Circuit characterized hotel revenues as rent in the context of addressing the issue of whether the revenues were subject to the security agreement entered into by the parties before the bankruptcy filing. Days Cal., 27 F.3d at 375.5 In the court’s decision and in the cases upon which it relied, hotel revenues were regarded as rents to effectuate the intention of the parties to create a security interest in the receipts, which otherwise would have been lost once a debtor filed for bankruptcy. The Ninth Circuit in Days Cal., and other decisions issued before § 552 of the Bankruptcy Code was amended in 1994, were concerned that lenders would lose their bargained-for security interests in hotel room revenues when mortgagors filed for bankruptcy. See Id. at 377 (finding that to hold that hotel revenues were not rent “would discourage the financing of what is a multi-billion dollar industry in the state”). In TH New Orleans, the Fifth Circuit held that hotel revenues are “like rent” in that they are produced by real property. Further, they may not be considered personal property as they are excluded from the Louisiana statutory definition of accounts receivable as an “indebtedness due to or arising out of the leasing of immovable property.” Id. at 1105 (citing La. R.S. § 9:3101(1) (repealed)). As the analysis of the Fifth and Ninth Circuit decisions illustrate, however, whether hotel revenues are derived from real property and treated as rents can only be resolved by reference to state law.
In the absence of controlling authority, I find persuasive the bankruptcy court’s analysis of Pennsylvania law in In re W. Chestnut Realty of Haverford, Inc., 166 B.R. 53, 56 (Bankr.E.D.Pa.1993) aff'd, 173 B.R. 322 (E.D.Pa.1994). In dicta the Eastern District determined that hotel revenues are not rents. This conclusion was based on the court’s observation that the status of a tenant in Pennsylvania is markedly different from the status of a licensee. A tenant is given the right to possess and use the landlord’s premises in subordination of the landlord’s title in consideration of the payment of rent. Id. at 55-56 (citing In re Wilson’s Estate, 349 Pa. 646, 648, *12437 A.2d 709, 710 (1944)). The rights of a licensee are more limited and generally described as “an authority to do a particular act or series of acts upon another’s land, without possessing any estate therein.” Baldwin v. Taylor, 166 Pa. 507, 511, 31 A. 250, 251 (1895), cited in Yocca v. Pittsburgh Steelers Sports, Inc., 806 A.2d 936, 949 (Pa.Cmwlth.Ct.2004) rev’d on other grounds, 578 Pa. 479, 854 A.2d 425 (2004). Unlike a tenant who pays rent to a landlord, a hotel guest does not acquire a right to possess or use the real property in subordination of a debtor’s title. Guests are not tenants; they are licensees. Although I am inclined to agree with the courts finding that hotel revenues are not rents, it is unnecessary for me to decide this issue.6 The record before me fails to establish that Magnolia took the required steps to terminate Debtor’s interest in the hotel revenues pre-petition.
C. Did Debtor retain an interest in the hotel revenues when the petition was filed?
A mortgagor has the right to continue to receive rents from real property until a mortgagee obtains possession. J.H. Streiker & Co. v. SeSide Co., Ltd. (In re SeSide Co., Ltd.), 152 B.R. 878, 883 (E.D.Pa.1993) (citing Randal v. Jersey Mortg. Inv. Co., 306 Pa. 1, 158 A. 865, 865-66 (1932)). After the mortgagor defaults, a mortgagee may enter into possession of the mortgaged property and collect the rents from tenants. Id. (citations omitted). Even when the mortgage contains an assignment of rents clause, enforcement of the mortgagees rights can only be accomplished by taking possession of the property and applying the rents to the mortgage until the debt is paid. Mountain View, 5 F.3d at 38 (citing Bulger v. Wilderman and Pleet, 101 Pa.Super. 168, 171 (Pa.Super.1931)). “A mortgagee can obtain ‘possession’ of realty and consequently obtain a present right to receive rents in two ways: (1) by entering into ‘actual possession’ of the real estate through foreclosure or acting as a mortgagee in possession; or (2) by taking ‘constructive possession’ of the realty by serving demand notices on the mortgagor’s tenants.” SeSide, 152 B.R. at 883 (citing Fogarty v. Shamokin & Mount Carmel Transit Co., 367 Pa. 447, 451, 80 A.2d 727, 728-29 (1951); Colbassani v. Society of Christopher Columbus, 159 Pa.Super. 414, 417, 48 A.2d 106, 107 (1946); Bulger, 101 Pa.Super. at 176-77.) Enforcement of the lien must be accomplished through this process even though the mortgagee has a perfected security interest in the rents. Mountain View, 5 F.3d at 38. Accordingly, Magnolia could obtain the right to receive the rents and, thereby, cut off Debt- or’s rights only by taking possession of the Mechanicsburg Hotel or by serving notice on the “tenants.” Magnolia did not take possession of the Mechanicsburg Hotel, nor did they serve notice on Debtor’s tenants. As discussed above, hotel guests are not tenants and, further, as acknowledged by Magnolia, service on hotel guests would be impractical. Therefore, the hotel room *125revenues remained property of the estate when Debtor filed its petition.
D. Is the protection Debtor has offered to provide to Magnolia’s collateral adequate?
Although Magnolia did not succeed in cutting off Debtor’s interest in the hotel room revenues generated by the Meehanicsburg Hotel, the revenues are subject to a valid security interest that was perfected by the filing of a UCC1. Therefore, they are cash collateral subject to the requirements of adequate protection.
A bankruptcy court should apply the following standard when determining whether a debtor should be permitted to use cash collateral:
(1) The court must establish the value of the secured creditor’s interest; (2) The court must identify risk to the secured creditor’s value resulting from the debt- or’s request for use of cash collateral; and (3) The court must determine whether the debtor’s adequate protection proposal protects value as nearly as possible against risks to that value consistent with the concept of indubitable equivalence.
Martin v. United States (In re Martin), 761 F.2d 472, 476-77 (8th Cir.1985).
In addition to reviewing the debt- or’s adequate protection proposal, the court should consider whether there is any reasonable chance of reorganization. If a debtor is engaged in an obviously futile attempt to reorganize, it should not be permitted to jeopardize a creditor’s cash collateral. In re C.F. Simonin’s Sons, Inc., 28 B.R. 707, 711 (Bankr.E.D.N.C.1983). See also Sharon Steel Corp. v. Citibank, N.A., 159 B.R. 165, 172 (Bankr.W.D.Pa.1993) (holding that debtor could not use cash collateral although objecting creditors were oversecured when business plan was unrealistic and unattainable).
Debtor does not dispute that under the First Mortgage Documents Magnolia has a perfected security interest in personal property, including accounts receivable and intangibles. If the hotel room receipts are considered “rents,” Magnolia has a lien under the First Rent Assignment. Debtor argues that because the Mechanicsburg Hotel is projected to generate a positive cash flow in nine months, when the equity in the real estate is also considered, Magnolia’s interest in cash collateral is adequately protected.
Debtor’s argument is flawed for several reasons. First, whether Magnolia’s interest in the hotel room revenues is characterized as personal property or as real property, Magnolia has a continuing security interest in the revenues under § 552(b)(2). Unlike other forms of cash collateral, a pre-petition security interest in hotel room revenues continues to attach to post petition revenues. 11 U.S.C. § 552(b). Under these circumstances, the offer of a replacement lien on the post-petition rents is meaningless because the creditor already has a lien on these assets. See In re Buttermilk Towne Center, LLC, 442 B.R. 558, 566 (6th Cir. BAP 2010) (holding that future rents do not provide adequate protection for the debtor’s expenditure of prior months rents); In re Las Torres Dev., LLC, 413 B.R. 687, 696-97 (Bankr.S.D.Tex.2009) (holding that it was “disingenuous” to offer replacement lien on post-petition rents because lender already had lien on rents); In re Chatham Parkway Self Storage, LLC, 12-42153, 2013 WL 1898058 (Bankr.S.D.Ga. Apr. 25, 2013) (holding that replacement lien in rents is “illusory” because § 552(b) provides lien on post-petition rents).
*126Debtor also fails to recognize that even if it were not personally liable on the Gurugovind loans, the Gurugovind Mortgages on the Mechanicsburg Hotel secure the loans and consume any remaining equity above the First Mortgage. Debtor does not argue that Gurugovind is not in default on the Magnolia loans. Therefore, Magnolia is entitled to look to the second and third mortgages for the satisfaction of its claim on the Gurugovind loans. While the remedies of a secured creditor can be suspended or abrogated, “the value of its secured position as it existed at the commencement of the case is to be protected throughout the case when adequate protection is required.” Matter of Malaspina, 30 B.R. 267, 270 (Bankr.W.D.Pa.1983) (quoting Collier on Bankruptcy, § 361.01 at 361-6, 15th. ed. 1982). Debtor projects that at the end of nine months it will have a positive cash flow. Through April, however, it expects to operate at a loss. In the absence of other sources of adequate protection, the forecasted profitability of Debtor’s operations nine months from the petition date alone is insufficient to provide Magnolia with adequate protection.
Finally, while Debtor did not execute a separate note or bond and may not have explicitly guaranteed the financing of the Enola Hotel, the Gurugovind Mortgages incorporate a personal obligation by Debtor to pay the “indebtedness” incurred by the related entity and the “indebtedness” as described as the amounts payable under the promissory notes executed in connection with the two 2008 loans. Personal liability for a debt typically is created through the execution of a note or bond. But the Pennsylvania Supreme Court has observed that “there may be mortgages not accompanied by any other evidence of indebtedness but which constitute in and of themselves both the obligation and the conveyance of the property intended to secure it.” Girard Trust Co. 369 Pa. at 503, 87 A.2d at 279. Under the terms of the Gurugovind Mortgages, both Debtor and Gurugovind were obligated to make payments on the debt to Magnolia. When this additional obligation is considered, which was not included in Debtor’s projected expenses, it becomes apparent that Debtor will be unable to provide Magnolia with adequate protection.
III. Conclusion
For the reasons set forth above, even if the hotel revenues generated by the operations of the Mechanicsburg Hotel are determined to be property of the estate, the revenues constitute cash collateral subject to Magnolia’s secured interest. Debtor has failed to sustain its burden to prove that it is able to safeguard Magnolia from the diminution in the value of its interest in the collateral while it attempts to reorganize. The Motion will be denied.
. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A),(B), and (O). This Opinion constitutes findings of fact and conclusions of law made under Fed. R. Bankr.P. 7052, which is applicable to contested matters pursuant to Fed. R. Bank. P. 9014.
. For reasons not in the record, Orrstown did not file a UCC-1 financing statement until 2006.
. The Bankruptcy Court for the Western District of Pennsylvania has held that a mortgagee’s UCC-1 financing statement, which referred to "all contracts and agreements relative to the construction, management, use and occupancy of the Improvements” and their proceeds, was sufficient to create a security interest in hotel revenues. In re Blue Ridge Motel Associates, 106 B.R. 81, 82 (Bankr.W.D.Pa.1989). The issue of whether the hotel revenues could be subject to an assignment of rents and, thus, constitute an interest in real property was not before the court. Likewise, in dicta, the Bankruptcy Court for the Eastern District of Pennsylvania has opined that hotel room revenues are not an interest in real property. In re W. Chestnut Realty of Haverford, Inc., 166 B.R. 53, 56 (Bankr.E.D.Pa.1993) aff'd, 173 B.R. 322 (E.D.Pa.1994).
. Declining to look to state law, the Eleventh Circuit held in Financial Sec. Assur., Inc. v. Tollman-Hundley Dalton, L.P., 74 F.3d 1120, 1124 (11th Cir.1996), that hotel revenues were "rents” as defined in Black’s Law Dictionary and, therefore, were included in the exception to § 552(a) set forth in § 552(b). See discussion of former statute in footnote 5.
. At the time the Days Cal. decision was rendered, § 552(a) of the Bankruptcy Code provided that property acquired by the estate after the petition was filed was not subject to a lien entered into by the debtor before the case was filed. Section 552(b) excepted "proceeds, product, offspring, rents, or profits” from this rule. 11 U.S.C. § 552(b) (amended 1994). Section 552(b)(2) now provides that if a creditor has a security interest in rents, or "fees charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties, then such security interest extends to such rents and such fees, charges, accounts, or other payments acquired by the estate after the commencement of the case to the extent provided in such security agreement, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.” 11 U.S.C. § 552(b)(2).
. In support of its argument, Magnolia notes that the Uniform Assignment of Rents Act (“UARA”) follows the Restatement (Third) of Property approach of defining rents to include "sums payable for the right to possess or occupy, or for the actual possession or occupancy of, real property of another person.” UARA § 2(12)(A) (2005) cited in R. Wilson Freyermuth, Modernizing Security in Rents: The New Uniform Assignment of Rents Act, 71 Mo. L. Rev. 1, 20 (2006). Thus, the UARA would treat hotel room revenues as "rents.” However, the UARA also provides that an assignment of rents creates only a security interest in rents, regardless of whether or not the agreement purports to be a conveyance of title. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496868/ | MEMORANDUM OPINION GRANTING MOTION FOR RECONSIDERATION AND, UPON RECONSIDERATION, ADDRESSING MOTIONS FOR PARTIAL SUMMARY JUDGMENT
BARBARA J. HOUSER, Bankruptcy Judge.
Before the Court are the Plaintiff’s Amended Motion for Reconsideration or New Trial and Brief (the “Motion for Reconsideration”) [Dkt. No. 136] filed by CERx Pharmacy Partners, LP (“CERx”) in which CERx requests that this Court modify its Memorandum, Opinion entered August 2, 2013 (the “Original Memorandum Opinion”), the Trustees’ Response to Plaintiffs Amended Motion for Reconsideration or New Trial [Dkt. No. 139] filed by the Chapter 7 trustees of the various debtor-Defendants’ bankruptcy estates (collectively, the “Trustees”),1 and the various replies and post-hearing briefs related thereto. The Court held a hearing on the Motion for Reconsideration on January 8, 2013. At the conclusion of the hearing, the Court ordered additional briefing on several issues. The last of those briefs was *140filed on January 17, 2014. The Motion for Reconsideration is now ripe for ruling.
1. PROCEDURAL HISTORY
On June 17, 2013, the Court held a hearing to consider the Defendants’ Partial Motion for Summary Judgment [Dkt. No. 53] and brief in support (“Defendants’ Brief’) [Dkt. No. 54] filed by ProvideRx of Grapevine, LLC, Provider Meds, LP (“PM”), Provider Technologies, Inc. (“PT”), OnSite RX of Phoenix, LLC, W PA Onsite RX, LLC, ProvideRx of Midland, LLC, ProvideRx of Waco, LLC, Pro-videRx of San Antonio, and Reef Gillum as trustee of the Gillum Family Master Heritage Trust (collectively with OnSiteRx, Inc.,2 the “Defendants”), Plaintiff’s Motion for Partial Summary Judgment [Dkt. No. 66] and brief in support (“Plaintiffs Brief’) [Dkt. No. 67] filed by CERx, and the responses and replies related thereto.
At the conclusion of the hearing, this Court orally granted CERx’s request for entry of a judgment against the Gillum Family Master Heritage Trust (“GFMHT”)3 for $10,301,130.81, plus interest at a rate of $4,739.36 per day since March 31, 2013, for sums GFMHT owes CERx under various continuing, unconditional, and unlimited payment guaranties GFMHT executed in favor of CERx covering PM’s debts to CERx. The Court also orally granted CERx’s request for a judgment in this amount against PT, as PM’s general partner, for the debts owed to CERx by PM. Accordingly, on June 26, 2013, this Court entered a Partial Summary Judgment [Dkt. No. 100] reflecting these rulings. The Court also requested supplemental briefing from the parties on several remaining issues at the conclusion of the hearing. By agreement of the parties, the last of those supplemental briefs was submitted on July 3, 2013, and the motions were taken under advisement.
The Court issued the Original Memorandum Opinion on August 2, 2013, in which it found that: (1) the loan documents are unambiguous and, as a matter of law, PM did grant CERx a security interest in all of its IP Assets (as defined on p. 7); (2) although CERx’s security interest attached to PM’s IP Assets, the collateral description contained in the UCC-1 financing statement filed by CERx with the Texas Secretary of State was insufficient to perfect CERx’s security interest in PM’s IP Assets, other than the Patent Applications (as defined on p. 21); (3) pursuant to its Notice of Disposition (as defined on p. 23), CERx only disposed of PM’s Patent Applications; (4) thus, as of its bankruptcy petition date, PM held title to all of its IP Assets, other than the Patent Applications, subject to CERx’s unperfected security interest; and (5) because CERx failed to perfect its non-Patent Application security interests, such interests were unperfected when PM filed its bankruptcy case and are subject to avoidance pursuant to 11 U.S.C. § 544(a)(1). Original Memorandum Opinion at 3. On September 12, 2013, CERx filed the Motion for Reconsideration.
At the conclusion of the January 8, 2014 hearing on the Motion for Reconsideration,4 the Court ordered additional briefing *141on the issues of: (1) whether the Court could read the Transmittal Letter (as defined on p. 22) in conjunction with the Notice of Disposition in order to determine the scope of CERx’s December 13, 2012 disposition of collateral, and (2) whether failure to provide a notice of disposition to all parties required to be given notice under the Texas UCC is grounds to void or otherwise rescind the disposition of collateral. Further, CERx was to include within its post-hearing brief citations to the portions of the summary judgment record connecting the source code referenced in the Transmittal Letter to the Source Code (as defined on p. 20) at issue here. As noted previously, CERx and the Trustees submitted their post-hearing briefs on January 17, 2014. Notably, the Trustees’ brief expressly conceded CERx’s argument on both points:
As a result, with respect to the validity of the foreclosure as to the ownership interest, if any, of Provider Meds, the Trustees believe that the answer to issue (1) is “yes” and that the answer to issue (2) is “no.” Since the Trustees agree with the Court’s tentative rulings with respect to the validity of the foreclosure as to the ownership interests, if any, of Provider Meds, we believe that there is no need to submit briefing on these issues.
Briefing of Legal Issues Discussed at January 8, 2011 Hearing [Dkt. No. 150] at 1. Further, CERx’s post-hearing brief provided the Court with sufficient references to the summary judgment record to show that the source code referenced in the Transmittal Letter is the Source Code at issue here.5 See Plaintiffs Brief Tracing the Sou/rce Code Referred to in CERx’s Transmittal Letter to the Source Code in the Court’s Registry [Dkt. No. 149] at ¶ 5.
II. LEGAL ANALYSIS
A. The Motion for Reconsideration
CERx failed to cite to the rule of procedure under which it would have the Court revisit the Original Memorandum Opinion, only stating that the Motion for Reconsideration is brought to correct a manifest error of law. Plaintiffs Reply Regarding its Amended Motion for Reconsideration or New Trial and Brief (“Reply Regarding Motion for Reconsideration”) [Dkt. No. 142] at 1. To decide which rule of procedure applies to the Motion for Reconsideration, and thus the relevant legal standard to apply, the Court must consider the nature of its decision as set forth in the Original Memorandum Opinion. If it was a final judgment, Fed.R.Civ.P. 59(e) would apply. However, the Original Memorandum Opinion was an interlocutory decision, as it addressed partial summary judgment motions and did not finally dispose of all issues raised in this adversary proceeding. See Moody v. Seaside Lanes, 825 F.2d 81, 85 (5th Cir.1987) (explaining that only the resolution of an entire adversary proceeding is “final”). Interlocutory orders are reconsidered under Fed.R.Civ.P. 54(b), as made applicable to adversary proceedings by Fed. R. Bankr.P. 7054(a). See Fed. R.CivJP. 54(b) (“[A]ny order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties ... may be revised at any time before the entry of a judgment adjudicating all the *142claims and all the parties’ rights and liabilities.”).
Although the precise standard for evaluating a motion to reconsider under Rule 54(b) is unclear, whether to grant such a motion rests within the discretion of the court and the standard appears to be less exacting than that imposed by Rules 59 and 60. Dos Santos v. Bell Helicopter Textron, Inc. Dist., 651 F.Supp.2d 550, 552 (N.D.Tex.2009). “Even so, considerations similar to those under Rules 59 and 60 inform the Court’s analysis.” Id. That is, considerations such as whether the movant is attempting to rehash its previously made arguments or is attempting to raise an argument for the first time without justification bear upon a court’s review of a motion for reconsideration under Rule 54(b). Id.
CERx summarizes its argument in its Reply Regarding Motion for Reconsideration, where it argues that portions of the Original Memorandum Opinion reflect a manifest error of law because:
(1) a defect in the sale process would be an affirmative defense that PM never pled, was not raised in the motions or briefs, and was not properly before the Court; (2) the Opinion fails to recognize that actual notice would suffice; (3) Trustees admit that PM had actual notice; and (4) sufficiency of notice does not affect the transfer of title. For these reasons alone, the Court should modify the Opinion to hold that CERx acquired all of PM’s IP Assets no later than by the December 13, 2012 sale.
Reply Regarding Motion for Reconsideration at ¶ 2.
As discussed in more detail below, the Court agrees that it erred in analyzing the sufficiency of the notice CERx provided to PM prior to conducting a public sale of the collateral PM had pledged to secure repayment of its notes under the May 6 Loan Documents. In the Original Memorandum Opinion, the Court read the Notice of Disposition in isolation and concluded that PM only received notice of CERx’s intent to dispose of the Patent Applications. The Court now recognizes that the Notice of Disposition must be read together with the Transmittal Letter, and when these documents are read together PM did, in fact, have actual notice of CERx’s intent to dispose of all of PM’s IP Assets, and that such notice was sufficient to dispose of PM’s interests in the IP Assets at the December 13, 2012 public sale. See infra pp. 164-66. As such, this Court’s prior finding that PM did not have notice of CERx’s intent to dispose of all of PM’s IP Assets was a manifest error of fact. And, as just explained, that manifest error of fact arose from a manifest error of law — i.e., that the Notice of Disposition had to be construed in isolation. Further, although a deficiency in the Notice of Disposition could give rise to damages, such deficiency would not be grounds to void or otherwise rescind the sale. Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419, 456 (Tex.App.-Houston [14th Dist.] 1998) (decided under former Article 9).
For the foregoing reasons, the Court will grant the Motion for Reconsideration and vacate the Original Memorandum Opinion. Now that the Motion for Reconsideration has been granted and the Original Memorandum Opinion vacated, the Court must return to the motions for partial summary judgment and decide them once again.
B. The Motions for Partial Summary Judgment6
As before, the primary issue remaining before this Court on summary judgment is *143whether the language in the loan and security documents entered into by and among the various parties was sufficient to grant CERx a security interest in all of PM’s intellectual property assets owned immediately prior to a December 13, 2012 disposition of collateral by public sale held by CERx (collectively, the “IP Assets”). For the reasons detailed below, this Court concludes that (1) the loan documents are unambiguous and, as a matter of law, PM did grant CERx a security interest in all of its IP Assets; (2) although CERx’s security interest attached to PM’s IP Assets, the collateral description contained in the UCC-1 financing statement filed by CERx with the Texas Secretary of State was-insufficient to perfect CERx’s security interest in PM’s IP Assets, other than the Patent Applications; (3) pursuant to its Notice of Disposition and accompanying Transmittal Letter, CERx disposed of PM’s IP Assets on December 13, 2012 by public sale; and (4) because the IP Assets had been purchased by CERx at the December 13, 2012 public sale, the IP Assets were no longer owned by PM on the date that it filed for Chapter 11 protection and did not become property of the PM bankruptcy estate; accordingly, the Chapter 7 trustee of PM’s bankruptcy estate may not avoid CERx’s unperfected lien on the IP Assets pursuant to 11 U.S.C. § 544.
Based upon the summary judgment record, however, the Court finds that a genuine issue of material fact exists regarding exactly what assets, other than the Patent Applications, comprised PM’s IP Assets on December 13, 2012. Accordingly, as set forth in more detail below, Plaintiffs Motion for Partial Summary Judgment will be granted with respect to PM’s IP Assets, the scope of which will be determined after trial, and Defendant’s Partial Motion for Summary Judgment will be denied.
1. Summary Judgment Standard
In deciding a motion for summary judgment, a court must determine whether 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.CivP. 56, as made applicable by Fed. R. Banke.P. 7056. In deciding whether a fact issue has been raised, the facts and inferences to be drawn from the evidence must be viewed in the light most favorable to the non-moving party. Berquist v. Washington Mut. Bank, 500 F.3d 344, 349 (5th Cir.2007). A court’s role at the summary judgment stage is not to weigh the evidence or determine the truth of the matter, but rather to determine only whether a genuine issue of material fact exists for trial. Peel & Co., Inc. v. The Rug Market, 238 F.3d 391, 394 (5th Cir.2001) (“the court must review all of the evidence in the record, but make no credibility determinations or weigh any evidence”) (citing Reeves v. Sanderson Plumbing Prods, Inc., 530 U.S. 133, 135, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000)); see also U.S. v. An Article of Food Consisting of 345/50 Pound Bags, 622 F.2d 768, 773 (5th Cir.1980) (the court “should not proceed to assess the probative value of any of the evidence-”). While courts must consider the evidence with all reasonable inferences in the light most favorable to the non-movant, the nonmoving party must come forward with specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Ze*144nith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). A genuine issue of material fact exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Pylant v. Hartford Life and Acc. Ins. Co., 497 F.3d 536, 538 (5th Cir.2007) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
After the movant has presented a properly supported motion for summary judgment, the burden then shifts to the non-moving party to show with “significant probative evidence” that there exists a genuine issue of material fact. Hamilton v. Segue Software Inc., 232 F.3d 473, 477 (5th Cir.2000) (internal citation omitted). However, where “the burden at trial [as to the material fact at issue] rests on the non-movant, the movant must merely demonstrate an absence of evidentiary support in the record for the non-movant’s case.” Miss. River Basin Alliance v. Westphal, 230 F.3d 170, 174 (5th Cir.2000) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
On cross-motions for summary judgment, the court must review each party’s motion independently, and view the evidence and inferences in the light most favorable to the nonmoving party. Taylor v. Gregg, 36 F.3d 453, 455 (5th Cir.1994).
2. Objections to the Summary Judgment Record
a. CERx’s Objections to the Affidavit of Reef Gillum, D.O.
CERx objects to and requests that this Court strike all of paragraphs 3 and 7, and portions of paragraph 4, of Dr. Reef Gil-lum’s affidavit [Dkt. No. 54-1] on the grounds that the specified statements are unsupported conclusions and/or not based upon facts. Objections to Affidavit of Reef Gillum, D.O. [Dkt. No. 64] at ¶¶ 1-3. The first sentence of paragraph 3, “[o]ur contention is that the Source [Code] is the property of OnSite RX, Inc.,” and all of paragraph 7, “[i]n short Defendants submit that ...,” are worded so that they do not reflect statements based upon Dr. Gillum’s personal knowledge. The second sentence of paragraph 3 and the third sentence of paragraph 4 of Dr. Gillum’s affidavit state his opinion as to the ultimate legal issue before this Court. In these sections, Dr. Gillum testifies as to the alleged scope of the security interests granted to CERx pursuant to the May 6 Loan Documents (as defined on p. 20) and which assets were allegedly the subject of CERx’s December 13, 2012 disposition of collateral.
“Under Fed.R.Evid. 701, a lay opinion must be based on personal perception, must be one that a normal person would form from those perceptions, and must be helpful to the jury.” U.S. v. Riddle, 103 F.3d 423, 428 (5th Cir.1997) (internal quotation marks and citation omitted). A lay witness may not give an opinion that requires “scientific, technical, or other specialized knowledge within the scope of Rule 702.” Fed.R.Evid. 701(c). It is also generally prohibited for a lay witness to interpret statutes and to give legal opinions. See U.S. v. Griffin, 324 F.3d 330, 347-48 (5th Cir.2003). For example, in Riddle, the Fifth Circuit held that it was improper for a lay witness in a bank fraud prosecution to explain provisions of the banking regulations, to express his opinion on “prudent” banking practices, and to “draw on his specialized knowledge as a bank examiner” in giving his opinions about the defendant’s actions. Riddle, 103 F.3d at 428-29; see also U.S. v. El-Mezain, 664 F.3d 467, 511-12 (5th Cir.2011) (holding that a lay witness may give opinions that require specialized knowledge, but the witness must draw straightforward conclusions from observa*145tions informed by his own experience). Here, Dr. Gillum is not a lawyer and has no specialized training or knowledge of the law that would permit him to so testify in accordance with Fed.R.Evid. 701(c). Accordingly, CERx’s objection is sustained and the above-referenced portions of Dr. Gillum’s affidavit are stricken from the summary judgment record.
b. The Defendants’ Objection to Plaintiffs Summary Judgment Evidence
The Defendants object to CERx Exhibits 89 [CERx App. 815], 94 [Id. at 678-682], 95 [Id. at 683-684], 116 [Id. at 731-736], 117 [Id. at 737-743], 118 [Id. at 827-828], 128 [Id. at 793-796], 129 [Id. at 797-804], and 130 [Id. at 1185-1186] as inadmissible hearsay. See Defendants’ Objection to Plaintiffs Summary Judgment Evidence [Dkt. No. 86] at p. 2. CERx responds to this objection in its Response to Defendants’ Objections to Plaintiffs Summary Judgment Evidence (“CERx Response to Objections”) [Dkt. No. 93]. With the exceptions of Exhibits 89, 94, and 118, CERx alleges that each of the exhibits subject to the Defendants’ objection is excluded from hearsay as an opposing party’s statement under Fed.R.Evid. 801(d)(2). CERx alleges that Exhibit 89 is an “adoptive admission” excluded from hearsay under Fed. R. Evid. 801(d)(2)(B), citing to U.S. v. Miller, 478 F.3d 48, 51 (1st Cir.2007), and Exhibit 94 is excluded from hearsay as a “verbal act,” citing to U.S. v. Pang, 362 F.3d 1187, 1192 (9th Cir.2004). Finally, CERx alleges that Exhibit 118 is excluded from hearsay as an “operative act,” again citing to Pang, and an opposing party’s statement under Fed. R.Evid. 801(d)(2)(B). As the proponent of the evidence, CERx bears the burden of establishing the admissibility of the evidence in support of its claims. See U.S. v. Roque, 703 F.2d 808, 812 (5th Cir.1983).
Exhibit 89 is an email dated July 10, 2012 from Jeff Fink, an attorney representing CERx, to William Meier, an attorney representing PM. Second Declaration of Jeffrey P. Fink at ¶¶ 1, 4; CERx App. at 805, 806. CERx submits the exhibit as evidence regarding the scope of the collateral granted by the May 6 Loan Documents and claims the email is an exception to hearsay as an adoptive admission. CERx Response to Objections at 2. According to U.S. v. Miller, 478 F.3d 48 (1st Cir.2007), as cited by CERx:
The law of evidence long has recognized “adoptive admissions.” See, e.g., Fed. R.Evid. 801(d)(2)(B). This doctrine provides that, in certain circumstances, a party’s agreement with a fact stated by another may be inferred from (or “adopted” by) silence. See id.; see also United States v. Fortes, 619 F.2d 108, 115 (1st Cir.1980). Such an inference may arise when (i) a statement is made in a party’s presence, (ii) the nature of the statement is such that it normally would induce the party to respond, and (iii) the party nonetheless fails to take exception. See United States v. Higgs, 353 F.3d 281, 309-10 (4th Cir.2003). In such an instance, the statement may be considered “adopted” by virtue of the party’s failure to respond. See, e.g., United States v. Negrón-Narváez, 403 F.3d 33, 39 (1st Cir.2005); cf. United States v. Morillo, 8 F.3d 864, 872-73 (1st Cir.1993) (“A defendant that accepts ... without contesting the facts set forth in the [presentence] report can scarcely be heard to complain when the sentencing court uses those facts to make its findings.”).
Id. at 51.
The Court sustains the Defendants’ objection as to CERx Exhibit 89. The failure of one counsel to respond to an *146email from another counsel that references “patented software pledged to CERx” in relation to a potential transaction with a third party cannot be found to be a manifestation that the Defendants adopted or believed each statement in the email to be true, especially when the referenced pledge was not the main subject of the email. This is particularly so in a commercial transaction that spanned multiple years. In any event, CERx submitted this document as evidence regarding the scope of the collateral granted by the May 6 Loan Documents. As explained below, the Court concludes that the loan documents are not ambiguous, and parol evidence cannot be admitted to vary the express terms of the documents. See Tex. v. Am. Tobacco Co., 463 F.3d 399, 407 (5th Cir.2006) (“Courts interpreting unambiguous contracts are confined to the four corners of the document, and cannot look to extrinsic evidence to create ambiguity.”); Clardy Mfg. Co. v. Marine Midland Bus. Loans Inc., 88 F.3d 347, 352 (5th Cir.1996) (“Where the contract is unambiguous, extrinsic evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports.”) (citations omitted); Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. CBI Indus., 907 S.W.2d 517, 520 (Tex.1995) (same).
Exhibit 94 is an email chain among Jeff Fentriss, a manager of FPRx Advisors, LLC, which is the general partner of CERx, third party defendant Cory Lorimer, and others. Jeff Fentriss Declaration at ¶¶ 1, 10; CERx App. at 1, 2. Attached to the email are various unexecuted drafts of the Term Sheet. CERx contends that the email and attached drafts are excluded from hearsay as “verbal acts,” citing to U.S. v. Pang, 362 F.3d 1187 (9th Cir.2004), and are the “operative documents evidencing the formation of a contract.” CERx Response to Objections at 2.
The Court sustains the Defendants’ objection to Exhibit 94 for at least two reasons. First, as just explained, the executed loan documents are not ambiguous, so parol evidence is inadmissible. Second, the “formation of the contract”— i.e., the Term Sheet — is not in dispute, as the executed Term Sheet is already part of the summary judgment record. CERx App. 66-68. Accordingly, the Court concludes that any prior drafts of the Term Sheet are irrelevant.
Turning to the Defendant’s remaining objections, Exhibit 95 is an email chain among Jeff Fentriss, a manager of FPRx Advisors, LLC, which is the general partner of CERx, Jeff Fentriss Declaration (the “Fentriss Declaration”) at ¶ 1; CERx App. at 1, Cary Lorimer, OnSiteRx’s former CFO, Defendants’ Amended Answer to Plaintiffs Original Complaint, Affirmative Defenses, Counter-Claims, and Third Party Cross Claims (“Defendants’ Answer”) at ¶ 178 [Dkt. No. 61], and other individuals. Per CERx, the email is offered to show that the “security interest would cover the proprietary source code.” CERx Response to Objection at 2. The only evidence submitted in support of the admission of Exhibit 95 is in paragraph 11 of the Fentriss Declaration, where Mr. Fentriss states “[attached hereto as Ex. 95 is a true and correct copy of a May 6, 2011 Email chain between me, Cary Lorimer, and Paul Ponder.” Fentriss Declaration at ¶ 11; CERx App. at 3. In their Answer, however, the Defendants allege that Mr. Lorimer was acting “for his own pecuniary gain” and conspired with CERx to gain access or control of the Defendants’ technology. Defendants’ Answer at ¶ 178. While these allegations are not evidence, they do put CERx on notice that questions exist as to the actions of Mr. Lorimer being within the scope of his *147relationship with OnSiteRx and whether Mr. Lorimer was authorized to make the subject statements. As such, the Court concludes that CERx has failed to carry its burden under either Fed.R.Evid. 801(d)(2)(C) or (D). Moreover, the Court further concludes that the May 6 Loan Documents are not ambiguous and it will not admit parol evidence to vary the documents’ express terms. For these reasons, the Court sustains the Defendants’ objection to Exhibit 95.
Exhibit 116 is a September 17, 2010 email from Dr. Gillum to Paul Ponder and Jeff Fentriss that transmits a cover letter and affidavit, each signed by attorney Mack Ed Swindle. CERx Response to Objection at 2. Similarly, Exhibit 117 is a September 29, 2010 email from Dr. Gil-lum to Paul Ponder and Jeff Fentriss transmitting the same cover letter and affidavit. The Court concludes that the emails from Dr. Gillum accompanying the documents are merely transmittal emails and not an opposing party’s statement, as the emails contain no substance, and sustains the Defendants’ objections to the cover emails, CERx App. 731, 737. The Court, however, will overrule the Defendants’ objection to the cover letter and accompanying affidavits. CERx App. 732-736, 738-742.
In the affidavit, which is titled Affidavit Regarding the Intellectual Property Matters for Provider Meds, LP and OnSiteRx for Use by Prospective Investors of Provider Meds, LP and OnSiteRx (the “Swindle Affidavit”), Mr. Swindle states:
My name is Mack Ed Swindle.... Our client, Provider Meds, LP (the “Company”) has asked that we provide information in connection with the intellectual property of Provider Meds relating to the investment opportunity for investors or prospective investors of Provider Meds, LP and OnSiteRX.
Swindle Affidavit at p. 1; CERx App. 733, 739. Similarly, the cover letter states that “[o]ur law firm has been asked to provide an Affidavit in connection with the intellectual property matters of our client, Provider Meds, LP. Such an Affidavit is enclosed .... ” CERx App. at 732, 738.
The Swindle documents sufficiently show that Mr. Swindle was authorized by PM to make the statements contained in the cover letter and affidavit. Accordingly, the Court concludes that CERx has carried its burden with respect to the Swindle Affidavit and accompanying cover letter under Fed.R.Evid. 801(d)(2)(D) and overrules Defendants’ objection. The Court, however, will not consider Exhibits 116 and 117 to the extent that the exhibits are parol evidence submitted to vary the terms of the May 6 Loan Documents.
Exhibit 118 is an email exchange dated October 5, 2009 between Stewart Stephens and Amar Pai regarding Mr. Pai’s acceptance of PM’s offer of employment. Second Declaration of Stewart Stephens (the “Stephens Declaration”) at ¶4; CERx App. at 817. CERx argues that the correspondence “is relevant to PM’s ownership of the intellectual property at issue.” CERx Response to Objections at ¶ 3. Based upon Mr. Stephen’s declaration, Stephens Declaration at ¶¶ 2-4; CERx App. 817, the Court concludes that CERx has established that Mr. Stephens was PM’s employee at the time the email was sent and that the email was sent within the scope of Mr. Stephens’s relationship with PM. See Fed.R.Evid. 801(d)(2)(D). Accordingly, Defendants’ objection to Exhibit 118 is overruled.
Exhibit 128 is an email chain involving Dr. Gillum that allegedly “establishes when the roll up was completed.” CERx Response to Objections at 3. The Court concludes that the portions of the email *148chain authored by Dr. Gillum are excluded from hearsay as a party admission under Fed.R.Evid. 801(d)(2)(D) and, thus, overrules the Defendants’ objection as to those portions. The Defendants’ objection is sustained as to the remainder of Exhibit 128.
Exhibit 129 is the transcript of a conversation between Dr. Gillum and various other persons, including Cary Lorimer, Randy Gillum, and Jeff Fentriss. CERx Response to Objections at 3. CERx directs the Court to the Fentriss Declaration for testimony regarding this exhibit. CERx App. [Dkt. No. 68] at 7. The Fentriss Declaration, however, does not address why statements by Mr. Lorimer or Randy Gillum would be excluded from hearsay under Fed.R.Evid. 802(d)(2). See Fentriss Declaration at ¶ 86; CERx App. at 13. The Second Jeff Fentriss Declaration, CERx App. 1183-1184, however, states that “[ajlthough Randy [Gillum] did not hold a formal title at PM, he frequently participated in major meetings and discussions regarding PM’s business. To my personal observation, Randy Gillum functioned as a high level advisor to PM.” Second Jeff Fentriss Affidavit at ¶ 2; CERx App. at 1184.
The Court concludes that CERx has failed to carry its burden to prove that either Randy Gillum or Mr. Lorimer were authorized to make the statements on the call or that such statements were made within the scope of Randy Gillum’s and Mr. Lorimer’s respective relationships with the Defendants. See Fed.R.Evid. 801(d)(2)(C), (D). As such, the Court sustains the Defendants’ objection to Exhibit 129 with respect to statements by Messrs. Fentriss, Lorimer, and Randy Gillum, but denies the objection with respect to statements made by Dr. Gillum. To the extent Dr. Gillum’s testimony is submitted to vary the terms of the May 6 Loan Documents, however, it is excluded as inadmissible parol evidence.
Exhibit 130 is the transcript of a conversation between Randy Gillum and Jeff Fentriss. Again, CERx directs the Court to the Second Jeff Fentriss Declaration, CERx App. 1183-1184, in support of its argument that Randy Gillum’s statement should be excluded from hearsay under Fed.R.Evid. 801(d)(2). For the reasons stated in the immediately preceding paragraph, the Court concludes that CERx has failed to establish that statements by Randy Gillum should be excluded from hearsay under Fed.R.Evid. 801(d)(2)(C) or (D). As such, the Court sustains the Defendants’ objection to Exhibit 130.
Although the Court sustains several of the Defendants’ objections, it notes that much of the evidence CERx sought to admit was in support of its allegation that it was granted a security interest in all of PM’s IP Assets pursuant to the May 6 Loan Documents. Even if the Court had overruled all of the Defendants’ objections, inclusion of the additional evidence into the summary judgment record would not have changed the outcome on that point, as the Court has concluded that CERx was granted a security interest in all of PM’s IP Assets without looking to the additional evidence.
c. Plaintiffs Objection to the Defendants’ Additional Summary Judgment Evidence
After the June 17, 2013 hearing, the Defendants attempted to supplement the summary judgment record via their Supplemental Brief in Response to Plaintiff’s Supplemental Briefing [Dkt. No. 104] (attaching the Supplemental Affidavit of Reef Gillum, D.O., the Collateral Assignment of License Agreement, and a Software License and Services Agreement dated December 29, 2006 by and between the GFMHT and various third parties). *149CERx objects to the Defendants’ supplemental evidence as untimely, and specifically objects to references to prior drafts of documents as irrelevant and in violation of the “best evidence rule.” See Plaintiff’s Objection to Defendants’ Additional Summary Judgment Evidence (“CERx Objection to Supplemental Evidence”) [Dkt. No. 108].
None of the cases cited in the CERx Objection to Supplemental Evidence, however, stand for the proposition that this Court lacks discretion to admit the supplemental evidence on the basis of its timeliness. Fed.R.CivP. 56(e), as made applicable by Fed. R. BankR.P. 7056, states that “[i]f a party fails to properly support an assertion of fact or fails to properly address another party’s assertion of fact as required by Rule 56(e), the court may: give an opportunity to properly support or address the fact ...; or (4) issue any other appropriate order.” Fed. R. BaNKR. P. 7056(e). Further, N.D. Tex. L.B.R. 7056-l(g) permits parties to file supplemental materials, including additional evidence, with permission of the Court. As such, both the local and federal rules permit this Court to exercise its discretion to consider evidence filed as a supplement. See Tremont LLC v. Halliburton Energy Svs., Inc., 696 F.Supp.2d 741, 790 (S.D.Tex.2010) (finding that both Rule 56(e) and the local rules of court for that district permit a court to exercise discretion in considering supplemental evidence); cf. Bernhardt By and Through Bernhardt v. Richardson-Merrell, Inc., 892 F.2d 440, 444 (5th Cir.1990) (finding that the district court did not abuse its discretion in excluding, on timeliness grounds, affidavit that was filed after district court initially ruled on summary judgment motion). As such, the Court, in the exercise of its discretion, does not find the supplemental materials to be time-barred, as argued by CERx. Thus, the Court will admit into the summary judgment record the Collateral Assignment of License Agreement [Dkt. No. 104-2] and the Software License and Service Agreement [Dkt. No. 104-8],
The Court, though, will not admit Dr. Gillum’s supplemental affidavit [Dkt. No. 104-1] into the summary judgment record. Paragraph 3 of the affidavit is not relevant to the issues before the Court. Further, the remaining substantive portions of the affidavit seek to improperly introduce evidence that addresses questions raised by the Court at the hearing on the motions, which the Defendants had the opportunity to address at the hearing, and not a party’s assertions. See Fed. R. BaNKR. P. 7056(e); Supplemental Affidavit of Reef Gillum, D.O. at ¶¶4 (“The Court has questions....”), 6 (“The Court further questioned.... ”), 8 (“Finally, the Court has questioned.... ”). Thus, the Court sustains CERx’s objection to Dr. Gillum’s supplemental affidavit.
3. Factual History
a. The OnSiteRx System
OnSiteRx, a debtor before this Court (Bankr.Case No. 13-30267), is the ultimate direct and/or indirect corporate parent of various entities that operated in the pharmacy services industry and were engaged in the business of providing remotely distributed and disbursed pharmaceutical products to patient care facilities such as hospitals, long-term care facilities, skilled nursing facilities, retirement facilities, and similar establishments.
In general terms, the OnSite system would provide a care facility and an appropriate central pharmacy with an electronic health record for the pharmaceutical transactions. The central pharmacy would deliver product to the customers’ locations to be stocked in the facility’s dispensing machines. Each receiving facility would *150have local equipment that would dispense medications in a unit or multi-dose package with patient identifying information such that the facility could then provide fully-dosed patient prescription packages on an as-needed basis. The non-patent intellectual property underlying the OnSite system is the subject of the parties’ cross-motions for partial summary judgment, particularly the proprietary source code used to operate the system (the “Source Code”) and any related rights.
b. The Prepetition Loans and Security Grant
Between June 2010 and January 2012, CERx loaned approximately $8.92 million in principal amount to PM, which is represented by numerous loan and security documents. Primarily at issue here are the loan and security documents dated as of May 6, 2011 (collectively, the “May 6 Loan Documents”) comprised of the (1) First Loan Modification Agreement executed by PM, GFMHT, and CERx (the “FLMA”), (2) Non-Binding Term Sheet executed by PM, GFMHT, and CERx (the “Term Sheet”), (3) Convertible Promissory Note executed by PM and CERx (the “Convertible Note”), (4) Patent Application Security Agreement executed by PM and CERx (the “PSA”), (5) Collateral Assignment executed by PM (the “Collateral Assignment”), and (6) the Collateral Assignment of License Agreement (herein so called). The most relevant provisions of these documents are as follows:
Pursuant to the PSA:
2. GRANT OF SECURITY INTEREST. Obligor [PM] hereby grants to the Secured Party [CERx] a lien and security interest in the following (the “Collateral”):
(a) U.S. Provisional Patent Application Serial No. 61/323,125, filed April 12, 2010, U.S. Patent Application Serial No. 13/085,298, filed April 12, 2011, PCT Application No. PCT/US/2011/032150, filed April 12, 2011, each titled “On Site Prescription Management System and Methods for Health care Facilities,” and all continuing patent applications (including, without limitation, continuation, continuation-in-part and divisional applications), reissue applications, corresponding rights to patent and all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world, and all patents, registrations, and certificates issuing therefrom (collectively, the “Patent Applications ”); and
(b) Any contract rights in, to or under the Patent Applications;
together with all Proceeds, products, offspring, rents, issues, right to recover past damages for infringement, profits and returns of and from any of the foregoing.
PSA at ¶ 2 (emphasis added); CERx App. at 126-127. As did the parties, the Court will similarly refer to the above-referenced assets as the “Patent Applications.”7 The PSA further provides that:
This Patent Security Agreement, together with the First Loan Modification Agreement and the documents referenced therein, constitute the entire agreement between the Obligor [PM] and the Secured Party [CERx] with respect to the subject matter hereof and all other prior and contemporaneous agreements, arrangements, and understandings between the parties hereto as *151to the subject matter hereof are, except as otherwise expressly provided herein, rescinded.
PSA at ¶ 14(j); CERx App. at 132.
The FLMA required the execution, delivery, and funding of the Convertible Note and execution of the PSA. FLMA at ¶¶ 1, 6; CERx App. at 83, 85. The FLMA also provides that the May 6 Loan Documents “constitute the entire agreement between Borrower [PM] and each Purchaser [including CERx] with respect to the subject matter thereof....” FLMA at ¶ 10; CERx App. at 86.
The Convertible Note (which is referenced in the FLMA) incorporates the Term Sheet and provides that:
Notwithstanding anything contained herein to the contrary, this Note is issued pursuant to the terms of that certain Term Sheet (herein so called) between Borrower and Lenders dated May 6, 2011 and attached hereto as Exhibit “A”.
Convertible Note at ¶ 4(k); CERx App. at 76.
In turn, the Term Sheet provides that: “[t]he Guarantor [GFMHT] shall provide the Purchaser [CERx] with a senior security interest in the IP assets owned by the Guarantor or any affiliates.... ” Term Sheet at ¶ 6 (emphasis added); CERx App. at 79. The parties agree that PM is an affiliate of GFMHT.
CERx also placed a UCC-1 financing statement on file with the Texas Secretary of State, which defined CERx’s collateral in terms nearly identical to that contained in the PSA:
This FINANCING STATEMENT covers the following collateral: (a) U.S. Provisional Patent Application Serial No. 61/323,125, filed April 12, 2010, U.S. Patent Application Serial No. 13/085,298, filed April 12, 2011, PCT Application No. PCT/US/2011/032150, filed April 12, 2011, each titled “On Site Prescription Management System and Methods for Health care Facilities,” and all continuing patent applications (including, without limitation, continuation, continuation-in-part and divisional applications), reissue applications, corresponding rights to patent and all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world, and all patents, registrations, and certificates issuing therefrom (collectively, the “Patent Applications”); and
(b) Any contract rights in, to or under the Patent Applications;
together with all Proceeds, products, offspring, rents, issues, right to recover past damages for infringement, profits and returns of and from any of the foregoing.
UCC-1 Financing Statement, Filing No. 11-0018796992, filed June 27, 2011 (the “UCC-1”); Defendants’ App. at 15.
c. The Prepetition Disposition of Collateral
The various notes became due and payable according to their terms on June 30, 2012, and were not paid. On or about July 1, 2012, CERx caused a Patent Assignment Abstract of Title to be filed with the United States Patent and Trademark Office. CERx App. at 813-815. CERx then served a demand letter on PM and GFMHT on July 6, 2012, informing PM and GFMHT that the loans had matured and demanding immediate payment. CERx App. at 808-811. On October 23, 2012, CERx, via its attorneys, sent a letter to PM (the “Transmittal Letter”) informing PM of its intent to dispose of its collateral. CERx App. at 858-859. The Transmittal Letter stated:
*152Under a Patent Application Security Agreement dated as of May 6, 2011 (Security Agreement), Provider [PM] granted CERx a security interest in certain collateral that includes three different patent applications and the source code and other intellectual property related [sic ] such applications.
CERx has determined that it is in CERx’s best interest to foreclose on all of the collateral granted under the Patent Application Security Agreement. On behalf of CERx, I am transmitting to you herewith a Notification of Disposition of Collateral which sets forth the time, place, and nature of the foreclosure and sale of such collateral.
CERx App. at 858.
Attached to the Transmittal Letter was a Notification of Disposition of Collateral (the “Notice of Disposition”), which stated:
We will sell all of the hereinafter defined “Collateral” to the highest qualified bidder in public as follows:
DAY AND TIME: December 13, 2012
TIME: 10:00 a.m. (Dallas, TX time)
PLACE: Gardere Wynne Sewell LLP 1601 Elm Street, 26th Floor Dallas, TX 75201
The “Collateral” means (a) U.S. Provisional Patent Application Serial No. 61/323,125, filed April 12, 2010, U.S. Patent Application Serial No. 13/085,298, filed April 12, 2011, PCT Application No. PCT/US/2011/032150, filed April 12, 2011, each titled “On Site Prescription Management System and Methods for Health care Facilities,” and all continuing patent applications (including, without limitation, continuation, continuation-in-part and divisional applications), reissue applications, corresponding rights to patent and all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world, and all patents, registrations, and certificates issuing therefrom (collectively, the “Patent Applications ”); and (b) any contract rights in, to or under the Patent Applications, together with all Proceeds, products, offspring, rents, issues, right to recover past damages for infringement, profits and returns of and from any of the foregoing.
CERx App. at 861.
On January 7, 2013, CERx sent another letter to PM informing PM that the collateral was sold in accordance with the Notice of Disposition and that CERx was the highest bidder for the assets at the public sale with a credit bid of $750,000. CERx App. at 865-866.
4. Issues Presented a. Whether PM Granted CERx a Security Interest in All of its IP Assets.
Under Southern Rock, Inc. v. B & B Auto Supply, 711 F.2d 683, 685 (5th Cir.1983), whether an agreement constitutes a security arrangement is determined with reference to state law. When interpreting a contract under Texas law, the court’s primary concern is to ascertain and give effect to the written expression of the parties’ intent. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex.2011); Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex.2006). By this approach, the courts “strive to honor the parties’ agreement and not remake their contract by reading additional provisions into it.” Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex.2010). The parties’ intent is governed by what is written in the con*153tract, not by what one side contends they intended but failed to say. Id. at 127. Thus, “it is objective, not subjective, intent that controls.” Matagorda Cnty. Hosp. Dist. v. Burwell, 189 S.W.3d 738, 740 (Tex.2006) (per curiam) (citing City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518 (Tex.1968)). A court must therefore give terms their plain and ordinary meaning unless the contract indicates that the parties intended a different meaning. Dynegy Midstream Servs., Ltd. P’ship. v. Apache Corp., 294 S.W.3d 164, 168 (Tex.2009). A court does not consider only those parts of a contract that favor one party, City of Keller v. Wilson, 168 S.W.3d 802, 811 (Tex.2005), but examines the writing as a whole to harmonize and give effect to all of the contract’s provisions. Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983). The court must consider the contract from a utilitarian standpoint and bear in mind the particular business activity to be served, and, when possible and proper to do so, avoid a construction that is unreasonable, inequitable, and oppressive. Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310, 312 (Tex.2005) (per curiam); Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex.1987).
If a contract is not ambiguous, courts must enforce it as written without considering parol evidence for the purpose of creating an ambiguity or giving the contract “a meaning different from that which its language imports.” David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex.2008) (per curiam). Courts determine whether a contract is ambiguous by looking to the contract as a whole in light of the circumstances present when the parties executed it. Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 731 (Tex.1981). The contract is unambiguous if it can be given a certain or definite meaning as a matter of law. El Paso Field Servs., L.P. v. MasTec N. Am., Inc., 389 S.W.3d 802, 806 (Tex.2012). A contract is not ambiguous simply because the parties advance conflicting interpretations. Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.1996). If the contract is subject to more than one reasonable interpretation after applying the pertinent rules of contract construction, then the contract is ambiguous and there is a fact issue regarding the parties’ intent. El Paso Field Servs., 389 S.W.3d at 806; J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex.2003).
Under Texas law, the principal test for determining whether a transaction is to be treated as a security interest is whether “the transaction intended to have effect as security.” Looney v. Nuss (In re Looney), 545 F.2d 916, 918 (5th Cir.1977) (citing to Tex. Bus. & Com.Code § 9.102 cmt. 1); Southern Rock, Inc., 711 F.2d at 685. No formal wording is required; the courts are to “examine the substance of the documents, in light of the circumstances of the case.” Looney v. Nuss, 545 F.2d. at 918. Indeed, a “security agreement need not be evidenced by a single document; two or more writings, considered together, may constitute a security agreement.” Id. at 919 n. 4 (construing three separate documents to find the parties’ objective intent to create a security interest in the absence of a document titled “security agreement”).
The Defendants’ arguments can be placed into four basic categories. First, the Defendants argue that collateral descriptions contained in the PSA and the Term Sheet8 are statutorily insufficient to permit CERx’s alleged interest in PM’s IP *154Assets to attach, other than with respect to the Patent Applications. According to the Defendants and pursuant to Texas UCC § 9.108(c), “[a] description of collateral as ‘all the debtor’s assets’ or ‘all the debtor’s personal property’ or using words of similar import does not reasonably identify the collateral.” Tex. Bus. & Com.Code § 9.108(c). Thus, the Defendants’ posit, the phrases “all other intellectual property,” as used in the PSA, or “IP assets,” as used in the Term Sheet, are statutorily insufficient to describe the collateral, thus preventing attachment of CERx’s alleged security interest in any non-patent related IP Assets.
Second, the Defendants argue that, even if CERx was granted a security interest in PM’s non-patent related IP Assets, the collateral description contained in the UCC-1 was insufficient to place a third party on inquiry notice that CERx claimed a security interest in non-patent related IP Assets and, as such, any alleged security interest in the non-patent related IP Assets would be voidable by a hypothetical lien creditor pursuant to 11 U.S.C. § 544.
Third, the Defendants argue that OnSi-teRx,9 not PM, owns the Source Code at issue. According to the Defendants, because OnSiteRx isn’t a party to the May 6 Loan Documents, and CERx has filed no UCC-1 financing statement that lists a grant of collateral allegedly given by OnSi-teRx, CERx cannot hold an attached, much less perfected, security interest in the non-patent related IP Assets.
Finally, for the first time in their supplemental briefing [Dkt. No. 104], the Defendants argue that the Term Sheet was “repudiated” by execution of the other May 6 Loan Documents and that the PSA and the Collateral Assignment Agreement supersede the Term Sheet and render it of no legal effect.
CERx, on the other hand, argues that the relevant language of the PSA, standing alone, is sufficient to grant a security interest in the Source Code and other IP Assets, as the terms “intellectual property protection” and “intellectual property” are interchangeable, and the phrase means exactly what it says — that CERx was granted a security interest in all of PM’s intellectual property. CERx further argues that the placement of the words “all other intellectual property” in the middle of the collateral description is of no importance.
Second, CERx argues that, in Texas, the collateral description “general intangibles” would have sufficiently described PM’s IP Assets pursuant to Texas UCC § 9.108(b)(3), which states that “a description of collateral reasonably identifies the collateral if it identifies the collateral by: (3) ... a type of collateral defined in this title.” Texas UCC § 9.102(a)(42) defines “general intangibles” to mean “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letter of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.” Tex. Bus. & Com.Code § 9.102(a)(42). According to CERx, because the larger category of general intangibles is statutorily sufficient, then the subset of “all other intellectual property” must also be sufficient.
Alternatively, CERx argues that, pursuant to both contractual rules of construction applicable in Texas and the “Compos*155ite Document Rule,”10 the May 6 Loan Documents must be integrated and, when read together, clearly show that the parties objectively intended that the security grant include all of PM’s IP Assets.
Finally, in its supplemental brief, CERx argues for the first time that the Patent Applications do, in fact, “correspond” to the Source Code because the Source Code allows the Onsite system to communicate with the individual dispensing machines.
The Court agrees with the Defendants that the PSA itself did not grant CERx a security interest in all of PM’s IP Assets. The Court will begin with a reading of the collateral description contained in the PSA:
U.S. Provisional Patent Application Serial No. 61/323,125, filed April 12, 2010, U.S. Patent Application Serial No. 13/085,298, filed April 12, 2011, PCT Application No. PCT/US/1011/032150, filed April 12, 2011, each titled “On Site Prescription Management System and Methods for Health care Facilities,” and all continuing patent applications (including, without limitation, continuation, continuation-in-part and divisional applications), reissue applications, corresponding rights to patent and all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world, and all patents, registrations, and certificates issuing therefrom (collectively, the “Patent Applications”);
PSA at ¶ 2 (emphasis added); CERx App. at 126-127.
This Court cannot read the phrase “all other intellectual property” in isolation from the rest of the paragraph, but must take its meaning from the surrounding words. Tekelec, Inc. v. Verint Sys., Inc., 708 F.3d 658, 665 n. 16 (5th Cir.2013) (“Under Texas law, the words of a contract must be read in context ... ”) (citing U.S. Fid. and Guar. Co. v. Goudeau, 272 S.W.3d 603, 606 (Tex.2008) (“Under the traditional canon of construction noscitur a sociis (‘a word is known by the company it keeps’), each of the words used [in the insurance contract at issue] must be construed in context.”)). First, the term “corresponding” must refer to another portion of the paragraph. Here, it clearly refers back to the previously and immediately-listed patent applications. Also, there is no demarcation between “rights to patent” and “all other intellectual property protections;” as such, the entire phrase is limited by the term “corresponding” and expressly relates to the patents. For the phrase to have the meaning posited by CERx, it would read “corresponding rights to patent, aed-all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world, and all patents, *156registrations ... The precedent discussed above, however, does not permit such an isolated reading of the phrase “all other intellectual property.” Id. The plain meaning of this paragraph is that “corresponding rights to patent and all other intellectual property protection of every kind ... in all countries of the world” grants exactly what is says — it grants rights in patents and corresponding rights to patent-like protections in all countries of the world.
The Court’s reading of the collateral description as only covering the Patent Applications is further bolstered by other language found throughout the PSA, which also only addresses patent and patent-related rights. CERx App. at 125-136. For example:
• ¶ 5 Representations and Warranties Concerning Collateral “(c) True and correct copies of all papers filed in and received from the USPTO [U.S. Patent and Trademark Office], comprising or relating to the Patent Applications are attached to the Patent Security Application.... ” PSA at ¶ 5(c); CERx App. at 128.
• ¶ 6 Covenants Concerning Collateral “(d) The Obligor shall execute all such collateral assignments with respect to Patent Applications as the Secured Party reasonably requests in order to perfect the security interest in such Collateral. The Obligor shall promptly execute for subsequent filing with the [USPTO], such collateral assignments with respect to the Patent Applications as the Secured Party reasonably requests.” PSA at ¶ 6(d); CERx App. at 128.
• ¶ 6 “(e) The Obligor shall use its best efforts in the prosecution and maintenance of all the Patent Applications, and shall promptly provide to the Secured Party or its designated counsel, copies of all correspondence from the USPTO, and all correspondence filed with the USPTO and all other official agencies regarding the Patent Applications.” PSA at ¶ 6(e); CERx App. at 128.
• ¶ 9 Remedies “(b) The Obligor shall execute and deliver on the date hereof to the Secured Party a patent assignment in the form attached hereto as Exhibit A pursuant to which all right, title and interest in and to the Patent Applications shall be assigned permanently to the Secured Party, which executed assignment shall be held by the Secured Party in escrow unless and until the occurrence of a default under this Patent Security Agreement. From and after the occurrence of a default under this Patent Security Agreement, if any, the Secured Party, may, in its sole and absolute discretion, and without notice to the Obligor, record such assignment with the [USPTO].” PSA at ¶ 9(b); CERx App. at 129.
If the PSA addressed all of PM’s IP Assets, as CERx contends, the documents would contain language addressing (or at least referencing) assets other than the Patent Applications. The PSA, however, only addresses patents and patent-related rights. This patent-specific language is carried through to the patent assignment attached to the PSA as Exhibit A (the “Patent Assignment”), which addresses U.S. Patent Application Serial No. 13/085,-298, filed April 12, 2011, titled “On Site Prescription Management System and Methods for Health care [sic] Facilities.” CERx App. at 135-136. Further, the Patent Assignment, in its second paragraph, tracks the language of the PSA:
WHEREAS, CERx ... is desirous of acquiring the entire right, title and interest in, to and under said invention *157and in, to and under the Patent Application, and all continuing patent applications (including, without limitation, continuation, continuation-in-part and divisional applications), reissue applications, corresponding rights to patent and all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world....”
CERx App. at 135 (emphasis added).
Neither the PSA nor the Patent Assignment mention or refer to copyrights, trademarks, trade secrets, software, source code, or similar, non-patent related items of intellectual property. Instead, the documents repeatedly refer to and describe patents and rights related to patents. For these reasons, the Court rejects CERx’s interpretation of the PSA and holds that, as a matter of law, the PSA did not grant CERx a security interest in PM’s non-patent related IP Assets.11
Learning from the hearing on the motions for summary judgment that the Court was struggling with its argument concerning the breadth of the grant of a security interest in the PSA, CERx argues in its supplemental brief for the first time that the Source Code “corresponds” to the Patent Applications in that it permits the OnSite system to communicate with the individual dispensing machines. Plaintiff’s Supplemental Brief in Support of its Motion for Summary Judgment (“Plaintiffs Supplemental Brief’) [Dkt. No. 99] at ¶¶ 23-25. This argument is very similar to one made by a secured creditor in the case of The Royal Bank and Trust Co. v. Per-eira (In re Lady Madonna Indus., Inc.), 99 B.R. 536 (S.D.N.Y.1989). In Lady Madonna, Royal Bank and Trust Co. instituted an adversary proceeding against a bankruptcy trustee, claiming that, via a security agreement, the debtors granted it a security interest in certain trademarks. The security agreement described the collateral as “all of our accounts receivable, contract rights, equipment, and farm products, and any instruments, documents, chattel paper and general intangibles related thereto or arising therefrom....” Id. at 538. The bankruptcy court found that the grant of security in “general intangibles” covered trademarks, but only those related to accounts receivable and contract rights. Id. The issue on appeal was “whether the trademarks and trade name ‘Lady Madonna’ and ‘Baby Madonna’ relate to the debtors’ accounts receivable and contract rights.” Id.
The bank argued that the trademarks were related to the accounts receivable and contract rights “since all of the debtors’ accounts receivable arose from the sale of ‘Lady Madonna’ and ‘Baby Madonna’ branded garments to the debtors’ franchisees, who traded under the name ‘Lady Madonna’ and ‘Baby Madonna.’” Id. at 540. In citing to the bankruptcy court’s findings, the district court found that this argument was “nothing more than a statement that the accounts receivable might arise in part from the trademarks and trade names, as well as the debtors’ inventory, franchise contracts, manufacturing contracts and skills of their employees.... That argument is nothing more than an assertion that the clause be interpreted to bring in all assets that somehow are used in the making of goods that are sold on credit. Such a construction would, howev*158er, effectively leave the term [related thereto or arising therefrom] without meaning.” Id. at 541. The district court then concluded that the trademarks and trade names did not “relate” to the debtors’ accounts receivable and contract rights. Id. See also Sanders v. Comerica Bank, 274 S.W.3d 861 (Tex.Civ.App.-Ft. Worth 2008) (finding grant in stock certificate and “all inuring to the shares of stock of said corporation, tangible and intangible” to be insufficient to grant a security interest in equipment, despite argument that the equipment, as a corporate asset, inured to the pledged stock).
Similar to the court in Lady Madonna, this Court concludes that CERx asks it to interpret the word “corresponding” far too broadly. To find that the Source Code and other intellectual property “correspond” to the patent rights because they interact with or touch upon the patented vending machines would eviscerate the language of the document.
Lastly, CERx argues that the Court must consider the alleged security grant contained in the Term Sheet, which CERx posits is integrated into and modifies the terms of the PSA via the Convertible Note and FLMA by application of the Composite Document Rule and applicable rules of contractual construction. The PSA states that “[i]n the event any term or provision of this Agreement conflicts with any term or provision of the First Loan Modification Agreement, the term or provision of the First Loan Modification Agreement shall control.” PSA at ¶ 14(c); CERx App. at 131. The FLMA provides that “[t]his Agreement, the Notes, the Purchase Agreements, the Guaranties, and the other instruments referred to herein constitute the entire agreement between the Borrower and each Purchaser with respect to the subject matter hereof and thereof.” FLMA at ¶ 10; CERx App. at 86. The Convertible Note states that “this Note is issued pursuant to the terms of that certain Term Sheet (herein so called) between Borrower and Lender dated May 6, 2011.” Convertible Note at 4(k); CERx App. at 76. As such, CERx argues that this incorporation makes the formerly non-binding Term Sheet binding and the Term Sheet must be read to modify the express language of the PSA to grant a security interest in all IP Assets. To do otherwise, according to CERx, would ignore the existence of the express terms of the now-binding Term Sheet.
As an initial matter, the Court notes that there is no conflict between the terms of the PSA and the FLMA. The relevant collateral provisions of the PSA are discussed on pages 20-23, above, and will not be repeated. The FLMA states:
6. Additional Collateral. On the date of this Agreement (a) the Borrower [PM] and the Lenders [CERx] shall enter into a Patent Application Security Agreement to grant the Purchaser a security interest in U.S. Patent Application Serial No. 13/085,298, filed by Borrower April 12, 2011 entitled “On Site Prescription Management System and Methods for Health care Facilities” to secure the Borrower’s obligations under the Notes....
FLMA at ¶ 6; CERx App. at 85-86. Consistent with the FLMA, the parties entered into the PSA, which granted CERx a security interest in the Patent Applications. There is no inconsistency between these two documents.
The analysis does not end there, however, as this Court is bound by precedent regarding contractual interpretation and must “consider the entire writing and attempt to harmonize and give effect to all provisions of the contract by analyzing the provisions with reference to the whole agreement.” Frost Nat’l Bank, 165 *159S.W.3d at 312; Hackberry Creek Country Club, Inc., 205 S.W.3d at 55-56. This Court must also bear in mind the particular business activity to be served (here, a secured commercial loan transaction), and, when possible and proper to do so, avoid a construction that is unreasonable, inequitable, and oppressive. Frost Nat’l Bank, 165 S.W.3d at 312; Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex.1987). While performing this task, the primary question before the Court is whether the parties objectively intended the transaction to have the effect as security. Looney v. Nuss, 545 F.2d at 918 (construing multiple documents to find the parties’ objective intent to grant a security interest); In re Webber, 350 B.R. 344, 385 (Bankr.S.D.Tex.2006) (promissory note and stock purchase agreement underlying shareholder’s acquisition of co-shareholder’s stock evidenced parties’ intent to create security interest for co-shareholder in acquired stock, despite non-existence of formal security agreement, given language in documents indicating that payment of note would be secured by stock); Montavon v. Alamo Nat’l Bank of San Antonio, 554 S.W.2d 787, 791 (Tex.Civ.App.-San Antonio 1977) (construing multiple documents to find parties’ objective intent that certificates of deposit serve as collateral).
Texas UCC § 9.203 details three requirements for the attachment and enforceability of a security interest between the parties: (1) value has been given, (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party, and (3) the debtor has authenticated a security agreement that provides a description of the collateral. Tex. Bus. & Com.Code § 9.203(b). A security interest attaches to the collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. Id. at § 9.203(a). A “security agreement” means an agreement that creates or provides for a security interest. Id. at § 9.102(a)(74).
When initially executed, the Term Sheet was a non-binding document that laid out the terms of a potential agreement between the parties regarding a future loan transaction. Term Sheet at ¶¶ 2 (“Purchaser is willing to loan an additional $1,500,000 to Borrower ...”), 5 (“Guarantor [GFMHT] shall provide the Purchaser [CERx] with a senior security interest in the IP assets owned by Guarantor or any affiliates ... ”); CERx App. at 66. Although drafted in a future tense, the loan transaction subsequently occurred, as evidenced by the Convertible Note that expressly incorporates the Term Sheet. Convertible Note at ¶ 4(k) (“Notwithstanding anything contained herein to the contrary, this Note is issued pursuant to the terms of that certain Term Sheet (herein so called) between Borrower [PM] and Lender [CERx] dated May 6, 2011 and attached hereto as Exhibit ‘A’_ Additional advances, if any, under this Note shall be made in accordance with the terms of the documents contemplated by the Term Sheet.”); CERx App. at 76.
Further, in accordance with Texas UCC § 9.203(3)(A): (1) value has been given via the loans; (2) the debtor12 has rights in the collateral or the power to transfer rights in the collateral to a secured party (at least with respect to the Patent Applications and other IP Assets that it owned);13 and (3) the debtor has *160authenticated a security agreement (the May 6 Loan Documents, particularly the Term Sheet) that provides a description of the collateral (the IP assets owned by GFMHT or any affiliates). Although the Term Sheet is not titled a “Security Agreement,” the express language used, coupled with the language of the Convertible Note and CERx’s funding, clearly shows the parties’ objective intent that PM’s IP Assets serve as collateral for the loans. That the PSA separately addresses the Patent Applications and the Collateral Assignment of License Agreement separately addresses a license, each a subset of the IP Assets, does not limit the grant of security in the Term Sheet or otherwise create internal conflict or ambiguity.
Here, CERx loaned money, which PM accepted, pursuant to the Term Sheet. That the Term Sheet states “shall grant” and not “is hereby granted” is of no avail, as the Texas UCC does not require an express granting clause (e.g., “debtor hereby grants creditor a security interest”). Sommers v. Int’l Bus. Mach., 640 F.2d 686, 689 (5th Cir.1981) (concluding that language on a purchase order to the effect that creditor “retains title to said books until paid ...” was sufficient to reserve a security interest in books, although bankruptcy trustee argued that granting language was required); see also Looney v. Nuss, 545 F.2d at 918 (construing multiple documents to find the parties’ objective intent to grant a security interest); In re Webber, 350 B.R. at 385 (same); Montavon, 554 S.W.2d at 791 (same). The proper analysis is whether the documents show the parties’ objective intent that PM’s IP Assets serve as collateral for the loans. Looney v. Nuss, 545 F.2d at 918. Under the undisputed facts of this case, the May 6 Loan Documents clearly show the parties’ objective intent that CERx be granted a security interest in PM’s IP Assets.
For example, in Montavon v. Alamo Nat’l Bank of San Antonio, 554 S.W.2d 787 (Tex.Civ.App.-San Antonio 1977), the court found that, based upon several documents, the parties intended that a security interest be granted in certain certificates of deposit, despite the fact that a promised hypothecation never occurred in accordance with the relevant documents. Id. at 791. The Montavon court found that the creditor bank acquired and perfected (via possession) valid and enforceable security interests in the stockholders’ certificates of deposit that served as security for the corporation’s debt, where the certificates were delivered to the bank by the stockholders for purposes of securing a line of credit and the stockholders executed a Consent to Pledge and Security Agreement Pledge covering the certificates. The Consent to Pledge, however, stated that the shareholders authorized the corporation to hypothecate, pledge and deliver the two certificates. In accordance with Texas precedent, the Montavon court construed the documents together in light of relevant Texas UCC provisions and was “influenced by the facts that: (a) the obvious purpose of the delivery of the endorsed Certificates of Deposit to the Bank was to secure a line of credit for Fipco [corporation]; (b) the bank in reliance thereon advanced such credit to Fipco; (c) under the applicable provisions of the Texas Business and Commerce Code, the effect of the delivery of such Certificates, the executed Consent to Pledge, and Security Agreement Pledge, was to perfect a valid security interest in the bank to such Certificates of Deposit to secure Fipco’s debt.” *161Id. The fact that the Montavons individually pledged and delivered the certificates to the bank, contrary to the express terms of the security documents stating the corporation was to do so, was not persuasive.
Finally, the Court does not find persuasive the Defendants’ arguments that the other May 6 Loan Documents refuted or disavowed the Term Sheet. In support of this argument the Defendants ask that this Court consider the Collateral Assignment of License Agreement.14 As argued by the Defendants, paragraph 6 of the FLMA states that: “(b) the Guarantor and the Lender shall enter into a Collateral Assignment of License Agreement to collaterally assign the Guarantor’s rights under the Software License and Services Agreement, dated December 28, 2006, by and between the Guarantor and MDI Achieve (Minnesota), Inc.” FLMA at ¶ 6; CERx App. at 85. Similarly, the Term Sheet states that “Guarantor shall provide the Purchaser with a senior security interest in the IP assets owned by Guarantor or any affiliates, including but not limited to the License Agreement and all its rights with rights [sic ] with respect to the related source code, if any, with MDI Achieve.” Term Sheet at ¶ 6; CERx App. at 67.
The Collateral Assignment of License Agreement, however, states that “[a]s collateral security for the Guaranteed Obligations, the Guarantor hereby assigns to Purchasers all of the Guarantor’s rights, title and interest in and to the [MDI] License Agreement; provided that the Guarantor does not hereby assign, transfer or provide to the Purchaser any Source Code (as defined in the License Agreement).” Collateral Assignment of License Agreement at B (emphasis added) [Dkt. No. 104-2, page 1 of 4], According to the Defendants, this exclusion of the MDI-related source code from CERx’s collateral package in the Collateral Assignment of License Agreement, despite the language of the Term Sheet and FLMA, reflects the parties’ intent that the Term Sheet be superseded by the other May 6 Loan Documents, making the Term Sheet of no force and effect.
The Defendants, however, do not cite to, nor could the Court find, any language in the May 6 Loan Documents, including the Collateral Assignment of License, that objectively refutes or somehow disavows the Term Sheet. To the contrary, the FLMA specifically references the Convertible Note and the documents referenced therein, which includes the Term Sheet. The fact that CERx “chose to perfect a security interest in only part of the described collateral in the Term Sheet,” Defendants’ reply brief [Dkt. No. 104] at ¶ 9, is not a sufficient basis for this Court to ignore the express terms of the May 6 Loan Documents.
Moreover, when referencing the MDI Achieve source code, the Term Sheet recognizes that the guarantor (or its affiliates) will transfer (“its rights ..., if any ... ”). Term Sheet at ¶ 6 (emphasis added); CERx App. at 67. That the later document — i.e., the Collateral Assignment of License Agreement — confirms that no source code is transferred is not a repudiation of the Term Sheet.
Nor does this Court find persuasive the Defendants’ argument that the May 6 Loan Documents, each physically dated as of May 6, 2011, were actually executed on different dates, for the proposition that the PSA and Collateral Assignment Agreement supersede the Term Sheet. This argument is contrary to the face of the documents themselves and this Court will not consider extrinsic evidence as grounds to *162modify the express and unambiguous terms of the contracts.
b. Whether the Phrase “IP Assets” Sufficiently Describes PM’s Non-Patent Intellectual Property to Permit the Security Interest to Attach.
Pursuant to Texas UCC § 9.108
(a) Except as otherwise provided in Subsections (c), ... a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.
(b) Except as otherwise provided in Subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by: (1) specific listing; (2) category; (3) except as otherwise provided in Subsection (e), a type of collateral defined in this title; (4) quantity; (5) computational or alloca-tional formula or procedure; or (6) except as otherwise provided in Subsection
(c), any other method, if the identity of the collateral is objectively determinable.
(c) A description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” or using words of similar import does not reasonably identify the collateral.
Tex. Bus. & Com.Code § 9.108. The purpose of requiring a description of collateral in a security agreement is evidentiary. Id. at cmt. 2. “The test of sufficiency under this section ... is that the description does the job assigned to it: make possible the identification of the collateral described.” Id. The description need not be in exact detail or serial number. Id.
Further, pursuant to Texas UCC § 9.102(a)(42), “general intangible” means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.15 Id. at § 9.102(a)(42). The term “general intangibles” in a secured transaction acts as a “catch-all” and brings under Article 9 miscellaneous types of contractual rights and other personal property that are used or normally may be used as commercial security. In re Barr, 180 B.R. 156, 158 (Bankr.N.D.Tex.1995).
Although it would have been preferable for the parties to use the defined term “general intangibles” in the security documents, failure to do so is not fatal to CERx’s argument on this point. This Court concludes that, because the broader “catch-all” of general intangibles would have been a statutorily sufficient collateral description, the subset of general intangibles referred to as intellectual property assets (IP assets) is also sufficient “to do the job assigned to it.” See Tex. Bus. Com.Code § 9.108 cmt. 2. Therefore, this Court holds, as a matter of law, that PM granted CERx a security interest in its IP Assets and that such interest attached to the IP Assets in accordance with the applicable provisions of the Texas UCC.
c. Whether CERx Properly Perfected its Security Interest in PM’s IP Assets.
Texas UCC § 9.502 states that a financing statement is sufficient only if it (1) provides the name of the debtor, (2) provides the name of the secured party or a representative of the secured party, and *163(3) indicates the collateral covered by the financing statement. Tex. Bus. & Com.Code § 9.502. Pursuant to Texas UCC § 9.504, a financing statement sufficiently describes the collateral that it covers if it provides either a description of the collateral pursuant to section 9.108 (regarding financing statements) or an indication that the financing statement covers all assets or all personal property. Id. at § 9.108.
On June 27, 2011, CERx filed its UCC-1 financing statement with the Texas Secretary of State that contained the following information:
Debtor: Providers Meds, LP
Secured Party: CERx Pharmacy Partners, LP
This FINANCING STATEMENT covers the following collateral: U.S. Provisional Patent Application Serial No. 61/323,125, filed April 12, 2010, U.S. Patent Application Serial No. 13/085,298, filed April 12, 2011, PCT Application No. PCT/US/2011/032150, filed April 12, 2011, each titled “On Site Prescription Management System and Methods for Health care Facilities,” and all continuing patent applications (including, without limitation, continuation, continuation-in-part and divisional applications), reissue applications, corresponding rights to patent and all other intellectual property protection of every kind (including, without limitation, all patent applications, industrial models, invention registrations) in all countries of the world, and all patents, registrations, and certificates issuing therefrom (collectively, the “Patent Applications”);
(b) Any contract rights in, to or under the Patent Applications;
Together with all Proceeds, products, offspring, rents, issues, right to recover past damages for infringement, profits and returns of and from any of the foregoing.
UCC-1 at p. 1; Defendants’ App. at 15. This language notably mirrors the language in the PSA, but does not contain the broader “IP assets” language contained in the Term Sheet.
CERx correctly points out that the standard for evaluating a collateral description in a financing statement is more liberal than that of judging a collateral description in a security agreement, as the former “need only be sufficient to put a third party on notice that there may be a security interest in the debtor’s property ... [t]he third party must then make inquiry to discover the complete nature of the agreement between the debtor and his creditor.” CERx Supplemental Brief af ¶ 28 (citing Villa v. Alvarado State Bank, 611 S.W.2d 483, 486-87 (Tex.Civ.App.Waco, 1981); Crow-Southland v. North Ft. Worth Bank., 838 S.W.2d 720, 723-24 (Tex.App.-Dallas 1992) (collateral description in financing statement does not serve to identify the collateral and define the property that the creditor may claim, it simply warns others of the prior security interest)). For example, while the term “all the debtor’s assets” is statutorily insufficient in a security agreement, Tex. Bus. & Com. Code § 9.108(c), such a description is sufficient in a financing statement, Id. at § 9.504(2).
CERx cites to various cases as analogies as to why the term “all other intellectual property” would put a reasonable third party on inquiry notice regarding CERx’s alleged interest in PM’s IP Assets. If that is what the UCC-1 said, this Court would agree. However, CERx specifically chose language much more limiting than “all other intellectual property.” Further, the Court finds CERx’s reasoning on this point attenuated:
The present case is like Crow-South-land in that our words “all other intel*164lectual property” either (a) were alone sufficient or (b) would have put a reasonable person on notice to inquire about what they meant in that long sentence. As discussed above, a third party need only ask what that sentence would mean if the words “all other intellectual property” were omitted to ask why they are there and, once included, what they mean. That inquiry would have led to a dictionary to look up the meaning of “intellectual property” or to the Term Sheet or both. Moreover, Crow-South-land also recognizes, consistent with Texas law, that the phrase “including, but not limited to” is expansive and not limiting. See id. The court reasoned that those words in the security agreement were expansive, not limiting, and thus merely referred to a non-exclusive example of the broader description.
Plaintiffs Supplemental Brief at ¶ 31.
For the reasons given in this Court’s prior analysis regarding the collateral description contained in the PSA, see supra at pp. 154-55, the language in the UCC-1 cannot be read to give inquiry notice that CERx claims an interest in “all other intellectual property,” for that is simply not what the UCC-1 says or implies. Rather, CERx specifically chose to limit the language’s application to patent and patent-related rights. The collateral description chosen by CERx makes no mention of “all the Debtor’s assets,” “all IP assets,” “copyrights,” “trademarks,” “software,” “source code,” or other non-patent related assets. Further, CERx goes on to title its collateral package the “Patent Applications.” Although what parties in privity choose to title something may not be relevant to this Court’s analysis regarding attachment; with respect to perfection, this Court concludes that a third party reviewing the UCC-1 would reasonably interpret the term “Patent Applications” to mean patent applications and patent-related rights.
Placement of the words “all other intellectual property protections” in the context chosen by CERx would not raise a red flag to a third party that “Patent Applications” allegedly includes all of PM’s intellectual property (such as trademarks, trade secrets, copyrights, source code, etc.). Although specificity is not required in a financing statement, the description must be sufficient to put a reasonable third party on inquiry notice. Tex. Bus. & Com. Code § 9.502 cmt. 2; Crow-Southland, 838 S.W.2d at 723-24.
This Court holds that, as a matter of law, the collateral description contained in the UCC1 is insufficient to give a reasonable person inquiry notice regarding the alleged nature of CERx’s security interest in PM’s IP Assets, other than the Patent Applications. However, the failure to perfect as against third parties, standing alone, did not prevent CERx from disposing of its collateral (PM’s IP Assets) at public sale on December 13, 2012, nor does it void the resulting disposition of collateral, to which we now turn.
d. Whether CERx’s Notice of Disposition was Sufficient.
As noted previously, the various notes owing by PM to CERx became due and payable according to their terms on June 30, 2012 and were not paid. On or about July 1, 2012, CERx caused a Patent Assignment Abstract of Title to be filed with the United States Patent and Trademark Office. CERx App. at 813-815. CERx then served a demand letter on PM and GFMHT on July 6, 2012, informing PM and GFMHT that the loans had matured and demanding immediate payment. CERx App. at 808-11. When such payment was not forthcoming, CERx began *165taking steps to dispose of its collateral under the Texas UCC.
Before a creditor can sell or otherwise dispose of collateral, however, the Texas UCC requires that the creditor send a “reasonable authenticated notification of disposition” to the debtor and other specified entities claiming an interest in the collateral. Tex. Bus. Com.Code § 9.611(b). Reasonable notification means notification reasonably calculated to give actual notice of the relevant fact to the person responsible for acting upon that fact. See FDIC v. Lanier, 926 F.2d 462, 465-66 (5th Cir.1991) (purpose of notification is to give debtor the opportunity to discharge debt, arrange for friendly purchaser, or to oversee sale to see that it is conducted in a commercially reasonable manner); Adcock v. First City Bank of Alice, 802 S.W.2d 805, 307 n. 3 (Tex.App.-San Antonio 1990); MBank Dallas, N.A. v. Sunbelt Mfg., Inc., 710 S.W.2d 633, 635-36 (Tex.App.-Dallas 1986). Per Texas UCC § 9.613, the notice with respect to non-consumer goods need not be precise — “[t]he contents of a notification providing substantially the information specified in [§ 9.613(1) ] are sufficient, even if the notification includes: ... (B) minor errors that are not seriously misleading.” Tex. Bus. Com.Code § 9.613(3). Further “[a] particular phrasing of the notification is not required.” Id. at § 9.613(4). Texas UCC § 9.613 sets forth a proposed form of “Notification Before Disposition of Collateral,” which appears to generally be the basis of the Notice of Disposition used by CERx. CERx.App. 861-863.
Following the above precedent, the Court concludes that, as a matter of law, the Transmittal Letter and Notice of Disposition were sufficient to give PM actual notice (1) that CERx claimed a lien on “three different patent applications and the source code and other intellectual property related [to] such applications,” and (2) of CERx’s proposed disposition of such collateral. See Lanier, 926 F.2d at 465-66. As discussed above, CERx’s lien was valid as between PM and CERx and the lien attached to the collateral. See supra pp. 152-62. The fact that the Transmittal Letter states that the lien was granted pursuant to the PSA, versus the Term Sheet, was not seriously misleading as between the parties. Reading the documents together, CERx gave PM reasonable notice that it intended to dispose of PM’s IP Assets — including the Source Code — via public sale.
The fact that CERx’s liens on certain of its collateral were not perfected as of the December 13, 2012 public sale does not affect the validity of the liens as between CERx and PM or CERx’s ability to dispose of its collateral in accordance with the Texas UCC. Notably, the relevant Texas UCC provisions speak in terms of “secured party,” which is defined as “a person in whose favor a security interest is created or provided for under a security agreement.” Tex. Bus. Com.Code § 9.102(a)(73)(A). A party need only be a “secured party” in order to exercise its rights under a security agreement. See Id. at § 9.610(a) (“After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral....;”) § 9.611(b) (“a secured party that disposes of collateral under Section 9.610 shall send ... a reasonable authenticated notification of disposition.”). Notably, these provisions do not speak in terms of a party holding a perfected security interest, but only a security interest created or provided for under a security agreement.
Further, even if the notice given to PM was somehow deficient, the remedies available under the Texas UCC are specified in § 9.625, titled “Remedies for *166Secured Party’s Failure to Comply with Chapter.” When collateral is sold in a commercially unreasonable manner, including if there are deficiencies in notice, the debt- or may recover damages or obtain protection from a deficiency judgment, but may not rescind the sale that has been made. Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419, 456 (Tex.App.-Houston [14th Dist.] 1998) (“Notwithstanding the availability of rescission prior to the adoption of the Uniform Commercial Code and in other areas of the common law, we decline to impose an equitable remedy where the Code provides an adequate legal remedy and at the same time permits additional claims giving rise to equitable remedies as long as the claims do not conflict with the provisions of the Code.”) (decided under former Article 9). Further, PM has never challenged the validity of CERx’s disposition of its collateral (PM’s IP Assets) nor alleged that the disposition was conducted in a commercially unreasonable manner.
Accordingly, the Court concludes that, as a matter of law, CERx acquired PM’s IP Assets via its disposition of collateral and public sale that occurred on December 13, 2012.
e. Whether CERx’s Security Interest in PM’s Non-Patent Related IP Assets is Subject to the Debtor’s “Strong Arm” Powers Under 11 U.S.C. § 544.
The Defendants argue that, because CERx failed to perfect its security interest in PM’s IP Assets (other than the Patent Applications), debtor PM is “entitled to judgment as a matter of law on its avoidance actions under 11 U.S.C. § 544 et seq.” Defendants’ Brief at ¶ 40.16 A review of the Court’s docket, however, reflects that PM has not filed an avoidance action against CERx, nor did the Defendants seek to avoid CERx’s unperfected lien in Defendant’s Amended Answer to Plaintiff’s Original Complaint, Affirmative Defenses, Counter-Claims, and Third Party Cross Claims [Dkt. No. 61].17
In the Fifth Circuit, however, “[l]eave to amend pleadings ‘shall be freely given when justice requires,’ ” Whitmire v. Victus Ltd., 212 F.3d 885, 889 (5th Cir.2000) (quoting Fed.R.Civ.P. 15(a)), and even if not explicitly stated, a request for leave to amend may be inferred when a party raises new claims in its response to a motion for summary judgment. See Stover v. Hattiesburg Pub. Sch. Dist., 549 F.3d 985, 989 n. 2 (5th Cir.2008) (finding it proper for the district court to consider and rule on a claim made for the first time in response to a motion for summary judgment); Sherman v. Hallbauer, 455 F.2d 1236, 1242 (5th Cir.1972) (concluding that the district court should have construed a legal theory set forth for the first time in response to a summary judgment motion as a motion to amend the pleadings and granted it as such). Accordingly, the Court will infer a request for leave to amend the Defendants’ counterclaims by virtue of the § 544 argument in the Defendants’ Brief.
Whether to grant the Defendants’ inferred request for leave to amend their counterclaims is determined by the following standard:
*167In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failures to cure deficiencies by amendments previously allowed, undue prejudice to the other party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be “freely given.”
Whitmire, 212 F.3d at 889 (quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). Here, the Court concludes that the § 544 allegations were not raised in Defendants’ Brief for purposes of delay, or with bad faith or dilatory motive. Moreover, CERx cannot claim surprise or undue prejudice with respect to the Defendants’ § 544 arguments. The Defendants raised these allegations on multiple occasions, with the Court permitting briefing on the issue at the conclusion of the June 17th hearing. Defendant’s Brief at ¶¶ 39-43, p. 24; Plaintiffs Brief at p. 20; Plaintiffs Supplemental Brief at ¶¶ 26-34. Indeed, the Court expressed its concerns regarding this issue multiple times at the June 17th hearing:
There’s a further “but” or open issue, ... because you [CERx] didn’t file a UCC-1 that is specific with respect to the documents, and therefore can’t the debtor-in-possession avoid your unper-fected lien, even assuming I can construe the security agreement and the term sheet together in such a way that you had the grant of a lien but it was unperfected on the petition date because the UCC-1 isn’t broad enough, and as a result of that you still don’t end up where you want to be, which is a lien on anything more than the patent applications, the way I’m reading the UCC-1 and the security agreement? So that’s the third or fourth open issue.”
Hr’g Trans. June 17, 2013 at 14:18-15:3; 117:23-118:16 (listing the issue as a matter for briefing and stating “[i]f it was an unperfected lien, ... was it unperfected on the date of the bankruptcy such that the Trustee can cut off your rights?”). Although CERx’s supplemental brief addressed the sufficiency of the collateral description contained in the UCC-1, it chose not to brief the avoidance issue under § 544. CERx Pharmacy Partners, LP’s Reply Regarding its Supplemental Motion for Partial Summary Judgment Brief [Dkt. No. 107], at ¶¶ 30-35 (“The UCC-1 Sufficiency Issue”). Accordingly, the Court will consider Defendants’ § 544 arguments as a motion to amend their counterclaims, which is granted.
Section 544 of the Bankruptcy Code provides that:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debt- or or any obligation incurred by the debtor that is voidable by — (1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists.
11 U.S.C. § 544(a)(1). In a Chapter 11 case, the debtor in possession holds the strong-arm powers. 11 U.S.C. § 1107(a). Under § 544, the debtor can avoid any conveyance as a hypothetical lien creditor if the conveyance is unperfected when the case begins. In re Casbeer, 793 F.2d 1436, 1439 (5th Cir.1986) (citing 11 U.S.C. § 544).
*168Texas law provides that an unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected. Tex. Bus. & Com.Code § 9.317(a)(2); In re Biggerstaff, 2004 WL 3209524 (Bankr.N.D.Tex.2004). Therefore, in order to maintain an interest in property senior to that held by a debtor as a hypothetical lien creditor, a creditor must possess a perfected security interest on the date the debtor files its bankruptcy petition. In re Stanton, 254 B.R. 357, 361 (Bankr.E.D.Tex.2000).
However, a debtor must claim an interest in the property in order to recover it under the strong arm clause. See Angeles Real Estate Co. v. Kerxton, 737 F.2d 416, 418-19 (4th Cir.1984) (trustee unable to avoid transfer when absolute assignment had been accomplished prepetition) (analyzed under Bankruptcy Act); Carlson v. Southwest Mobile Homes (In re Melvin), 64 B.R. 104, 106-07 (Bankr.W.D.Mo.1986) (to recover property as lien creditor, trustee must claim title through debtors); In re Armstrong, 56 B.R. 781, 785 (W.D.Tenn.1986) (“The trustee’s status as a hypothetical lien creditor under § 544(a) extends only to property included in the estate, as determined by § 541”); In re Northern Acres, Inc., 52 B.R. 641, 648 (Bankr.Mich.1985) (“even though the properties held by the debtor in possession are subject to unperfected liens, the debtor in possession may not use the lien avoidance powers of § 544(a) to set them aside because, on the facts of this case, the properties were not property of the estate as of the commencement of the case.”). Because CERx’s public sale of the IP Assets occurred on December 13, 2012, prior to the commencement of PM’s bankruptcy case, and CERx purchased the IP Assets at the public sale, the IP Assets did not become property of the PM bankruptcy estate. Thus, as a matter of law, the Court concludes that the Chapter 7 trustee of the PM bankruptcy estate may not avail herself of the strong-arm powers of § 544 with respect to the IP Assets that were subject to CERx’s prepetition public sale.
III. CONCLUSION
Based upon the summary judgment record before it, the Court hereby concludes that:
A. Pursuant to the May 6 Loan Documents, PM granted CERx a security interest in all of its IP Assets.
B. The security interest granted by PM to CERx pursuant to the May 6 Loan Documents attached to PM’s IP Assets and was enforceable by CERx against PM pursuant to Texas UCC § 9.203.
C. Although CERx’s lien in PM’s IP Assets attached, CERx failed to perfect its liens in PM’s IP Assets other than the Patent Applications.
D. In accordance with the Transmittal Letter and Notice of Disposition, CERx disposed of all of PM’s IP Assets at the December 13, 2012 public sale.
E. Due to the December 13, 2012 public sale of PM’s IP Assets, the Chapter 7 trustee of the PM bankruptcy estate may not avoid CERx’s liens on the IP Assets pursuant to the strong-arm powers of 11 U.S.C. § 544.
F. Other than with respect to the Patent Applications, there is a material issue of fact regarding what assets comprised PM’s IP Assets that were subject to the December 13, 2012 public sale, including whether or not the Source Code was owned by PM at the time of that sale.
*169An order and/or judgment reflecting this ruling shall follow. The Court hereby directs the parties’ counsel to confer with each other and attempt to submit an agreed order and/or judgment consistent with this ruling to the Court within ten days of the entry of this Memorandum Opinion on the Court’s docket. If no agreement can be reached, each party shall submit its own proposed order and/or judgment on or before the tenth day after entry of this Memorandum Opinion on the Court’s docket, along with an explanation of why the other side’s proposed order and/or judgment is improper.
. The following Defendants are currently debtors in bankruptcy proceedings pending before this Court: OnSiteRx, Inc. (13-30267), ProvideRx of Grapevine, LLC (12-38039), Provider Technologies, Inc. (13-33020), Provider Meds, LP (13-30678), ProvideRx of Midland, LLC (13-33016), ProvideRx of Waco, LLC (13-33017), ProvideRx of San Antonio LLC (13-33018), and W PA OnSiteRx, LLC (13-32615). The debtor-Defendants’ bankruptcy cases were converted from Chapter 11 to Chapter 7 on or about August 30, 2013. A Chapter 7 trustee was subsequently appointed in each case.
. Although OnSiteRx, Inc. (“OnSiteRx”) is a debtor-Defendant, it is not a party to the Defendants' Partial Motion for Summary Judgment.
. In their pleadings, the Defendants refer to GFMHT as "Gillum Master Family Heritage Trustee” and “Gillum Master Family Heritage Trust.” The trust's proper name appears to be “Gillum Family Master Heritage Trust.”
. Plaintiff filed the Motion for Reconsideration on September 12, 2013, and set the matter for status conference on October 25, 2013 [Dkt. No. 143]. Plaintiff later withdrew its notice of the status conference [Dkt. No. 144], *141and did not re-notice the Motion for Reconsideration until it gave notice of the January 8, 2014 hearing on December 11, 2013 [Dkt. No. 146],
. As discussed in more detail below, a genuine issue of material fact remains regarding whether PM or OnSiteRx owned the Source Code on December 13, 2012. That issue will be determined at trial.
. This Memorandum Opinion supersedes in its entirety the Original Memorandum Opin*143ion addressing the motions for partial summary judgment issued on August 2, 2013 [Dkt. No. 124],
. For purposes of clarity, the term "Patent Applications” refers to the patent applications and patent-related rights listed in the PSA, but does not include the Source Code or other non-patent related IP Assets.
. As discussed below, the Defendants also argue that the Term Sheet is not binding and should not be considered by the Court. The Court disagrees, as explained below.
. The Defendants allege that OnSiteRx owns the Source Code and provided a verbal license to PM, who thereafter provided sub-licenses to each operational pharmacy. Defendants’ Reply Brief [Dkt. No. 84] at ¶¶ 22-24, 29-33.
. In its briefing, CERx appears to meld the formal "Composite Document Rule,” which has not been adopted by the Fifth Circuit or Texas courts, and the general rules of integrated contractual construction under Texas law. Although the two principles appear to be virtual corollaries, this Court is reluctant to adopt the Composite Document Rule, instead relying on similar precedent established under Texas law. See Looney v. Nuss, 545 F.2d at 918 (determining the parties’ objective intent, as reflected in the documents, to create a security interest); Southern Rock, Inc., 711 F.2d at 685 (same); cf. In re Swersky, 1999 WL 135260, at *3 (N.D.Tex.1999) (unpublished decision) (analyzing the Illinois UCC and discussing the Composite Document Doctrine as adopted by the Seventh Circuit); but cf. In re Maddox, 92 B.R. 707 (Bankr.W.D.Tex.1988) (citing to Looney v. Nuss (In re Looney), 545 F.2d 916, 918 (5th Cir.1977) in support of integrated contractual construction that the Maddox court refers to as the “Composite Document Rule”).
. For these same reasons, the Court rejects CERx's argument that the Patent Assignment, which contains language identical to the PSA, worked to transfer any rights PM may have held in the Source Code to CERx upon PM’s default under the May 6 Loan Documents on June 30, 2012.
. As relevant here, the Texas UCC defines "debtor” as "(A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor_" Tex. Bus. & Com.Code § 9.102(a)(28).
. The Court notes that, other than with respect to the Patent Applications, there is no *160evidence in the summary judgment record from which this Court can determine exactly what assets comprised PM's IP Assets as of December 13, 2012. CERx App. at 126-136, 812; Defendants' App. at 2-3. That issue remains for trial.
. Collateral Assignment of License Agreement [Dkt. No. 104-2],
. Software “means a computer program and any supporting information provided in connection with a transaction relating to the program. The term does not include a computer program that is included in the definition of ‘goods.’” Id. at § 9.102(a)(76).
. Although Defendants refer to § 544 "et seq.," they fail to address any alleged Chapter 5 cause of action other than avoidance of an unperfected security interest pursuant to the “strong arm” powers of 11 U.S.C. § 544.
. The Court notes that the Chapter 7 trustee of the PM bankruptcy estate has filed Trustee Reed’s Amended Motion for Leave to File Amended Answer, Counterclaim, Cross-Claim and Third Party Claim, and Brief in Support [Dkt. No. 153], to which CERx has objected [Dkt. No. 155]. That matter, however, is not currently before the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496870/ | ORDER DENYING DEFENDANT’S MOTION TO DISMISS THE ADVERSARY PROCEEDING COMPLAINT
C. KATHRYN PRESTON, Bankruptcy Judge.
This cause came on for consideration of Defendant’s Motion to Dismiss the Adver*221sary Proceeding Complaint (Doc. 10) (“Motion”), the Plaintiffs’ Response in Opposition (Doc. 12) (“Response”), and Defendant’s Reply Brief in Support of its Motion (Doc. 13) (“Reply”).
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05-02, entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
I. Standard of Review
When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) 1, the facts articulated in the complaint must be taken in a light most favorable to the plaintiff and accepted as true. Bovee v. Coopers & Lybrand CPA, 272 F.3d 356, 360-61 (6th Cir.2001). A motion to dismiss should be granted if the complaint lacks some factual context sufficient to state a claim to relief that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligations to provide the ‘grounds’ of his ‘entitlement to relief requires 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. The Court need not accept as true legal conclusions or unwarranted factual inferences. Bovee, 272 F.3d at 361. Therefore, the Plaintiff must allege facts (which should be taken as true) sufficient to suggest that a breach of duty or obligation occurred. Bell Atlantic Corp., 550 U.S. at 555-56, 127 S.Ct. 1955.
Typically, the Court is restricted to the pleadings when deciding a motion to dismiss attacking the legal sufficiency of the allegations contained in the complaint. However, in addition to the allegations of the complaint, the Court may also consider other materials integral to the complaint, public records, and other materials appropriate for judicial notice. Bovee, 272 F.3d at 360-61; New England Health Care Employees Pension Fund v. Ernst & Young, LLP, 336 F.3d 495, 501 (6th Cir.2003), cert. den’d, 540 U.S. 1183, 124 S.Ct. 1424, 158 L.Ed.2d 87 (2004); Wyser-Pratte Management Co., Inc. v. Telxon Corp., 413 F.3d 553, 560 (6th Cir.2005).
II. Factual and Procedural Background
On or around November 24, 2003, Plaintiffs executed a note and mortgage (“Mortgage Loan”) with ABN AMRO Mortgage Group, Inc. (“ABN AMRO”). On April 30, 2007, Plaintiffs filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Plaintiffs’ Chapter 13 plan was confirmed on December 3, 2007, and pursuant to the confirmed plan, payments on the Mortgage Loan were to be made by “conduit” through the Chapter 13 Trustee. Shortly thereafter, Defendant CitiMortgage, Inc. (“CitiMortgage”) became successor in interest by merger to ABN AMRO, and began servicing the Mortgage Loan. On December 17, 2012, the Court entered an order deeming the Mortgage Loan current (“Deem Mortgage Current Order”). The Deem Mortgage Current Order directed CitiMortgage to adjust the Mortgage Loan balance to reflect the balance delineated in the original amortization schedule as of *222November 2012. It farther ordered that any amounts in excess of that balance would be discharged. On December 27, 2012, the Court entered an order granting Plaintiffs a discharge pursuant to 11 U.S.C. § 1328(a), and the bankruptcy case was closed on March 26, 2013. Upon Plaintiffs’ motion, the Court reopened Plaintiffs’ bankruptcy case on July 5, 2013. On August 19, 2013, Plaintiffs, purportedly on behalf of themselves and others similarly situated, filed their Class Action Complaint (“Complaint”), thereby commencing this adversary proceeding.
The Complaint alleges that CitiMort-gage has violated the discharge injunction imposed by § 524 of the Bankruptcy Code. Specifically, Plaintiffs allege that on February 22, 2013, CitiMortgage’s collection department sent a letter to Plaintiffs attempting to collect “delinquency expenses” in the amount of $427.61, which were posted to Plaintiffs’ Mortgage Loan account during the pendency of their bankruptcy. According to the Complaint, Plaintiff Mr. Kilbourne contacted a representative of CitiMortgage and explained that any such fees had been discharged, and therefore, CitiMortgage was not permitted to collect on the fees. However, the representative responded that CitiMortgage was within its rights to collect on the fees. On March 28, 2013, counsel for Plaintiffs sent a letter requesting that CitiMortgage cease and desist with any further collection of the fees. CitiMortgage did not respond to the letter. On May 22, 2013, Plaintiffs refinanced the Mortgage Loan with another bank. The payoff statement provided by CitiMortgage indicated a June 1, 2013 Mortgage Loan payoff balance of $121,524, which included delinquency expenses of $1,612.50 and late charges of $427.61. Nonetheless, the Plaintiffs went forward with the refinancing.
III. Discussion
The Motion seeks dismissal of the Complaint on procedural grounds, asserting that Plaintiffs fail to state a claim upon which relief can be granted because there is no private right of action for violations of the discharge injunction under § 524. Therefore, CitiMortgage argues, this matter is not permitted to proceed as an adversary proceeding, but rather must be brought by motion as a contested matter in the main bankruptcy case.
A. No Private Right of Action.
In support of its position, CitiMortgage cites Pertuso v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir.2000). In Pertuso, discharged Chapter 7 debtors filed a complaint in district court alleging that Ford Motor Credit violated the discharge injunction. The Sixth Circuit Court of Appeals affirmed the district court’s dismissal of the complaint, holding that 11 U.S.C. § 524 does not create a private right of action. Id. at 422-23. The Court stated, “[t]he obvious purpose [of § 524] is to enjoin the proscribed conduct — and the traditional remedy for violation of an injunction lies in contempt proceedings, not in a lawsuit such as this one.” Id. at 421. Therefore, the proper mechanism for redressing a violation of the discharge injunction is a contempt proceeding initiated in the bankruptcy court that issued the discharge. See Baker by Thomas v. Gen. Motors Corp., 522 U.S. 222, 236, 118 S.Ct. 657, 139 L.Ed.2d 580 (1998) (“Sanctions for violations of an injunction ... are generally administered by the court that issued the injunction.”).
This Court, however, does not interpret the Sixth Circuit Court of Appeal’s holding to stand for the proposition that an action for violation of the discharge injunction may only be brought by motion; Pertuso only dictates that a contempt pro*223ceeding be initiated in the bankruptcy court which issued the discharge. Accordingly, commencement of an adversary proceeding to redress a violation of the discharge injunction may be proper, if the adversary proceeding is initiated in the court that issued the discharge order. As Plaintiffs’ discharge was issued by this Court, Pertuso does not command that the Complaint be dismissed.
B. Proper Procedure.
Federal Rule of Bankruptcy Procedure 9020 provides that “Rule 9014 governs a motion for an order of contempt made by the United States trustee or a party in interest.” Fed. R. Bankr.P. 9020. Rule 9014 states that “[i]n a contested matter not otherwise governed by these rules, relief shall be requested by motion. ...” Fed. R. Bankr.P. 9014. In turn, Rule 7001 lists the types of proceedings that are adversary proceedings, and therefore, are not governed by Rule 9014. Specifically, Rule 7001(1) provides that “a proceeding to recover money or property” is an adversary proceeding. Fed. R. Bankr.P. 7001(1).
In the instant case, the Complaint is sufficient to assert a cause of action for the recovery of money or property. Although Plaintiffs only specifically request an order sanctioning CitiMortgage for contempt and for payment of attorney fees and costs, the final paragraph of the Complaint requests “any other relief that the Court determines is just and equitable under the circumstances.” Complaint at 10. As discussed above, the Complaint alleges that CitiMortgage not only attempted to collect discharged fees and expenses, but that CitiMortgage actually collected such fees and expenses when Plaintiffs refinanced the Mortgage Loan. Accordingly, the Court finds the Complaint sufficient to state a claim for the recovery of the discharged fees and expenses, which, pursuant to Federal Rule of Bankruptcy Procedure 7001, is an adversary proceeding. Further, as Plaintiffs’ request for an order of contempt and for sanctions arises from the same facts and circumstances as the cause of action to recover the discharged fees and expenses paid to CitiMortgage, the Court will not require Plaintiffs to seek separate redress by motion filed in the bankruptcy case. Such would be a waste of judicial resources and cause the parties to incur additional and unnecessary attorney fees and costs.
The Court acknowledges that, pursuant to Federal Rule of Bankruptcy Procedure 9020 and 9014, the traditional way to bring an action for contempt is by motion. “However, courts routinely hear contempt actions brought as adversary proceedings.” Motichko v. Premium Asset Recovery Corp. (In re Motichko), 395 B.R. 25, 32 (Bankr.N.D.Ohio 2008). See also, Brannan v. Wells Fargo Home Mortgage, Inc. (In re Brannan), 485 B.R. 443, 455 (Bankr.S.D.Ala.2013); Palazzola v. City of Toledo (In re Palazzola), 2011 WL 3667624, *11 (Bankr.N.D.Ohio 2011); Beck v. Gold Key Lease, Inc. (In re Beck), 272 B.R. 112, 130 n. 25 (Bankr.E.D.Pa.2002). The court in Motichko further stated:
To dismiss on procedural grounds alone would be to elevate form over substance. This is particularly true where — as here — an adversary proceeding provides more procedural protection for the defendant than does a contested matter brought by way of motion. Furthermore, “even when filed as a motion, a contempt action can be handled in the same procedural manner as an adversary proceeding should a court so choose.”
Motichko, 395 B.R. at 33 (quoting Beck, 272 B.R. at 130). This Court agrees with the Motichko court. Therefore, even if Plaintiffs’ Complaint did not allege a cause *224of action for recovery of money or property, thereby classifying it as an adversary proceeding under Federal Rule of Bankruptcy Procedure 7001, to dismiss the on Complaint procedural grounds alone would improperly elevate form over substance.
IY. Conclusion
In accordance with the foregoing, the Court finds that Plaintiffs’ action was properly filed as an adversary proceeding, and that Plaintiffs have alleged sufficient facts within the Complaint to assert a claim for violation of the discharge injunction and the recovery of money and/or property. Therefore, it is
ORDERED AND ADJUDGED that Defendant’s Motion to Dismiss the Adversary Proceeding Complaint (Doc. 10) is DENIED. It is further
ORDERED AND ADJUDGED that within 14 days from the date of entry of this Order, Defendant shall file and serve its answer to the Complaint.
IT IS SO ORDERED.
. Fed.R.Civ.P. 12 is applicable to adversary proceedings pursuant to Fed. R. Bankr.P. 7012. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496871/ | DECISION DETERMINING MORTGAGE LIEN IS SUBJECT TO AVOIDANCE PURSUANT TO 11 U.S.C. § 544(a)(3)
LAWRENCE S. WALTER, Bankruptcy Judge.
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 157(b)(2) and 1334 and the standing General Order of Reference in this District.
This matter is before the court on the amended complaint [Adv. Doc. 53] filed by Plaintiffs Chapter 13 Trustee Jeff Kellner and Debtor Paul Geraci (“Plaintiffs”) to: 1) avoid and have released a mortgage on *226Debtor’s one-half interest in real property-constituting the Debtor’s personal residence known by the street address 622 Franklin Avenue, Englewood, Ohio 45322; and 2) bar the mortgage holder from filing an unsecured proof of claim subsequent to avoidance. The mortgage is held by Defendant Flagstar Bank (“Flagstar”)1 which answered the amended complaint and filed a cross-claim against Co-defendant Shelly Geraci, the Debtor’s non-filing wife [Adv. Doc. 54]. The cross-claim was dismissed by the court [Adv. Doc. 75] and, as of the trial date, no claims against Shelly Geraci remained. Consequently, the avoidance dispute is limited to whether the mortgage may be avoided as to the Debtor’s one-half interest in the real property at issue.
The trial was held on January 29, 2014. After review of the testimony of the two witnesses, the exhibits, stipulations, briefs, and arguments of counsel, the court determines that Flagstar’s mortgage is subject to avoidance as to Debtor Paul Geraci’s one-half interest in the real property at issue and the avoided lien will be preserved for the benefit of the estate. The court further determines that upon avoidance, Defendant Flagstar is permitted to file a timely unsecured claim pursuant to Fed. R. Bankr.P. 3002(c)(3). The court will now present a more detailed factual and legal basis for these determinations.
FACTUAL FINDINGS
The following are the findings of fact from the parties’ stipulations [Adv. Doc. 90], the exhibits admitted at the trial, and the testimony of the witnesses.
Debtor Paul A. Geraci (“Debtor”) and his non-filing wife, Shelly L. Geraci, acquired title to property known as 622 Franklin Avenue, Englewood, Ohio 45322 (“622 Franklin Property”) by Special/Limited Warranty Deed filed on February 13, 2007 (“Deed”) [Def. Ex. A2]. The Debtor and his non-filing wife each own an undivided one-half interest in the property. The Deed contains a description of the property by street address, parcel number, and legal description which is stated in the Deed as follows:
Situate in the City of Union, County of Montgomery and State of Ohio and being Lot numbered 818 in the Springview Acres Subdivision No. 7, as recorded in Plat Book “69”, Page 20 of the Plat Records of Montgomery County Ohio.
[Def. Ex. A]. The parties agree that the legal description, parcel number, and street address as listed in the Deed are correct identifiers for the 622 Franklin Property.
On March 12, 2008, the Debtor voluntarily executed a Note in the amount of $99,216.00 payable to First Ohio Banc & Lending, Inc. (“Note”) [Def. Ex. B], On that same date, the Debtor and Shelly Geraci voluntarily executed an Open-End Mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”) as nomi*227nee for First Ohio Banc & Lending, Inc. in the principal amount of $99,216.00 (“Mortgage”) [Def. Ex. C]. The Mortgage was filed in Instrument No. Mort 08-020905 of the Montgomery County Records on March 25, 2008. This Mortgage creates the hen which Plaintiffs assert is avoidable.
The front page of the Mortgage instrument contains a reference to the lender obtaining a security interest in the “following described property” in Montgomery County, Ohio underneath which it states:
LEGAL DESCRIPTION ATTACHED HERETO AND MADE A PART HEREOF
APN #: M58-00201-0034
which has the address of 622 FRANKLIN AVE, ENGLEWOOD, Ohio 45322-3213 (“Property Address”)
The street address and the tax identifier provided on the front page of the mortgage are correct identifiers for the 622 Franklin Property owned by the Geracis and may be cross-referenced against the same identifiers in the Deed. However, the “Legal Description” referred to on the front page and attached to the Mortgage as Exhibit A, contains entirely incorrect information. More specifically, the legal description attached to the Mortgage states as follows:
Exhibit A
SITUATED IN THE CITY OF CEN-TERVILLE, COUNTY OF MONTGOMERY, STATE OF OHIO AND BEING LOT NUMBERED TWENTY (20) OF ROSE ESTATES, SECTION 1 AS RECORDED IN PLAT BOOK “90”, PAGE 83 OF THE PLAT RECORDS OF MONTGOMERY COUNTY, OHIO PARCEL ID NO: 068-011-09-0003
Commonly known as 210 Marsha Jeanne Way Dayton, OH 45458. However, by showing this address no additional coverage is provided.
Both parties agree that the entirety of the language in Exhibit A, including the legal description, Parcel ID number, and street address, is for a different parcel of real property, one referred to for purposes of this decision as the Marsha Jeanne Way Property. The Geracis have never had an ownership interest in the Marsha Jeanne Way Property described in Exhibit A.
At the trial, Debtor’s counsel called Robert Ross to testify regarding how the defects in the mortgage would impact a title search for a potential purchaser of the 622 Franklin Property. Mr. Ross is a local attorney who has engaged in real estate title work for about 25 years3 for both residential and commercial properties. Mr. Ross testified that when conducting a title search, he would research various public records including those found in the Recorder’s Office as well as Auditor and Treasurer records to discover any encumbrances or other interests against the property to be purchased.
How the search would begin depends on what information is provided to Mr. Ross. If Mr. Ross has the deed, he would use the legal description of the property contained therein. On the other hand, with the names of the current owners or property address, he would use auditor and treasurer records to obtain a legal description for the property at issue. Mr. Ross stated that the legal description describes a piece of property by its boundaries as contained in county records and is a more definitive identifier of a piece of property than a street address. Furthermore, the Recorder’s Office indexes properties by their legal description. Consequently, the legal de*228scription is a more useful tool in a title search than a street address which is just a common label that does not describe the property and is often unreliable. Likewise, the parcel ID number can be a useful tool to find a legal description but once the legal description is found, it is that along with the owner’s name that is used to review the chain of title and look at instruments contained in the chain.
Once a legal description is obtained, it would be used in reviewing the records from the Recorder’s Office. Mr. Ross was provided a copy of the Montgomery County Recorder’s Index as of April 2, 2013 for the names Paul Geraci and Paul A. Geraci (“Index”) [Def. Ex. F]. Mr. Ross indicated that a title examiner would use this Index to determine what properties are currently owned or were owned by the Debtor and their chain of title. The Index covers a recording period from 1995 through April 2, 2013.
The Index has a total of twenty-one items or instruments under the names Paul Geraci and Paul A. Geraci. For each, whether it be a deed, mortgage, release of mortgage or other instrument, the Index indicates the property that the instrument relates to by way of legal description. Each of the twenty-one instruments relates to one of three different legal descriptions: 1) Bayberry Trail S03A (LOTS 0-0) Lot/Unit: 121 (“Bayberry Trail”); 2) Springview Acres 07 (LOTS 780-942) Lot/ Unit: 818 (“Springview Acres”); and 3) Rose Estates SOI (LOTS 1-26) Lot/Unit: 20 (“Rose Estates”) [Def. Ex. F]. The parties agree that the “Springview Acres” legal description is the legal description of the 622 Franklin Property. The “Rose Estates” legal description, on the other hand, describes the Marsha Jeanne Way property that is not owned by the Debtor. The “Bayberry Trail” legal description describes a separate parcel of property that the Debtor owned on Coralberry Drive and was in foreclosure at the time the bankruptcy petition was filed.
Mr. Ross testified that the legal description on the Deed for the 622 Franklin Property matches the “Springview Acres” legal description on the Index. Consequently, in doing a title search for a potential purchaser of the 622 Franklin Property using the legal description for that property from the Deed, Mr. Ross testified that he would review only those instruments shown on the Index to relate to the “Springview Acres” legal description. He would not look at the instruments associated with the “Bayberry Trail” or “Rose Estates” legal descriptions because those instruments relate to entirely different parcels of property than the one being considered for purchase. Mr. Ross testified that unless there was some clear error or suspicious item on the Index, he would not examine instruments that were outside the chain of title for the property he was researching.
In his review of the Index, Mr. Ross testified that Item # 11 is the Deed related to the “Springview Acres” property and is, in fact, the Deed by which the Debtor took title to the 622 Franklin Property in February of 2007. This would be the starting point for researching encumbrances on the property. The Index indicates three mortgages on the “Springview Acres” property which are Items # 10, # 12 and # 13.4 The Index indicates that all three mortgages have been released via instruments listed as Items # 6, # 7 and # 9. These are the only items on the Index related to the “Springview Acres” *229legal description. Consequently, if Mr. Ross were conducting a title search of the 622 Franklin Property for a potential purchaser, he would indicate that all mortgages on the property had been released and no mortgage liens currently existed on the property.
The Mortgage that Plaintiffs want to avoid is listed on the Index as Item # 8. However, it is improperly indexed by the “Rose Estates” legal description which describes the Marsha Jean Way property. Because it is not indexed by the “Spring-view Acres” legal description, Mr. Ross testified that the Mortgage does not fall in the chain of title for the 622 Franklin Property and he would not have known to review it during a title search nor identify it as an encumbrance for a potential purchaser of the 622 Franklin Property.5
Mr. Ross further testified that there were no suspicious errors or other red flags on the Index itself that would lead him to review instruments outside the chain of title for the 622 Franklin Property. For example, he noted that some instruments only contain a street address and do not contain a legal description of the property to which they relate. He noted that the lack of a legal description might be indicated in the records by a blank area where the legal description should be. In such circumstances, Mr. Ross testified that he would review the instrument to determine the property to which the instrument related. No such blanks existed with respect to the Paul Geraci Index.
LEGAL ANALYSIS
A. Section 544 Avoidance Powers and “Bona Fide Purchaser” Status
Joint Plaintiffs,6 the Debtor and Chapter 13 Trustee, seek to avoid the Mortgage pursuant to 11 U.S.C. § 544(a)(3) because of the defective legal description the Mortgage contains. Sec*230tion 544(a) gives the trustee certain “strong arm” powers that include the ability to set aside a mortgage that a hypothetical bona fide purchaser of that property on the date of the bankruptcy filing would be able to avoid under state law. 11 U.S.C. § 544(a)(3); Argent Mortg. Co. v. Drown (In re Bunn), 578 F.3d 487, 488 (6th Cir.2009). Pursuant to Ohio law, an encumbrance is unenforceable against a bona fide purchaser who takes in good faith, for value, and without actual or constructive knowledge of any defect. Mason v. Ocwen Loan Servicing, LLC (In re Votaw), 2012 WL 529242, at *5 (Bankr.N.D.Ohio Feb. 17, 2012). Because § 544 gives the trustee bona fide purchaser status regardless of any actual knowledge that the trustee may have, constructive knowledge is the only relevant inquiry in a § 544 avoidance action. 11 U.S.C. § 544(a); Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1027 (6th Cir.2001); Bank of New York v. Sheeley (In re Sheeley), 2012 WL 8969064, at *8 (Bankr.S.D.Ohio April 2, 2012).
“Ohio has long abided by the principal that a purchaser of real property is charged with constructive notice of all prior conveyances recorded in his chain of title.” Columbia Gas Transm. Corp. v. Bennett, 71 Ohio App.3d 307, 594 N.E.2d 1, 5 (1990). Unlike actual notice, constructive notice is imputed notice which exists by reason of the proper filing and recording of a conveying instrument. Id. at 6. For purposes of constructive notice, Ohio law assumes that a purchaser of residential property has diligently and thoroughly examined the chain of title via relevant title indexes to discover the existence of adverse claims or encumbrances. Bunn, 578 F.3d at 489; Columbia Gas, 594 N.E.2d at 6. Consequently, the failure to discover an instrument within the chain of title, even though improperly recorded by a county recorder, will not negate constructive notice. Columbia Gas, 594 N.E.2d at 6 (citing Roebuck v. Columbia Gas Transm. Corp., 57 Ohio App.2d 217, 386 N.E.2d 1363 (1977)).
Nonetheless, a purchaser’s obligation to examine the instruments is limited to those that could reasonably be expected to exist in the record chain of title. Id. The purchaser “is not required to exercise a higher degree of diligence and undertake an exhaustive search of the records to discover the most remote adverse claims or encumbrances.” Id. (citing Spring Lakes Ltd. v. O.F.M. Co., 12 Ohio St.3d 333, 467 N.E.2d 537, 540 (1984)). “To impute to a purchaser constructive notice of an instrument outside the chain of title merely because it was recorded is ‘wholly inconsistent with equitable principals’ ” and is, further, inconsistent with the purpose of recording statutes which is to put third parties, like lien holders and potential purchasers, on notice. Id. (further citations omitted); Fifth Third Mortg. Co. v. Brown, 970 N.E.2d 1183, 1186 (Ohio Ct.App.2012); Terra Vista Estates, Inc. v. Moriarty, 1992 WL 292267, at *2 (Ohio Ct.App. Oct. 15, 1992) (concluding that the simple act of recording a lien does not put a purchaser on constructive notice if the record is outside the chain of title). Consequently, where an instrument improperly identifies the property burdened and that erroneous description causes the instrument to be recorded outside the chain of title through no fault of the recorder,7 a subsequent bona fide purchaser cannot be charged with constructive notice of the conveyance. Columbia Gas, 594 N.E.2d at *2317. See also Menninger v. Hawthorne (In re Hawthorne), 2013 Bankr.LEXIS 1567, at *9 (Bankr.S.D. Ohio April 1, 2013).
The court must next determine whether the errors in the Mortgage caused it to be recorded outside the chain of title in a manner that would not charge a subsequent bona fide purchaser with constructive notice of the encumbrance. A bankruptcy judge from this district addressed the issue and almost identical factual scenario and concluded that constructive notice was lacking and the mortgage was avoidable. In Menninger v. Hawthorne (In re Hawthorne), a trustee attempted to avoid a mortgage that encumbered joint debtors’ property when the mortgage referenced a correct street address and parcel number for the debtors’ property, but also provided an incorrect legal description for a parcel of property that the debtors had never owned. 2013 Bankr.LEXIS 1567, at *3. Judge Hopkins noted that the mortgage was recorded, but the only descriptor of the encumbered property used in the recorder’s index was the erroneous legal description describing the incorrect parcel of property. Id. at *10. While the mortgage referred to the correct address and parcel number for the debtors’ property, neither of these descriptors was referenced in the recorder’s index. Id. Thus, the defective legal description caused the recorder, through no fault of its own,8 to erroneously record the mortgage outside the chain of title. Id. Judge Hopkins concluded that as a matter of Ohio law, the trustee could not be charged with constructive notice of the misindexed mortgage and it was subject to avoidance pursuant to 11 U.S.C. § 544(a)(3). Id. at *14.
Like the mortgage in Hawthorne, the Mortgage at issue in this case contains two correct identifiers for the 622 Franklin Property on the front page, but the information in the attached legal description is entirely incorrect and describes a parcel of property at Marsha Jeanne Way that the Debtor has never owned. When the Mortgage was recorded, it was the legal description that was used for indexing purposes to indicate the property encumbered by the Mortgage. Consequently, the incorrect legal description caused the Recorder’s Office, through no fault of its own, to index the Mortgage outside the chain of title for the 622 Franklin Property. Mr. Ross testified that because of the misin-dexing, the Mortgage would not be discovered during a title search for a potential purchaser of the 622 Franklin Property. Consequently, this court reaches the same conclusion as Judge Hopkins in Hawthorne: the bankruptcy trustee, in the shoes of a bona fide purchaser, cannot be charged with constructive notice of a mortgage misindexed because of a defective legal description. Consequently, Flags-tar’s mortgage is avoidable pursuant to 11 U.S.C. § 544(a)(3).
Nonetheless, Flagstar argues that the Sixth Circuit’s decision in Bunn is controlling and requires a conclusion that the mortgage provides constructive notice defeating the trustee’s avoidance powers. The court disagrees. In Bunn, the Sixth Circuit concluded that a recorded mortgage gives constructive notice even when a legal description is omitted as long as a correct informal identifier for the property, like a street address, is provided. 578 F.3d at 490. In reaching this conclusion, the Sixth Circuit noted that “Ohio mortgage law does not appear to require a precise legal description of the mortgaged property.” Id. Instead, Ohio Rev.Code § 5302.12 provides that a properly execut*232ed mortgage will have “force and effect” when “in substance” it follows a form set forth at the end of the statute requiring only a “description of land or interest in land and encumbrances, reservations, and exceptions, if any” Id. The Sixth Circuit concludes that a “reasonably prudent real estate purchaser, upon discovering that a residential lot has a mortgage that describes the lot by address but not by plat number when both the address and plat number are on the granting deed and the seller owns no other real estate in the county, is unlikely to proceed as if the lot were unencumbered.” Id. For that reason, the Sixth Circuit concluded that the trustee could not use § 544 strong arm powers to avoid a mortgage that omitted a formal legal description when a correct street address of the property is listed.9 Id.
*233The critical fact differentiating Bunn from this case is that the Bunn mortgage contained no incorrect identifier for the property encumbered, it was only missing a formal legal description of the property. As noted by Mr. Ross in his testimony, a missing legal description would not cause the instrument to be misindexed and referenced to an erroneous piece of property; instead, the lack of a legal description would most likely result in an instrument indexed to no property at all, leaving a blank area where the legal description would be. Mr. Ross indicated that, during a title search, any instrument that is discovered in the index with no reference to a specific parcel of property would be reviewed. In other words, an omitted legal description, as opposed to an incorrect one, would not result in a misindexing of the mortgage and, thus, the mortgage at issue in Bunn would likely be discovered during a title search.
The fact that the Mortgage at issue in this case contains an incorrect legal description and the error caused the mortgage to be misindexed in the records differentiates this case from Bunn so that it is not controlling. In accordance with Columbia Gas and Hawthorne, this court concludes that the Mortgage held by Flagstar fails to provide constructive notice to a hypothetical bona fide purchaser. Consequently, the Mortgage is subject to avoidance pursuant to 11 U.S.C. § 544(a)(3).
B. Proof of Claim
Because the Mortgage is avoidable, the next question that must be answered is whether Flagstar may file an unsecured proof of claim for the balance owed pursuant to the Note. Flagstar has not yet filed a proof of claim in the Debt- or’s bankruptcy case and Plaintiffs request that the court prohibit Flagstar from filing one at this late date. The Plaintiffs’ position is without merit. Federal Rule of Bankruptcy Procedure 3002(c)(3) provides:
(c) Time for filing
In a chapter 7 liquidation, chapter 12 family farmer’s debt adjustment, or chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code, except as follows:
(3) An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity’s interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed.
Fed. R. Bankr.P. 3002. Pursuant to Rule 3002(c)(3), Flagstar will have thirty (30) days after judgment is entered avoiding its mortgage lien to file an unsecured proof of claim.
CONCLUSION
The Mortgage lien against the Debtor’s one-half interest in the 622 Franklin Property is subject to avoidance by the Trustee pursuant to 11 U.S.C. § 544(a)(3) because the Mortgage instrument contains a legal description of an incorrect parcel of prop*234erty that fails to provide constructive notice to a bona fide purchaser. The avoided lien will be preserved for the benefit of the estate. A judgment to this effect will be entered contemporaneously with this decision and Flagstar will have thirty (30) days from the entry of the judgment to file a proof of claim.
SO ORDERED.
. The Debtor named three potential mortgage holders and/or servicers in the complaint: First Ohio Banc & Lending, Inc., Flagstar, and Mortgage Electronic Registration Systems, Inc. ("MERS”). Only Flagstar filed an answer asserting that it is the successor-in-interest to MERS as nominee for First Ohio Banc & Lending [See Doc. 54, Cross-claim, ¶ 8], This decision does not include a determination of whether Flagstar actually holds the note and mortgage because no evidence on that issue was presented at the trial. Consequently, should the identity of the actual mortgage holder remain subject to dispute, the parties agreed that it may be addressed in later proceedings.
. Although most of the exhibits were used and identified by both parties in their joint stipulations and at trial, the court will use Defendant Flagstar’s exhibit designations for citation purposes in this decision.
. Mr. Ross testified that he had done legal real estate work for 20 years, but also worked fer tide companies before becoming an attorney.
. Mr. Ross indicated that the listings on the Index are not necessarily in chronological order so a mortgage and release on the "Springview Acres” property is actually listed before the Deed by which Mr. Geraci acquired title to the property.
. Mr. Ross testified that assuming he was given the Mortgage at issue in this case, reviewed the contents, and saw the inconsistencies between the front page and attached legal description, he would still consider it a mortgage on the wrong property because the legal description is considered the controlling identifier of encumbered property.
. At the trial, the court addressed an issue raised by Flagstar which is whether the Plaintiff-Debtor has direct standing to avoid a mortgage lien pursuant to 11 U.S.C. § 544(a). Flagstar asserts that a debtor’s direct standing to use § 544(a) is limited and inapplicable in this case. The court agrees. Section 544(a) is "unambiguous and grants the trustee, not debtors, the powers and rights of a bona fide purchaser” to avoid a transfer of an interest in property or to defeat a mortgage. Bank of New York v. Sheeley (In re Sheeley), 2012 WL 8969064, at *12 (Bankr.S.D.Ohio April 2, 2012). However, a debtor may use § 544 powers to avoid a transfer to recapture exempt assets, but only in the limited circumstances provided in 11 U.S.C. § 522(h). One limitation on a debtor's ability to make use of these avoidance powers is that the transfer sought to be avoided may not be a voluntary transfer on the part of the debtor. 11 U.S.C. 522(g)(1)(A). Because a mortgage is a consensual or voluntary lien, a debtor cannot use § 522(h) to take on the trustee's powers to avoid a mortgage lien. Kildow v. EMC Mort. Corp. (In re Kildow), 232 B.R. 686, 692-93 (Bankr.S.D.Ohio 1999). Consequently, the Debtor lacks direct standing to pursue the avoidance of Flagstar’s mortgage lien in this case. Nonetheless, the Sixth Circuit Bankruptcy Appellate Panel concluded that a debt- or can exercise a trustee's § 544 avoidance powers using derivative standing to pursue a benefit for the estate rather than to pursue a debtor’s own interests. U.S. Bank Nat’l Assoc. v. Barbee (In re Barbee), 461 B.R. 711, 714-15 (6th Cir. BAP 2011). The court made clear at the trial that the Debtor's limited role in this adversary proceeding is in representation of the estate through derivative standing. The Debtor does not have standing to pursue avoidance for his own benefit nor may he obtain an exemption in any recovery. 11 U.S.C. § 522(g).
. When the misindexing of an instrument is the fault of the recorder’s office as opposed to a drafting error, then "the great weight of authority supports sustaining the validity” of the instrument. Columbia Gas, 594 N.E.2d at 7.
. Judge Hopkins noted that the mistake was likely a scrivener's error of National City, the original mortgage holder. Hawthorne, 2013 Bankr.LEXIS 1567, at *10.
. In Bunn, the Sixth Circuit describes Ohio law and how it assumes that a potential purchaser of a parcel of residential property has searched the relevant title indexes and deeds in the chain of title for purposes of constructive notice. 578 F.3d at 489. However, the actual determinations in Bunn focus on whether the content of the mortgage at issue would provide constructive notice rather than how the mortgage was indexed and whether it would be found during a title search. See, generally, 578 F.3d 487. See also Hawthorne, 2013 Bankr.LEXIS 1567, at *9 n. 3 (noting that it did not appear that the Sixth Circuit in Bunn was asked to decide the indexing issue). Like the court in Hawthorne, this court concludes that the index is dispositive in this case since a potential purchaser would not be in a position to review the content of a mortgage that could not be found through a reasonable title search. Hawthorne, 2013 Bankr.LEXIS 1567, at *9 n. 3. Nonetheless, the court's ruling would not change if the court were to focus its determination on the content of Flagstar's mortgage. Whether focused on the content of the mortgage or how it was indexed, the vast majority of courts conclude that a mortgage containing a legal description for an incorrect parcel of real estate, even when other property identifiers in the mortgage are correct, is avoidable. See Ameriquest Mortg. Co. v. Stradtmann (In re Stradtmann), 391 B.R. 14, 18-19 (8th Cir. BAP 2008) (noting that "a mortgage containing a defective legal description does not provide constructive notice to subsequent purchasers unless the subject property can be determined with reasonable certainty or the defect is apparent from the face of the mortgage”; a conflict between the legal description and the street address is not considered an apparent defect and consequently the mortgage was avoidable); Stubbins v. Conseco Fin. Servicing Corp. (In re White), 2012 Bankr.LEXIS 4475, at *38-39 (Bankr.S.D.Ohio Aug. 30, 2012); Sheeley, 2012 WL 8969064, at *9 (distinguishing Bunn noting that constructive notice is not provided when a metes and bounds legal description in a mortgage is erroneous and conflicts with the street and parcel number for the property); Votaw, 2012 WL 529242, at *3-4 (concluding that Bunn is inapplicable to cases in which the information in the mortgage describing the property is actually incorrect rather than just omitted); Jahn v. Bank of America (In re Lawson), 2011 WL 1167115, at *10-12 (Bankr.E.D.Tenn. March 28, 2011) (distinguishes Bunn because the deed of trust contains information about two entirely different pieces of property leaving the meaning of the deed of trust ambiguous; deed of trust avoidable by trustee); Chase Home Fin., LLC v. Calloway (In re Calloway), 429 B.R. 802, 813-14 (Bankr.N.D.Ala.2010); Hanrahan v. Univ. of Iowa Comm. Credit Union (In re Thomas), 387 B.R. 4, 9-11 (Bankr.N.D.Iowa 2008) (noting that the most critical element in the recordation process is the accuracy of the legal description; when a search is made it is through the legal description of the respective properties and if it is so misleading as to describe the wrong parcel, it does not provide constructive notice to third parties); Chase Manhattan Mortg. Corp. v. Bird (In re Hiseman), 330 B.R. 251, 257 (Bankr.D.Utah 2005) (noting that constructive notice of a recorded document extends only to the legal description in the document and because the legal description in the trust deed described the wrong parcel of land, no constructive knowledge can be imputed to the trustee). But see Field v. Ocwen Loan Servicing, LLC (In re Schlabach), 490 B.R. 555, 565-66 (Bankr.S.D.Ohio 2012) (concluding that a mortgage that contained a correct street address but a metes and bounds description for only one of two adjacent lots that were both collateral for the mortgage lien provided sufficient informa*233tion to put a potential purchaser on constructive notice that both lots at that street address were encumbered by the lien). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496874/ | Order Sanctioning Attorney Richard G. Fonfrias
JACQUELINE P. COX, Bankruptcy Judge.
I. Facts and Background
On June 20, 2013 (“Petition Date”), Debtor, Daniel Adam Zarco, Sr. (“Debt- or”), sought bankruptcy relief under Chapter 7 of the Bankruptcy Code. Debtor’s attorney Richard G. Fonfrias has filed three motions for damages herein. On July 1, 2013, he filed a Motion for Damages (“Motion or First Motion”). Docket No. 13.
The Debtor’s bank account at J.P. Morgan Chase (“Chase”) was frozen prepetition after an entity known as Rapid Advance obtained a judgment against him and his business, Toro Builders Corporation. The Debtor complained in the Motion that Rapid Advance’s attorney Patrick Siegfried violated the automatic stay by not releasing Rapid Advance’s prepetition levy on the frozen bank account once bankruptcy protection was sought. The Notice of Motion, as well as a July 8, 2013 Amended Notice of Motion at docket number 15, indicates that Attorney Patrick Siegfried was served at a Bethesda, Mary*249land address and via fax and that Rapid Advance was served at a Bethesda, Maryland address and via fax. There is no indication that the First Motion was served on Chase. The Debtor asked that notice of his Motion be shortened “due to the urgency of needing his bank a[sic] account unfrozen.” Docket No. 13, ¶ 19. The proposed order filed with the Motion asked that the court grant the following relief: compel Attorney Patrick Siegfried to release the levy on Debtor’s personal checking account at Chase; that Attorney Patrick Siegfried be ordered to pay $6000 to Debtor for damages and for such other and further relief as the Court deemed fair and just. See Proposed Order, Docket No. 13.
On July 10, 2013, Mr. Fonfrias filed a second Motion for Damages (“Second Motion”) which sought an order compelling Chase to release the levy and an assessment of actual and punitive damages against Chase. Docket No. 16.
The Notice of Motion filed with the July 10, 2013 Second Motion indicates that two entities were served: Attorney Patrick Siegfried, via fax and Chase at two addresses and at a fax number. See Docket Number 16. No officer or employee of Chase was identified as having received notice of the Second Motion. During a hearing on July 16, 2013, this Court raised concerns that no person at Chase had been served and suggested that Chase’s Chief Executive Officer Jamie Dimon could be served. July 16, 2013 Transcript, p. 4. The Court suggested that an actual person at Chase be served. Id. at 6. The matter was continued to July 23, 2013. Review of the court docket on July 23, 2013 revealed that nothing had been filed indicating that a person at Chase had been served. Neither Mr. Fonfrias nor the Debtor appeared in court on July 23, 2013. See July 23, 2013 Transcript, p. 2.
The matter was continued to July 25, 2013. On July 25, 2013, Attorney Fonfrias directed the Court’s attention to an Amended Notice of Motion, Docket No. 23, filed on July 25. However, that document was also suspect. It indicated that Amanda McCloud had been served at Court Orders & Levies at Chase, without indicating whether she was an agent or officer at Chase. In addition, it stated that it had been mailed on July 10, 2013, prior to this Court’s July 16, 2013 suggestion that the Motion be renoticed. The Court suggested that Mr. Fonfrias renot-ice the matter for August 1, 2013 and file a proof of service. See July 25, 2013 Transcript, p. 3.
On July 25, 2013, an additional Amended Notice of Motion was filed at Docket No. 25. The docketed copy of that pleading does not include a statement indicating when or if it was served. In addition, it fails to indicate whether Amanda McCloud was an agent or officer of Chase.
On August 1, 2013, the Court again suggested serving Mr. Dimon. The Court asked Attorney Toni Dillon, who often represents Chase, to find out if Chase had notice of the Motion. The matter was reset to August 20, 2013.
On August 20, 2013, Ms. Dillon had no information regarding this matter. Mr. Fonfrias did not appear in court on August 20, 2013; the Motion was stricken. See Order at Docket No. 28 striking the Second Motion for Damages.
On August 22, 2013, Mr. Fonfrias filed a Third Motion for Damages (“Third Motion”), complaining of the same situation; it was set for hearing on September 12, 2013. See Docket No. 29. The Third Motion included much of what the First and Second Motions alleged. It sought an order compelling Chase to release the levy on the Debtor’s personal banking account *250and an assessment of actual and punitive damages against Chase. The First Motion had not been resolved.
On September 12, 2013, Attorney Kevin Driscoll appeared on behalf of Chase. He pointed out that while Mr. Fonfrias was trying to access $10,000 from the Chase account in issue, the Debtor’s schedules indicated that there was no money in the account and that the Debtor did not claim an exemption in the funds in the account. Review of the Debtor’s initial petition for relief, at Schedule C, Property Claimed As Exempt, reveals that the Debtor did not exempt the funds in the account. The Debtor’s Schedule B of Personal Property indicated that the account had no funds in it. See Docket No. 1, pp. 9-12. The Debt- or filed Amended Schedules B and C on September 20, 2013, disclosing $8,647.10 in the account and claiming an exemption in those funds. See Docket No. 37. Attorney Driscoll also reported that the account had $10,000 in it on the Petition Date. He also reported that the funds in the account were held pursuant to a garnishment proceeding and that because this is a chapter 7 case, the funds belong to the chapter 7 trustee. The Third Motion for Sanctions was denied on September 12, 2013. Order at Docket No. 31.
II. Discussion
Federal Rule of Bankruptcy Procedure 9014 requires that when relief is requested by motion that the party against whom relief is being sought be given reasonable notice and an opportunity for hearing. Subdivision (b) of F.R.B.P. 9014 provides that motions shall be served in the manner provided for service of a summons and complaint by F.R.B.P. 7004. F.R.B.P. 7004(b)(3) provides that a domestic or foreign corporation may be served by mailing a summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process. Mr. Fonfrias should have served the first two motions on Chase through one of its officers or agents.
Local Bankruptcy Rule 9013 — 1(A)(3) requires that motions be properly served on all parties in interest. Since each motion sought relief regarding Chase, Chase should have been served as an interested party. Local Bankruptcy Rule 9013-1(C)(3) provides that every motion must be filed with the clerk of court and that the filing must include a Certificate of Service which must state for each recipient who is a registrant with the court’s CM/ECF system, the date of the filing and the name of the recipient, and for each recipient who is not a registrant with the court’s CM7ECF system, the date, manner of service, and name and address of the recipient. No Certificates of Service were filed with any of the Motions for Sanctions.
Mr. Fonfrias sought relief against Chase in the Second Motion without noticing an officer or employee of that entity according to the Amended Notice of Motion, even though this Court suggested that a person at Chase be named, and suggested that notice to Chase’s Chief Executive Officer Jamie Dimon would be sufficient. Mr. Fonfrias noticed Mr. Dimon on the Third Motion for Sanctions filed on August 22, 2013.
a. Property of the Bankruptcy Estate
Upon filing a bankruptcy case, the debt- or’s property becomes property of the bankruptcy estate; the chapter 7 trustee becomes responsible for collecting and reducing the property of the bankruptcy estate to money. 11 U.S.C. §§ 541(a) and 704(a)(1).
*251Attorney Fonfrias’ failure to notify Chase through an officer or an agent authorized by appointment or by law on the First and Second Motions is troubling. The issue is whether he tried to exert unauthorized control over bankruptcy estate assets by not properly noticing Chase. Chase had a duty to turn over the funds to the chapter 7 trustee, not to the Debtor. 11 U.S.C. § 542(a). Had Chase turned over the account’s funds to anyone other than the trustee, it would be hable to the bankruptcy estate for turning over the funds to the wrong entity.1
b. Sanctions
Federal Rule of Bankruptcy Procedure (“F.R.B.P.”) 9011(c)(1)(B) allows a court on its own initiative to enter an order describing conduct that appears to violate subdivision (b) and direct an attorney to show cause why he or she has not violated that provision.
On January 8, 2014, this Court issued an order allowing Mr. Fonfrias to explain at a hearing set for February 5, 2014 why he should not be sanctioned pursuant to F.R.B.P. 9011(c)(1)(B) for violating his duty as an attorney under subdivision (b) of that Rule to not present to the court motions and pleadings for improper purposes. “Bankruptcy Rule 9011(b) is essentially the equivalent of Federal Rule of Civil Procedure 11.” In re Liou, 503 B.R. 56, 60 n. 7 (Bankr.N.D.Ill.2013). Subdivision (b) 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,
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law
fed. R. baNkr. p. 9011(b)(1) and (2).
Trustee David Herzog testified at the February 5, 2014 hearing that he receives notifications electronically through the court’s electronic filing system and that he viewed Mr. Fonfrias’ motions as efforts seeking sanctions, not for turnover. He also stated that he did not view Mr. Fonf-rias’ conduct as an effort to deceive him and to obtain property belonging to the bankruptcy estate. The trustee’s position is understandable. According to Debtor’s Schedule B there were no funds in the account and Debtor’s Schedule C, Property Claimed as Exempt, did not claim any assets as exempt. The trustee was correct to conclude that there were no bankruptcy estate assets to be turned over.
Mr. Fonfrias had previously stated that he did not believe that the funds were property of the bankruptcy estate and admitted that he had not served the chapter 7 trustee with notice of the Third Motion. *252See September 12, 2013 Transcript, at pp. 8-9.
On February 5, 2014, Mr. Fonfrias explained that he filed the First Motion to obtain a finding that Chase violated the automatic stay by not unfreezing the Debt- or’s account. That is not true. The First Motion for Damages did not seek a finding that Chase had violated the automatic stay; it asked the court to compel the release of the levy on the account.
Mr. Fonfrias also stated that he did not know that there were funds in the account. See February 5, 2014 Transcript, pp. 3-9. The Court does not believe that he asked to have Chase unfreeze an account that held no funds. A statement he made earlier in this matter belies that assertion. At the July 16, 2013 hearing Mr. Fonfrias stated that his “client was trying to run a business so checks started bouncing.” See July 16, 2013 Transcript, p. 3. This strongly suggests that Mr. Fonfrias wanted to unfreeze the account so that his Ghent’s checks could be paid from the funds in the account. Mr. Fonfrias thought that there were funds in the account. The Motions for Damages were part of an effort by Mr. Fonfrias and the Debtor to exert unauthorized control over the account. Upon Debtor’s bankruptcy filing, the funds in the account became property of the bankruptcy estate. The funds were no longer available to cover the Debtor’s outstanding checks. Yoon v. Minter-Higgins, 399 B.R. 34, 39 (N.D.Ind.2008) (explaining that where a bank paid checks issued prepetition after the petition date, a trustee was entitled to recover from the debtor the value of the funds that were in her account on the petition date).
Mr. Fonfrias has violated F.R.B.P. 9011(b) by claiming that he did not know that there were funds in the account and that the funds there were not property of the bankruptcy estate. The Court finds that Mr. Fonfrias presented the Motions for Damages for an improper purpose, to exert control over funds that his client had no right to.
The Court sanctions Mr. Fonfrias in the amount of $1,000 payable to the Clerk of the Bankruptcy Court.
If Chase submits a request for attorneys’ fees expended to respond to the pleadings filed by Mr. Fonfrias, the Court will consider requiring Mr. Fonfrias to reimburse Chase for those costs, as allowed by F.R.B.P. 9011(c)(2).
The Debtor’s First Motion for Damages at Docket No. 16 is DENIED.
This matter is set for a Status Hearing on Wednesday, April 22, 2014 at 10:30 a.m.
. Section 542(a) states "Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” 11 U.S.C. § 542(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496875/ | MEMORANDUM DECISION
TIMOTHY A. BARNES, Bankruptcy Judge.
The matter before the court arises out of the objection (the “Objection”) of the Chapter 7 trustee, Barry A. Chatz (the “Trustee ”), to the exemption that debtor Debra West (the “Debtor ”) claimed in her interest in her former husband’s 401(k) plan. The Debtor claims the exemption under section 12-1006 of the Illinois Code of Civil Procedure. For the reasons set forth herein, the Objection is not well taken, and the claim of exemption allowed.
JURISDICTION
The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “Bankruptcy Code ”). 28 U.S.C. § 1334(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). An objection to a debtor’s claim of exemption is a core proceeding. 28 U.S.C. § 157(b)(2)(B); In re Johnson, 480 B.R. 305, 308 (Bankr.N.D.Ill.2012) (Baer, J.). The court also has constitutional authority to determine the exemption because, even though the exemption may derive from state law, “[t]he right to exempt property from the bankruptcy estate is established *255by an express provision of the Bankruptcy Code (section 522) and is central to the public bankruptcy scheme.” In re Carlew, 469 B.R. 666, 673 (Bankr.S.D.Tex.2012) aff'd sub nom. W. v. Carlew, CIV.A. H-12-0913, 2012 WL 3002197 (S.D.Tex. July 23, 2012).
Accordingly, final judgment is within the scope of the court’s authority.
BACKGROUND
On July 12, 2013, the Debtor commenced the above-captioned case by filing a petition under Chapter 7 of the Bankruptcy Code. Prior to the petition date, the Debt- or and her former spouse, Daniel West, were involved in a divorce proceeding in the Circuit Court of Cook County. The state court entered a Judgment for Dissolution of Marriage on April 11, 2013, which incorporated the Marital Settlement Agreement (the “MSA ”) executed by the Debtor and Mr. West. The MSA provides for the Debtor to receive $80,000 from Mr. West’s retirement plan with his employer (the “Retirement Plan”). However, the Debtor had not received an actual distribution of the funds prior to the commencement of this case, and has not since received such funds.
On Schedule B, the Debtor listed an interest of $80,000 in the Retirement Plan. On Schedule C, the Debtor claimed her interest in the Retirement Plan as exempt pursuant to 735 ILCS 5/12-1006. The Trustee timely filed the Objection on November 27, 2013.
PROCEDURAL HISTORY
Neither party has requested an eviden-tiary hearing, instead submitting this matter for ruling on their papers and arguments of counsel. In considering the Objection, the court has evaluated the arguments of the parties at the February 4, 2014 hearing on the Objection, has reviewed the Objection itself and the exhibits submitted in conjunction therewith [Docket No. 22], and has considered:
(1) Response to Chapter 7 Trustee’s Objection to Debtor’s Claim of Exemptions [Docket No. 29]; and
(2) Chapter 7 Trustee’s Reply in Support of Objection to Debtor’s Asserted Exemption Pursuant to Bankruptcy Rule 4003(b) [Docket No. 30].
Though the foregoing items do not constitute an exhaustive list of the filings in this case, the court has taken judicial notice of the contents of the docket in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. Mar. 8, 1993); Inskeep v. Grosso (In re Fin. Partners), 116 B.R. 629, 635 (Bankr.N.D.Ill.1989) (Sonderby, J.) (authorizing a bankruptcy court to take judicial notice of its own docket).
DISCUSSION
At its core, the matter before the court is simple. The Debtor wishes to have the court determine that her interest in the Retirement Plan is not property of the bankruptcy estate. Failing that, the Debtor seeks to have her interest in the Retirement Plan found to be exempt from prosecution. However, given the pending transfer of the funds from the Retirement Plan to the Debtor, the issue is complicated somewhat by recent case law. The court will consider each issue in turn.
A. Property of the Bankruptcy Estate
The Debtor wishes, first and foremost, to have her interest in the Retirement Plan found not to be property of her bankruptcy estate.
In this regard, the oft-quoted phrase “[p]roperty interests are created and defined by state law” immediately comes to mind. Butner v. United States, *256440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). As this court has pointed out in the past, however, see, e.g., Sullivan v. Glenn (In re Glenn), 502 B.R. 516, 542 (Bankr.N.D.Ill.2013) (Barnes, J.), the But-ner decision contains one very important caveat. The Supreme Court in Butner went on to state that “[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.” Butner, 440 U.S. at 55, 99 S.Ct. 914 (emphasis added).
This is a case that, in part, illustrates the exception.
The property in question is a portion of Mr. West’s Retirement Plan. It appears that the Retirement Plan is created pursuant to and governed by section 401(k) of title 26 of the United States Code (hereinafter, the “Internal Revenue Code ” and, in short, “IRC § -”). While the parties throughout the proceeding refer to the Retirement Plan as a 401(k) plan, neither party has provided the court with a copy of the Retirement Plan itself, and neither party has briefed whether the plan is a qualified plan pursuant to IRC § 401.
If the Retirement Plan is a 401(k) plan, it is federal law that must be looked to as to the creation and nature of interests in the Retirement Plan. That law permits spouses of plan participants to receive all or a portion of the benefits payable to a participant under a plan pursuant to a qualified domestic relations order. 26 U.S.C. §§ 401(a)(13)(B), 414(p)(8). Federal law makes clear, therefore, that the Debtor is permitted to have an interest in a 401(k) plan. Federal law does not, however, provide guidance as to whether such an asserted interest is otherwise valid. For that, the court must look to state law. Butner, 440 U.S. at 55, 99 S.Ct. 914.
As a matter of Illinois law, the Retirement Plan constituted marital property prior to the entry of the Judgment for Dissolution of Marriage. On this much, the parties agree. The parties further agree that the Illinois Marriage and Dissolution of Marriage Act provides that “[e]ach spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action.” 750 ILCS 5/503(e). Due to that law, and thereafter due to the Judgment for Dissolution of Marriage, in accordance with that Judgment, the Debtor has an interest in the Retirement Plan. Upon the entry of the Judgment for Dissolution, which incorporated the MSA, that interest became quantified and the Debtor’s sole and separate property. See Cullen v. Cullen (In re Cullen), Nos. 95-B-25374, 99-A-621, 2000 WL 381929, at *4 (Bankr.N.D.Ill. Apr. 12, 2000) (Ginsberg, J.); Bigelow v. Brown (In re Brown), 168 B.R. 331, 334 (Bankr.N.D.Ill.1994) (Ginsberg, J.). As the District Court in Szyszko v. Szyszko has made clear, there is no question that the Illinois courts would respect such rights, and this court, absent a compelling federal reason to do otherwise, must do the same. No. 01-C-2417, 2001 WL 766905, at *2 (N.D.Ill. July 6, 2001) (citing Butner, 440 U.S. at 55, 99 S.Ct. 914) (Because the Illinois “equitable distribution law creates statutory rights in marital property, the bankruptcy court should honor those laws unless some federal interest requires a different result.”); G & R Manufacturing Co. v. Gunia (In re G & R Manufacturing Co.), 91 B.R. 991 (Bankr.M.D.Fla.1988) (“The Bankruptcy Code ... [did not] intend for the Bankruptcy Court to serve as an appellate court for divorce decrees.”).
Whether the Debtor’s interest in the Retirement Plan constitutes property of the Debtor’s bankruptcy estate, however, *257forces the inquiry back to federal law. The commencement of a bankruptcy case creates an estate comprised of “all legal or equitable interests of the debtor in property.” 11 U.S.C. § 541(a). The scope of this provision is “broad.” United States v. Whiting Pools, Inc., 462 U.S. 198, 204-5, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). As the Seventh Circuit Court of Appeals has noted, “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541.” In re Carousel Int’l Corp., 89 F.3d 359, 362 (7th Cir.1996) (internal quotation and citation omitted).
Despite the broad scope of section 541, the Bankruptcy Code contains a number of exceptions to the general rule. The exception of greatest interest here is contained in section 541(c)(2), which provides that “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankrupt-cy law is enforceable in” a bankruptcy case. 11 U.S.C. § 541(c)(2). Under this section, an enforceable transfer restriction in a trust — such as an anti-alienation provision contained in a pension plan qualified under the Employee Retirement Income Security Act of 1974 (“ERISA ”) — will allow a debtor to exclude such interest from the bankruptcy estate. See Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (finding that the anti-alienation provision contained in an ERISA-qualified pension plan constituted a restriction on transfer enforceable under applicable nonbankruptcy law; therefore the plan was excluded from bankruptcy estate).
While Patterson provides a bright line rule as to whether ERISA-qualified plans are property of a debtor’s estate,1 whether other assets can be excluded from estate property under section 541(c)(2) involves a case-by-case approach requiring the bankruptcy court to analyze the terms of the particular retirement plan at issue. See Hill v. Dobin, 358 B.R. 130, 132, 135 (D.N.J.2006) (even where a plan contains an anti-alienation provision, courts consider whether the provision is “enforceable” under applicable nonbankruptcy law and whether the plan constitutes a “trust”).
Although the circumstances of this case seem to indicate that the Retirement Plan contains a restriction on transfer, no evidence to that effect has been submitted. As noted above, neither party has provided the court with the Retirement Plan itself. As such, no analysis can take place and the Debtor has not demonstrated that the Retirement Plan contains an enforceable transfer restriction under applicable non-bankruptcy law.2 Further, as the Trustee *258argues, the Debtor has undercut this very position by scheduling the asset in question as property of the estate. Under the circumstances, therefore, the court cannot conclude that section 541(c)(2) prevents the Debtor’s interest in the Retirement Plan from becoming property of her bankruptcy estate. Without evidence to support the argument, the Debtor’s request to have her interest in the Retirement Plan be determined not to be property of her bankruptcy estate must fail.
The court therefore finds that the Debt- or’s interest in the Retirement Plan is property of the estate. Because, however, the Debtor’s interest in the Retirement Plan is property of the estate, the statutory exemptions applicable to such property may apply, and the court now turns to the issue that has been the focus of the parties’ dispute: whether the Debtor is entitled to exempt her interest in the Retirement Plan.
B. The Debtor’s Claimed Exemption
The Debtor here has, in the alternative, claimed her interest in the Retirement Plan as exempt. As noted above, that claim has garnered most of the parties’ attention.
By default, debtors in bankruptcy may choose between the exemptions provided by section 522(b)(2) (the so-called “federal” exemption) or, in the alternative, the exemptions listed in section 522(b)(3), which include exemptions provided by state law and federal nonbankruptcy law. See 11 U.S.C. § 522(b)(1); see also In re Bauman, 11 B 32418, 2014 WL 816407, at *11 (Bankr.N.D.Ill. Mar. 4, 2014) (Goldgar, J.); Grochocinski v. Laredo (In re Laredo), 334 B.R. 401, 409 (Bankr.N.D.Ill.2005) (Squires, J.).
If a state “opts out” of the federal exemption scheme provided in section 522(b)(2), debtors that reside in that state may no longer choose, and thus are limited to the exemptions set forth in section 522(b)(3). See 11 U.S.C. § 522(b)(2); see also Bauman, 2014 WL 816407, at *12. Illinois has “opted out” of the federal exemption scheme. See 735 ILCS 5/12-1201. Accordingly, Illinois debtors are restricted to the exemptions in section 522(b)(3), which, in turn, include Illinois exemption statutes.
*259Here, the Debtor has claimed her interest in the Retirement Plan as exempt under section 12-1006 of the Illinois Code of Civil Procedure,3 which provides in pertinent part as follows:
A debtor’s interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment, attachment, execution, distress for rent, and seizure for the satisfaction of debts if the plan (i) is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended....
735 ILCS 5/12 — 1006(a).
To qualify for the Illinois exemption, the retirement plan must be held in “a trust or equivalent arrangement,” In re Schoonover, 331 F.3d 575, 577 (7th Cir.2003), and must come within the Internal Revenue Code provisions for tax-qualified retirement plans, In re Ellis, 274 B.R. 782, 787 (Bankr.S.D.Ill.2002). As noted by bankruptcy courts in this Circuit, “the language of § 12-1006(a) ... [is] unequivocal in protecting any interest a debtor may have in the assets of a pension or retirement plan and any right to receive benefits, distributions, or other payments under such a plan.” In re Lummer, 219 B.R. 510, 512 (Bankr.S.D.Ill.1998); see also In re Dzielak, 435 B.R. 538, 551 (Bankr.N.D.Ill.2010) (Barbosa, J.). The statute is broad and “devoid of any suggestion that its scope excludes debtors who have come into their pension rights derivatively.” Lummer, 219 B.R. at 512; see also Dzielak, 435 B.R. at 551.
Several things work in favor of the Debtor in her claim. First, a debtor’s claim of exemptions is presumptively valid. 11 U.S.C. § 522(1). Second, the Seventh Circuit has made clear that the Illinois exemption statutes are to be interpreted in favor of a debtor. In re Barker, 768 F.2d 191, 196 (7th Cir.1985) (“[W]here an exemption statute might be interpreted either favorably or unfavorably vis-á-vis a debtor, we should interpret the statute in a manner that favors the debtor.”); see also Laredo, 334 B.R. at 410.
Here, the Trustee does not dispute that the Retirement Plan constitutes a valid “retirement plan” for purposes of the Illinois exemption statute. Nor does the Trustee challenge that the Debtor has an interest in assets of or payments under the Retirement Plan. Thus the Debtor’s claim of exemption, standing alone, is not challenged and is presumptively valid. 11 U.S.C. § 522(i). Were no transfer of assets from the Retirement Plan required, the court’s inquiry would be concluded.
C. The Effect of the Transfer
The Trustee, however, did object. The crux of the Trustee’s objection is that, given that Debtor’s interest in the Retirement Plan must still be transferred to the Debtor, the need for and nature of that transfer causes the otherwise exempt interest to be nonexempt.
This is not an issue of first impression in this court. In 2010, under facts similar but not identical to those at bar here, *260Judge Barbosa rejected a similar contention by a Chapter 7 trustee. Dzielak, 435 B.R. at 551. In Dzielak, the trustee argued that the transfer of funds from the debtor’s spouse’s retirement plan to her defeated the exempt nature of the funds. As noted by Judge Barbosa, the trustee argued “that the Debtor cannot assert the retirement plan exemption because what she will receive is not a ‘retirement plan’ in her hands.” Id. at 549 (“[S]he is trying to assert her ex-husband’s exemption.”).
This court agrees with Judge Barbosa’s thoughtful analysis in Dzielak. In particular, Judge Barbosa’s conclusion, that irrespective of the pending transfer, a debtor is entitled to assert an exemption of her spouse’s retirement plan based on her Illinois rights arising from their concurrent divorce proceedings, is well taken. As Judge Barbosa stated, “at issue today is only whether the Debtor has the right to assert an exemption in the still-contingent interest, and not whether the contingency has occurred or whether certain property in the hands of the Debtor constitutes the property for which the exemption was claimed. The Debtor has a right to claim an exemption at least in the plan itself, and that is all she has done.” Id. at 551.
There are two differences, however, between the situation presented to the court in Dzielak and that before the court today.
First, unlike in Dzielak, the Debtor here has an interest that is no longer contingent. The debtor in Dzielak was relying on her rights under 750 ILCS 5/503(e), while the Debtor’s rights here arise under the Judgment for Dissolution, and by extension, the MSA. This is not a reason, however, to weaken the holding of Dzielak, but to strengthen it. As noted previously, except in limited circumstances not at issue here, bankruptcy courts adhere to the rulings of the state courts on such matters. Cullen, 2000 WL 381929, at *4; Brown, 168 B.R. at 334. The court finds no reason to part from the logic of Dzielak on this basis.
Second, there is a recent Seventh Circuit decision that the Trustee argues changes the law in this arena. This second difference warrants further discussion.
The Seventh Circuit has recently considered whether a debtor’s claim of exemption in a retirement account inherited but not yet transferred to her is valid. In re Clark, 714 F.3d 559 (7th Cir.), cert. granted sub nom. Clark v. Rameker, — U.S. -, 134 S.Ct. 678, 187 L.Ed.2d 544 (2013). In Clark, the Court of Appeals considered whether sections 522(b)(3)(C) and (d)(12) of the Bankruptcy Code could be used as the basis for such an exemption. As with the Illinois exemption statute, these provisions require that the funds in question be “retirement funds” and that they be in an account that is exempt from taxation under certain sections of the Internal Revenue Code. 11 U.S.C. § 522(b)(3)(C), (d)(12); Clark, 714 F.3d at 559-60. The Court held that the funds in the non-spousal inherited IRA were not “retirement funds” within the meaning of section 522(b)(3)(C) or (d)(12) of the Bankruptcy Code, and could not be successfully claimed as exempt by the debtor. Clark, 714 F.3d at 562.
In making its determination, the Court analyzed the economic attributes of non-spousal inherited IRAs and compared them to the attributes of spousal inherited IRAs. The Court noted that the attributes of a non-spousal Inherited IRA changed upon the inheritance, such that: (i) new contributions could not be made; (ii) the balance could not be rolled over or merged with any other account; (iii) the distributions were required to begin within a year of the original owner’s death rather than being dedicated to the beneficiary’s retire*261ment years; and (iv) the payout must be completed within five years. Id. at 560.
It is true that, at least as the Debtor’s interest is concerned, the Retirement Plan here seems to bear some of these traits in common with that of the IRA in Clark. The Debtor cannot, it appears, make new contributions to the Retirement Plan and the Debtor’s interest will not remain in the Retirement Account per the terms of the MSA.
But there are important differences. Unlike in Clark, prior to the ownership change (in Clark the devise, in this case the marriage dissolution), these funds were the Debtor’s retirement funds per operation of Illinois law. Clark concluded that an inherited IRA “did not represent anyone’s retirement funds” after the passing of the devisor. Clark, 714 F.3d at 561. Here, however, pursuant to applicable Illinois law, the funds in the Retirement Plan belonged jointly to both the Debtor and her former spouse prior to the entry of the Judgment of Dissolution, and though now divided, continue in each divided part to be each spouse’s respective retirement funds.
Further, unlike in Clark, the Debtor’s interest in the Retirement Plan may be rolled over or merged with another account; never losing its tax-deferred attributes. The MSA requires the transfer of that now divided Retirement Plan to be done by a QDRO. A QDRO is a transfer mechanism specifically designed to comport with the IRC and ERISA transfer restrictions, retaining the asset’s tax attributes. 26 U.S.C. § 401(a)(13)(B) (allowing a state court to assign retirement benefits without penalty through a QDRO); 29 U.S.C. § 1056(d)(3)(A), (d)(3)(B)© (same); see also In re Remia, 503 B.R. 6, 12, n. 38 (Bankr.D.Mass.2013) (both “ERISA and the IRC were designed so that the type of funds at issue would retain their character as tax-exempt throughout the process of a marital property settlement.”). A distribution received under a QDRO may be rolled over into an eligible retirement plan, such as an IRA, so as to preserve the fund pending such alternate payee’s retirement. See 26 U.S.C. § 402(c), (e)(1); see also In re Abbata, 157 B.R. 201, 205 (Bankr.N.D.N.Y.1993); accord Dzielak, 435 B.R. at 551. This exception to the anti-alienation requirement of ERISA was designed “to give enhanced protection to the spouse and dependent children in the event of divorce or separation.” See Boggs v. Boggs, 520 U.S. 833, 847, 117 S.Ct. 1754, 138 L.Ed.2d 45 (1997).
Provided, therefore, that the transfer is done in the form required by the MSA, the nature of the Debtor’s interest in her retirement funds will not change as a result of the transfer.
At oral argument, much of the discussion centered on whether the transfer presented an “opportunity for present consumption.” In Clark, the Seventh Circuit wrote that “inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings.” Clark, 714 F.3d at 562. It is true that, should the Debtor be permitted to violate the terms of the MSA, there may be an opportunity here for present consumption. That does not, however, change the nature of Debt- or’s interest in the Retirement Plan.
The critical factor in Clark was that the IRA’s retirement attributes had been lost upon inheritance by a non-spouse.4 In contrast, a retirement plan transferred pursuant to a QDRO is done expressly for the purpose of preserving the retirement nature of the plan. The facts here do not truly present an opportunity for immediate *262consumption. What is presented is something that nearly all retirement funds offer: an opportunity to access the funds after the appropriate penalty and tax are withheld. 26 U.S.C. § 72(t) (providing that a 10 percent tax is imposed on any distribution from a qualified retirement plan if the distribution fails to satisfy one of several statutory exceptions); see also Rousey v. Jacoway, 544 U.S. 320, 323, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005). The ability for early withdrawal under such conditions does not, in itself, affect the nature of a retirement plan’s exempt status. See, e.g., In re Ritter, 190 B.R. 323, 326-27 (Bankr.N.D.Ill.1995) (Squires, J.) (finding that debtor was entitled to exempt retirement accounts under 735 ILCS 5/12— 1006 even though she had withdrawn some funds from the accounts prior to reaching mandatory retirement age).
The court therefore concludes that the reasoning of Clark does not dictate a result other than that previously provided in Dzielak, as modified to fit the facts of this case. Because the Debtor’s interest in the Retirement Plan meets the requirements of section 12-1006 of the Illinois Code of Civil Procedure and because the Debtor’s distribution from the Retirement Plan is to be transferred in a way so as to preserve the retirement nature of the funds, she has properly claimed an exemption of her interest in the Retirement Plan.
CONCLUSION
For the foregoing reasons, the Objection must be overruled and the exemption permitted. The Debtor’s interest in the Retirement Plan is exempt. A separate order to that effect will be entered concurrent with this Memorandum Decision.5
ORDER
This matter comes before the court on the Objection to Debtor’s Asserted Exemption (the “Objection”) filed by Barry A. Chatz (the “Trustee ”) [Docket No. 22] in the bankruptcy case of Debra West (the “Debtor”)', the court having jurisdiction over the subject matter and all necessary parties having appeared at the hearing that occurred on February 4, 2014 (the “Hearing”)', the court having considered the Objection, the relevant filings, the relevant case and statutory law and the arguments presented by the parties at the Hearing; and in accordance with the Memorandum Decision of the court in this matter issued on this same date, wherein the court found that the Objection is not well taken;
NOW, THEREFORE, IT IS HEREBY ORDERED:
That the Objection is OVERRULED and the Debtor’s claim of exemption is allowed.
. ERISA-qualified plans satisfy the “trust” and "enforceability” requirements. First, The Patterson Court made clear that ERISA-qualified plans contain anti-alienation provisions that are enforceable under nonbank-ruptcy law. This is because under ERISA, a plan participant, beneficiary, fiduciary, or the Secretary of Labor may file a civil action to "enjoin any act or practice” which violates ERISA or the terms of the plan. 29 U.S.C. §§ 1132(a)(3), (a)(5). Second, ERISA imposes a trust requirement on plan assets. 29 U.S.C. § 1103; see also In re Jokiel, 453 B.R. 743, 751-52 (Bankr.N.D.Ill.2011) (Barbosa, J.); In re Handel, 301 B.R. 421, 430-31 (Bankr.S.D.N.Y.2003). However, outside the Seventh Circuit, some courts have concluded that even where a plan is ERISA-qualified, a debtor must show that the plan is an express trust to be excluded under section 541(c)(2). See, e.g., In re Barnes, 264 B.R. 415, 430-31 (Bankr.E.D.Mich.2001).
. In this case, the MSA provides that the Debtor "will receive the sum of [$80,000] from the 401(k) plan which shall be transferred via qualified domestic relations order.” Objection, Exhibit C (Marital Settlement Agreement), ¶ 7.12. The necessity of a qualified domestic relations order (a "QDRO ”) to transfer the Debtor's interest to the Debtor appears to indicate that the Retirement Plan *258is either a 401(k) plan or is ERISA-qualified, or both. In either case, the Retirement Plan would contain an anti-alienation clause or, at the very least, be subject to the anti-alienation provisions built into each statute. See, e.g., 26 U.S.C. § 401(a)(13)(A) (IRC restriction on transfer); 29 U.S.C. § 1056(d)(1) (ERISA restriction on transfer).
The court, however, should not be required to speculate as to the contents of the Retirement Plan. See Progressive N. Ins. Co. v. Salata, 3:10-CV-214, 2011 WL 3806267, at *4 (N.D.Ind. Aug. 26, 2011) (declining to speculate and construct a party's potential arguments); see also United States v. Dunkel, 927 F.2d 955, 956 (7th Cir.1991) ("Judges are not like pigs, hunting for truffles buried in briefs.”). Though the parties’ choice of terms and whatever inference the court might draw from the terms of the MSA might both indicate that the Retirement Plan has the essential attributes, the court is without evidence in that regard and, without evidence, it cannot conclude that the Retirement Plan contains an enforceable transfer restriction under applicable nonbankruptcy law. Had the Debtor provided sufficient evidence to that effect, existing case law may have supported a finding that the Debtor’s interest in the Retirement Plan is excluded from the bankruptcy estate. See Nelson v. Ramette (In re Nelson), 322 F.3d 541, 545 (8th Cir.2003) (finding that a debtor who acquires an interest in an ERISA-quali-fied plan via a QDRO can exclude that interest from a bankruptcy estate in the same way that the plan participant himself could have excluded it because such a plan would contain an enforceable anti-alienation provision); see also Ostrander v. Lalchandani (In re Lalchandani), 279 B.R. 880, 885-86 (1st Cir. BAP 2002) (same).
. Because the Debtor has not claimed an exemption under § 522(b)(3)(C) (providing an exemption for retirement funds to the extent they are in an account exempt from taxation under certain provisions of the Internal Revenue Code), the court’s analysis is limited to the Illinois exemption. See, e.g., Bauman, 2014 WL 816407, *13 (parties must not be required to guess at the legal basis for an exemption claim, and thus failure to provide the federal exemption statute as the basis for an exemption equates to the party not claiming an exemption in that regard).
. Clark expressly held that the inheritance of a retirement plan by one spouse from the other would not result in a change in tax attributes of the plan. Clark, 714 F.3d at 560.
. The court is aware that the Seventh Circuit’s ruling in Clark is on appeal before the Supreme Court. Given that the court’s ruling in this matter does not rely on the validity of the holding in Clark, there is no conflict between today’s ruling and that process, and no reason to delay entry of an order overruling the Objection. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496876/ | OPINION
Mary P. Gorman, Chief Judge.
The Chapter 13 Trustee has filed motions to modify the confirmed plans in each of these cases. The Trustee claims that the debtors in each case have had increases in their incomes since their plans were confirmed and, accordingly, their plans should be modified to provide increased payments to unsecured creditors. Because the Trustee has failed to meet his burden of proof and failed to establish that he is entitled to the relief requested, both motions will be denied.
I. Factual and Procedural Background
Because the same legal issues were raised in each of these cases, they have been consolidated for the purposes of this Opinion. The factual basis for the Trustee’s motion in each case is different, however, and the facts of each case must be set forth separately.
A. Myrick and Elvie Powers
Myrick and Elvie Powers filed their voluntary petition under Chapter 13 on May 24, 2010. At the same time, they filed their Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (“B22C”). The calculations on their B22C resulted in the Powers being identified as over-the-median-income debtors with a five-year applicable commitment period for their Chapter 13 plan. The Powers’ income was disclosed on their B22C and their Schedule I as consisting of about $5800 gross per month from Mrs. Powers’ employment, $1479 per month in Mr. Powers’ Social Security benefits, and $1129 per month in Mr. Powers’ YA benefits.
On March 1, 2011, the Powers’ First Amended Chapter 13 Plan (“Plan”) was confirmed. The Plan proposed that the Powers would pay $660 to the Trustee for seven months and then $758 per month for fifty-three months. From the amounts paid in, the Trustee was directed to pay the claims of several secured creditors and distribute “approximately $22,665” to unsecured creditors. The Powers’ B22C calculation had resulted in available monthly disposable income of only $18.43. The significant payment to unsecured creditors was required because the Powers owned a non-exempt unencumbered parcel of real estate valued at $29,900.
In February 2012, the Powers moved to sell their residential real estate for an amount less than what was owed against *266it. They expected to complete the sale with financial assistance from Mrs. Powers’ employer. After the sale was approved and closed, the Powers moved to modify the terms of their Plan to remove the payments on their mortgage arrearage debt which had been fully satisfied through the sale. They also requested that their monthly payments to the Trustee be reduced to the amount necessary to fund the Plan with the mortgage arrears deleted. The Powers’ motion to modify was granted and their plan payments were reduced to $670 per month beginning in May 2012.
On June 17, 2013, the Trustee filed the motion to modify which is at issue here. The Trustee claims that the Powers’ 2012 income tax return disclosed a $50,000 increase in income over the amounts shown on their 2011 return. After providing an involved tax calculation, the Trustee suggests that the Powers now have a net increase in income of $2984.92 per month. He suggests that for the twenty-three months which remained at the time the motion was filed, the Powers should raise their payments by $746 per month resulting in a total increase in Plan payments of $17,158. He suggests that after his commission, this increase would result in a net additional dividend to unsecured creditors of $15,442.
The Powers filed an objection to the motion to modify. They claimed that some of the increased income came from moving and relocation benefits received from Mrs. Powers’ employer. Mrs. Powers was transferred by her employer to Florida. The Powers also claimed that they were divorcing and their expenses were changing and increasing due to the establishment of separate households.
The Trustee undertook discovery on the Powers’ financial situation. Subsequently, the parties filed a stipulation on the submission of agreed documents. The documents include amended Schedules I and J prepared by Mrs. Powers and alternate amended Schedules I and J prepared by the Trustee for Mrs. Powers. On her own amended Schedule I, Mrs. Powers says that she is divorced and that her fifteen-year-old daughter resides with her. She discloses net monthly income of $5108.64 which includes $766 of Social Security benefits for her daughter but also includes the deduction of an auto loan payment. The Trustee’s amended Schedule I for Mrs. Powers shows net income of $6509.76 per month. On her own amended Schedule J, Mrs. Powers claims $4546 in expenses. On the amended Schedule J prepared by the Trustee, expenses are listed as $4496 and the Trustee notes that he used “Means Test” figures for St. John County, Florida, for some of the figures. The parties’ stipulation says that the Trustee’s amended Schedule I accurately reflects Mrs. Powers’ income for the “six month period for which pay advices were provided.” Further, the parties agreed that the Trustee’s amended Schedule J accurately reflects Mrs. Powers’ expenses “with the exception of motor vehicle payments.”
With respect to Mr. Powers, an amended Schedule I was filed which the parties stipulated correctly discloses his current income. Mr. Powers now receives $1559 per month in Social Security benefits and $3088 per month in VA benefits for total monthly income of $4647. Mr. Powers prepared an amended Schedule J which claims $4712.56 in expenses. Another amended Schedule J was prepared by the Trustee showing $2856 in monthly expenses for Mr. Powers and noting that the Trustee used “Means Test” figures from St. John County, Florida, for “reasonably necessary” expenses. The parties agreed that Mr. Powers’ own amended Schedule J accurately reflects his current expenses.
*267The stipulation also includes some pay advices, the Powers’ 2012 tax return, and Mrs. Powers’ 401k loan statement. Both parties rely on the stipulation for their factual presentation and waived the opportunity for an evidentiary hearing. Both the Trustee and the Powers’ attorney have briefed the issues.
B. David Powell
David Powell filed his voluntary petition under Chapter 13 on September 20, 2011. His subsequently-filed B22C showed that he was an under-the-median-income debtor with an applicable commitment period of three years. Although both Mr. Powell’s B22C and Schedule I disclosed gross income in excess of $7000 per month, he supports a spouse, a stepson, a daughter, and a grandson. His net income was shown as about $5200 per month and on his Schedule J, he claimed expenses of almost $5000 per month. The Trustee initially objected to the B22C, claiming that Mr. Powell had incorrectly completed the form and that if the form were corrected, Mr. Powell would have a five-year applicable commitment period. Mr. Powell filed an amended B22C which showed he was an over-the-median-income debtor but the Trustee subsequently conceded that Mr. Powell was, in fact, an under-the-median-income debtor.
After several failed attempts at plan confirmation, Mr. Powell’s Second Amended Chapter 13 Plan (“Amended Plan”) was finally confirmed on July 26, 2012. The Amended Plan proposed payments over a thirty-six-month term totaling $15,096. Of that amount, $10,507 was projected to be paid to unsecured creditors.
On June 17, 2013, the Trustee filed his motion to modify claiming that Mr. Powell’s income had increased by a little over $32,000 from 2011 to 2012. The Trustee requested that Mr. Powell increase his monthly plan payment by $436.75 for the last fifteen months of his plan term and, thereby, increase the dividend to unsecured creditors by almost $6000. Mr. Powell objected claiming that he was not legally obligated to modify his the Amended Plan as requested.
The Trustee undertook significant discovery on Mr. Powell’s financial condition. In lieu of an evidentiary hearing, however, the parties simply stipulated that “if there is legal authority” for the proposed increase, Mr. Powell does have significantly increased income and could make increased payments. Both parties also briefed the legal issues.
II. Jurisdiction
This Court has jurisdiction over the issues before it pursuant to 28 U.S.C. § 1334. Core proceedings include decisions about the confirmation of Chapter 13 plans and other proceedings affecting the adjustment of the debtor-creditor relationship. See 28 U.S.C. § 157(b)(2)(A), (L), (O).
III. Legal Analysis
The Trustee alleges in each case that the debtors have more income now than they had at the time of plan confirmation and, accordingly, their plans should be modified to provide increased dividends to their unsecured creditors. Although the Trustee concedes that the disposable income provisions of § 1325(b) do not apply to motions to modify and denies that he is seeking to recalculate their disposable income, his motions to modify do, in fact, request a resetting of disposable income. Regardless of how the Trustee characterizes his motions, his evidentiary stipulations and his arguments claim that disposable income can and should be recalculated in both cases. Neither the Bankruptcy Code nor the case law interpreting the relevant Code provisions supports his position.
*268
A. Section 1825(b) Does Not Apply to § 1329 Plan Modifications
Debtors are only required to commit all of their projected disposable income to plan payments for distribution to unsecured creditors if the trustee or an unsecured creditor has objected to confirmation of the plan and if the debtor has not otherwise provided to pay all unsecured claims in full. 11 U.S.C. § 1325(b)(1). Disposable income is calculated by first determining a debtor’s “current monthly income,” which is the average of the income earned by the debtor during each of the six calendar months preceding the case filing. 11 U.S.C. § 101(10A). Reasonable and necessary expenses for the support of a debtor and his or her dependents are then deducted from the “current monthly income.” 11 U.S.C. § 1325(b)(2). For high-income debtors, the deductions for some reasonable and necessary expenses are fixed by the National and Local IRS standards. 11 U.S.C. §§ 1325(b)(3), 707(b)(2)(A)-(B). The net amount available after subtracting the expenses from “current monthly income” is multiplied by the number of months in a debtor’s applicable commitment period to determine the debtor’s total projected disposable income. 11 U.S.C. § 1325(b)(1)(B). A debtor’s “applicable commitment period” is calculated on the B22C and generally results in higher-income debtors having a sixty-month plan term and lower-income debtors having a thirty-six-month plan term. 11 U.S.C. § 1325(b)(4). Once all of the calculations have been completed, the actual amount a debtor must pay unsecured creditors through a plan may be adjusted due to significant changes in circumstances which are known or virtually certain at the time of confirmation. See Hamilton v. Lanning, 560 U.S. 505, 524, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010).
Under certain circumstances, confirmed Chapter 13 plans may be modified. 11 U.S.C. § 1329. But modifications are allowed only for the purposes set forth in the statute. Matter of Witkowski, 16 F.3d 739, 745 (7th Cir.1994). Those purposes include, inter alia, increasing or decreasing payments to particular classes of claims and extending or reducing the time for payments to be made. 11 U.S.C. § 1329(a). Some, but not all, of the requirements for plan confirmation apply to plan modifications. Specifically, § 1329(b)(1) provides:
(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.
11 U.S.C. § 1329(b)(1).
The Trustee’s motions seek to increase payments to the class of unsecured creditors in each case and, therefore, his motions are of the type allowed by § 1329(a)(1). As the essence of the motions is to recalculate disposable income in each case, the motions appear to rely on § 1325(b) for substantive authority. But because § 1325(b) is not one of the provisions identified in § 1329(b)(1) as applying to plan modifications, the issue arises as to whether the Trustee can seek a recalculation of § 1325(b) disposable income with a motion brought under § 1329.
The starting point for the analysis must be to give plain meaning to the language of the statutes at issue. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); see also Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (a court’s inquiry may be limited solely to the plain meaning analysis unless the result is absurd). The express language of § 1325(b) limits its *269applicability to plan confirmation. Plan modification is separate and distinct from plan confirmation. A plan must have been confirmed in order for a modification to be requested under § 1329. See In re Davis, 439 B.R. 863, 866 (Bankr.N.D.Ill.2010) (citing Forbes v. Forbes (In re Forbes), 215 B.R. 183, 188 (8th Cir. BAP 1997)). The plain meaning of § 1325(b) is that it provides an additional condition for confirmation of a plan which has otherwise met the requirements of § 1325(a). Davis, 439 B.R. at 867. Nothing in § 1325(b) suggests that it applies outside of the confirmation process.
Likewise, the express language of § 1329(b)(1) lists the provisions of Chapter 13 which apply to plan modifications and the list does not include § 1325(b). Implicit in listing the provisions that do apply to modifications is the exclusion of other unlisted provisions which do not apply. See Davis, 439 B.R. at 867 (citing TRW Inc. v. Andrews, 534 U.S. 19, 28, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001)); see also In re Young, 370 B.R. 799, 802 (Bankr.E.D.Wis.2007); In re Forte, 341 B.R. 859, 864 (Bankr.N.D.Ill.2005). The plain meaning of § 1329(b)(1) is that the enumerated provisions apply to Chapter 13 modifications and other unenumerated provisions do not. To read § 1329(b)(1) as incorporating provisions which were specifically not listed simply because it includes the broad mandates of § 1325(a) would render the provision superfluous. If all provisions of Chapter 13 apply to plan modifications, there would have been no reason for § 1329(b)(1) to have been drafted. See Davis, 439 B.R. at 868.
This Court has previously held that because § 1325(b) by its own terms is limited to the confirmation process and is not made applicable to plan modifications by § 1329(b)(1), proposed plan modifications are not analyzed under a disposable income test. See In re Coay, 2012 WL 2319100, at *5 (Bankr.C.D.Ill. June 19, 2012); In re Walker, 2010 WL 4259274, at *9-10 (Bankr.C.D.Ill. Oct.21, 2010). The clear weight of authority is that the disposable income provision of § 1325(b) does not apply to plan modifications under § 1329. See, e.g., In re Lorenzo, 2013 WL 1953319, at *2 (Bankr.S.D.Fla. May 10, 2013); In re Salpietro, 492 B.R. 630, 637 (Bankr.E.D.N.Y.2013); In re Tibbs, 478 B.R. 458, 461 (Bankr.S.D.Fla.2012); Davis, 439 B.R. at 866; In re Prieto, 2010 WL 3959610, at *2 (Bankr.M.D.Fla. Sept. 22, 2010); In re Wetzel, 381 B.R. 247, 251-52 (Bankr.E.D.Wis.2008); In re Hill, 386 B.R. 670, 676 (Bankr.S.D.Ohio 2008); Young, 370 B.R. at 802; Forte, 341 B.R. at 864; In re Golek, 308 B.R. 332, 337 (Bankr.N.D.Ill.2004); In re Sounakhene, 249 B.R. 801, 805 (Bankr.S.D.Cal.2000); Forbes, 215 B.R. at 191; In re Moss, 91 B.R. 563, 566 (Bankr.C.D.Cal.1988). Only limited authority suggests otherwise. See, e.g., In re King, 439 B.R. 129, 134 (Bankr.S.D.Ill.2010).
The disposable income provision of § 1325(b) was added to the Code in 1984 and the language limiting its applicability to the confirmation process was in the original provision. See Matter of Smith, 848 F.2d 813, 820 (7th Cir.1988). Amendments made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), however, confirm, as a practical matter, the inapplicability of § 1325(b) to plan modifications under § 1329.1 Under BAPCPA, the old best *270efforts test gave way to a new rigorous and formulaic calculation of disposable income. See In re York, 415 B.R. 377, 378-79 (Bankr.W.D.Wis.2009). As set forth above, a debtor’s “current monthly income” and “applicable commitment period” are both calculated based on the income earned by a debtor during the six-month period before filing. A high-income debtor must refer to IRS standards published as of the date of filing for the amount of some expense deductions. Only changes in income or expenses which, as of the date of confirmation, are known or virtually certain to occur may be used to adjust the calculation. Thus, once properly calculated using the required statutory formula, disposable income is not subject to change at a later date because the components of the calculation are fixed as of confirmation. Id. at 382.
Either § 1325(b) applies to plan modifications as it is written and in its entirety or it does not apply at all. Because as a practical matter it cannot apply in its entirety and because § 1325(b) is limited to use in the confirmation process and not included in § 1329(b)(1), § 1325(b) does not apply to plan modifications and cannot, therefore, provide substantive authority for modifying a confirmed plan to reset disposable income.
B. Section 1329 Modifications Must be Based on Statutory Authority
Even though the Trustee has acknowledged that § 1325(b) does not apply to plan modifications under § 1329, the only purpose of his motions is to reset disposable income and require increased payments to unsecured creditors in each case. Because he lacks statutory support for resetting disposable income after confirmation, the Trustee suggests there are equitable grounds for the relief he seeks. In his brief, the Trustee claims that motions to modify which do not directly contravene or run afoul of a Code provision should be evaluated “solely on the equities of the situation.” The Trustee’s position is that so long as he seeks a type of modification described in § 1329(a), he needs no other statutory authority to justify a proposed modification. To the contrary, he suggests that a court in its discretion should look at all the circumstances and do whatever it thinks the equities compel.
In large measure, the Trustee relies on Witkowski to support his arguments. Granted, Witkowski does hold that there is no threshold amount of changed circumstances required to bring a motion to modify a confirmed Chapter 13 plan and that “the doctrine of res judicata does not apply.” Witkowski, 16 F.3d at 746. But Witkowski also makes clear that modifications are allowed only for the purposes set forth in § 1329(a) and only if the modifications comply with the specific provisions enumerated in § 1329(b). Id. at 745. And Witkowski clarifies that the inapplicability of res judicata relates only to the issue of the threshold amount of change needed to seek such modifications. Id. at 748. Finally, Witkowski reminds that the allowance of plan modification is within a court’s discretion. Id. But nothing in Witkowski *271suggests that plan modifications may be allowed absent express statutory authority simply because a trustee, an unsecured creditor, or a debtor wants a change. And nothing in Witkowski would support a finding that a debtor with a confirmed plan can be made to pay more — or be allowed to pay less — absent any statutory authority and solely because the arguments, one way or the other, have some equitable appeal.
In considering whether there is equitable authority to modify confirmed Chapter 13 plans, it is important to note the general rule that confirmed plans bind the debtor and each creditor. 11 U.S.C. § 1327(a). The Seventh Circuit has repeatedly emphasized the sanctity of confirmation orders. See, e.g., Adair v. Sherman, 230 F.3d 890, 894 (7th Cir.2000); Matter of Greenig, 152 F.3d 631, 635 (7th Cir.1998); Matter of UNR Industries, Inc., 20 F.3d 766, 769 (7th Cir.1994); Holstein v. Brill, 987 F.2d 1268, 1270 (7th Cir.1993); Matter of Pence, 905 F.2d 1107, 1110 (7th Cir.1990). Nothing in this strong body of case law suggests that this Court can exercise its discretion to modify a confirmed Chapter 13 plan other than for the reasons or under the circumstances expressly provided for by statute.
Allowing plan modifications requested by either a trustee, an unsecured creditor, or a debtor for reasons and upon terms not set forth in the Code, but rather based on equitable grounds, raises practical problems beyond the legal concerns addressed above. Absent clear guidelines, equitable arguments for modification could be used to defeat the underlying intent of the for-muías contained in the Code which control confirmation in the first place. The disposable income calculation of § 1325(b) does not necessarily yield a fair or equitable result in every case. Some income, such as Social Security benefits and child support, need not be considered in the calculation and that creates a disparity which might be viewed as inequitable. See 11 U.S.C. §§ 101(10A), 1325(b)(2); see also In re Brooks, 498 B.R. 856, 863-64 (Bankr.C.D.Ill.2013) (Perkins, J.) (child support income not counted in disposable income calculation). In other cases, debtors claim fixed amounts from IRS standards for some expense deductions regardless of their actual expenses, leaving some debtors with windfalls and others shortchanged. This disparity is also arguably inequitable. But the inequities, if any, in the current statutory formulas must be remedied by Congress and not by allowing the Trustee to take a second run at a disposable income calculation through plan modification, unconstrained by the original statutory formulas.
The practical problems associated with allowing an equitable modification to reset disposable income are obvious in the Powers’ case. The Powers have disclosed that they both are receiving Social Security benefits including $1559 by Mr. Powers and $766 by Mrs. Powers for her daughter. The Trustee includes the Social Security benefits in his calculations, suggesting that the Powers have increased income and can pay more.2 But the Trustee also quibbles with Mrs. Powers about her expenses and reduces those expenses on his proposed Schedule J, albeit by only about $50 per month, because he applies IRS Local stan*272dards to some of her expenses. Thus, the Trustee seeks to reset disposable income, free from the constraints of the original formula on the income side while still imposing the statutory limits on the expense side. His approach in that regard has little equitable appeal.
The parties agreed that the Trustee’s Amended Schedule J for Mrs. Powers was correct and that document shows her with $2013.76 net income after expenses. The parties also stipulated that Mr. Powers’ amended Schedule J correctly shows a negative $65.56 per month available. Thus, the Powers have a combined net of $1948. 20 available income, but only after including $2425 in Social Security benefits in the calculation. Although it is not disputed that Mrs. Powers has had a real increase in her earned income, compelling modification as requested would allow the Trustee to do an end-run around the original confirmation standards which do not include Social Security income in the § 1325(b) calculation. Modification requests, whether made by a trustee or a debtor, must be proposed in good faith, and moving to modify to circumvent the original confirmation requirements may suggest bad faith. York, 415 B.R. at 382.
Another practical concern with allowing equitable plan modifications is determining the starting point for the original disposable income calculation. The Trustee claims in each case that the 2012 income tax returns show an increase in income from the 2011 returns and that those changes justify the requested modifications. But in these cases, as with many others, the tax return for the year in which the plan was confirmed was not determinative of disposable income or the amount proposed to be paid to unsecured creditors. Unless the correct starting point is identified, no equitable amount of change can be identified.
The Powers’ case is again illustrative of the problem. The Powers’ B22C filed with them petition showed $18.43 per month in disposable income. Over sixty months, they would have been required to pay unsecured creditors less than $1200 to meet the requirements of § 1325(b). But they proposed to pay unsecured creditors over $22,000 because that amount was required to make sure that unsecured creditors receive as much as they would if the Powers had filed Chapter 7 and had their non-exempt unencumbered property liquidated. 11 U.S.C. § 1325(a)(4). The Powers’ case is not unique. Debtors often propose to pay in more than their disposable income calculation suggests they must pay. Sometimes they do so because the larger amount is required in order to save property or to pay priority claims in full. But debtors are not required to pay their unsecured creditors the sum of their disposable income and liquidation analysis amounts. Rather they must pay only the higher of the calculations which then satisfies both tests. By proposing to pay over $22,000 to unsecured creditors, the Powers essentially covered not only the equity in the property they wanted to keep but also up to $22,000 in disposable income. The Trustee now identifies approximately $17,000 in additional disposable income that he says should be added to the Plan. But the Powers are already paying more than that to them unsecured creditors.
If the less than $1200 the Powers would have had to pay to unsecured creditors based on their B22C is the starting point for the Trustee’s motion to modify calculation, then adding $17,000 in increased disposable income leaves them with no more to pay into their Plan because they are already paying $22,000 to unsecured creditors. No equitable argument — or legal argument for that matter' — can be made that they must do more. The argument for an *273increase can only be made if, contrary to the facts, the assumption is made that $22,000 was the Powers’ starting disposable income. But it was not, and the Trustee’s equitable arguments fail for that reason.
A similar problem arose in the Coay case. In Coay, by the time the Trustee sought modification, the Coays were paying unsecured creditors not only the over $10,000 agreed to as part of the original plan confirmation process, but also an additional $16,000 which had been earmarked for a mortgage lender’s claim. Coay, 2012 WL 2319100, at *9. After the lender obtained stay relief and withdrew its claim, the Coays did not seek to modify their confirmed plan and, at the time the motion to modify was filed, the Trustee was projecting that all of the lender’s funds would go to unsecured creditors instead. Id. Nevertheless, even though there was no evidence that at the time of confirmation anything near $26,000 was available as disposable income, the Trustee sought modification using the Coay’s 2009 tax return as a starting point and relying on the faulty assumption that what was already being paid in was based on that return. Id. at *3. This Court denied the requested modification on the legal grounds set forth above and also found that the Trustee had failed to meet his burden of proof on the facts. Id. at *9.
In Coay, this Court found that at the time the Trustee’s motion to modify was filed, the Coays were already “gratuitously paying unsecured creditors significantly more than they would have been required to pay if they had litigated the issue in early 2010.” Id. But the fault, if any, for that result was with the Coays and their attorney, not with the Trustee. Debtors may pay more than they are obligated to, and it is not up to the Trustee to suggest to them that they should do otherwise. And to be clear, this Court finds no fault with the Trustee and debtors settling issues relating to disposable income calculations and agreeing on plan payment amounts to expedite confirmation. What is a concern, however, is the Trustee’s failure to realize that by reason of some of those settlements, some debtors are doing more than they are obligated to do or, as with the Powers, are doing all that they are obligated to do. Under those circumstances, this Court must find that in addition to there being no legal authority for equitable plan modifications, there is also no factual basis to claim entitlement to the equitable relief requested.
Finally, it must be noted that within recent weeks, the Supreme Court has again emphasized the limits on bankruptcy courts’ equitable powers, stating, “[w]e have long held that ‘whatever equitable powers remain in bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.” Law v. Siegel, 571 U.S. -, 134 S.Ct. 1188, 1194-95, 188 L.Ed.2d 146 (2014) (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988)). The Bankruptcy Code contains an express formula for calculating disposable income, an express provision limiting the disposable income calculation to the confirmation process, and an express provision identifying the relevant Code provisions applicable to plan modifications. The Supreme Court’s recent pronouncements do not support throwing out all of those express Code provisions in favor of a simple consideration of the equities as the Trustee suggests here.
C. No Other Code Provisions Support the Trustee’s Position
When plan modification is sought by a trustee, an unsecured creditor, or a debtor, the statutorily-created tests of good faith, best efforts or liquidation anal*274ysis, and feasibility apply. 11 U.S.C. §§ 1325(a)(3),(4),(6), 1329(b)(1); see Wetzel, 381 B.R. at 254-55. And the movant has the burden of proof by a preponderance of the evidence on all issues. Id. When discussing an issue such as feasibility, a debtor’s current income and expenses are obviously relevant to the inquiry. See Walker, 2010 WL 4259274, at *10; Coay, 2012 WL 2319100, at *7. But no Code provision suggests that a debtor’s current income and expenses — however determined-should simply be netted to decide if plan payments should be modified.
The Trustee has not raised any other applicable Code provision to support his motions. He does not claim that either the Powers or Mr. Powell have acquired new assets which should be considered or that the feasibility of either the Powers’ Plan or Mr. Powell’s Amended Plan has been compromised. Obviously, nothing herein should be construed as suggesting that the Trustee does not have authority to bring motions to modify under the applicable Code provisions. The holding here is limited to his ability to bring a motion not supported by any Code provisions and based solely on his view of the equities.
The statutory framework for properly prosecuting a motion to modify is clear. A motion to modify must first seek relief of the type described in § 1329(a). When a motion is brought seeking a modification not of the type allowed, it will be denied. See, e.g., In re Conley, 504 B.R. 661, 663 (Bankr.D.Colo.2014) (debtor may not use a motion to modify a confirmed plan to rebifurcate a secured claim); In re Arguin, 345 B.R. 876, 882 (Bankr.N.D.Ill.2006) (debtor may not use a motion to modify to effectuate surrender of vehicle and reclassify balance due on secured claim as unsecured).
Second, the motion must comply with and be supported by the Code provisions made applicable to modifications by § 1329(b)(1). Frequently, motions to modify are brought to require a debtor to pay in the liquidation value of after-acquired assets. 11 U.S.C. § 1325(a)(4); see also Wetzel, 381 B.R. at 252 (collecting cases). Alternatively, modifications are often sought when a plan as originally confirmed is no longer feasible and a debtor can no longer comply with its terms. 11 U.S.C. § 1325(a)(6); see also Davis, 439 B.R. at 869. The good faith requirement provides a check and balance on proposed modifications whether requested by a trustee, a debtor, or a creditor. 11 U.S.C. § 1325(a)(3); Davis, 439 B.R. at 869. Finally, any proposed modification is subject to notice and an opportunity to be heard by all parties in interest. 11 U.S.C. § 1329(b)(2). It is at this stage that the Court must exercise its discretion. See Forte, 341 B.R. at 866-67.
In making his arguments, the Trustee complies with the first step of the process in that the relief he requests is of the type mentioned in § 1329(a). But he skips past the second step arguing that although he must not specifically run afoul of the relevant Code provisions, his proposed modifications need not find any affirmative support in those Code provisions. He then moves to the third step arguing that this Court can exercise its discretion without reference to the Code and based “solely on the equities.” As set forth above, this Court finds little authority for that position. And to the extent that the Court’s discretion is as broad as the Trustee suggests, as set forth below, the Court finds that the Trustee has not made his case that the equities support his requested modifications in either case.
D. The Trustee Has Not Established a Factual Basis for Relief in Either Case
Deciding to grant or deny a motion to modify a confirmed Chapter 13 *275plan is within a court’s discretion. See Witkowski, 16 F.3d at 748; Forte, 341 B.R. at 869-70. As with any motion, the mov-ant must establish both legal authority and a factual basis for the relief requested. Here, the Court has already found that the Trustee lacks legal authority for the relief he requests. But it is also important to briefly consider the facts presented. Again, because the facts of the two cases differ, they must be discussed separately.
1. Myrick and Elvie Powers
The facts associated with the motion seeking to modify the Powers’ Plan have already been discussed at some length. The Powers’ original disposable income calculation did not include their Social Security income and resulted in $18.43 per month available for unsecured creditors. Notwithstanding their lack of disposable income, the Powers proposed to pay unsecured creditors over $22,000 through their Plan to cover the liquidation value of non-exempt unencumbered property.
The Trustee has identified what he claims is approximately $17,000 in additional disposable income based on the Powers’ current circumstances. But that amount is calculated by including the Powers’ Social Security benefits. And the amount of disposable income claimed to be due to unsecured creditors now is still less than the amount the Powers are already actually paying to unsecured creditors. Even if the Powers were required to increase their disposable income payments by $17,000, there is no authority to require them to pay that in addition to the liquidation value of their property. The $22,000 they are paying covers both requirements. The facts do not support the requested plan modification or an exercise of this Court’s discretion to compel modification over objection.
2. David Powell
The only evidence presented by the Trustee in support of his motion as to Mr. Powell is the stipulated fact that Mr. Powell could pay the requested increased payment if ordered to do so. This one fact means that the Trustee’s request does not run afoul of the feasibility requirement for plan modification, but does little to assist the Court in determining whether the Court should exercise its discretion to order plan modification over Mr. Powell’s objection.
Mr. Powell’s original Schedules I and J showed about $193 per month in disposable income available, and that is what he proposed to pay in his first plan. After some back and forth with the Trustee, which appears to have involved the treatment of Mr. Powell’s non-filing spouse’s small amount of self-employment income, the Amended Plan was confirmed which required payments of $193 for four months, $200 for four months, and $483 for twenty-eight months. Where these final numbers came from is unknown. Mr. Powell’s Amended B22C filed in January 2012 showed negative disposable income of $46.07 per month. No other helpful financial information is in the record although Mr. Powell sought and received extensions of time to file amended plans on several occasions based on his representations that he was gathering financial information for the Trustee.
The Trustee claims in his motion to modify that Mr. Powell’s income increased based on a comparison of his 2011 and 2012 income tax returns. That may well be. But there is nothing in the record to suggest that his original plan payments were based on the income shown on his 2011 return. To the contrary, his Amended Plan was finally confirmed in July 2012. Thus, at the time of confirmation, more than half of 2012 had passed and whatever *276income he was making at the time was known or, at least, knowable. The sketchy facts presented here do not support the requested plan modification or an exercise of this Court’s discretion to compel modification over objection.
IY. Conclusion
The Trustee concedes that the disposable income provisions of § 1325(b) do not apply to plan modifications under § 1329. Nevertheless he seeks to reset disposable income in each case. But he has failed to provide authority for the proposition that plan modifications may be compelled solely on equitable grounds. And in each case here, the Trustee has failed as a matter of fact to establish that even if the Court has the broad discretion he suggests, the equities run in his favor and compel plan modifications over the objections of the debtors.
In deciding these issues, this Court is well aware of the Trustee’s arguments about the conventional wisdom of how Chapter 13 cases are administered. And, of course, his basic argument that debtors who can pay more should be made do so has equitable appeal in some quarters. But the plain meaning of the statutes gets in the way and compels the result here.
This Court is also aware of the language in the Supreme Court’s opinion in Ransom which suggests that motions to modify to increase debtor plan payments may be routinely brought. Ransom v. FIA Card Services, N.A., 562 U.S. -, -, 131 S.Ct. 716, 729, 178 L.Ed.2d 603 (2011). But Ransom does not say that § 1325(a) applies to § 1329 motions or that § 1329 motions may be based solely on the equities and not on the Code. More importantly, Ransom does not address the scope of bankruptcy courts’ equitable powers. Perhaps one day the Supreme Court will speak precisely on the issue, and if that decision is that bankruptcy courts have the broad equitable powers the Trustee claims they do, this Court will not complain. In the meantime, this Court must decide the cases before it constrained by the plain meaning of the relevant Code provisions. And regardless of the limits of the Court’s discretion, the results would not change here because the Trustee failed to establish that the equities run in his favor in either of the cases before this Court.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
. The Trustee argues that because no change was made to § 1329 by BAPCPA, Congress must have intended to continue to allow motions to modify confirmed Chapter 13 plans to reset disposable income as the Trustee is seeking to do here. But that assumes that the pre-BAPCPA law clearly allowed such modifications, which is not the case. The long line *270of cases holding that § 1325(b) does not apply to § 1329 modifications includes both pre-BAPCPA and post-BAPCPA cases. And in the Seventh Circuit, Witkowski — decided in 1994 — clearly established that plans could only be modified for purposes set forth in § 1329(a) subject to the relevant Code provisions enumerated in § 1329(b)(1). Witkowski, 16 F.3d at 745. If the Trustee's grounds for his motion are other than statutory — and he admits that they are — then his argument relying on the lack of change to § 1329 makes little sense. If the Trustee’s post-confirmation resetting of disposable income was not expressly authorized by statute pre-BAPCPA— and it was not — then it is not expressly authorized by statute now.
. It is clear that the Trustee intended to include the Social Security income received by both Mr. and Mrs. Powers in his calculations. His amended Schedule I prepared for Mrs. Powers, however, appears to have a mathematical error which subtracts rather than adds in the benefit. It is clearly an error because if the Trustee had intended to ignore the benefit, he would not have added or subtracted it. The error changes the Trustee’s numbers but not the overall result here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496877/ | Order Overruling Trustee’s Objection to Amended Chapter 13 Plan for Failure to Offer All Social Security Income
ROBYN L. MOBERLY, Bankruptcy Judge.
The Trustee raised several objections to the Debtor’s First Amended Chapter 13 Plan, all of which hinge upon the treatment of Debtor’s social security income and whether the failure to include all of Debtor’s social security income in Debtor’s plan payments is bad faith. For the reasons stated herein, the Court finds that the Debtor is not obligated to devote all of his social security income to the Plan and the failure to do so is not bad faith.
Background
John Timothy Worthington (“Debtor”) filed his Chapter 13 Petition on July 19, 2013. He promptly filed his proposed Plan on the same date. The Trustee contends that the definition of “current monthly income” spelled out in Bankruptcy Code sections 101(10A)(A) and (B) lead to the result that social security payments are included in a debtor’s current monthly income. Therefore, Trustee objected to Debtor’s proposed Plan. In response, Debtor amended his Plan and now offers $800 per month to the Plan. The Trustee still objects to the confirmation of the Debtor’s proposed Plan. The parties filed briefs with the court and oral argument was held on March 10, 2013.
Analysis
The Bankruptcy Code defines “current monthly income” in two subsections: 101(10A)(A) includes average monthly income from all sources that the debtor receives, without exclusion, and subsection 101(10A)(B) includes payments from non-*278debtors for debtor’s expenses but excludes social security payments. Therefore, the Trustee argues, Congress’ intent to include social security was expressed in subsection 101(10A)(A), being the subsection dealing with income, and requires inclusion of social security payments in the meaning of “current monthly income”. Trustee’s argument disregards Bankruptcy Code subsection 101(10A)(B), which augments the definition of “current monthly income” with “any amount paid by any entity other than the debtor ..., on a regular basis for the household expenses of the debtor ... but excludes benefits received under the Social Security Act....” (emphasis added). The Trustee does not harmonize the two subsections defining “current monthly income” without impermissible straining of the language used.
The Trustee’s interpretation would give effect to the general language of subsection 101(10A)(A) over the specific exclusion of social security benefits provided in subsection 101(10A)(B) as well as the prohibition of 42 U.S.C. § 407(b). 42 U.S.C. § 407(b) forbids subjecting social security benefits to bankruptcy law without specific reference to the Social Security Act. General language of a statutory provision, although broad enough to include it, cannot be held to apply to a matter specifically dealt with in another part of the same enactment. United States v. Chase, 135 U.S. 255, 260, 10 S.Ct. 756, 34 L.Ed. 117 (1890); D. Ginsberg & Sons v. Popkin, 285 U.S. 204, 208, 52 S.Ct. 322, 76 L.Ed. 704 (1932). Thus, the axiom that specific statutory language controls over general statutory language resolves this question. The court finds the definition of “current monthly income” under 11 U.S.C. § 101(10A)(A) and (B) does not include social security income. The majority of circuits which have addressed this issue have likewise ruled social security benefits are not includable in section 101(10A)’s definition of “current monthly income”. (See, In re Carpenter, 614 F.3d 930 (8th Cir.2010); Baud v. Carroll, 634 F.3d 327 (6th Cir.2011); In re Ragos, 700 F.3d 220 (5th Cir.2012); In re Welsh, 711 F.3d 1120 (9th Cir.2013)).
The Trustee contends that the term “disposable income” used in Bankruptcy Code § 1325(b)(2) includes social security income (by its reference to “current monthly income”) and the failure to include social security income in the determination of income available to fund the plan is bad faith under Section 1325(a)(3). Section 1325(b)(2) states “... the term ‘disposable income’ means 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) less amounts reasonably necessary to be expended” for the support of the debtor and his dependents. The definition of “current monthly income”, which is the starting point for determining “disposable income”, must necessarily be the same as defined in subsection 101(10A). The court finds this argument circuitous and not producing a different result.
The Trustee cites the court to Mains v. Foley, 2012 WL 612006 (W.D.Mich. February 24, 2012), a Sixth Circuit District Court case. In the Foley case, the debtor had more than $1,339 per month income, including all social security income, over and above expenses and the debtor did not offer any of his social security benefits to the Plan, while paying less than 5% dividend to unsecured. In Foley, the Debtor’s scheduled debts were largely consumer debts reflecting nothing more than “living beyond their means”. The living expenses listed on Schedule J were grossly inflated *279and debtors could have easily paid all of their unsecured creditors 100% over a three year plan. Foley does not hold that social security benefits are includable in current monthly income, but instead held that, in the context of that case, the failure to devote any of the Debtor’s social security income to the Plan was bad faith under 11 U.S.C. § 1325(a)(3).
This brings us to the Trustee’s second argument: the failure to include all of Debtor’s social security income is bad faith under 11 U.S.C. § 1325(a)(3).
A district court in the Ninth Circuit, affirming a bankruptcy court, indirectly addressed whether social security income should be considered in funding a Chapter 13 plan recently in In re Suttice, 487 B.R. 245 (Bankr.C.D.Cal.2013). Suttice was a chapter 7 case wherein the Trustee filed a motion to dismiss arguing the bankruptcy filing was abusive based on the totality of the circumstances, which included the debtor’s receipt of social security income. The court enumerated factors to consider in determining whether the totality of the circumstances supports a finding of abuse of the bankruptcy process to include: debtor’s likelihood of sufficient future income to fund a chapter 13 plan that would pay a substantial portion of unsecured claims, whether the petition was filed in response to a calamity, whether the schedules suggest that debtor obtained cash advances and consumer goods in excess of their ability to pay, whether debtor’s budget is excessive, whether the statement of income and expenses misrepresents debt- or’s financial circumstances and whether debtor has engaged in eve-of bankruptcy purchases. The district court also found that, regardless of the outcome of the other factors, social security income could not be taken into account in determining whether the debtor could fund a chapter 13 plan for purposes of § 707(b)(3)(B). Id. at 254.
In re Canniff, 498 B.R. 213 (Bankr.S.D.Ind.2013) provides an excellent review of relevant case law across the circuits. Trustee argues that Canniff was overturned by Foley, however, Foley was decided by the Sixth Circuit before Canniff was decided by the bankruptcy court of this district. Unlike the cases discussed above, after objection of the Trustee, Debtor has now offered $800 of social security income to the Plan. Debtor’s gross income consists of roughly $5,100 earned income and $1,874 in social security benefits. While Debtor’s expenses are high, Debtor nonetheless is offering nearly half of his social security benefits, which this court cannot find to be bad faith under 11 U.S.C. § 1325. Trustee advanced no facts supporting bad faith beyond the assertion of the failure to offer all of the Debtor’s social security income. Trustee’s argument fails. Bolstering the argument that a failure to offer all of one’s social security income to the Plan is not bad faith, one must remember that § 407 of the Social Security Act specifically exempts social security benefits from being subject to bankruptcy law.
Debtors have offered a significant portion of their social security income to fund their plan. Other than inflated expenses, the Trustee has made no other argument to support a finding that the plan was not offered in good faith. The Court cannot find a duty under the Bankruptcy Code to offer substantially all of a debtor’s social security income to fund their plan.
Trustee’s objection to confirmation of Debtor’s chapter 13 Plan is overruled. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496878/ | MEMORANDUM DECISION
SUSAN V. KELLEY, Bankruptcy Judge.
Harambee Community School, Inc. (“Harambee”) closed its doors without paying about $50,000 in unemployment contributions to the State of Wisconsin, Department of Workforce Development (“DWD”). DWD tried to collect the unpaid contributions from Harambee’s administrator, Lenora Smith Davis (the “Debtor”) under *281Wis. Stat. § 108.22(9). She filed a petition under Chapter 13 of the Bankruptcy Code, and DWD filed this adversary proceeding for a declaration that the Debtor’s liability is not dischargeable in bankruptcy. The Debtor denies that she is liable under Wis. Stat. § 108.22(9).
DWD filed a Motion for Summary Judgment, and the Court determined that liability for nonpayment of unemployment contributions is a tax as defined in § 523 of the Bankruptcy Code, but left the remaining issues for trial. After the trial, three issues remained, and the parties filed post-trial briefs.
I. FACTS AND PROCEDURAL POSTURE
The Court has jurisdiction under 28 U.S.C. §§ 1334 and 157. As a nondis-chargeability determination, this is a core proceeding over which the Court has authority to enter a final order pursuant to 28 U.S.C. § 157(b)(2)(P.
The parties stipulated to the admission of a number of exhibits, and the Court heard the testimony of the Debtor, two officers of Harambee, and Kenneth Brady, the supervisor of DWD’s unemployment insurance tax collections unit. The evidence showed that Harambee was a nonprofit corporation that operated a private elementary school in Milwaukee, Wisconsin. A Board of Directors (also called the School Board) ran the school. The Debtor was the “administrator” of Harambee, and when the principal unexpectedly left, she also filled that role. Beginning in 2009, the Board gave her the title “chief operating officer,” although she was not an officer of the corporation. The president and vice president testified that they turned to the Debtor after a former administrator embezzled a large amount of funds. They provided the Debtor with the title “chief operating officer” in order to boost her credibility with the students, parents and staff at the school, but they did not give her authority over corporate management or financial decisions that such a title might imply.
The Debtor’s actions with respect to finances were strictly supervised and controlled (essentially micromanaged) by the Board. The Board minutes confirm that all financial decisions were made by the Board, and then delegated to the Debtor. For example, the September 6, 2007 Finance Committee portion of the Board minutes noted: “Petty cash was used for some items such as office supplies and was not kept in a proper accounting system. For the future, Administration will not keep any petty cash.” Board minutes frequently refer to advice given by Haram-bee’s auditors and accountants, and the need for the Board to implement that advice.
Payroll and the payment of payroll taxes and unemployment contributions were handled by an outside service, Bene-Chex, Inc. and Harambee’s accountants. The school’s Accounting Policy and Procedures Manual states: “Payroll has been outsourced to a human resource payroll service provider who prepares the entire payroll for the school and makes the appropriate payroll tax deposits. The business office manager has full responsibility for coordinating all payroll and personnel activities with the human resource payroll service provider. The school uses the outside auditor to assist the business manager in preparing the necessary journal entries to book payroll cost.” This policy was evidenced by a January 2009 letter from the accounting firm instructing the Debtor to sign an attached unemployment contribution tax form and mail it to DWD in an enclosed envelope. The letter also advised that the accountants had arranged for the withdrawal of the unemployment *282tax deposit by electronic funds transfer and told the Debtor to deduct the payment from the checking account.
The Debtor testified credibly that she could not remember signing the unemployment contribution reports, and there was no evidence that she signed the reports for the periods when the contributions were not paid. The bulk of the reports were filed online by the accountants — the Debt- or did not even know how to file the reports online — and the Debtor assumed the accountants arranged for payment by electronic funds transfer. The Debtor’s supposition was confirmed by a May 31, 2010 invoice in which Harambee’s accountant recorded a “Follow-up call to Curt Otto from Benechex regarding possible discontinuation of payroll services and advising him that Harambee is required to pay State Unemployment Compensation taxes.”
The Debtor had the authority to sign checks, but all checks required two signatures. She admitted that her duties included “overseeing accounts payable and receivable,” but these duties appeared to be limited to reporting the status of pay-ables and receivables to the Finance Committee of the Board. Determinations as to when and how bills should be paid were made by the Finance Committee, and the Debtor was not a member of the Finance Committee. Her duties also included supervising staff, from maintenance staff to teachers, developing curriculum, administering school security, and managing the food service program. Although she was present at the school premises overseeing various departments, the Board of Directors and its committees supervised every aspect of the Debtor’s management.
Around the time the unemployment contributions went unpaid, the Debtor’s focus was squarely on securing accreditation for the school, which was necessary for its very survival. When Harambee’s bank got wind that the accreditation decision was going to be adverse to the school, the bank seized the funds in Harambee’s operating account, net of the payroll. The school was able to secure some funds through contributions and donations, but not enough to meet its obligations. Haram-bee’s president testified that, along with other debts, there was no money available to pay to DWD for the unemployment compensation contributions. By December 2010, the utilities were cut off, and the school closed.
According to DWD, the first two quarterly unemployment contribution reports for 2010 were filed late. The contributions for those periods were never paid. DWD contends that Harambee owes the following amounts through October 2013, and that the Debtor is personally liable for the full amount:
Quarter Tax Interest Penalties Costs Total
IQ 2010 $26,836.37 $10,497.67 $50.00 $78.78 $37,462.82
2Q 2010 6$8,821.92 $3,109.68 $50.00 $11,981.60
Total $35,658.29 $13,607.35 $100.00 $78.78 $49,444.42
II. ANALYSIS
Section 108.22(9) of the Wisconsin Statutes provides:
An individual who is an officer, employee, member or manager holding at least 20% of the ownership interest of a corporation or of a limited liability company subject to this chapter, and who has control or supervision of or responsibility for filing any required contribution reports or making payment of contributions, and who willfully fails to file such *283reports or to make such payments to the department, or to ensure that such reports are filed or that such payments are made, may be found personally liable for such amounts, including interest, tardy payment or filing fees, costs and other fees, in the event that after proper proceedings for the collection of such amounts, as provided in this chapter, the corporation or limited liability company is unable to pay such amounts to the department. Ownership interest of a corporation or limited liability company includes ownership or control, directly or indirectly, by legally enforceable means or otherwise, by the individual, by the individual’s spouse or child, by the individual’s parent if the individual is under age 18, or by a combination of 2 or more of them, and such ownership interest of a parent corporation or limited liability company of which the corporation or limited liability company unable to pay such amounts is a wholly owned subsidiary. The personal liability of such officer, employee, member or manager as provided in this subsection survives dissolution, reorganization, bankruptcy, receivership, assignment for the benefit of creditors, judicially confirmed extension or composition, or any analogous situation of the corporation or limited liability company and shall be set forth in a determination or decision issued under s. 108.10.
At the trial, three issues were raised by the Court and disputed by the parties. First, did the Debtor hold at least 20% of the ownership interest of Harambee; second, assuming she did, did the Debtor have control or supervision of or responsibility for filing the required contribution reports or making payment of contributions; and finally, did the Debtor willfully fail to file such reports or to make such payments to DWD.
The first issue is whether the Debtor held at least 20% of the ownership of the corporation. The Debtor did not own 20% of Harambee in the traditional sense; as a non-stock corporation, Harambee did not issue securities. But the definition of “ownership” in § 108.22(9) “includes ownership or control, directly or indirectly, by legally enforceable means or otherwise, by the individual....” DWD argues that because the Debtor supervised school staff, filed reports with the Department of Public Instruction, and held other broad responsibilities with Harambee, she controlled the corporation. The Debtor denies that she controlled Harambee in the sense suggested by the statute.
The Court agrees with the Debtor. Although the term “control” is not defined in § 108.22(9), the context suggests that the term means control in the sense of corporate governance, not day-to-day management of corporate operations. Another Wisconsin statute expressly defines “control” as having the ability to direct voting shares or rights or to achieve a majority on the board of directors, not the ability to supervise day-to-day operations. Wis. Stat. § 214.01 provides:
(3)(a) A person is considered to have control of a savings bank, savings bank subsidiary, affiliate or savings bank holding company if the person, acting alone or in concert with one or more persons, owns, holds, or directs with power to vote or holds proxies representing, 10% or more of the voting shares or rights of a savings bank, savings bank subsidiary, affiliate or savings bank holding company; or has the ability to achieve in any manner the election or appointment of a majority of the directors of a savings bank, savings bank subsidiary, affiliate or savings bank holding company.
*284The decisions of the Wisconsin Labor and Industry Review Commission (“LIRC”) reinforce this interpretation. All of the LIRC decisions cited by DWD feature individuals who held themselves out as holding the requisite ownership interest or were designated as owners on the corporate records. None of the decisions involved an individual whose alleged control was limited to day-to-day operations under the strict supervision of a governing board.
For example, in Mortgage Specialists, Inc., UI Hearing No. S9200409MW (LIRC Aug. 31, 1994), DWD issued an Initial Determination that Ardell Kreuser was personally liable for the corporation’s unpaid taxes. After an appeal, the LIRC set out the elements that DWD must prove to establish personal liability:
(1) that Kreuser held at least 20 percent of the ownership interest of Mortgage Specialists; (2) that he had direct or supervisory responsibility for filing contribution reports or making contribution payments; and (3) that he willfully failed to make the payments or file the reports.
On the ownership element, the LIRC noted that Mr. Kreuser agreed to buy 49 percent of the corporation’s stock (although he never paid for it), and he held these shares on the corporation’s books. Mr. Kreuser accepted stock dividends and voted his shares, all evidencing his ownership of the corporation. In connection with his own claim for unemployment benefits, the decision observes: “Significantly, during the investigation of his benefits claim, Mr. Kreuser stated he owned and controlled 49 percent of the Mortgage Specialists.” When the corporation experienced financial problems, the other 49% shareholder wanted to continue the operations, but Mr. Kreuser and the corporate secretary (who held the remaining shares) voted to liquidate. Their decision prevailed, and Mr. Kreuser oversaw the liquidation of the corporation. The facts in Mortgage Specialists are completely distinguishable from this case. The Debtor never held herself out as owning any percentage of Harambee, did not control any decisions about Harambee’s eventual liquidation, and never oversaw that liquidation. Although she was a valued and important employee, the Debtor’s control, if any, involved the day-to-day management of the school, not the governance of the corporation.
In 1997, after the LIRC decided Mortgage Specialists, Inc., Wis. Stat. § 108.22(9) was amended to add the “ownership includes ownership and control” language. However, later decisions do not retreat from focusing on traditional notions of ownership and control. For example, in Leo J. Schilz, UI Hearing No. S0100133MW (LIRC Dec. 10, 2001), the LIRC affirmed the Appeal Tribunal’s decision that Mr. Schilz was personally liable for his corporations’ unpaid taxes. The LIRC repeated the familiar elements of personal liability:
First, the individual the department seeks to impose liability upon, must be an officer holding at least 20 percent of the ownership interest in the corporation. Second, the individual must have control or supervision of or responsibility for making unemployment insurance contributions. Third, the individual must willfully fail to make such payments or insure that such payments are made. Fourth, before imposing personal liability the department must first institute ‘proper proceedings’ against the corporation and the corporation must be unable to pay the taxes in question.
The LIRC rejected Mr. Schilz’s claim that he was not an owner. Apparently, *285Mr. Sehilz signed the contribution reports as an owner, and told a DWD representative that he had sold some corporate stock to another individual. The LIRC concluded: “All of this evidence, taken together, and particularly when coupled with the appellant’s representations to vendors that he was an owner of the businesses in question, is sufficient to establish the ownership interest for purposes of the personal liability statute.” In Sehilz, the LIRC focused on Mr. Schilz’s holding himself out as an owner of the corporation, rather than any functions and duties he carried out in operating the corporate business.
In Michael A. Pharo, UI Hearing No. S9900158MD (LIRC Dec. 28, 2001), the LIRC recognized that: “The statute specifically states that the ownership interest includes ownership or control, directly or indirectly, by legally enforceable means or otherwise.” Based on the facts of that case, the LIRC concluded that Mr. Pharo was an owner:
After the resignation in July of 1995 of Mr. Leach, the appellant operated the business. Pursuant to a July 18, 1995 shareholder resolution, the appellant was authorized from that point to act as president of the corporation. Upon Mr. Leach’s resignation, the appellant changed the locks in the office and said he was taking over the corporation. This is sufficient to establish the requisite ownership or control for purposes of personal liability under Wis. Stat. § 108.22(9).
The facts in Pharo are closer to those in Mortgage Specialists than this case. In Pharo and Mortgage Specialists, the individuals held themselves out as corporate owners — and then “walked the talk” by taking over the corporations, changing locks and overseeing corporate liquidations. Here, the Debtor served as principal and administrator of a school under the strict control and supervision of a Board of Directors. While the Debtor admittedly had a long list of duties and responsibilities, she testified credibly that she was merely the “eyes and ears of the Board” at the school, and did not make financial or management decisions without Board approval. When Harambee’s bank seized the funds in the corporate bank account, some donations trickled in to enable the Board to keep the school afloat until the announcement of the all-important accreditation decision. There was no evidence that the Debtor “took over” the liquidation either on her own (as in Mortgage Specialists) or with the vote of the stakeholders (as in Pharo). If locks were changed at Harambee, there is no evidence that the Debtor changed them.
The minutes of the Board meetings and the testimony of Harambee president Mar-reese Allen-Harris, and vice president Sister Calista Robinson, confirm that Haram-bee had a large, active Board of Directors and dedicated, involved officers who supervised and directed the Debtor’s actions in school operations. For example, Ms. Allen-Harris testified that the Finance Committee made recommendations, and the Board ultimately decided which bills would be paid. (Transcript at 90). When asked whether paying bills or making decisions about what bills would be paid was the Debtor’s responsibility, Ms. Allen-Harris responded “No.” (Id. at 88). Sister Robinson confirmed: “Well we certainly had a board and the board would give direction to Mrs. Davis on what to do.” (Id. at 80). When asked, “So was there any task that Lenora completed as COO that she would have had unilateral power to go and do without any oversight from any entity including the school board?” Sister Robinson replied, “No.” (Id.) Unlike in the LIRC decisions cited by DWD, the Debtor did not have control over corporate gover*286nance. While she may have had control over calling in a substitute teacher when needed, the Debtor lacked the kind of control over Harambee that is envisioned in Wis. Stat. § 108.22(9).
III. CONCLUSION
Since a 20% ownership interest is a requirement for the imposition of personal liability, and since the Debtor did not own (or control as contemplated by the statute) 20% of Harambee, she is not personally liable for the unpaid unemployment contributions. As a result of this conclusion, it is not necessary to determine whether the Debtor had control over filing the reports or making the unemployment contribution payments. However, much of the testimony and evidence supported the Debtor’s argument that she lacked such control.
The foregoing discussion constitutes the Court’s findings of fact and conclusions of law. A separate Order will be entered dismissing the Complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496879/ | SCHERMER, Bankruptcy Judge.
Kathy A. Cruz, appeals from the: (1) September 11, 2013 Order Imposing Sanctions and Judgment; and (2) October 1, 2013 Order Denying Motion to Vacate or to Alter or Amend Judgment. For the reasons that follow, we rule consistently with respect to the bankruptcy court’s two decisions, affirming in part, and reversing and remanding in part.
ISSUES
The issues in this appeal are whether the bankruptcy court erred when it: (1) decided that Cruz violated Federal Rule of Bankruptcy Procedure 9011, and imposed sanctions, for her conduct throughout a debtor’s case; (2) suspended Cruz from the practice of law in the Arkansas bankruptcy court for a period of time; and (3) imposed sanctions against Cruz under 11 U.S.C. § 105 and its inherent authority based on misrepresentations allegedly made by Cruz during a show cause hearing. The bankruptcy court acted within its discretion when it found a violation of Rule 9011 and imposed sanctions including suspending Cruz from the practice of law in Arkansas’s bankruptcy court. However, the bankruptcy court’s imposition of sanctions under § 105 and its inherent authority was improper because Cruz did not receive separate prior notice and an opportunity to be heard regarding such sanctions.
BACKGROUND
On January 24, 2008, Jonathan Michael Young (the “Debtor”), filed a petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”). Prior to the petition date, the Debtor and his former wife, Kristalynn Young, who is now known as Kristalynn Stephens (“Stephens”), divorced. The state court entered a divorce decree on November 1, 2007, awarding Stephens alimony of $1,100 per month (subject to review after a year), attorney’s fees of $10,890 and restitution in the amount of $2,350. The Debtor was put in jail in January 2008 (prepetition) for contempt due to his failure to pay alimony to Stephens. He was released when his parents posted a $5,000 bond. The Debtor’s appeal of the divorce decree and the contempt ruling was pending on the petition date.
The Debtor’s original Schedule E listed prepetition obligations to Stephens for attorney’s fees in the amount of $10,890, and restitution in the amount of $2,350, but it did not include an obligation for prepetition alimony. Instead, the Debtor’s Schedule J included $1,100 of alimony each month as a postpetition expense.
Stephens filed a motion in the Debtor’s bankruptcy case for relief from the automatic stay with respect to the Debtor’s *289state court appeal. The motion for relief from the stay ended in a June, 2008 agreed order granting relief from the stay. Shortly thereafter, on July 1, 2008, the Debtor’s bankruptcy case was converted to one under Chapter 13. The original Chapter 13 plan, filed in July, 2008, did not mention Stephens.
Unfortunately, the parties did not agree on the interpretation of the June, 2008 stay relief order and whether Stephens was permitted to seek a ruling of contempt against the Debtor in state court. After the entry of the stay relief order and after the state appellate court affirmed the lower state court’s decision, Stephens sent a letter to the Debtor dated October 6, 2008 (the “October Letter”). The October Letter set forth the arrearages in the Debtor’s alimony payments for the period October, 2007 through October, 2008.
The bankruptcy court stated that, applying the bond that was posted earlier by the Debtor’s parents to the amount of the alimony arrearages stated in the October Letter, resulted in a balance of $9,300, most (if not all) of which accrued postpetition, and that the October Letter stated that if Stephens did not receive assurances of payment from the Debtor by a date certain, she would file for contempt. Stephens filed a petition in state court and the state court held contempt hearings in December 2008 and March 2009, resulting in the Debtor being held in contempt and serving jail time.
It was Stephens’s request for a ruling of contempt that led to the filing of an adversary proceeding by the Debtor against Stephens in December, 2010, alleging a stay violation. In his adversary proceeding, the Debtor referred to his alimony arrearages as “prepetition” alimony. In addition, in the complaint, the Debtor claimed that Stephens had not been paid because she continued to object to confirmation of the plan and she failed to file a proof of claim.
Two days after the date of the October Letter, on October 8, 2008, Cruz: (1) amended the Debtor’s Schedule E to include $9,300 in alimony (the exact balance determined by the bankruptcy court to be set forth in the October Letter after applying the bond posted by the Debtor’s parents), as a § 507(a)(1) unsecured priority claim; and (2) filed a Modification of Chapter 13 Plan (the “Modified Plan”) that included a priority debt for $9,300 in “past due alimony,” to be paid in full under the plan, and stated that the Debtor would “continue” to make his $1,100 alimony payments to Stephens directly. The Modified Plan also provided for full payment of the restitution and attorney fee amounts set forth in the divorce decree.
Beginning in 2008 and ending in 2009, the Chapter 13 trustee filed objections to the Debtor’s Chapter 13 plan on the basis that the Debtor did not provide proof of payment of postpetition domestic support obligations. The Debtor obtained several continuances of the confirmation hearing. And, although Stephens’s last objection to plan confirmation was withdrawn early in 2009, the Debtor did not confirm a plan until April 6, 2011, because of the trustee’s pending objections.
Following the October, 2008 Modified Plan, the Debtor modified his plan twice: (1) once in March, 2009 (making no changes to plan provisions), at the same time the Debtor filed an amended Schedule J showing an amended alimony expense of $800; and (2) the second time in March, 2011, when Crux filed a third modified plan (the “Third Modified Plan”). The Third Modified Plan included a statement “[t]hat the [Djebtor believes he is current on all domestic support obligations that were due after the filing date of his chapter 13 plan.” Other than this statement, *290the terms of the plan did not change. In April, 2011, the bankruptcy court entered an order confirming the Debtor’s Chapter 13 plan.
On March 10, 2009, after the time of the state court contempt hearing, Stephens filed a proof of claim in the Debtor’s bankruptcy case, which characterized the claim as a prepetition priority domestic support claim under 11 U.S.C. § 507(a)(1), and attached the divorce decree. The Debtor objected to the proof of claim only on the basis of the amount of the claim, not based on the characterization of it as a prepetition priority claim. The bankruptcy court sustained the claim objection, and Stephens was permitted to, and did, file an amended unsecured, priority claim in a lesser amount (an amount that the bankruptcy court later construed to represent prepetition restitution and attorney’s fees under the divorce decree, plus mostly post-petition alimony, under the divorce decree), but with the same classification.
The bankruptcy court found that the Debtor made his required plan payments, but, notwithstanding the fact that he listed an alimony expense on his Schedule J, he had never made his postpetition alimony payments to Stephens.
The bankruptcy court held a trial in the adversary proceeding and, in June, 2013, the court issued its decision in the adversary proceeding. In its Memorandum Opinion on the merits in the adversary proceeding, the court set forth the basis for its issuance of a separate show cause order. The court issued a separate Order to Appear and Show Cause (the “OSC”), which “directed] the [Djebtor to show cause why his case should not be dismissed for cause pursuant to 11 U.S.C. § 1307, ..., and directed] the [Djebtor’s attorney, [Cruz], to show cause why she should not be sanctioned pursuant to Federal Rule of Bankruptcy Procedure 9011.”1 The OSC also stated that it “is issued pursuant to 11 U.S.C. § 105 and Federal Rule of Bankruptcy Procedure 9011(c)(1)(B).” That is the only reference in the OSC to § 105. The OSC set forth the possibly sanctiona-ble conduct of Cruz under a heading titled “Federal Rule of Bankruptcy Procedure 9011.” The OSC set forth four bases upon which the court was considering sanctions against Cruz, with specific information about the court’s concerns. Thereafter, the court entered an order inviting written responses to the OSC.
Following a hearing on the OSC, the court issued its Order Imposing Sanctions and its separate Judgment. Referring to three of the four items set forth in its OSC, the court imposed sanctions against Cruz under Federal Rule of Bankruptcy Procedure 9011, suspending her from practice in the Arkansas bankruptcy court for six months, imposing a $1,000 fine, payable to the Clerk of the court, and requiring her, within six months, to attend twelve hours of continuing legal education on Chapter 13 bankruptcy. The court also sanctioned Cruz, under 11 U.S.C. § 105 and the court’s inherent power, for alleged misrepresentations made by Cruz in her testimony to the court at the hearing on the OSC, imposing a concurrent six month suspension on her practice before the Arkansas bankruptcy court, and fining her an additional $1,000 payable to the Clerk of the court. In addition, the court referred and provided a copy of the sanctions order to the Office of the Committee on Professional Conduct.2
*291Cruz then filed a Motion to Vacate or to Alter or Amend Judgment, which the bankruptcy court denied.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error, and conclusions of law are reviewed de novo. Briggs v. Labarge (In re Phillips), 433 F.3d 1068, 1071 (8th Cir.2006) (citation omitted). “A bankruptcy court’s decision to impose sanctions is reviewed for an abuse of discretion.” Id. (citing Schwartz v. Kujawa (In re Kujawa), 270 F.3d 578, 581 (8th Cir.2001); Grunewaldt v. Mut. Life Ins. Co. of N.Y. (In re Coones Ranch, Inc.), 7 F.3d 740, 743 (8th Cir.1993)) (“We apply an abuse-of-discretion standard of review in all aspects of Rule 11 (and by analogy, Rule 9011) cases.”) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990)).
DISCUSSION
A. Jurisdiction
As a preliminary matter, we have jurisdiction over this appeal from the final orders and judgment of the bankruptcy court. See 28 U.S.C. § 158(a)(1) and (b). The standard for determining finality for the purposes of appeal is “more flexible” in bankruptcy matters than it is in other civil cases. Isaacson v. Manty, 721 F.3d 533, 537 (8th Cir.2013) (“Our jurisdiction over bankruptcy appeals, however, is governed by 28 U.S.C. § 158(d)(1), which establishes a ‘more flexible’ standard of finality than does [28 U.S.C.] § 1291.”) (citing Contractors, Laborers, Teamsters and Eng’s Health and Welfare Plan v. Killips (In re M & S Grading, Inc.), 526 F.3d 363, 368 (8th Cir.2008)). “Although this standard is more flexible than in nonbankruptcy contexts, an order entered before the conclusion of a bankruptcy case is not subject to review under § 158(d) unless it finally resolves a discrete segment of the underlying proceeding.” M & S Grading, Inc., 526 F.3d at 368 (citing In re Farmland Indus., Inc., 397 F.3d 647, 650 (8th Cir.2005)). “[FJinality depends on the extent to which (1) the order being appealed ‘leaves the bankruptcy court nothing to do but execute the order,’ (2) delay in appellate review would prevent ‘effective relief,’ and (3) a later reversal ‘would require recommencement of the entire proceeding.’ ” Isaacson, 721 F.3d at 537 (citing M & S Grading, Inc., 526 F.3d at 368).
The bankruptcy court’s orders and judgment were final. The bankruptcy court based its ruling imposing sanctions on Rule 9011, § 105 and its inherent authority. See Isaacson, 721 F.3d at 537-38 (discussing finality in context of sanctions order). Sanctions were imposed after the Chapter 13 plan was confirmed, and after the court had entered its judgment on the merits in the adversary proceeding. In addition, the Debtor obtained his Chapter 13 discharge less than two months after Cruz filed her amended notice of appeal, and the Chapter 13 trustee filed his final report less than three months after Cruz filed her amended notice of appeal. The bankruptcy court imposed nonmonetary sanctions. And, the monetary sanctions imposed by the bankruptcy court were non-compensatory and were made payable to the Clerk of the bankruptcy court.
B. Sanctions
Pursuant to Federal Rule of Bankruptcy Procedure 9011(c)(1)(B), a bankruptcy court may impose sanctions on its *292own initiative. Fed. R. BaNKrP. 9011(c)(1)(B). In addition, Bankruptcy-Code § 105(a) provides a bankruptcy court with authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of’ the Bankruptcy Code, and allows the court to “tak[e] action or mak[e] any determination necessary or appropriate to ... prevent an abuse of process.” 11 U.S.C. § 105(a). And, a bankruptcy court “may also possess ‘inherent power ... to sanction “abusive litigation practices.” ’ ” Law v. Siegel, — U.S. -, -, 134 S.Ct. 1188, 188 L.Ed.2d 146, 2014 WL 813702, at *5 (2014) (citing Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375-376, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)) (quotation marks omitted).
Notice and an opportunity to be heard must be afforded to the party to be sanctioned prior to the imposition of sanctions. Walton v. LaBarge (In re Clark), 223 F.3d 859, 864 (8th Cir.2000) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 56-57, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991)); Fed. R. Bankr.P. 9011(c). “[N]otice must be given that the court is considering imposing sanctions.” Id. at 864-865.
(I) Sanctions based on conduct throughout the case
The bankruptcy court imposed sanctions against Cruz under Federal Rule of Bankruptcy Procedure 9011 for her conduct related to filings throughout the case. Pursuant to Rule 9011(b), an attorney presenting papers to the court makes certain certifications. The attorney:
(b) is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; [and] (3) the allegations and other factual contentions have evidentia-ry support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery ...
Fed. R. BanxrP. 9011(b)(l)-(3). Assuming notice has been given and the party to be sanctioned has had a reasonable opportunity to respond, the bankruptcy court may impose sanctions for a violation of Rule 9011(b). Fed. R. BanKrP. 9011(c).
Rule 9011(c)(1)(B) discusses the imposition of sanctions on the court’s initiative: “On its own initiative, the court may enter an order describing the specific conduct that appears to violate subdivision (b) and directing an attorney, law firm, or party to show cause why it has not violated subdivision (b) with respect thereto.” Fed. R. BanxrP. 9011(c)(1)(B). The order imposing sanctions “shall describe the conduct determined to constitute a violation of this rule and explain the basis for the sanction imposed.” Fed. R. BaNkr. P. 9011(c)(3).3
(a) Determination of Rule 9011 violation and imposition of sanctions
The bankruptcy court acted within its discretion when it found violations of Rule 9011(b) and imposed sanctions on *293Cruz under Rule 9011 for her conduct throughout the Debtor’s case. We see no problem with the notice and opportunity to respond provided by the bankruptcy court to Cruz (and Cruz does not complain of any) with respect to Cruz’s Rule 9011 violations and related sanctions. The OSC set forth four clear and easy to comprehend bases upon which it believed Rule 9011(b) had been violated and upon which it was considering the imposition of sanctions.
The court’s sanctions order explained which conduct was improper and why sanctions were imposed. And, the court’s reasons for imposing sanctions under three of the four areas mentioned in the OSC showed that Cruz’s conduct in the case was not reasonable under the circumstances. See Phillips, 433 F.3d at 1071 (“[T]he attorney must make a reasonable inquiry into whether there is a factual and legal basis for a claim before filing.”); Snyder v. Dewoskin (In re Mahendra), 131 F.3d 750, 759 (8th Cir.1997) (“[T]he established standard for imposing sanctions is an objective determination of whether a party’s conduct was reasonable under the circumstances.”) (quoting In re Armwood, 175 B.R. 779, 788 (Bankr.N.D.Ga.1994)).
(i) Postpetition domestic support obligations
As the bankruptcy court recognized, a Chapter 13 debtor is required to pay his postpetition domestic support obligations on an ongoing basis. See 11 U.S.C. § 1307(c)(ll) (“the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, ... for ... failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition”); 11 U.S.C. § 1325(a)(8) (“the court shall confirm a plan if ... the debtor has paid all amounts that are required to be paid under a domestic support obligation and that first become payable after the date of filing of the petition.... ”); 11 U.S.C. § 1328(a) (“in the case of a debtor who is required ... to pay a domestic support obligation, after such debtor certifies that all amounts payable ... that are due on or before the date of the certification ... have been paid ... the court shall grant the debtor a discharge.... ”).
Likewise, the court correctly set forth the process by which a debtor lists the amount of his postpetition domestic support obligations as expenses on his Schedule J, and those amounts are subtracted from the debtor’s income when computing his Chapter 13 plan payments. See 11 U.S.C. § 1325(b)(2)(A)® (defining “disposable income” as “current monthly income received by the debtor ... less amounts reasonably necessary to be expended ... for ... a domestic support obligation, that first becomes payable after the date the petition is filed[.]”). And, the court recognized that proofs of claims are not permitted for postpetition domestic support obligations. See 11 U.S.C. § 502(b)(5) (disallowing a claim “to the extent that ... such claim is for a debt that is unmatured on the date of the filing of the petition and that is excepted from discharge under section 523(a)(5) of this title.”); Burnett v. Burnett (In re Burnett), 646 F.3d 575, 582 (8th Cir.2011) (Bankruptcy Code does not allow proof of claim for postpetition domestic support obligation).
(ii) Overview
The bankruptcy court characterized Cruz’s violations of Rule 9011(b) as an effort to protect the Debtor from the consequences of the Debtor’s failure to make his required postpetition alimony payments. The record amply supports the bankruptcy court’s ruling. The court determined that Cruz had to have known *294that the Debtor failed to make his required postpetition alimony payments, so Cruz amended the Debtor’s schedules and his plan to treat the alimony debt as prepetition priority debt and to state that the Debtor would “continue” to pay his postpe-tition alimony outside of his plan. In addition, the plan involved the filing of a false certification regarding payment of postpe-tition domestic support obligations to obtain confirmation. Meanwhile, Cruz allowed the Debtor to maintain an expense on the Debtor’s Schedule J for postpetition alimony payments, thus excluding that amount from the calculation of the Debt- or’s payments to creditors under his plan. Therefore, the bankruptcy court found that Cruz promoted confirmation of a plan that excluded the alimony amount from the funds available to creditors, while affording priority payment to the same alimony debt, at the expense of other creditors,
(iii) The Third Modified Plan
Because the bankruptcy court deemed it to be the most serious matter, we begin our discussion with the statement made in the Third Modified Plan “[t]hat the [Debt- or believes he is current on all domestic support obligations that were due after the filing date of his chapter 13 plan.” (emphasis added). To the contrary, Bankruptcy Code § 1325(a)(8) requires, for confirmation, that “the debtor has paid all amounts that are required to be paid under a domestic support obligation and that first become payable after the date of filing of the petition...” 11 U.S.C. § 1325(a)(8) (emphasis added).
The bankruptcy court determined that Cruz had “manipulated the Code, the court, and the bankruptcy system” when she included the offending statement in the Debtor’s Third Modified Plan. In light of the trustee’s ongoing objections to confirmation of the plan based on the Debtor’s failure to prove compliance with § 1328(a)(8), Cruz’s improper intent and purpose for including the offending language in the plan was apparent. The bankruptcy court had solid ground for its reasoning that the Debtor’s alteration of the language of § 1325(a)(8) was “a manipulation too subtle to have been anything but purposeful.” We also hold that the bankruptcy court was warranted in making its decision that the facts represented by the offending certification lacked support because Cruz knew that the Debtor failed to pay postpetition alimony.
(iv) The Modified Plan
The OSC alerted Cruz about the bankruptcy court’s concerns that: (1) the Modified Plan provided for the Debtor to “continue” to make his $1,100 monthly alimony payments to Stephens, when he had not been making those payments, and did not do so going forward; and that (2) in the Modified Plan, $9,300 of postpetition alimony was improperly characterized as pre-petition priority debt.4
The record supports the bankruptcy court’s determination that, when Cruz filed the Modified Plan stating that the Debtor “shall continue to pay his current monthly alimony of $1,100 to [Stephens] direct,” Cruz knew that the Debtor had not been making the postpetition alimony payments on his Schedule J, and had been enjoying the improper deduction on his Schedule J throughout his case. As the court noted, the Modified Plan was filed two days after receipt of the October Letter stating that the Debtor had not been making his alimony payments. The record also shows that the Modified Plan was filed after the Debt- *295or was jailed for his failure to comply with obligations under the divorce decree. There was a firm basis for the bankruptcy court’s determination that Cruz acted with an improper purpose when she double listed the alimony as an expense on Schedule J and a priority debt to be paid through the plan. We will not second guess the bankruptcy court’s rejection of Cruz’s stated reasons why she believed the statements in the Modified Plan were appropriate.
The bankruptcy court’s ruling that the Debtor improperly took $9,300 in mostly postpetition alimony and recharacterized it as prepetition priority alimony in the Modified Plan, was also supported by the record. The court compared the calculations in the October Letter and in the divorce decree to show this mischaracterization of the debt. In the sanctions order, the court considered the record as a whole and various parts of it, to decide that Cruz could not show a factually and legally supported basis for her actions or filings, and that she acted for an improper purpose. Cruz attempted to rationalize her listing in the plan of $9,300 in prepetition priority debt based on her preconversion theory. Under Cruz’s preconversion theory, the Debtor was supposedly permitted to characterize postpetition domestic support obligation debt as prepetition debt in his converted case, provided such debt was incurred prior to the conversion date.
The court noted that the $9,300 amount in the plan fit neatly with the alimony calculation in the October Letter, but the court found that Cruz could not satisfactorily explain how she arrived at the $9,300 amount set forth in the Modified Plan, and how that entire amount was for debt attributable to the preconversion period. In addition, the court appropriately decided that the characterization of the alimony obligation by Cruz in the Modified Plan ignored, and was belied by, the Debtor’s Schedule J, which lists an ongoing monthly expense for alimony. And, we note that, as the bankruptcy court recognized, the legal arguments made by Cruz do not make sense in light of the bankruptcy court’s assessment of the facts. Therefore, we do not explore any such arguments further.
(v) The complaint
Certain provisions of the complaint filed in the adversary proceeding merited attention in the OSC. The bankruptcy court was concerned about Cruz’s statements in the complaint that, as of the time of the March 9, 2009 state court contempt hearing, Stephens “still had not been paid because [she] had failed to file a Proof of Claim, and had continued to object to confirmation.” The court viewed this statement as a part of Cruz’s characterization of the situation as one where Stephens willfully violated the stay by bringing the state court contempt action and trying to collect money but, had she filed a proof of claim and not objected to confirmation of the plan, she would otherwise have access to such funds.
As the bankruptcy court recognized, the statement regarding objections to confirmation by Stephens is factually incorrect. The record reflects that as of the March 9, 2009 state court contempt hearing, Stephens did not have a pending objection to the Debtor’s plan. The statement that Stephens did not receive payment because she had not filed a proof of claim as of the March 9, 2009 contempt hearing was legally incorrect. We agree with the bankruptcy court’s statement that where the Debt- or had consistently scheduled the alimony as a postpetition expense on his Schedule J, Stephens was not required or permitted under the Bankruptcy Code to file a proof of claim for that debt.
*296(b) Amount and type of sanctions
The amount and type of sanctions were appropriate under the circumstances. Sanctions shall be “limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated.” Fed. R. BankR.P. 9011(c)(2). In addition, sanctions entered on a court’s initiative may be in a nonmonetary form or in the form of an order to pay a penalty into the court. Fed. R. BaNKR.P. 9011(c)(2).
The monetary sanction of $1,000 imposed by the bankruptcy court was commensurate with the goal of deterring Cruz and others from future misconduct. Likewise, we see no problem with the requirement for Cruz to attend continuing legal education on Chapter 13. And, we see no abuse in the bankruptcy court’s referral of this matter to the Office of the Committee on Professional Conduct.
(i) Suspension of Cruz from practice
Cruz specifically attacks the bankruptcy court’s ruling suspending her from practice in the Arkansas bankruptcy court for six months. According to Cruz, the bankruptcy court did not have the authority to suspend Cruz from practicing law because such a suspension did not comport with the requirements of a local rule of the District Courts for the Eastern and Western Districts of Arkansas. We disagree.
Local Rule 2090-2 of the United States Bankruptcy Court for the Eastern and Western District of Arkansas states that:
The standard of professional conduct for attorneys practicing in this Court is governed by the Arkansas Rules of Professional Conduct and Federal Rule of Bankruptcy Procedure 9011. The Court will refer violations of the Arkansas Rules of Professional Conduct to the Arkansas Committee on Professional Conduct for such actions and such sanctions as the Committee deems appropriate. Additionally, the Court shall have such authority and discretion as are permitted by and under the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, statutory and common law, and the express and inherent powers conferred upon them. Sanctions may include suspension or disbarment from the practice before this Court.
Bankr. Ajrk. Looal R. 2090-2 (emphasis added).
Local Bankruptcy Rule 9020-2 was approved by the Eighth Circuit Judicial Council and by the United States District Courts for the Eastern and Western Districts of Arkansas. It is, therefore, irrelevant what the district courts’ rules provide. The bankruptcy court’s rule permits suspension from practice as sanctions. And, the bankruptcy court acted within its discretion when it imposed the sanction of a six month suspension of Cruz from practice, as that sanction was reasonably suited to the violations found by the bankruptcy court.
(II) Sanctions based on conduct at hearing on the order to show cause
The bankruptcy court imposed sanctions against Cruz under § 105 and the court’s inherent powers for what it referred to as misrepresentations during her testimony at the show cause hearing. Cruz was not given notice and an opportunity to be heard before the imposition of such sanctions. The OSC did not, and could not have, mentioned the possibility of being sanctioned for her allegedly false testimony at a hearing that had not yet taken place. Cruz was not alerted to such sanctions until they were already imposed. Given the seriousness of a decision to impose sanctions, separate notice and an opportunity to be heard were necessary. *297Therefore, we reverse the imposition of sanctions against Cruz based on her testimony at the OSC hearing, and we remand that matter to the bankruptcy court to hold a hearing if it wishes to do so. We also direct the bankruptcy court, prior to any such hearing, to provide Cruz with notice regarding which portions of her testimony at the hearing on the OSC are alleged to be sanctionable, and an opportunity for Cruz to respond.
CONCLUSION
For the reasons stated, we affirm the bankruptcy court’s decision that Cruz violated Federal Rule of Bankruptcy Procedure 9011, as well as its imposition of sanctions in connection therewith, including suspension of Cruz from practice. We reverse the bankruptcy court’s imposition of sanctions against Cruz based on her testimony at the hearing on the OSC, and we remand to the bankruptcy court the decision regarding sanctions for alleged misrepresentations by Cruz at that hearing. If the bankruptcy court wishes to consider sanctions for Cruz’s testimony at the show cause hearing, it shall hold a separate hearing and, prior to any such hearing, provide Cruz with notice and an opportunity to respond regarding which portions of Cruz’s testimony are alleged to be sanctionable.
. The bankruptcy court withdrew the OSC against the Debtor.
. The bankruptcy court entered an order, upon certain conditions, staying its sanctions award pending this appeal. The conditions for the stay were that Cruz was required to *291deposit $2,000 into the court registry and the stay will terminate immediately once we enter our ruling in this appeal.
. To impose monetary sanctions on a court’s initiative, the court must "issue[ ] its order to show cause before a voluntary dismissal or settlement of the claims made by or against the party which is, or whose attorneys are, to be sanctioned.” Fed. R. BankrP. 9011(c)(2)(B).
. The bankruptcy court also noted that the complaint referred to the Debtor’s alimony arrearages as prepetition alimony. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496880/ | JUDGMENT
Pursuant to the judgment of the United States Court of Appeals, the mandate in this case is hereby recalled and the Panel’s opinion and judgment of November 29, 2012 are vacated. It is further ordered and adjudged that the judgment of the Bankruptcy Court is reversed and this case is remanded to the Bankruptcy Court for proceedings consistent with the opinion of the U.S. Court of Appeals. Mandate shall issue forthwith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496882/ | MEMORANDUM DECISION REGARDING MOTION TO CONFIRM MODIFIED CHAPTER 13 PLAN
W. RICHARD LEE, Bankruptcy Judge.
Before the court is a motion by the debtors Frances and Ricky Pasley (the “Debtors”) to confirm their sixth modified chapter 13 plan (the “Modified Plan”). The “below-median-income” Debtors have successfully modified their mortgage, significantly reducing the monthly payments, and they now seek to shorten the term of this bankruptcy from 60 months to 44 months (the “Motion”). In opposition, the chapter 13 trustee Michael H. Meyer (the “Trustee”) contends that reduction of the plan’s term does violence to the “good faith” requirement of 11 U.S.C. *315§ 1325(a)(3)1 (the “Objection”). After oral argument, the parties waived the right to an evidentiary hearing and the matter was submitted on the briefs and declarations.
Initially, the Debtors were only required to be in bankruptcy for 36 months; however, there was “cause,” at the time, to extend the term to 60 months. Because cause no longer exists for permitting the Debtors to remain that long in bankruptcy, and because there is no statutory basis to require that they do so, the Trustee’s Objection will be overruled and the Motion will be granted.
This memorandum decision contains the court’s findings of fact and conclusions of law required by Federal Rule of Civil Procedure 52(a), made applicable to this contested matter by Federal Rules of Bankruptcy Procedure 7052 and 9014(c). The court has jurisdiction over this matter under 28 U.S.C. § 1334, 11 U.S.C. §§ 1325 and 1329, and General Order Nos. 182 and 330 of the U.S. District Court for the Eastern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (L).
Background and Findings of Fact.
The Debtors reside in the foothill community of Oakhurst, California. They own a modest home, valued on their schedules at $150,000 (the “Residence”), which is encumbered by a loan and deed of trust in favor of Wells Fargo Bank, N.A. (the “Mortgage”). Wells Fargo Bank’s proof of claim reports that the Mortgage had an outstanding balance of approximately $203,000, with an arrearage of approximately $7,380, at the commencement of this ease. The ongoing monthly payments were initially $1,476.89. The Residence is also encumbered by a second hen in favor of Wells Fargo Bank, for which a claim was filed in the approximate amount of $105,000 (the “Junior Mortgage”). The Debtors also own an automobile, a 2007 Nissan valued in the schedules at $18,000, which serves as collateral for a loan held by Ally Financial in the amount of $15,866 (the “Auto Loan”). One of the Debtors, Frances Pasley, was regularly employed.2 The other Debtor, Ricky Pasley, was retired and unemployed at the commencement of this case. His only reported source of income was social security and a modest pension. The Debtors have no dependents and their combined gross monthly income, exclusive of the social security benefits, was reported on schedule I as $4,225.31, placing them below the applicable median income for a household of two in California.3 After allowance for reasonable and necessary expenses, their monthly net income stated on schedule J was $250.
The Original Plan. The Debtors commenced this chapter 13 case in January 2011. Based on their income, the Debtors qualified as “below-median-income” for purposes of determining which sections of the Bankruptcy Code would govern ealeu-*316lation of the “projected disposable income” they had to pay to unsecured creditors. Their income status also determined the “applicable commitment period,” the length of time the Debtors’ chapter 13 plan had to provide for those payments.
After several unsuccessful attempts at confirming a chapter 13 plan, the Debtors finally confirmed their fifth modified plan, without an objection from the Trustee, in September 2011 (the “Original Plan”). In paragraph 2.03 of the Original Plan, the Debtors committed to make 60 monthly payments to the Trustee in varying amounts, increasing from $313 in months 1 and 2 to $3,339.02 in months 58 through 60.4 The Original Plan put the Mortgage in class 1, meaning that the ongoing post-petition payments had to be paid through the Trustee and the prepetition arrearage would be amortized over the 60-month term, making the total paid on account of the Mortgage claim $1,641.49 per month. The Auto Loan was placed in class 2 as a modified secured claim, to be reamortized over the 60-month term with payments of $293.49 per month.
In August 2011, the court granted the Debtors’ motion to value the Residence, which effectively made Wells Fargo Bank’s Junior Mortgage a “wholly unsecured” claim. Only one other unsecured claim was filed in this case, a credit card obligation to Chase Bank U.S.A. in the approximate amount of $3,000. The Original Plan did not require any distribution to the holders of general unsecured claims. All of the payments over the 60-month term of the Original Plan were devoted to the Mortgage, the Auto Loan, and administrative expenses. In the absence of an objection from the Trustee, there was no dispute that the Original Plan met all of the statutory requirements for confirmation, including the good faith requirement (§ 1325(a)(3)), the chapter 7 liquidation test (§ 1325(a)(4)), and the disposable income test (§ 1325(b)(1)(B)).
Modification of the Mortgage and the Modified Plan. In October 2013, after Wells Fargo Bank made several changes to the Mortgage payment, the court authorized the Debtors to enter into a loan modification agreement with the Bank (the “Mortgage Modification”). The Mortgage Modification essentially consolidated the remaining prepetition arrearage with the outstanding principal balance. The debt service burden for the Mortgage decreased by roughly $700 a month, from $1,664.72 to $958.56, presumably through a reduction of the interest rate and extension of the Mortgage term.5 In support of the motion to authorize the Mortgage Modification, the Debtors filed amended schedules I and J which, after adjusted expenses, reported a new monthly net income in the amount of $749.89.
Following the Mortgage Modification, the Debtors filed the present Motion, seeking to replace the Original Plan with the Modified Plan. Under the proposed Modi*317fied Plan, the plan term will be reduced from 60 to 44 months,6 and the monthly payments to the Trustee will be reduced from the adjusted previous level of $2,060 to $740 for the remaining months. The Modified Plan moves the Mortgage to class 4, which provides for direct payment by the Debtors. With the monthly cash flow savings, the Modified Plan also accelerates amortization of the Auto Loan by increasing the distribution to Ally Financial from $293.49 to $696. The Modified Plan, however, continues to pay nothing to the general unsecured creditors.
Issue Presented.
The Motion drew the Objection from the Trustee, who contends, inter alia, that the Modified Plan does not satisfy the “good faith” requirement under § 1325(a)(3).7 Specifically, the Trustee argues that the Original Plan committed the Debtors to make payments to their creditors for 60 months, and that they cannot now shorten that commitment to 44 months. The Trustee contends that the cash which the Debtors will save from the Mortgage Modification, i.e., their new monthly net income, should be distributed to the unsecured creditors after the Auto Loan is paid for the remaining months of the 60-month term. The Trustee does not suggest that the Debtors have engaged in inappropriate actions, simply arguing that the principles of “fairness” and “waiver” support his Objection. The only issue before the court is whether the good faith required by § 1325(a)(3) prevents these below-median-income chapter 13 debtors, who initially confirmed a 60-month plan, from subsequently modifying their plan to reduce the term.
Analysis and Conclusions of Law.
The Original Plan and Determination of the Plan Term; the “Cause” Factor.
When the Debtors confirmed their Original Plan, the term of that Plan and the required distribution to unsecured creditors were functions of the Debtors’ “projected disposable income.” It is universally accepted that unsecured creditors must receive through a chapter 13 plan either 100% of their allowed claims, see § 1325(b)(1)(A), or “all of the debtor’s projected disposable income to be received in the applicable commitment period,” § 1325(b)(1)(B) (emphasis added). The term “applicable commitment period” is defined by statute and determined by a debtor’s income level. See § 1325(b)(4). It is undisputed that the Debtors’ income was, at the commencement of this case, and indeed still is, “below median.” For such below-median-income debtors, the “applicable commitment period ... shall be ... 3 years.” § 1325(b)(4)(A)(i) (hereafter referred to as the “ACP”). The Debtors’ income status not only fixes the minimum plan term, but it also determines the “default” maximum plan term. See § 1322(d). The Debtors, as below-median-income debtors, were statutorily prohibited from confirming a chapter 13 plan that was “longer than 3 years, unless the court, for cause, approves a longer period [not to exceed 5 years].” § 1322(d)(2).
This court routinely approves, with the Trustee’s consent, chapter 13 plans for below-median-income debtors which exceed 36 months. The most common cause for such extension is the debtor’s need for additional time to amortize the mortgage *318arrearage, the automobile payments, and/or the priority tax claims. See 8 Collier on Bankruptcy ¶ 1322.18[l][b], at 1322-61 (16th rev. ed. 2013) (“The usual reason for extension of plan payments beyond three years for debtors subject to section 1322(d)(2) is the debtor’s inability to cure a default under section 1322(b)(5) or to pay priority or allowed secured claims in a shorter time.” (citations omitted)).
Here, the Debtors initially confirmed a 60-month plan, which allowed them to rea-mortize the Mortgage arrearage and the Auto Loan claim. Those two obligations alone totaled more than $23,000, and it cost the Debtors approximately $475 per month to pay those obligations over a 60-month term. It is apparent from schedules I and J that the Debtors did not have sufficient income to amortize those obligations in less than 60 months. Accordingly, at the time of confirmation, there was cause within the meaning of § 1322(d)(2) to extend the term of the Original Plan to 60 months.
The Modified Plan and Reduction of the Plan Term. Now, the circumstances have changed. The Debtors have successfully modified their Mortgage and gained the benefit of a substantial reduction in their monthly debt service burden, presumably enhancing the Debtors’ ability to keep both their home and automobile and successfully emerge from bankruptcy. Due to the Mortgage Modification, the Debtors no longer need to cure the Mortgage arrearage through a plan. Further, with the monthly savings resulting from the modification, they are now able to pay off the Auto Loan in 44 months. As a result, there no longer appears to be any cause for an extended plan term beyond the 44 months requested by the Debtors in their Modified Plan.8
Modification of a confirmed chapter 13 plan is governed by § 1329. The Modified Plan, if approved, will replace the Original Plan. See § 1329(b)(2). Pursuant to § 1329(b), the “projected disposable income” requirement of § 1325(b)(1)(B) is no longer an immediate condition for post-confirmation plan modification; it essentially merges into the good faith test under § 1325(a)(3). See Sunahara v. Burchard (In re Sunahara), 326 B.R. 768, 781 (9th Cir. BAP 2005). However, under § 1329(c), the ACP defined in § 1325(b)(4) is still relevant because it controls the maximum plan term. The court is compelled to revisit that issue and determine anew whether there is cause to confirm a modified plan with an extended term:
A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time.
§ 1329(c) (emphasis added).
The language of § 1329(c), applicable to the Modified Plan, is consistent with that of § 1322(d), applicable to the Original Plan, in that they both fix a maximum term for chapter 13 plans based on a debtor’s income level, which for these below-median Debtors results in a maximum term of 36 months. Compare §§ 1329(c), 1325(b)(4)(A)®, with § 1322(d)(2). Again, the maximum term of any modified chapter 13 plan may only be extended for *319cause, and there is no apparent cause here to support a modified plan with a term longer than 44 months.
The Trustee also suggests that confirmation of the Original Plan established a new ACP of 60 months. Presumably, the Trustee is basing this argument on paragraph 2.03 of the Original Plan, which designates 60 months as the “commitment period of the plan,” meaning the number of months the Debtors needed to make payments for the successful completion of that Plan. However, the ACP relevant to this analysis is defined by statute, not by any provision in the Original Plan. At the commencement of this case, the ACP for these Debtors was, and still is, 36 months. Nothing in the Original Plan or applicable law changes that. Even though the Original Plan carried a longer term, the Debtors are statutorily precluded from modifying their chapter 13 plan with a term that exceeds 36 months unless there is cause to do so. See § 1329(c). With the Mortgage Modification, there is no longer any cause for the Debtors to have a plan that extends for 60 months.
Application of the “Good Faith” Test. It is fundamental that modification of a confirmed chapter 13 plan be “proposed in good faith and not by any means forbidden by law.” § 1325(a)(3); accord Mattson v. Howe (In re Mattson), 468 B.R. 361, 367 (9th Cir. BAP 2012) (“[Section 1329(b)(l)’s] reference to § 1325(a) means that the plan as modified must be proposed in good faith under § 1325(a)(3).”). The Debtors have the burden of proof here. See Max Recovery, Inc. v. Than (In re Than), 215 B.R. 430, 436 n. 11 (9th Cir. BAP 1997).
The Bankruptcy Code does not define “good faith;” that determination is left to the courts. “[T]he proper inquiry is whether the [debtors] acted equitably in proposing their Chapter 13 plan.” Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1390 (9th Cir.1982). Good faith is determined by looking at the “totality of the circumstances,” which permits the court to consider (1) whether the debtors misrepresented facts, unfairly manipulated the Bankruptcy Code, or otherwise proposed the plan in an inequitable manner; (2) the history of the debtors’ filings and dismissals; (3) whether the debtors intended only to defeat state court litigation; and (4) whether the debtors’ behavior was egregious. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir.1999) (considering lack of “good faith” as “cause” for case dismissal); Meyer v. Lepe (In re Lepe), 470 B.R. 851, 857-58 (9th Cir. BAP 2012) (reciting Leavitt factors in § 1325(a)(3) analysis). Here, the Trustee does not contend, neither does the record even suggest, that the Debtors have misrepresented any facts, had any prior history of filings and dismissals, filed this bankruptcy to defeat state court litigation, or engaged in egregious behavior. By process of elimination then, the only “good faith” factor under Leavitt for the court to consider is whether the Debtors are attempting to unfairly manipulate the Bankruptcy Code or otherwise propose their Modified Plan in an inequitable manner.
“Although a party has an absolute right to request modification between confirmation and completion of the plan, modification under § 1329 is not without limits.” Powers v. Savage (In re Powers), 202 B.R. 618, 622 (9th Cir. BAP 1996). For instance, § 1329(a) “limits the kinds of modifications that can be proposed.” Id. The chapter 13 plan modifications permitted by statute include “increasing] or reducing] the amount of payments on claims of a particular class provided for by the plan” and “extending] or reducing] the time for such payments.” § 1329(a)(1), (2). Here, it appears that the Debtors are at*320tempting to do exactly what § 1329(a) allows: reduce the amount of plan payments to the class 1 Mortgage, increase the amount of payments to the class 2 Auto Loan, and decrease the time for such payments by 16 months. The Trustee makes no showing that the Debtors are attempting to manipulate the Bankruptcy Code, and the court is mindful that “[t]aking advantage of a provision of the Code ... is not an indication of lack of good faith.” Drummond v. Welsh (In re Welsh), 465 B.R. 843, 854 (9th Cir. BAP 2012), aff'd, 711 F.3d 1120 (9th Cir.2013).
Similarly, the court rejects the Trustee’s argument that the creditors have some “right” to expect the Debtors to remain in chapter 13 for 60 months. The good faith analysis under § 1325(a)(3) may also consider “the legal effect of the [modification] of a Chapter 13 plan in light of the spirit and purposes of Chapter 13.” Chinichian v. Campolongo (In re Chinichian), 784 F.2d 1440, 1444 (9th Cir.1986). As to this factor, the Trustee argues that the Modified Plan had “originally [given] [unsecured] creditors the opportunity to seek increased payments that correspond to [the Debtors’] increase in income for 60 months.”9 In support of his argument, the Trustee relies on a discussion by the Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) in Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir.2013) (en banc), regarding the minimum duration of chapter 13 plans. However, Flores has no application to this case because the debtors in Flores were above-median-income with a 60-month ACP and they were attempting to confirm a plan with a lesser term.
In Flores, the Ninth Circuit concluded that the ACP defined in the Bankruptcy Code acts as a temporal requirement at confirmation, regardless of the debtor’s “projected disposable income,” holding that “a bankruptcy court may confirm a Chapter 13 plan under 11 U.S.C. § 1325(b)(1)(B) only if the plan’s duration is at least as long as the applicable commitment period provided by § 1325(b)(4).” Id. at 862 (overruling Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868 (9th Cir.2008)). The Ninth Circuit addressed the policy reasons why a plan must have a minimum duration: “A minimum duration for Chapter 13 plans is crucial to an important purpose of § 1329’s modification process: to ensure that unsecured creditors have a mechanism for seeking increased (that is, non-zero) payments if a debtor’s financial circumstances improve unexpectedly.” Id. at 860. If debtors were not bound to a minimum plan duration, “[c]reditors’ opportunity to seek increased payments that correspond to changed circumstances would be undermined.” Id.
The Trustee offers that analysis to argue that unsecured creditors in this case have an expectation of a 60-month minimum plan duration (i.e., 60 months in which they can potentially seek increased plan payments) based on what the Debtors’ Original Plan provided. However, any temporal condition that the Ninth Circuit may have confirmed in Flores referred to the statutory ACP, not the term established in the initial plan. See id. (noting that “unsecured creditors may request a later modification of the plan to increase the debtor’s payments if the debtor acquires disposable income during the pen-dency of the applicable commitment period ” (emphasis added)). Thus, in this case, to the extent the unsecured creditors had some expectation regarding the term of the Original Plan, that expectation was limited to the only ACP in play here, and that is 36 months. And creditors do not *321lose that expectation with the Modified Plan since its proposed term is 44 months.
Another factor the court may consider in the good faith analysis is whether the “proposed modification correlate^] to [a debtor’s] change in circumstances.” Mattson, 468 B.R. at 371. The Trustee argues that the Mortgage Modification is not a sufficient “changed circumstance” to support a reduction in the Plan’s duration. However, the Mortgage Modification is not just a circumstance to be considered here; it is the ultimate reason why the Modified Plan cannot have a 60-month term. By application of § 1329(c), there is no longer cause to justify a 60-month plan.
The court’s conclusion here, that the Debtors may propose their 44-month Modified Plan without running afoul of § 1325(a)(3), is also supported by the Bankruptcy Appellate Panel’s (the “BAP”) pre-BAPCPA decision in Villanueva v. Dowell (In re Villanueva), 274 B.R. 836 (9th Cir. BAP 2002). There, the debtor originally proposed a 60-month plan, rather than a 36-month plan, in order to pay some secured claims. Id. at 839. Before the plan was confirmed, the debtor surrendered the collateral and filed an amended plan with a 36-month term. Id. The bankruptcy court declined to confirm the amended plan on bad faith grounds and required the debtor to extend the term back to 60 months as a condition of confirmation. Id. On appeal, the BAP reversed and remanded the case for the bankruptcy court to enter an order confirming the 36-month plan. Id. at 843.
The BAP rejected the bankruptcy court’s conclusion that the debtor’s 36-month plan lacked good faith just because he had initially proposed a 60-month plan. See id. at 842-43. “[T]he proposal of a 36-month plan, standing alone, even where the debtor initially proposed a longer term, does not constitute bad faith.” Id. at 842. The BAP looked to the pre-BAPCPA version of § 1322(d), which did not allow for any chapter 13 plan to be longer than 36 months unless the court found cause to extend the term. Id. This showed “the Code’s preference for three-year plans” and confirmed that “a creditor could not coerce a debtor into proposing a plan longer than 36 months.” Id. The BAP observed that the debtor “had no motivation to extend the plan term beyond 36 months” after surrendering the collateral:
Reducing the plan term may seem opportunistic, perhaps even unfair, but we cannot conclude the debtor’s proposal of his ... amended plan was not in good faith. [The debtor’s] motivation to stay in his plan 60 months understandably evaporated once he no longer had the [collateral] he wanted to keep.
Id. at 843. Here, the same analysis applies to the Debtors’ Modified Plan. However, instead of § 1322(d), the Debtors can rely on § 1329(c) to defeat any suggestion that they can be coerced into a 60-month term.
Finally, the Trustee argues that the Debtors must establish that they lack the ability to continue making plan payments beyond the 44th month of the Plan. Indeed, this was part of the BAP’s rationale in affirming the court’s denial of a plan modification in Mattson, 468 B.R. 361. However, Mattson is not applicable here.
In Mattson, above-median-income debtors confirmed a 60-month plan in which they would make monthly payments of $150. Id. at 364. Shortly after confirmation, the debtors’ disposable income substantially increased. Id. at 364-65. They moved to modify the plan by increasing the payments to $1,000 and reducing the term to 36 months. Id. at 365. The bankruptcy court denied the proposed modification based on a lack of good faith. See id. *322at 366. The BAP agreed. Id. at 372 (“Debtors’ contribution of a portion of their increased income to their plan for a three year period does not amount to per se good faith.”). The BAP noted that the debtors failed to “point to any facts in the record which showed they would be unable to continue their increased payments beyond the 36 month period that they proposed.” Id. Thus, “allowing them to shorten the term for their plan would be an inequitable result under In re Goeb.” Id.
While the holding in Mattson makes a valid point, the case is distinguishable because the debtors there were above-median-ineome with a 60-month ACP and they were proposing a modified plan with a term less than that permitted by the Code at confirmation. In contrast to Mattson, the Debtors in this case are below-median-income debtors whose proposed Modified Plan, though shorter than the Original Plan, is still longer than their 36-month ACP. The court need not make the same “ability-to-pay” inquiry in this case because the Debtors are not proposing a Modified Plan that runs afoul of their ACP.
The Trustee’s “Waiver” Argument. Before concluding, the court will address the “waiver” issue raised by the Trustee. With reference to the Ninth Circuit’s holding in Flores, 735 F.3d 855, he contends that the Debtors chose to confirm a chapter 13 plan with a “temporal period” of 60 months, that the unsecured creditors now have a right to expect either 100% payment on their claims or the benefits of a 60-month plan, and that the Debtors have implicitly waived the right to exit this bankruptcy with a discharge before those 60 months have expired. However, nothing in the applicable law supports the imposition of such a waiver rule. Indeed, the BAP has acknowledged, in dicta, that “a debtor’s circumstances may justify a reduction in plan length” from what was previously set forth in the originally confirmed plan. Mattson, 468 B.R. at 373. Neither does “the doctrine of res judicata [prevent debtors] from shortening the term of their plan.” Id. at 372; see also § 1329(a)(2)(allowing plan modifications that “extend or reduce the time for [paying claims under the plan]”); Than, 215 B.R. at 435 (“Res judicata does not apply to the provisions sought to be modified.”).
The fundamentals of a waiver situation were explained in Groves v. Prickett, 420 F.2d 1119 (9th Cir.1970):
A waiver is an intentional relinquishment or abandonment of a known right or privilege. A waiver can be employed only for defensive purposes. Although it can preclude the assertion of legal rights, it cannot be used to impose legal duties. As minimum requirements to constitute an “implied waiver” of substantial rights, the conduct relied upon must be clear, decisive and unequivocal of a purpose to waive the legal rights involved. Otherwise, there is no waiver.
Id. at 1125-26 (citations omitted). There is nothing in the record to even suggest that the Debtors intentionally “relinquished or abandoned” the “right or privilege” of completing their bankruptcy in less than 60 months. They were not required to make such an irrevocable “election” when they confirmed the Original Plan. The initial 60-month term was required at the time to permit the Debtors to successfully reamortize their secured obligations; thus, there was cause to confirm a plan that exceeded 36 months. Indeed, the Debtors could not have confirmed a plan with a term greater than 36 months without a showing of cause. See § 1322(d)(2). Had the Debtors originally proposed a 44-month plan to amortize their secured obligations, the Trustee would have had no basis on which to object *323and demand a longer term. The creditors are not prejudiced by the fact that the Original Plan had a 60-month term. They were not entitled to any distribution based on the disposable income and chapter 7 liquidation tests.
The Trustee’s Objection is not based on any statutory predicate. Rather, it is based on equitable principles of “fairness.” He argues, “Debtors originally gave creditors the opportunity to seek increased payments that correspond to their increase in income for 60 months. To take away this opportunity now without a good faith showing is inherently unfair.”10
In the absence of a statutory basis for locking the Debtors into a 60-month plan, the Trustee is essentially asking the court to exercise its general equitable powers under § 105(a).11 However, it is not clear that the court’s equitable powers under § 105(a) extend that far. The U.S. Supreme Court recently addressed the scope and application of § 105(a) to remedy an egregious case of bad faith conduct by the debtor in litigation of an adversary proceeding. See Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), rev’g 435 Fed.Appx. 697 (9th Cir.2011). The Supreme Court acknowledged that, in addition to the statutory power under § 105(a) to carry out the provisions of the Code, the bankruptcy court “may also possess ‘inherent power ... to sanction abusive litigation practices.’ ” Id. at -, 134 S.Ct. 1188 (quoting Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375-76, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)). The Court then admonished, “But in exercising those statutory and inherent powers, a bankruptcy court may not contravene specific statutory provisions.... Section 105(a) confers authority to ‘carry out’ the provisions of the Code, but it is quite impossible to do that by taking action that the Code prohibits.” Id.
In the proceeding below in Law v. Siegel, the Ninth Circuit had followed the precedent established in Latman v. Burdette (In re Latman), 366 F.3d 774 (9th Cir.2004), a decision now abrogated by the Supreme Court’s decision. See Law, 435 Fed.Appx. at 698. The Ninth Circuit applied § 105(a) to bestow upon the bankruptcy court the general equitable power to surcharge a debtor’s state law homestead exemption to compensate the bankruptcy estate for over $500,000 of administrative expenses resulting from the debtor’s bad faith conduct. See id.
The Supreme Court rejected all of the arguments for such a remedy, finding that there was no statutory basis in the Bankruptcy Code for doing so. See Law, — U.S. at -, 134 S.Ct. 1188. “[FJederal law provides no authority for bankruptcy courts to deny an exemption on a ground not specified in the Code.” Id. (emphasis in original). The Court noted that the “equitable surcharge” conflicted with two provisions of the Bankruptcy Code: § 522(b), which allows a debtor to exempt property in the first place, and § 522(k), which expressly limits the use of exempt property to pay for administrative expenses. See id. at -, 134 S.Ct. 1188.
Applying the same rationale to this case, there is nothing in the Bankruptcy Code that authorizes this court to force the below-median-income Debtors to remain in bankruptcy for 60 months when first, § 1325(b)(4)(A)® only required the Debtors to be in bankruptcy for 36 months and second, there is a specific statutory prohibition, § 1329(c), that requires a showing *324of cause to even permit an extended term. In light of the holding in Law v. Siegel, this court does not have the equitable power to give the Trustee the ruling he seeks.
Conclusion.
Based on the foregoing, the court finds and concludes that the Debtors’ Modified Plan has been proposed in good faith. The Trustee’s Objection will be overruled. The Debtors’ Motion to confirm their sixth modified chapter 13 plan will be granted. The Debtors shall submit to the Trustee a proposed confirmation order consistent herewith.
. Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated after October 17, 2005, the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub.L. No. 109-8, 119 Stat. 23.
. In their responding brief, the Debtors' counsel makes an offer of proof regarding Mrs. Pasley’s health issues and asks the court to consider that as a factor in the good faith analysis. However, this Motion can be decided on other grounds, and Mrs. Pasley’s medical condition is not relevant.
.The annualized current monthly income reported on line 15 of Official Form 22C was $50,703.84. The applicable median family income was $61,954.
. Paragraph 2.03 of this district’s standard form chapter 13 plan, applicable at the time of this case, states in pertinent part,
Commitment period. The monthly plan payments will continue for___ months, the commitment period of the plan. Monthly plan payments must continue for the entire commitment period unless all allowed unsecured claims are paid in full over a shorter period of time....
. The Debtors did not lodge a copy of the actual Mortgage Modification agreement with the court or disclose the specific terms. This court typically will authorize debtors to enter into a negotiated modification of their mortgage if the trustee has no objection and the modification does not interfere with performance of the confirmed plan. However, in the absence of a controversy, the court does not review or approve or disapprove the negotiated terms of the modification agreement itself.
. The Modified Plan was proposed in the 34th month.
. The Trustee raised other minor objections to the Modified Plan, but the parties agreed that those issues may be resolved in the confirmation order if necessary. The Trustee’s counsel represented that the only unresolved issue, for which a ruling was requested from this court, is the “good faith” term reduction issue.
. The Trustee does not object to the proposed 44-month term on any grounds but good faith. Accordingly, the court is satisfied that 44 months is the appropriate amount of time now required to pay the Auto Loan and complete the Modified Plan.
. Trustee’s Suppl. Br. 5:9-10, Jan. 23, 2014, ECFNo. 117.
. Trustee’s Suppl. Br. 5:9-11 (emphasis added).
. Section 105(a) provides in pertinent part, "The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.... ” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496883/ | MOSIER, Bankruptcy Judge.
Recharacterization is an equitable remedy that allows courts to ignore a party’s characterization of a transaction and, instead, give effect to the transaction’s actual substance. In bankruptcy cases, under certain circumstances, a transaction labeled as a loan may be recharacterized as an equity investment. In this case, William Karl Jenkins (Jenkins) and his wife Earlene Jenkins appeal the bankruptcy court’s determination that funds they advanced should not be considered a loan but should be treated as an equity investment. Although recharacterization is an unusual remedy, given the unique facts of this case, we affirm the bankruptcy court’s conclusion that any funds the Jenkinses advanced to Alternate Fuels, Inc. (AFI) should be treated as an equity investment. The Jenkinses also appeal the bankruptcy court’s alternative findings and conclusions that they did not sustain their burden of proof as to the validity and amount of their claims, and that any secured claims they may have should be equitably subordinated. We also affirm the bankruptcy court’s decision on those issues.2
I. FACTUAL BACKGROUND
Jenkins was not a stranger to coal mining and surface restoration and, in 1999, became aware of an opportunity in connection with AFI. AFI originally filed a Chapter 11 petition in December 1992. While AFI was successful in obtaining confirmation of a plan of reorganization, it was less successful in operating under the plan and, in 1996, AFI ceased mining operations. The Chapter 11 trustee who was operating the reorganized debtor abandoned the debtor’s assets and resigned. AFI’s secured creditors foreclosed on the equipment that was collateral for their loans and AFI remained liable for debts that were not discharged in its original Chapter 11 case. AFI’s only remaining assets after that were mining permits.
Through a series of events that are not entirely clear, but are also not important, an individual by the name of John War-mack acquired all of AFI’s stock. War-mack also formed Cimarron Energy Co. and held 99% of its stock. The other 1% was held by Larry Pommier, who had been hired by the Chapter 11 trustee to work for AFI. Cimarron acquired the equipment *328that was previously owned by AFI and commenced mining operations.
In order to continue mining operations, Warmack and Cimarron provided new reclamation bonds to the State of Missouri. The reclamation bonds were required to assure that AFI would reclaim, or restore, the permitted sites after mining operations were completed. Although the reclamation bonds obligated AFI to complete reclamation, the twenty-four certificates of deposit (Certificates of Deposit) securing the bonds were held by Cimarron or War-mack personally. Because Cimarron conducted the mining operations and owned the equipment, the equipment and the Certificates of Deposit were insulated from AFI’s creditors.
In 1999, Pommier informed Jenkins that Warmack was looking to liquidate his interest in AFI. Warmack had completed his mining efforts, but AFI was still obligated to reclaim the permitted mining sites. Through the acquisition of Warmack’s interest in AFI, Cimarron, and the Certificates of Deposit, Jenkins saw an opportunity to obtain Cimarron’s equipment and, after successful reclamation of the permitted mining sites, the Certificates of Deposit.
On December 6, 1999, Jenkins and his wife entered into an agreement to purchase all of Warmack’s interest in AFI and Cimarron. Because Jenkins was listed on the Federal Office of Surface Mining’s Applicant Violator System, he was prohibited from owning stock of a surface coal mining company. To get around this obstacle, Jenkins arranged for ownership of the AFI stock to be placed in the name of Michael Christie, who was a mere straw man for the Jenkinses. Christie had no significant involvement with AFI or Ci-marron. The purchase also included the assignment of the Certificates of Deposit in the total face amount of $1,377,000. The Jenkinses paid Warmack $549,250. Pursuant to the purchase agreement, War-mack used the funds to pay down secured debts on the equipment owned by Cimar-ron.
Even though AFI received no benefit from the $549,250 payment, AFI executed a promissory note in the amount of $500,000, payable to Green Acres Farms, a business name Jenkins had registered with the Missouri Secretary of State.3 The promissory note was for a term of five years but stated that “this note shall be paid in full upon reclamation bond release from the State of Missouri. Said bonds currently being used to secure reclamation liability for Alternate Fuels, Inc. at the Blue Mound Mine.” At trial, Jenkins provided copies of numerous checks beginning in the year 2000, but failed to produce any checks or other documentation specifically evidencing this alleged loan. Jenkins candidly testified that AFI had no ability to pay this note and the only source of payment would be the Certificates of Deposit. Any monies advanced by Jenkins to AFI were for the purpose of funding the reclamation process with the intent and purpose of ultimately having the Certificates of Deposit released to Jenkins. After the transaction with Warmack was completed, the Jenkinses beneficially owned 100% of AFI, 99% of Cimarron, which owned all of the mining equipment, and they owned the Certificates of Deposit. AFI was left with the permitted mining sites that were subject to reclamation and a $500,000.00 indebtedness to the Jenkinses.
Jenkins never intended to have AFI conduct any mining operations. The sole purpose of the transaction with Warmack was to obtain the proceeds of the equipment *329(which was valued between $1 to $2 million) and the release of the Certificates of Deposit following reclamation of the permitted sites. Although release of the Certificates of Deposit was contingent on AFI’s satisfactory completion of its reclamation work, the Jenkinses immediately began receiving the interest payments on the Certificates of Deposit.
AFI did not recognize or follow corporate formalities such as shareholder or director meetings. Jenkins controlled all of AFI’s operations, which were limited to reclamation efforts through Cimarron, and he delegated the day-to-day operations of AFI and Cimarron to Pommier. AFI had no income, and its operations were funded through checks issued by Green Acres Farms. The checks were made payable to AFI and delivered to Pommier, who then endorsed them for payment to Cimarron. There was no written agreement between AFI and Cimarron relative to the reclamation expenses or the advances, and there was no contemporaneous accounting of the advances. Specifically, there was no documentary evidence presented that the checks written to AFI and immediately endorsed for payment to Cimarron were used for reclamation expenses. The advanced funds were never subject to the claims of AFI’s creditors because they were never deposited into an AFI account.
On November 6, 2000, AFI executed another promissory note, in the amount of $500,000 plus future advances, payable to Green Acres Farms.4 The interest rate on the second note was 9%. Although Green Acres Farms advanced sums for reclamation prior to the date of the second note, Jenkins failed to provide any accounting to connect the funds advanced to the amount of the promissory note and failed to produce any checks or other documentation specifically evidencing this alleged loan. This promissory note was also for a term of five years and stated that “this note shall be paid in full upon reclamation bond release from the State of Missouri. Said bonds currently being used to secure reclamation liability for Alternate Fuels, Inc. at the Blue Mound Mine.” Pommier testified that the second note was not intended to be an additional indebtedness, but to replace the first note with a lower rate of interest. Jenkins denied this assertion. As with the prior note, Jenkins knew that AFI had no prospect of paying this note and the only prospect for payment was the Certificates of Deposit.
A third note, in the amount of $1,000,000 and dated October 11, 2001, was executed by Pommier on behalf of AFI.5 Like the prior two notes, there is no accounting that supports the amount of the third note. Again, this promissory note was for a term of five years and stated that “this note shall be paid in full upon reclamation bond release from the State of Missouri. Said bonds currently being used to secure reclamation liability for Alternate Fuels, Inc. at the Blue Mound Mine.” Pommier also testified that the third note was not intended to be additional debt, but to supersede or replace the second note. Jenkins also denied this assertion and, once again, Jenkins knew AFI would not be able to pay this note.
During its reclamation efforts, Cimarron obtained an arbitration award against Mackie Clemmons Coal Company in the amount of $170,000. Pommier testified that the sums received for this arbitration award were used to pay Girard National Bank to release a lien on some of Cimar-ron’s equipment. Pommier further testi*330fied that the Jenkinses’ proof of claim sought recovery of this payment. Jenkins did not dispute that testimony, and there is a check in the amount of $170,000, dated June 30, 2000, that is consistent with Pom-mier’s testimony.6
The evidence is vague regarding the liquidation of the mining equipment, but it is undisputed that the equipment, valued between $1,000,000 and $2,000,000, was liquidated. Pommier testified that Jenkins retained the proceeds, and Jenkins offered no evidence to refute that testimony. Jenkins did not offer to provide an accounting of the proceeds from the sale of the equipment.
In 2002, Jenkins and Pommier believed the reclamation process was nearly complete, but that the State of Missouri had unreasonably blocked and interfered with the reclamation. Concluding that the State would never find the reclamation fully satisfactory, AFI filed a lawsuit against Tom Cabanas and Richard Hall, officers and employees of the Missouri Department of Natural Resources.
Jenkins saw an advantage in the possibility that proceeds of the Cabanas litigation might allow AFI to pay the notes, and took it. Since Jenkins controlled AFI, he caused it to assign $8,000,000 of its potential recovery from the Cabanas litigation to the Jenkinses on March 1, 2003. On this same date, a fourth note was executed by AFI in favor of Green Acres Farms and the Jenkinses in the amount of $2,370,761.00.7 The fourth note states that it is a renewal of the prior three notes, but makes no reference to any future advances and is not supported by any contemporaneous or prior accounting. Like the three prior notes, this note was for a term of five years but stated that the “note shall be paid in full upon reclamation bond release from the State of Missouri or proceeds from the lawsuit filed in Federal Court case no. 02CV1182 said bonds currently being used to secure reclamation liability for Alternate Fuels, Inc. at the Blue Mound Mine” (emphasis added). This promissory note does not reconcile with the first three notes.
The Cabanas litigation ultimately resulted in a judgment in favor of AFI against Tom Cabanas. On appeal, the judgment was affirmed, but the amount of the judgment was reduced. In September 2008, the State of Missouri satisfied the judgment by paying a little over $7,000,000 into the registry of the United States District Court for the Western District of Missouri.8
News of the judgment spread, and creditors of AFI began making claims against the judgment proceeds. Apparently not wanting the responsibility or potential liability associated with payment of these competing claims, Pommier opted to file a Chapter 11 bankruptcy petition on behalf of AFI on January 28, 2009. Christopher John Redmond (Trustee) was appointed as the Chapter 11 trustee.
The Jenkinses filed a proof of claim against AFI’s estate in the amount of $4,336,813. The Jenkinses’ claim is composed of (1) $3,823,862.92 for payment of the first three promissory notes, plus interest, secured by the assignment of $3,000,000 of the Cabanas lawsuit; (2) $487,298.62 for “money” related to reclamation; and (3) accounts for Dan Card, in the amount of $7,676.00, and Pat Miller, in *331the amount of $17,975.56. The Trustee filed an adversary proceeding against the Jenkinses challenging their claim. The Trustee sought to have the Jenkinses’ loans to AFI recharacterized as an equity contribution, or have their secured claims equitably subordinated or disallowed entirely.
The bankruptcy court found that the Jenkinses’ claim for $3,823,862.92 for the three promissory notes should be rechar-acterized as equity. Similarly, the court found that the Jenkinses’ claim for $487,298.62 for money related to reclamation should also be recharacterized as equity contributions rather than debt. As a result, the court set aside AFI’s assignment of the Cabanas litigation proceeds because the Jenkinses no longer held an allowed claim.
Alternatively, the bankruptcy court held that the Jenkinses had not sustained their burden of proof as to the validity and amount of their claim. The bankruptcy court also alternatively found that, if the Jenkinses’ claims were not recharacterized as equity or disallowed, the Jenkinses’ claims should be treated as “unsubordinat-ed, unsecured claims for the amount of the transfers,” but the Jenkinses’ secured claim on the Cabanas litigation proceeds should be equitably subordinated.
II. APPELLATE JURISDICTION
The appealed order was entered by the bankruptcy court on December 10, 2012, making the notice of appeal due on Christmas Eve, December 24, 2012. The Jen-kinses filed their notice of appeal on December 26, 2012. Christmas Eve is not a “defined” legal holiday in Rule 9006(a)(6)(A).9 However, December 24, 2012 was “declared a holiday” by both President Barack Obama and the State of Kansas, and is therefore considered a holiday pursuant to Rule 9006(a)(6)(B) and (C). Since Christmas Day, December 25, is a defined legal holiday, December 26 was the next day that was neither a weekend nor a legal holiday, and the Jenkinses’ notice of appeal filed on that date was timely under Rule 9006(a)(1)(C).
This Court has jurisdiction to hear timely filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.10 None of the parties elected to have this appeal heard by the United States District Court for the District of Kansas, and they have therefore consented to appellate review by this Court. The appealed order fully resolved the parties’ adversary proceeding and is therefore final for purposes of appeal.11 An order disposing of an objection to a creditor’s claim is a final order for the purposes of appeal.12
III. ISSUE AND STANDARD OF REVIEW
A. Did the bankruptcy court properly recharacterize the Jenkinses’ promissory notes as equity?
This is a mixed issue of law and fact, in which legal determinations are reviewed *332de novo, and fact findings are reviewed for clear error.13
B. Did the bankruptcy court err by equitably subordinating the Jen-kinses’ secured claims?
This is a mixed issue of law and fact, in which legal determinations are reviewed de novo, and fact findings are reviewed for clear error.14
C. Did the bankruptcy court properly disallow the Jenkinses’ claim?
Whether the bankruptcy court applied the proper standard is a legal determination that is reviewed de novo.15 The sufficiency of a claimant’s evidence is a factual finding and is reviewed for clear error.16
IV. DISCUSSION
Although the bankruptcy court could have simply disallowed the Jenkinses’ claim because they failed to properly support it, the court primarily focused its analysis on recharacterization of the claims. Given the facts of this case, the bankruptcy court correctly focused on the question of recharacterization.
A. The Bankruptcy Court Correctly Recharacterized The Jenkinses’ Claims.
While disallowance or subordination of the Jenkinses’ claims is proper, recharac-terization is the more appropriate remedy in this case. Because the Jenkinses beneficially owned AFI at the time of the alleged cash infusions, any “loans” from the Jenkinses to AFI may be scrutinized to ensure that they are properly characterized.
1. The Travelers and Law decisions do not preclude recharacterization in this case.
In reaching its conclusion that the Jen-kinses’ claim against AFI should be re-characterized, the bankruptcy court considered the thirteen-factor test identified by the Tenth Circuit Court of Appeals in In re Hedged-Investments.17 However, the Jenkinses contend that multiple-factor tests for recharacterization, including the one in Hedged-Investments, were implicitly abrogated by the United States Supreme Court in In re Travelers,18 In Travelers, the Supreme Court considered a claim by a Chapter 11 debtor’s bonding company for attorney’s fees it incurred in litigating issues in the bankruptcy. The bankruptcy court’s disallowance of the bondholder’s claim for attorney’s fees was based on a rule adopted by the Ninth Circuit in In re Fobian.19 In Fobian, the Ninth Circuit held that attorney’s fees are not recoverable in bankruptcy for litigating issues peculiar to federal bankruptcy law.20 The Travelers Court found that there was no support for the Fobian rule in the Bankruptcy Code and therefore rejected it, stating:
*333The absence of textual support is fatal for the Fobian rule. Consistent with our prior statements regarding creditors’ entitlements in bankruptcy, see, e.g., Raleigh [v. Illinois Dept. of Revenue], supra, [530 U.S. 15] at 20, 120 S.Ct. 1951 [147 L.Ed.2d 13 (2000) ], we generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed. See 11 U.S.C. § 502(b).21
The Jenkinses argue that Travelers precludes recharacterization unless recharac-terization is allowed by applicable state law. They contend that Kansas law does not recognize recharacterization and, therefore, the bankruptcy court erred by applying an equitable federal doctrine to disallow their claim. Simply put, the Jen-kinses assert their claim is enforceable under Kansas law and, because there is no express provision in the Bankruptcy Code that disallows it, their claim must be allowed in this case.
The Jenkinses also contend that the Supreme Court’s recent ruling in Law v. Siegel22 prohibits recharacterization.23 They argue that § 502(b) does not give bankruptcy courts discretion to grant or withhold claims based on whatever considerations they deem appropriate. This exact argument was rejected by the Fourth Circuit Court of Appeals in In re Official Committee of Unsecured Creditors for Domier Aviation (North America), Inc.24 As that court explained:
Thus, implementation of the Code’s priority scheme requires a determination of whether a particular obligation is debt or equity. Where, as here, the question is in dispute, the bankruptcy court must have the authority to make this determination in order to preserve the Code’s priority scheme. If the court were required to accept the representations of the claimant, as GMBH appears to argue, then an equity investor could label its contribution a loan and guarantee itself higher priority — and a larger recovery — should the debtor file for bankruptcy. Thus, denying a bankruptcy court the ability to recharacterize a claim would have the effect of subverting the Code’s critical priority system by allowing equity investors to jump the line and reduce the recovery of true creditors. In light of the broad language of § 105(a) and the larger purpose of the Bankruptcy Code, we believe that a bankruptcy court’s power to recharac-terize is essential to the proper and consistent application of the Code.
GMBH contends that recharacterization does not exist independently of the bankruptcy court’s disallowance power under § 502(b) or the court’s equitable subordination power under § 510(c). This argument seems to be rooted in GMBH’s view that recharacterization serves the same purposes and requires the same analysis as disallowance or equitable subordination. In fact, contrary to GMBH’s arguments, recharacterization requires a different inquiry and serves a different function.
Disallowance of a claim under § 502(b) is only appropriate when the claimant has no rights vis-a-vis the bankrupt, i.e., when there is “no basis in fact or law” for any recovery from the debtor. When a bankruptcy court disal*334lows a claim, the claim is completely-discharged. By contrast, recharacteri-zation is appropriate when the claimant has some rights vis-a-vis the bankrupt. That is, when a bankruptcy court re-characterizes a claim, it necessarily recognizes the existence of a relationship between the debtor and the claimant, but it determines that the relationship is one of an equity owner rather than a creditor.25
Recharacterization is not based on the enforceability of a claim; it is based on establishing the true substance of a transaction. It is not a determination of whether a claim should be allowed or disallowed; it is a determination of whether a claim should be treated as a claim or as an equity security interest. If a claim is disallowed, it is essentially not recognized in the bankruptcy case. If a claim is recharacterized, it is still recognized in the bankruptcy case, but is simply treated as an equity security interest.
Significantly, the Travelers and Law decisions do not deal with recharacterization at all, or even mention the Hedged-Investments decision. It is not implicit, and clearly not explicit, that Travelers or Law abrogated a bankruptcy court’s ability to recharacterize an alleged loan. Additionally, the Jenkinses have not provided a persuasive argument that equitable re-characterization is not permissible under Kansas law.
2. The Hedged-Investments Factors Dictate Recharacterization in This Case.
The Jenkinses contend that even the Hedged-Investments factors compel treatment of their claims as loans. In Hedged-Investments, the Tenth Circuit expanded the “more generally phrased test” it used in Mid-Town26 in favor of a multi-factor test. The non-exclusive factors the Tenth Circuit considered were:
(1) the names given to the certificates evidencing the indebtedness;
(2) the presence or absence of a fixed maturity date;
(3) the source of payments;
(4) the right to enforce payment of principal and interest;
(5) participation in management flowing as a result;
(6) the status of the contribution in relation to regular corporate creditors;
(7) the intent of the parties;
(8) “thin” or adequate capitalization;
(9) identity of interest between the creditor and stockholder;
(10) source of interest payments;
(11) the ability of the corporation to obtain loans from outside lending institutions;
(12) the extent to which the advance was used to acquire capital assets; and
(13) the failure of the debtor to repay on the due date or to seek a postponement.27
The purpose of the Hedged-Investments factors is to “distinguish true debt from camouflaged equity” by determining whether certain facts are more supportive of a loan or an equity transaction.28 These factors are not dispositive of characteriza*335tion, and their applicability and weight depend on the facts of each case in which they are applied.29
The Hedged-Investments factors should be viewed in the overall context of the disputed transactions. The Jenkinses base their claim on the three Notes and a bald statement of additional amounts advanced, but they failed to provide a reliable accounting with respect to the Notes or the additional advances. At the time the Notes were signed, there was no economic benefit or incentive for AFI to reclaim the permitted mining sites. Although AFI would discharge its legal obligation to complete reclamation, it would have to incur debt to do so. If AFI elected not to complete reclamation, the State of Missouri would look to the surety bonds and, presumably, AFI would incur an indebtedness to the Jenkinses for the Certificates of Deposit that would be lost.
When the Notes were signed, and at the time of the alleged advances, Jenkins knew AFI could not pay the Notes or the advances. AFI had no valuable assets, no business operations, no capital, and no income. Because AFI was incapable of repaying any advances, Jenkins would not receive any economic benefit from AFI. The only prospect Jenkins had to recover the advances was the release of the Certificates of Deposit. Whether and when the Certificates of Deposit would be released was uncertain. The Notes state that they would “be paid in full upon reclamation bond release.” What is not clear from the evidence is whether AFI’s obligation under the Notes would be satisfied upon the release of the bonds or whether AFI would have an indebtedness for efforts that only benefitted Jenkins.
The bankruptcy court considered each of the Hedged-Investments factors in light of the evidence before it, concluding that the weight of the evidence supported recharac-terization of the Jenkinses’ loans to equity. The bankruptcy court concluded that two of the Hedged-Investments factors were inapplicable, three of the factors “superficially” supported treatment of the advances as loans and the remaining seven factors “strongly” supported recharacteri-zation. The bankruptcy court’s conclusions are clearly supported by the evidence.
The first Hedged-Investments factor is “the names given to the certificates evidencing the indebtedness.” The Jenkinses maintain that the bankruptcy court gave this factor insufficient weight. The bankruptcy court simply noted that, although the documents state they are promissory notes, they were all preprinted forms and the provisions regarding acceleration upon failure to make timely payments and attorney’s fees stated “N/A.” The Jenkinses are fortunate the bankruptcy court gave this factor any weight in their favor. The instruments may be titled promissory notes, but they do not “fulfill the proper formalities for a commercial loan.”30 The bankruptcy court correctly noted that the Jen-kinses’ advances were not “traditional-style” loans. A “loan” is a sum of money loaned for a specified period and repayable with an agreed interest. Typically, the amount loaned, the terms of repayment, and the interest are agreed to at the time the money is loaned. Advances, interest rates, and repayment terms are not customarily left to the discretion of the lender. The lender’s right to receive repayment is supported by consideration, money loaned and accounted for with contempora*336neous records. In short, the amount loaned and the amount to be repaid are readily calculable at the beginning of the transaction, are typically documented, and the obligation to pay is not conditional. Specifically, the lender is not entitled to receive repayment in excess of the amount actually loaned plus the agreed interest. On the other hand, “equity” is an investment — an expenditure of money — in order to earn a financial return. The amount of financial return is unknown and the entitlement to receive payment is conditional. The amount of payment received may be unrelated to the amount advanced or may be received in exchange for little consideration.
In the present case, there is little if any evidence that the terms of the promissory notes were determined prior to the advances, and the amounts advanced cannot be reconciled to the amount of the Notes. There is no accounting that connects the funds allegedly advanced to the amount of the Notes, and there are no contemporaneous records of funds advanced prior to or pursuant to the alleged loan. The Notes are not supported by reasonably equivalent consideration. AFI received no consideration in exchange for the first $500,000 note and, while there is evidence of advances, there is insufficient evidence to reconcile any alleged advances to AFI to the amounts stated in the additional promissory notes.31 At the time the advances were made, the return the Jenkins-es would receive on monies they advanced was uncertain and could only come from proceeds of the Certificates of Deposit. The bankruptcy court’s inclusion of this factor on the side of loan characterization, even superficially, was generous to the Jenkinses.
The second factor is “the presence or absence of a fixed maturity date.” A fixed maturity is indicative of a loan rather than an equity investment. The Jenkinses contend that this factor supports loan treatment because each of the Notes contains a repayment date of 5 years from the date of issue. However, the language in the instrument is not determinative of this factor. The bankruptcy court correctly concluded that, notwithstanding this provision in the Notes, there was no fixed maturity date because Jenkins knew AFI had no ability to pay the Notes and he only advanced funds to obtain release of the Certificates of Deposit. Whether and when the Certificates of Deposit would be released was uncertain.
The third factor is the “source of payments.” The bankruptcy court concluded that the parties looked to the Certificates of Deposit, not AFI, as the source of payment of the Notes, and for that reason found that the third factor weighed heavily in favor of recharacterization. The Jenkinses assert that advances made to a “flagging business” should not factor into the recharacterization analysis. The Jen-kinses’ argument completely ignores the bankruptcy court’s actual finding, mistakenly focuses on the nature of the advances to the debtor rather than the source of payment from the debtor, and also misquotes the Hedgedr-Investments court. The Hedgedr-Investments court stated, “excessive suspicion about loans made by owners and insiders of struggling enterprises would discourage legitimate efforts to keep a flagging business afloat.”32 Although undercapitalization *337remains an important factor, under the multi-factor approach, Hedged-Investments simply advised that bankruptcy courts should not give disproportionate weight to that factor.33 Additionally, the Jenkinses’ argument is not persuasive because they were not making advances to a “flagging business.” AFI was out of business, and the Jenkinses were not attempting to resuscitate it. Jenkins clearly knew that repayment of the Notes was not dependent on AFI’s business success, but was dependent on successful reclamation of the permitted mining sites. The bankruptcy court correctly concluded that the expected source of repayment was not AFI and this factor weighed heavily in favor of recharacterization.
“The right to enforce payment of principal and interest” is the fourth Hedged-Investments factor. The bankruptcy court found that the Jenkinses’ right to enforce payment of the Notes was “illusory.” When the Notes were executed, Jenkins and Pommier knew that AFI had no ability to pay the Notes, so any attempt to enforce payment would be futile. Thus, no attempts were made to enforce payment of the Notes. The Jenkinses again argue that the terms of the Notes should be dispositive and, since they had a contractual right to enforce payment, AFI’s lack of ability to pay should be irrelevant. As previously stated, recharacterization looks beyond labels to the substance of a transaction.34 Jenkins knew he could not enforce payment of the Notes. The bankruptcy court’s finding that the Jenkinses’ right to enforce payment was “illusory,” and that this factor was supportive of re-characterization, is adequately supported by facts in the record.
The fifth factor is “participation in management flowing as a result” of the contribution. The bankruptcy court concluded that the fifth factor superficially supported treatment of the advances as loans. Since AFI was already under Jenkins’ control when the advances were made, there was no resulting increase in management as a result of the advances. Again, the court’s determination that this factor superficially supported characterization as loans was more favorable to the Jenkinses than it needed to be. The court easily could have determined this factor was inapplicable because Jenkins already exercised complete control of AFI.
The sixth factor is the “status of the contribution in relation to regular corporate creditors.” The bankruptcy court concluded that this factor was not relevant.35 The Jenkinses dispute this conclusion because there is no subordination language in the Notes. Here again, the bankruptcy court’s conclusion that this factor was not relevant was more favorable to the Jenkinses than it needed to be. While express subordination language may be relevant, the court need not limit its inquiry into this factor to express subordination, as there are other inquiries that may be relevant to the “status” of the contribution in relation to other creditors.36 If the advances from the Jenkinses were, as alleged, used to pay creditors of AFI for costs associated with its reclamation efforts, then the Jenkinses were effectively *338subordinating their right to payment to AFI’s other creditors. Because the bankruptcy court could have concluded that the Jenkinses were effectively subordinating their right to payment, its conclusion that this factor was not relevant is not clearly erroneous.
With respect to “the intent of the parties,” the seventh factor, the record is quite clear. In fact, the parties’ intent was largely stipulated to in the bankruptcy court’s pre-trial order.37 The purpose of the advances and the Notes was to secure the Jenkinses’ investment by funding the reclamation process with the intent and purpose of having the Certificates of Deposit released to the Jenkinses. The Jen-kinses maintain that the bankruptcy court misconstrued this factor when it focused on the purpose of the Notes, which was to secure the Jenkinses’ investment in AFI and Cimarron, and failed to focus on “whether the parties intended that the money be repaid pursuant to the instrument.” If this were a distinction with a difference, it still would not help the Jen-kinses. Jenkins candidly and succinctly testified that everyone knew AFI had no money to pay the Notes and the only way he was going to be repaid was by release of the Certificates of Deposit. It is clear, when the first three Notes were signed, the parties did not intend that the advances be repaid by AFI pursuant to the terms of the Notes. Jenkins expected payment to come from the Certificates of Deposit rather than from AFI.
The eighth factor is “ ‘thin’ or adequate capitalization.” The Jenkinses’ only dispute on this factor is that the bankruptcy court placed too much emphasis on AFI’s thin capitalization. Undercapitalization is an important factor, but the Jenkinses argue that courts should not give “disproportionate weight to the poor capital condition” of the debtor company.38 Disproportionate weight should not be given to undercapitalization when there is a legitimate prospect that a flagging business will be able to generate income and repay the contribution. But, if there is absolutely no prospect of repayment from business operations or liquidation of assets, this factor should be given appropriate weight. When the Jenkinses made the alleged advances, AFI had no capital, no business activity, no assets to liquidate, and no prospect of generating any income. The Jenkinses were not attempting to rescue, rehabilitate, or revive AFI; they were only attempting to obtain the Certificates of Deposit. The bankruptcy court did not place disproportionate weight on this factor and properly concluded that AFI’s total lack of capital strongly supported recharacterization.
The Jenkinses do not dispute the ninth Hedged-Investments factor, the “identity of interest between the creditor and stockholder.” Because the Jenkinses made all of the advances and were also the only shareholders, there was a 100% identity of interest. The bankruptcy court determined that this factor favored equity characterization.
The bankruptcy court found that the tenth factor, the “source of interest payments,” was not applicable because AFI never made any interest payments. The Jenkinses argue that the bankruptcy court missed the mark because the Notes provide that interest would be paid and the Cabanas litigation provided a source for interest payments. It is the Jenkinses who miss the mark here. The interest provision in the Notes does not address *339the source of payments actually made. At the time the Notes were signed, the Cabanas litigation did not exist and AFI had no identifiable income source for interest payments. The bankruptcy court was correct that this factor is not relevant in this case.
The eleventh Hedgedr-Investments factor focuses on “the ability of the corporation to obtain loans from outside lending institutions.” If the debtor is unable to obtain outside financing, “the fact that no reasonable creditor would have acted in the same manner is strong evidence that the advances were capital contributions rather than loans.”39 The bankruptcy court found that AFI had unsuccessfully attempted to obtain financing from at least six banks and, therefore, this factor strongly supported recharacterization. The Jenkinses did not contest this determination.
The bankruptcy court concluded that the twelfth factor, “the extent to which the advance was used to acquire capital assets,” superficially supported characterization as loans, as the use of funds for operating expenses is generally indicative of a loan. But the court noted that, during the relevant time period, AFI made no capital acquisitions so there was no decision made as to whether to use the advances to fund operations or purchase assets. Given these facts, the bankruptcy court correctly concluded this factor was of reduced significance.
Finally, the thirteenth factor considers “the failure of the debtor to repay on the due date or to seek a postponement.” The bankruptcy court found that none of the Notes were paid by their 5-year due dates and no extensions were sought. The court also noted that none of the parties appeared to view AFI’s failure to pay or seek extensions to be a default. The court concluded this factor strongly supported re-characterization as well. Again, the Jen-kinses do not contest this finding.
In summary, the bankruptcy court’s conclusion that the Jenkinses’ claim should be recharacterized as equity is supported by the facts and is not clearly erroneous. The bankruptcy court used the detailed list of factors set forth in Hedgedr-Investments to analyze the totality of the circumstances surrounding the transactions. The facts and circumstances surrounding the disputed transactions clearly support recharac-terization. Jenkins paid Warmack $549,250.00 to purchase Warmack’s equity interest in AFI and Cimarron and War-mack’s interest in the Certificates of Deposit. This was clearly a payment for an equity interest, and AFI received none of these funds. The intended purpose of AFI’s reclamation was to enable the Jen-kinses to obtain the Certificates of Deposit. AFI had no capital or funds to finance the reclamation, could not obtain outside financing to fund the reclamation, and would receive no economic benefit from completing the reclamation. The Jenkins-es were the beneficial owners of AFI and controlled AFI. They knew, since AFI had no ability to pay the Notes, they would be unable to enforce payment. The only purpose to the reclamation and the advances was to benefit the beneficial owners of AFI. The advances should be treated as equity contributions.
B. The Bankruptcy Court Correctly Disallowed the Jenkinses’ Proof of Claim.
The bankruptcy court disallowed the Jenkinses’ claim because they *340failed to carry their burden of persuasion as to the validity and amount of their claim-. If an objection is made to a proof of claim, the creditor has the ultimate burden of persuasion as to the validity and amount of the claim.40 The record amply supports the bankruptcy court’s finding.
As the bankruptcy court noted, there is no direct correlation between the worksheets Jenkins claims memorialized AFI’s reclamation costs and the amount of the Notes. Only one of the worksheets Jenkins relied upon was acknowledged by Pommier41 and, in any event, the worksheets are not contemporaneous records of transactions but are simply summaries and calculations based on checks Jenkins has produced. They are also facially inconsistent with the Notes.
There is no evidence that a $500,000 transfer was made to AFI in December 1999. The evidence is that the funds the Jenkinses advanced in late 1999 were paid to Warmack, and were used to pay secured debt on equipment owned by Cimarron. In exchange for this payment, the Jenkins-es received Warmack’s interest in AFI, Cimarron, and the Certificates of Deposit. Although AFI did not receive any of these funds, it executed the first $500,000 Note in favor of Green Acres Farms. Since AFI received nothing in exchange for the first Note, it was not supported by any consideration.
The evidence shows that a $170,000.00 advance to AFI on June 30, 2000, was used to pay off Cimarron’s obligation to Girard National Bank for equipment.42 Contrary to the Jenkinses’ assertion that the $170,000 was an advance to AFI, it was used to pay a Cimarron obligation, and AFI received no benefit from these funds. Also included in the Jenkinses’ proof of claim is a November 6, 2001, direct payment from Green Acres Farms to Girard National Bank for $137,900.43 The memo on the check states that payment was to “Pay off Cimarron Note on Equipment @ G.N.B.” There is no evidence that AFI received any benefit from this payment.
There are two other payments the Jen-kinses include in their proof of claim: (1) a payment from Green Acres Farms directly to Girard National Bank, on December 28, 2004, in the amount of $33,518.59 for equipment;44 and (2) another payment from Green Acres Farms, on February 28, 2005, in the amount of $50,116.64 for a loan payment.45 There is no evidence that either of these payments benefitted AFI.
Consequently, the evidence is that AFI did not benefit from or receive any consideration for at least $891,535.23 of the approximately $2,423,812.81 principal amount that the Jenkinses claim. There are numerous other checks evidencing payments directly to parties other than AFI and, although many of those checks were written to AFI, they were immediately endorsed to Cimarron and were never deposited into an AFI account.
In addition to payment of the three Notes, the Jenkinses’ proof of claim seeks payment of $487,298.62 for money related to reclamation and to accounts for Dan Card and Pat Miller. There is no promis*341sory note from AFI with respect to this portion of the claim, and the Jenkinses presented no evidence to substantiate this claim other than exhibit G attached to their proof of claim.46 A review of exhibit G reveals that it is not evidence at all but simply a hand-written list entitled “Total Money Due 10-31-08,” without any other foundation. Simply writing amounts claimed to be due on paper does not meet the claimant’s burden to prove a claim.
Any claim the Jenkinses may have is nowhere near the amount they assert. The only options for the bankruptcy court were to speculate as to the amount and validity of the Jenkinses’ claim or disallow it. It would have been error for the court to speculate, and the evidence in this case clearly supports its finding that the Jen-kinses failed to carry their burden to prove the amount and validity of their claim.
C. The Jenkinses’ Secured Claim Should be Subordinated.
Section 510 of the Bankruptcy Code47 permits bankruptcy courts to subordinate all or part of an allowed claim to all or part of another allowed claim. Equitable subordination is not based on the substance of a transaction, but rather on the behavior of the parties involved, and is intended to remedy some inequity or unfairness. Three requirements “must be met for a court to exercise its equitable subordination power: (1) inequitable conduct on the part of the claimant sought to be subordinated; (2) injury to the other creditors of the bankrupt or unfair advantage for the claimant resulting from the claimant’s conduct; and (3) consistency with the provisions of the Bankruptcy Code.”48 The first of these requirements, inequitable conduct, “encompasses three categories of misconduct: (1) fraud, illegality, and breach of fiduciary duties; (2) undercapitalization; or (3) claimant’s use of the debtor as a mere instrumentality or alter ego.”49 When a claimant is an “insider,” a different level of scrutiny applies, and “the party seeking subordination need only show some unfair conduct, and a degree of culpability, on the part of the insider.”50 Even applying the higher level of scrutiny, the evidence clearly supports the bankruptcy court’s findings and the subordination of the Jenkinses’ “secured” claim.
It is uncontroverted that AFI was un-dercapitalized. Jenkins’ stated purpose when operating AFI was to obtain a release of the Certificates of Deposit for his own benefit. Because he was prohibited from holding stock in AFI, Jenkins accomplished this goal by having the legal interest in AFI placed in Christie’s name. Jenkins’ manipulation of AFI enabled him to obtain the Notes that are unsupported by adequate consideration and vastly exceed the claimed advances to AFI. Finally, Jenkins used his knowledge and control of AFI to obtain an assignment of the Cabanas litigation proceeds to secure his bogus antecedent debt.
Jenkins argues that subordination is not appropriate because there would have been no judgment proceeds if he had not advanced the sums the Jenkinses seek to recover and, therefore, no creditors were harmed. While it may be true that the *342Cabanas litigation proceeds resulted from Jenkins’ efforts, this one fact does not justify his attempts to take advantage of his situation to secure payment of his alleged reclamation costs ahead of other AFI creditors. There was no source of repayment at the time of the Jenkinses’ advances. The Cabanas litigation was the only source of repayment, and Jenkins unfairly took advantage of his inside knowledge and control of AFI to obtain the assignment of those litigation proceeds, to the detriment of AFI’s other creditors.
In summary, the Jenkinses assert a secured claim that: (1) arose from their use of AFI as an instrumentality for their benefit while it was undercapitalized; (2) gave them an unfair advantage by use of their inside knowledge of the Cabanas litigation and their control of AFI, which allowed them to obtain an assignment of litigation proceeds and to secure their questionable antecedent debt to the disadvantage of other creditors; and (3) subordination is consistent with the provisions of the Bankruptcy Code. Further, the Jenkinses are insiders who assert a claim that is inadequately documented, lacks adequate consideration and, at a minimum, is grossly overstated. These deficiencies all resulted from their own culpable conduct, and the bankruptcy court’s equitable subordination of their “secured” claim is not clear error.
V. CONCLUSION
Looking at the transactions the Jenkins-es rely upon in their entirety, and applying the Hedgedr-Investments factors, recharac-terization was appropriate. The Jenkinses failed to carry their burden to prove the validity and the amount of their claim and it should have been disallowed. Finally, even assuming the Jenkinses’ claim was allowed, their “secured” claim should be subordinated and any allowed claim should be treated as unsecured. The bankruptcy court’s legal conclusions were correct and its factual findings were supported by the record and were not clearly erroneous. The bankruptcy court’s ruling is therefore AFFIRMED.
. Appellee Redmond filed a motion to strike certain exhibits designated by the Appellants from the appellate record, which was referred to this panel for its consideration. Although this Court always endeavors not to consider documents it deems irrelevant, whether or not they are included in the appellate record, having considered the parties’ memoranda in support and opposition to the motion, the motion is hereby denied.
. See Promissory Note dated Dec. 6, 1999, in Appellants’ Appendix (''Appx.”) at 1556.
. See Promissory Note dated Nov. 6, 2000, in Appx. at 1559.
. See Promissory Note dated Oct. 11, 2001, in Appx. at 1562.
. See Green Acres Farms Check No. 1070, in Appx. at 966.
. See Promissory Note dated March 1, 2003, in Appx. at 1617.
.The net proceeds of that amount, which are approximately $5 million after payment of costs and attorney’s fees, are currently held by the bankruptcy court.
. Fed. R. Bankr.P. 9006(a)(6)(A). Unless otherwise noted, all further references to "rules” in this decision will be to the Federal Rules of Bankruptcy Procedure.
. 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr.P. 8002; 10th Cir. BAP L.R. 8001-3.
. Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945)).
. In re Bryan, 407 B.R. 410, 413 (10th Cir. BAP 2009).
. Sender v. Bronze Group, Ltd. (In re Hedged-Invs. Assocs., Inc.), 380 F.3d 1292, 1297-98 (10th Cir.2004).
. Id.
. Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988).
. Phillips v. White (In re White), 25 F.3d 931, 933 (10th Cir.1994).
. In re Hedged-Invs., 380 F.3d at 1298.
. Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007).
. In re Fobian, 951 F.2d 1149 (9th Cir.1991).
. Id. at 1153.
. Travelers, 549 U.S. at 452, 127 S.Ct. 1199 (emphasis added).
. Law v. Siegel, - U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146, 2014 WL 813702 (2014).
. Appellants’ Statement of Supplemental Au- , thority, Docket No. 86.
. In re Official Comm. of Unsecured Creditors for Dornier Aviation (North America), Inc., 453 F.3d 225 (4th Cir.2006).
. Id. at 231-32 (emphasis and citations omitted).
. In re Hedged-Invs., 380 F.3d at 1298 n. 1 (citing Sinclair v. Barr (In re Mid-Town Produce Terminal, Inc.), 599 F.2d 389, 392 (10th Cir.1979)).
.In re Hedged-Invs., 380 F.3d at 1298.
. Id.
. Miller v. Dow (In re Lexington Oil & Gas Ltd.), 423 B.R. 353, 365 (Bankr.E.D.Okla.2010).
. In re Hedged-Invs., 380 F.3d at 1299.
. The court found that "the amounts of the Notes were not directly related to transfers to AFI, but did roughly reflect the sum of checks that had been written by Green Acres to AFI during the prior year.” Redmond v. Jenkins (In re Alternate Fuels, Inc.), Bankr.No. 09-20173, Adv. No. 11-6026, 2012 WL 6110429, at *11 (Bankr.D.Kan. Dec. 10, 2012).
. In re Hedged-Invs., 380 F.3d at 1298 n. 1.
. Id.
. Id. at 1297.
. The court concluded that "[s]ince AFI had no income other than the Jenkinses’ advances to pay creditors, the fact that creditors were paid and the Jenkinses were not has no relevancy." In re Alternate Fuels, 2012 WL 6110429, at *11.
.For example, constructive subordination'— payment of other creditors in lieu of payments pursuant to the terms of the instrument in dispute — may be a relevant factor.
. See Final Pretrial Order at ¶¶ 34-38, in Appx. at 86-87.
. In re Hedged-Invs., 380 F.3d at 1298 n. 1.
. Bayer Corp. v. MascoTech, Inc. (In re AutoStyle Plastics, Inc.), 269 F.3d 726, 752 (6th Cir.2001).
. In re Hedged-Invs., 380 F.3d at 1297-98.
. See Depo. Ex. 4, in Appx. at 850.
. See Green Acres Farms Check No. 1070, in Appx. at 966.
.See Green Acres Farms Check No. 1339, in Appx. at 990.
. See Green Acres Farms Check No. 1938, in Appx. at 923.
. See Green Acres Farms Check No. 1990, in Appx. at 926.
. See Ex. G to Proof of Claim dated 7/11/2009, in Appx. at 1566.
. 11 U.S.C. § 510(c)(1).
. Sender v. Bronze Group, Ltd. (In re Hedged-Invs. Assocs., Inc.), 380 F.3d 1292, 1300 (emphasis added) (internal quotation marks omitted).
. Id. at 1301 (emphasis added) (internal quotation marks omitted).
. Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496884/ | Chapter 13
MEMORANDUM OPINION AND ORDER DENYING PLAINTIFF/DEBTOR’S MOTION FOR SUMMARY JUDGMENT
ROBERT D. BERGER, U.S. BANKRUPTCY JUDGE
Debtor Patricia J. Turkal filed suit against Defendant Altamira Condominium Association (“Altamira”) seeking a determination that Debtor’s post-petition homeowners association dues are dischargeable under 11 U.S.C. 1328(a).1 Debtor has moved for summary judgment,2 and Alta*344mira has responded, largely agreeing with Debtor on the facts but alleging improper service and arguing that the facts do not support summary judgment for Debtor. The motion is fully briefed and the Court is prepared to rule. Because Debtor failed to show Altamira had notice or actual knowledge of Debtor’s bankruptcy in time to meaningfully participate, the Court denies her motion.
I. Jurisdiction.
An adversary proceeding to determine the dischargeability of particular debts is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter jurisdiction.3 The parties do not dispute the Court’s subject matter jurisdiction.
Altamira argues that this Court lacks personal jurisdiction over the association due to improper service. As a general rule, a plaintiff bears the burden of establishing personal jurisdiction over defendants and proving the validity of his or her method of serving defendants by a preponderance of the evidence;4 the Court would lack personal jurisdiction over a party if the service on that party were insufficient. When there has been no evidentiary hearing, and the case is still in its pretrial phase, the district court must determine whether personal jurisdiction exists based on affidavits and other materials.5
Here, Altamira argues that Debt- or failed to obtain service on Altamira, specifically alleging that the summons in the adversary proceeding was against the Viera Condominium Association, not the Altamira Condominium Association. Debtor’s Complaint lists Altamira Condominium Association as defendant.6 Debt- or initially requested summons be issued on Viera Condominiums Association7 and Chris Montanino,8 neither of whom are named in the complaint. Then, on July 12, 2013, Debtor requested that summons be issued on Altamira Condominium Association and on Chris Montanino, as President of Altamira.9 On July 15, the summons on Altamira and Chris Montanino issued,10 and on July 16, the certificates of service were filed, showing service by mail on Altamira Condominium Association11 and Chris Montanino12 at an address on Pflumm Road, in Olathe, Kansas. The Court takes judicial notice that this address is listed as Altamira Condominium Association’s principal place of business on the Kansas Secretary of State’s Annual Report for Altamira Condominium Association. This service appears to be in keeping with Fed. R. Bankr.P. 7004(b)(3), which permits service by mail of a copy of the summons and complaint to the attention of an officer of a domestic association. Altamira provides no reason why this apparently good service is faulty, and the Court finds none. The Court deems this service of the summons sufficient to give the Court personal jurisdiction over Altamira.
*345II. Legal Standard.
Summary judgment is appropriate if the moving party demonstrates that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.13 In applying this standard, the court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party.14 A fact is “material” if, under the applicable substantive law, it is “essential to the proper disposition of the claim.”15 An issue of fact is “genuine” if “ ‘the evidence is such that a reasonable jury could return a verdict for the nonmoving party.’ ”16
The moving party initially must show the absence of a genuine issue of material fact and entitlement to judgment as a matter of law.17 In attempting to meet this standard, a movant that does not bear the ultimate burden of persuasion at trial need not negate the other party’s claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party’s claim.18 Here, where the creditor has the burden of proving nondischargeability, Debtor need only point out a lack of evidence of nondischargeability.
Once the movant has met this initial burden, the burden shifts to the nonmov-ing party to “set forth specific facts showing that there is a genuine issue for trial.” 19 The nonmoving party may not simply rest upon its pleadings to satisfy its burden.20 Rather, the nonmoving party must “set forth specific facts that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant.”21 To accomplish this, the facts “must be identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated therein.”22 Rule 56(c)(4) provides that opposing affidavits must be made on personal knowledge and shall set forth such facts as would be admissible in evidence.23 The nonmoving party cannot avoid summary judgment by repeating conclusory opinions, allegations unsupported by specific facts, or speculation.24
*346Finally, summary judgment is not a “disfavored procedural shortcut”; on the contrary, it is an important procedure “designed to secure the just, speedy and inexpensive determination of every action.”25 In responding to a motion for summary judgment, “a party cannot rest on ignorance of facts, on speculation, or on suspicion and may not escape summary judgment in the mere hope that something will turn up at trial.”26
III. Uncontroverted Facts.
Debtor filed a chapter 18 bankruptcy petition on November 5, 2008 (District of Kansas Case 08-22906), and the chapter 13 Plan was confirmed in early 2009. Debtor owns a condominium in Johnson County, Kansas (the “Condominium”). Although Debtor had two mortgages on the Condominium, on the date of her chapter 13 petition, the Condominium was not encumbered by a lien in favor of Defendant; Debtor did not owe anything to Defendant; and Debtor did not identify Defendant as a creditor on her bankruptcy schedules. Defendant received neither notice of the bankruptcy when it was filed nor any subsequent notice regarding amendments and/or motions.
After the petition, Debtor had an obligation to pay ongoing Condominium dues to Defendant, ranging from $465 per month to $660 per month. Debtor paid all Condominium dues and fees invoiced from the petition date through July 31, 2013, making her last payment on August 6, 2013. On October 10, 2012, Debtor moved to amend her chapter 13 Plan to surrender the Condominium, and the motion was granted without objection. Defendant has now moved to vacate the Court’s Order granting the motion to amend the chapter 13 Plan. Since October 2012, Debtor has not made payments to the senior mortgagee, Countrywide Home Loans Servicing LP (Countrywide), but Countrywide has not commenced foreclosure proceedings. Debtor does not now live in or spend any time at the property, and the property is presently unoccupied.
Neither party has submitted any documents concerning Debtor’s obligation to pay the Condominium fees.
IY. Analysis and Conclusions.
This case presents the question of whether post-petition condominium dues are subject to discharge under 11 U.S.C. § 1328(a).27 As a general matter, and subject to some exceptions not relevant here, post-petition debts are not subject to discharge in a chapter 13 bankruptcy. The question, then, becomes whether the post-petition condominium dues accrued post-petition or prepetition. Courts faced with this question have generally taken one of three approaches:
One line holds that the debtor’s liability for condominium assessments is nondis-chargeable, arising from a covenant running with the land.... [These] cases determine[] that condominium assessments accrue postpetition because the debtor owns the property postpetition. The determinative factor under this analysis is that the condominium declaration constitutes a covenant running with the land.
*347The second line holds that the debtor’s liability for the assessments is dis-chargeable, arising from a prepetition contractual obligation.... [These] cases determine[ ] that postpetition condominium assessments accrue prepetition because the debtor’s ownership of the condominium prepetition initially establishes his liability for future condominium assessments, although the liability is contingent and unliquidated. These cases hold that the condominium declaration is a contract entered into when the debtor purchased the condominium. The purchase of the condominium obligates the debtor to pay any assessments levied in the future. This obligation to pay is uncertain, depending upon the debtor’s continued ownership of the land and whether the condominium association levies assessments. However, the assessments still accrue prepetition because the definition of debt under the Bankruptcy Code includes unliquidated, contingent and un-matured debts.28
Other courts take a third approach, holding that the liability for condominium assessments arises from a covenant running with the land, but that the debt is dis-chargeable as a personal liability for the debtor and remains as an in rem obligation on the property.29 Debtor argues for the second approach, suggesting that the dues are dischargeable because they arise from a prepetition contractual obligation.
This Court need not decide among these approaches here.30 Altamira asserts Debtor’s failure to list Altamira in Debtor’s schedules and Debtor’s failure to notify Altamira of the bankruptcy as an affirmative defense, and the parties agree that Debtor did not identify Altamira as a creditor on her bankruptcy schedules and that Altamira did not receive notice of the bankruptcy when it was filed nor any subsequent notice regarding amendments and/or motions. When a creditor is not listed on a debtor’s schedules and has no notice and no actual knowledge of the bankruptcy, the creditor’s claim is nondischargeable under § 523(a)(3).31 The debt- or bears the burden of proving that a creditor had “notice or actual knowledge” under § 523(a)(3) and has not even alleged such notice or knowledge here.32 Taking this failure to its logical conclusion, even if, as Debtor argues, the dues were a debt that accrued prepetition, the debts would nonetheless be nondischargeable under § 523(a)(3).33 Thus, Debtor cannot show *348she is entitled to judgment as a matter of law, and so Debtor’s Motion for Summary-Judgment is denied.34
IT IS SO ORDERED.
. All future statutory references are to the Bankruptcy Code ("Code”), as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101-1532, unless otherwise specifically noted.
. Doc.21.
. 28 U.S.C. § 157(b)(1) and § 1334(b).
. Fed. Deposit Ins. Corp. v. Oaklawn Apartments, 959 F.2d 170, 174 (10th Cir.1992).
. Richardson v. Alliance Tire & Rubber Co., Ltd., 158 F.R.D. 475, 478 (D.Kan.1994).
. Doc. 1-1, at 1.
. Doc. 4.
. Doc. 5.
. Doc. 12 and 13.
. Doc. 14 and 15.
. Doc. 16.
.Doc. 17.
. Fed. R. Civ. P. 56(a); see also Grynberg v. Total, S.A., 538 F.3d 1336, 1346 (10th Cir.2008).
. City of Herriman v. Bell, 590 F.3d 1176, 1181 (10th Cir.2010).
. Wright ex rel. Trust Co. of Kan. v. Abbott Labs., Inc., 259 F.3d 1226, 1231-32 (10th Cir.2001) (citing Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir.1998)).
. Thomas v. Metro. Life Ins. Co., 631 F.3d 1153, 1160 (10th Cir.2011) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
. Spaulding v. United Transp. Union, 279 F.3d 901, 904 (10th Cir.2002) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
. Adams v. Am. Guar. & Liab. Ins. Co., 233 F.3d 1242, 1246 (10th Cir.2000) (citing Adler, 144 F.3d at 671); see also Kannady v. City of Kiowa, 590 F.3d 1161, 1169 (10th Cir.2010).
. Anderson, 477 U.S. at 256, 106 S.Ct. 2505; Celotex, 477 U.S. at 324, 106 S.Ct. 2548; Spaulding, 279 F.3d at 904 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).
. Anderson, 477 U.S. at 256, 106 S.Ct. 2505; accord Eck v. Parke, Davis & Co., 256 F.3d 1013, 1017 (10th Cir.2001).
. Mitchell v. City of Moore, Okla., 218 F.3d 1190, 1197-98 (10th Cir.2000) (quoting Adler, 144 F.3d at 671); see Kannady, 590 F.3d at 1169.
. Adams, 233 F.3d at 1246.
. Fed. R. Civ. P. 56(c)(4).
. Id.; Argo v. Blue Cross & Blue Shield of Kan., Inc., 452 F.3d 1193, 1199 (10th Cir.2006) (citation omitted).
. Celotex, 477 U.S. at 327, 106 S.Ct. 2548 (quoting Fed. R. Civ. P. 1).
. Conaway v. Smith, 853 F.2d 789, 794 (10th Cir.1988).
.Section 523(a)(16), which renders nondis-chargeable a post-petition fee or assessment related to a condominium ownership, does not apply in a chapter 13 full payment discharge under § 1328(a).
. Affeldt v. Westbrooke Condo. Ass’n (In re Affeldt), 60 F.3d 1292, 1295 (8th Cir.1995) (citations omitted).
. In re Kahn, 504 B.R. 409 (Bankr.D.Md.2014).
. The Court notes that such an analysis would involve review of the contract or other document that allegedly created Debtor’s obligation to pay dues. Where, as here, a creditor fails to file the document, the creditor has not carried the creditor’s burden in a summary judgment setting, and the Court would be compelled to rule for the debtor. In re Affeldt, 60 F.3d at 1295.
. Section 523(a)(3) does not apply to a no-asset chapter 7 case in which there is not a proof of claim deadline. 4 Collier on Bankruptcy ¶ 523.09(5), at 523-69 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2013). Since all chapter 13 bankruptcy cases have a proof of claim deadline, this no-asset exception to § 523(a)(3) would not apply.
. Jones v. Arross, 9 F.3d 79, 81-82 (10th Cir.1993). Debtor may be able to show that Altamira had actual knowledge of the bankruptcy in time for Altamira to meaningfully participate, but Debtor has made no effort to do so at the summary judgment stage.
. Additionally, a creditor who does not receive timely notice is not bound by a chapter 13 plan. See Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, *348§ 229. 1, at ¶ 349.1 Sec. Rev. Oct. 8, 2010, www.Chl3online.com.
. Spaulding, 279 F.3d at 904. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496885/ | MEMORANDUM DECISION
WILLIAM T. THURMAN, Bankruptcy Judge.
If there was ever a need for a better drafted contract, this is the case. With just some attention to terms of performance, terms of default, deadlines and the like, much of the controversy that the parties have presented to the Court could have been resolved between them. However, those rudimentary terms are absent from the two page document that the parties agree is their written contract. Because of the sparsity of terms, the Court is forced to look to course of dealing between the parties and industry norms to fill in the blanks. With this in mind, the Court has constructed this decision.
The matter before the Court is an adversary proceeding brought by Nathan Jones against Scott Colby Dawson and his wife, Shanna Lynn Dawson.1 Mr. Jones requests that the Court deny Mr. Dawson’s discharge of a particular debt, which Mr. Jones claims to be in the amount of $149,736.32, pursuant to 11 U.S.C. § 523(a)(2)(A).2 Mr. Jones alleges that Mr. Dawson made fraudulent representations relating to the construction of an airplane hangar at the Provo City Municipal Airport (the “Hangar”).
I. JURISDICTION AND VENUE
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(b) and 157. This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue is appropriate under 28 U.S.C. § 1409. Notice for the trial is and has been appropriate in all respects.
II. Findings of Fact
1. Mr. Jones, through his agent, Mario Markides, solicited bids for the construction of the Hangar.
*3512. CoDa Construction, Inc. (“CoDa”), a Utah corporation solely owned by Mr. Dawson, was the successful bidder at a bid price of $270,700. Ms. Dawson was identified as the corporate secretary; however, her involvement with CoDa was only to do some invoicing work under specific instruction from Mr. Dawson.
3. Mr. Dawson received his contractor license from the state of Utah in April 2007, and is an experienced contractor.
4. CoDa prepared an estimate for the total project. Exhibit 2, dated August 30, 2011, is the estimate prepared by Mr. Dawson and signed by Mr. Jones (the “Estimate”).3 Mr. Jones accepted the Estimate on or about September 9, 2011.
5. The Estimate includes the following components and specific costs for the construction of the Hangar:
• 80 x 75 x 20 prefab steel building with PBR walls reverse panel and gajvalume [sic] screw down roof with R-36 roof and R-19 walls with gutter and down spouts 1-framed opening 1-opening for bifold door 60 x 20 and 2-3070 doors — $65,000
• Erection on a 80x75 prefab steel building to be erected at the Provo Airport with PBR walls and galvalume roof with gutter and downspouts— $29,700
• Concrete on footings and foundation rebar, floor in building and drive way. Footings are to be standard 2 foot. Foundation to be standard 8" x 4'— $63,000
• Removal of Asphalt, Relocate drainage pipe (includes 1 extra drain), and dig foundation includes digging fiber optic and temp fencing — $39,500.
• Rough in Plumbing — $5,000
• 60 x 20 bifold door with auto lock and remote opener and sheeting — $30,500
• Exclusions — All prices are based on information provided to Coda Construction, Inc. and no sewer hookup just rough in and stubbed out Insulation R-19 walls and r-36-roof— $10,800
• Plans and Permits — $17,000
• Electrical & Lighting as per invoice cost of material plus labor as per building codes — $0 (cost plus)
• Heating gas; line as per cost of materials plus labor — $0 (cost plus)
• Overhead door — $4,200
• 10 x 10 concrete room 8" thick walls 1-3060 steel door with lock set — $8,000
6. The Estimate as used by the parties sets out the scope of the project. However, as stated previously, many of the terms have to be imported from the course of dealing between the parties and the industry norms of the construction industry.
7. The Estimate shows a total fixed cost of $272,700, which number was reduced in writing to $270,700 on the Estimate.4 The Estimate also contains terms anticipating some variable costs for electrical, lighting, heating gas line, and cost of labor for installation.5 There is no written agreement as to the specific costs of these additional items.
8. Mr. Jones, who had previously hired contractors in six different hangar construction projects in Arizona, believed and was under the impression that Mr. Dawson would complete the project by December 25, 2011, but this completion date was not included in the Estimate.
*3529. Mr. Jones offered to pay the full $270,700 up-front at the start of the project, but Mr. Dawson refused his offer.
10. The parties agreed to follow industry custom, which was to invoice for each project segment or component of the job for roughly 50% up-front with the balance to be invoiced and paid when that segment or component was completed. However, the parties did not follow industry norm at all times.
11. Further, as testified by Darrell Jason Lester, a worker on the job site, when a segment or component is first invoiced, industry custom is for the contractor to apply the funds received directly towards the items indicated in the invoice.
12. Each invoice issued by CoDa, prepared by Mr. Dawson or pursuant to Mr. Dawson’s instruction, included a list of one or more items taken from the Estimate, provided the cost of the item, the description of the item, and included a total percentage of the job on each item. The total percentage indicates that the payment requested was for the commencement of the item listed, for an up-front payment that was required for the delivery of the item, or, if the component had been completed, that the remaining balance should be paid.
13. From September 2011 through February 2012, Mr. Jones paid CoDa $230,000 in multiple installments upon receipt of various invoices.6
14. Mr. Jones did not request receipts or proof of payments from Mr. Dawson for goods and services related to the project that Mr. Dawson was to pay, just invoices.
15. In preparing the Estimate, Mr. Dawson built in an internal profit of 20% of the cost of the project and an additional 10% on the specific costs of certain components on the Estimate, which he referred to as his “commission.”
16. Mr. Dawson did not disclose his intended commission to Mr. Jones. According to Mr. Dawson’s accounting on Exhibit 18 and Mr. Dawson’s testimony, out of the funds received from Mr. Jones, Mr. Dawson issued CoDa shareholder distributions in the minimum amount of $35,124.7 Again, as stated above, Mr. Dawson was the sole shareholder of CoDa.
17. Mr. Dawson also accounted for a minimum distribution of $24,462.57 for “Builders Overhead.”8 At the time Mr. Dawson withdrew this builder’s overhead amount from the funds paid by Mr. Jones for the construction of the Hangar, Mr. Dawson knew that he would not have sufficient funds remaining to complete the project.
18. At the commencement of the project, unexpected expenses arose. The Estimate was based on a footing to be “standard 2 foot,” but because of the high ground water, Provo City required the foundation to be dug eighteen inches deeper than the standard two feet, thus requiring an extra 8,437.5 cubic feet of excavation and an increased quantity of gravel fill material. The parties agreed that Mr. Jones would pay for the increased cost, but never agreed upon the amount.
19. On October 7, 2011, Mr. Dawson issued an initial invoice, invoice number 130, for $70,000 that included the cost of the permits with a total percentage of 100%, indicating that Mr. Dawson would complete the appropriate papers and obtain the necessary building permits from Provo City for a total of $17,000.9 The *353invoice also included a bifold door and the building indicating a total percentage of 65.57% and 50.77%, respectively.10
20. Mr. Jones paid for invoice number 130 in two installments,11 the first installment of $55,000 and the second of $20,000, providing a credit of $5,000.12 Mr. Dawson testified that he set aside $17,000 of the $55,000 payment for the permits. The Court received Exhibit 21 for impeachment purposes. Exhibit 21 shows that out of the initial $55,000 paid by Mr. Jones on September 9, 2011, Mr. Dawson made significant withdrawals for personal use through September 2011, contrary to his testimony as to the use of those funds. Accordingly, the Court does not find Mr. Dawson’s testimony credible.
21. Mr. Dawson did not purchase the identified permit from Provo City for the construction of the Hangar, but instead began construction using a fast track permit from Provo City that limited construction to the foundation of the Hangar.
22. On October 7, 2011, Mr. Dawson issued a separate invoice for $25,000 for excavation indicating a total percentage of 63.24% completed, which Mr. Jones paid.13
23. Mr. Dawson issued an invoice on November 15, 2011 for concrete indicating a total percentage of 47.62% for a total amount of $30,000, which Mr. Jones paid.14
24. Mr. Dawson told Mr. Markides that 100% of the cost had to be provided before the building component for the Hangar could be delivered to the work site.15 On December 1, 2011, Mr. Dawson issued an invoice with a total percentage of 100% for the building.16 Because the building had not been delivered to the construction site, Mr. Jones paid $30,000 of $32,000 invoice, which funding was enough for the building to be delivered.
25. The building was delivered shortly after the invoice was issued, but Mr. Mar-kides questioned Mr. Dawson about the height of the building. Mr. Dawson told Mr. Markides that the building was the correct height and only appeared shorter because it had not been erected. When the building was later erected, the building was a foot shorter than required.
26. On December 12, 2011, Mr. Dawson issued an invoice for excavation showing a total percentage of 100%,17 but the excavation was not complete. Mr. Dawson told Mr. Markides that to complete the excavation he needed the remaining balance of the funds for the segment. Mr. Jones paid the balance, but Mr. Dawson never completed the segment.
27. On January 11, 2012, Mr. Dawson issued a second invoice for the concrete and bifold door indicating 100% completion for a total of $43,500.18 Despite the statement of 100% total on the invoice, the concrete portion was not complete, and Mr. Jones withheld $13,500 of the payment. Mr. Jones paid 100% of the invoiced amount for the bifold door up-front as Mr. Dawson represented the payment was required for delivery.
*35428. On January 30, 2012, Mr. Dawson issued an invoice for erection of the building and insulation indicating a total of 50% and 100%, respectively, for a total of $25,650, which Mr. Jones paid.19
29. On February 27, 2012, Mr. Dawson issued an invoice for an overhead door and plumbing in the amount of $9,200 indicating a total percentage of 100%.20 Mr. Dawson told Mr. Markides that Mr. Dawson needed the 100% payment up-front for delivery of the overhead door. Mr. Mar-kides agreed, but believed that the request was ahead of schedule given the status of the project.
30. After issuing the second invoices on the bifold door and rebar, the items were delivered to the project site. However, the items were not taken off the delivery trucks and were returned to the manufacturers because the manufacturers, who Mr. Dawson had subcontracted with to make and deliver these items, never received the full payment from Mr. Dawson.
31. In mid-February, Mr. Dawson met with Mr. Markides. Mr. Markides told Mr. Dawson that no additional funds would be provided by Mr. Jones until the items already invoiced were completed as indicated by the total percentage, and that Mr. Dawson had three weeks to catch up with the segments and components invoiced.
32. Mr. Dawson did not meet the three week deadline.
33. On April 11, 2012, Mr. Markides received a call from an employee at the permit office of Provo City stating that the permit as indicated in the Estimate and invoices issued had not been paid for and that the project would be shut down if the permit was not purchased the same day.
34. Mr. Jones went to the Provo City office and purchased the permit on April 11, 2012. The full permit cost had previously been invoiced in invoice number 130, but, upon being paid for the same, Mr. Dawson did not purchase the permit. Further, Mr. Dawson has not reimbursed Mr. Jones for the permit he purchased on April 11, 2012.
35. At some point between the end of March and early April 2012, Mr. Dawson was “kicked off the project,” which the parties understood meant that Mr. Dawson was no longer the contractor and that Mr. Jones would be completing the project with another contractor.
36. In April 2012, Mr. Dawson issued several more invoices to Mr. Jones.
37. Mr. Dawson contends that if Mr. Jones paid the remaining Estimate price, Mr. Dawson would have been able to complete the project.
38. Mr. Dawson and his wife kept an accounting of the invoices and funds paid relating to the project, and that accounting shows payments of invoices to suppliers related to the project in the amount of $90,310.67.21
39. The accounting kept by Mr. Dawson on Exhibit 18 also shows the following payments made out of the funds for the construction of the Hangar:
• Payroll and Taxes = $34,333.01
• Jason Lester = $2,700
• Insurance and bonding = $3,522.25
• Fuel = $3,449.92
• Shareholder Distributions = $35,124
• Auto and Truck Expenses = $11,607.44
• Office Rent = $3,000
• Professional Fees (accountant & legal) = $3,091.64
*355• Operating Expenses (equipment repairs, phones, etc.) = $3,848.52 Travel Expenses to bid jobs = $759.23
• Miscellaneous building supplies = $5,093.12
• Advertising = $547.97
• Tools and equipment = $4,307.53
• Donations = $842.13
• Builders Overhead = $24,462.57
40. Mr. Dawson paid employees during the first few months of the project, but did not continue to pay the employees, including Mr. Lester, who claims he is still owed funds.
41. Mr. Dawson’s accounting for fuel expenses of $3,449.92 and auto and truck expenses of $11,607.44 included both personal and business related activities, but it did not delineate a breakdown of what expenses went toward the Hangar.
42. Mr. Dawson believed that at the time he was kicked off the project, the project was about 90% complete, but Messrs. Jones and Markides believed the job was much farther from being completed when Mr. Dawson stopped work on the site.
43. Mr. Jones’ total cost to complete the project, including the monies paid to Mr. Dawson, was $420,436.32, which is $149.736.32 over the Estimate.
III. Discussion
a. Legal Standard Under Section 523(a)(2)(A)
A party seeking non-discharge-ability as to a particular debt has an uphill but not impossible battle. Exceptions to discharge are narrowly construed, and, according to the case law, any doubt is to be resolved in the debtor’s favor.22 Under 11 U.S.C. § 523(a)(2)(A),23 a party asserting nondischargeability must show by a preponderance of the evidence24 that (1) the debtor made a false representation; (2) the debtor made the representation with the intent to deceive the creditor; (3) the creditor relied on the representation; (4) the creditor’s reliance was justifiable; and (5) the debtor’s representation caused the creditor to sustain a loss.25 The Court addresses each of these elements in turn.
i False Representations
Mr. Jones asserts that the invoices produced by Mr. Dawson (both the initial invoices and the subsequent invoices) and the statements made to Mr. Markides are separate false representations under § 523(a)(2)(A). Mr. Dawson argues that an invoice is just an invoice, and is not any form of representation. The Court finds the testimony of Messrs. Markides and Lester credible, and the Court is persuaded that, based on industry custom as used and intended in this instance, an invoice is a representation that the funds to be received for the invoice will either be put towards the cost of the segment or component listed on the invoice or indicates that the remaining balance should be paid because the segment or component listed is completed.
Mr. Dawson prepared and presented numerous invoices to Mr. Jones; how*356ever, those invoices did not correctly reflect the progress of the Hangar. The course of dealing between the parties was a bit irregular, but they adopted a system as a general rule that required Mr. Dawson to issue two invoices for a particular component. The first invoice would generally be for some percentage of the total cost on the Estimate and the second invoice would be for the balance owed after completion. Many of the items on the invoices were neither completed nor paid for by Mr. Dawson. For example, Mr. Dawson invoiced for a permit to construct the Hangar in October 2011.26 Mr. Jones paid the invoiced amount and believed that the permit was purchased, but later learned in April 2012 that Mr. Dawson never purchased the required permit. Mr. Dawson also issued invoices for the concrete and excavation segments, indicating that the segments were complete.27 The segments were not complete. Despite representations that Mr. Dawson needed 100% of the funding up-front for the purchase of a door and rebar, which amounts were paid up-front by Jones, Mr. Dawson did not pay the vendors for the items and the items were not delivered to or left at the job site by the provider. Mr. Dawson also issued first invoices for segments or components that were not ready for commencement at the job site. Through these invoices, Mr. Dawson made representations of the status of the project and what the funds from Mr. Jones would be used toward, which representations were false. Accordingly, the Plaintiff has met this burden of showing that the representations made by Mr. Dawson were false.
ii Intent
The intent to deceive “may be inferred from the totality of the circumstances,”28 and the debtor “must have acted with the subjective intent to deceive the creditor.”29 From Mr. Dawson’s testimony, it is clear that he had experience in the construction industry prior to the Hangar project. Mr. Dawson argues that his intent was to complete the project, and relies on some of the work he completed on the project as a showing of his intent. Mr. Dawson claims that if he had received the rest of the funds as requested, he would have been able to finish the project. However, this argument is outweighed by the evidence presented by Mr. Jones. Mr. Dawson represented with each invoice that he would begin construction or had finished construction on a particular segment of the project. Familiar with industry custom, Mr. Dawson was aware that issuing those invoices represented that the funds would go to the construction of the Hangar, and the second invoice would indicate completion of that segment. Mr. Dawson did not put the payments received towards the items listed on the invoices as industry custom provides. He used funds received from Mr. Jones to issue shareholder distributions of a minimum of $35,124 and overhead of $24,462.57 instead of putting them toward the costs identified in the invoices, despite his knowledge that doing so would impair the construction of the Hangar. Accordingly, the Court finds that by a preponderance of the evidence Mr. Dawson had the intent to deceive Mr. Jones.
Hi Reliance
Here, industry custom dictates that when an invoice is generated, the payment made on that invoice will go toward the component listed on the invoice. Mr. *357Jones received the invoices from Mr. Dawson and made payment on those invoices. As the project progressed, it became clear that some segments or components were not progressing as represented, but Mr. Jones provided payments relying on Mr. Dawson’s statements that the balance was needed to complete the segment or obtain the component. Mr. Jones relied on the representations of Mr. Dawson.
iv. Justifiable Reliance
Although the express language of the statute uses “reasonable” reliance, the United States Supreme Court stated in Field v. Mans that under § 523(a)(2)(A) a creditor must show justifiable reliance, a lower standard than reasonable reliance.30 “Justifiable reliance does not require the creditor prove he acted consistent with ordinary care and prudence. Instead, ‘[jlustification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case.’”31 Here, Mr. Dawson argues that Mr. Jones should have requested receipts or monitored the project more closely, therefore, his reliance is not justified. However, although these suggestions may be ordinary care and prudence, Mr. Jones, who had engaged in the construction of six other hangars in the past, justifiably relied on the representations of Mr. Dawson. It is justifiable that he would rely on the invoices as representations of the status of the project under the circumstances and that the payments made to Mr. Dawson based on an invoice would be used for those items on the invoice.
V. Loss
Under § 523(a)(2)(A), the plaintiff must prove by a preponderance of the evidence that “the amount of his damages [is] attributable to actual fraud,”32 and “ ‘[b]ut for’ causation alone is not enough.”33 Mr. Jones requests damages in the amount of $149,736.32, and claims that this amount is a direct and proximate result of Mr. Dawson’s false representations. He calculates this amount by subtracting the bid amount on the Estimate or $270,700 from the total cost he paid to complete the project of $420,436.32 for a difference of $149,736.32. Mr. Jones has shown a loss under § 523(a)(2)(A), but has not persuaded the Court that $149,736.32 is the appropriate amount of damages. There were many items which Mr. Jones paid for which were not within the parameters of Exhibit 2, accordingly they should not be included in the loss calculation.
“Although nondischargeability under section 523 is a matter of federal law,” as stated by our Bankruptcy Appellate Panel, which the Court finds persuasive, the Court “determined] ‘the existence and the amount of the underlying debt’ under state law.’ ”34 Mr. Dawson correctly cited to Long v. Stutesman as the measure for damages for fraud under Utah law, which this Court also applies to a false representation. Long provides that the “measure of damages for fraud is [the] difference between [the] value of [the] property purchased and [the] value it would have had if *358[the] representations were true.”35 However, Mr. Dawson did not provide a figure as possible damages for the Court. In In re Gerlach,36 the Tenth Circuit stated that if the creditor can prove that the debtor obtained credit through fraud, “the court should declare the debt nondischargeable in an amount which it can reasonably estimate as obtained by fraud.”37 Accordingly, the Court uses the standards of Long and Gerlach in reaching its own determination of damages.
The amount of damages here can be reasonably estimated under the guidance of Long and based on the evidence presented. Exhibit 18 is illustrative for the Court. Exhibit 18 is the accounting prepared by Mr. Dawson and his wife throughout the Hangar project using QuickBooks, a computer program. Although there can be questions about the accuracy of Exhibit 18, it is the only evidence presented to the Court that shows how Mr. Dawson used the amounts paid by Mr. Jones for the Hangar.
If all of the funds received by CoDa from Mr. Jones would have been placed into the construction of the Hangar, the value received by Mr. Jones would have been the amount of $280,000. The actual value of the property received by Mr. Jones was substantially less, but not without value. The Court finds that from the amounts in Exhibit 18, some were put toward the Hangar project and some were not. The Court finds that of the total received only $144,115.10 went toward the project. This amount includes invoices paid by CoDa, payroll and taxes, amounts paid to Mr. Lester,38 insurance and bonding, operating expenses, miscellaneous building supplies, and tools and equipment. For the purposes of this decision and computation, the Court has excluded the shareholder distributions, office rent, professional fees, travel expenses to bid jobs, advertising, donations, builder’s overhead, and fuel and auto expenses that were indistinguishably used for both business and personal expenses from the $230,000 actually received. Thus, the value of the property received by Mr. Jones is calculated to be $144,115.10. This is best illustrated as follows:39
Description from Exhibit 18 Amount Used Toward Hangar
Invoices Paid $90,310.67 Y
Payroll and Taxes_$34,333.01_Y_
Jason Lester $2,700.00 Y
*359Insurance and Bonding_$3,522.25_Y
Fuel $3,449.92 N
Shareholder Distributions_$35,124.00_N
Auto and Truck Expenses_$11,607.446_N
Office Rent_ $3,000.00_N
Professional Fees_$3,091.64_N
Operating Expenses $3,848.52 Y
Travel Expenses to Bid Jobs_ $759.23_N
Miscellaneous Building Supplies $5,093.12 Y
Advertising_ $547.97_N
Tools and Equipment_ $4,307.53_Y
Donations $842.13 N
Builders Overhead$24,462,57_N
Subtracting the value of the property received that the Court finds went into the construction of the Hangar (i.e. $144,115.10) from the total amount received from Mr. Jones, which would have been the value he expected and paid for if the representations were true (i.e. $230,000), the Court finds that the amount of loss suffered by Mr. Jones is $85,884.90 as a direct and proximate result of the false representations by Mr. Dawson. In other words, Mr. Dawson did not use $85,884.90 as he represented. Mr. Jones may have suffered other contractual damages, but the Court does not find or conclude that the alleged contractual damages arose as a result of the false representations made by Mr. Dawson.
IV. CONCLUSION
The debt owed by Mr. Dawson to Mr. Jones should be nondischargeable pursuant to § 523(a)(2)(A) in the amount of $85,884.90 and a judgment should be entered accordingly.
. At the conclusion of the two day trial on February 5, 2014, this Court found that Ms. Dawson did not make a fraudulent representation and concluded that her discharge on the alleged debt should not be denied pursuant to 11 U.S.C. § 523(a)(2)(A).
. In his initial complaint in his prayer for relief, which has not been amended, Mr. Jones requested that the debt be non-dis-chargeable pursuant to 11 U.S.C. § 523(a)(4) and (a)(6), but included in the body of the complaint was a claim that the debt be non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Mr. Jones did not discuss the claim under 11 U.S.C. § 523(a)(4), and he announced in court that he is only proceeding under 11 U.S.C. § 523(a)(2)(A).
. Exh. 2.
. Id.
. Id.
. See Exs. 3 and 18.
. Ex. 18.
. Id.
. Ex. 5.
. Id.
. Ex. 16.
. Ex. 5.
. Ex. 4.
. Ex. 6.
. It is noted that the use of the word building is limited to the specific prefab steel building contemplated for erection on the site. While, the use of the word Hangar, contemplated a completed structure.
. Ex. 7.
. Ex. 8.
. Ex. 9.
. Ex. 10.
. Ex. 12.
. Ex. 18.
. See DSC Nat’l Props., LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (10th Cir. BAP 2012).
. Unless otherwise indicated, all future statutory references are to the Bankruptcy Code, Title 11 of the United States Code.
. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996); see also Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 and n. 3 (10th Cir.2009).
. Ex. 5.
. Exs. 9 and 10.
. In re Young, 91 F.3d at 1375.
. In re Johnson, 477 B.R. at 169.
. 516 U.S. 59, 74-77, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
. Barney v. Perkins (In re Perkins), 298 B.R. 778, 792 (Bankr.D.Utah 2003) (citing Field, 516 U.S. at 74-75, 116 S.Ct. 437).
. Diamond v. Vickery (In re Vickery), 488 B.R. 680, 692 (10th Cir. BAP 2013) (emphasis in original).
. Phoenix Equity Ventures, LLC v. Baillio (In re Baillio), No. 08-1124, 2010 WL 3782065, at *21 (Bankr.D.N.M. Sept. 21, 2010).
. Knaub v. Rollison (In re Rollison), No. CO-13-028, 500 B.R. 663, 2013 WL 5797861, at *3 (10th Cir. BAP Oct. 29, 2013).
. Long v. Stutesman, 269 P.3d 178, 184 (Utah Ct.App.2011).
. John Deere Co. v. Gerlach (In re Gerlach), 897 F.2d 1048 (10th Cir.1990). In re Gerlach was decided before the Supreme Court issued Grogan, which, as cited above, determines that the burden on the creditor under § 523(a)(2)(A) is a preponderance of the evidence, not clear and convincing evidence. In re Gerlach used clear and convincing; however, the Court believes that the part of the opinion that does not address the burden of proof is still good law and should be followed here.
. Id. at 1052 (emphasis added).
. Although there was a dispute whether Mr. Lester was fully paid by Mr. Dawson, there was no dispute that Mr. Lester received payments at the start of the Hangar project. The accounting on Exhibit 18 shows payments for a commission, reimbursements, and a bonus, which the Court credits as funds put toward the project.
. Under the column "Used Toward Hangar," the Court finds that some amounts were properly used for the Hangar and some were not. A "Y” indicates that the amount has been contributed toward the Hangar project, and an “N” indicates that the amount was not. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496886/ | Chapter 7
MEMORANDUM OPINION ON MOTIONS TO DISMISS
Michael G. Williamson, United States Bankruptcy Judge
Before this bankruptcy case was filed, three probate estates obtained more than $1 billion in judgments against the Debt- or’s wholly owned subsidiary- — Trans Health Management, Inc. (“THMI”) — and THMI’s former parent — Trans Healthcare, Inc. (“THI”). One of the probate estates, in an attempt to collect on its judgment against THI and THMI, obtained a $110 million judgment against the Debtor in state-court proceedings supplementary before filing this involuntary bankruptcy case. Those three probate estates (along with three others) (collectively, the “Probate Estates”) — all creditors in this bankruptcy case — are seeking to recover those judgments from: THI’s former parent and shareholders, THI’s primary secured lenders, and several entities and individuals that allegedly received THMI’s assets as part of an alleged “bust-out scheme.”
According to the complaint, THI Holdings, LLC (“THIH”) and THIH’s primary shareholder, a series of entities referred to as the “GTCR Group,” conspired to allow THI’s two primary secured lenders — General Electric Capital Corporation (“GECC”) and Ventas, Inc. (“Ventas”) — to loot THI and THMI to repay $75 million in loans before the GTCR Group and THIH ultimately sold THI’s and THMI’s assets to a group of individuals and entities referred to as the “Fundamental Entities”— Fundamental Long Term Care Holdings, *365LLC (“FLTCH”), Fundamental Administrative Services (“FAS”), Trans Health, Inc. — Baltimore (“THI-Baltimore”), Murray Forman, Leonard Grunstein, and Rubin Schron — for far less than their fair market value in order to preserve the substantial investment the GTCR Group made in THI.1 To complete the alleged bust-out scheme, THMI’s liabilities were transferred to the Debtor (a sham entity created for the sole purpose of acquiring THMI’s liabilities), and THI was allowed to slowly go out of business before being put into a state-court receivership.
This Court must now decide whether those facts (alleged with excruciatingly more detail in the complaint) give rise to liability under alter-ego or veil-piercing theories and for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraudulent transfer (and conspiracy to commit a fraudulent transfer), and successor liability. For the reasons set forth below, the Court concludes that the Plaintiffs fail to state a claim for relief under any alter-ego or veil-piercing theories but that they do state claims for relief against (i) Edgar Jannotta (a GTCR principal and director of THI and THMI) for breach of fiduciary duty; (ii) GTCR, THIH, THI-Baltimore, FLTCH, Forman, and Grun-stein for aiding and abetting a breach of fiduciary duty; (Hi) THI-Baltimore, FLTCH, FAS, Forman, and Grunstein for fraudulent transfer; (iv) THI-Baltimore, FLTCH, and FAS for successor liability; and (v) THI-Baltimore, FLTCH, FAS, Forman, and Grunstein for conspiracy to commit a fraudulent transfer.
FACTUAL BACKGROUND
The “bust-out” scheme alleged in the complaint — even if not told in the most compelling fashion — has all the makings of a legal thriller. Of course, it is important to remember it is not the Court’s job to determine — at the pleading stage — whether the allegations in the complaint are true or whether they are mostly the work of fiction. Some of the Defendants here tell a completely different story in complaints for declaratory judgment they filed in related adversary proceedings. Instead, the Court must accept all of the facts in the complaint as true in determining whether the scheme alleged by the Plaintiffs gives rise to any claim for relief. To understand the “bust-out” scheme alleged by the Plaintiffs, it is easiest to start with THI.
THI is founded as a nursing home operator
THI, which was founded in 1998, operated nursing homes, assisted living facilities, and long-term acute care hospitals throughout the United States through various operating subsidiaries. THMI, which was a wholly owned subsidiary of THI until March 2006, provided management services to THI’s operating subsidiaries, including clinical services and compliance, business management, corporate financial control, financial systems analysis, accounts payable and receivable management, corporate and tax accounting, payroll, and benefits administration.
THI is funded by the GTCR Group and other lenders
The initial funding for THI came from a private equity firm the Plaintiffs refer to as the “GTCR Group.” The GTCR Group consists of GTCR VI Executive Fund; GTCR Fund VI, LP; GTCR Associates VI; GTCR Partners VI, LP; and GTCR *366Golder Rauner, LLC (the “GTCR Group”). According to the Plaintiffs, the GTCR Group was intent on building a nationwide nursing home empire.
The GTCR Group provided the initial funding for THI at its inception in 1998. Three years later, the GTCR Group contributed another $4.5 million to THI. And the following year, the GTCR Group contributed another $5.68 million. In all, the GTCR Group contributed a total of $37 million of its own capital to THI between 1998 and 2005.
In addition to its own investment, the GTCR Group also helped raise capital from other lenders — namely Ventas and GECC. Ventas initially entered into two loan transactions with THI in 2002: a $55-million term loan and a $22-million mezzanine loan. Ventas also entered into a sale-leaseback transaction with THI whereby THMI would operate nursing homes owned by Ventas Realty, Inc. (‘Ventas Realty”). The two loans from Ventas were secured by the stock in THI and THMI, and both THI and THMI guaranteed the mezzanine loan and the sale-leaseback transaction. In late 2002, GECC acquired the $55 million term loan from Ventas.
The GTCR Group runs THI’s day-to-day operations
Aside from raising capital for THI, the GTCR Group was also instrumental in THI’s day-to-day management and administration. From the start, the GTCR Group entered into a Professional Services Agreement with THI in July 1998, around the time THI was created. Under its agreement with THI, the GTCR Group was responsible for formulating THI’s corporate strategy and corporate investments, including acquisitions, divestitures, and debt and equity financing.
The GTCR Group, as a result of its substantial investment in THI, also gained majority control of THI’s Board of Directors. The GTCR Group placed two of its directors — Edgar Jannotta and Ethan Budin — on THI’s three-member board of directors (the third member was Anthony Mistano, THI’s CEO). The GTCR Group also appointed those same two directors— Jannotta and Budin — to THMI’s three-member board, as well. According to the Plaintiffs, the GTCR Group’s management of THI and its subsidiaries — through the Professional Services Agreement and control of their boards of directors — was so pervasive that THI’s vendors and customers dealt directly with the GTCR Group on routine matters, such as negotiating lease terms.
On top of that, the GTCR Group specifically held itself out to the public as being the operator of THI, THMI, and THI’s other subsidiaries. As a general matter, the GTCR Group held itself out to its investors and others as being in charge of its portfolio companies. It was no different with THI. And, in fact, the GTCR Group made all the material financial decisions for THI and THMI and directed their business and corporate strategy.
The GTCR Group restructures THI
At some point in 2008, the GTCR Group decided to significantly grow its nursing home empire. At the time, Integrated Health Services, one of the nation’s largest nursing home operators, was in bankruptcy in Delaware, and THI was looking to acquire Integrated Health Services’ assets out of bankruptcy. In order to acquire Integrated Health Services’ assets, the GTCR Group restructured THI.
First, the GTCR Group created THI Holdings, LLC. The GTCR Group, which had at the time held approximately 83% of the stock in THI, exchanged its stock in THI for an equal amount of stock in THI Holdings. Second, THI Holdings created two new subsidiaries: THI-Baltimore and *367THI of Baltimore Management, LLC (“THMI-Baltimore”).
When the restructuring was complete, THI Holdings was the parent of two wholly owned subsidiaries: THI and THI-Baltimore. THI and THI-Baltimore, in turn, were each the parent of a wholly owned subsidiary: THMI and THMI-Baltimore, respectively. The idea behind the restructuring, apparently, was to replicate the THI structure for the assets the GTCR Group was ultimately hoping to acquire. Under the restructuring, THI-Baltimore (similar to THI) would operate the nursing homes acquired from Integrated Health Services, and THMI-Baltimore (similar to THMI) would provide management services to the THI-Baltimore operated homes.
The GTCR Group attempts to expand its nursing home empire
Despite the restructuring, THI-Baltimore was unable to acquire the Integrated Health Services’ homes. It turns out that THI-Baltimore was outbid by an entity called ABE Briarwood (“ABE”). ABE, according to the complaint, was created by Rubin Schron, Murray Forman, and Leonard Grunstein. An entity founded and controlled by Schron — Cammeby’s Funding, LLC — provided the financing for ABE to acquire Integrated Health Services’ homes. Although THI-Baltimore did not acquire the homes, as it intended, it was not completely cut out of the deal.
While ABE acquired Integrated Health Services’ assets, it was not a licensed nursing home operator, and that is where THI-Baltimore comes back into the picture. ABE agreed to lease or sublease (ABE acquired a fee simple interest in some of the nursing homes and a leasehold interest in others) the Integrated Health Services homes to THI-Baltimore to operate. THMI-Baltimore then would provide the management services to the THI-Baltimore operated homes. Under the arrangement agreed to by THI-Baltimore and ABE, THI-Baltimore would use the income generated from operating the nursing homes to pay rent to ABE (for leasing the nursing homes) and management fees to THMI-Baltimore (for providing management services), presumably leaving a hefty profit afterwards.
Because THMI-Baltimore did not have any employees, however, it used THMI’s employees and equipment (and other assets) to provide management services to the newly acquired nursing homes. And even though the management contracts were held by THMI-Baltimore, THMI actually received the substantial revenues under those contracts because the services were provided using its employees and equipment.
The THI empire begins to crumble
Initially, it appeared that THI (and the deal with ABE) was successful. By mid-2003, THI was reporting gross annual revenues of $1 billion. For that year, it appears THI had reported $6 million in net income based on the $1 billion in revenue. In actuality, though, THI had suffered a $29 million loss. By September 2003, Ven-tas became aware that THI had materially misstated its financials, including overstating its income for 2003 by $10 million and understating its expenses by $25 million (resulting in $6 million in net income becoming a $29-million net loss), in connection with obtaining the $55 million term loan and $22 million mezzanine loan.
Ventas and GECC take advantage of THI
According to the complaint, GECC and Ventas were required by federal law to report THI’s material (fraudulent) misstatements. Moreover, the Plaintiffs allege GECC (as a federally regulated bank) had a legal duty to refuse to do business *368with anyone who was profiting from illegal activity. But instead of complying with their obligation to report THI, GECC and Ventas (according to the complaint) used their knowledge of THI’s potential criminal misconduct to their advantage.
First, the Plaintiffs say GECC and Ven-tas forced THI to enter into a series of onerous and unreasonable forbearance agreements. Under those forbearance agreements, GECC and Ventas were able to extract millions of dollars in interest and various fees from THI. And the Plaintiffs say the onerous fees GECC and Ventas extracted under the forbearance worsened THI’s financial condition.
Second, GECC took control of THI’s bank accounts. Under its loan agreement with GECC, THI’s cash flowed through a series of lockboxes and sweep accounts. After GECC declared THI in default for making the material misrepresentations, GECC began “trapping cash” in THI’s accounts. In particular, GECC instructed Bank of New York (THI’s depository bank) to capture all of the money held in THI’s accounts. Capturing THI’s cash gave GECC control of a large portion of THI’s assets, while, at the same time, depriving THI of its ability to pay bills as they became due, thereby jeopardizing patient care.
The Wrongful Death and Other Actions
According to the Plaintiffs, the substantial fees extracted by GECC and Ventas— while benefiting the lenders — only worsened THI’s financial condition, which, in turn, led to a series of lawsuits against the GTCR Group, Jannotta, THI, and THMI. One of those lawsuits alleged that the GTCR Group, Jannotta, and THI were conspiring to divert money loaned to certain facilities to pay the obligations of other facilities. Also included among those lawsuits was a series of wrongful death and negligence claims against THI and THMI. Three of those lawsuits were filed by Plaintiffs in this proceeding — the Estates of Jackson, Nunziata, and Jones. In all, THI and THMI were facing over 150 lawsuits by early 2006.
The GTCR Group orchestrates the “Bust Out” scheme
All of this led THI to perform a bankruptcy liquidation analysis. In January 2005, the boards of directors for THI and THMI authorized those entities to file for bankruptcies. The boards of directors apparently determined, presumably based on the liquidation analysis, that filing for bankruptcy would be in the best interests of each of the companies, as well as their creditors, employees, and other interested parties. Despite the fact that the companies determined filing for bankruptcy would be in their best interests, the GTCR Group and Jannotta instead opted to perpetrate a “bust-out” scheme.
The first phase of the bust-out scheme involved divesting THMI of its liabilities and then selling its assets for less than fair market value as part of two linked transactions in 2006. In the first transaction, THIH sold all of its stock in THI-Baltimore (which owned all of the stock in THMI-Baltimore) to FLTCH. At the time of the sale, THI-Baltimore held the right to operate a number of nursing homes, and THMI-Baltimore nominally held the right to provide management services to the homes operated by THI-Baltimore. In actuality, though, THMI was the entity that had been providing the management services and collecting the revenue. The assets that were transferred to FLTCH had been valued (on an enterprise value basis) at more than $183 million as of January 2006; yet, FLTCH only paid $9.9 million for them.
In the second linked transaction, THI sold all of its stock in THMI to the Debtor *369for $100,000. The Debtor had been incorporated just months before the transaction by the law firm of Troutman Sanders, where Forman (one of FLTCH’s owners) was a partner. The Debtor’s sole shareholder is Barry Saacks, an elderly graphic artist who currently lives in a nursing home. Although Saacks has some recollection of being asked if he was interested in buying computer equipment, he was not aware that he owns the Debtor or that he acquired the stock in THMI. And, it turns out, Saacks (who did not have any money to buy any computer equipment in the first place) did not pay the purchase price— FLTCH apparently loaned him the $100,-000 — nor did he ever receive any of THMI’s assets. In short, the complaint paints this as a sham transaction.
FLTCH continues THI’s and THMI’s operations
After the sale, FLTCH rebranded THMI assets and continued generating millions of dollars of profits, but without the millions of dollars in liabilities. Within six months, THMI-Baltimore changed its name to Fundamental Clinical Consulting (“FCC”) and took over the operations and clinical support for the nursing homes, and FAS was created to take over the administrative services under the management contracts previously held (at least nominally) by THMI-Baltimore. All of THMI’s employees became employees of either FCC or FAS, depending on whether the employee provided operational or clinical support (FCC) or administrative services (FAS). To this day, FLTCH, FCC, and FAS operate out of the same location— using the same employees and equipment — that THI and THMI did.
The GTCR Group winds THI doum
While THMI and the Debtor quickly became defunct after the linked transactions, THI remained an active corporation for almost three years. Since THMI had been sold, however, THI no longer had a company that provided management services to the nursing homes it continued to operate. So THI created Pathway Health Management, Inc. (“Pathway”) to provide those services. But Pathway was merely a shell entity with few or no employees. As a consequence, Pathway contracted with THMI-Baltimore, which, in turn, used the former THMI employees that had moved to FAS after the linked transaction in order to provide services for Pathway since THMI-Baltimore had few or no employees itself. Although THI would go on to operate for three years after the linked transactions, the GTCR Group began the second phase of the “bust-out” scheme in 2007: winding down THI.
In November 2007, the GTCR Group sold a THI entity known as THI of Ohio at Greenbriar South, LLC for $4.7 million. Three months later, the GTCR Group sold all the remaining THI properties (except for one facility in Maryland) to Omega Healthcare Investors, Inc. and Communi-Care Health Services. As part of that same transaction, the GTCR Group sold THI’s right to operate those properties to CommuniCare. THI received nearly $48 million from the February 2008 sale to Omega and CommuniCare.
After using the nearly $53 million in proceeds from the November 2007 and February 2008 sales to pay off its creditors, THI then sought appointment of a state-court receiver in Maryland in January 2009. Jannotta — THI’s sole board member at the time — consented to the state-court receivership. According to the Plaintiffs, the only creditor that received notice of the receivership petition was GECC. So none of THI’s creditors (other than GECC) had notice and an opportunity to object to the receivership. In fact, the Plaintiffs say THI presented the receivership petition to the Maryland state court *370ex parte and obtained a receivership order the same day.
The receivership order appointed Michael Sandnes — THI’s former director of operations — as THI’s state-court receiver. Sandnes was later replaced by Alan Gro-chal, an attorney at Tydings & Rosenberg, the firm that filed the receivership petition on THI’s behalf and which previously represented GECC and Jannotta. Having obtained the receivership order, the GTCR Group was able to execute the third — and final — phase of the bust-out scheme: concealing the fraudulent linked transactions.
By filing for a receivership, rather than for bankruptcy, the GTCR Group, Jannot-ta, and THI — as well as the Fundamental Entities — were able to avoid the heightened scrutiny of a bankruptcy trustee, who undoubtedly would have examined the linked transactions closely. And they were able to avoid the scrutiny of THI’s creditors, as well. Once the receivership was filed, they simply had to conceal the linked transactions long enough for the statute of limitations to run on any fraudulent transfer or similar claims.
To do that, the GTCR Group and Fundamental Entities had to take control of the defense of THI and THMI in the state-court wrongful death (or negligence) actions. By the time THI filed for receivership, five of the six Probate Estates had filed wrongful death or negligence actions. The sixth Probate Estate filed a wrongful death action against THI and THMI three weeks after THI filed for receivership. If any of the Probate Estates had obtained a judgment against THI or THMI, it potentially could have pursued the Defendants on fraudulent transfer and other similar claims.
So the THI Receiver first obtained the right to defend THMI (which, by this time, was defunct) in the receivership order. Then the THI Receiver attempted to domesticate the receivership in Florida by filing an action in Miami-Dade County (even though none of the wrongful death cases were pending there) naming Bonnie Creekmore as a defendant (even though she had not sued THI and THMI yet). In that domestication action, the THI Receiver sought a stay of the six pending wrongful death cases. But the state court in Miami left the decision to stay the wrongful death actions up to each state court where the wrongful death or negligence claims were pending, and each of the courts declined to stay the actions. Even though the actions were not stayed, the THI Receiver (through the Fundamental Entities) began directing the lawyers it retained to defend THI and THMI to withdraw their representation in April 2010, just over four years after the linked transactions and sixteen months after the THI Receiver secured the right to defend THMI.
This involuntary bankruptcy case is filed
The decision to withdraw the representation of THI and THMI eventually led to more than $1 billion in empty-chair jury verdicts against THI and THMI and eventually this involuntary bankruptcy case. Specifically, three months or so after the lawyers for THI and THMI withdrew, the Estate of Jackson obtained a $110 million judgment against THI and THMI. The Estate of Jackson then added the Debtor's name to the judgment in post-judgment proceedings supplementary. After adding the Debtor to its judgment against THI and THMI, the Estate of Jackson filed this involuntary case. The day before the order for relief was entered, the Estate of Nunziata obtained a $200 million judgment against THMI. One month later, the Estate of Webb obtained a $900 million judgment against THI and THMI. So more than $1 billion in judgments were entered *371against THI and THMI around the time this bankruptcy case was filed.
PROCEDURAL POSTURE
Before turning to the claims asserted in the complaint, it is useful to understand how the parties got to this point procedurally. Before this involuntary bankruptcy case was filed, the Probate Estates had been attempting to collect their judgments against THI and THMI from (most or all of) the Defendants in state-court proceedings supplementary. It is the Court’s understanding that the claims being pursued in the proceedings supplementary included fraudulent transfer claims. After this bankruptcy case was filed, the Trustee indicated her intent — as THMI’s sole shareholder — to pursue fraudulent transfer claims against some or all of the Defendants.
Before the Trustee could assert any claims in this case, however, FLTCH and FAS filed a declaratory judgment action against THMI in New York seeking a declaration that any fraudulent transfer (and other) claims against them were barred by the statute of limitations. This Court, at the request of the Trustee, enjoined the New York declaratory judgment action because it impermissibly interfered with the Trustee’s administration of this case. After the Court enjoined their declaratory judgment action, FLTCH and FAS sought to enjoin the Probate Estates from pursing their proceedings supplementary in state court.
Because the claims being pursued by the Probate Estates in state court appeared to overlap (at least to some extent) with the claims the Trustee intended to pursue in this case, the Court was concerned that allowing the Probate Estates to continue pursuing their state court claims would likewise interfere with the Trustee’s administration of this bankruptcy estate. On top of that, a district court judge — in an order remanding an appeal of one of this Court’s orders — directed this Court to determine whether the Debtor and THMI should be treated as the same entity, whether under an alter ego, substantive consolidation, or other legal or equitable theory. In order to comply with the district court’s directive to determine whether the Debtor and THMI should be treated as the same entity, as well as to avoid any interference with the Trustee’s administration of this estate, this Court enjoined the Probate Estates from pursuing their state court proceedings supplementary and ordered that any alter ego, veil piercing, fraudulent transfer, or other similar claims be litigated in one forum: this Court.
In response to this Court’s order directing that all of the claims among the parties proceed in this Court, some of the Defendants filed adversary proceedings seeking a declaration that they were not liable under any alter ego, veil piercing, fraudulent transfer, or other theories. In turn, the Probate Estates filed a two-count complaint for declaratory judgment in this proceeding.2 In Count I, the Probate Estates sought a declaration that THI and the Fundamental Entities were liable for the judgments against THI and THMI under a successor-liability theory.3 In Count II, the Probate Estates sought a declaration that the Defendants were all liable for the judgments against THI and THMI under a veil-piercing theory.4 The Trustee later intervened in that proceeding and added one count to substantively consolidate the *372Debtor and THMI.5 The Probate Estates and the Trustee later sought leave to amend their complaint and intervention complaint, respectively, to file all of their claims together in one joint complaint.
It is that joint amended complaint that is the operative pleading.6 That complaint — which is 228 pages long and contains 1,201 numbered paragraphs — includes twenty-two counts. The twenty-two counts in the complaint can be broken down into eight claims for relief: one count for substantive consolidation by the Trustee (Count I), two counts for breach of fiduciary duty (Counts II & III), four counts for aiding and abetting a breach of fiduciary duty (Counts IV-VII), one count for successor liability (Count VIII), two counts for piercing the corporate veil (Counts IX & X), three counts for alter-ego liability (Counts XI-XIII), eight counts for (actual or constructive) fraudulent transfer (Counts XIV-XXI), and one count for conspiracy to commit a fraudulent transfer (Count XXII).
The Defendants — in five separate motions to dismiss — have moved to dismiss twenty-one of the twenty-two counts: no Defendant moved to dismiss the count for substantive consolidation.7 It would be impossible to succinctly summarize the various grounds asserted for dismissing the twenty-one counts. Suffice it to say, the Defendants collectively assert that each of the counts (other than the one for substantive consolidation) fails to state a claim for relief. The Defendants also assert a variety of other grounds (i.e., statute of limitations, in pari delicto, etc.) they contend warrant dismissal even if the Plaintiffs could allege the elements of their claims. The Court will initially analyze the motions to dismiss by claim for relief, and in doing so, the Court will proceed somewhat out of order: first it will address whether any of the Defendants may be liable for the judgments against THI and THMI under an alter-ego or veil-piercing theory (Counts IX-XIII), next whether the GTCR Group, THIH, or Jan-notta may be liable for breach of fiduciary duty (Counts II & III) and whether any of the remaining Defendants may be liable for aiding and abetting a breach of fiduciary duty (Counts IV-VII), then whether any of the Defendants may be liable under a fraudulent transfer theory (Counts XIV-XXI) or conspiracy to commit fraudulent transfer (Count XXII), and finally whether any of the Defendants that received THI’s or THMI’s assets may be liable as a successor entity (Count VIII)- If the Court determines that any of the twenty-one counts state a claim for relief, the Court will then consider whether the Defendants’ other defenses require dismissal.
STANDARD ON MOTION TO DISMISS
Ordinarily, when ruling on a motion to dismiss, the Court eschews rehashing the all-too-familiar standard set forth by the United States Supreme Court in Iqbal8 and Twombly.9 But, in this case, it may actually be instructive, although the Court need not trace the history of pleading standards under Rule 8. It is enough to say *373that, as this Court explained in ruling on a motion to dismiss in a different adversary proceeding in this case, a plaintiff need only allege enough facts to nudge his or her claims for relief from the realm of conceivable to plausible.10 So the question here is whether the Plaintiffs have alleged enough facts to state plausible claims for relief for alter-ego liability or piercing the corporate veil, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, actual or constructive fraudulent transfer, conspiracy to commit a fraudulent transfer, and successor liability.
CONCLUSIONS OF LAW11
The Plaintiffs fail to state a claim under any alter-ego or veil-piercing theories
In Counts IX through XIII of the complaint, the Plaintiffs have asserted alter-ego and veil-piercing claims against all of the Defendants (other than Ventas). Specifically, the Plaintiffs seek a declaration that the Defendants (other than Ventas) are liable for the debts of THI and THMI under either an alter-ego or veil-piercing theory (Counts IX & XI-XIII). The Plaintiffs also seek a declaration that the Fundamental Entities are liable for the Debtor’s debts (Count X). The complaint, however, fails to allege the required elements to state a claim for relief for alter-ego liability or veil-piercing against any of the Defendants.
Initially, there appears to be some disagreement over which law applies. The Defendants say that either Florida or Delaware law applies. The Plaintiffs say it could be Florida, Delaware, Pennsylvania, or New York law that applies, depending on which Defendant the claim is asserted against. All of the parties seem to agree, however, that the elements necessary to pierce the corporate veil or establish alter-ego liability are essentially the same: (i) domination and control; (ii) improper or fraudulent use of the corporate form; and (iii) injury to the claimant as a result of the fraudulent or improper use of the corporate form.12
Here, the only person or entity that plausibly had control over THI and THMI was the GTCR Group. The Plaintiffs allege, among other things, that the GTCR Group: owned nearly 83% of the shares of THI and THMI (through its ownership interest in THIH); placed its principals on the board of directors for THI and THMI; was responsible for the day-to-day operations of THI and THMI under a Professional Services Agreement (or otherwise) and made all material financial and strategy decisions for those entities; and held itself out as the operator of THI and THMI to those entities’ vendors. The GTCR Group contends that the allegations in the complaint are consistent with a run-of-the-mill parent-subsidiary relationship, and it also notes the complaint lacks any *374allegations that the GTCR Group failed to observe the corporate formalities.
While the Court tends to agree with the GTCR Group that any one of facts alleged in the complaint (i.e., an 83% ownership interest, majority control of the board, day-to-day control over business operations, etc.), taken by itself, would not plausibly give rise to domination or control, all of the facts — when taken together — could. For that reason, GTCR’s argument on that point is unavailing at the pleading stage and would be better raised on summary judgment. As to the other Defendants, the Plaintiffs fail to satisfy the domination and control element (at least with respect to THI).
The closest they come, in some respects, is Jannotta, a principal of the GTCR Group who served as a director for THI and THMI. Aside from his position as one of three board members, though, nothing else in the complaint plausibly demonstrates Jannotta dominated and controlled THI or THMI. As for Ventas and GECC, the facts of the complaint really allege nothing more than a lender-borrower relationship — albeit aggressive secured lenders. And the complaint does not allege any facts showing THI-Baltimore, FLTCH, FAS, Forman, Grunstein, or Schron exercised any control over THI and THMI before the March 2006 transaction. Because the complaint — at best— only alleges conceivable domination and control by entities or individuals other than the GTCR Group, the alter-ego and veil-piercing claims against all of the Defendants other than the GTCR Group must be dismissed.
That leaves for consideration whether the Plaintiffs have sufficiently alleged the second element to state a claim for alter-ego liability or veil-piercing against the GTCR Group: creation or use of the corporate form for an improper purpose.13 A close reading of the complaint reveals it is devoid of any allegations that the corporate form of THI or THMI was used for an improper purpose. The allegations in the complaint recognize THI and THMI were initially created for a legitimate purpose. And there is no question — based on a review of the allegations of the complaint — that THI and THMI were used for the legitimate purpose of operating nursing homes for years. The only alleged improper or fraudulent conduct is that the GTCR Group (along with others) concocted a “bust-out” scheme that would ultimately put the assets of THI and THMI out of reach of their creditors- — -thereby protecting the GTCR Group’s investment.
While that may be improper or fraudulent conduct (assuming the allegations are true), it does not involve the improper use of THI’s or THMI’s corporate form. For instance, the GTCR Group did not create THI or THMI for the purpose of receiving a fraudulent transfer. Nor was either THI or THMI the recipient of a fraudulent transfer. Instead, the Plaintiffs simply allege that the GTCR Group fraudulently transferred corporate assets or a corporation to a third party. The only real allegation involving an improper or fraudulent use of the corporate form involves the Debtor’s creation.
The complaint does plausibly allege that the Debtor was essentially created as a sham corporation. According to the complaint, the Debtor was formed for the sole purpose of receiving THMI’s liabilities, while its assets were secreted away to FLTCH. But there is no allegation that the GTCR Group had any actual involvement in the Debtor’s creation or that GTCR had any control over the Debtor. *375The Court is unaware of any theory whereby a creditor of THI or THMI could pierce the corporate veil or hold the shareholders of THI and THMI (or its upstream parents) liable under an alter-ego theory because a third party created a sham corporation to house fraudulently transferred assets. To the extent the theory is that the GTCR Group misused the corporate form by knowingly transferring liabilities to a sham corporation, that is not what caused the loss. It is the transfer of the assets from THI or THMI that caused the loss. So, even if the second element is satisfied, the third element is not, and as a consequence, the Plaintiffs cannot state a claim against the GTCR Group under any alter-ego or veil-piercing theories.
Nor do they state an alter-ego or veil-piercing claim against the Fundamental Entities (FAS, THI-Baltimore, FLTCH, Forman, Grunstein, and Schron). As just discussed, the Plaintiffs have plausibly alleged the second element (i.e., fraudulent or improper use of the corporate form) against some of the Fundamental Entities. After all, there are sufficient facts alleged that would demonstrate the Debtor is a sham entity created solely to house THMI’s liabilities. Surely that is an improper or fraudulent purpose. But the Plaintiffs cannot satisfy either the first or third elements. Taking the third element first, the transfer of THMI’s liabilities to the Debtor did not cause Plaintiffs’ loss. More importantly, the Plaintiffs have not alleged that any of the Fundamental Entities dominated and controlled the Debtor. Short of incorporating the Debtor, the Plaintiffs do not allege how the Fundamental Entities controlled the Debtor. The real allegation is that the Fundamental Entities (or at least some of them) controlled THMI after the March 2006 linked transactions. Because the Plaintiffs cannot satisfy the first or third elements for state a claim for alter-ego or veil-piercing liability, Count X must be dismissed.
The Plaintiffs state a claim for relief against Jannotta for breach of fiduciary duty
The complaint asserts two counts of breach of fiduciary duty against the GTCR Group, Jannotta, and THIH. In Count II of the complaint, the Trustee (on behalf of THMI) alleges that the GTCR Group, Jannotta, and THIH breached their fiduciary duties to THMI. In Count III, the Probate Estates allege those same defendants breached their fiduciary duties to THMI’s creditors. There is no disagreement over the required elements for a breach of fiduciary duty claim: the Plaintiffs must allege the existence of a duty and breach of that duty to state a claim for relief.14
Naturally, the starting point for analyzing a motion to dismiss a breach of fiduciary duty claim is the existence of a fiduciary relationship. Here, the GTCR Group and THIH say they did not owe THMI a fiduciary duty because they were merely “upstream parents of or investors in THMI’s own parent.” According to the GTCR Group and THIH, a direct parent does not owe a fiduciary duty to a wholly owned subsidiary, nor do more remote corporate parents. Since none of the Defendants dispute that Jannotta (a director of THI and THMI) owed a fiduciary duty to those entities, the only question is — -at least as far as the existence of a fiduciary duty goes — whether the GTCR Group and THIH owes THI and THMI a fiduciary duty.
The Court concludes they do not. The Court finds the court’s reasoning in Asar-*376co, LLC v. Americas Mining Corp,15 persuasive on this point. There, Asarco asked the district court to hold that a parent corporation owes a fiduciary to duty to its wholly owned subsidiary (and any creditors of the subsidiary) if the subsidiary is insolvent.16 Initially, the court noted that Asarco’s argument was essentially a hybrid of two principles: (i) a parent owes a fiduciary duty to a subsidiary’s minority shareholder; and (ii) directors owe fiduciary duties to an insolvent subsidiary (or a subsidiary operating in the zone or vicinity of insolvency).17 But the problem with that hybrid approach, according to the court, is that it creates a new fiduciary duty where none previously existed. The court observed that the principle that a director of an insolvent corporation owes a duty to the corporation’s shareholders does not create a new duty; it simply adds beneficiaries of that duty (creditors in addition to shareholders). By contrast, finding the existence of a duty owed by a corporate parent would actually impose a new duty. This Court, like the court in Asarco, is unwilling to impose a new fiduciary duty where one did not previously exist.
It is worth mentioning — as the Asarco court did — -that there is no need to impose a new duty on corporate parents of wholly owned subsidiaries.18 To the extent the corporate parent was involved in a breach of fiduciary duty, Delaware law recognizes claims for aiding and abetting a fiduciary duty.19 That claim can “fill the gap” where a fraudulent transfer or other claim may not be cognizable. Below, the Court will discuss whether the Plaintiffs have stated a claim against the GTCR Group or THIH for aiding and abetting a fiduciary duty. For now, the Court concludes that only Jannotta owed a fiduciary duty to THI and THMI, so it will consider whether the Plaintiffs have alleged sufficient facts to show that Jannotta plausibly breached his fiduciary duty.
Jannotta argues that the Plaintiffs fail to make the required showing for five reasons: First, the Plaintiffs improperly lump Jannotta together with the GTCR Group and THIH, without ever specifying which Defendant committed which act. Second, the breach of fiduciary duty claim is based on eleven wrongful decisions, but according to Jannotta, the Plaintiffs fail to allege that THMI (the company whose board he sits on) made any of those decisions. Third, the Plaintiffs fail to allege any conflict of interest that could give rise to a breach of the duty of loyalty. Fourth, the Plaintiffs fail to allege any harm to THMI. Fifth, the Plaintiffs fail to allege sufficient facts to overcome the business judgment rule. While those arguments have some appeal, at least initially, they are ultimately unavailing at this stage.
There is no question that the Plaintiffs’ pleading is unwieldy and confusing, thanks in no small part to the Plaintiffs’ practice of lumping Defendants together in groups without differentiating the conduct of each specific Defendant. It is also true that, at times, that poor pleading practice obscures the nature of the Plaintiffs’ claims. But, with respect to the fiduciary duty claims, it is possible to discern the substance of the claims.
According to the Plaintiffs, Jannotta is a principal in the GTCR Group, a venture capital firm that sought out to *377build a nationwide nursing home empire for the purpose of securing a financial benefit for its principals. When THI and THMI, two companies that the GTCR Group invested over $40 million into, ran into financial problems, the GTCR Group conspired to allow THI’s two primary secured lenders (GECC and Ventas) to loot the company to repay their loans before ultimately selling it (as well as THMI’s assets) to FLTCH for far less than fair market value in an effort to preserve at least some of its substantial investment in the company (and that of its principals). Along the way, Jannotta served as a director for THI and THMI. Those facts— assuming they are true — more than meet the pleading standard for stating a claim for breach of fiduciary duty.
At a minimum, those facts give rise to a plausible conflict of interest: Jannotta — a principal of a company that invested over $40 million in THI — was more interested in preserving any portion of GTCR’s investment than preserving THI’s going concern for the benefit of its creditors. The complaint also alleges that Jannotta bene-fitted from allowing THI to be looted and its assets (along with those of THMI) sold — even at less than fair market value — because the sales proceeds were used to resolve litigation pending against the GTCR Group and Jannotta personally. And the complaint alleges that the GTCR Group opted not to have THMI file for bankruptcy and instead allowed its assets to be looted for the benefit of GTCR and its principals, so the complaint does allege potential harm to THMI and its creditors.
Does the complaint lack specifics regarding who made which of the wrongful decisions? It does. Could the complaint have alleged more facts to overcome the business judgment rule? Most likely. But those questions misunderstand the Plaintiffs’ burden at the pleading stage. The Plaintiffs need not prove their claims in their pleadings. The Plaintiffs only need to allege enough facts to nudge the claim for relief from the realm of conceivable to plausible, and because they have done that here with respect to Jannotta, the motion to dismiss with respect to the breach of fiduciary duty claims against Jannotta should be denied (while the motions to dismiss with respect to the GTCR Group and THIH should be granted).
The Plaintiffs state a claim for relief against GTCR, THIH, THI-Baltimore, FLTCH, Forman, and Grun-steinfor aiding and abetting a breach of fiduciary duty
In addition to alleging that the GTCR Group, Jannotta, and THIH breached their fiduciary duties to THMI and its creditors, the Plaintiffs allege those Defendants and the remaining Defendants (GECC, Ventas, THI-Baltimore, FLTCH, FAS, Forman, Grunstein, and Schron) are liable for aiding and abetting any alleged breach of fiduciary duty. The Court’s conclusion that the Plaintiffs state a claim for relief against Jannotta for breach of fiduciary duty resolves a threshold argument by the Defendants that a plaintiff cannot state a claim for aiding and abetting a breach of fiduciary duty if there is no underlying breach in the first place.20 That leaves for the Court’s consideration whether the remaining Defendants actually aided and abetted Jannotta’s breach.
The parties, again, largely agree on the elements of a claim for aiding and abetting a breach of fiduciary duty. To *378state a claim for aiding and abetting, the Plaintiffs must allege that the remaining Defendants knowingly participated in Jan-notta’s breach of fiduciary duty.21 More specifically, the Plaintiffs must allege that the remaining Defendants knew that Jan-notta’s conduct constituted a breach of a fiduciary duty and that they gave substantial assistance or encouragement to him in committing the breach.22 The primary disagreement appears to be with the specificity of the allegations against the remaining Defendants.
The remaining Defendants say any allegations regarding their alleged knowing participation in any breach are, at best, generalized and conclusory. GECC, for instance, argues that the complaint is completely devoid of any specific allegations regarding how GECC became aware of Jannotta’s alleged wrongful actions. The Plaintiffs, however, contend that the remaining Defendants are overstating their pleading burden: according to the Plaintiffs, they need only allege facts from which the remaining Defendants’ knowing participation can be reasonably inferred.
The Court agrees with the Plaintiffs that they need only plead enough facts for the Court to be able to infer the remaining Defendants’ knowing participation.23 And, while the Plaintiffs’ complaint is not a model of clarity, it does allege enough facts for the Court to infer — for purposes of ruling on a motion to dismiss — whether or not the Plaintiffs sufficiently alleged that the remaining Defendants knowingly participated in Jannotta’s alleged breach of fiduciary duty. Based on the Court’s reading of the complaint, the Plaintiffs have met that burden with respect to some of the remaining Defendants and have failed to meet it with respect to others.
The Plaintiffs’ complaint centers around the alleged “bust-out” scheme: the GTCR Group invested millions into THI and THMI. Starting in 2003, it became apparent that the GTCR Group’s investment was at risk when THI is discovered to have falsified its financial statements (overstating its income and understating its expenses by millions). And the situation only worsened when THI and THMI became the subject of numerous negligence actions. So the GTCR Group, in an effort to save some of its investment, hatched a scheme whereby it allowed THI’s primary lenders (GECC and Ventas) to siphon millions from the company in the form of interest and fees only to later sell the company to the Fundamental Entities for far less than fair market value, with the end result that THI-Baltimore, FLTCH, FAS, Forman, and Grunstein get a company worth — when stripped free from its liabilities — over $100 million for less than $10 million, the GTCR Group pockets $10 million for a company whose assets would have gone to pay hundreds of millions (if not billions) of dollars in judgments, and the Debtor ends up with a liability-ridden shell company.
From those facts, the Court can reasonably infer that the GTCR Group and *379THIH knowingly participated in Jannotta’s alleged breach of fiduciary duty. After all, Jannotta is a principal of the GTCR Group and sat on the board of directors for THIH, THI, and THMI all the way up to the linked transactions in March 2006. The GTCR Group also placed another one of its principals (Ethan Budin) on the board of directors for THIH, THI, and THMI, although Budin only served on the THIH board through June 2004 (which was still during the time it was discovered that THI falsified its financials). And the GTCR Group, which invested millions of dollars in THI, was intimately involved in the day-to-day management of THI. Plus, the scheme, as alleged, would have inured to GTCR’s benefit. Given all of that, the Court concludes the Plaintiffs state a claim against GTCR and THIH for aiding and abetting a breach of fiduciary duties.
The Court can likewise infer that the some of those referred to in the complaint as “the Fundamental Entities” knowingly participated in Jannotta’s alleged breach of fiduciary duty. According to the complaint, FLTCH paid less than $10 million for $100 million in assets (in some sense, it could be said that THMI’s assets went to THI-Baltimore first, which was then sold to FLTCH). More important, Forman and Grunstein, who own FLTCH and would benefit from FLTCH’s receipt of THMI’s assets, created the Debtor solely for the purpose of housing THMI’s liabilities as part of the March 2006 linked transactions. From those facts, the Court can reasonably infer — at least at the pleading stage — that THI-Baltimore, FLTCH, Forman, and Grunstein knowingly participated in Jannotta’s breach of fiduciary duty. So the Plaintiffs state a claim for aiding and abetting a breach of fiduciary duty against THI-Baltimore, FLTCH, Forman, and Grunstein, as well.
But the Plaintiffs fail to state a claim for relief for aiding and abetting against FAS and Schron. With respect to FAS, it was not even in existence at the time the “bust-out” scheme took place. It was not created until six months after the March 2006 linked transactions. The complaint does not allege that Jannotta breached any fiduciary duty after that point in time. And a close reading of the complaint is for the most part silent (or certainly nonspecific) about Schron’s role — other than conclusory allegations (which the Court need not, and does not, accept) that Forman and Grun-stein were acting as Schron’s agents.
The Plaintiffs likewise fail to state a claim for relief for aiding and abetting against GECC and Ventas. Distilled to their essence, the aiding and abetting claims against GECC and Ventas stem principally from two acts: (i) participating in the onerous loan agreements with THI; and (ii) giving its blessing to the linked transactions in March 2006. Neither of those acts gives rise to a breach of fiduciary duty claim. To begin with, the Court agrees with Ventas that it — as a commercial lender — is not liable for aiding and abetting a fiduciary duty simply because it is a counterparty to the forbearance agreements.24
As for the allegations that GECC and Ventas signed off on the March 2006 linked transactions, the Court cannot reasonably infer from the facts of the complaint that GECC and Ventas knowingly participated in that breach. The Court understands the Plaintiffs’ argument that it is not up to the Court at the pleading stage to determine whose theory of the case — the Plaintiffs’ theory or that of GECC and Ventas — is more plausible. *380The problem here is that the Plaintiffs’ theory — THI’s primary secured lenders knowingly signed off on THI fraudulently transferring away all of its revenue-generating assets to third parties — is not at all plausible. Accordingly, the aiding and abetting claims against GECC and Ventas must be dismissed.
The Plaintiffs state a claim for relief against THI-Baltimore, FLTCH, FAS, Forman, and Grunstein for fraudulent transfer
In the Court’s view, the main thrust of this case is the Plaintiffs’ claims for fraudulent transfer. In all, the Plaintiffs allege a total of eight counts for fraudulent transfer against the Defendants (Counts XIV-XXI). Four of those counts are for actual fraud, and four are for constructive fraud. It does not appear that the elements to state a claim for relief for fraudulent transfer — whether actual or constructive— are subject to much dispute.
To state a claim for actual fraudulent transfer, the Plaintiffs must allege that THI or THMI made a transfer (during the relevant time period) with the actual intent to hinder, delay, or defraud its creditors.25 Since a defendant rarely admits actual intent (and actual intent is otherwise difficult to prove), courts traditionally look to the badges of fraud that everyone is familiar with to determine the existence of actual intent.26 By comparison, the pleading burden is reduced for constructive fraudulent transfer claims. For constructive fraud claims, the Plaintiffs need not prove an actual intent to defraud. Instead, constructive fraud claims are based on the transferor’s financial condition at the time of the transfer and the adequacy of consideration for the transfer.27 To prove a claim for constructive fraudulent transfer, the Plaintiffs need only allege the amount of transfer by THI or THMI, that THI and THMI were insolvent, and that THI and THMI did not receive reasonably equivalent value for the transfer.28
The Court concludes that the Plaintiffs easily satisfy their pleading burden for stating a claim for relief against THI-Baltimore and FLTCH. The complaint alleges a deliberate scheme to transfer the assets of THI and THMI to FLTCH (really through THI-Baltimore) in order to put them out of the reach of creditors. According to the Plaintiffs, those assets were worth over $100 million three months before the transfer to FLTCH. Yet, FLTCH only paid $9.9 million for those assets. And the complaint includes a number of other facts satisfying several of the badges of fraud: the transfer was concealed; before the transfer was made, THI and THMI had been sued; the transfer was of all of THMI’s assets; and THMI (and THI) became insolvent shortly *381after the transfer. The complaint unquestionably states claims for fraudulent transfer against THI-Baltimore and FLTCH.
The same is true for Forman and Grunstein, but for a slightly different reason. According to the complaint, the transfer was not made directly to Forman or Grunstein. But under section 550, the Trustee may recover the value of a transfer from the entity for whose benefit the transfer was made. The Court concludes that the facts of the complaint plausibly allege that the transfer of THMI’s assets to FLTCH was for the benefit of Forman and Grunstein since they owned FLTCH— a closely held company.
Rubin Schron is a different story. Like Forman and Grunstein, there is no allegation in the complaint that he was the direct recipient of THMI’s assets. By the plain terms of the relevant stock purchase agreement, FLTCH was the recipient. Instead, Schron allegedly benefitted from the transfer because of his connection to FLTCH. But a fair reading of the allegations of the complaint — and the Court concedes the allegations appear contradictory at times — reflects that Schron did not own FLTCH. The Plaintiffs cannot overcome that defect by simply alleging in concluso-ry fashion — as they do — that Forman and Grunstein were acting as Schron’s agents. Nor is the allegation that Schron concocted some mortgage-backed securities scheme, which as far as the Court can tell is largely irrelevant, sufficient to overcome that defect either. Because Schron had no ownership interest in FLTCH, the complaint does not plausibly allege that the transfer of THMI’s assets was for his benefit.
As for the GTCR Group and Jannotta, the only alleged transfers they received is fees and interest from THI for loans the GTCR Group made to or procured for THI. Those transfers, however, were made one or two years before THI even defaulted on its loans with Ventas and GECC and before the various lawsuits were filed against THI. So those transfers do not give rise to a plausible claim for actual fraud, nor do they give rise to a claim for constructive fraud since the complaint does not allege that those transfers were made while THI was insolvent or in the zone of insolvency or that THI did not receive reasonably equivalent value.
That leaves THI’s secured lenders: Ventas and GECC. The only transfer Ven-tas and GECC allegedly received is millions of dollars in fees and interest under the terms of certain forbearance agreements. There is one fatal defect in their claims against Ventas and GECC. The Plaintiffs fail to plausibly allege that THI did not receive reasonably equivalent value for the payments of millions of dollars of interest and fees to Ventas and GECC.
There, of course, is nothing unusual about a borrower who is in default entering into a forbearance agreement and paying increased fees and interest to avoid default. In those cases, the lender’s forbearance is the consideration for the fees and costs. What makes it appear potentially fraudulent from the complaint is the fact that it was millions of dollars in fees and interest. To be sure, the payment of millions of dollars in fees and interest does potentially raise a red flag. But the complaint does not say how many millions. And according to the complaint, Ventas and GECC held $75 million in outstanding loans. So even a one-percent increase in the interest rate could generate millions in additional interest over time. Plus, avoiding a default had real value to THI since, as the Plaintiffs allege in the complaint, THI’s business would have been crippled had it been declared in default. Absent some facts regarding the amount of inter*382est and fees received by Ventas and GECC, any fraudulent transfer claim is, at best, merely conceivable — not plausible— and therefore must be dismissed.
The Plaintiffs state a claim for relief against THI-Baltimore, FLTCH, and FAS for successor liability
In Count VIII of the Complaint, the Plaintiffs assert a claim against THI-Baltimore, FLTCH, FAS, Forman, Grunstein, and Schron for successor liability. The gravamen of that claim is that FLTCH received all of THMI’s assets and continued operating the same nursing homes out of the same location using the same management, employees (performing essentially the same job function), equipment, and logos. According to the Plaintiffs, FLTCH and FAS took numerous actions on THMI’s behalf, including emptying its bank accounts, holding themselves out as the THMI’s decision-makers, and controlling THMI’s litigation. THMI, of course, went out of business after the March 2006 linked transactions. The Defendants say the Plaintiffs fail to state a successor liability claim because the Plaintiffs are unable to allege a continuity of ownership between THMI, on the one hand, and THI-Baltimore, FLTCH, and FAS, on the other (and Schron says there is no legal basis for holding an individual liable under a successor liability theory).
The Plaintiffs, however, argue that successor liability can be established on any of four grounds: (i) the successor corporation expressly or impliedly assumed the obligations of the predecessor corporation; (ii) the transaction was a defacto merger; (iii) the successor corporation is a mere continuation of the predecessor corporation; or (iv) the transaction was a fraudulent effort to avoid the liabilities of a predecessor corporation.29 The Plaintiffs do not argue there was an express or implied contract in this case. And despite their best efforts to shoehorn this case into the second exception, it is not clear to the Court that the de facto merger exception applies. It appears the Plaintiffs come closer to alleging facts sufficient to fall within the “mere continuation” exception, but the Court need not address that issue because the Plaintiffs unquestionably allege enough facts to fall within the final exception (i.e., the transaction was a fraudulent effort to avoid THMI’s liabilities).
The entire theory of the complaint is that FLTCH, Forman, and Grunstein created the Debtor as a sham corporation to acquire all of THMI’s liabilities, while FLTCH received all of THMI’s assets (through its acquisition of THI-Baltimore, which, in some sense, could be plausibly viewed as having received THMI’s assets first). And according to the complaint, FLTCH paid less than fair market value for the assets it acquired. Because the complaint sufficiently alleges that the linked transactions were fraudulent, the Plaintiffs have sufficiently alleged successor liability against THI-Baltimore, FLTCH and FAS, which, according to the complaint, are carrying on the business of THMI (and THI) under a new name.
But what about Forman, Grunstein, and Schron? Schron argues that the successor liability theory cannot be applied against an individual. Schron says only a company can be held liable under a successor liability theory. The Plaintiffs say the case law relied on by Schron does not support that proposition. To support their contention that an individual can be held liable under a successor liability theory, *383the Plaintiffs rely on Battino v. Cornelia Fifth Avenue.30
That case, however, does not support the Plaintiffs’ proposition. For starters, the court in Battino held — applying New York law — that neither the de facto merger nor the mere continuation exception applied in that case.31 The court went on to apply a broader test for “substantial continuity” used by federal courts in the labor and employment context.32 When analyzing the individual defendant’s liability, the Court specifically noted it was not considering whether he was a “successor,” but rather whether he was deemed an employee under the Fair Labor Standards Act.33 So Battino — the sole legal support for the Plaintiffs’ contention — does not support holding Schron (and, by extension, Forman and Grunstein) liable under a successor liability theory.
The Plaintiffs state a claim for civil conspiracy against THI-Baltimore, FLTCH, FAS, Forman, and Grunstein
The Plaintiffs allege that all of the Defendants are liable for conspiracy to commit a fraudulent transfer under Illinois (the GTCR Group), Maryland (GECC and Ventas), and New York (THI-Baltimore, FLTCH, FAS, Forman, Grunstein, and Schron). It does not appear from any of the cases cited by the Plaintiffs, however, that non-transferors or non-transferees that neither control nor benefit from fraudulently transferred assets — regardless of which state’s law applies — can be held liable for civil conspiracy. For that reason, the conspiracy claims against the GTCR Group, GECC, Ventas, and Schron must be dismissed. But New York does recognize a conspiracy claim where the recipient of a fraudulent transfer commits an overt act in furtherance of that transfer,34 and the Plaintiffs have alleged THI-Baltimore, FLTCH, FAS, Forman, and Grunstein committed an overt act in furtherance of a fraudulent transfer they received, so the conspiracy claims against them stand.
The Court will not dismiss the Plaintiffs’ claims based on the statute of limitations
A number of Defendants claim that the Plaintiffs’ claims for aiding and abetting a breach of fiduciary duty and fraudulent transfer are barred by the statute of limitations. According to the Defendants, the last act giving rise to the Plaintiffs’ claims occurred in 2006 — over seven years before this proceeding was filed. Even if the filing of the THI receivership triggered the statute of limitations, the Plaintiffs’ claims still would be time barred, regardless of whether a two-year, three-year, or four-year statute of limitation applied.
The Plaintiffs, however, contend that any applicable statute of limitations has been tolled because the Defendants have concealed the facts giving rise to the claims in this proceeding. They also argue that the statute of limitations has not yet run on the fraudulent transfer claim against the Fundamental Entities (FLTCH, FAS, THI-Baltimore, Forman, Grunstein, and Schron) because all of the various phases of the “bust-out scheme” *384can be collapsed into a single transaction under New York law, with the Defendants entering into a settlement agreement in January 2012 — well within the statute of limitations. The Defendants say the Court must reject the Plaintiffs’ equitable tolling argument because the Plaintiffs fail to allege any facts supporting the application of that doctrine.
The Court disagrees. As set forth above, the Plaintiffs allege — even if not in the most clear and concise manner — that the Defendants (at least the GTCR Group, FLTCH, Forman, and Grunstein) hatched a scheme to sell THMI’s assets to FLTCH for less than fair market value and then conceal that transfer (first by having THI file for receivership rather than bankruptcy and later by having FAS taking control of THMI’s state-court litigation) until after the limitations period had expired. It is certainly true that the Plaintiffs have not proven that equitable tolling (or any other equitable doctrine) applies, but that is not the standard.
Two different standards are at play here. The first one is the general pleading standard — i.e., that the Plaintiffs need only allege enough facts to nudge their claim from the realm of conceivable to plausible.35 The second, and more relevant standard, is that an affirmative defense ordinarily is not a basis for a motion to dismiss unless the defense is clear on the face of the pleadings.36 Here, there are enough facts of a possible concealment that the Defendants’ statute of limitations defense is not clear on the face of the pleadings.
So the Court will not dismiss the Plaintiffs’ claims on that basis at this stage of the proceeding. Denial of the motions to dismiss on that basis is without prejudice. The Defendants are free to raise the statute of limitations as an affirmative defense, which is better suited for summary judgment.
The doctrine of in pari delicto does not bar the Plaintiffs’ claims at the pleading stage
THI-Baltimore, FLTCH, FAS, Forman, and Grunstein argue that the Court must dismiss the aiding and abetting (and conspiracy to commit) breach of fiduciary duty claims against them based on the doctrine of in pari delicto. Under the equitable doctrine of in pari delicto, a plaintiff is barred from asserting a claim if the plaintiff participated in the wrongdoing that was a substantial cause of the alleged damages.37 Here, the Defendants contend that, according to the complaint, THMI is alleged to have participated in every step of the fraudulent “bust-out” scheme, and even if the bad conduct was by THMI’s directors, the bad conduct of a director can be imputed to THMI.
The Plaintiffs principally raise three reasons why the in pari delicto defense, at least from their perspective, does not bar their claims. First, they say the defense is not absolute; a court can decline to apply it where the plaintiffs culpability is far less than that of the defendant’s. Second, the “adverse interest exception” provides that an agent’s conduct is not imputed to the corporation if the agent was acting in his or her own self-interest. Third, they say fraud can*385not be imputed to a chapter 7 trustee. For those three reasons, the Plaintiffs say it would be inappropriate to dismiss their claims based on the in pari delicto defense at this stage.
The Court agrees. As mentioned above, an affirmative defense is an appropriate basis of a motion to dismiss only where it is clear on the face of pleadings.38 Here, the Court is not persuaded the in pari delicto defense is clear. At a minimum, there is a question — even assuming an agent’s conduct can be imputed to the corporation — whether the adverse interest exception applies. Because the in pari delicto defense is not clear on its face, it is not grounds for dismissing Counts VI, VII, and XXII at this stage.
The Plaintiffs have standing to assert their claims that are not derivative of the Debtor, THI, or THMI
FLTCH, FAS, Forman, and Grunstein all contend the Probate Estates must be dismissed from this complaint because they lack standing. That standing argument is premised on three assumptions: (i) only the Trustee has standing to pierce the Debtor’s corporate veil, assert breaches of a fiduciary duty owed to the Debtor, or avoid any fraudulent transfer by the Debt- or; (ii) only the Trustee has standing to assert claims through THMI; and (iii) none of the parties have standing to assert claims through THI. Even if all three assumptions underlying their standing argument are true, it does not lead to the conclusion they urge.
To begin with, the Probate Estates assert a number of claims that are not derivative of the Debtor, THI, or THMI. They have their own breach of fiduciary duty claims — based on a breach of fiduciary duty owed to THI’s creditors — against many of the Defendants, as well as claims for aiding and abetting breaches of that fiduciary duty. They also have alter ego claims and veil piercing claims against entities and individuals other than the Debt- or (the Court already dismissed the veil piercing claim against the Debtor). So it is not appropriate to dismiss the Plaintiffs from this proceeding in its entirety.
There are a handful of claims— i.e., namely, the fraudulent transfer claims — that are derivative of either THI or THMI. But the Trustee is a party to those claims. For that reason, those claims should not be dismissed. The Probate Estates, however, can be dismissed from those counts since the Trustee is the proper party with standing to assert those claims. Other than the fraudulent transfer claims, the Plaintiffs shall remain party to the remaining counts.
CONCLUSION
The Defendants are right to complain about the Plaintiffs’ pleading practices in this case. In fairness, the Plaintiffs are in somewhat of a “catch-22”: if they do not allege enough facts, the Defendants will claim it is because they do not exist; if they allege too many, the Defendants will say it is a sign the Plaintiffs are desperately taking an “everything but the kitchen sink” approach. Nevertheless, the Court shares the frustration Judge Merryday expressed in a case the Probate Estates filed in district court:
In sum, the complaint is a confusing, ambiguous, generalized, conclusory, and uninformative (and intermittently melodramatic) paper. The complaint requires considerable energy to read with patience and to attempt to understand with confidence.39
*386The complaint in this case, unfortunately, shares many of the same pleading deficiencies Judge Merryday complained of. Most problematic, the complaint here repeatedly attributes acts to entire groups of individuals and entities — i.e., “the THI Enterprise,” “the Fundamental Enterprise,” etc. As Judge Merryday observed, the constant attribution of individual acts to groups can — and, in that case, did — disguise much of the information necessary to glean the meaning of the critical allegations.40 Having said that, this Court (particularly given the two years it has spent dealing with all of these parties in the main bankruptcy case) is able to glean the meaning of the critical allegations — albeit not without considerable energy.
And in doing so, the Court concludes (for the reasons set forth above) the Plaintiffs fail to state a claim for relief under any alter-ego or veil-piercing theories but that they do state causes of action against (i) Jannotta for breach of fiduciary; (ii) GTCR, THIH, THI-Baltimore, FLTCH, Forman, and Grunstein for aiding and abetting a breach of fiduciary duty; (iii) THI-Baltimore, FLTCH, FAS, Forman, and Grunstein for fraudulent transfer; (iv) THI-Baltimore, FLTCH, and FAS for successor liability; and (v) THI-Baltimore, FLTCH, FAS, Forman, and Grunstein for conspiracy to commit a fraudulent transfer. So the motions to dismiss will be denied with respect to those claims. The remaining claims will be dismissed without prejudice. The Court will enter a separate order granting the motions to dismiss (without prejudice), in part, and denying them, in part.
It is worth saying a word about the decision to dismiss the remaining claims without prejudice. Ordinarily, dismissal of a complaint (or individual claims for relief) should be without prejudice. Several of the Defendants, however, claim the dismissal should be with prejudice, either because the Plaintiffs could never state a claim for relief given the facts of this case or because the Plaintiffs have already had several attempts to plead these same claims. At this point, the Court is not ready to conclude that the Plaintiffs could not allege additional facts that may potentially give rise to the causes of action the Court is dismissing, nor does this Court hold previous dismissals (in different courts) against the Plaintiffs because, while those claims may have involved many of the same operative facts, they involved different causes of action. But the Court cautions the Plaintiffs that any future pleadings should cure the pleading defects in this complaint (and the types of defects Judge Merryday complained of).
. These, of course, are only allegations in the complaint. As discussed below, the Court is required to accept all well-pled allegations in the complaint as true. By reciting the factual background of this case, the Court is not making any determination regarding the veracity of the allegations. They are just that— allegations.
. Adv. Doc. No. 1.
. Id.
. Id.
. Adv. Doc. No. 36.
. Adv. Doc. No. 109.
. Adv. Doc. Nos. 75, 76, 77, 78 & 79. The Plaintiffs jointly responded to those motions to dismiss. Adv. Doc. No. 99. And the Defendants filed five separate replies. Adv. Doc. No. 102. 104. 105. 106 & 107.
. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
. Scharrer v. THI Holdings, LLC (In re Fundamental Long Term Care, Inc.), 494 B.R. 548, 554 (Bankr.M.D.Fla.2013).
. The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(H). Moreover, no party timely objected to this Court entering a final order or judgment in this case. An order objecting to the Court’s authority to enter a final judgment was required to be filed by the deadline for responding to the complaint. Adv. Doc. No. 3 at ¶ 4.
.In re Hillsborough Holdings Corp., 166 B.R. 461, 468-69 (Bankr.M.D.Fla.1994). In Hillsborough Holdings, Judge Paskay explained that the law with respect to veil piercing in Florida and Delaware are “functionally the same.” Id. at 468 (citing In re Rodriguez, 895 F.2d 725 (11th Cir.1990)).
. Hillsborough Holdings, 166 B.R. at 468-69.
. In re Mobilactive Media, LLC, 2013 WL 297950, at *21 (Del. Ch. Jan. 25, 2013).
. 396 B.R. 278 (S.D.Tex.2008).
. Id. at 415.
.Id.
. Id. at 415-16.
. Id.
. Malpiede v. Townson, 780 A.2d 1075, 1096 (Del.2001) (holding that a plaintiff must allege the existence of a fiduciary a duty and breach of that duty in order to state a claim for aiding and abetting a breach of fiduciary duty).
. Id.
. Anderson v. Airco, Inc., 2004 WL 2827887, at *2 (Del. Nov. 30, 2004). In Anderson, the Delaware Supreme Court distinguished between aiding and abetting and conspiracy. A conspiracy, the court observed, involves an agreement to participate in wrongful activity. Aiding and abetting simply requires a defendant to knowingly give substantial assistance to someone who performs wrongful conduct. Id.
.Miller v. Greenwich Capital Fin. Prods., Inc. (In re Am. Business Fin. Servs., Inc.), 362 B.R. 135, 145 (Bankr.D.Del.2007); In re Shoe-Town, Inc. Stockholders Litig., 1990 WL 13475, at *8 (Del. Ch. Feb. 12, 1990).
. McGowan v. Ferro, 2002 WL 77712 (Del. Ch. Jan. 12, 2002).
. Mukamal v. Am. Express Co. (In re Arrow Air, Inc.), 2012 WL 6561313, at *4 (Bankr.S.D.Fla. Dec. 14, 2012). There appears to be a dispute about which law applies to the Plaintiffs' fraudulent transfer claims. According to the Plaintiffs, the law of Delaware, Florida, Maryland, and New York apply. But the Plaintiffs acknowledge the laws of those states contain substantially similar elements. So the Court will, as Ventas suggests, analyze the claims under Florida law.
. Dev. Specialists, Inc. v. Hamilton Bank (In re Model Imperial, Inc.), 250 B.R. 776, 791 (Bankr.S.D.Fla.2000); see also § 726.105(2)(a)-(k), Fla. Stat. (listing the "badges of fraud”).
. Court-Appointed Receiver for Lancer Mgm't Group, LLC v. 169838 Canada, Inc., 2008 WL 2262063, at *3 (S.D.Fla. May 30, 2008).
. Id.; see also Official Comm. of Unsecured Creditors v. JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.), 394 B.R. 721, 735 (Bankr.S.D.N.Y.2008).
. In re DESA Holdings Corp., 353 B.R. 419, 420 n. 2 (Bankr.D.Del.2006) (citing Berg Chilling Systems, Inc. v. Hull Corp., 435 F.3d 455, 464 (3d Cir.2006)).
. 861 F.Supp.2d 392 (S.D.N.Y.2012).
. Id. at 400-01.
. Id. at 401-02.
. Id. at 408.
.In re Allou Distrib., Inc., 379 B.R. 5, 36 (Bankr.E.D.N.Y.2007). It does not appear from the filings that THI-Baltimore, FLTCH, FAS, Forman, or Grunstein dispute that New York law applies or that a civil conspiracy claim exists. They simply allege it was not properly alleged. Adv. Doc. No. 79 at 17-18 & Adv. Doc. No. 106.
. Scharrer v. THI Holdings, LLC (In re Fundamental Long Term Care, Inc.), 494 B.R. 548, 554 (Bankr.M.D.Fla.2013).
. Fortner v. Thomas, 983 F.2d 1024, 1028 (11th Cir.1993).
. Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 354 (3d Cir.2001).
. Fortner, 983 F.2d at 1028.
. Jackson-Platts v. McGraw-Hill Cos., 2013 WL 6440203, at *4 (M.D.Fla.2013).
. Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496887/ | ORDER
JAMES R. SACCA, Bankruptcy Judge.
Can an order confirming a Chapter 13 plan treating a pawn transaction as a secured claim bind the pawn broker where the redemption period had expired pre-petition, bul; where the Debtor had physical possession of the goods on the petition date? This issue is before the Court on USA Title Pawn’s (“USA Title”) Motion to Terminate Automatic Stay (the “Motion”), filed on January 1, 2014 [Doc. No. 30]. The matter came on for hearing on February 20, 2014. In addition to the Motion and arguments of counsel, the Court has considered USA Title’s “Supplemental Citation of Authority in Support of Motion for Relief from Stay” [Doc. No. 35] and all other matters of record.
In the Motion, USA Title asks the Court for permission to take possession of two motor vehicles currently in the physical possession of the Debtor. USA Title claims these vehicles are neither the property of the Debtor nor the property of the Debtor’s estate. The Debtor contends otherwise and asserts that USA Title is bound by the terms of her confirmed Chapter 13 plan. Accordingly, the Court must determine the parties’ respective interests in the vehicles and the effect of the confirmation of the plan.
Background
The facts here are not in dispute. The Debtor executed two separate pawn contracts with USA Title involving two motor vehicles. Under the first pawn contract, dated June 25, 2012, USA Title received a security interest in Debtor’s 2006 Suzuki Aeris (the “Suzuki”) in exchange for a $1,856.18 cash loan to the Debtor. Under the second pawn contract, dated August 3, 2012, USA Title received a security interest in the Debtor’s 1999 Chevrolet Tahoe (the “Chevrolet”) in exchange for a $1,803.84 cash loan to the Debtor.
The Debtor did not make the payments as required by the pawn contracts. The Suzuki contract was in default on April 23, 2013 and the grace period within which to redeem the vehicle expired on May 23, 2013. The Chevrolet contract was in default on June 4, 2013 and the grace period within which to redeem that vehicle expired on July 5, 2013. There was no extension of the redemption period nor did the Debtor redeem either vehicle. The Debtor did not file her Chapter 13 case until July 19, 2013. She listed USA Title as a creditor on her mailing matrix and on her schedule of creditors holding secured claims. She also proposed a plan which provided for USA Title to be treated as the holder of claims to which a § 506 valuation is applicable.1 Although USA *397Title did receive notice of the case and the proposed treatment in the plan, USA Title did not object to the plan, nor did it file a claim in the case. The plan was confirmed on November 8, 2013 [Doc. No. 22].
The Parties’ Respective Interests in the Vehicles
Pursuant to 11 U.S.C. § 541, upon the filing of a voluntary petition by a debtor, an estate is created which comprises “all legal or equitable interests of the debtor in property” at that time. Property of the estate includes, among other things, tangible property that a debtor owns subject to a lien or security interest. United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Whether a debtor has a legal or equitable interest in property at the commencement of a bankruptcy case is determined by reference to state law. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The Georgia law applicable to this case is found in three sections of the Official Code of Georgia Annotated: O.C.G.A. § 44-12-130, O.C.G.A. § 44-12-131 and O.C.G.A. § 44-14-403.
O.C.G.A. § 44-12-130 defines a “pawn transaction” as “any loan on the security of pledged goods or any purchase of pledged goods on the condition that the pledged goods may be redeemed or repurchased by the pledgor or seller for a fixed price within a fixed period of time.” Although a pledged good2 customarily requires the creditor to have control of the property, the Georgia Code permits a borrower to pledge a motor vehicle by providing that the pawnbroker’s possession of the vehicle’s certificate of title is “conclusively deemed to be possession of the motor vehicle.” O.C.G.A. § 44-12-130(5). In this matter, both vehicles were pledged goods, as the Debtor delivered both vehicles’ certificates of title to USA Title in exchange for cash loans. The loans were made with conditions that the Debtor may redeem the vehicles for a fixed price within a fixed period of time; thus both transactions were pawn transactions within the meaning of O.C.G.A. § 44-12-130.
O.C.G.A. § 44-12-131 requires specific provisions in a pawn transaction. This section provides that all pawn transactions must be for at least a thirty-day period but may be continued or extended for additional thirty-day periods by written agreement of the parties. O.C.G.A. § 44-12-131(a)(1). If the pledgor — who retains physical possession and use of the motor vehicle — defaults in making the contracted payments, the lender may then repossess the vehicle itself. O.C.G.A. § 44-12-131(a)(3).
If the parties do not agree to extend or continue the pawn transaction and the borrower does not pay the principal, interest, and charges in full to redeem the pawned property by the maturity date (as may be extended), the borrower has an additional grace period of thirty days — in the case of motor vehicles — to redeem the pawned property. O.C.G.A. § 44-14-403(b)(1), (2). To redeem such property, the borrower must pay the principal, interest, and other charges due on the maturity date plus an additional interest charge of up to 12.5 percent of the principal. O.C.G.A. § 44-14-403(b)(3). If the vehicle is not timely redeemed, O.C.G.A. § 44-14-*398403(b)(3) provides: “Pledged goods not redeemed within the grace period shall be automatically forfeited to the pawnbroker by operation of this Code section, and any ownership interest of the pledgor or seller shall automatically be extinguished as regards the pledged item.” However, if a debtor files for bankruptcy protection while he or she still has a right to redeem the property, then that right of redemption becomes property of the debtor’s estate. Oglesby v. Title Max (In re Oglesby), 2001 WL 34047880 (Bankr.S.D.Ga.2001); see also Bell v. Instant Car Title Loans (In re Bell), 279 B.R. 890, 896-97 (Bankr.N.D.Ga.2002).
Under Georgia law, the rights of a pawnbroker in pawned property are different from the rights that the holder of a security interest generally has in encumbered property, largely because of the automatic entitlement to full ownership of pawned property that a pawnbroker has when the pledgor does not timely redeem the property. In re Moore, 448 B.R. 93, 100 (Bankr.N.D.Ga.2011).
Because the Debtor did not pay the outstanding principal, interest, or other charges due on the maturity dates of the contracts and because the Debtor did not redeem the vehicles prior to filing for bankruptcy protection, the vehicles are not included in “property of the estate.” The pawn contracts terminated and USA Title became the owner of the vehicles as a result of the statutorily mandated forfeiture prior to the commencement of this case. O.C.G.A. § 44-14-403(b)(3); In re Bell, 279 B.R. at 896-97 (holding debtor no longer had an interest in pawned motor vehicle on date her bankruptcy petition was filed, after expiration of 30-day grace period for redeeming the vehicle).
Debtor relies on In re Bell for the proposition that Georgia law requires the repossession of a pawned vehicle as a necessary precondition for extinguishment of a debtor’s interest in a vehicle that was pledged in a pawn transaction. Although the pawnbroker in Bell repossessed the Debtor’s motor vehicle after the grace period for redemption expired, but before the petition was filed, that fact was simply a matter of record, and nothing in that court’s opinion suggests that repossession of a pawned vehicle is a necessary precondition for termination of a debtor’s interest in the vehicle. To the contrary, pursuant to O.C.G.A. § 44-12-130(5), a pawnbroker’s possession of a certificate of title, as USA Title retained in this case, “shall be conclusively deemed to be possession of the motor vehicle.” Furthermore, Georgia courts have held that once the tolling period expires without redemption, extinguishment occurs regardless of whether the vehicle was repossessed. In re Moore, 448 B.R. at 101. The same conclusion was reached in connection with a similar Alabama law in In re Jones, 304 B.R. at 468.
Effect of the Chapter 13 Plan Confirmation
The Debtor maintains that confirmation of her Chapter 13 plan, which listed the Suzuki and Chevrolet as collateral for claims to which valuation under § 506 valuation was applicable, binds USA Title to its provisions and revives the Debtor’s title to both motor vehicles.
The Court disagrees. While there is “a strong presumption in favor of the finality of confirmation orders,” Deutsche Bank National Trust Company v. Thompson (In re Thompson), 499 B.R. 908, 911 (Bankr.S.D.Ga.2013) (punctuation and citation omitted), a debtor “succeeds to no greater interest in an asset than that held by the debtor at the time the bankruptcy petition is filed.” In re Dunlap, 158 B.R. 724, 727 (M.D.Tenn.1993) (internal quotes and citation omitted). Bank*399ruptcy courts have also held that a “Chapter 13 plan may not provide for disposition of property which is not property of the estate as defined in 11 U.S.C. § 541” and the “fact of plan confirmation cannot bind a property owner to a plan provision disposing of his property rights when such property is not within the Court’s vested jurisdiction.” Estep v. Fifth Third Bank of N.W. Ohio (In re Estep), 173 B.R. 126, 131 (Bankr.N.D.Ohio 1994) (internal quotes and citation omitted).
Cases dealing with this issue have held that § 1322(b)(2) — which authorizes a debtor to modify the rights of certain holders of secured claims in a Chapter 13 plan — cannot be used to restructure the claims of a pawnbroker after the expiration of the redemption period. In the case of In re Dunlap for example, the district court held that the debtors had lost all of their interest in the pawned property once the redemption period expired. In re Dunlap, 158 B.R. at 727. Upon expiration of the statutory redemption period without the pawned goods having been redeemed, “the debtor forfeits ‘all right, title and interest of, in and to the pledged property and the debt becomes satisfied.’ ” Id. (quoting the Tennessee Code, which is similar to the relevant Georgia Code provisions here). The court concluded that a debtor cannot cure or modify the pawn contract under § 1322 after the redemption period has expired because this remedy only applies to goods in which the estate retains an interest. Id.
Likewise, in Geddes v. Mayhall Enterprises, LLC, the bankruptcy court held that the debtors no longer had any interest in a pawned automobile because, as of the petition date, the pawn contract had matured and the debtor’s statutory right of redemption had expired. Geddes v. Mayhall Enter., LLC (In re Jones), 304 B.R. 462 (Bankr.N.D.Ala.2003);3 see also In re Walker, 204 B.R. 812 (Bankr.M.D.Fla.1997) (dealing with a post-petition, pre-confirmation expiration of the redemption period) and In re Jackson, 2007 WL 954751 (Bankr.E.D.Tenn.2007) (involving Georgia pawn shop statute, finding that pawn shop would not have been bound by terms of confirmed plan had it not filed a proof of claim, after confirmation, which amounted to acceptance of the terms of the plan).
Similarly, the Eleventh Circuit in Commercial Federal Mortgage Corporation v. Smith, applying Alabama real estate foreclosure law, held that § 1322 allows modifications only to the extent that there exists something to modify and that once the debtors’ claim to title is extinguished at a foreclosure sale, § 1322(b) is no longer available to the debtor. Commercial Fed. Mortg. Carp. v. Smith (In re Smith), 85 F.3d 1555, 1559 (11th Cir.1996), Also, it has been held that a lessor may not be bound by the terms of a confirmed Chapter 13 plan providing for the assumption and cure of a vehicle lease when the lease had been terminated pre-petition. In re Estep, 173 B.R. at 131.
Here, the Debtor’s obligation fully matured and she defaulted on payment and failed to redeem the Suzuki and the Chevrolet within the Georgia Code’s grace period, so USA Title became the effective owner of the vehicles prior to the filing of this case as a result of the statutory automatic forfeiture provision, and they ceased to be the Debtor’s property. Had the debtor filed bankruptcy before her right to redeem expired, she would have been permitted to cure her default and keep the vehicles; but her right of redemption ex*400pired pre-petition, so at that point she no longer had a right to cure her default under the Bankruptcy Code.
True enough, the confirmed Chapter 13 plan treats the two vehicles as property of the Debtor and the obligation related thereto as a debt that can be restructured, but this fact is irrelevant when, as here, the vehicles did not become property of the estate upon the filing of Debtor’s petition, and therefore they were not property within the Court’s vested jurisdiction. In re Estep, 173 B.R. at 131; Winters Nat. Bank & Trust Co. of Dayton v. Simpson, 26 B.R. 351, 354 (Bankr.S.D.Ohio 1982).
For the very same reasons that a former mortgage-holder is not bound to the terms of a confirmed Chapter 13 plan providing for the cure of a lawfully foreclosed mortgage 4 and a former lessor is not bound to the terms of a confirmed plan assuming and curing a terminated lease, the Debt- or’s Chapter 13 plan cannot bring property into her bankruptcy estate that was not her property as of the petition date. Even though the Debtor continued to possess the vehicles on the petition date, she no longer held legal title to them. Her equity of redemption had expired, thus she had no rights left in the property and she therefore no longer has any right to cure her default.
Conclusion
Based on the forgoing, it is hereby
ORDERED that USA Title’s Motion is GRANTED, and the automatic stay is modified to allow USA Title to exercise its state law rights and remedies to obtain possession of the vehicles.
. The confirmed plan does not attempt to redeem the vehicles nor does it otherwise propose to pay USA Title in full, but rather values the vehicles at no more than $425 each, which amount would be paid over time at 4.25%. The plan also provides that unse*397cured creditors will receive less than payment in full.
. O.C.G.A. § 44-12-130 defines a pledged good as "tangible personal property, including, without limitation, all types of motor vehicles or any motor vehicle certificate of title, which property is purchased by, deposited with, or otherwise actually delivered into the possession of a pawnbroker in connection with a pawn transaction.”
. The Alabama forfeiture statute mirrors the Georgia forfeiture statute in that both provide for the forfeiture of the pledgor’s ownership interest to the pawnbroker if the pledged goods are not redeemed within the grace period. In re Jones, 304 B.R. at 469.
. See In re Comer, 2014 WL 917485 (Bankr.E.D.Tenn.2014); In re Toney, 349 B.R. 516 (Bankr.E.D.Tenn.2006); In re Mangano, 253 B.R. 339 (Bankr.D.N.J.2000); In re Jauregui, 197 B.R. 673 (Bankr.E.D.Cal.1996); and Simpson, 26 B.R. at 354. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496888/ | OPINION AND ORDER SUSTAINING TRUSTEE’S OBJECTION TO DEBTOR’S AMENDED CLAIM OF EXEMPTIONS
EDWARD J. COLEMAN, III, Bankruptcy Judge.
Before the Court is an objection to the debtor’s claim of exemption in an annuity filed by Todd Boudreaux, the chapter 7 trustee {“Trustee”). Trustee’s objection requires the Court to revisit the Supreme Court of Georgia’s opinion in Silliman v. Cassell, 292 Ga. 464, 738 S.E.2d 606, 612 (2013). In Cassell, the Georgia Supreme Court answered certified questions from the United States Court of Appeals for the Eleventh Circuit regarding whether a certain single-premium fixed annuity was an “annuity” within the meaning of Georgia’s exemption statute at O.C.G.A. § 44-13-100(a)(2)(E). The Cassell court held that the National Life Insurance Company annuity was such an annuity, and the court of appeals adopted this answer in Silliman v. Cassell (In re Cassell), 713 F.3d 81 (11th Cir.2013). In this case, the Court must apply the analysis and holding of the Georgia Supreme Court in its Cassell opinion to the Jackson National Life Insurance Company annuity at issue in this case {“Annuity”). This is a core proceeding pursuant to 28 U.S.C. § 157(b), and the Court has jurisdiction pursuant to 28 U.S.C. § 1334. In accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure, I make the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
A. Procedural History
As originally filed, Debra R. Sheffield’s {“Debtor ”) Schedule C stated that the Annuity was exempt pursuant to § 44-13-100(a)(2.1) of the Official Code of Georgia {“Georgia Code ”).1 (Dckt. 1, at 13.) Trustee filed his first objection to Debtor’s claim of exemption in the Annuity on April 11, 2013. (Dckt. 29.) Trustee’s initial objection was based on the broad assertion that “[u]nless and until the Debtor can produce sufficient documents to establish a right to claim exemptions in the above-listed assets, the Trustee requests the Court deny those claims of exemptions.” (Dckt. 29, ¶ 6.) A hearing on Trustee’s objection was held on July 9, 2013. (Dckt. 55.) No testimony was taken at the hearing, but Trustee advised the Court that if the requested documents proved the Annuity was a rollover into an IRA, he would withdraw his objection. Subsequently, Trustee obtained the contract for the Annuity and filed a Brief in Support of Trustee’s Objection to Claim of Exemptions on August 27, 2013. (Dckt. 56.) On September 5, 2013, Debtor amended her Schedule B and Schedule C. (Dckt. 57.) Debtor’s Amended Schedule C states that the Annuity is exempt pursuant to O.C.G.A. § 44-13-100(a)(2)(E), § 18-4-22, and § 47-2-332. (Dckt. 57, at 4.) Debtor then filed a responsive brief. (Dckt. 58.)
Trustee timely filed an objection to Debtor’s now amended claim of exemptions on September 10, 2013 (Dckt. 60.) The Court held a status conference on *404Trustee’s objection on November 12, 2013. (Dckts. 69, 71.) At the status conference, Trustee indicated his belief that no eviden-tiary hearing was needed and that the parties could stipulate to the material facts.2 (Dckt. 71.) Accordingly, on December 8, 2013, Trustee and Debtor filed their Joint Stipulation of Chapter 7 Trustee and Debtor on Trustee’s Objection to Exemptions (“Joint Stipulation”).3 (Dckt. 72.)
B. Stipulated Facts
Debtor and Trustee stipulated to the following facts. On March 7, 2013, Debtor filed a chapter 7 bankruptcy petition in the Southern District of Georgia. (Joint Stipulation, dckt. 72, ¶ 1.) Trustee was the duly appointed chapter 7 trustee for Debtor’s case. (Id., ¶ 2.) Trustee timely objected to Debtor’s claim of exemptions. (Id., ¶ 3.)
Debtor was born on November 21, 1964 and was 48 years old when she filed her bankruptcy petition. (Id., ¶ 4.) Debtor is an employee of Colony Bank and has worked at that bank for twenty years. (Id., ¶ 5.)
On December 2, 2008, Debtor obtained a Jackson National Life Perspective L. Series Fixed and Varied Annuity (“Annuity,” “Contract,” or “Annuity Contract”). (Id., ¶ 6.) The Annuity was funded by making a single payment. Debtor accumulated the funds used for that payment by making deposits into a traditional Individual Retirement Account (“IRA ”) over a period of years while working for a previous employer. Debtor intended to “roll over” from the IRA the total value of that account ($9,728.72) to fund the purchase of the Annuity within a new, traditional IRA account. (Id., ¶ 7.) Debtor has not contributed any additional funds to the Annuity other than the funds previously held in the IRA. (Id., ¶ 8.) At the petition date, the Annuity had death proceeds and a cash value of about $16,779.66. (Id., ¶ 9.) Debt- or is the sole owner of the Annuity. (Id., ¶ 10.) The Annuity was issued at the time Debtor was 44 years old. (Id., ¶ 11.) The Annuity includes the following terms:
a. Income Date (as defined by the Annuity): December 2, 2054; and
b. Fixed Account Minimum Interest Rate (as defined by the Annuity): 2.00% in the first 10 Contract Years, 3.00% thereafter.
(Id., ¶ 12.) When Debtor purchased the Annuity, she intended it to be a protected retirement account, specifically a traditional IRA. (Id., ¶ 13.)
C. Contract Language
In addition to the stipulated facts above, the Court makes these additional findings of fact based on the Contract itself. Presumably in response to a subpoena sent by Trustee (dckt. 45), Jackson National Life *405Insurance Company produced the Contract entered into between the company and Debtor relating to the Annuity, which was attached to Trustee’s brief as Exhibit “B.”4 (Dckt. 56-2.) The data pages of the Contract include the following statement: “The Contract Options You have selected will be detailed in a confirmation sent to You by the Company on or after the Issue Date.” (Dckt. 56-2, at 8.) This “confirmation” of the Contract’s options is not part of the record. As a result, Debtor’s initial elections are not apparent other than those contained in the data pages of the Contract. However, the Contract provisions reflect Debtor’s ability to freely amend these options. Therefore, the omission of this information is not fatal to Trustee’s objection.
According to the Contract, Debtor is both the “Owner” and “Annuitant.” Owner is defined in part as “[t]he person or entity shown on the Contract Data Page who is entitled to exercise all rights and privileges under this Contract.” (Dckt. 56-2, at 11.) Annuitant is defined in part as “[t]he natural person on whose life annuity payments for this Contract are based.” (Dckt. 56-2, at 9.) Kim Sheffield, identified in the Contract as Debtor’s spouse, is the “Beneficiary” under the Contract. (Dckt. 56-2, at 3.) Beneficiary is defined as “[t]he person(s) or entity(ies) designated to receive any Contract benefits upon the death of the Owner.” (Dckt. 56-2, at 9.) Income Date is defined as “[t]he date on which annuity payments are to begin.” (Dckt. 56-2, at 10.) According to the Joint Stipulation and the data pages of the Contract, the Income Date is December 2, 2054. (Dckt. 56-2, at 3; Dckt. 72, ¶ 12.) On that date, Debtor will be ninety years old. In addition to defining those terms, the Contract provides the following provisions relating to the terms “Annuitant,” “Assignment,” “Beneficiary,” and “Income Date”:
ANNUITANT. The Owner may change the Annuitant at any time prior to the Income Date....
ASSIGNMENT. The Owner may assign this Contract before the Income Date, but the Company will not be bound by an assignment unless it is in writing and has been accepted and recorded at the Company’s Service Center....
BENEFICIARY. The individual(s) or entity(ies) designated by the Owner to receive any amount payable under this Contract upon the Owner’s death or upon the death of the Annuitant on or after the Income Date pursuant to the terms of this Contract The original Ben-eficiaryfies) will be shown on the Contract Data Page.... The Owner may change the Beneficiary(ies) by submitting a written request to the Service Center, unless an irrevocable beneficiary designation was previously filed with the Company....
INCOME DATE. If no Income Date is selected, the Income Date will be the Latest Income Date. At any time at least seven days prior to the Income Date then indicated on the Company’s records, the Owner may change the Income Date to any date later than the Income Date currently on record by written notice to the Service Center, subject to the Latest Income Date.
(Dckt. 56-2, at 13, 28.)
The Contract allows the Owner (or Beneficiary if applicable) to elect to receive a *406lump-sum payment. That distribution, however, may be deemed a withdrawal. (Dckt. 56-2, at 28.) Otherwise, the Owner may elect among several annuity-type income options, which include life income, joint and survivor life income, life annuity with 120 or 240 monthly payments guaranteed, or income for a specific period. (Dckt. 56-2, at 28-29.) The Owner appears to have the ability to change the option selected:
The Owner may, upon prior written notice to the Company at Its Service Center, elect an income option at any time prior to the Income Date or change an income option up to seven days before the Income Date. Unless otherwise designated, the Owner will be the payee.
(Dckt. 56-2, at 28.) The Contract’s default option is a life annuity with 120 monthly payments guaranteed. (Id.)
In another section, the Contract provides its withdrawal provisions:
At or before the Income Date, the Owner may withdraw all or part of the amounts under this Contract by informing the Company at the Service Center. For full withdrawal, this Contract, or a completed Lost Contract Affidavit, must be returned to the Service Center.
(Dckt. 56-2, at 19.) Certain withdrawals appear to be subject to a Withdrawal Charge and an Excess Interest Adjustment. (Dckt. 56-2, at 19.) According to the data pages of the Contract, the applicable Withdrawal Charge rate is 0% because over four years have passed since Debtor made her initial and only premium payment. (Dckt. 56-2, at 6.) Debtor may make withdrawals without penalty under the following circumstances: (1) if the withdrawal is not more than ten percent of the premiums that remain subject to withdrawal charges that have not been previously withdrawn less the excess of the contract value over remaining premiums (dckt. 56-2, at 20); (2) if the owner incurs a terminal illness (dckt. 56-2, at 20); (3) if the owner incurs a heart attack, stroke, coronary artery surgery, life-threatening cancer, renal failure, or Alzheimer’s disease (dckt. 56-2, at 22); or (4) if the owner requires inpatient care at a nursing home or hospital for 90 days or longer (dckt. 56-2, at 23).
CONCLUSIONS OF LAW
The Bankruptcy Code permits a debtor to exempt certain assets from the bankruptcy estate, including certain retirement accounts, to further the Code’s fresh start policy. Wallace v. McFarland (In re McFarland), 500 B.R. 279, 283 (Bankr.S.D.Ga.2013) (Barrett, J.); see also Law v. Siegel, — U.S. -, -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). Trustee, as the objecting party, bears the burden to prove by a preponderance of the evidence that the claim of exemption in the Annuity is improper. Fed. R. Bankr.P. 4003(c); In re Mooney, 503 B.R. 916 917 (Bankr.M.D.Ga.2014); Silliman v. Cassell, 292 Ga. 464, 738 S.E.2d 606, 612, adopted by Silliman v. Cassell (In re Cassell), 713 F.3d 81 (11th Cir.2013).
Georgia “opted out” of the federal exemptions provided for in § 522(d) of the Bankruptcy Code. Therefore, Georgia debtors are only permitted to exempt property under state law or federal law other than Bankruptcy Code § 522(d). Georgia’s bankruptcy specific exemptions are set forth in O.C.G.A. § 44-13-100.
A. Exemption Under O.C.G.A. § H-IS-100
Debtor’s main argument is that the Annuity is exempt under O.C.G.A. § 44-13-*407100(a)(2).5 In response, Trustee argues that Debtor may not claim an exemption in the Annuity pursuant to O.C.G.A. § 44-13-100(a)(2) because the Annuity falls outside the scope of retirement plans exempted by that statute. Section 44-13-100 of the Georgia Code provides that “(a) ... any debtor who is a natural person may exempt ... the following property: ... (2) The debtor’s right to receive: ... (E) A payment under a pension, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor....” O.C.G.A. § 44-13-100(a)(2)(E).
In response to certified questions from the Eleventh Circuit Court of Appeals, the Supreme Court of Georgia recently articulated the elements of a claim of exemption in an annuity pursuant to O.C.G.A. § 44-13-100(a)(2):
To be exempt under this provision, the [annuity] must meet three requirements: (1) it must be an annuity; (2) the right to receive the annuity payments must be on account of illness, disability, death, age, or length of service; and (3) the payments must be reasonably necessary to support [Debtor] or her dependents.
Cassell, 738 S.E.2d at 609 (footnote omitted) (internal quotation marks omitted).
When interpreting a statute, its plain meaning controls unless its literal application will “produce a result demonstrably at odds” with legislative intent. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); see also Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, — U.S. -, 132 S.Ct. 1670, 1680, 182 L.Ed.2d 678 (2012). For purposes of O.C.G.A. § 44-13-100(a)(2)(E), “an annuity is an obligation to pay an amount at regular intervals for a certain or uncertain period of time.” Cassell, 738 S.E.2d at 610. However, the Cassell court noted:
If we were to apply only this definition of annuity for purposes of O.C.G.A. § 44-13-100(a)(2)(E), every annuity regardless of its origin or purpose would be exempt from a debtor’s bankruptcy estate and protected from creditors. We do not believe this is the result intended by our legislature when it adopted O.C.G.A. § 44-13-100(a)(2)(E).
Id. A review of the caselaw reveals that “[c]ourts have limited the scope of the exemption to mean that a debtor’s interest in an annuity may qualify for the exemption if it is intended to ‘provide income that substitutes for wages,’ and if it is not a typical savings account.” McFarland, 500 B.R. at 284 (quoting Rousey v. Jacoway, 544 U.S. 320, 331, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005)). Therefore, the “pertinent question is whether [the Annuity] provides income as a substitute for wages.” Cassell, 738 S.E.2d at 610.
The Supreme Court of Georgia provided the following guidance for how to determine when income provides a substitute for wages:
*408To make this determination, courts must consider the nature of the contract giving rise to the annuity, as well as the facts and circumstances surrounding the purchase of the annuity.... In Andersen, an opinion often cited by courts when determining whether a plan or contract is of the type exempt from the bankruptcy estate, the court similarly found no single factor determinative. The court instead considered a variety of factors....
Id. at 610-11 (citations omitted). Being mindful that Trustee bears the burden of proof in this case, the Court will now apply the factors considered by the United States Bankruptcy Appellate Panel for the Eighth Circuit in Andersen v. Ries (In re Andersen), 259 B.R. 687, 691-92 (8th Cir. BAP 2001), to the facts in this contested matter.
1. “Were the payments designed or intended to be a wage substitute?” Andersen, 259 B.R. at 691.
Overall, this factor weighs in favor of Trustee. The Contract defines “Income Date” as “[t]he date on which annuity payments are to begin.” (Dckt. 56-2, at 10.) The Income Date of the Annuity is December 2, 2054. (Dckt. 56-2, at 3.) Debtor was born on November 21, 1964. (Dckt. 72, ¶ 4.) Focusing on the Contract’s terms under Debtor’s current elections, it appears that she will not receive any income from the Annuity until she is ninety years old. (See dckt. 56-2, at 3, 10). Debtor’s choice to defer any and all payments under the Annuity until she is ninety years old shows that the Annuity was intended to be more like an investment and less like an exemptible contract to provide retirement funds. See McFarland, 500 B.R. at 285 (finding that the debtor made clear that he did not intend for an annuity to serve as a replacement for wages because he elected to defer payments the maximum number of years); cf. Cassell, 738 S.E.2d at 608 (finding that an annuity provided income as a substitute for wages where the annuity gave the debtor the immediate right to payments and the debtor testified that “she purchased the annuity to replace her income given her age at the time of purchase, 65, and to support her in her retirement”).
2. “Were the contributions made over time? The longer the period of investment, the more likely the investment falls within the ambit of the statute and is the result of a long standing retirement strategy, not merely a recent change in the nature of the asset.” Andersen, 259 B.R. at 691.
This factor weighs slightly in Debt- or’s favor. On one hand, Debtor only made a single contribution to purchase and fund the Annuity, suggesting that the contributions to this annuity were not made over time. On the other hand, the funds used for that single contribution are directly traceable to contributions that Debt- or made over time into a traditional IRA. Although not determinative, courts have considered it “significant” that the funds used to purchase an annuity came from employment-related retirement funds. See Cassell, 738 S.E.2d at 611 n. 4 (“For example, in In re Vickers, 408 B.R. 131, 140-42 (Bankr.E.D.Tenn.2009), the court considered significant the fact that the annuity for which an exemption was claimed was purchased with funds held within and obtained directly from a self-employed IRA fund; see also In re Kiceniuk, No. 12-17802(RTL), 2012 WL 4506597 (Bankr.D.N.J. Sept. 28, 2012) (annuity funded by the transfer of monies from the debtor’s employment related 401(k) to which she contributed regularly).”).
*4093. “Do multiple contributors exist? Investments purchased in isolation, outside the context of workplace contributions, may be less likely to qualify as exempt” Andersen, 259 B.R. at 691.
Under the facts of this case, this factor is similar to the one above and, likewise, weighs slightly in favor of Debt- or. This is because, although the actual purchase of the Annuity took place outside of the workplace, the funds used were directly traceable to contributions she made from earnings to fund a traditional IRA while working for a former employer. (See dekt. 72, ¶ 7.)
A “What is the return on investment? An investment which returns only the initial contribution with earned interest or income is more likely to be a nonexempt investment. In contrast, investments which compute payments based upon the participant’s estimated life span, but which terminate upon the participant’s death or the actual life span, are akin to a retirement investment plan. That is. will the debtor enjoy a windfall if she outlives her life expectancy? Is she penalized if she dies prematurely?” Andersen, 259 B.R. at 691.
Overall, this factor weighs in Trustee’s favor. Because no testimony was taken or relevant facts stipulated to, the Court will not opine about the return on investment of the Annuity Contract. Despite the availability of annuity-type options, Debtor currently retains the ability to wait until she is ninety years old to receive any payments, and at that time, she may elect to receive a lump-sum payment rather than annuity payments that take into account her life expectancy. For this reason, the Annuity appears to be much more like an investment rather than a contract to provide retirement benefits.
5. “What control may the debtor exercise over the asset? If the debtor has discretion to withdraw from the corpus, then the contract most closely resembles a nonexempt investment.” Andersen, 259 B.R. at 691 (footnote omitted).
Of all of the factors considered, this factor weighs most heavily in favor of Trustee. The Court finds that this factor is also the most significant factor under consideration in light of the facts of this case. Debtor’s control is readily apparent due to her discretion to change the timing and frequency of the annuity income and the beneficiary of death benefits. Debtor’s control over the Annuity supports the finding that the Annuity does not serve as a wage substitute. . See Goodman v. Bramlette (In re Bramlette), 333 B.R. 911, 921 (Bankr.N.D.Ga.2005) (holding that annuity was not exempt where the debtor retained discretion to withdraw from the corpus and to decide at later date to receive a fixed return on its investment); In re Michael, 339 B.R. 798, 805 (Bankr.N.D.Ga.2005) (holding that annuity was not exempt where the debtor retained the authority to surrender, assign, or amend the annuity at any time and to exercise any right and receive any benefit under the contract).
6. ‘Was the investment a prebankrupt-cy planning measure? In this regard, the court may examine the timing of the purchase of the contract in relation to the filing of the bankruptcy case.” Andersen, 259 B.R. at 692.
This factor weighs heavily in favor of Debtor. Debtor obtained the Annuity on December 2, 2008 but did not file her bankruptcy petition until March 7, 2013. *410(Dckt. 72, ¶¶ 1, 6.) The fact that she obtained the Annuity over fours years before she filed for bankruptcy tends to show that the investment was not a prebankruptcy planning measure. Furthermore, Trustee presented no evidence to indicate that the Annuity’s purchase was part of a prebank-ruptcy scheme, and he bears the burden of proof.
After considering these factors, I conclude that the Annuity falls outside the scope of “annuity” for purposes of O.C.G.A. § 44-13-100(a)(2) because it does not provide income as a substitute for wages. In further support of my decision in this case, I note that the Annuity is analogous to the annuities that the bankruptcy courts analyzed and found nonexempt in Bramlette and McFarland. In Bramlette, the United States Bankruptcy Court for the Northern District of Georgia concluded that an annuity was not “an exempt ‘pension, annuity, or similar plan or contract’ under O.C.G.A. § 44-13-100(a)(2) because it was not a contract to provide benefits in lieu of earnings after retirement or a plan created to fill or supplement a wage or salary void.” Bramlette, 333 B.R. at 921. The Bramlette court found the following facts relevant to that determination:
Although the debtor purchased the annuity in contemplation of her retirement, she made only one contribution shortly before the filing of her bankruptcy case, has discretion to withdraw from the corpus, and currently has the option to decide at a later time to receive a fixed return on her investment. The circumstances clearly demonstrate that the purchase of the annuity was a recent change in the nature of her assets rather than the result of a long standing retirement strategy.
Id More importantly, I find that the post-Cassell case, McFarland, provides the greatest caselaw support for my conclusion that the Annuity falls outside the scope of retirement funds exemptible under O.C.G.A. § 44-13-100(a)(2). See McFarland, 500 B.R. at 285-86 (finding that an annuity did not fall within the scope of O.C.G.A. § 44-13-100(a)(2) where the annuity contract’s terms were essentially identical to those of the Contract at issue in this case, including that certain early withdrawals were subject to charges). In that case, my colleague, Judge Barrett, explained that “the Georgia legislature weighted the fresh start concept against creditors’ needs when it adopted the exemptions.” Id. at 286 (internal quotation marks omitted). As a result, not every investment account is exempt in a bankruptcy case. The Annuity is among those chosen by the Georgia legislature to be nonexempt.
Because I find the Annuity does not qualify as an annuity for purposes of O.C.G.A. § 44-13-100(a)(2)(E), I decline to decide whether Debtor’s right to receive payments under the annuity is on account of illness, disability, death, age, or length of service and whether the payments are reasonably necessary to support the Debt- or and her dependents.
B. Exemption Under Other Georgia Code Sections
In her Amended Schedule C, Debtor also claims that the Annuity is exempt pursuant to O.C.G.A. § 18-4-22 and § 47-2-332. Trustee argues in his objection that Debtor cannot exempt the Annuity under O.C.G.A. § 18-4-22 because the Annuity was not established under section 408 or 408(A) of the Internal Revenue Code as required by that statute. Likewise, Trustee contends that Debtor cannot exempt the Annuity under O.C.G.A. § 47-2-332 because she is not a former employee of the State of Georgia and the account *411for the Annuity was not established in the manner required by that statute.
Section 18-4-22 of the Georgia Code makes certain pension and retirement accounts exempt from garnishment. See In re McFarland, 481 B.R. 242, 254 (Bankr.S.D.Ga.2012) (Barrett, J.) (“Georgia Code sections exempt[ ] from garnishment ‘funds or benefits from a pension or retirement program as defined in 29 U.S.C. § 1002(2)(A) or funds or other benefits from an individual retirement account’ but only ‘until paid or otherwise transferred to a member of such program.’ ” (quoting O.C.G.A. § 18-4-22(a))).The other statute cited by Debtor. O.C.G.A. § 47-2-332, relates to the “right to a pension, annuity, retirement allowance, return of contributions, the pension, annuity, or retirement allowance itself, any optional benefit, or any other right accrued or accruing to any person” under the Employees’ Retirement System of Georgia. O.C.G.A. § 47-2-332(a).
Under the Bankruptcy Code, a Georgia-domiciled debtor is limited to the exemptions found in O.C.G.A. § 44-13-100. In re McFarland, 481 B.R. at 255; see also In re Joyner, 489 B.R. 292, 297 (Bankr.S.D.Ga.2012) (Davis, J.). The sole exception to that rule was identified in In re Fullwood, 446 B.R. 634 (Bankr.S.D.Ga.2010) (Davis, J.). In In re Full-wood, the bankruptcy court held that O.C.G.A. § 34-9-84 applied in bankruptcy cases and exempted the debtor’s workers* compensation recovery’ because (1) workers’ compensation awards were protected long before the Georgia bankruptcy exemptions were created in 1980 and (2) O.C.G.A. § 44-13-100 does not address workers’ compensation awards. See Roach v. Ryan (In re Ryan), No. 11-40712, 2012 WL 423854, at *1 (Bankr.S.D.Ga. Jan. 19, 2012) (Davis, J.). In contrast. O.C.G.A. § 44-13-100 specifically addresses what types of annuities and similar contracts are exempt in bankruptcy cases. Therefore. Debtor’s attempt to exempt the Annuity under O.C.G.A. § 18-4-22 and § 47-2-332 must fail even if the Annuity met the requirements of those statutes (which appears not to be the case in any event).
ORDER
For the foregoing reasons, Trustee’s Objection to Debtor’s Amended Claim of Exemptions (dckt. 60) is SUSTAINED.
. Section 44-13-100(a)(2.1) of the Georgia Code contains four subsections (A through D), but Debtor’s Schedule C, as originally filed, did not specify a particular subsection.
. In accordance with Rule 9014 of the Federal Rules of Bankruptcy Procedure, the Court finds that an evidentiary hearing is not required in this contested matter. See Gonzalez-Ruiz v. Doral Fin. Corp. (In re Gonzalez-Ruiz), 341 B.R. 371, 381 (1st Cir. BAP 2006) ("Where the parties do not request an eviden-tiary hearing or where the core facts are not disputed, the bankruptcy court is authorized to determine contested matters ... on the pleadings and arguments of the parties, drawing necessary inferences from the record.”); Wilmington Trust Co. v. AMR Corp. (In re AMR Corp.), 490 B.R. 470, 479 (S.D.N.Y.2013) ("It is unnecessary to conduct an evi-dentiary hearing on a contested matter unless there are disputed issues of material fact that a Bankruptcy Court cannot decide based on the record.”).
. The Joint Stipulation is a two-page document, containing thirteen numbered paragraphs. The parties had the opportunity but declined to more fully develop the facts in the record by presenting evidence at the July 9, 2013 hearing as well as by requesting an evidentiary hearing be set at the November 12, 2013 status conference.
. At the November 12, 2013 hearing on Trustee's objection, the Court informed the parties that the Contract had not yet been made part of the record. In response, counsel for both parties informed the Court that a copy of the Contract was attached to their respective briefs (dckts. 56, 58). Therefore, I find that the parties have stipulated to the admission of the Contract into evidence for purposes of Trustee’s objection.
. As a preliminary matter, subsection D of O.C.G.A. § 44-13-100(a)(2.1) permits debtors to exempt their aggregate interest in an IRA. See O.C.G.A. § 44-13-100(a)(2.1)(D). Because Debtor amended her Schedule C to remove O.C.G.A. § 44-13-100(a)(2.1), she has withdrawn her claim that the Annuity is exempt because it is an IRA. This finding is consistent with Debtor's Amended Schedule B that lists the Annuity under the “Annuities” Type of Property section rather than the "Interests in IRA, ERISA, Keogh, or other pension or profit sharing plans” Type of Property section where she claimed an exemption in her 401(k) worth $65,713.72. (See dckt. 57, at 1-2.) Debtor acknowledged that, although it was her intention to have the Annuity held as an IRA, she failed to properly make that election. (See Joint Stipulation, dckt. 72, ¶¶ 7, 13.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496889/ | OPINION AND ORDER
SUSAN D. BARRETT, Chief Judge.
Before the Court are affirmative defenses asserted in the answer filed by Earl C. Nalley, Jr. (“Clay Nalley”) and Cynthia Nalley (jointly, “the Nalleys” or “Debtors”) seeking to dismiss this adversary proceeding filed by Wilton Clinton Meeks, III (“Meeks”), Paul and Jesse Burke (jointly, “the Burkes”), and A. Stephenson Wallace, the Chapter 7 Trustee (“the Chapter 7 Trustee”) (jointly, “Plaintiffs”). The adversary complaint seeks declaratory relief that the 11 U.S.C. § 362 stay has been violated, injunctive relief, and trans*414fer avoidance pursuant to 11 U.S.C. § 549. This is a core matter pursuant to 28 U.S.C. § 157(b)(2) and the Court has jurisdiction pursuant to 28 U.S.C. § 1334. For the following reasons, the Court finds the transfer is void ab initio and the affirmative defenses seeking dismissal are denied.
FINDINGS OF FACT
The Nalleys filed a joint chapter 11 petition which was subsequently converted to one under chapter 7 upon motion by the United States Trustee. Dckt. No. 35, Chap. 7 Case No. 05-11160. Through separate adversary proceedings, the Burkes and Meeks obtained nondischargeable judgments against Clay Nalley.1 Importantly, the nondischargeable judgments are only against Clay Nalley and not Cynthia Nalley.
The Nalleys are the joint administrators and apparently the sole heirs at law of the estate of April Christy Nalley f/k/a April Shearouse, their deceased minor daughter, whose pre-petition probate estate is being administered in the Probate Court of Burke County. The probate estate has certain rights to an insurance annuity (“the Annuity”) to which the Nalleys are potential beneficiaries. It is undisputed that whatever rights the Nalleys have in or to the Annuity and proceeds therefrom are property of the bankruptcy estate subject to allowed exemptions.
On October 21, 2008, during the pen-dency of the underlying chapter 7 case and without relief from the § 362 automatic stay, the Superior Court of Burke County entered a divorce decree (“the divorce decree”) which “approved, adopted, and incorporated by reference” a divorce settlement agreement dated August 29, 2008 reached between Clay and Cynthia Nalley. Under the section entitled “PROPERTY DIVISION,” the divorce decree purports to divide the Nalleys’ potential interests in the Annuity by providing:
D. INSURANCE ANNUITY: Both parties are heirs to the Estate of April Shearouse, a minor child who has predeceased the parties in this case. The estate is being administered in the Probate Court of Burke County. An asset of the estate remains, to wit: The American General Annuity, policy No. [ ], as owned by Saint Paul Fire & Marine Insurance Co. This annuity is subject to the potential claim of A. Stephenson Wallace, Chapter 7 Trustee in Bankruptcy Case No. 05-11160 pending in the United States Bankruptcy Court for the Southern District of Georgia, Augusta Division.
The annuity consists of future disbursements of: $100,000.00 payable September 30, 2010; $100,000.00 payable September 30, 2015; and $125,000.00 payable September 30, 2020. The parties have filed exemptions in their Chapter 7 Case, claiming a portion of the future disbursements as exempt. To the extent either Clay Nalley or Cynthia Nalley becomes entitled to any disbursement under the Annuity or title to the Annuity based [on] their claim of exemptions or the Trustee’s abandonment of the Annuity, any such disbursement or transfer shall be considered the sole property of the Wife. To the extent that either Husband or Wife becomes entitled to receive all or part of the disbursement payable September 30, 2010, September 30, 2015, or September 30, 2020, any disbursements shall be the sole property of Cynthia Nalley. All rights, *415title and interest in the Annuity shall be considered the sole property of the Wife, and the Husband shall have no further interest or claim in the Annuity-
Dckt. No. 1, Ex. A, ¶ D.
Previously, the Trustee filed an adversary in this Court against the Nalleys seeking to compel Debtors as co-administrators of the probate estate to execute necessary documents to transfer from the probate estate to themselves as sole heirs the future income stream from the Annuity. See Wallace v. Nalley et al., Adv. Proc. No. 06-01055, Dckt. No. 1. The Trustee amended the complaint to add insurance companies as defendants and sought a determination of the respective rights of the parties to the control and sale of the Annuity and its income stream and authorization to sell the Annuity to J.G. Went-worth. See Wallace v. Nalley et al., Adv. Proc. No. 06-01055, Dckt. No. 50. The Court granted a motion to dismiss filed by the insurance companies determining that under the probate exception, the probate court must determine the rights to the Annuity and any future payments from the Annuity and in the alternative the Court abstained from considering this matter pursuant to 28 U.S.C. § 1834(c). See Wallace v. Nalley et al., Adv. Proc. No. 06-01055 (Bankr.S.D.Ga. March 28, 2009). Subsequently, on July 27, 2009, Debtors and the Trustee entered into a consent order dismissing the adversary proceeding without prejudice. See Wallace v. Nalley et al., Adv. Proc. No. 06-01055, Dckt. No. 87.
Thereafter in December 2011, the Trustee filed a motion to compromise seeking to sell his interest in the Annuity to the Nalleys for $10,000.00. The Trustee’s motion states for the Annuity’s income stream to be transferred to the Nalleys and thereby become an asset the Trustee can dispose of, the administration of the probate estate must be completed and closed. Chapter 7 Case No. 05-11160, Dckt. No. 171. This requires the Nalleys to certify that all debts, including the taxes associated with the probate estate have been paid. Id. The Nalleys are unable to make this certification. Id. As a result, the motion states the Trustee recognizes the prospect that a very large tax debt would subsume this asset. Id. After notice, this sale was approved with the consent of the Burkes and Meeks with the caveat that the settlement was “between the Debtors and [the Trustee] only, and does not prejudice any rights of Jesse Burke, Paul Burke, and Clint Meeks against the Debtors or the Debtors’ assets.” Id., Dckt. No. 180. Unbeknownst to the Court, the Trustee, the Burkes and Meeks at the time this order was presented, consented to, and entered, the divorce decree approving the Nalley’s property settlement had been entered without relief from the § 362 stay. Dckt. No. 40, Aff. of Trustee.2 The Nalleys’ bankruptcy counsel also is the counsel that presented the consent divorce decree to the Superior Court Judge in the divorce proceeding. The Nalleys have never paid the $10,000.00 to the Trustee to consummate the sale.
Then in April 2013, the Trustee again moved to abandon his interest in the Annuity citing the same reasons as set forth in his previous motion. Dckt. No. 189, Chap. 7 Case No. 05-11160, Trustee’s Motion to Abandon Asset, ¶¶ 10-11. However, this time, Meeks was aware of the divorce decree’s property division and objected to the abandonment and filed this *416complaint. Dckt. No. 195, Chap. 7 Case No. 05-11160. The Trustee and the Burkes subsequently joined in the complaint. After an expedited hearing, an order was entered granting Plaintiffs relief from the automatic stay for the limited purpose of allowing Meeks and the Burkes to record their judgments against Clay Nalley and to file notices of lis pendens against the Nalleys as to the Debtors’ respective interest, if any, in and to the Annuity. Dckt. No. 31.
CONCLUSIONS OF LAW
The Nalleys argue the complaint should be dismissed because: 1) the Court lacks subject matter jurisdiction under the probate exception as the Annuity is under the exclusive jurisdiction of the Probate Court of Burke County, Georgia; 2) the property transferred was not property of the bankruptcy estate, and thus there was no violation of the automatic stay and the Court lacks subject matter jurisdiction to set aside the transfer; 3) there is no injury to the bankruptcy estate so Plaintiffs lack standing; and 4) lastly, the two year statute of limitations set forth in 11 U.S.C. § 549(d)(1) bars the filing of the § 549 cause of action. Conversely, Plaintiffs assert the divorce decree’s transfer of Clay Nalley’s interest in the Annuity constitutes a violation of the automatic stay provisions of 11 U.S.C. § 362 injuring the bankruptcy estate and that the statute of limitations of 11 U.S.C. § 549(d) is subject to equitable tolling and therefore, the § 549 cause of action is viable.
First, the Nalleys argue the probate exception requires dismissal of the complaint. The “probate exception” to federal jurisdiction bars the Bankruptcy Court’s jurisdiction over the res of the Nalley’s daughter’s probate estate. The probate exception leaves the administration of a decedent’s estate to state probate courts, and prevents federal courts from disposing of property that is in the custody of a probate court. Marshall v. Marshall, 547 U.S. 293, 308, 126 S.Ct. 1735, 164 L.Ed.2d 480 (2006) (federal courts are precluded from “endeavoring to dispose of property that is in the custody of the state probate court”). However, this adversary does not involve administrating property of the decedent’s estate or disposing of property that is in the custody of the probate court. In a prior adversary proceeding, the Trustee sought to compel the Nalleys, as administrators of the probate estate, to determine the respective rights to the Annuity. See Wallace v. Nalley et al., Adv. Proc. No. 06-01055, Dckt. Nos. 1 and 50. Relevant to the current matter, this Court ruled the Trustee has the right to seek to sell any rights the bankruptcy estate has in the contingent future payments from the Annuity once those rights have been determined by the Burke County probate court. See Wallace v. Nalley et al., Adv. Proc. No. 06-01055 (Bankr.S.D. Ga. March 23, 2009). This current adversary proceeding focuses on whether the Nalleys violated the automatic stay when they entered into a property division without seeking relief from the 11 U.S.C. § 362 stay and whether this was an unauthorized post-petition transfer under 11 U.S.C. § 549. Specifically, the Court is determining whether the transfer of Clay Nalley’s contingent future interest in the Annuity and distributions therefrom was in violation of the automatic stay. As this adversary does not involve the administration of decedent’s estate or the administration thereof, the narrow probate exception does not apply.
Furthermore, the complaint involves a purported violation of the automatic stay and transfer of property of the bankruptcy estate, therefore, the complaint “arises under” the Bankruptcy Code *417and the Court has subject matter jurisdiction to consider the issue. 28 U.S.C. § 157(a). “A bankruptcy court’s in rem jurisdiction permits it to ‘determin[e] all claims that anyone, whether named in the action or not, has to the property or thing in question.’ ” Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 448, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004) (citations omitted). Furthermore, allegations involving 11 U.S.C. § 362(a) and transfer avoidance claims under 11 U.S.C. § 549 are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(G), (H), and (O). See Divane v. A and C Elec. Co., Inc., 193 B.R. 856, 862 (N.D.Ill.1996) (“because the automatic stay is so integral to the very operation of the bankruptcy laws ... without question ‘a proceeding to prosecute a violation of the automatic stay is a core proceeding ... ’ ”). For these reasons, this Court has subject matter jurisdiction to consider these issues.
The next issue is whether the portion of the divorce decree addressing the Annuity is a division of property of the bankruptcy estate. Section 541(a)(1) of the Bankruptcy Code provides that the bankruptcy estate contains “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Under the expansive language of § 541, “the term ‘property’ 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). The definition of property of the bankruptcy estate set forth in § 541 ensures that “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative” is placed within the custody of the bankruptcy court. In re Yonikus, 996 F.2d 866, 869 (7th Cir.1993) abrogated on other grounds by Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 1195, 188 L.Ed.2d 146 (2014); see also In re Elrod, 91 B.R. 187, 189 (Bankr.M.D.Ga.1988) (holding that any equitable interest that the debtor’s wife might have had in the marital home could not vest upon the filing of a divorce decree, but rather vested in the bankruptcy estate). More particularly, “[property of the estate includes contingent interests in future payments.” In re Law, 336 B.R. 780, 782 (8th Cir. BAP 2006).
In reviewing the pertinent language of the divorce decree, the first sentence of the actual division states “[t]o the extent either Clay Nalley or Cynthia Nalley becomes entitled to any disbursement under the Annuity or title to the Annuity based [on] their claim of exemptions or the Trustee’s abandonment of the Annuity, any such disbursement or transfer shall be considered the sole property of the Wife.” The following sentences do not contain the same conditions as to the exemptions and abandonment, stating, “[t]o the extent that either Husband or Wife becomes entitled to receive all or part of the disbursement payable September 30, 2010, September 30, 2015, or September 30, 2020, any disbursements shall be the sole property of Cynthia Nalley. All rights, title and interest in the Annuity shall be considered the sole property of the Wife, and the Husband shall have no further interest or claim in the Annuity.” Debtors’ bankruptcy schedules list the income stream from the Annuity as joint property of their bankruptcy estates. Chap. 7 Case No. 05-11160, Dckt. No. 1. While abandonment revests property in the debtor, abandonment has not occurred in this case. At the time of the divorce decree, without relief from the § 362 stay, Clay Nalley was attempting to transfer a contingent future interest, his interest in decedent’s estate, *418which is a transfer of property of the bankruptcy estate. Given the broad definition of property of the bankruptcy estate, I find this provision of the divorce decree is a division of property of the bankruptcy estate, and an act to exercise control thereover.
The Bankruptcy Code prohibits property division between spouses without first obtaining relief from the § 362 stay which provides the Trustee and creditors with notice and an opportunity to protect their interest. 11 U.S.C. § 362(b)(2)(A)(iv); see e.g. In re Taub, 413 B.R. 55, 68 (Bankr.E.D.N.Y.2009) (conditioning relief from the stay to protect creditors of the bankruptcy estate by allowing state court to determine equitable distribution up to entry of judgment but enforcement was to be made in the bankruptcy court through case administration). Certain actions are excepted from the automatic stay, including “civil action[s] or proceeding^] ... for the dissolution of a marriage.” 11 U.S.C. § 362(b)(2)(A)(iv). This exemption helps to ensure that bankruptcy courts will not “be used as a weapon in an on-going battle between former spouses.” Carver v. Carver, 954 F.2d 1573, 1579 (11th Cir.1992) (holding that the bankruptcy court should have abstained from hearing a debtor’s claim for violation of the automatic stay where the debtor’s ex-wife filed a state court claim for nonpayment of child support obligations). But, “to the extent that [the divorce] proceeding seeks to determine the division of property that is property of the estate” it is not excepted from the automatic stay. 11 U.S.C. § 362(b)(2)(A)(iv); In re Briglevich, 147 B.R. 1015, 1019 (Bankr.N.D.Ga.1992) (holding that the portions of the post-petition divorce decree which direct any transfer of property of the bankruptcy estate violate the automatic stay and are void) citing In re Elrod, 91 B.R. 187 (Bankr.M.D.Ga.1988).
The nondischargeable judgments against Clay Nalley attach to his assets, including his exemptions and any interest he has in the Annuity as a result of the Trustee’s prospective abandonment. Without notice to the Trustee, the Court, or their creditors, the Nalleys entered into this consent divorce decree diverting Clay Nalley’s interest in the Annuity to Cynthia Nalley. The result of the divorce decree as written deprives Clay Nalley’s creditors, including those holding nondischargeable judgments, of this potential asset. While this is a joint chapter 7 case, the separate marital assets and debts of Mr. and Mrs. Nalley have not been consolidated. See 11 U.S.C. § 302; Fed. R. Bankr.P. 1015; In re Rudd, 483 B.R. 354, 358 (Bankr.M.D.Ala.2012) (“The effect of a joint filing is to ‘ereate[ ] two separate bankruptcy estates.’ ”); In re Hicks, 300 B.R. 372, 377-78 (Bankr.D.Idaho 2003); 2 Lawrence P. King, Collier On Bankruptcy ¶ 302.02[l][b], at 302-7 (16th ed. 2013). Based upon the review of the language and its effect on the bankruptcy estate, I find this provision of the divorce decree involves a division of property of the bankruptcy estate in violation of the § 362 stay. 11 U.S.C. § 362(a)(3) (prohibiting acts “to exercise control over property of the estate.”); 11 U.S.C. § 362(b)(2)(A)(iv) (not excepting division of property of the estate from the automatic stay); See also In re Briglevich, 147 B.R. at 1019 (finding divorce decree in violation of 11 U.S.C. § 362(a)(3)).
In the current situation, the bankruptcy is not being used as a weapon between spouses, but rather, the spouses are attempting to use the divorce exception of 11 U.S.C. § 362(b)(2)(A)(iv) as a weapon against Clay Nalley’s creditors in favor of Cynthia Nalley’s interest. To the extent that a divorce decree is being used *419to further “fraud, collusion, or the like,” bankruptcy courts, despite the usual deference to state court divorce proceedings, “may reexamine a distribution of property and make appropriate adjustments”. In re Williford, 2006 WL 3544928, at *5 (Bankr.M.D.Ala. Dec. 8, 2006); see also Carver v. Carver, 954 F.2d at 1580 (“[Wjhere the purposes of the automatic stay provision would clearly be served by affording a remedy for its violation, and the court would not be required to delve too deeply into family law, the court need not abstain from hearing the claim.”).
In the Eleventh Circuit, transfers in violation of the § 362 automatic stay are “void and without effect” or “void ab initio.” Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir.1982) (describing violations as “void and without effect”); accord U.S. v. White, 466 F.3d 1241, 1244 (11th Cir.2006); In re Spivey, 1998 WL 34066138, at *4 (Bankr.S.D.Ga. March 16, 1998) (holding that “[a]ny stay violation is void ab initio.”). However, “[t]his is not to say that the dissolution of marriage itself is affected ... [t]he Bankruptcy Code protects property of the bankruptcy estate and of the debtor; it does not protect the marital status of the debtor.” In re Green, 1989 WL 1719956, at *4 (Bankr.S.D.Ga. Sept. 8, 1989) (holding a divorce decree void only “insofar as it deals with issues of alimony, support or division of property.”); see also In re Herter, 456 B.R. 455, 476 (Bankr.D.Idaho June 21, 2011) (holding that portion of divorce decree dividing debtors’ property was void ab initio in violation of the automatic stay; however divorce decree was effective to dissolve the debtors’ marriage). As a result, the paragraph in controversy in this proceeding, paragraph 1(D) of the settlement agreement, labeled Insurance Annuity, alone is void. The portions of the divorce decree dissolving the marriage and all other provisions remain valid between the Nalleys.
The Nalleys also contend there is no harm or diminution to the bankruptcy estate and therefore the Plaintiffs lack standing and the Court lacks jurisdiction citing In re Wood Treaters, LLC, 491 B.R. 591 (Bankr.N.D.Fla.2013). In Wood Treaters, LLC, the court held that the Trustee had not carried its burden at trial to show there had been a diminution to the estate by showing either the goods were not purchased for fair value or were resold at a loss by the debtor or the liquidator and therefore lacked standing. Id. at 601. However, in this case, there is harm. Meeks and the Burkes are subject to the automatic stay and cannot enforce their judgments without relief from the stay. 11 U.S.C. § 362(a) (the filing of a bankruptcy petition “operates as a stay, applicable to all entities, of ... (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”); 11 U.S.C. § 362(c)(1) (“[t]he stay of an act against property of the estate ... continues until such property is no longer property of the estate.”); see also 11 U.S.C. § 362(a)(4) (prohibiting “any act to create, perfect, or enforce any lien against property of the estate”); O.C.G.A. § 9-12-81(b) (providing that entry of a money judgment on the execution docket creates a lien against the judgment debtor’s property as against bona fide purchasers).
Meeks and the Burkes have judgment liens solely against Clay Nalley and the divorce decree gives a potentially substantial asset to Cynthia Nalley without obtaining § 362 relief and without notice to the Trustee, the Court or the creditors. Because Meeks’s and the Burkes’ prior interests have been subverted by a violation of the automatic stay, they have suffered injuries that satisfy the standing require*420ment. See In re Ring, 178 B.R. 570, 580 (Bankr.S.D.Ga.1995) (holding that a creditor had standing to seek a declaration that an action taken in violation of the automatic stay is void ab initio). This is a different scenario than the transfer in Wood Treat-ers which did not violate the automatic stay.
Lastly, the Nalleys argue the statute of limitations defense precludes the 11 U.S.C. § 549 avoidance action. Because Clay Nalley’s transfer of his interest in the decedent’s estate is void and without effect, the Court need not address the Nalley’s statute of limitations defense on the 11 U.S.C. § 549 avoidance action. A statute of limitations defense under 11 U.S.C. § 549(d) is inapplicable to a transfer prohibited by the automatic stay. In re Briglevich, 147 B.R. at 1019 (finding post-petition property division in divorce decree null and void and stating statute of limitations defense of § 549(d) not applicable to transfers that violate the § 362 stay).
For the foregoing reasons, it is therefore ORDERED that the division of property from Clay Nalley to Cynthia Nalley, set forth in paragraph 1(D) of the settlement agreement, labeled Insurance Annuity, is ORDERED void ab initio3 and the Nal-leys’ affirmative defenses seeking dismissal of the complaint are ORDERED DENIED.
. The Burkes have a nondischargeable judgement against Clay Nalley in the amount of $39,228.27; and Meeks holds a nondischargeable judgment in the amount of $101,607.35. Adv. Proc. No. 05-1053, Dckt. No. 32; Adv. Proc. No. 05-01054, Dckt. No. 65.
. There is some evidence the Trustee was aware of the Debtors' divorce, but not the property settlement.
. The portions of the divorce decree dissolving the marriage and all other provisions remain valid between the Nalleys. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496890/ | Chapter 11
DECISION
CARLA CRAIG, Chief United States Bankruptcy Judge
On August 8, 2013, this Court issued a decision (the “Decision”) and an order (the “Order”) granting the defendants’ motion pursuant to Rule 12(b)(6) to dismiss the complaint of Chapter 11 debtor and debt- or-in-possession Peter J. Garcia (“Peter” or “Debtor”) seeking to avoid the pre-petition involuntary transfers of his interests in certain businesses as preferences or fraudulent transfers.1 Before the Court is the Debtor’s motion pursuant to Bankruptcy Rule 9023 seeking reconsideration of the Order to the extent it dismissed the claims seeking relief under the Bankruptcy Code’s preference provision, § 547. The Debtor argues that the Court “misapprehended a material question of law and policy” in holding that the challenged transfers were not “for or on account of an antecedent debt” within the meaning of § 547(b)(2). (Pl.’s Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, ECF No. 37-1 at l.2) For the following reasons, the motion is denied.
BACKGROUND3
On August 19, 2011, Michael Garcia and Joaquin Garcia (the “Individual Defendants”), relatives of Peter and members of corporate defendants JMP Properties, LLC and All-Boro Management Co. LLC (the “LLCs,” and together with the Individual Defendants, the “Defendants”), caused the LLCs to adopt resolutions expelling Peter from the LLCs. As a result of the expulsions, Peter’s membership interests in the LLCs were transferred to the Individual Defendants. Pursuant to the operating agreements of the LLCs, upon the expulsion, the Defendants became obligated to pay Peter the market value of his interests in the LLCs. This amount has not yet been determined.
On November 28, 2011, an involuntary petition was filed against the Debtor. On March 16, 2012, the Debtor commenced this adversary proceeding against the Defendants alleging that the involuntary transfers of his membership interests are avoidable as preferences under § 547(b), and as fraudulent conveyances under § 548(a)(1)(B).
On January 24, 2013, the Defendants filed the motion to dismiss the adversary proceeding.
*437On August 8, 2013, the Court issued the Decision and the Order granting the Defendants’ motion. The fraudulent conveyance claims were dismissed because, among other reasons, the Debtor received reasonably equivalent value in exchange for his interests in the LLCs in the form of the right to receive payment of the value of the interests as of the date of the expulsion. The preference claims were dismissed because the Complaint failed to allege a plausible basis to infer that the transfers were “ ‘for or on account of an antecedent debt owed by the debtor before such transfer was made’ as required by § 547(b)(2).” Garcia, 494 B.R. at 812.
In reaching the conclusion that the transfers did not satisfy § 547(b)(2), the Court relied in part on a “common sense approach for determining whether a loan repayment is ‘for or on account of a debt owed by the debtor,’ ” which is “to consider whether the creditor would be able to assert a claim against the estate, absent the repayment.” Id. at 813 (quoting Smith v. Creative Fin. Mgmt., Inc. (In re Virginia-Carolina Fin. Corp.), 954 F.2d 193, 197 (4th Cir.1992)). Applying this approach to the involuntary transfer of Peter’s membership interests in the LLCs, the Court stated:
[T]he transfer of Peter’s membership interests did not satisfy, in whole or in part, any debt owed to Defendants. Put differently, the amount owed by Peter after his expulsion from the LLCs was the same as it was immediately prior to that event. As explained by another court in the context of termination of rights under a franchise agreement, “[a]lthough Plaintiffs parted with an interest in property upon Defendants’ termination of Plaintiffs’ rights under the franchise agreement, equipment lease, and sublease, the transfer of possession did not constitute payment of Defendants’ claim or any portion thereof.” [Thompson v. Doctor’s Assocs., Inc. (In re Thompson), 186 B.R. 301, 311 (Bankr.N.D.Ga.1995).]; see also Peltz v. Vancil (In re Bridge Info. Sys., Inc.), 474 F.3d 1063, 1068 (8th Cir.2007) (holding that payment by debtor to tenant in connection with prepetition settlement of a lawsuit was to buy out tenant’s future option, as provided in the lease, to renew for an additional term, such that payment was not for or on account of damages, but for the value of the option).
Garcia, 494 B.R. at 813-14.
APPLICABLE LEGAL STANDARDS
I. Reconsideration under Bankruptcy Rule 9023 and Rule 59(e)
Rule 59, made applicable to this adversary proceeding pursuant to Bankruptcy Rule 9023, permits a party to make a motion “to alter or amend a judgment.” Fed.R.Civ.P. 59(e). Pursuant to Rule 54(a), made applicable to this matter by Bankruptcy Rule 7054(a), the Order is a “judgment” that may be reconsidered under Rule 59 because it is an “order from which an appeal lies.” Fed.R.Civ.P. 54(a); Fed. R. Bankr.P. 7054.
Rule 59(e) does not provide specific grounds for amending or reconsidering a judgment. See Fed.R.Civ.P. 59(e). The Second Circuit has held that “[t]he major grounds justifying reconsideration are an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.” Virgin Atl. Airways, Ltd. v. Nat’l Mediation Bd., 956 F.2d 1245, 1255 (2d Cir.1992) (internal quotations and citation omitted); Doe v. New York City Dep’t of Social Servs., 709 F.2d 782, 789 (2d Cir.1983).
The Plaintiff seeks reconsideration on the grounds that the Court’s deter*438mination that the transfers of his interests in the LLCs were not “on account of an antecedent debt” within the meaning of § 547(b)(2) constituted “a manifest error of law.” (PL’s Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, EOF No. 87-1 at 3.) Under the “clear error” standard, relief is “appropriate only when a court overlooks ‘controlling decisions or factual matters that were put before it on the underlying motion’ and which, if examined, might reasonably have led to a different result.” Corines v. Am. Physicians Ins. Trust, 769 F.Supp.2d 584, 593-94 (S.D.N.Y.2011) (quoting Eisemann v. Greene, 204 F.3d 393, 395 n. 2 (2d Cir.2000)). “[R]econsid-eration will generally be denied unless the moving party can point to controlling decisions or data that the court overlooked— matters, in other words, that might reasonably be expected to alter the conclusion reached by the court.” Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir.1995). It is well settled that “[a] motion for reconsideration is neither an occasion for repeating old arguments previously rejected nor an occasion for making new arguments that could have been previously advanced.” Associated Press v. U.S. Dep’t of Def., 395 F.Supp.2d 17, 19 (S.D.N.Y.2005).
“A motion for reconsideration is ‘an extraordinary remedy to be employed sparingly in the interests of finality and conservation of scarce judicial resources.’ ” Corines, 769 F.Supp.2d at 593-94 (quoting In re Initial Public Offering Sec. Litig., 399 F.Supp.2d 298, 300 (S.D.N.Y.2005), aff'd sub nom. Tenney v. Credit Suisse First Boston Corp., Nos. 05 Civ. 3430, 05 Civ. 4759, & 05 Civ. 4760, 2006 WL 1423785, at *1 (2d Cir.2006)). See also Schonberger v. Serchuk, 742 F.Supp. 108, 119 (S.D.N.Y.1990) (motions made pursuant to Rule 59(e) must adhere to stringent standards to prevent “wasteful repetition of arguments already briefed, considered and decided”). The determination of whether a motion for reconsideration should be granted is within the sound discretion of the court. See Spa 77 G L.P. v. Motiva Enters. LLC, 772 F.Supp.2d 418, 437 (E.D.N.Y.2011).
II. Avoidance of Preferential Transfers under § 517(b)
Section 547(b) provides:
[T]he trustee [or debtor-in-possession] may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). Each of these five elements must be proven to sustain a preference claim.
*439
DISCUSSION
The Debtor asserts that the Court erred in holding that the transfers of his interests in the LLCs did not satisfy § 547(b)(2) because they did not reduce, in whole or in part, the debt owed to the Defendants. He argues that the phrase “on account of’ contained in § 547(b)(2) is ambiguous because it can have two meanings: an “accounting meaning ... when it constitutes partial payment for the antecedent debt” or a “causative meaning ... when it is made ‘because of the antecedent debt.” (Pl.’s Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, ECF No. 87-1 at 6.) He contends that, because there is no controlling ease law interpreting the phrase “on account of,” the Court must “rely on extrinsic sources of construction, including the statutory purpose and policies which underlay its enactment.” (Pl.’s Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, ECF No. 37-1 at 1.)
The Debtor urges this Court to adopt what he describes as the “causative meaning” in the context of his preference claims, and to conclude that that the complaint adequately pleaded that the transfers were “on account of an antecedent debt” as required by § 547(b) because Peter’s debt to the Defendants is the reason the Individual Defendants expelled him from the LLCs. In other words, the Debt- or argues, given that, had he not taken approximately $715,000 in excess distributions, he would still have his membership interests in the LLCs, the transfer of the membership interests was “on account of’ that antecedent debt. In support of this position, the Debtor cites a statement by the Supreme Court, in a case under Title VII, that “the ordinary meaning of ‘because of is ‘by reason of or ‘on account of.’ ” Univ. of Tex. Sw. Med. Ctr. v. Nassar, — U.S. -, 133 S.Ct. 2517, 186 L.Ed.2d 503 (2013) (quoting Gross v. FBL Fin. Servs., Inc., 557 U.S. 167, 176, 129 S.Ct. 2343, 174 L.Ed.2d 119 (2009).
This argument was already rejected in the Decision.4 Garcia, 494 B.R. at 812. This motion does not cite any controlling law overlooked by the Court in reaching that conclusion. Therefore, there is no basis to reconsider that holding under Rule 59(e). Moreover, the Debtor’s argument that the Court should apply the Supreme Court’s statement concerning the meaning of “because of,” in Nassar, in analyzing the meaning of “on account of’ as used in § 547(b)(2), is rejected on the merits.
The Debtor’s reliance on Nassar is misplaced for multiple reasons. First, the issue before the Supreme Court in Nassar was not the interpretation of “on account of’; rather, it was whether the causation standard applicable to status-based discrimination claims under Title VII also applies to retaliation claims under Title VII. Nassar, 133 S.Ct. at 2524. The statement relied upon by the Debtor for the proposition that “on account of’ means “because of’ was included in Nassar as background concerning the history of certain provisions of Title VII and other anti-discrimination statutes, and the standards applicable thereto. Specifically, Nassar was quoting Gross v. FBL Financial Services, Inc., 557 U.S. 167, 129 S.Ct. 2343, 174 L.Ed.2d 119 (2009), which addressed *440the standard applicable to a claim under the Age Discrimination in Employment Act of 1967. The quoted statement from Nassar is thus dicta, and irrelevant as well.
Title VII claims are demonstrably different from preference claims. Title VII is intended to protect individuals from the intentional tort of “wrongful discrimination in the Nation’s workplaces and in all sectors of economic endeavor,” and to “provide[ ] remedies to employees for injuries related to discriminatory conduct and associated wrongs by employers.” Nassar, 133 S.Ct. at 2522. On the other hand, the policies behind § 547(b), as explained in the Decision, are to prevent unequal treatment of similarly situated creditors in order to promote the “central” bankruptcy policy of “equality of distribution among creditors,” Begier v. I.R.S., 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990), and to discourage creditors “from a race to the courthouse during the slide into bankruptcy,” Velde v. Kirsch, 543 F.3d 469, 472 (8th Cir.2008).
The relevant language of the statutes at issue is also different. The provisions analyzed in Nassar and Gross contain the words “because of,” not “on account of.” The fact that “because of,” a broad phrase, was held in the discrimination context to mean “by reason of’ or “on account of’ does not lead to the conclusion that § 547(b)’s use of the narrower phrase “on account of’ necessarily means “because of’ or “by reason of.” Interestingly, notwithstanding the use of the word “because” in Title VII’s provisions for status-based discrimination and for retaliation claims, the Supreme Court in Nassar concluded that different causation standards should be applied to those claims. Nassar, 133 S.Ct. at 2532-33. This further supports the conclusion that the interpretation of “because of’ in the discrimination context should not be automatically extended to preference claims under the Bankruptcy Code.
The Debtor’s argument that the transfers were “on account of an antecedent debt” because the Defendants were motivated to expel Peter from the LLCs because of their claim against him for excessive distributions runs counter to the well-established principle that intent of the parties is irrelevant when determining whether a transfer constituted a preference under § 547(b). See, e.g., T.B. Westex Foods v. Fed. Deposit Ins. Corp. (In re T.B. Westex Foods), 950 F.2d 1187, 1195 (5th Cir.1992) (“The purpose of a transfer is not dispositive of the question whether it qualifies as an avoidable preference under section 547(b) because ‘it is the effect of the transaction, rather than the debtor’s or creditor’s intent, that is controlling.’”); Gladstone v. Bank of Am. (In re Vassau), 499 B.R. 864, 868 (Bankr.S.D.Cal.2013) (“[I]t is well established that the intent of the parties is irrelevant to the preference analysis.”); Picard v. Katz, 462 B.R. 447, 450 (S.D.N.Y.2011) (Preferences are avoidable under § 547(b) “regardless of the facial validity of the transfer or the intent of the parties to the transfer.”); Waldschmidt v. Chrysler Credit Corp. (In re Messenger), 166 B.R. 631, 634 n. 2 (Bankr.M.D.Tenn.1994) (“The enactment of the Bankruptcy Code in 1978 removed any ‘scienter’ requirement for preference recovery. The knowledge or intent of the creditor is irrelevant in determining whether an avoidable transfer occurred.” (citations omitted)).
On the other hand, the Court’s conclusion that the transfers of the Debtors interests were not “on account of an antecedent debt” because they did not reduce or satisfy the Defendants’ claim against the Debtor, is entirely consistent with applicable case law interpreting “on account of’ as used in § 547(b)(2). See, e.g., USAA *441Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d 880, 888 (9th Cir.2010) (stating that transfer of security interest satisfied § 547(b)(2) when it “was in exchange for” antecedent loan); Baker Hughes Oilfield Operations, Inc. v. Cage (In re Ramba, Inc.), 416 F.3d 394, 398 (5th Cir.2005) (describing the inquiry under § 547(b)(2) as “whether the transfer ... was made in payment of an antecedent debt”); Klein v. Tabatchnick, 610 F.2d 1043, 1049 (2d Cir.1979) (“ ‘Preference implies paying or securing a pre-existing debt of the person preferred.’ ” (quoting Dean v. Davis, 242 U.S. 438, 443, 37 S.Ct. 130, 61 L.Ed. 419 (1917))); Peltz v. Vancil (In re Bridge Info. Sys., Inc.), 327 B.R. 382, 387-89 (8th Cir. BAP 2005) (holding that payment by debtor to tenant in connection with prepet-ition settlement of a lawsuit was to buy out tenant’s future option, as provided in the lease, to renew for an additional term, such that payment was not for or on account of damages, but for the value of the option), aff'd, 474 F.3d 1063 (8th Cir.2007); Tese-Milner v. Edidin & Assocs. (In re Operations N.Y. LLC.), 490 B.R. 84, 102 (Bankr.S.D.N.Y.2013) (dismissing preference claim under Rule 12(b)(6) where complaint “fail[ed] to plead any facts suggesting that the ... transfers satisfied a debt that the [djebtor owed to [defendant]”); Condren v. Harrison (In re Borison), 226 B.R. 779, 790 (Bankr.S.D.N.Y.1998) (“The essential requirement of Code § 547 is the payment with property of the debtor of an antecedent debt within 90 days of the filing of the petition.” (emphasis omitted)).
The Supreme Court has instructed that “[w]hen conducting statutory interpretation, [courts] ‘must be careful not to apply rules applicable under one statute to a different statute without careful and critical examination.’ ” Gross, 557 U.S. at 174, 129 S.Ct. 2343 (quoting Fed. Express Corp. v. Holowecki, 552 U.S. 389, 393, 128 S.Ct. 1147, 170 L.Ed.2d 10 (2008)). Based upon the ample case law under § 547 and its underlying policies, and the significant differences between discrimination claims and preference claims, this Court declines to apply the interpretation of “because of’ as used in Title VII claims to “on account of’ as used in § 547(b)(2).
The Debtor also points out that the creation or perfection of a security interest may be avoided as a preference, even though the security interest does not reduce the claim it secures. He therefore contends that the Court erred by concluding that the transfer of his interests in the LLCs was not “on account of’ the Debtor’s antecedent debt because it did not reduce or satisfy his debt to the Defendants. The Debtor argues that, had the LLCs’ operating agreements “provided that an actual security interest in the Debtor’s LLC membership interests ... was agreed to be given to secure ‘any obligation which would arise between the parties that was not cure upon demand,’ ” there would be no question that § 547(b) would apply. (PL’s Reply Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, ECF No. 43 at 3.)
While it is true that the creation or perfection of a security interest may be avoidable as a preference, the transfers of Peter’s interests in the LLCs neither created nor perfected a security interest in the Debtor’s property to secure the Defendants’ claims.5 Therefore it is irrelevant whether the creation or perfection of such a security interest during the preference *442period would have been avoidable.6
In his reply, the Debtor contends that the expulsions from the LLCs, “while technically not the perfection of a security interest, act in many ways just like the perfection of a security interest to the detriment of other [creditors” because the other creditors are deprived of receiving any economic benefit of the ongoing value of the interests, while the Defendants are given “priority.” (Pl.’s Reply Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, ECF No. 43 at 2.) The Plaintiff asserts that “the expulsions must be avoided as preferences because the detriment and prejudice to other unsecured creditors is unacceptably large and the improvement of Defendants’ position at the expense of those other creditors is simply antithetical to sound bankruptcy policy.” (PL’s Reply Mem. of Law in Supp. of Mot. for Reconsideration, Adv. Pro. No. 12-1085-CEC, ECF No. 43 at 6.)
This argument could have been raised before, and does not cite any controlling law overlooked by the Court. It therefore does not constitute a basis for reconsideration under Rule 59(e), and, in any event, it must be rejected on the merits. It is unclear how the Debtor contends that his expulsion from the LLCs impermissibly improved Defendants’ position in this bankruptcy case at the expense of other creditors. As explained in the Decision, Peter received reasonably equivalent value in exchange for his interests in the LLCs, in the form of a contractual right to payment of the value of his membership interest, and therefore, contrary to the Debtor’s assertions, his other creditors were not “deprived of any economic benefit.” Garcia, 494 B.R. at 814-16. An asset transferred for reasonably equivalent value (thereby unavoidable under § 548(a)(1)(B)) may not be recovered as a preference merely because it subsequently appreciates in value. For example, if the debtor sold real property at the current market rate within 90 days of filing for bankruptcy, the debtor may not avoid the sale merely because the property’s value increases thereafter.
Even if the Debtor’s contractual right to receive payment of the value of his membership interests may be set off by the Defendants against their claims against the Debtor for return of the excess distributions, this right of setoff provides no basis to avoid the transfer under § 547(b).7 The Defendants’ rights concerning setoff are governed by § 553. That section provides, in pertinent part:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debt- or that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
(1) the claim of such creditor against the debtor is disallowed;
(2) such claim was transferred, by an entity other than the debtor, to such creditor—
(A) after the commencement of the case; or
*443(B)(i) after 90 days before the date of the filing of the petition; and
(ii) while the debtor was insolvent (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561); or
(3) the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition;
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b) (17), 362(b) (27), 565, 556, 559, 560, or 561).
(b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
11 U.S.C. § 553(a), (b)(1) (emphasis added). Thus, under § 553(a)(3), if the Debt- or could show that the debt owed by the Defendants to the Debtor as a result of the expulsion was incurred for the purpose of obtaining a right of setoff, the Debtor might be able to prevent the Defendants from setting off that debt again the amounts he owed by reason of the excess distributions. Significantly, however, nothing in this statutory scheme would provide a basis for avoiding the transfer of the Debtor’s membership interests. The Debtor cannot use § 547(b) to circumvent § 553. Although a “setoff has the effect of paying one creditor more than another,” it has long been acceptable “despite the preferential advantages bestowed upon certain creditors.” Bohack Corp. v. Borden, Inc. (In re Bohack Corp.), 599 F.2d 1160, 1165 (2d Cir.1979) (discussing § 68 of the Bankruptcy Act).
For these reasons, the Debtor has not set forth any basis under Rule 9023 to reconsider this Court’s determination that the transfer of the Debtor’s interests in the LLCs were not “on account of an antecedent debt” as required by § 547(b)(2).
CONCLUSION
For the foregoing reasons, the Debtor’s motion pursuant to Bankruptcy Rule 9023 is denied. A separate order will issue.
. Unless otherwise indicated, citations to "Rules” are to the Federal Rules of Civil Procedure and to “Bankruptcy Rules” are to the Federal Rules of Bankruptcy Procedure; statutory citations are to provisions of Title 11, U.S.C.; and citations to "DCL” are to New York’s Debtor and Creditor Law.
. The Debtor's memoranda of law in support of this motion were not paginated. In order to provide pinpoint citations to the memoran-da, the Court treated the page containing the "Preliminary Statement” as page 1.
.A more detailed description of the background of this motion is provided in the Decision. See Garcia v. Garcia (In re Garcia), 494 B.R. 799, 803-806 (Bankr.E.D.N.Y.2013).
. The Defendants argued that the Debtor's dishonesty, and not the debt owed to them, was the reason for the expulsion. In response, the Debtor argued that "the alleged wrongful act is inextricably tied together with the debt. The alleged wrongful act is the taking of money — nothing else.” (PL’s Mem. at 21-22, Adv. No. 12-1085-CEC, ECF No. 21).
. The Decision focused on whether the transfers reduced or satisfied the Defendants’ claim against the Debtor because there was no allegation that the transfers of the Debtor’s interests created or perfected a security interest in favor of the Defendants.
. Indeed, the Debtor acknowledges that it is a "counterfactual example.”
. The Debtor challenges whether the Defendants have a right of setoff, and there has been no determination on that issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496892/ | Chapter 11
MEMORANDUM DECISION
ALLAN L. GROPPER, UNITED STATES BANKRUPTCY JUDGE
Introduction
Debtor Jesup & Lamont, Inc. (“JLI”) filed a voluntary chapter 11 bankruptcy petition on July 30, 2010. About seven weeks later, on September 24, 2010, its wholly owned broker-dealer subsidiary, Jesup & Lamont Securities Corp. (“JLSC”), also filed under chapter 11. The two cases were jointly administered and the Court approved a Chapter 11 Plan of Liquidation (the “Plan”) on October 6, 2011. By virtue of provisions in the Plan, Matthew Harrison was appointed “Confirmation Trustee” of the “Jesup Liquidating Trust” (the “Trust”), authorized to pursue claims on behalf of either or both estates.
On March 14, 2012, the Confirmation Trustee (the “Trustee”) filed, and later *457amended, an adversary complaint in this Court (as amended, the “Complaint”). The Complaint was filed in the name of the Trust and on behalf of both estates against New Jersey Community Bank (“NJCB”), Robert O’Donnell, chief executive officer and chairman of the board of NJCB, and Stephen Rabinovici, former chairman of the board of both Debtors. Count I alleges breach of fiduciary duty claims against Rabinovici; Count II alleges aiding and abetting breach of fiduciary duty claims against NJCB and O’Donnell; Counts III and IV allege fraudulent conveyance claims under the Bankruptcy Code and New York State law, respectively, against NJCB; and Count V alleges, in the alternative, preferential transfer claims under 11 U.S.C. § 547 against NJCB. On July 17, 2013, defendants NJCB and O’Donnell filed a motion to dismiss the preference and aiding and abetting breach of fiduciary duty claims asserted against them. That same date, defendant Rabinovici filed a motion to dismiss the count asserted against him alleging breach of fiduciary duty if the underlying causes of action, fraudulent conveyance and preference, were dismissed. On July 26, 2013, the Trustee responded with a motion for summary judgment in his behalf on the preference and fraudulent conveyance claims against NJCB.
Facts
JLI was a holding company whose principal subsidiary was JLSC, a registered broker-dealer subject to regulation, inter alia, by the Financial Industry Regulatory Authority (“FINRA”). On May 28, 2009, JLI borrowed $2.1 million from NJCB (the “JLI Loan”). Plaintiffs Statement of Undisputed Material Facts (“Pi’s Stmt.”) at ¶ 10; Counter Statement of Undisputed Facts of Defendants NJCB and Robert O’Donnell (“Counter Stmt.”) at ¶ 10. JLI transferred the $2.1 million to its wholly-owned subsidiary, JLSC, and it is not disputed that the funds became the property of JLSC. However, the money remained at NJCB. Counter Stmt, at ¶ ll.1 JLSC agreed to keep the $2.1 million in a certificate of deposit account at NJCB (the “NJCB CD Account”) and executed an “Assignment of Deposit Account” by which it pledged the funds as collateral for the JLI Loan. Id. There is no dispute that JLSC did not guarantee the JLI Loan, but it is equally without dispute that NJCB had a claim against the property of JLSC up to the amount of the collateral deposited.
On July 23, 2009, FINRA demanded that some or all of the $2.1 million be moved to another bank for reasons that are not clear on the record. JLI requested a modification of the JLI Loan terms to-permit the $2.1 million in the NJCB CD Account to be moved. Pl.’s Stmt, at ¶¶ 13, 14, 17; Counter Stmt, at ¶¶ 13, 14, 17. Roma Bank agreed to accept the funds in an account in the name of JLSC at Roma Bank (the “Roma Account”). To continue to protect NJCB’s loan, Roma issued a $2 million letter of credit in favor of NJCB (the “Roma L/C”), collateralized by $2 million deposited by JLSC. Pl.’s Stmt, at ¶ 19; Counter Stmt, at ¶ 19. NJCB approved the transfer of funds and accepted delivery of the Roma L/C. PL’s Stmt, at ¶ 18; Counter Stmt, at ¶ 19. $100,000 remained in the NJCB CD Account and continued to collateralize the loan. PL’s Stmt, at ¶ 21; Counter Stmt, at ¶ 21. The Assignment of Deposit Account agreement remained outstanding. It continued to provide that collateral would include “all additional deposits hereafter made to the Account.” (Dkt. No. 38, Ex. F-3).
*458The material facts apparently did not change for the next ten months. The initial loan term was due to expire on May 28, 2010. PL’s Stmt, at IT 26; Counter Stmt, at ¶ 26. In April 2010, JLI requested that the loan term be extended for another year. Pl.’s Stmt, at ¶ 27; Counter Stmt, at ¶ 27. NJCB internally approved renewal of the loan for another year in June 2010, although new loan documents were never executed. PL’s Stmt, at ¶¶ 28-29; Counter Stmt, at ¶¶ 28-29. At about the same time, however, FINRA apparently became concerned about the safety of the $2 million deposited by JLSC, as the Roma account was not FDIC-insured.
In June 2010, FINRA demanded that the $2 million be deposited in an FDIC-insured account. PL’s Stmt, at ¶ 34; Counter Stmt, at ¶ 34. On June 24, Steven Rabinovici, the chairman of the board of both Debtors, requested that Roma Bank close the Roma Account and transfer the funds to an account at Hopewell Valley Community Bank (“Hopewell Valley”), where the account would be insured. PL’s Stmt, at ¶ 37; Counter Stmt, at ¶ 37. Roma Bank wired the money as requested, without imposing any written conditions on the transfer. PL’s Stmt, at ¶¶ 38, 40; Counter Stmt, at ¶¶ 38, 40. Although it was apparently contemplated that Hopewell Valley would open a letter of credit in favor of NJCB, as Roma Bank had, Hopewell Valley was unable to do so immediately. PL’s Stmt, at ¶¶ 42, 44; Counter Stmt, at ¶¶ 42, 44. On June 25, as the financial situation at both Debtors was deteriorating rapidly, Rabinovici sent a letter to Hopewell Valley requesting that Hopewell Valley wire the $2 million to the NJCB CD Account. PL’s Stmt, at ¶ 47; Counter Stmt, at ¶ 47. Hopewell Valley wired the money to NJCB the same day, and it was deposited into the NJCB CD Account (the “NJCB Transfer”). PL’s Stmt, at ¶48; Counter Stmt, at ¶ 48. Three days later, on June 28, at Rabinovici’s direction, NJCB applied the funds in the NJCB CD Account to repay the JLI Loan. PL’s Stmt, at ¶¶ 50-51; Counter Stmt, at ¶¶ 50-51. In deposition testimony, O’Donnell stated that Rabinovici had informed him that the loan should be paid off because Rabinovici did not want NJCB to be hurt. (Dkt. No. 38, Ex. F (O’Donnell Dep., 11/12/2010 at 70:2-6)).
There is apparently no dispute that the events of June 2010 took place on the eve of the failure of JLSC; according to Defendants’ representation at oral argument, on June 18, 2010, JLSC had already been ordered to cease operations. JLI filed its bankruptcy petition on July 30, 2010, about 35 days after the June 25 Transfer. JLSC followed on September 24, 2010. On March 14, 2012, the Trustee initiated this adversary proceeding regarding the $2 million transferred from Hopewell Valley to NJCB on June 25, 2010 (the NJCB Transfer). Complaint at ¶ 1. The instant motions followed.
Discussion
I. Introduction
The principal issues in this case are raised by the motions to dismiss of certain of the Defendants and the Trustee’s motion for summary judgment on the preference and fraudulent conveyance counts. In brief, the Trustee asserts that the col-lateralization of JLSC’s debt for the benefit of its parent, shortly before the bankruptcy filing of both the parent and the subsidiary, was a fraudulent conveyance because JLSC received absolutely no consideration for taking on the obligation. If there was consideration, the Trustee further argues, then the collateralization was a preference as a payment on an antecedent obligation. Defendants argue that the collateralization falls in a gap between preference and fraudulent conveyance law. *459Their best argument is that the collaterali-zation cannot be avoided because there was fair value for fraudulent conveyance purposes but no antecedent debt for preference purposes. They also contend that it falls outside the 90-day look-back period for preference liability, and that the Trustee does not have standing to sue on a claim of aiding and abetting a breach of fiduciary duty.
The Court finds that, on this record, the Trustee has established that the collateral-ization at issue was a preference. On the only preference issues that are open to serious dispute, the Trustee has established that the collateralization of debt that occurred on June 25, 2010 was a transfer on account of an antecedent debt owed by the debtor before such transfer was made and that it was made within the 90-day look-back period. If, however, there was no antecedent liability (as the Defendants argue), then the transfer was a fraudulent conveyance. There is no gap — on this record, it is one or the other.
Finally, the motion to dismiss the claim of aiding and abetting a breach of fiduciary duty cannot be decided on the present record, as it is impossible to determine, on the pleadings, which state law would apply to these claims.
II. The Legal Standard
The legal standards governing the motions to dismiss and for summary judgment are not in substantial dispute.
A. Motion to Dismiss
A motion to dismiss under Fed.R.Civ.P. 12(b)(6), made applicable by Bankruptcy Rule 7012(b), is “designed to test the legal sufficiency of the complaint, and thus does not require the Court to examine the evidence at issue.” De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 69 (2d Cir.1996) (citation omitted), cert. denied, 519 U.S. 1007, 117 S.Ct. 509, 136 L.Ed.2d 399 (1996); see also Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.1984). “It is elementary that, on a motion to dismiss, a complaint must be read as a whole, drawing all inferences favorable to the pleader.” Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562 (2d Cir.1985), citing Conley v. Gibson, 355 U.S. 41, 47-48, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
Although a complaint need not include detailed factual allegations, the plaintiff must incorporate “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “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).” Id.; see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). “Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). “[Ojnce a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint.” Twombly, 550 U.S. at 546, 127 S.Ct. 1955; accord Roth v. Jennings, 489 F.3d 499, 510 (2d Cir.2007).
Fed.R.Civ.P. 8(a)(2) requires that most complaints contain only a “short and plain statement of the claim showing that the pleader is entitled to relief.” In accordance with the liberal pleading standards of Rule 8, “a plaintiff must disclose sufficient information to permit the defendant *460‘to have a fair understanding of what the plaintiff is complaining about and to know whether there is a legal basis for recovery.’ ” Kittay v. Kornstein, 230 F.3d 531, 541 (2d Cir.2000), quoting Ricciuti v. N.Y. City Transit Auth., 941 F.2d 119, 123 (2d Cir.1991). A complaint charging a defendant with an intentional fraudulent conveyance must meet the stricter standards of Fed.R.Civ.P. 9(b), but a charge of constructive fraud (as in the present case) requires only compliance with Rule 8, made applicable by Bankruptcy Rule 7008. Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox, Inc.), 429 B.R. 73, 96 (Bankr.S.D.N.Y.2010).
B. Motion for Summary Judgment
Summary judgment under Federal Rule of Civil Procedure 56, made applicable by Federal Rule of Bankruptcy Procedure 7056, is proper where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Morenz v. Wilson-Coker, 415 F.3d 230, 234 (2d Cir.2005). The moving party bears the burden of demonstrating the absence of any genuine issue of material fact, and all inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). However, once there is a showing of the absence of an issue of fact, the opposing party must produce specific evidence that raises a genuine issue. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). A fact is “material” if it might affect the outcome of the suit under the governing substantive law, and “summary judgment will not lie if the dispute about a material fact is ‘genuine,’ that is, 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).
III. Motion for Summary Judgment on Counts Three, Four, and Five
The Trustee moves for summary judgment on Complaint Counts Three (fraudulent conveyance under § 548), Four (fraudulent conveyance under § 544 of the Bankruptcy Code and New York Debtor & Creditor Law §§ 270-76), and Five (avoidance of a preferential transfer under § 547).
We deal first with the motion for summary judgment on the preference count. We also accept the premise of the motion, which is brought under § 547 of the Bankruptcy Code, that JLSC is the proper plaintiff on this claim against NJCB, based on the fact that the $2,000,000 transferred to NJCB, deposited subject to the preexisting “Assignment of Deposit Account” and then set off or applied to JLI’s debt, was JLSC’s property.2
*461A. Preference Claim Under § 547
11 U.S.C. § 547(b) sets out the requirements for pleading a prima facie preference claim:
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.
11 U.S.C. § 547(b). The Trustee alleges that the NJCB Transfer was a preferential transfer avoidable pursuant to 11 U.S.C. § 547 because it caused $2 million of JLSC’s property to become collateral for a debt that was unsecured immediately before the transfer.3 The result is that NJCB purported to be a secured rather than unsecured creditor and almost immediately offset the collateral or applied it to the debt. On the facts of record, the requirements of § 547(b)(1), (3) and (5) are easily resolved in the Trustee’s favor on his motion, as is the requirement of the lead-in clause of § 547(b) that the debtor have an interest in the property.
i. Whether the Debtor JLSC had an Interest in Property (§ 547(b))
It is not disputed that JLSC had an interest in the $2 million of its property when the funds were transferred into the NJCB CD Account on June 25, 2010, and pledged as collateral for the JLI Loan. Pl.’s Stmt, at ¶¶ 37, 48; Counter Stmt, at ¶¶ 37, 48. Nor were there any other liens against the funds, as it is not disputed that Roma Bank transferred the funds to Hopewell Valley free and clear of all liens. Pl.’s Stmt, at ¶¶ 38, 40; Counter Stmt, at ¶¶ 38, 40. Hopewell Valley had no claim against JLI or JLSC, and there is no contention to the contrary.
NJCB argues that it had “a lien on the [NJCB Account] and all proceeds, replacements, and substitutes thereof at all relevant times,” and it contends that the funds continued to be “proceeds” of its collateral as they were transferred to and from Roma Bank and then to and from Hopewell Valley Bank. This argument is also without merit. The funds had not been collateral of NJCB for almost a year, since July 2009 when they became collateral for the Roma Bank L/C. At that point they were not subject to the Assignment of Deposit Account, and as noted above, it is not disputed that Roma Bank released the $2 million free and clear of any liens. NJCB cites an example in the comments to UCC § 9-332 to support its proposition that the money constituted proceeds of the NJCB Account and that NJCB maintained a security interest in the proceeds. How*462ever, UCC § 9-315, which is cross-referenced in the UCC example, makes it clear that any security interest in cash proceeds is temporary, usually limited to 20 days. Moreover, UCC § 9 — 312(b)(1) provides that “a security interest in a deposit account may be perfected only by control under Section 9-314.” UCC. § 9-312(b)(1). NJCB did not have control over the money when it was released from the NJCB Account into an account in JLSC’s name at Roma Bank and then released by Roma Bank. UCC § 9-332(b) further provides that “a transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” UCC § 9-332(b). There is no allegation of collusion, and the statute thus makes clear that when the money was transferred from the NJCB Account into an account at Roma Bank, it was free from NJCB’s lien. NJCB has not cited any case that supports its theory that a lender can have a continuing lien on cash that it released years before,
ii Whether the Transfer was Made to or for the Benefit of a Creditor (§ 547(b)(1))
It is not disputed that the NJCB Transfer was made for NJCB’s benefit. When asked whether the funds “came back for New Jersey Community Bank’s benefit,” O’Donnell stated “[y]es, ... but deposited to [JLSC’s] security account.” O’Donnell 2004 Examination at 225 3-7, Docket No. 38-6 at 49. NJCB nevertheless disputes that it was a creditor of JLSC because it had loaned $2.1 million to JLI and had no in personam claim against JLSC. This is not determinative, as NJCB had the right to satisfy JLI’s debt from property posted by JLSC on a non-recourse basis pursuant to the Assignment of Deposit Account, dated May 28, 2009. (Dkt. No. 38, Ex. F-3). Under § 102(2) of the Bankruptcy Code, “ ‘claim against the debtor’ includes claim against property of the debtor.” See Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991).4 NJCB had a claim against JLSC’s property that arose before the order for relief, and as an “entity that has a claim against the debtor” NJCB is a creditor within the meaning of § 101(10)(A) of the Bankruptcy Code.5
iii. Whether the Transfer was Made while the Debtor was Insolvent (§ 547(b)(3))
Section 547 provides that “[f]or the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.” 11 U.S.C. § 547(f). Defendants do not challenge or proffer any evidence or argument that JLSC was not insolvent on the transfer date.6
iv. Whether the Transfer Enables Such Creditor to Receive More than Such Creditor Would Receive Under Chapter 7 (§ 547(b)(3))
“To compare what the creditor would have received in a Chapter 7 liquidation *463with what it received pre-petition, it is necessary to consider how the debt would have been treated in a Chapter 7 liquidation.” Braniff Airways, Inc. v. Exxon Co. U.S.A., 814 F.2d 1030, 1034 (5th Cir.1987), citing In re Mason and Dixon Lines, Inc., 65 B.R. 973, 976 (Bankr.M.D.N.C.1986); see also In re McLean Industries, Inc., 162 B.R. 410, 422-23 (S.D.N.Y.1993), rev’d on other grounds, 30 F.3d 385 (2d Cir.1994). The only defense raised by NJCB on this branch of the motion is that NJCB would have been paid in full in a liquidation of either JLSC or JLI because the Roma L/C remained outstanding for months after the NJCB Transfer, and there is nothing in the record to indicate that NJCB could not have drawn on it and been paid in full.
NJCB’s rights against Roma Bank, however, are not determinative. The test in § 547(b)(1) is whether the transfer allowed the creditor to “receive property of the debtor that it would not have received in a Chapter 7 liquidation.” (emphasis added). In In re Wedtech Corp., 187 B.R. 105, 107-08 (S.D.N.Y.1995), the District Court rejected the argument that the debtor’s payment to a creditor within the 90-day preference period did not result in the creditor receiving more than it would have received in a Chapter 7 liquidation because the creditor’s loan was secured by property of a non-debtor third party. Id. The district court reasoned that the debtor’s transfer of funds to the creditor resulted in the creditor’s receipt of property of the debtor that it would not otherwise have received in a Chapter 7 liquidation, and that it was irrelevant that the creditor had, prior to the transfer, protection from a third party.
The same principle applies here. At the time of the NJCB Transfer, Roma Bank had released the $2 million of JLSC’s collateral. If the subsequent NJCB Transfer had not occurred, the NJCB debt would not have been collateral-ized by the $2 million deposited into the NJCB CD Account. Rather, NJCB would have had a loan secured by $100,000 in the NJCB CD Account and protected by, but not collateralized by, the Roma L/C. In a Chapter 7 liquidation, NJCB would only be entitled to the $100,000 in the NJCB CD Account, and the remainder of the debt owed under the JLI Loan would be unsecured (if not collected from a draw on the Roma L/C). It is correct, as NJCB argues, that the Roma Bank L/C remained outstanding for many months after the challenged transfer of funds. However, NJCB has not provided any authority to support the proposition that its decision to apply JLSC’s funds to the debt rather than draw on the Roma Bank L/C releases it from preference liability. NJCB did, therefore, “receive property of the debtor that it would not have received in a Chapter 7 liquidation.” In re Wedtech Corp., 187 B.R. at 108.
As discussed above, several of the requirements for stating a prima facie preference claim are easily satisfied. Two require more extensive analysis: § 547(b)(2), providing that the transfer be “for or on account of an antecedent debt owed by the debtor before such transfer was made,” and § 547(b)(4), requiring that the transfer be made within 90 days before the petition date.
v. Whether the Transfer was Made for or on Account of an Antecedent Debt Owed by the Debtor Before Such Transfer was Made (§ 547(b)(2))
“Debt” is defined in § 101(12) of the Bankruptcy Code as “liability on a claim.” A claim is defined in § 101(5)(A) as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, ma*464tured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” There is no dispute that the debt to NJCB was owed by JLI. JLI had borrowed the funds, and its subsidiary JLSC had never guaranteed the debt. However, as noted above, under § 102(2), “claim” includes a claim against property of the debtor. In order to establish his prima facie preference claim, the Trustee must show only that the transfer was made for or on account of an antecedent claim against JLSC’s property.
The Trustee can make this showing because it is undisputed that JLSC had initially deposited its property — $2.1 million of funds borrowed — in support of its parent’s obligation and had executed a continuing Assignment of Deposit Account agreement by which it agreed that collateral for the debt would include all additional deposits made to the Account. The fact that the collateral posted at NJCB had been released by NJCB prior to the transfer and no longer served as collateral for JLI’s debt did not mean that JLSC had no liability to NJCB in respect of the $2,000,000, or that NJCB had no “claim” against JLSC’s property. NJCB’s claim to JLSC’s property was documented in the Assignment of Deposit Account, which provided that collateral would include “all additional deposits hereafter made to the Account,” and this gave NJCB the right to collateralize the JLI loan with the property of a JLI subsidiary.
Moreover, if JLSC had no obligation whatsoever to NJCB at the time of the NJCB Transfer, as NJCB argues, an insolvent JLSC’s use of its property to secure its parent’s debt would be a classic fraudulent conveyance.7 Indeed, if Rabi-novici had used $2,000,000 belonging to an insolvent non-debtor company he controlled to collateralize a loan to one of his other companies, he might arguably be liable for aiding and abetting a fraudulent conveyance (assuming the existence of such a cause of action). However, JLSC was not a stranger to the transaction, and the $2,000,000 was deposited into the pre-existing NJCB CD Account in accordance with the agreement governing that account. It was also lawfully deposited because JLSC had arguably received consideration for the use of its money to collateralize its parent’s obligation — it had received the proceeds of the loan, at least formally. JLSC’s liability under the NJCB CD Account Agreement, coupled with its status as a beneficiary of the borrowing, meant that there was a basis for Defendants to use JLSC’s property to collateralize its parent’s debt, and this liability constituted an antecedent debt within the meaning of § 547(b)(2).
vi Whether the Transfer was Made on or within 90 Days Before the Date of the Filing of the Petition
The second serious issue raised by Defendants is whether the NJCB Transfer was made within 90 days before the date of the filing of the bankruptcy petition by JLSC. This is the subject of the motion to dismiss filed by NJCB, the sole defendant on the preference claim, and it is based on the fact that JLSC filed its bankruptcy petition with this Court on September 24, 2010, which is 91 or 92 calendar days after the transfer on June 25, depending on whether the petition date is counted. Defendant NJCB argues that the transfer was accordingly outside the preference period for a non-insider such as NJCB.8
The issue involves the application of Bankruptcy Rule 9006, which, as *465amended in 2009, provides, in pertinent part:
(a) Computing time
The following rules apply in computing any time period specified in these rules, in the Federal Rules of Civil Procedure, in any local rule or court order, or in any statute that does not specify a method of computing time.
(1) Period Stated in Days or a Longer Unit. When the period is stated in days or a longer unit of time:
(A) exclude the day of the event that triggers the period;
(B) count every day, including intermediate Saturdays, Sundays, and legal holidays; and
(C) include the last day of the period, but if the last day is a Saturday, Sunday, or legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or legal holiday. Fed. R. Bankr.P. 9006 (emphasis added).
If Bankruptcy Rule 9006 is applied as written, the challenged transfer took place within the 90-day look back period of § 547(b) of the Bankruptcy Code, as the petition was filed on September 24, 2010, and the 90th calendar day earlier (not counting the date of the chapter 11 petition) fell on Saturday, June 26, 2010. Under Rule 9006(a)(1)(C) “the period [would] continue[] to run” until the end of the following weekday counting backward, which was Friday, June 25. If Bankruptcy Rule 9006 is ignored, the transfer on June 25 took place either 91 or 92 calendar days before the petition date, depending on whether the date of the petition is counted.9
For their argument that Rule 9006 should not be applied, Defendants rely primarily on In re Greene, 223 F.3d 1064 (9th Cir.2000). There the majority first held that § 547(b)(4)(A) is not an “applicable statute” to which the rule applied, construing the rule as it read before the 2009 amendment. Id. at 1068-69.10 The Court then held that under the Rules Enabling Act, Rule 9006 could not increase the 90-day period for avoidance of a preferential transfer because such a construction would “abridge, enlarge, or modify [a] substantive right.” Id., quoting 28 U.S.C. § 2075. The Court reasoned that a litigant’s right to escape preference liability based on the premise that the transfer took place more than 90 calendar days before the bank*466ruptcy filing is substantive, and that the trustee’s rights under § 547(b)(4)(A) would be enlarged if the rule were applied. The third judge on the Greene panel disagreed on both points. He noted that Fed. R.Civ.P. 6(a) had been applied to enlarge the period for filing a lawsuit, notwithstanding the Rules Enabling Act, and noted that “procedural rules ‘may and often do affect the rights of litigants.’ ” 223 F.3d at 1074, quoting Hanna v. Plumer, 380 U.S. 460, 465, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965). He also found unpersuasive the majority’s contention that application of the rule in the preference period context would be unreasonable because no affirmative act is required when one counts backward, and thus a litigant need not be concerned that a court clerk’s office might be closed on the day on which a filing deadline fell.
Greene is contrary to a line of cases, including one in this court, that applied Bankruptcy Rule 9006 as it read before the 2009 Amendments to the calculation of the look-back period in a preference avoidance action. See Matter of Nelson Co., 959 F.2d 1260, 1266 (3d Cir.1992) (applying Rule 9006 to calculate the 90-day preference period by not counting the day of the “event”); Harbor Nat. Bank of Boston v. Sid Kumins, Inc., 696 F.2d 9 (1st Cir.1982) (applying Bankruptcy Rule 906(a), the predecessor to current Bankruptcy Rule 9006(a), in calculating the preference period); In re Levinson, 128 B.R. 365 (Bankr.S.D.N.Y.1991) (applying Bankruptcy Rule 9006 in determining whether the defendant-creditor received a voidable preference, where the transfer in question, a judgment lien against the debtor’s real estate, occurred on November 15,1990 and the chapter 13 petition was filed on February 13, 1991); In re J.A.S. Markets, Inc., 113 B.R. 193, 197-98 (Bankr.W.D.Pa.1990) (applying Rule 9006(a) to count backwards from the filing date; because the ninetieth day fell on a Saturday, the Court held that the preceding Friday was within the 90-day period).
No reported cases have been found that have applied Bankruptcy Rule 9006 since the 2009 Amendments, but it is relevant that part of the reasoning of the Greene majority is no longer valid. The Greene majority opinion was premised in part on the proposition that the preference law was not an “applicable statute” for purposes of former rule 9006, and it is no longer good law to that extent. The 2009 Amendment provides that Rule 9006 applies to the calculation of time “in any statute that does not specify a method of computing time” rather than in “any applicable statute.” The Advisory Note to the 2009 Amendment explains: “Under new subdivision (a)(1), all deadlines stated in days (no matter the length) are computed in the same way. The day of the event that triggers the deadline is not counted. All other days — including intermediate Saturdays, Sundays, and legal holidays— are counted, with only one exception: If the period ends on a Saturday, Sunday, or legal holiday, then the deadline falls on the next day that is not a Saturday, Sunday, or legal holiday.” Thus, to the extent that Greene was premised on the proposition that Rule 9006 enlarges substantive rights, the 2009 amendment explains that the Rule is intended to give substance to all methods of calculating time not otherwise specified in a statute. The preference law does not specify that “calendar days” be used in the calculation of the look-back period; § 547(b)(4) refers only to “days,” providing no method of calculation. Rule 9006 affects a substantial right of a party only if one inserts the word “calendar” in § 547(b)(4). Rule 9006 in effect instructs the court and the parties as to how to count days where the statute does not provide a method. This is the critical fac*467tor that establishes that the rule should be applied as written and that its application does not violate the Rules Enabling Act by altering “substantive rights.”
The Ninth Circuit’s holding in Greene also cannot be reconciled with a line of cases in this circuit construing Fed. R.Civ.P. 6(a).11 Bankruptcy Rule 9006 is nearly identical to Fed.R.Civ.P. 6, and it was so before the 2009 amendments; the 2009 amendments to both became effective on December 1, 2009. Courts in this circuit have frequently applied Fed.R.CivJP. 6(a)(1)(C) to hold events timely where the last day fell on a Saturday, Sunday, or legal holiday and the event occurred the following Monday. See Tiberio v. Allergy Asthma Immunology of Rochester, 664 F.3d 35, 37 (2d Cir.2011) (stating that Fed. R.Civ.P. 6 applies to the ninety-day period to file a complaint after receipt of an EEOC right-to-sue letter but that plaintiffs complaint fell outside this period); Taylor v. Fresh Direct, 2012 WL 6053712, *3-4 (S.D.N.Y. Dec. 5, 2012) (stating that the ninety-day period in which a complaint must be filed following receipt of an EEOC right-to-sue letter expired on January 3, 2012, where January 1 and January 2 were both legal holidays); Toliver v. City of New York, 2012 WL 6849720, *3 n. 10 (S.D.N.Y. Sept. 25, 2012) (stating that the 120-day period in which service must be completed expired on Monday, June 18, 2012, where the 120th day after the February 17, 2012 filing date fell on June 16, 2012, a Saturday). Other courts have similarly applied Rule 6(a)(1)(C) of the Federal Rules of Civil Procedure to hold actions mandated by a statute timely where the last day fell on a Saturday, Sunday, or legal holiday and the event occurred the following Monday. See, e.g., Edwards v. Bay State Milling Co., 519 Fed.Appx. 746, 748 (3d Cir.2013) (stating that the ninety-day period in which a complaint must be filed following receipt of an EEOC right-to-sue letter expired on Monday, April 5, 2010, where the 90th calendar day fell on Saturday, April 3, 2010).
Defendants finally contend that the foregoing cases and the provisions of Bankruptcy Rule 9006 and Fed.R.Civ.P. 6 should not apply in any event because the preference statute requires counting backwards. Defendants note that JLSC’s petition was filed on a weekday and the prior transfer took place on a Friday; in their view, the Debtor was not “prevented” from filing its petition by the fact that the “deadline” occurred on a weekend. Defendants’ argument is similar to that of the Greene majority, which reasoned that Bankruptcy Rule 9006 should not apply when calculating backward because the date of the filing in court (the bankruptcy petition) would not fall on a weekend or *468holiday. Defendants also note that if we count forward from the date of the NJCB Transfer on June 25, 2010, the 90-day period expired on Thursday, September 23, 2010, one day before JLSC filed its bankruptcy petition.
Defendants’ final argument is unpersuasive. It has long been settled that in calculating the relevant preference period a court should count backwards from the date of the petition. Matter of Nelson Co., 959 F.2d 1260, 1266-67 (3d Cir.1992); In re Antweil, 97 B.R. 63, 63 (Bankr.D.N.M.1988); In re Enterprise Fabricators, Inc., 36 B.R. 220, 221 (Bankr.M.D.Tenn.1983). The Advisory Committee Notes to the 2009 Amendments also state that a look-back period should be calculated in accordance with the Rule. See 2009 Advisory Committee Notes to Subdivision (a)(5) of Rule 9006 (“A backward-looking time period requires something to be done within a period of time before an event.”) As to the contention that Bankruptcy Rule 9006 should be applied only where the triggering event might be impeded by a weekend closure of a clerk’s office, it is relevant that when Bankruptcy Rule 9006 was amended in 2009, it was commonplace to file complaints electronically, a step that can be taken on a Saturday, Sunday or holiday. An original purpose of Fed.R.Civ.P. 6 and Bankruptcy Rule 9006 may have been related to court closure or the fact that some take the idea of a day of rest very seriously. Nevertheless, the Rule also serves to provide a uniform method of calculation of time periods that can be used and relied on where the statute does not specify that “days” means “calendar days.” To parse the Rule and only apply it when a court filing cannot be made because the deadline fell on a day other than a regular business day would deprive the rule of uniformity and certainty. Uniformity and certainty are critical in the application of any rule. Bankruptcy Rule 9006 should be applied as written, and Defendants’ motion to dismiss Count I for failure to satisfy § 547(b)(4) is denied.
Based on the foregoing, the Trustee has made out a prima facie case as to preference liability. Subsection (c) of § 547 sets forth the defenses to preference liability.12 The only statutory defenses raised by Defendants are under §§ 547(c)(1) and (4).13
vii. Whether the Transfer was a Contemporaneous Exchange for New Value
Section 547(c)(1) provides that a trustee (or debtor in possession) may not avoid a transfer “to the extent that such transfer was (A) intended by the debtor and the creditor to or for whose benefit *469such 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). NJCB argues that “in exchange for the NJCB Transfer, NJCB immediately credited JLSC’s account in the amount of $2 million.... That credit was a payment obligation of NJCB to JLSC.” The reasoning is specious. The NJCB Transfer resulted in collateralization of the JLI Loan by increasing the NJCB CD Account, security for the JLI Loan, by $2 million. JLSC did not receive “new value” in return for this collateralization. The NJCB transfer burdened JLSC’s property by purporting to make it collateral for the loan to JLI.
viii. Whether the Creditor Gave New Value to or For the Benefit of the Debtor after the Transfer
NJCB argues if the $2 million credit to the NJCB Account does not fall under § 547(c)(1), it must fall within § 547(c)(4), which provides a defense to a preference claim if the creditor gave new value to the debtor subsequent to the claimed preferential transfer. According to NJCB, JLSC received the benefit of a $2 million “credit” to its account. This contention is also without the slightest basis. As noted above, the preference in this case resulted from the further collateralization of the JLI Loan. No new value was given by NJCB in exchange for this encumbrance.
Based on the foregoing, the Trustee is entitled to summary judgment on his preference claim.
B. Fraudulent Conveyance Claim Under § 548
Section 548(a)(1) provides,
(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 debtor 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) 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; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer 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;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. 11 U.S.C. § 548(a)(1).
The Trustee argues that the transfer of $2 million from JLSC’s account at Hopewell Valley into the NJCB Account was a fraudulent conveyance because (1) JLSC *470had an interest in the funds, (2) the transfer occurred within two years before the date of the filing of the petition, (3) JLSC received less than reasonably equivalent value in exchange for the transfer, and (4) JLSC was insolvent at the time of the NJCB Transfer.
i. Whether JLSC had an Interest in the Property
For the reasons set forth above relating to the preference claim, JLSC had an interest in the property.
ii. Whether the Transfer Occurred Within Two Years of the Filing of the Petition
The transfer at issue occurred on June 25, 2010. PL’s Stmt, at ¶47; Counter Stmt, at ¶ 47. JLSC filed its bankruptcy petition on September 24, 2010. Pl.’s Stmt, at ¶ 4; Counter Stmt, at ¶ 4. There is no dispute that the transfer at issue occurred within two years of the filing of the bankruptcy petition,
iii.Whether JLSC Received Less than Reasonably Equivalent Value for the NJCB Transfer
“Reasonably equivalent value” is not defined in the Bankruptcy Code. “Value” is defined as “property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.” 11 U.S.C. § 548(d)(2)(A). Whether the debtor received “reasonably equivalent value” for the alleged fraudulent transfer is ordinarily a question of fact. In re Adelphia Comm. Corp., 2006 WL 687153 at *11 (Bankr.S.D.N.Y. Mar. 6, 2006) (citing Satriale v. Key Bank USA (In re Burry), 309 B.R. 130, 137 (Bankr.E.D.Pa.2004)). Where, however, a debtor receives no value for an alleged conveyance, a court may find that the transfer was fraudulent, as a matter of law, as long as the other elements in § 548 are satisfied. See Mellon Bank v. Official Comm. of Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 139, 149-150 (3d Cir.1996) (“[Bjefore determining whether the value was ‘reasonably equivalent’ to what the debtor gave up, the court must make an express factual determination as to whether the debtor received any value at all.”); Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 435 B.R. 866, 876 (Bankr.S.D.N.Y.2010) (grant of summary judgment); Nisselson v. Empyrean Inv. Fund, L.P. (In re MarketXT Holdings Corp.), 376 B.R. 390, 421 (Bankr.S.D.N.Y.2007) (“[s]ince no ‘value’ was received, the Debtor could not have received ‘reasonably equivalent value’ ”); Devon Mobile Commc’ns Liquidating Trust v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), No. 02-41729(CGM), 2006 WL 687153, at *11 (Bankr.S.D.N.Y. Mar. 6, 2006) (“In determining value, the Court makes a two fold inquiry: whether the debtor received any value at all in exchange for the transfer, i.e. any realizable commercial value as a result of the transaction, and whether that value was in fact reasonably equivalent....”)
The Trustee argues that the debt- or received no “value” for the transfer because JLSC was not obligated to NJCB under the JLI Loan or, stated differently, JLSC did not owe an antecedent debt to NJCB at the time of the NJCB Transfer. NJCB argues that JLSC did receive “value” in exchange for the NJCB Transfer in the form of (1) a credit to the NJCB Account for the amount of the transfer, (2) the third party benefit to JLI for collateralization and repayment of the JLI Loan, or (3) forbearance from NJCB’s exercising of its rights under the JLI Loan. They are both wrong. The Trustee is wrong because, as discussed above, JLSC received the proceeds of the original loan when they were downstreamed by JLI. In return, *471JLSC signed the open-ended NJCB CD Account agreement that the Bank could use its property and any further deposits to collateralize the loan.14
Defendants are wrong because they misstate — perhaps with the preference claim in mind — the value that JLSC received. The credit of the funds to JLSC’s account did not provide JLSC with any value because the alleged fraudulent conveyance was not the funds transfer but the pledge of the funds, making them subject to the NJCB lien.15 Similarly, Defendants do not have a fraudulent conveyance defense merely because there was a benefit to JLI. “[Transfers made or obligations incurred solely for the benefit of third parties do not furnish reasonably equivalent value, unless the debtor’s net worth is unaffected because it received a direct or indirect economic benefit from the transfer.” In re Globe Tanker Servs., Inc., 151 B.R. 23, 24-25 (Bankr.D.Conn.1993) (citations omitted).
Defendants also argue that JLSC received value from the Bank’s forbearance in collecting its debt. The record is unclear whether there was forbearance by NJCB on its collection of the JLI Loan. In some cases, forbearance can constitute “reasonably equivalent value” under § 548(d)(2)(A). See In re Silverman Laces, Inc., 2002 WL 31412465 (S.D.N.Y. Oct. 24, 2002) (holding that the debtor received “reasonably equivalent value” when the creditor waived its rights to pursue legal remedies for default and agreed to extend debtor’s obligations in return for a security interest in debtor’s inventory, ie., securing the antecedent debt); In re Pembroke Development Corp., 124 B.R. 398, 400-01 (Bankr.S.D.Fla.1991) (“In the case at hand, part of the consideration given by the creditor for the execution of the Modification Agreement was its forbearance of foreclosure on a loan that the creditor had made to Pembroke Charter Corporation.”). Here, however, forbearance on the JLI loan would only constitute “value” to JLI. There certainly was no forbearance on the application of JLSC’s $2 million deposit of additional collateral. It was applied to pay down the JLI debt within days of its deposit.
Nevertheless, there is a question of fact whether JLSC received reasonably equivalent value from the collateralization because its obligation dated from the time it arguably received some benefit from the transaction. There is often extensive fraudulent conveyance litigation when a subsidiary obligates itself on a debt of its parent. In this circuit, the leading case appears still to be Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979, 991-92 (2d Cir.1981), where the Court held that where an insolvent debtor pays another party’s debt, such transfer will be a constructive fraudulent conveyance unless the debtor receives an indirect benefit of reasonably equivalent value from the transfer.16 The key consideration is whether *472the debtor’s net worth has been preserved. Id. at 991; see also Mellon Bank, N.A. v. Metro Commc’ns, Inc., 945 F.2d 635, 646-47 (3d Cir.1991) (whether “the transaction conferred realizable commercial value on the debtor reasonably equivalent to the realizable commercial value of the assets transferred”); Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re TOUSA Inc.), 680 F.3d 1298, 1311 (11th Cir.2012).
A finding of reasonably equivalent value does not require an exact equivalent exchange of consideration. MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., 910 F.Supp. 913, 937 (S.D.N.Y.1995). However, the benefits the debtor receives from the transfer must approximate its expected costs. TOUSA, 680 F.3d at 1311 (voiding transfers of liens on their assets granted by subsidiaries to secure the debt of a parent corporation where the “costs of the transaction far outweighed any perceived benefits” and “the potential benefits were nowhere close to its expected costs”); see also Rubin, 661 F.2d at 991-92 (where the value of the benefit received by the debtor approximates the value of the property transferred by the debtor, the net effect on the debtor’s estate is insignificant). Defendants appear to argue that there was reasonably equivalent value merely because JLSC and JLI were able to continue in business. (Def. Br. at 15-18). That is not the law. The opportunity to avoid a default or bankruptcy may not necessarily constitute “reasonably equivalent value.” See TOUSA 680 F.3d at 1311-12 (concluding that under the facts of the case, the indirect benefit received by subsidiaries in avoiding bankruptcy did not constitute reasonably equivalent value to the liens they provided to collateralize the parent compa-njfs obligation, as it only delayed the inevitable).
Nevertheless, Defendants have raised a triable question of fact as to whether JLSC received reasonably equivalent value from the NJCB Transfer since JLSC may have received value from the JLI Loan, and it had agreed to encumber its property in support thereof. The value of indirect benefits is often difficult to quantify. Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d Cir.1991). When considering a value dependent upon a contingent event, a court takes into consideration the likelihood of that event occurring. Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L. Inc. (In re R.M.L., Inc), 92 F.3d 139, 148, 156 (3d Cir.1996) (concluding that reasonably equivalent value was not present because the record of the case showed that a commitment letter was so conditional that the chances of a loan closing were negligible). However, if at the time of a transfer there is a chance that the transfer “will generate a positive return,” value will be conferred. Id. at 152. Further, if that value approximates the value of what the debtor transferred, there will be reasonably equivalent value.
Plaintiffs motion for summary judgment on the fraudulent conveyance count must be denied for a further reason. Ordinarily collateralization of a legitimate debt is not a fraudulent conveyance. See Pfeifer v. Hudson Valley Bank, N.A. (In re Pfeifer), 2013 WL 3828509 (Bankr.S.D.N.Y. July 23, 2013) (citing cases). Section 548(d)(2)(A) specifically provides that value includes “securing of a present or antecedent debt of the debtor.” To the extent JLSC owed an antecedent debt to NJCB based on its receipt of the proceeds *473of the JLI Loan, there was some value to JLSC. Whether it constituted reasonably equivalent value cannot be determined on this record.
iv. JLSC was Insolvent at the Time of the NJCB Transfer
The Trustee must also prove that the debtor “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)(l)(B)(ii)(I).17 The Bankruptcy Code defines “insolvent” as the “financial condition such that the sum of [an] entity’s debts is greater than all of such entity’s property, at a fair valuation.” 11 U.S.C. § 101(32)(A). There is no presumption of insolvency in a fraudulent conveyance action as there is in the preference statute.
To prove insolvency, a trustee may rely on “balance sheets, financial statements, appraisals, expert reports, and other affirmative evidence.” In re Knippen, 355 B.R. 710, 722-23 (Bankr.N.D.Ill.2006), citing Freeland v. Enodis Corp. (In re Consol. Indus. Corp.), 292 B.R. 354, 360 (N.D.Ind.2002). If a trustee shows that the debtor was insolvent at a time subsequent to the date of the alleged fraudulent transfer, the trustee must also show that the debtors’ financial condition did not change during the interim period. See In re Crawford, 454 B.R. 262 (Bankr.D.Mass.2011); In re Kaylor Equip. Rental, Inc., 56 B.R. 58 (Bankr.E.D.Tenn.1985). In this case, the Trustee attempts to show that JLSC was insolvent on the NJCB Transfer date by projecting backwards from JLSC’s September 24, 2010 petition date to the June 25, 2010 NJCB Transfer date.
On the instant record, the Trastee has adequately shown that JLSC was insolvent on the petition date through bankruptcy schedules and the Debtor’s quarterly status reports. The schedules filed with JLSC’s petition represent that JLSC was insolvent on the petition date, with assets of $2,586,059.15 and liabilities of $7,873,934.75. The Trustee also references a June 18, 2010 letter from FINRA to JLSC indicating that, as of that date, JLSC had not shown that it was in compliance with net capital requirements, and that if it did not make such a showing, it would be required to cease conducting business except to liquidate transactions. The Trustee argues that, as a result, JLSC could not have increased its assets during the period between the NJCB Transfer on June 25, 2010, and the subsequent chapter 11 filing. However, the Trustee undermines his argument because he has also introduced reports that JLSC was required to file as a broker-dealer that demonstrate that JLSC lost over $1.8 million in June 2010 and over $4.5 million in July 2010. In those two months alone, the losses JLSC sustained are greater than the difference between JLSC’s assets and liabilities on the petition date.
Thus, from the evidence presented, it is not clear whether JLSC’s insolvency on the petition date was impacted by intervening events after the date of the FINRA letter. The Trustee is not entitled to summary judgment on the issue of insolvency and, if further proceedings are necessary, the Trustee must establish that JLSC was insolvent at the time of the NJCB Transfer or became insolvent as a result of it.
v. Defendants’ Defenses
Defendants also raise an additional defense to the fraudulent conveyance count. *474They allege that the NJCB Transfer was not a fraudulent transfer because “NJCB has a lien on the [NJCB Account] and all proceeds, replacements, and substitutes thereof at all relevant times.” The argument that the $2,000,000 was always “proceeds” of NJCB’s collateral is rejected for the reasons set forth above at p. 11.
In sum, the Trustee’s motion for summary judgment on his fraudulent conveyance claim under 11 U.S.C. § 548(a)(1)(B) is denied at this time as there are material issues of fact in dispute.
C. Fraudulent Conveyance Claim Under New York Debtor & Creditor Law §§ 270-76 and § 544 of the Bankruptcy Code
New York Debtor & Creditor Law § 278 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.” N.Y. Debt. & Cred. Law § 273 (McKinney). An estate representative can access this provision through § 544(b) of the Bankruptcy Code, which 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 is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.” 11 U.S.C. § 544(b)(1).
The Trustee argues that the Trustee may avoid the NJCB Transfer as a fraudulent transfer under the New York Debtor and Creditor Law but the questions of fact as to reasonably equivalent value (fair consideration under state law) and insolvency would also preclude summary judgment on this count. Further, as also discussed below, the Trustee has not established that New York law is controlling in the present case. In fact, in his filings and at the September 13, 2013 hearing, the Trustee argued that New York law does not control as far as the aiding and abetting claims are concerned. In any event, on this record it is also unclear why state law needs to be considered, inasmuch as all relevant events took place with the two-year look-back period provided under § 548.
The Trustee’s motion for summary judgment on the New York Debtor and Creditor Law claim is also denied at this time.
D. Aiding and Abetting Claim
Finally, in the Second Claim for Relief the Trustee charges NJCB and O’Donnell with aiding and abetting a breach of fiduciary duty. Complaint at ¶ 30-33. These Defendants move to dismiss this claim based upon the Wagoner rule, which provides that a bankruptcy trustee or estate representative does not have standing to sue third parties for damages where management of the debtor was itself primarily responsible for the misconduct. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.1991). “The rationale underlying the Wagoner rule derives from the fundamental principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation.” Wight v. BankAmerica Corporation, 219 F.3d 79, 86 (2d Cir.2000).
The Wagoner rule, however, is a rule of New York law, and the premise of the motion to dismiss Count II is that New York law and the Wagoner rule apply. The Trustee argues to the contrary and asserts that on a choice of law analysis, New York law would not apply. That raises the issue of the law that should apply to a claim for aiding and abetting a breach of fiduciary duty.
*475To perform a choice of law analysis, a bankruptcy court ordinarily applies the choice of law rules of the state in which it is located. In re Coudert Brothers LLP, 673 F.3d 180, 186-87 (2d Cir.2012); Enron Wind Energy Sys. v. Marathon Elec. Mfg. Corp. (In re Enron Corp.), 367 B.R. 384, 392 (Bankr.S.D.N.Y.2007). Under New York choice of law rules, courts only engage in a choice of law analysis when there is an actual conflict between the possibly applicable laws. Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir.1998). There is such a conflict in this case because the Wagoner rule has been rejected by many other jurisdictions. See e.g., Carr America Realty Corp. v. Nvidia Corp., 302 Fed.Appx. 514, 516 (9th Cir. Nov. 25, 2008) (“[T]he Wagoner rule has been much criticized and we decline to follow it.”); In re Senior Cottages of Am., LLC, 482 F.3d 997, 1003 (8th Cir.2007) (“Although Wagoner has been followed in the Second Circuit, it has also been criticized for characterizing an in pari delicto defense as a standing issue.”); Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 346-47 (3d Cir.2001), citing In re Dublin Secs., Inc., 133 F.3d 377, 380 (6th Cir.1997) (“An analysis of standing does not include an analysis of equitable defenses, such as in pari delicto. Whether a party has standing to bring claims and whether a party’s claims are barred by an equitable defense are two separate questions, to be addressed on their own terms.”).
Courts in this district, applying New York’s choice of law rules, differ on the issue of the law that should govern a claim for aiding and abetting a breach of fiduciary duty. Some courts hold that the law of the jurisdiction having the greatest interest in the litigation should govern. Granite Partners, L.P. v. Bear, Stearns Co. Inc., 17 F.Supp.2d 275, 306 (S.D.N.Y.1998); Solow v. Stone, 994 F.Supp. 173, 177 (S.D.N.Y.1998); Cromer Finance Ltd. v. Berger, 2003 WL 21436164, *8-9 (S.D.N.Y.2003); In re Adelphia Communications Corp., 365 B.R. 24, 40-41 (Bankr.S.D.N.Y.2007). Other courts have applied the internal affairs doctrine, reasoning that since the fiduciary duty of a director or officer of a corporation is established by the law of the state of incorporation, the duty of an accessory should be determined by the same legal principles. Walton v. Morgan Stanley & Co., Inc., 623 F.2d 796, 798 n. 3 (2d Cir.1980); Lachman v. Bell, 353 F.Supp. 37, 39-40 (S.D.N.Y.1972); Buckley v. Deloitte & Touche USA LLP, 2007 WL 1491403 at *13 (S.D.N.Y. May 22, 2007), citing Allied Irish Banks, P.L.C. v. Bank of Am., N.A., 2006 WL 278138, *12, 2006 U.S. Dist. LEXIS 4270, *35 (S.D.N.Y. Feb. 2, 2006); BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F.Supp.2d 123, 129 (S.D.N.Y.1999); Lou v. Belzberg, 728 F.Supp. 1010, 1023 (S.D.N.Y.1990).
In this case, it is not necessary to accept either line of authority because the parties do not contend that all of the possible candidates have accepted Wagoner, and it is impossible to determine, on the allegations of the Complaint (or the present record), which state law would apply. If we were to apply the law of the state having the greatest interest in the dispute, the facts of record are the following. The defendants on the count charging aiding and abetting a breach of fiduciary duty are NJCB and O’Donnell, the movants. At the Hearing the parties agreed that NJCB is located in New Jersey. All acts of O’Donnell occurred in New Jersey. JLSC operated out of thirteen offices; four of these offices were located in Florida, three were in New Jersey, and one was in New York. Rabinovici, the CEO of both Debtors, was apparently located in New York, and communications from Rabinovici were from New York.
*476On these facts, it is impossible to determine whether Rabinovici’s location in New York would make New York the jurisdiction with the greatest interest in the litigation. If New Jersey had the greater interest, the Wagoner rule would not apply, as New Jersey seems to have rejected it.18 Florida courts have held that the in pan delicto defense should not be determined on a motion to dismiss.19
As for the internal affairs doctrine, neither JLI nor JLSC was incorporated in New York. JLSC was incorporated in the State of Washington. JLI was incorporated in Florida. Wagoner seems also to have been rejected in the State of Washington.20
On a motion to dismiss, a court is required to accept the well-pleaded allegations of the complaint as true. Where a choice of law determination cannot be made based on the pleadings, the motion should be denied, without prejudice, leaving the material facts for later determination. Commerce and Indus. Ins. Co. v. U.S. Bank Nat. Ass’n, No. 07 Civ. 573KJGK) 2008 WL 4178474, *7-8 (S.D.N.Y. Sept. 3, 2008) (denying motion to dismiss complaint when record was unclear how choice of law analysis would be resolved but affording parties opportunity for further briefing on issue for later determination). The motion to dismiss Count II is, therefore, denied without prejudice.
Conclusion
For the foregoing reasons, the pending motions are decided as follows. Applying Bankruptcy Rule 9006 as written, the preference claim is timely, and the motion to dismiss Count V is denied. The Trustee has established all of the elements of a preferential transfer under § 547, and the Defendants have failed to establish any of the statutory defenses. The Trustee’s motion for summary judgment in his favor on Count V is, therefore, granted. There are questions of fact regarding the elements of the fraudulent conveyance claims under § 548 and State law, and the Trustee’s motion for summary judgment on Counts III and IV is denied at this time. On the record of this case, it is not possible to determine which State’s law would apply to the claim for aiding and abetting a fraudulent conveyance, therefore, the motion to dismiss Count II is denied, without prejudice.
Rabinovici’s motion to dismiss Count I against him alleging breach of fiduciary duty was premised on dismissal of the *477preference and fraudulent conveyance claims against other Defendants. Since these claims are not all dismissed, Rabino-vici’s motion is also denied, without prejudice.
The Trustee is directed to settle an order and judgment on five days’ notice.
. The purpose of the transaction is not entirely clear from the record, but it is assumed that it was engaged in for regulatory purposes.
. Both parties have briefed and argued the motion to dismiss as if the preference claim belongs only to Debtor JLSC, which owned the $2 million transferred to NJCB on June 25, 2010. Nevertheless, the Complaint seems to bring the preference claim on behalf of both Debtors. We do not reach the question whether JLI would have a preference claim on account of the June 25, 2010 transfer, when its debt to NJCB became a secured rather than an unsecured debt, and its liability to its subsidiary on account of the inter-company transfer increased dramatically (or the value of its investment in its subsidiary decreased accordingly). Moreover, we do not consider whether the application of the collateral to the JLI debt on June 28, 2010 was a preferential setoff under Bankruptcy Code § 553.
. $100,000 of JLSC’s funds had remained at NJCB throughout and continued to collateralize the debt. Nothing herein implies that the deposit of $100,000 was an avoidable preference, as it took place long before the 90-day look-back period.
. Moreover, under § 1111 (a) of the Bankruptcy Code, a party in NJCB’s position, with a non-recourse claim in a chapter 11 case against collateral posted by a debtor, becomes a recourse creditor with an allowable claim. See In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596, 599 (7th Cir.2013).
. Creditor is defined in § 101(10)(A) of the Bankruptcy Code as
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.
.The calculation of the 90-day period is discussed below.
. See also discussion below at section III-B.
. For an insider, the preference period is a year. 11 U.S.C. § 547(b)(4)(B).
. The setoff or application of the collateral to the debt took place later. We do not consider whether this took place within the 90-day look-back period of § 553(b) of the Bankruptcy Code.
. The version of the rule in effect when Greene was decided read as follows:
Computation. In computing any period of time prescribed or allowed by these rules, by the local rules, by order of court, or by any applicable statute, the day of the act, event or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday, or a legal holiday, or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the clerk’s office inaccessible, in which event the period runs until the end of the next day which is not one of the aforementioned days. When the period of time prescribed or allowed is less than 8 days, intermediate Saturdays, Sundays and legal holidays shall be excluded in the computation. As used in this rule and in Rule 5001(c), "legal holiday” includes New Year’s Day, Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, Christmas Day, and any other day appointed as a holiday by the President or the Congress of the United States, or by the state in which the bankruptcy court is held, (emphasis added).
. Rule 6 of the Federal Rules of Civil Procedure reads, in pertinent part:
(a) Computing Time. The following rules apply in computing any time period specified in these rules, in any local rule or court order, or in any statute that does not specify a method of computing time.
(1) Period Stated in Days or a Longer Unit. When the period is stated in days or a longer unit of time:
(A) exclude the day of the event that triggers the period;
(B) count every day, including intermediate Saturdays, Sundays, and legal holidays; and
(C)include the last day of the period, but if the last day is a Saturday, Sunday, or legal holiday, the period continues to run until the end of the next day that is not a Saturday, Sunday, or legal holiday. ...
(5) "Next Day” Defined. The "next day” is determined by continuing to count forward when the period is measured after an event and backward when measured before an event. Fed.R.Civ.P. Rule 6(a)(1), (5).
. 11 U.S.C. § 547(c) provides in pertinent part:
The trustee may not avoid under this section a transfer—
(1) to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;
(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 ... 11 U.S.C. § 547(c)(1), (2), (4).
. Defendants raised the ordinary course business defense of § 547(c)(2) in their answer but did not brief it. It is accordingly deemed waived. Guzman v. Macy’s Retail Holdings, Inc., 2010 WL 1222044 at *9 (S.D.N.Y.2010).
. If the Trastee were correct on his claim that JLSC received no value from the transfer, the Trustee would lose on his preference claim, as discussed above, but he would have at least a sound basis for his fraudulent conveyance claim.
. See discussion above at pp. 4, 15-16. On June 24, JLSC’s $2 million was held at Hopewell Valley free and clear of all liens. When the money was transferred into the NJCB Account on June 25, it was held as security for the JLI Loan. A credit to an account that collateralizes property for the benefit of a third party cannot be considered full value because of the name on the account.
.Although Rubin considered the term “fair consideration” under the Bankruptcy Act of 1898, its analysis has been followed in cases considering “reasonably equivalent value” under the Bankruptcy Code. Gen. Elec. Credit Corp. v. Murphy (In re Rodriguez), 895 F.2d 725, 727 n. 2 (11th Cir.1990). Rubin has *472been subjected to searching analysis in Richard Squire, Strategic Liability in the Corporate Group, 78 U. Chi. L.Rev. 605, 651-54 (2011), but is binding authority in this circuit.
. A plaintiff in a constructive fraudulent conveyance case can also prove that a debtor had unreasonably small capital or was illiquid at or as a result of the transfer, but the Trustee in this case has relied on insolvency.
. See NCP Litig. Trust v. KPMG LLP, 187 N.J. 353, 384, 901 A.2d 871 (N.J.2006) (holding that imputation of a corporate officer’s fraud to the corporation does not bar a claim against a negligent third-party, and determining that a bankruptcy representative who acts for innocent shareholders is entitled to pursue a claim against a negligent auditor, with the auditor then afforded the opportunity to raise a defense of comparative fault).
. See, e.g., World Capita Comm., Inc. v. Island Capital Mgmt. (In re Skyway Commc’ns Holding Corp.), 389 B.R. 801, 810-811 (Bankr.M.D.Fla.2008) (the in pari delicto defense is not suitable for disposition on a motion to dismiss because it is not "an absolute standard” to be applied in every situation, rather, the factual record must be developed to balance the parties’ relative fault); Welt v. Efloor Trade, LLC (In re Phoenix Diversified Inv. Corp.), 439 B.R. 231, 242 (Bankr.S.D.Fl.2010) (although seldom appropriate to determine on a motion to dismiss, the in pari delicto defense can be asserted if the facts establishing it "(1) are definitively ascertainable from the complaint and other allowable sources of information, and (2) suffice to establish the affirmative defense with certitude.” )
.In Golberg v. Sanglier, 96 Wash.2d 874, 883, 639 P.2d 1347 (Wash.1982), the Court said "a decision as to whether a party is in pan delicto relies on public policy considerations.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496895/ | Chapter 13
MEMORANDUM DECISION REGARDING FUNDS HELD BY STATE COURT APPOINTED RECEIVER
CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE
Before the Court are several motions containing many issues including a motion to avoid a hen against the debtor’s real property held by his condominium association, a motion to quantify the condominium association’s claim, a motion for turnover of the funds held by a state court appointed receiver, a motion to amend a so ordered stipulation between the debtor and the condominium association, and motions to approve fees of various professionals. As each of these issues relates to and is dependent upon the outcome of one or more of the others, the Court asked the parties to submit a joint statement containing agreed upon facts, issues, and evidence, as well as the order in which the parties wanted the issues to be decided. The Court now resolves the six questions contained in the parties joint statement.
Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate).
Background1
Prior to the filing a bankruptcy petition, Errol Forde (the “Debtor”) became the owner of two condominium units in Hill-crest Park (“Hillcrest”), Unit 1A and Unit 6G. All of the owners of units in Hillcrest are subject to the condominium declaration, by-laws, and house rules of Hillcrest (the “Condominium Documents”). Joint Statement, ECF No. 123, Ex’s. A-C. Prior to filing the case, the Debtor defaulted in paying obligations owed to Hillcrest under the Condominium Documents. As a result of the Debtor’s failure to pay obligations due under the Condominium Documents, Hillcrest filed three notices of lien relative to Unit 1A and two notices of lien relative to Unit 6G. Hillcrest subsequently filed a summons and complaint against the Debt- or and notices of pendency against each unit.
Hillcrest obtained an Order of Reference and Appointment of Receiver for each unit, which appointed Kenneth Gould as the Receiver (the “Receiver”). Hillcrest obtained a judgment of foreclosure against each unit, and a sale was scheduled for each unit.
On December 1, 2010, the Debtor filed a chapter 13 petition with this Court bearing case number 10-24487 (the “First Case”). The First Case was dismissed by order dated March 14, 2013. During the First Case, prior counsel for the Debtor and counsel for Hillcrest agreed that the Receiver would continue to collect rent pursuant to the State Court Orders of Reference. The Receiver collected rents during the First Case and continued to collect rents after the First Case was dismissed. Hillcrest did not make an application for an award of attorneys’ fees during the First Case. Upon dismissal of the First *513Case, Hillcrest filed an application in state court (the “State Court Action”) to obtain release of the proceeds held by the Receiver. Prior to the state court making a decision on the application, the Debtor filed a second bankruptcy case. The state court in the State Court Action did not award attorneys’ fees to Hillcrest as the action was stayed by the second bankruptcy case.
On June 7, 2013, the Debtor filed a chapter 13 petition with this Court (the “Second Case”). Upon the filing of the Second Case, the Debtor, through his counsel, filed a motion to extend the automatic stay. Hillcrest filed opposition to that motion. The Court granted the Debt- or an extension of the automatic stay and, in an effort to resolve the issues set forth herein, the parties executed a stipulation (“Stipulation”), which was intended to relieve the Receiver of his obligations under the state court orders, to segregate the funds being held by the Receiver and create a mechanism by which each party would make its claim, in this Court, to the funds held by the Receiver.
The Receiver collected $66,557.17 in total. Pursuant to the terms of the Stipulation, counsel for Hillcrest is holding the sum of $56,500.00, while counsel for Debt- or is holding the remaining $10,057.17.
To date, and throughout the First Case, the Debtor remained substantially current on the fees and assessments owed to Hill-crest under the Condominium Documents. The parties agree that the market analysis of Unit 1A, filed as exhibit M to the Joint Statement, and the market analysis of Unit 6G, filed as exhibit T to the Joint Statement, accurately represent the value of the condominium units and are to be employed for the purpose of valuation herein.
On August 12, 2013, Hillcrest filed an objection to confirmation of the Debtor’s chapter 13 plan. ECF No. 60. On August 15, 2013, Hillcrest filed a Motion to Quantify the Prepetition Claim of Hillcrest Park Condominium Group 5, and for an Order Paying a Prepetition Referee and Receiver, and Related Relief (“Motion to Quantify”). ECF No. 43. On November 14, 2013, Debtor filed a motion to avoid Hillcrest’s lien. ECF No. 73. On November 20, 2013, Debtor filed opposition to Hillcrest’s Motion to Quantify. ECF No. 81. On January 17, 2014, Hillcrest filed opposition to Debtor’s motion to avoid its lien. ECF No. 95. On January 20, 2014, Hillcrest filed a reply to Debtor’s opposition to its Motion to Quantify. ECF No. 96. On February 19, 2014, Debtor filed a response to both of Hillcrest’s motions. ECF No. 106.
At the hearing held on February 25, 2014, the Court requested that Debtor and Hillcrest create a joint document summarizing the facts, issues, and law relevant to each position. On March 14, 2014, the parties filed a joint statement and twenty-five exhibits (“Joint Statement”). Joint Statement, ECF No. 123.
Discussion
In the Joint Statement, the parties asked the Court to decide the following six issues:
1) To what extent did Hillcrest perfect its lien against the condominium units prior to the Debtor’s filing of his second chapter 13 case?
2) To the extent that Hillcrest holds perfected liens against the Debtor’s condominium units, are the statutory liens created thereby subject to being voided and reclassified as general unsecured debts under 11 U.S.C. §§ 506(a), (d), 1322(b) and Federal Rule of Bankruptcy Procedure 3007?
*5143) Does Hillcrest have a claim or a secured position against the money being held by the Receiver?
4) If Hillcrest does have an interest in the funds held by the Receiver, is that interest subordinate to the first mortgagee’s interest?
5) May Hillcrest now amend its claim to exceed the amount to which it was limited through the parties’ “So Ordered” stipulation of settlement filed with this Court?
6) Should the professionals be awarded the fees requested in Hillcrest’s application to quantify its claim?
The Court addresses each of these issues in order.
1. To what extent did Hillcrest perfect its lien against the condominium units prior to the Debtor’s filing of his second chapter 13 case?
On September 26, 2013, Hillcrest filed a claim in the sum of $63,003.82 as a secured claim. Proof of Claim, No. 13-36334, Claim No. 6-1. Debtor argues that the proof of claim is not supported by liens actually filed in Westchester County nor is it supported by the Judgment of Foreclosure entered by Westchester County Supreme Court. See Joint Statement 8. Debtor argues that for liens to exist they must be recorded in the county clerk’s office. Id. at 6. Debtor argues that Hill-crest is entitled only to the amount the liens that were part of the September 5, 2010 judgment: on Unit 1A, $10,267.32 plus interest at 9% per year from June 23, 2010 (totaling $11,754.00); and on Unit 6G, $8,335.15 plus interest at 9% per year from June 23, 2010 (totaling $9,575.97). Id. at 8. Debtor relies on New York Real Property Law §§ 339-z and 339-aa for this argument. Id. at 7.
Hillcrest argues that under New York Real Property Law § 339-z, the board of managers of a condominium has a lien for unpaid common charges. Id. at 9. The lien is not self-executing and a condominium must file a notice of lien in the appropriate recording offices, pursuant to Real Property Law § 339-aa. Id. Hillcrest argues that a lien so recorded is effective for six years after the date of filing and continues until all sums secured, with interest, have been paid. Id. at 9-10. Hillcrest argues that the condominium has a right to recover attorneys’ fees and related charges which are contemplated by the Condominium Documents in an action to foreclose for nonpayment of common charges. Id. at 11. Hillcrest’s right to recover such fees is found in the By-Laws. Id. at 10.
Hillcrest argues that once a condominium files a notice of lien, under New York Real Property Law § 339-aa, the lien extends to subsequently accruing unpaid common charges and accrued interest up to the time of sale or conveyance. Id. Hillcrest asserts that the liens in question here state that interest shall continue to accrue until payment is made in full and the lien is satisfied. Id. Hillcrest believes that its liens include the fees and costs for litigation in the Debtor’s First Case, the Westchester County case, and this Second Case. Id. at 11.
Under New York Real Property Law § 339-z, a condominium is given a lien for unpaid common charges:
The board of managers, on behalf of the unit owners, shall have a lien on each unit for the unpaid common charges thereof, together with interest thereon, prior to all other liens except only (i) liens for taxes on the unit in favor of any assessing unit, school district, special district, county or other taxing unit, (ii) all sums unpaid on a first mortgage of record, and (iii) all sums unpaid on a subordinate mortgage of record held by the New York job development authori*515ty, the New York state urban development corporation, the division of housing and community renewal, the housing trust fund corporation, the New York city housing development corporation, or in a city having a population of one million or more, the department of housing, preservation and development.
N.Y. Real Prop. Law § 339-z (McKinney’s 2014). The lien is not self-executing. In re Eatman, 182 B.R. 386, 391 (Bankr.S.D.N.Y.1995). To become effective, the condominium must file a notice of lien in the appropriate recording office. Id. New York Real Property law § 339-aa, which governs hens for common charges and their duration, states in relevant part:
The lien provided for in [§ 339-z] shall be effective from and after the filing in the office of the recording officer in which the declaration is filed a verified notice of hen ...; and shall continue in effect until all sums secured thereby, with the interest thereon, shall have been fully paid or until expiration six years from the date of filing, whichever occurs sooner.
N.Y. Real Prop. Law § 339-aa (McKinney’s 2014). Once the hen is filed, it extends to accruing unpaid common charges and accrued interest. See Eatman, 182 B.R. at 391; Washington Fed. Sav. & Loan Ass’n v. Schneider, 95 Misc.2d 924, 408 N.Y.S.2d 588, 590-591 (N.Y.Sup.Ct.1978).
New York Real Property Law defines “common charges” as “each unit’s proportionate share of the common expenses in accordance with its common interest.” N.Y. Real Prop. Law § 339-e(2) (McKinney’s 2014). “Common expenses” are defined by the statute as “(a) expenses of operation of the property, and (b) all sums designated common expenses by or pursuant to the provisions of this article, the declaration or the by-laws.” Id. § 339-e(4). Thus, common charges do not automatically include attorneys’ fees, unless provided in the declaration or the condominium’s by-laws.
Hillcrest relies on Article VI section 62 for its right to recover attorneys’ fees. Section 6 of Article VI only permits attorneys’ fees to be sought in an action to recover common charges; it does not make these fees “common expenses,” meaning attorneys’ fees do not automatically become part of Hillerest’s lien under New York Real Property Law § 339-aa. See Eatman, 182 B.R. at 391 (“[T]he lien does not, at least on its face, extend to attorney’s fees.”). Similarly, the by-laws do not define “late charges” as common expenses and, as such, late charges are not automatically part of Hillcrest’s lien.3
*516However, the Judgment of Foreclosure for each unit permits Hillcrest to assert these charges as part of its lien. Each Judgment of Foreclosure states:
the Referee shall pay to Plaintiff a sum equal to the aggregate of all other amounts which the Plaintiff have paid or may hereafter be required to pay to protect its lien or preserve the premises in accordance with the provisions of the condominium Declaration and By-Laws, and the same so paid shall be added to the sum otherwise due to the Plaintiff pursuant to the Plaintiffs claims herein and be deemed secured by said lien, Declaration and By-Laws as therein provided and adjudged a valid lien on the premises[.]
Joint Statement, Ex. K at 7, Ex. R at 7 (emphasis added). The Court is bound by the state court’s judgments of foreclosure, which permits Hillcrest to add to its liens “all other amounts” that Hillcrest “may hereafter be required to pay.” In re Jones, 2011 WL 917849, at * 5 (Bankr.D.Mass. Mar. 15, 2011) (“[Wjhere a judgment is not invalid — does not, for fraud or want of jurisdiction, lack the force of a judgment — a bankruptcy court may not reexamine the issues it determined.”) (citing Heiser v. Woodruff, 327 U.S. 726, 737, 66 S.Ct. 853, 90 L.Ed. 970 (1946)). Such amounts include attorneys’ fees incurred for litigation in the Debtor’s first and second bankruptcy. See Jones, 2011 WL 917849, at *7 (“In view of the fact that the Debtor’s bankruptcy filings interrupted the Trust’s attempt to enforce its lien by foreclosure, the Trust’s and the firm’s efforts to deal with the bankruptcy filing clearly do relate to enforcement of the lien.”). Thus, Hillcrest’s liens include post-judgment common charges and interest, plus any other expenses and attorneys’ fees that it subsequently incurred.
2. To the extent that Hillcrest holds perfected liens against the Debtor’s condominium units, are the statutory liens created thereby subject to being voided and reclassiñed as general unsecured debts under 11 U.S.C. §§ 506(a), (d), 1322(b) and Federal Rule of Bankruptcy Procedure 3007?
Debtor argues that Hillcrest’s statutory liens may be voided pursuant to 11 U.S.C. § 506. Joint Statement 11. Debt- or and Hillcrest have agreed that Unit 1A has an appraised value of $71,937.00 and a first mortgage lien in the amount of $251,402.93. Id. at 12. The parties have also agreed that Unit 6G has a value of $60,833.00 and a first mortgage of $152,476.90. Id. Debtor argues that these liens should be valued at $0 and that the anti-modification provision of 11 U.S.C. § 1322(b) does not apply as the liens are on non-residential property. Id. at 12-14. Debtor asks the Court to reclassify these liens as general unsecured claims.
Hillcrest argues that under New York Real Property law interest accrues until payment is made in full. Id. at 16-17. Hillcrest relies on In re Raymond, 129 B.R. 354 (Bankr.S.D.N.Y.1991) and argues that its statutory liens cannot be “stripped off’ under § 506(a) and (d). Id. at 16-18. Hillcrest also argues that allowing the strip off of its hen would be unfair to the 150 other condominium owners who are affected by this ruling. Id. at 18.
*517In In re Plummer, the court allowed a debtor to strip off a condo association’s lien and stated that
no matter the specific definitional category in which condominium assessment liens fall, there is no question but that an assessment lien is a charge against the condominium owner’s property to secure performance of the owner’s obligation to pay assessments. As such, condominium assessment liens squarely fall within the Bankruptcy Code’s definition of liens and are subject to the application of Bankruptcy Code section 506. To hold otherwise would be to give condominium associations a special status under the bankruptcy laws that is not set forth in the Bankruptcy Code.
484 B.R. 882, 889 (Bankr.M.D.Fla.2013); see also In re Aliu-Otokiti, 2013 WL 1163782, at *3 (Bankr.M.D.Fla. Mar. 19, 2013) (holding that a condo association’s second-priority lien was unsecured and subject to avoidance under § 506).
Hillcrest argues that In re Raymond is analogous to the case at hand. The Court disagrees. In Raymond, the court determined that condo association fees that accrued post-discharge were non-dischargea-ble. 129 B.R. 354, 365 (Bankr.S.D.N.Y.1991) (concluding that “Sutton did not violate the discharge injunction of Code § 524(d) through its attempt to collect a debt for condominium common charges, assessments and late fees which accrued subsequent to the Debtors’ discharge.”). Raymond did not address the facts at hand, as it was not interpreting § 506.
The Court agrees with the Plummer court’s interpretation of § 506, and believes that Hillcrest’s lien should be reclassified as unsecured under § 506. Section 506(d) is clear; it applies to “liens” generally and does not carve out an exception for statutory liens. 11 U.S.C. § 506(d) (“To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void_”). The anti-modification provision of § 1322(b)(2) does not apply here as these condominiums are not the Debtor’s principal residence. 11 U.S.C. § 1322(b)(2) (“[T]he plan may ... modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.... ”).
Hillcrest’s claim is wholly unsecured under § 506 and may be “stripped off.” The Court is not persuaded that its outcome should be modified due to the effect on other condominium owners. Those owners took the risk that another owner could file bankruptcy, just as every creditor does.
3. Does Hillcrest have a claim or a secured position against the money being held by the Receiver?
Debtor argues that Hillcrest does not have a security interest in the funds held by the Receiver as it failed to perfect its interest through the pending state court proceeding prior to the bankruptcy filing. Joint Statement 18. Debtor argues that the rents being held by the Receiver should be applied to the mortgage and real property taxes due and owing on the property. Id.
Hillcrest argues that its claim is secured against Debtor’s real property and against the funds collected by the Receiver. Id. at 24. Hillcrest relies on the orders appointing the Receiver and the Judgments of Foreclosure. Id.
Section 506(a) of the Bankruptcy Code “describes the extent to which an allowed claim is to be treated as a secured claim for purposes of the Code, as well as how a secured claim is to be valued” and is the starting point for any determination as to whether Hillcrest has a secured claim *518against funds held by the Receiver in this case. See Collier on Bankruptcy ¶ 506.01 (16th ed. 2014); 11 U.S.C. § 506. In determining whether a creditor holds a secured claim, a bankruptcy court should first decide whether the creditor is secured as a matter of nonbankruptcy law; in other words, the issue is whether Hillcrest has an in rem right under nonbankruptcy law to collect the funds held by the Receiver ahead of general unsecured creditors. Id.
The term “lien” as used in section 506(a) is defined broadly in section 101 to mean any “charge against or interest in property to secure payment of a debt or performance of an obligation.” Consistent with this definition, a claim may be a secured claim regardless of whether the relevant lien was created by agreement, statute, common law, equity, or judicial process.
See id. at ¶ 506.03.
Hillcrest relies on the “seventh decretal paragraph” of each of the Judgments of Foreclosure, which states:
[T]he Referee shall pay to Plaintiff a sum equal to the aggregate of all other amounts which the Plaintiff have paid or may hereafter be required to pay to protect its lien or preserve the premises in accordance with the provisions of the condominium Declaration and By-Laws, and the same so paid shall be added to the sum otherwise due to the Plaintiff pursuant to the Plaintiffs claims herein and be deemed secured by said lien, Declaration and By-Laws as therein provided and adjudged a valid lien on the premises.
Joint Statement, Ex. K, at 7, Éx. R, at 7 (emphasis added). These provisions do appear to give Hillcrest an interest in the funds above other general unsecured creditors. The state court’s decrees, in the Judgments of Foreclosure, do not condition the payment upon a sale, and the Court is bound by that determination. Id.; see Jones, 2011 WL 917849, at * 5 (“[Wjhere a judgment is not invalid — does not, for fraud or want of jurisdiction, lack the force of a judgment — a bankruptcy court may not reexamine the issues it determined.”) (citing Heiser v. Woodruff 327 U.S. 726, 737, 66 S.Ct. 853, 90 L.Ed. 970 (1946)). Even if there were conditions on the payment, Hillcrest’s lien would be inchoate and entitled to secured status. Vienna Park Props. v. United Postal Sav. Ass’n (In re Vienna Park Props.), 976 F.2d 106, 113 (2d Cir.1992). Hillcrest is secured in the funds held by the Receiver and is entitled to file a secured claim on that basis.
Hillcrest is not entitled to deduct its secured interest in the funds collected by the Receiver prior to turning them over to the estate. “Section 543(a) and (b) of the Bankruptcy Code mandates a ‘custodian’ to turn over to the bankruptcy trustee or debtor-in-possession any property of the debtor that is in the possession, custody or control of the non-bank custodian.”4 Dill v. Dime Sav. Bank, FSB (In re Dill), 163 B.R. 221, 225 (E.D.N.Y.1994). The section makes no mention of a receiver deducting amounts owed to creditors from the property in his possession.
The rents are most likely “cash collateral” and subject to § 363. In re Goode, 235 B.R. 584, 589 (Bankr.E.D.Tex.1999) (“Under the provisions of 11 U.S.C. § 1304(b), a Chapter 13 debtor engaged in business may exercise the powers of a trustee under § 363(c) of the Bankruptcy Code to seek authorization to utilize the cash collateral of a creditor. Because actual cash in *519hand is obviously of great value to a secured creditor, such a debtor is required to segregate and account for any cash collateral in his possession and is further prohibited from using such cash collateral in any manner, unless all secured creditors having an interest in such cash consent to such use or the court authorizes such use over the creditor’s objection, after notice and a hearing.”). The parties have not raised this issue and, as such, the Court will make no determination on whether the rents constitute cash collateral or whether the Debtor may use these funds. Any funds turned over by the Receiver shall be escrowed pending further determination of this Court.
4. If Hillcrest does have an interest in the funds held by the Receiver, is that interest subordinate to the first mortgagee’s interest?
The Judgments of Foreclosure do not subordinate Hillcrest’s interest in the funds to the first mortgagee’s interest. Joint Statement, Ex. K, at 8, Ex. R, at 8. This is consistent with the New York Real Property law, which subordinates a condominium’s lien for unpaid common charges against the unit to that of the first mortgage holder. See N.Y. Real Prop. Law § 339-z (McKinney’s 2014). The law makes no mention of the first mortgagee’s lien on rents collected by the Receiver. Id. In any case, the state court would have considered these issues in making its determination and could have ordered the Receiver to pay the first mortgage.
The Court is persuaded by U.S. Bank National Association v. Culver, in which a state court considered “whether the cost of the condominium common charges accruing while a foreclosure action is pending be paid without first applying the rents to the reduction of the first mortgage.” 2010 WL 2326598, at *1, 27 Misc.3d 1233(A), 911 N.Y.S.2d 697 (N.Y. Sup.Ct. June 8, 2010). In Culver, the board’s hen on the real property was “underwater” and would have been extinguished once a foreclosure sale was completed by the first mortgage holder. Id. To protect its rights, it sought appointment of a receiver of rents on the unit. Id. Ultimately, the court permitted appointment of the receiver over the opposition of the first mortgage holder and allowed the condo association to collect on its rents, despite the first mortgage lien. Id. at *2-*3.
The Court will enforce the judgment as written and will not subordinate Hillcrest’s security interest in the funds to the interests of the first mortgage holder. See Jones, 2011 WL 917849, at *5.
5. May Hillcrest now amend its claim to exceed the amount to which it was limited through the parties’ “So Ordered” stipulation of settlement fíled with this Court?
On August 1, 2013, the Court “so ordered” the Stipulation between Hillcrest and the Debtor. Joint Statement, Ex. D. The Stipulation states: ‘Whereas, Hill-crest Park represents that it will seek an application ... for a determination quantifying the amount sought by Hillcrest Park, including counsel fees, for obligations relating to both Investment Properties in a sum no greater than $50,000.00.” Id. at 3-4. Hillcrest moves to modify the Stipulation in order to file a proof of claim in the amount of $62,889.06 and asks the Court to quantify its claim in that amount. Joint Statement 34-36. Debtor argues that there are no grounds to vacate or modify the Stipulation. Id. at 31.
Hillcrest argues that it made a mistake in calculations of its numbers and should be permitted to correct its mistake. Id. at 35. Hillcrest argues that the miscalculation arises from a change in management *520and an incorrect computation of late charges and extraneous expenses. Id. Hillcrest’s treasurer is prepared to testify at an evidentiary hearing on this matter. Id. Hillcrest argues that this is the type of “mistake or inadvertence” contemplated by Federal Rule of Civil Procedure 60(b). Id.
A stipulation is an enforceable contract. See In re Royster Co., 132 B.R. 684, 687 (Bankr.S.D.N.Y.1991). Where the terms are unambiguous, the Court must enforce a stipulation as written. Id. Stipulations may be modified by Courts only where necessary to prevent a “manifest injustice.” Chem. Leaman Tank Lines, Inc. v. Aetna Cas. & Sur., 71 F.Supp.2d 394, 397-99 (D.N.J.1999) (“Indeed, if substantial evidence ... were all that was required to disregard it, the purpose of stipulations would be severely undercut. ... If a party could be relieved of a stipulation on a mere showing of substantial contrary evidence, litigants could not rely on stipulations of fact and would have to be fully prepared to put on their proof.”).
The result is no different under Federal Rule of Civil Procedure 60(b). As the Second Circuit has stated:
An argument based on hindsight regarding how the movant would have preferred to have argued its case does not provide grounds for Rule 60(b) relief, nor does the failure to interpose a defense that could have been presented earlier, nor does the failure to marshall [sic] all known facts....
Paddington Partners v. Bouchard, 34 F.3d 1132, 1147 (2d Cir.1994) (internal citations omitted). Hillcrest is limited to a maximum of $50,000 for its claim.
6. Should the professionals be awarded the fees requested in Hillcrest’s application to quantify its claim?
a) State Court Attorney
Hillcrest is seeking fees for its state court counsel, Fred G. Quagliato. Attached to the motion are his affirmation and time records. Joint Statement, Ex. W. Any fees awarded in the Judgments of Foreclosure are allowed to be included as part of Hillcrest’s proof of claim under the doctrine of full faith and credit and, as the Judgment of Foreclosure allowed Hillcrest to continue to accrue attorneys’ fees necessary to protect its lien, it follows that Hillcrest should be able to claim its prepetition attorneys’ fees as part of its secured claim so long as they are reasonable. See Kittel v. First Union Nat’l Bank (In re Kittel), 2002 WL 924619, at *6 (B.A.P. 10th Cir.2002) (“As to the Bank’s prepetition fees and expenses, the bankruptcy court rightly recognized and accorded full faith and credit to the previously-granted state court judgment, which granted to the Bank not only fees for the foreclosure case, but also fees that might prospectively be incurred in the defense of the Bank’s lien in a bankruptcy case.”).
The Court has already determined in, issue number one and number three supra, that Hillcrest is entitled to attorneys’ fees as part of its claim. The Court has also determined that such claim is limited to $50,000, pursuant to the Stipulation.
Debtor’s analysis pursuant to § 327 and § 330 is not relevant to this determination as the fees have previously been awarded by the state court. See In re Sun ’N Fun Waterpark LLC, 408 B.R. 361, 373 (B.A.P. 10th Cir.2009) (“Rule 2016 is inapplicable where a secured creditor is seeking recovery of prepetition fees.”). Hillcrest is entitled to include all of its pre-petition5 state *521court attorneys’ fees in its proof of claim as same were awarded by the state court pursuant to the Judgments of Foreclosure. Those fees that were incurred post-judgment may be reviewed for excessiveness as part of the claims allowance process.
b) Bankruptcy Attorney
Hillcrest is seeking fees for its bankruptcy counsel, Elizabeth Haas, in connection with the First and Second bankruptcy. The Court has already determined that Hillcrest is entitled to attorneys’ fees as part of its claim. For the same reasons stated in the above section, Hillcrest is entitled to pre-petition attorney’s fees for its bankruptcy counsel. These fees may only be challenged for excessiveness, duplication, etc., as part of the claims allowance process.
c) Receiver
Hillcrest is seeking an order approving fees for the Receiver in the amount of $5,285, plus reimbursement of actual and necessary out-of-pocket expenses in the amount of $204.06. Hillcrest is seeking to have these funds paid out of the funds collected by the Receiver, which are currently being escrowed. Debtor has objected to the reasonableness of this claim.
Receivers are compensated pursuant to § 543(c). Section 543(e)(2) states: “The court, after notice and a hearing, shall ... provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian.” If allowed, the Receiver’s fees and expenses are entitled to be treated as an administrative expense pursuant to § 503(b)(3)(E). It is clear from the statute that Receivers who are excused from service by the Bankruptcy Court are entitled to fees for pre-petition services. In re Youngquist, 501 B.R. 877, 888 (Bankr.D.Kan.2013). The only standard provided by § 543(c)(2) is reasonableness. The determination of what is reasonable is a determination of federal, not state, law. Id. at 891. The factors for determining reasonableness are similar to those used in considering other attorneys’ fees and include: the time and labor expended by the custodian; the benefit of the custodian’s services to the debtor and the estate; the size and/or complexity of the estate; what the custodian would have received if he or she had been appointed as trustee for the debtor, and the quality of the custodian’s services. Id. The Receiver may file a claim for his fees pursuant to § 503(b)(3)(E) and Debtor will have the opportunity to object.
d)Referee
The Referee, Barbara Lerman, is seeking $500 for each case, in accordance with the Westchester Supreme Court’s “Order of Reference and Appointment of Receiver of Rents.” Debtor does not appear to contest this fee. The Referee may file a claim for this amount.
Conclusion
For the foregoing reasons, the Court grants the following relief: as to issue number one, Hillcrest’s liens include post-judgment common charges and interest, plus any other expenses and attorneys’ fees that it subsequently incurred; as to issue number two, Hillcrest’s liens against Debtor’s real property may be voided; as to issue number three, Hillcrest has a claim secured by the money being held by the Receiver; as to issue number four, Hillcrest’s interest in the funds held by the Receiver is not subordinate to the first mortgage lien; as to issue number five, Hillcrest is bound by the stipulation and may not assert a claim above $50,000; as to issue number six, Hillerest’s claim may include attorneys’ fees subject to the limi*522tations provided for in this decision, the Receiver and Referee may file claims for their fees. Additionally, the funds held by the Receiver shall be turned over to the estate and held in escrow pending subsequent orders of this Court. Debtor shall settle an order consistent with this Memorandum Decision on counsel for Hillcrest.
. Unless otherwise indicated, all ECF citations are to In re Forde, No. 13-36334 and all facts without a citation are stipulated in the parties’ Joint Statement, ECF No. 123.
. This section, labeled "Default in Payment of Common Charges,” states:
In the event any Unit Owner shall fail to make prompt payment of his common charges, such Unit Owner shall be obligated to pay interest at the highest legal rate on such unpaid common charges computed from the due date thereof, together with all expenses, including attorneys' fees, paid or incurred by the Board of Managers in any proceeding brought to collect such unpaid Common Charges. The Board of Managers shall have the right and obligation to attempt to recover such common charges, together with interest thereon, and the expenses of the proceeding, including attorneys' fees, in an action to recover the same brought against such Unit Owner, or by foreclosure of the lien on such Unit granted by Section 339-1 of the Real Property Law of the State of New York, in the manner provided in Section 339-aa thereof.
Joint Statement, Ex B. at 14.
. The by-laws define common expenses as follows:
The common expenses shall include, without limitation, the cost of all insurance premiums on all policies of insurance required to be or which have been obtained by the *516Board of Managers pursuant to the provisions of Section 2 Article VI and the fees and disbursements of the Insurance Trustee.” By-laws Liber 7503 page 288. The by-laws go on to state that "[tjhe common expenses may also include such amounts as the Board of Managers may deem necessary for customary or extraordinary legal expenses incurred with respect to the Condominium Property.
Joint Statement, Ex. B at 11.
. There has been no assertion that the funds collected by the Receiver are not property of the Debtor and as such, the Court assumes without deciding that they are.
. For clarity's sake, the Court uses prepetition in this context to mean fees incurred prior to the filing of this bankruptcy case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8496896/ | Chapter 11
MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFF’S MOTION TO STRIKE AFFIRMATIVE DEFENSES
MARTIN GLENN, United States Bankruptcy Judge
Vittoria Conn (“Conn” or “Plaintiff’), on behalf of herself and other former employees of Dewey & LeBoeuf LLP (“Dewey”) in this certified class action adversary proceeding, seeks to impose WARN Act liability on the Dewey bankruptcy estate because Dewey terminated employment of the class without providing the 60 or 90 days’ advance notice required by federal and New York law, respectively. Dewey’s answer to the complaint asserts affirmative defenses including two that are the subject of the pending motion for partial summary judgment or, in the alternative, for judgment on the pleadings — -first, the “faltering company” exception to liability, and, second, the “unforeseeable circumstances” exception to liability (together, the “Exceptions”).1 Both defenses are explained below, but the statutory predicate for a WARN defendant to trigger either of these affirmative defenses is (1) shortened notice to employees (ie., “as much notice as is practicable” when less than the required 60 or 90 days’ notice is given) that (2) must include a “brief statement” explaining why these particular Exceptions to liability apply in the circumstances.
The Plaintiffs counsel argues that the shortened notice — including the required brief statement — must be in writing. Dewey’s counsel acknowledges that the shortened notice must be in writing but argues that the required brief statement need not be included in the written notice. It is undisputed here that a written notice was given, and that it did not include the required brief statement. Dewey argues that two separate letters plus oral statements made at one or more meetings when some but not all employees were present suffices to satisfy the notice requirement. The issue for the Court, therefore, is straight-forward: must the required brief statement be included in the written notice before a WARN Act defendant may rely on the faltering company or unforeseeable circumstances affirmative defenses? The Court concludes the answer is YES; the notice — including the required brief statement — must be in writing. Since the required brief statement was not included in the written notice that was given here, the motion for summary judgment or for judgment on the pleadings striking the first and second affirmative defenses is granted.
I. BACKGROUND
A. The Collapse of Dewey
The very public collapse of Dewey & LeBoeuf LLP in early-May 2012 resulted in the end of a storied law firm that traced its roots in the case of Dewey to 1909, and included at various times such legendary lawyers as Elihu Root (who served as the Secretary of War from 1899 until 1904 under Presidents McKinley and T.R. Roosevelt), John Harlan (who served as an Associate Justice of the U.S. Supreme Court from 1955 until 1971), Henry Friendly (who served as a judge on the U.S. Court of Appeals from 1959 until 1974), Emory Buckner (who served as U.S. Attorney for the Southern District of New York from 1925 until 1927), and Thomas *525Dewey (who served as Governor of New York from 1943 until 1954, and, twice, as a candidate for President of the United States).
In its most recent incarnation, the firm was the result of a merger in 2007 of two prominent New York-based firms, Dewey Ballantine LLP and LeBoeuf, Lamb, Green & MacRae LLP. At its peak, more than 1400 lawyers worked at the firm in 26 domestic and foreign offices. In the months leading up to its collapse, hundreds of partners and associates left the firm. But more than 550 employees (lawyers and non-lawyers) allegedly remained employed by the firm until their employment was terminated shortly before the chapter 11 bankruptcy filing on May 28, 2012.
Events that unfolded after the bankruptcy filing cast further light on the firm’s demise. Seven former employees, including the firm’s Director of Finance, have pled guilty to state criminal charges that allege systematic misstatements to partners and creditors about the firm’s financial performance dating back to 2007.2 Three of the most senior people at the firm have been indicted by a state grand jury, pled not guilty, and are awaiting disposition of very serious criminal charges.3 Disclosure of the Manhattan district attorney’s investigation (before any indictments) allegedly torpedoed the firm’s efforts to arrange a merger or continued financing of its operations, and resulted in the bankruptcy filing.
B. Dewey Provides Employees with Letters Warning of Layoffs
On May 4 and 10, 2012, Dewey sent letters to its employees warning that the firm’s precarious financial condition could result in employee layoffs. In pertinent parts, these letters provided:
May 4, 2012 Letter:
As you are undoubtedly aware, Dewey & LeBoeuf LLP has unexpectedly experienced a period of extraordinary difficulties in the last few days. Although we continue to pursue various avenues, it is possible that adverse developments could ultimately result in the closure of the firm, which would result in the termination of your employment.
Accordingly, in order to give you as much advance notice as possible, and to comply with any legal obligations that we may have, this letter will serve as conditional advance notice under the Federal Worker Adjustment Retraining and Notification Act (“WARN”), and all other similar applicable state and local laws, of the possibility that your employment may be terminated, and if that occurs your separation will be permanent, not temporary. In addition, you will not have any “bumping” rights (that is, the ability to use your seniority), to remain employed by displacing another employee from his or her job.
May 10, 2012 Letter.
As you know from the firm’s May 4, 2012 WARN Notice issued to all employees, Dewey & LeBoeuf is unexpectedly experiencing extraordinary difficulties. Unfortunately, the situation is deteriorating at a more rapid pace than was initially anticipated. Due to these adverse developments and the firm’s inability to find alternative solutions, this decision was not previously anticipated and notice of your termination was given as soon as practicable.
*526Therefore, this letter confirms that your employment with Dewey & LeBoeuf LLP will end effective May 15, 2012. Your termination is permanent. In addition, you will not have any “bumping” rights (the ability to use your seniority to remain employed by displacing another employee from his or her job).
Dewey’s counsel conceded during oral argument of the Motion that neither of these letters fully satisfied the requirements in the WARN Act applicable when employees receive less than 60 days’ notice of impending layoffs because the letters did not include the required brief statement.4
C. WARN Act Litigation Filed and Motion to Dismiss Denied
The Plaintiff filed this class action, alleging claims under the federal, New York, and California WARN Acts (defined below),5 in the bankruptcy court on May 29, 2012.6 The complaint alleges that the terminated employees were not provided statutorily-required 60 or 90 days’ advance notice that their employment might be terminated. Dewey moved to dismiss the complaint, but the Court denied the motion. See Conn v. Dewey & LeBoeuf LLP (In re Dewey & LeBoeuf LLP), 487 B.R. 169 (Bankr.S.D.N.Y.2018). Familiarity with that decision is assumed. In denying the motion to dismiss, the Court concluded that WARN Act plaintiffs may seek equitable relief, including “back pay as equitable restitutionary relief as opposed to damages.” Id. at 176.
D. Dewey Stipulated to Class Certification
After the Court denied the motion to dismiss, Dewey stipulated to the certification of a class, defined as “the Plaintiff and the other similarly situated employees of Debtor who worked at or reported to Debtor’s New York, and Washington D.C. Facilities and were terminated without cause on or before May 15, 2012 or within 30 days of that date, as the reasonably foreseeable consequence of the mass layoffs and/or plant closings order by Debtor on or about May 15, 2012, and who are affected employees, within the meaning of 29 U.S.C. § 2101(a)(5), the New York Labor Law § 860 et seq. [...], excluding those who timely file a request to be excluded from the Class.” Consent Order Granting Motion for Class Certification *527and Related Relief, dated March 8, 2013, ¶ 2 (ECF Doc. # 25).
E. Dewey Answers and Asserts Affirmative Defenses
Dewey answered the complaint and asserted affirmative defenses. (ECF Doc. # 26.) Only the first and second affirmative defenses are at issue in the current Motion.
Dewey’s first and second affirmative defenses provide as follows:
First Affirmative Defense
The Debtor states that it is not liable to Ms. Conn and/or other members of the putative class pursuant to either the Federal or New York WARN Acts, because it actively was seeking capital or business prior to the terminations and reasonably in good faith believed that advance notice would preclude its ability to obtain such capital or business, and this new capital or business would have allowed the Debtor to avoid or postpone a shutdown for a reasonable period. Sending WARN notices to the Debtor’s employees would have had the inevitable effect of consigning the enterprise to failure. These facts establish the statutory “faltering company” defense pursuant to both the Federal and New York WARN Acts. See 29 U.S.C. § 2102(b)(1); N.Y. Comp.Codes R. & Regs. tit. 12, § 921-6.2.
Second Affirmative Defense
The Debtor states that it is not liable to Ms. Conn and/or other members of the putative class pursuant to either the Federal or New York WARN Acts because while the Debtor was actively seeking capital and/or business opportunities (in the form of a business-preserving merger with another law firm) that would have stabilized its operations the press reported a criminal investigation of one of the Debtor’s Chairmen, who had until recently been the sole Chairman of the firm. These reports, which were true, lead [sic] the potential merger partner(s) to abandon discussions and consigned the enterprise to failure in short order. These facts constitute an “unforeseen business circumstance,” which is a statutory defense to this action pursuant to both the Federal and New York WARN Acts. See 29 U.S.C. § 2102(b)(2)(A); N.Y. Comp.Codes R. & Regs. tit. 12, § 921-6.3.
(Id. at 11-12.)
F. Plaintiffs Motion for Partial Summary Judgment or for Judgment on the Pleadings
The Plaintiff has now moved for partial summary judgment, or, in the alternative, for judgment on the pleadings, striking the first and second affirmative defenses— first, the so-called “faltering company” exception to WARN Act liability, 29 U.S.C. § 2102(b)(1) and N.Y. Comp.Codes R. & Regs. Tit. 12, § 921-6.2; and second, the “unforeseeable circumstances” exception to liability, 29 U.S.C. § 2102(b)(2)(A) and N.Y. Comp.Codes R. & Regs. Tit. 12, § 921-6.3. The Motion is supported by a declaration from the Plaintiffs attorney, Jack A. Raisner (ECF Doc. # 39-2), and the Plaintiff also attached (1) the adversary complaint filed against Dewey (ECF Doc. #39-7), (2) Dewey’s answer (ECF Doc. # 39-4), and (3) the May 4, 2012 and May 10, 2012 letters sent by Dewey to employees (ECF Doc. # # 39-5 and 39-6, respectively). Additionally, the Plaintiff filed a Statement of Undisputed Facts pursuant to Local Rule 7056-l(b) and (e). (ECF Doc. # 39-1.)
Dewey filed an opposition to the Motion (ECF Doc. # 40), along with (1) a response to the Plaintiffs statement of undisputed facts, which asserts additional undisputed facts (ECF Doc. # 42); (2) the Declaration *528of Stephen J. Horvath, a former Dewey partner (the “Horvath Dec!.,” ECF Doc. #41); (3) various e-mails and calendar appointments regarding meetings where Dewey informed employees that they would be terminated (ECF Doc. # # 41-1, 41-3-41-5); (4) lists of Dewey employees who were invited to and/or attended meetings regarding employee termination (ECF Doc. # # 41-2, 41-6); (5) e-mails sent to Dewey employees who did not attend meetings regarding employee termination (ECF Doc. # # 41-7-41-8); and (6) Dewey’s May 10, 2012 letter sent to employees regarding their termination (ECF Doc. # 41-9). The Plaintiff filed a Reply (ECF Doc. #44), supported by Declarations from the Plaintiff (ECF Doc. # 44-1) and from Alice Stuart, a former Dewey associate who attended one of Dewey’s employee termination meetings (ECF Doc. # 44-2).
The parties agree that Dewey provided written WARN notices less than sixty days before terminating the Plaintiff and other class members. But Dewey seeks to avail itself of the Exceptions to WARN Act liability that permit shortened notice. First, Dewey relies on the “faltering company” exception. This exception permits shortened notice by a company that was actively seeking capital or business that would have allowed the company to continue operating, and the company had a good faith basis for believing that issuing a WARN Act notice earlier would have doomed its attempt to obtain the necessary capital or business. 29 U.S.C. § 2102(b)(1); 12 N.Y.C.R.R. § 921-6.2
Second, Dewey relies on the “unforeseeable business circumstances” exception, which permits shortened notice when a company’s shutdown was caused by business circumstances that were not reasonably foreseeable when notice would have been required. 29 U.S.C. § 2102(b)(2)(A); 12 N.Y.C.R.R. § 921-6.3.
Both of these affirmative defenses are ordinarily very “fact intensive and are thus not conducive to the motion to dismiss stage.” Dewey, 487 B.R. at 175 (quoting Thielmann v. MF Global Holdings Ltd., 481 B.R. 268, 278 (Bankr.S.D.N.Y.2012)). But the necessary predicate for a defendant to be able to assert these affirmative defenses allowing for shortened notice is a showing that the shortened notice included a brief statement of the basis for the reduced notice period — the employer must “give as much notice as is practicable and at that time shall give a brief statement of the basis for reducing the notification period.” 29 U.S.C. § 2102(b)(3); see also 12 N.Y.C.R.R. § 921-6.6 (requiring shortened notice to be “accompanied by a statement of the basis for reducing the notice period”).7
As already noted, Dewey’s counsel concedes that the letters Dewey sent on May 10 and May 14 lacked a brief statement describing the reasons for the shortened notice that would support application of either of the two affirmative defenses. Dewey argues that it satisfied the brief statement requirement not by including the brief statement in the written WARN notices, but rather by supplementing those notices by inviting every employee to attend meetings where they would be told *529the reasons for their imminent termination. In his declaration, Stephen Hor-vath states that he personally attended most of those meetings, where he informed employees that the layoffs were necessary “because the Firm had been unsuccessful in the measures that had been attempted to continue its operations, either as it was or through a restructuring or merger, and [] Dewey had been unable to extend its credit facility and was overwhelmed in recent days by partner departures.” (Hor-vath Decl. ¶ 9.) As for the meetings he did not attend, Horvath states that to his knowledge, the firm’s director of finance communicated the same points to attendees.8 (Id.)
The Plaintiff responds that these in-person meetings were inadequate because the brief statement must be contained in the written WARN notice, not issued separately. Only 296 of the 429 class members attended these meetings (see Opp. at 4), and for that reason alone, the meetings failed as substitutes for actual written statements. Although Dewey sent supplemental e-mails to the employees who did not attend the meetings, those e-mails either did not mention the reasons for shortened notice (see Opp. Ex. G), or only stated that employees were being terminated because of the “firm’s financial situation and the recent loss of partners” (see id. Ex. H).
At the March 20, 2014 hearing on the Motion, Dewey’s counsel emphasized the practicality of its approach. (See Mar. 20, 2014 Tr. at 96:18-25.) As a large employer in the modern technology age, Dewey asserts that it used a method for communicating (electronic calendar invitations followed by meetings followed by e-mails) with its employees that was reasonably calculated to ensure delivery under the circumstances. Dewey argues that this method was preferable to inserting the brief statement in the written WARN notices because at the meetings, employees could ask questions about the reasons for shortened notice. (Id. at 23:24.) Thus, Dewey frames the central question on this Motion as: Does the Court “read this brief statement requirement as being something that, in a circumstance where there is an effort to deliver, where everyone is given the chance to sit in a room and hear and ask-follow up questions,”9 precludes Dewey from availing itself of the WARN Acts’ Exceptions?
On the other hand, the Plaintiffs counsel argues that that the WARN Acts are bright-line statutes. Since the statutes require a brief statement to be contained in the WARN notice itself, there is no room for an employer to improvise an alternative method for delivering the statement.
The Court concludes that Dewey’s “practicality” approach simply cannot trump the language of the statutes and the implementing regulations adopted by the Department of Labor. Requiring written notice that includes the brief statement does not preclude meetings with employees to further explain the circumstances and allow for employees to ask questions. The written notice may help to better frame the discussion.
II. DISCUSSION
A. Motion to Strike
Federal Rule of Civil Procedure 12(f), made applicable to this proceeding *530by Bankruptcy Rule 7012(b), allows the Court to strike an insufficient defense from a pleading. To prevail, the movant must meet the “standard on a 12(b)(6) motion to dismiss for failure to state a claim.” Cohen v. Elephant Wireless, Inc., No. 03 Civ. 4058(CBM), 2004 WL 1872421, at *2, 2004 U.S. Dist. LEXIS 16583, at *1 (S.D.N.Y. Aug. 19, 2004). The movant “must also show that it would be prejudiced if the defense were to remain in the pleading.” Id. at *2, 2004 U.S. Dist. LEXIS 16583 at *7-8. “Motions to strike are generally disfavored, and should be granted only when there is a strong reason for doing so.” In re Tronox, Inc., No. 09 Civ. 6220(SAS), 2010 WL 2835545, at *4, 2010 U.S. Dist. LEXIS 67664, at *13 (S.D.N.Y. June 28, 2010) (internal quotation marks omitted). And “courts are even more reluctant to grant a motion to strike an affirmative defense” before discovery has commenced. Cohen, 2004 WL 1872421 at *2, 2004 U.S. Dist. LEXIS 16583 at *8.
B. Summary Judgment
Federal Rule of Civil Procedure 56(a), made applicable by Bankruptcy Rule 7056, states that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” To successfully assert that a fact is not in dispute or cannot be disputed, a movant must
cit[e] to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or show[] that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
Fed.R.CivP. § 56(c)(1). Moreover, “[t]he party seeking summary judgment bears the burden of establishing that no genuine issue of material fact exists and that the undisputed facts establish [the movant’s] right to judgment as a matter of law.” Rodriguez v. City of New York, 72 F.3d 1051, 1060-61 (2d Cir.1995); see also McHale v. Boulder Capital LLC (In re The 1031 Tax Grp., LLC), 439 B.R. 47, 58 (Bankr.S.D.N.Y.2010).
C. WARN Exceptions
1. Statutory, Regulatory, and Interpretive Language
This Motion raises questions of statutory and regulatory interpretation. Specifically, the Court must decide whether Dewey, as a matter of law, is precluded from asserting that it qualifies for the Exceptions to WARN Act liability, discussed further below. When interpreting these Exceptions, the Court must construe the Exceptions narrowly because the Acts are remedial. See Local Union 7107 v. Clinchfield Coal Co., 124 F.3d 639, 640 (4th Cir.1997) (explaining that exceptions to remedial legislation such as the WARN Act are construed narrowly).
As a starting point, though, the Court must examine what the WARN Acts normally require of employers. Section 2102 of the Federal WARN Act is titled “Notice required before plant closings and mass layoffs.” 29 U.S.C. § 2102. The very first provision requires an employer to provide 60-days’ written notice of a plant closing or mass layoff. Id. § 2102(a) (emphasis added). The next subsection — which governs the Exceptions in dispute — does not alter the form or type of notice that must be given.10 That subsection explains when *531a shortened notice period is acceptable and provides that when giving shortened notice, an employer must still give “as much notice as is practicable and at that time shall give a brief statement of the basis for reducing the notification period.” Id. § 2102(b)(3). Nothing in subsection (b) indicates that shortened notice with the brief statement may be delivered in a means other than writing. The N.Y. WARN Act contains similar provisions, but requires 90-days’ notice. N.Y. Lab. L. § 860, et seq. Thus, the statutory language indicates that to qualify for the Exceptions, the employer must deliver written WARN notice.
In addition to the statutory language, the federal WARN regulations (the “Regulations”) — which implement the Federal WARN Act — further describe WARN notices. See 20 C.F.R. § 639.1(b) (“These regulations establish basic definitions and rules for giving notice, implementing the provisions of WARN.”). Regulation 639.7 establishes the required contents of WARN notices and provides that the notice must be “written in language understandable to the employees.... ” 20 C.F.R. § 639.7 (emphasis added). Regulation 639.7 does not differentiate between the 60-day notice or shortened notice, so the natural conclusion is that even shortened notice must be written in language understandable to employees.
Dewey concedes that even shortened WARN notices must be written; Dewey only contends that the requisite brief statement may be delivered separately from the shortened notice, by means other than writing. Dewey seizes on the fact that 29 U.S.C. § 2102(b), which governs the WARN Exceptions, does not explicitly require the brief statement to be in writing11 and does not explicitly require the brief statement to appear in the WARN notice itself.12 The Plaintiff takes the opposite position, arguing that the brief statement must be written and must be included with the written WARN notice.
To determine whether the brief statement must be contained in the written WARN notice, the Court again turns to the language of the statutes and regulations. First, both WARN Acts establish that employers giving shortened notice must give “as much notice as is practicable and at that time shall” give “a brief statement of the basis for reducing the notification period.” 29 U.S.C. § 2102(b)(3); N.Y. Lab. L. § 860-c(2). The statutes do not say that the brief statement may be given around the time of the shortened notice, or that the statement may be delivered separately from the shortened notice. See Sides v. Macon Cnty. Greyhound Park, Inc., 725 F.3d 1276 (11th Cir.2013) (“ ‘At that time’ implies a concrete point at which the employer actually gives ‘notice.’ ”) (emphasis in original). The Court must afford the term “at that time” its plain meaning. See In re D.F., 70 A.3d 240, 243 (D.C.2013) (“The primary and general rule of statutory [or regulatory] construction is that the intent of the lawmaker is to be found in the plain language ....”) (internal quotation marks omitted).
Moreover, Regulation 639.9, which governs shortened notice, provides that an *532“employer must, at the time [shortened] notice is actually given, provide a brief statement of the reason for reducing the notification period, in addition to the other elements set out in § 639.7.” 20 C.F.R. § 639.9 (emphasis added). The only sensible reading of Regulation 639.9 is that a WARN notice delivered on shortened time must contain (1) the brief statement, and (2) all of the other elements required by regulation 639.7. This comports with the plain meaning of the regulatory language. See In re D.F., 70 A.3d at 243 (“Statutory or regulatory construction begins with the plain language of the statute or regulation.”) (internal quotation marks omitted).
Still other sources indicate that WARN notices delivered on shortened time must be written and must contain the brief statement. In the Federal Register, the Department of Labor (the “DOL”) gave a “section-by-section analysis of the regulations and [public] comments.” See 53 Fed.Reg. 48884-01 (Dec. 2, 1988). When describing shortened notice, the DOL explained that “a brief statement of the basis for reducing the notification period should accompany the other elements required in the notice under the regulations.” Id. (emphasis added). In a later entry, the DOL explained that the WARN Exceptions should be construed narrowly, and when invoking an exception, an employer must “give notice containing a brief statement of the reason” for shortened notice. 54 Fed.Reg. 16042-01 (Apr. 20, 1989) (emphasis added). The DOL’s interpretation of the WARN Regulations as requiring the WARN notice to contain the brief statement is entitled to a high degree of deference. Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997) (holding that an agency’s interpretation of its own regulation is “controlling” unless “plainly erroneous or inconsistent with the regulation”).
Taken together, the statutory, regulatory, and interpretive content all direct an employer delivering shortened WARN notice to provide the brief statement in that notice itself. Dewey opted not to insert the brief statement in the written WARN notices, so summary judgment in favor of the Plaintiff is proper. See Grimmer v. Lord Day & Lord, 937 F.Supp. 255, 256 (S.D.N.Y.1996) (granting plaintiff summary judgment on affirmative defenses due to inadequate brief statement); see also In re Tweeter Opco, Inc., 453 B.R. 534, 546-47 (Bankr.D.Del.2011) (granting plaintiff summary judgment where defendant did not provide adequate brief statements in shortened WARN notices).
2. Policy Considerations
Requiring shortened WARN notice to be written and to contain the brief statement adheres to the WARN Acts’ legislative scheme. The Federal WARN Act “draws a lot of bright lines; it is really nothing but lines.” Phason v. Meridian Rail Corp., 479 F.3d 527 (7th Cir.2007) (emphasis in original). Those bright lines protect workers and their families by ensuring that they can properly prepare for the loss of employment and need to find new work. See 20 C.F.R. 639.1 (explaining the purposes and benefits of the Federal WARN Act). Here, the bright lines ensure that an employer cannot qualify for one of the WARN Exceptions without first giving employees a written WARN notice that contains all of the necessary information required by the statute, including the brief statement. This prevents information from trickling out in piecemeal fashion or in a manner that may not reach all employees.
Dewey argues that because the WARN Exceptions deal with extenuating circumstances, the Court may condone delivery of WARN notices and brief statements by means other than writing so long as those *533means were practicable under the circumstances. In support, Dewey cites Richards v. Advanced Accessory Systems, LLC (In re Advanced Accessory Systems, LLC), 443 B.R. 756, 767-68 (Bankr.E.D.Mich.2011), where a bankruptcy court found that a company qualified for the “unforeseeable business circumstances” exception even though it did not provide any written notice at all, let alone a written brief statement. The company relied on employee meetings instead. Id. In that case, the court found that the employer was only required to give notice that was “practicable under the circumstances,” and given the company’s swift demise, meetings in lieu of written notice were practicable. Id. at 767. Requiring written notice in extreme and dire circumstances would be “nonsensical” according to the Advanced Accessory court. Id.
But the Advanced Accessory court was not confronted with a case where a significant number of employees did not attend the meetings where the brief statements were purportedly delivered. See id. at 761. The Advanced Accessory court explained that, upon learning of the business’s inability to continue operating, the employer “held meetings at each of [its] facilities” to notify employees of the imminent layoffs, and “[a]t the meetings, [the employer] explained the reasons for shortened notice.” Id. The Advanced Accessory court did not address any allegations that a substantial group of the affected employees never received the required brief statements. The facts in Advanced Accessory differ significantly from those here.
Beyond this distinction, the Court respectfully disagrees with Advanced Accessory. That court addressed the plaintiffs’ curious argument that because the defendant did not provide 60-days’ written notice, it could not avail itself of one of the WARN Exceptions. Id. at 767. The court properly rejected that argument because imposing the 60-days’ notice requirement for shortened notice is nonsensical. Still, though, the Advanced Accessory court never addressed why shortened notice did not also fall under the written notice requirement, and instead declared that an employer must only do “whatever is practicable under the circumstances.” Id. But eliminating the written notice requirement altogether contradicts the WARN Regulations and existing caselaw in this district. Regulation 639.7 requires WARN notices to be “written in language understandable to the employees-” 20 C.F.R. § 639.7 (emphasis added). Moreover, Regulation 639.9 provides that shortened notice may even be given “after the fact,” so the Court finds no basis to conclude that an employer can disregard the written notice requirement altogether. 20 C.F.R. § 639.9. Even under the most extenuating circumstances, an employer can still deliver written notice considering that it may do so after the fact. Moreover, one court in this district explicitly found that “the statute and regulations clearly provide that an employer cannot invoke either [Exception without giving some written WARN notice.” Barnett v. Jamesway Corp. (In re Jamesway Corp.), 235 B.R. 329, 342 (Bankr.S.D.N.Y.1999) (emphasis added). The Court concludes that even under dire circumstances, employers must deliver written WARN notices containing the necessary brief statements to qualify for the WARN Exceptions.
III. CONCLUSION
Dewey provided written WARN notices on shortened time. Those notices did not contain the necessary brief statements for Dewey to satisfy the WARN Exceptions. Although Dewey attempted to supplement the WARN notices with firmwide meetings delivering the brief statements, the Court *534rejects the argument that those meetings complied with the WARN Acts’ provisions. The facts here demonstrate why an employer should not be permitted to deliver the brief statements separately: not all class members attended the meetings, and what was said is subject to dispute. Dewey’s position raises the type of post-hoc, litigation-oriented argument that the WARN Acts’ bright lines are intended to avoid.
The WARN Exceptions are to be construed narrowly, and when giving shortened WARN notice, an employer must deliver the required brief statement in the written WARN notice itself.
The Court concludes that Dewey does not qualify for the WARN Exceptions. The Plaintiffs Motion is therefore GRANTED, and Dewey’s first and second affirmative defenses are STRICKEN.
IT IS SO ORDERED.
. See Plaintiffs Motion to Strike Affirmative Defenses or, Alternatively, for Partial Summary Judgment (the ''Motion,” Adv. Pro. No. 12-01672, ECF Doc. #39). Unless otherwise noted, all references to the docket are to Adv. Pro. No. 12-01672.
. Ashby Jones, Guilty Pleas of Dewey Staff Detail the Alleged Fraud, Wall St. J., Mar. 29, 2014, at B3.
. Jennifer Smith and Ashby Jones, Fallen Law Firm's Leaders Are Indicted, Wall St. J., Mar. 7, 2014, at Bl.
. See Mar. 20, 2014 Tr. at 94:5-10 (“[The Court:] Do you agree that neither the May 4th nor the May 10th letters satisfy ... the notice requirements? MR. DAVIS: They do not satisfy the brief statement requirement as articulated in [Grimmer v. Lord Day & Lord, 937 F.Supp. 255, 256 (S.D.N.Y.1996)
. For purposes of this opinion, "WARN Acts” refers to the federal Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et seq. (the “Federal Warn Act”), and the New York Worker Adjustment and Retraining Notification Act, New York Labor Law § 860 et seq. (the "NY WARN Act”). While the complaint included a cause of action for violation of California Labor Code § 1400 et seq. (the "CAL WARN Act”), the certified class makes no reference to a CAL WARN Act claim. The Debtor’s answer denied that it employed 75 employees in its California office at the time of the layoffs, which is the required number of employees to trigger application of the CAL WARN Act. The focus of the current Motion is the Plaintiff's effort to strike affirmative defenses under the Federal and N.Y. WARN Acts. It appears that the Plaintiff has abandoned any claim under the CAL WARN Act, but it is unnecessary for purposes of the pending Motion to resolve this question.
.On May 10, 2012 — -three days after the plaintiff Conn was fired — she filed a WARN Act class action in the U.S. District Court for the Southern District of New York. After the bankruptcy petition was filed, Conn filed this adversary proceeding in the bankruptcy court.
. In light of the indictments and guilty pleas of Dewey employees it may stretch credulity to argue that Dewey could satisfy the "good faith” requirement for the faltering company defense, or that Dewey’s collapse was the result of unforeseeable business circumstances. Those questions need not be reached because the Court concludes that Dewey did not satisfy the notice requirements to trigger possible application of either affirmative defense.
. Because the Court concludes that the written notices must contain the required brief statement, which they did not, it is unnecessary to decide whether Horvath’s alleged oral statements would have constituted a brief statement sufficient to withstand the present Motion if they had been included in the written notices.
. See Mar. 20, 2014 Tr. at 98:18-99:2.
. Section 2102(b)(2)(B) dispenses with the notice requirement altogether in the event of *531a natural disaster, but that subsection is not at issue here.
. See Opp. at 9 (“[T]he statute unequivocally requires the WARN Act notice (but not the "brief statement”) be written. If Congress intended that the statement be in writing ... it would have said so.”).
. See id. ("Neither the statute nor the regulations say that the “brief statement" must be included in the WARN Act notice if an entity relies on one of the exemptions set forth in 29 U.S.C. § 2102(b).”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497058/ | OPINION
GEORGE W. EMERSON, JR., Bankruptcy Judge.
The issue before the Panel on appeal is whether the bankruptcy court erred in avoiding the transfer of $74,102.60 to 1st National Cash Refund pursuant to 11 U.S.C. § 549 and ordering recovery of transferred property from 1st National Cash Refund and Carl Woodford pursuant to 11 U.S.C. § 550. After reviewing the record, the parties’ briefs, and applicable law, the Panel concludes that the bankruptcy court did not abuse its discretion in determining that the statutes of limitation found in 11 U.S.C. § 549 and 11 U.S.C. § 550 were equitably tolled and that the bankruptcy court properly found that the trustee had power to avoid and recover the transferred property. Accordingly, for the reasons stated in the bankruptcy court’s thorough and well-reasoned opinion entered on September 9, 2013, Ruth A. Slone v. Jason E. Anderson, et al., (In re Anderson), Ch. 7 Case No. 10-30064, Adv. No. 10-3361 (Bankr.S.D.Ohio 2013) ECF No. 97, we affirm. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497060/ | MEMORANDUM OPINION
TRACEY N. WISE, Bankruptcy Judge.
This case is about a lake house, and the limited liability company that Debtors formed with two family friends to purchase and manage it. Prior to their bankruptcy, Debtors Mr. and Mrs. Gleason and the VonLehmans formed an LLC to purchase, manage, and share a lake house in Sardinia, Ohio. Debtors contributed a little over half of the lake house’s purchase price, but they financed their contribution with the assumption of a mortgage that the Von-*116Lehmans obtained in their own names. Debtors continued to make all payments on the loan to the present day. However, some time after Debtors filed for bankruptcy, the VonLehmans decided the lake house’s upkeep costs were too high and proposed to sell. Debtors refused to acquiesce in a sale to anyone outside their extended family but couldn’t find a willing family buyer. Unable to settle their differences with the Debtors, the VonLeh-mans took to state court, seeking a judgment that under an Ohio LLC membership statute, Debtors lost their voting rights in the LLC when they filed for bankruptcy. Over Debtors’ arguments that Section 541 of the Bankruptcy Code preempted the Ohio statute, the state court granted the VonLehmans their requested relief.
Upon the state court’s entry of judgment, Debtors took two actions in this Court. First, they filed a motion for contempt [Bk. Doc. 48]1 (the “Contempt Motion”) against the VonLehmans, contending, alternatively, that the filing of the state court action directly violated Debtors’ discharge by seeking to divest Debtors of property which was abandoned to them at the close of their case, and that the VonLehmans’ state court action indirectly violated Debtors’ discharge because it was brought for the purpose of coercing the Debtors to pay their discharged debt on the loan they assumed. Second, they filed an adversary proceeding against the Von-Lehmans, seeking a declaratory judgment that Section 541 preempts Ohio’s LLC membership statute, contrary to the decision of the state court.
Debtors’ related actions fail- for related reasons. The discharge order discharges debts. It does not shield debtors from in rem actions brought to determine the status of property, even if that property were abandoned to debtors in their bankruptcy case. The VonLehmans’ state court action, therefore, did not directly violate the discharge. Nor did it indirectly violate the discharge. On the facts stipulated to by the parties, the VonLehmans brought the state court action for one purpose: to effectuate a sale in which the Debtors would not acquiesce. Hence, Debtors’ motion for contempt fails.
Debtors’ adversary proceeding also fails. Debtors, in essence, request the Court to review and reverse the state court’s decision that Section 541 does not preempt Ohio’s LLC membership law. Debtors do not deny that normally such a request would be barred by the Rooker-Feldman doctrine, which forbids lower federal courts from reviewing state court judgments. But, they contend, their adversary proceeding falls within an exception to Rooker-Feldman that allows this Court to correct state court judgments that modify the discharge. That argument fails because, as explained below, Debtors’ discharge was not modified by the state court. The state court action concerned Debtors’ property rights — a matter on which the discharge is silent. Because no exception to Rooker-Feldman applies, this Court lacks subject-matter jurisdiction over Debtors’ adversary proceeding and will dismiss it.
I. Facts and Procedural History.
In 2006, the Debtors and the VonLeh-mans formed a limited liability company, GVL Lake Properties, LLC (“GVL”). GVL purchased a lake house with an adjoining lot on Lake Waynoka, in Sardinia, Ohio, from Debtor Margaret Gleason and her siblings. Under GVL’s operating agreement, the initial equity in GVL was *117divided equally between the VonLehmans and the Debtors. The VonLehmans obtained a loan from Fifth Third Bank to purchase the lake house, which GVL assumed. In turn, the Debtors’ capital contribution in GVL was financed by their assumption of the Fifth Third loan. Debtors were not personally liable to Fifth Third on the loan, but in GVL’s operating agreement, they agreed to make all payments on, and pay all fees and expenses associated with, the loan (the “Assumed Loan”). Additionally, the operating agreement provided for the payment of the lake house’s maintenance costs, splitting them equally between the Debtors and the Von-Lehmans, and gave both couples equal voting rights in the LLC.
On October 17, 2011, Debtors filed a Chapter 7 petition for bankruptcy. In their schedules, they listed the Assumed Loan as an unsecured debt. The VonLeh-mans did not file a proof of claim in Debtors’ bankruptcy case, and on April 25, 2012, the Debtors received a discharge. Debtors, however, continued to pay the discharged Assumed Loan, and as of March 7, 2014, had not missed a payment on the loan.
In January 2012, the VonLehmans told the Debtors that they could no longer justify the expense of maintaining the lake house, and wanted to unwind GVL. For several months, the Debtors and the Von-Lehmans discussed selling the lake house to the Debtors’ daughter and son-in-law, at a price of $415,000. The VonLehmans, in spite of having received appraisals valuing the lake house at $500,000, were willing to sell it for $415,000; however, the Debtors’ daughter withdrew her offer. In June 2012, Debtors suggested that they would instead attempt to sell to one of Mrs. Gleason’s siblings, but none made an offer. In July 2012, Debtors proposed to only sell the lake house’s adjacent unimproved lot. The VonLehmans rejected that proposal, thinking that the lake house and lot would be more valuable sold together than sold separately.
On July 30, 2012, after seven months of failed attempts to find a buyer in Debtors’ family, Mr. VonLehman wrote to the Debtors and announced his plan to list the lake house and adjacent lot for a price “in the mid $500,000’s.” [Bk. Doc. 67, Ex. 6.] Mr. VonLehman explained that, under Ohio law, the Debtors ceased to be members of GVL when they filed for bankruptcy. Thus, he reasoned, he was free to sell the lake house without the Debtors’ consent. Mr. VonLehman wrote that he was still open to offers from the Debtors’ relatives, stating that it was his “absolute hope ... that you and/or your family can purchase the Lake House.” Id. But, he “encouraged Debtors] to act sooner than later,” before the lake house was sold to someone else. Finally, though stating that, in his opinion, the Debtors lost their membership rights in GVL, he wrote that “both of our families may continue to use the Lake House as we have done in the past, as long as both families pay for the usage.” Id.
On August 21, 2012, Mr. VonLehman again wrote to the Debtors, confirming his refusal to sell the lot alone. He again encouraged the Debtors to come forward with a family buyer if they had one. However, he wrote that since it didn’t appear that the Debtors had a willing family buyer, they should “face reality” and agree to a sale. [Bk. Doc. 67, Ex. 7.] He added that while, in his lawyer’s opinion, the Debtors no longer had voting rights in GVL, they retained economic rights and would reap proceeds from a sale. Finally, he wrote that if the Debtors did not agree to a sale, he would file an action in state court to confirm his authority to sell the lake house without Debtors’ approval.
*118Failing to obtain consent from the Debtors to sell, on September 28, 2012, the VonLehmans filed an action against the Debtors in the Brown County (Ohio) Court of Common Pleas. The VonLehmans sought a declaratory judgment that under O.R.C. § 1705.15(C)(2), an Ohio LLC membership statute, Debtors ceased to be members of GVL upon the filing of their bankruptcy petition. The VonLehmans also sued the Debtors for intentional interference with their efforts to list the property, alleging that in August 2012 the Debtors prevailed on the realtors the Von-Lehmans contacted to not sell the lake house for GVL. On November 27, 2012, the Debtors moved to refer the VonLehmans’ suit to arbitration. In late 2012, the parties attempted mediation, but failed to settle the suit.
On February 25, 2013, Mr. VonLehman wrote to the Debtors to address the management of GVL and the sharing of costs during the pendency of the lawsuit. Mr. VonLehman proposed that going forward, the two families should pre-approve expenses at the lake house before paying for them, and only pay half of the expenses for which they gave approval. Further, he requested that the Debtors make efforts to cut back on lake house expenses. He also wrote that the two families would continue to take turns using the lake house every week.
On October 16, 2013, the state court action still pending, Mr. VonLehman wrote to the Debtors to advise them of a decrease in the monthly payments due on the assumed Fifth Third loan. He wrote that “I trust you will fund the exact amount of payment each month in a separate deposit.” [Bk. Doc. 67, Ex. 12 at 1.] This is the only evidence of the VonLehmans communicating with the Debtors regarding payment of the discharged loan assumption debt.
On December 11, 2013, the Brown County Court of Common Pleas entered a partial summary judgment in the VonLeh-mans’ favor, granting their request for a declaratory judgment that the Debtors were no longer members of GVL. In defending the VonLehmans’ action, Debtors had argued that O.R.C. § 1705.15(C)(2) was preempted by 11 U.S.C. § 541(c)(1)(B), which provides that property interests of a debtor in bankruptcy become property of the estate notwithstanding state laws which divest persons of property rights upon the filing of a bankruptcy petition. The state court rejected that argument, holding that under a Sixth Circuit case, In re Bell, 700 F.2d 1053 (6th Cir.1983), § 541(c)(1)(B) ceased to operate once the Chapter 7 Trustee abandoned the Debtors’ non-economic rights in GVL to the Debtors. The court did not grant summary judgment on the VonLehmans’ intentional interference claim, which remains pending. On January 9, 2014, Debtors appealed the state court judgment, and on February 3, 2014, the Ohio Court of Appeals dismissed their appeal.
On December 13, 2013, two days after the entry of judgment in state court, Debtors filed the Contempt Motion against the VonLehmans, seeking sanctions, actual damages, and attorney’s fees for the Von-Lehmans’ alleged violations of the discharge injunction. On the same date, they filed the above-captioned adversary proceeding against the VonLehmans and GVL, seeking (i) a declaratory judgment that O.R.C. § 1705.15(C)(2) is preempted by § 541(c)(1)(B) and that Debtors therefore retain their voting rights in GVL, (ii) an order enjoining the VonLehmans from acting in derogation of Debtors’ rights as members of GVL, and (iii) a judgment declaring that the VonLehmans waived their right to seek the relief they sought in *119state court by not taking action in Debtors’ bankruptcy case. [AP Doc. 1.]
The VonLehmans objected to Debtors’ Contempt Motion. [Bk. Doc. 50.] Debtors filed a response and the VonLehmans filed a sur-response. [Bk. Docs. 55 and 56.] The Court heard Debtors’ Contempt Motion on February 11, 2014. At the hearing, the parties agreed the Court would benefit from a more developed record and submitted an agreed order setting a schedule for joint stipulations. [Bk. Doc. 59.] The parties filed extensive joint stipulations, summarized above, and on March 11, 2014, the Court again heard Debtors’ Contempt Motion, following which it was submitted on the record.
The VonLehmans also moved to dismiss Debtors’ adversary proceeding, arguing that Debtors’ complaint should be dismissed for lack of subject-matter jurisdiction under the Rooker-Feldman doctrine, that Debtors lacked prudential standing, and that Debtors’ claims failed on the merits due to claim preclusion. [AP Doc. 6.] Debtors filed a response [AP Doc. 12], and the Court heard the VonLehmans’ motion to dismiss on March 11, 2014, following which it was also submitted on the record.
II. Analysis
A. Debtors’ Contempt Motion.
Debtors offer two theories of contempt in this case, one direct and the other indirect. The first goes as follows. When Debtors filed their bankruptcy case, their voting rights in GVL became property of the estate, and § 541(c)(1)(B) prevented Ohio’s LLC membership law from terminating those rights. After Debtors were discharged and their case was closed, the voting rights, which were not administered in the course of the case by the Chapter 7 Trustee, were abandoned to Debtors under § 554(c). At that point, Debtors contend, § 541(c)(1)(B) continued to operate, preempting Ohio’s LLC membership law and preventing the termination of their rights. Thus, Debtors reason, their voting rights were abandoned to them as a consequence of their discharge, and it therefore violates the discharge to file an action seeking to deprive Debtors of those rights.
The VonLehmans dispute the premise of Debtors’ argument — that Debtors’ voting rights in GVL are still retained by the Debtors. As they successfully argued in state court, they contend that under Bell, § 541(c)(1)(B) only shields property of the estate, not property abandoned to the Debtors, from ipso facto laws like Ohio’s, and that it ceases to operate upon abandonment. Debtors respond that language to this effect in Bell is dictum. But the VonLehmans also argue that even were the Debtors’ rights in GVL still good, the discharge does not shield property abandoned to a debtor at the close of his case from in rem actions brought to determine its status. Whether or not they were legally entitled to the relief they in fact received in state court, the VonLehmans contend, their filing of the state court action did not violate the discharge.
On this latter point, the VonLeh-mans are unquestionably right. Thus, the Court need not consider whether they or the Debtors correctly read Bell and § 541(c)(1)(B). The discharge discharges debts, and enjoins creditors from attempting to collect debts as personal liabilities of discharged debtors. See 11 U.S.C. § 524(a)(2). The discharge does not inoculate a debtor’s property against in rem actions, even if that property were abandoned to a debtor upon his discharge. As this Court recently held, “it is only the personal liability of the debtor that is extinguished by the discharge; in rem actions remain intact.” In re Campbell, No. 10-22561, 2014 WL 32161, at *5 (Bankr.E.D.Ky. Jan. 6, 2014).
*120The cases on which Debtors rely do not support their expansive understanding of the discharge; rather, they only support their arguments about § 541(c)(1)(B) and the effects of abandonment. Debtors heavily rely on In re Daugherty Construction, Inc., 188 B.R. 607 (Bankr.D.Neb. 1995), which held that § 541(c)(1)(B) barred the enforcement of a state ipso facto law during the pendency of a bankruptcy case, and that attempts to enforce such a law violated the automatic stay. But Daugherty did not concern the discharge. Debtors quote language from Dewsnup v. Timm (In re Dewsnup), 908 F.2d 588 (10th Cir.1990), to the effect that abandoned property “reverts to the debtor and stands as if no bankruptcy petition was filed.” Id. at 590. But whether or not this language can be read to imply that § 541(c)(1)(B) or § 554 preempts ipso fac-to laws after abandonment, Dewsnup did not hold that attempts to divest debtors of abandoned property violate the discharge. Dewsnup, famously affirmed by the Supreme Court in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), was a case about lien-strippng, not the discharge. Whatever the scope of § 541(c)(1)(B), in rem suits regarding the status of abandoned property do not implicate the discharge, and a contempt motion is not a proper means by which to seek an adjudication of that status.
The VonLehmans’ action in filing the lawsuit did not attempt to collect a discharged debt; it sought an adjudication of Debtors’ property rights in GVL, and damages for a post-discharge tort claim. On Debtors’ novel theory of the discharge, any person, creditor or non-creditor, who wished to litigate the status of property abandoned to a debtor in a bankruptcy case would forever be barred, under pain of contempt sanctions, from bringing an in rem action. That theory is simply wrong.
Debtors’ second theory of contempt in this case is that the VonLehmans filed the state court action for the purpose of coercing the Debtors to pay their discharged debt to the VonLehmans — namely, the assumed Fifth Third loan. Debtors theorize that once the VonLehmans obtained sole control of GVL, they intended to tell the Debtors they no longer would be welcome in the lake house unless they continued to pay their discharged obligations. Because the state court action was, Debtors claim, a stratagem to coerce repayment, it was an indirect collection attempt that violated the discharge. The VonLehmans, unsurprisingly, deny that coercing repayment motivated the filing of the state court action.
Debtors’ second theory of contempt implicates unsettled questions about the discharge. Courts broadly agree that a facially permissible action will violate the discharge if a creditor “‘acted in such a way as to coerce or harass the debtor improperly’... so as to obtain payment of [a] discharged debt.” Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1308 (10th Cir.2008) (quoting Pratt v. Gen. Motors Acceptance Corp. (In re Pratt), 462 F.3d 14, 19 (1st Cir.2006)) (internal quotation marks omitted). Courts, however, have differed on the relevance of creditors’ motives to the indirect coercion theory.2 Debtors contend that any act intended to induce repayment violates the discharge, regardless of whether it has any real coercive effect.
Even assuming Debtors’ version of the indirect coercion theory is correct, the *121Court finds that the VonLehmans did not violate the discharge. The record overwhelmingly shows that the VonLehmans filed the state court action out of a desire to sell the lake house, after trying and failing for nine months to get the Debtors to agree to a sale. Even with the Debtors insisting on a sale at a price substantially below the lake house’s market value, the VonLehmans were willing to sell to the Debtors’ relatives at a discount. The Von-Lehmans resorted to court only after the Debtors failed to produce a family buyer and only after the VonLehmans repeatedly attempted to obtain the Debtors’ consent to a sale outside their family.
Debtors rely on two pieces of evidence to maintain that the VonLehmans filed the state court action to coerce repayment. First, they rely on Mr. VonLehman’s email of July 30, 2012, sent before the filing of the state court action, in which Mr. Von-Lehman wrote that both families could continue to use the lake house so long as they paid for their usage. Second, they rely on arguments in the VonLehmans’ state court pleadings to the effect that allowing the Debtors to continue as members in GVL and veto a sale even after their obligation to finance GVL had been discharged would cause an unjust result.
Mr. VonLehman’s email shows that the VonLehmans wanted the Debtors to continue to pay for the expenses incurred by their post-petition use of the lake house, not the discharged Assumed Loan. It is not evidence that the VonLehmans brought the state court action for the purpose of coercing them to pay the latter. The Debtors’ continued payment of the Assumed Loan seems to have never been in serious doubt. The evidence is that Debtors — both before and after the lawsuit — made voluntary payments on the Assumed Loan, presumably in an effort to keep the lake house from being sold. Mr. VonLehman’s email of October 16, 2018, informing the Debtors of a decrease in the payments on the Assumed Loan and “trusting]” that Debtors would continue to make payments on the loan, is not to the contrary, but rather, reflects the VonLeh-mans’ assumption that Debtors would continue to make voluntary payments. Moreover, the fact that all of the “demands” for payment on which Debtors rely were made before the VonLehmans won the state court action seriously belies the contention that the VonLehmans filed the state court action to place themselves in a better position to make coercive payment demands.
As to the VonLehmans’ discussion of Debtors’ discharged debt in their state court pleadings, it only shows that the VonLehmans understood that debt was discharged and wanted to be able to satisfy their debt to Fifth Third with the lake house sale proceeds in the event that the Debtors stopped paying the Assumed Loan. In short, the VonLehmans’ state court action may well have been motivated, in some sense, by Debtors’ discharge, in that the Debtors’ discharge exposed the VonLehmans to primary responsibility for the Assumed Loan. This is a consequence of Debtors’ discharge, not a violation of it.
The VonLehmans’ state court action neither directly violated Debtors’ discharge, nor was an indirect attempt to coerce Debtors to repay their discharged debt. The Court therefore denies Debtors’ Contempt Motion.
B. The Adversary Proceeding.
After the state court held that upon filing for bankruptcy Debtors lost their non-economic rights in GVL, Debtors filed an adversary proceeding in this Court requesting a declaratory judgment that Debtors still retained them. In so doing, Debtors effectively requested this Court to review and reverse a state court judgment. *122Under the Rooker-Feldman doctrine, this Court lacks that authority.
Debtors’ adversary complaint seeks a declaratory judgment that Ohio’s LLC membership law is preempted by § 541(c)(1)(B), that Debtors therefore retain their rights in GVL, that the VonLeh-mans waived their right to seek the relief they sought in state court by not seeking it in this Court, and injunctive relief against any acts by the VonLehmans inconsistent with Debtors’ continuing membership rights in GVL — e.g., attempting to sell the lake house without the Debtors’ permission.
The VonLehmans moved to dismiss on several grounds. First, they argued that the Court lacks subject-matter jurisdiction under Rooker-Feldman to hear what is essentially an appeal of a state court judgment. Second, they argued that Debtors lack prudential standing to make claims under § 541(c)(1)(B), because Debtors are outside the zone of interests that statute was enacted to protect and are asserting the rights of a third party, namely, the Chapter 7 Trustee. Third, they argued that Debtors’ claims could be dismissed on the merits on the ground of res judicata.
The Court’s analysis starts and stops with Rooker-Feldman. The Rook-er-Feldman doctrine, which takes its name from two cases, Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983), forbids lower federal courts from hearing cases that “essentially invite [them] to review and reverse unfavorable state-court judgments.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 283, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). Rooker-Feldman ousts lower federal courts of subject-matter jurisdiction in “[1] cases brought by state-court losers [2] complaining of injuries caused by state-court judgments [3] rendered before the district court proceedings commenced [4] and inviting district court review and rejection of those judgments.” Id. at 284, 125 S.Ct. 1517. The premise underlying Rooker-Feldman is that appellate jurisdiction over state court judgments has exclusively been granted by Congress to the Supreme Court; courts below that court cannot exercise its appellate jurisdiction. See id. at 291-92, 125 S.Ct. 1517.
Debtors do not contest that all four parts of the Exxon Mobil test are met here. They argue, however, that their adversary proceeding falls within one of the few subject-matter exceptions to Rooker-Feldman. In Hamilton v. Herr (In re Hamilton), 540 F.3d 367 (6th Cir.2008), the Sixth Circuit held that bankruptcy courts have authority, notwithstanding Rooker-Feldman, to decide that a state court judgment modified a discharge. In Hamilton, a state court held a debtor personally liable for a discharged debt because he failed to plead the discharge as a defense. Hamilton, 540 F.3d at 370. When the debtor subsequently filed an action in bankruptcy court requesting an injunction against the creditor’s attempts to collect the discharged debt in state court, the bankruptcy court held it lacked jurisdiction under Rooker-Feldman. The Sixth Circuit, however, reasoning that under 11 U.S.C. § 524(a)(1) judgments that modify the discharge are void ab initio, concluded that bankruptcy courts must have jurisdiction to decide whether a state court judgment modified the discharge. However, the Sixth Circuit also held that once a bankruptcy court concludes a state-court judgment did not modify the discharge, “the Rooker-Feldman doctrine would bar federal court jurisdiction” to review and reject a state court judgment on any other ground. Id. at 376.
*123Debtors contend that the state court judgment modified their discharge, and that this Court therefore has jurisdiction to review it. The state court judgment modified their discharge, they argue, for the same reasons that they argue in their Contempt Motion the VonLehmans’ filing of the state court action directly violated their discharge. To wit, by depriving the Debtors of property which they claim was abandoned to them upon discharge, the state court judgment altered the bundle of rights which Debtors obtained as a result of their discharge.
This argument fails for roughly the same reasons it failed when Debtors made it in their Contempt Motion. Hamilton’s discharge exception rests entirely on § 524(a)(1). Section 524(a)(1) “voids any judgment ... to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged.” That is to say, § 524(a)(1) voids judgments that hold debtors personally liable for discharged debts. It does not void judgments that deprive debtors of property abandoned to them upon their discharge. The judgment the VonLehmans obtained did not hold Debtors personally liable for a discharged debt, unlike the judgment at issue in Hamilton. It therefore does not fall within the discharge exception to Rooker-Feldman.
Debtors flatly request this Court to reverse a state court judgment, in contravention of Rooker-Feldman. Their argument that the state-court judgment falls within the discharge exception to Rooker-Feld-man fails for the same reason their argument that the state-court action violated the discharge fails. In rem actions regarding the status of a debtor’s prepetition property do not violate the discharge, and decisions on those actions, right or wrong, cannot modify the discharge. Debtors’ adversary proceeding will be dismissed for lack of subject-matter jurisdiction.
The Clerk is directed to file a copy of this Memorandum Opinion in the Debtors’ main bankruptcy case and the above-captioned adversary proceeding.
. References to the docket in Debtors’ main bankruptcy case appear as [Bk. Doc.]. Refer-enees to the docket in Debtors' adversary proceeding appear as [AP Doc.].
. Compare Paul, 534 F.3d at 1308 (endorsing an objective inquiry on whether a creditor’s actions were effectively coercive); In re Mahoney, 368 B.R. 579 (Bankr.W.D.Tex.2007) (same), with In re Russell, 378 B.R. 735 (Bankr.E.D.N.Y.2007) (applying an inquiry into creditors’ motives) In re Sommersdorf, 139 B.R. 700 (Bankr.S.D.Ohio 1991) (same), | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497062/ | OPINION GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS’ CROSS MOTION FOR SUMMARY JUDGMENT
JAMES D. GREGG, Bankruptcy Judge.
I. INTRODUCTION & ISSUE PRESENTED.
This adversary proceeding arises from a longstanding family dispute between Sherry Trost (the “Plaintiff’) and her stepson and his wife, Zachary and Kimberly Trost, (collectively, the “Defendants”). The dis*142pute involves ownership of videotapes and other memorabilia from a television show, Michigan Outdoors, that was created and operated by Fred Trost (“Fred”), Sherry’s husband and Zachary’s father.1 The Plaintiff alleges that she became the owner of these assets after Fred’s death in 2007, and that the Defendants subsequently converted the property to their own use. Pri- or to the filing of the Defendants’ bankruptcy case, the Plaintiff filed a lawsuit against the Defendants in the United States District Court for the Western District of Michigan (the “District Court action”). A three day jury trial was held in the District Court action, and the Plaintiff obtained a judgment against the Defendants for common law conversion under Michigan law. The conversion judgment was then affirmed by the Sixth Circuit Court of Appeals. After the Defendants filed their chapter 7 case, the Plaintiff initiated this adversary proceeding, seeking a determination that the debt arising from the conversion of her property is excepted from the Defendants’ discharge under § 523(a)(6) of the Bankruptcy Code.2
The sole issue presented is whether the prior federal court judgment finding the Defendants liable for common law conversion is entitled to preclusive effect in this adversary proceeding. If so, do the factual findings that were actually litigated and necessary to the prior judgment establish that the Defendants’ conversion of the Plaintiffs property was willful and malicious under § 523(a)(6)? Alternatively, does the prior judgment, as alleged by the Defendants, determine that the retention of property was not a willful and malicious injury?
II. JURISDICTION.
The court has jurisdiction over this bankruptcy case. 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); Local Rule 83.2(a) (W.D. Mich.). This adversary proceeding is a statutory core proceeding. 28 U.S.C. § 157(b)(2)(I) (determinations regarding dischargeability of a debt). Notwithstanding the holding in Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this court is constitutionally authorized to enter a final order in this adversary proceeding. See Tibble v. Wells Fargo Bank, N.A. (In re Hudson), 455 B.R. 648, 656 (Bankr.W.D.Mich.2011) (the Stem decision is extremely narrow; “[ejxcept for the types of counterclaims addressed in Stern v. Marshall, a bankruptcy judge remains empowered to enter final orders in all core proceedings”); cf. Waldman v. Stone, 698 F.3d 910, 921 (6th Cir.2012) (bankruptcy court lacks constitutional authority to enter final judgment on debtor’s state law fraud claims against creditor). Because this is a nondischargeable debt action, Stem and Waldman do not govern.
Very recently, the Sixth Circuit issued an opinion, albeit unpublished, that reached the same conclusion. Hart v. Southern Heritage Bank (In re Hart), — Fed.Appx. -, 2014 WL 1663029 (6th Cir. Apr. 28, 2014). Hart buttresses this court’s conclusion determining it is empowered to enter a final judgment.
*143III. FACTS AND PROCEDURAL HISTORY.
The facts underlying this dispute were stipulated to in the District Court action,3 and are restated, in relevant part, as follows:
Plaintiff, Sherry Trost, is the widower [sic] of Fred Trost. Fred Trost started a television show in Michigan in 1982, titled Michigan Outdoors. Michigan Outdoors was a dba of Fred Trost Enterprises, Inc. Fred Trost Enterprises, Inc. accumulated significant debts, including, but not limited to, a significant multi-million dollar civil judgment known as the “Buck Stop Judgment.” Plaintiff married Fred Trost on July 29, 1988.... The “Michigan Outdoors” tape library owned by Fred Trost Enterprises, Inc. was bought by ZNT Marketing, Inc., a company owned by Zachary Trost and JoAnn Cribley at [t]he auction held when all assets related to the television show were seized due to the Buck Stop Judgment.
Fred Trost continued to operate his show[;] however[,] the debts from Fred Trost Enterprises, Inc. followed Fred Trost and made it impossible for him to own or operate the show in his own name or to own any assets of the show. In fact, Fred Trost was going to have to shut down the show and the business because of the debt. Fred Trost was to receive a significant inheritance from his parents upon their passing[;] however[,] these funds would not be available in time to save the show. Plaintiff and nonparty JoAnn Cribley agreed to take ownership of the show and its assets and agreed to take on the show’s debts in their names so that Fred Trost could continue to operate the show. Plaintiff and JoAnn Cribley became officers and owners of Practical Sportsman, Inc.
In 2002, a non-profit corporation, Practical Sportsman Foundation, was set up in order to continue the operation of the show. Again, JoAnn Cribley and Sherry Trost were officers of Practical Sportsman Foundation. Practical Sportsman Foundation took on debts of the previous business entities and incurred additional debt. Fred Trost remained in charge of the running of the business, including finances and bookkeeping.
Plaintiff took a second mortgage on her home so Practical Sportsman Foundation could obtain an operating loan in the amount of $86,000.00. Practical Sportsman Foundation incurred at least $56,797.06 payroll tax liability to the Internal Revenue Service. Plaintiff ultimately paid that tax liability out of her personal funds.... She used money from her retirement account and incurred additional tax liability for using her retirement funds.
Practical Sportsman Foundation incurred additional tax debt to the [S]tate *144of Michigan of approximately $16,000 ... [and] borrowed an additional operating loan of $9,000 to support the show and the business. Because the Plaintiff and JoAnn Cribley were the legal owners and financiers of Practical Sportsman Foundation, they were ultimately liable for the loan and tax debts.
Fred Trost became suddenly ill in May 2007. After several months in the hospital, Fred Trost passed away in July 2007 prior to receiving his inheritance or paying any of the debts from the show.
Defendant Zachary Trost is the son of Fred Trost and [the stepson] of Plaintiff Sherry Trost. Defendant Kim Trost is the wife of Zachary Trost. Zachary Trost worked on the show with his father over the years and he and/or his company owned a museum and published a magazine related to the show.
Fred Trost predeceased one of his parents and never received the inheritance. Zachary Trost and [his sister] Tara Trost received an inheritance from Fred Trost’s parents.
(USDC Dkt. Nos. 69 & 81; Trost, 525 Fed.Appx. at 337-38.)
After Fred Trost died in 2007, Sherry Trost agreed to give Zachary Trost the assets she owned relating to Fred’s show, including videotapes of show episodes, raw footage, and other show memorabilia. (See Trost, 525 Fed.Appx. at 338.) In exchange, Zachary was to pay off the debts Sherry incurred running the show. (Id.) Zachary took the assets from Sherry, and attempted to profit from them. (Id.) However, over the next two years, he ignored Sherry’s repeated requests to pay off the debts. (Id.) When Sherry ultimately demanded that Zachary return the assets, he refused. (Id.)
In June 2009, Sherry Trost filed the District Court action against Zachary and Kimberly Trost. The First Amended Complaint in the District Court action alleged seven counts against the Defendants, including causes of action for breach of contract, fraud, conversion, and statutory conversion. (USDC Dkt. No. 17.)
In February 2012, a three day jury trial was held in the District Court action.4 Sherry Trost testified during her case-in-chief, along with JoAnn Cribley and two other witnesses. (Trost, 525 Fed.Appx. at 339.) Sherry Trost also offered nearly two dozen exhibits into evidence. (Id.) The testimony and exhibits established that the property at issue included the video library of Fred’s show, video editing equipment, show props, wildlife mounts, rifles, shotguns, hunting and fishing equipment, and a shotgun reloading machine. (Id.) The evidence further established that these assets were owned by Sherry Trost. (Id.) According to the testimony at trial, and consistent with the parties’ stipulation, the assets were originally purchased by ZNT Marketing, Inc. (“ZNT”), an entity owned jointly by Zachary Trost and JoAnn Cribley, after entry of the Buck Stop Judgment. (Id.) When ZNT encountered financial difficulties, Sherry Trost testified that the assets were transferred to her in exchange for payment of ZNT’s debts. (Id.) JoAnn Cribley offered consistent testimony, explaining that she cut the checks *145to ZNT which resulted in the assets being transferred to Sherry Trost. (Id.)
Sherry Trost also presented evidence at trial about her agreement with Zachary and Kim Trost regarding the videotapes and memorabilia:
At or near the time of Fred’s death, Sherry ... explained, Zachary offered to pay the debts she incurred over the years to keep the show running in exchange for the video library, the memorabilia and other property related to the show. Sherry said they discussed the offer on several occasions and that she accepted it. She never put the agreement in writing, though, because she did not think it was necessary to do so with someone she considered her son.
Others knew of the arrangement, too. JoAnn testified that she attended a dinner after Fred passed away where Zachary said he wanted to protect his father’s legacy and would pay the show’s debts in exchange for the property. Jason Marshall, Sherry’s son and Zachary’s stepbrother, also told the jury that he discussed the debts and the agreement with Zachary while Fred was in the hospital. And Deborah Guinn, Sherry’s former sister-in-law, testified that she spoke with Zachary about taking care of the show’s debts after Fred died.
Sherry kept the property at issue in a storage unit and in her home. In July 2007, after Sherry gave Zachary the key to the storage unit, he took the items from both locations to the home he and Kim shared. In the months that followed, Sherry repeatedly tried to speak with Zachary about paying the debts. But he would not return her calls. Sherry also tried communicating with Zachary via email. In one message, dated September 11, 2008, she suggested that she “would not object (and neither would Fred) to selling the tape library, [Fred’s] guns and other assets to help pay off the debts.” Zachary responded five days later: “Let me know how and when you would like to ‘take back’ the guns and video library ... I have spoke [sic] to the family and if you are able to determine a fair market value on the video library, the family might be interested in purchasing it.” Through counsel, Sherry later demanded that Zachary return her property, but he never did.
JoAnn also corresponded with Zachary on numerous occasions about the agreement he made with Sherry. The emails they exchanged reflect Zachary’s efforts to raise money by selling videos and memorabilia to Fred’s fans. He hoped, for example, to “maximize the possible sales” of the tapes, and related that his “plans all along have been to use some of that revenue to help the cause.” Zachary’s emails further indicated his intent to “help [JoAnn] and Sherry out” and documented his travails to [get] his sister, Tara to pitch in. They also make plain that he was directly involved in dealing with Sherry’s IRS debts. Zachary hired a lawyer to “handle dealing with the IRS on Sherry Trost and JoAnn Cribley’s behalf.” Zachary wrote to the lawyer: “We would like your firm to try to make a settlement, (hopefully eliminating penalties and interest and getting it lowered as much as possible considering the current situation) and resolve their tax problems.”
(Id. at 339-40.)
After the conclusion of the Plaintiffs case-in-chief, Zachary and Kim Trost rested their case without testifying or providing any other evidence or witnesses. (Trost, 525 Fed.Appx. at 340.) (Why they did this is curious to this court, but they did.) Instead, they filed a motion for judgment as a matter of law under Fed. R.Crv.P. 50(a). The district court took the *146motion under advisement, and submitted the case to the jury.
The jury instructions defined common law conversion as “any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.” (USDC Dkt. No. 72 at 34.) The jury instructions further explained that:
Plaintiff claims the Defendants Zachary and Kim Trost converted her property by obtaining that property through deceit and/or false representations. To establish this Plaintiff has the burden of proving that Defendant or Defendants obtained Plaintiffs property by deceit or false representations.
(Id.) The jury was instructed to enter a verdict for the Plaintiff on the common law conversion claim if the Plaintiff proved each of these elements by a preponderance of the evidence. (Id.)
The jury determined that Zachary and Kimberly Trost had converted the Plaintiffs property, and entered a judgment for $108,797.06 plus costs and attorney fees against each Defendant on the conversion count. (USDC Dkt. No. 86.)5 The jury also found that Zachary Trost breached his contract with the Plaintiff, and awarded $194,725.30 plus attorney fees and costs on the breach of contract claim. (Id.) Finally, the jury determined that Zachary Trost did not defraud the Plaintiff. (Id.)
After entry of the jury verdict, the district court issued an Order Granting in Part and Denying in Part Defendants’ Motion for Judgment as a Matter of Law. (USDC Dkt. No. 88.) In its order, the district court upheld the jury verdict on the Plaintiffs conversion claim. (Id. at 16-19.) After reciting the legal standard for common law conversion, the district court held that the evidence at trial was sufficient to establish that Sherry Trost was the owner of the property. (Id. at 17-18.) In support of this conclusion, the court cited the testimony regarding Sherry Trost’s acquisition of the property, and Zachary Trost’s email offers to purchase or return the property after he took possession of it. (Id.) The court further explained:
Zachary and Kim Trost sat in the courtroom throughout the trial and neither ever too[k] the witness stand to testify that they owned this property or believed Sherry did not. Viewing the evidence in the light most favorable to the non-moving party (Sherry Trost), the jury could certainly accept the testimony of Sherry Trost and JoAnn Crib-ley that MSDA and/or Fred Trost purchased the video tape library from ZNT and that Sherry Trost received the video tape library as part of that transaction, and that everyone involved believed Sherry owned the video library and memorabilia.
(Id. at 18 (emphasis added.)) The district court also found that the evidence was sufficient to establish that both Zachary and Kim Trost converted the Plaintiffs property. (Id. at 18-19.) The court explained:
[The Defendants] initially took possession of the property with Sherry’s blessing. This was essentially Zachary’s project, but as the email exhibits suggest, Kim Trost, as Zachary’s wife and a part of the “family,” was fully aware of what was happening. Zachary, e.g., e-mailed JoAnn Cribley on July 25, 2008 that, “Kim and I are still planning to help you and Sherry out.” [citation omitted]. The evidence also shows that Zachary continued to hold and exercise control over the *147property in their home, and neither one returned any of it, despite demands by both Sherry and her attorney, even up to the time of trial. Rather, they stopped talking to Sherry. This behavior constituted conversion as defined above, and significantly, neither Zachary nor Kim took the stand to deny it. Based on the testimony and exhibits Sherry Trost produced, there was a sufficient basis for the jury to make a finding of common law conversion against Zachary and Kim Trost.
(Id.) Accordingly, the district court denied the Defendants’ motion for judgment as a matter of law on the common law conversion claim. The court also granted Zachary Trost’s motion as to the breach of contract claim and vacated the $194,725.30 judgment against him. Based upon the factual record at trial, the district court entered a judgment for common law conversion in the amount of $108,797.06 against the Defendants on March 8, 2012. (USDC Dkt. No. 89.)
Zachary and Kim Trost appealed denial of their motion for judgment as a matter of law on the conversion claim to the Sixth Circuit Court of Appeals. On appeal, the Defendants raised four issues with regard to the conversion judgment, all of which were rejected by the Sixth Circuit in a written opinion dated May 7, 2013. (Trost, 525 Fed.Appx. at 341-44.) First, the Defendants argued that the videotapes were not chattel that could be subject to conversion because the imagery on the tapes was intellectual property. The Sixth Circuit summarily rejected this argument, holding that video tapes “are obviously chattels that can be converted.” (Id. at 341.) The court explained that Zachary and Kim Trost “hauled away personal items that belonged to Sherry, and stored them in their home and a storage unit.” (Id. at 342.) “When Sherry Trost demanded that they return her property, she tried to get back the very same boxes of videotapes and memorabilia.” (Id.) The Defendants’ argument that the property was intellectual property, and not chattels, failed.
Next, the Defendants argued that Sherry Trost failed to establish that she was the owner of the videotapes and show memorabilia. The Sixth Circuit rejected this argument as a “red herring.” (Trost, 525 Fed.Appx. at 342.) The court noted that the “parties stipulated that Fred could not and did not own any property related to the show” and that “Sherry and JoAnn took ‘ownership of the show,’ including its assets and debts.” (Id.) Zachary and Kim Trost presented “no evidence to the contrary.” (Id.) The court also explained that the evidence at trial regarding “when and how” Sherry Trost came to own the property was “more than sufficient to support the jury’s verdict.” (Id.) The court explained:
JoAnn [Cribley] specifically said that she cut checks to ZNT, the entity she and Zachary controlled, to transfer the video library and other property to Sherry. No witness disputed Sherry’s ownership, and each one corroborated that Zachary and Kim took the property from Sherry. Moreover, the jury was presented with Zachary’s email to Sherry offering to buy the video library from her and asking her “how and when” she would like to take back the property. Based on this evidence ... the jury stood on firm ground in concluding that Sherry owned the video library and memorabilia.
(Id.)
Third, the Defendants argued that Sherry Trost failed to offer sufficient evidence to establish the value of the property. Again, the Sixth Circuit rejected this argument. The court held that “it was appropriate for the jury to set the value of the *148property when it was converted by the amount of the debts that Zachary agreed to pay in exchange for it.” (Trost, 525 Fed.Appx. at 343.) The court also noted that, “[i]f anything stood in the way of a precise value calculation, it was the couple’s [Zachary and Kimberly Trost’s] possession of the assets and undisputed refusal to give them up.” (Id.)
Finally, the Defendants argued that the conversion judgment should be set aside as to Kim Trost, because there was “no evidence that she participated in any wrongdoing.” (Trost, 525 Fed.Appx. at 343.) The Sixth Circuit disagreed. The court explained that the record established that:
Kim participated in taking Sherry’s property, equally possessed it in her home, knew that Sherry demanded its return, and aided in the refusal to comply. Sherry testified that Kim helped her husband move the property to their home. Kim knew that she and Zachary had property for which Sherry expected payment, but explained to JoAnn that stock market losses made it difficult to come up with the money. Kim also confirmed Zachary’s aim to honor the agreement in emails to JoAnn. Later, when Sherry’s attorney sent a written demand to their home seeking return of the property, neither Zachary nor Kim responded. And in spite of being sued almost three years before the jury was impaneled, the property remained in their joint home. The jury’s verdict as to Kim easily stands.
(Id.)
The Sixth Circuit also reversed the district court’s ruling on the Plaintiffs breach of contract claim, holding that “the jury was given more than enough evidence to decide the parties entered into a contract that Sherry performed.” (Trost, 525 Fed. Appx. at 346.) The Sixth Circuit remanded the case to the district court for reinstatement of the jury’s verdict. (Id.) In so doing, the court noted that, because the damages for the breach of contract and conversion claims were “coextensive,” the Plaintiff would be required to elect her remedy between the two theories on remand to “avoid double recovery.”6 (Id.)
On July 23, 2013, Zachary and Kim Trost filed a voluntary chapter 7 petition in this bankruptcy court. Sherry Trost filed this adversary proceeding on October 8, 2013. (AP Dkt. No. 1.) The complaint alleges that the debt owed under the judgment in the District Court action should be excepted from discharge because it resulted from the Defendants’ fraud under § 523(a)(2) or constituted a willful and malicious injury to the Plaintiffs property under § 523(a)(6). The complaint also seeks denial or revocation of the Defendants’ discharge under § 727(a) or dismissal of the Defendants’ bankruptcy case for lack of good faith.
On February 1, 2014, the Plaintiff filed a motion for summary judgment only on the § 523(a)(6) count of her complaint. (AP Dkt. No. 10.) The Defendants filed a cross motion for summary judgment on all counts of the Plaintiffs complaint on February 1, 2014. (AP Dkt. No. 11.) On February 28, 2014, this court entered an *149order scheduling a hearing on the cross motions for summary judgment solely on the § 523(a)(6) count. (AP Dkt. No. 13.) The hearing was held before this court on March 21, 2014. At the hearing, the court heard oral argument from both parties, then took the matter under advisement.
IV. DISCUSSION.
A. Summary Judgment Standard.
Federal Rule of Bankruptcy Procedure 7056, which incorporates Federal Rule of Civil Procedure 56, states that “[t]he court shall grant summary judgment if the mov-ant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Bankr.P. 7056(a). The court is not to “weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).
The initial burden to demonstrate the absence of a genuine dispute of material fact is on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). Upon such a showing, the burden shifts to the non-moving party to present specific facts demonstrating that there is a genuine dispute of material fact for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). All facts and related inferences are to be viewed in the light most favorable to the non-moving party. Anderson, 477 U.S. at 255, 106 S.Ct. at 2513. However, the non-movant “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356. “Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’ ” Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356 (citation omitted).
B. Section 523(a)(6) — Willful and Malicious Injury.
The Plaintiff asserts that the judgment debt owed to her by the Defendants for their conversion of the videotapes and other memorabilia from Fred Trost’s television show is nondischargeable under § 523(a)(6). Section 523(a)(6) excepts from discharge debts “for willful and malicious injury by the debtor[s] to another entity or to the property of another entity.” § 523(a)(6). The statute requires that the alleged injury be both willful and malicious for the debt to be nondischargeable. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 463 (6th Cir.1999). The Plaintiff bears the burden of establishing both elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
For purposes of § 523(a)(6), willfulness requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998) (emphasis in original). Thus, a willful injury is one where the debtor “‘desires to cause [the] consequences of his act, or ... believes that the consequences are substantially certain to result from it.’ ” In re Markowitz, 190 F.3d at 464 (quoting Restatement (Second) of Torts § 8A (1964) (emphasis added)). An injury is “malicious” under § 523(a)(6) when the debtors act “in conscious disregard of [their] duties or without just cause or excuse; it does not require ill-will or specific intent to do harm.” Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986); *150Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 308 (6th Cir. BAP 2004).
The Plaintiff argues that the facts necessary to establish “willful and malicious injury” under § 523(a)(6) were actually litigated and necessarily determined in the District Court action and were affirmed by the Sixth Circuit in the subsequent appeal. Accordingly, the Plaintiff asserts that, based upon collateral estoppel, she is entitled to a nondischargeable debt judgment as a matter of law. Defendants, in their cross motion, assert to the contrary.
C. Preclusive Effect of Prior Federal Judgment.
Collateral estoppel, also referred to as issue preclusion, “precludes relitigation of issues of fact or law actually litigated and decided in a prior action between the same parties and necessary to the judgment, even if decided as part of a different claim or cause of action.” Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 461 (6th Cir.1999) (quoting Sanders Confectionery Prods., Inc. v. Heller Financial, Inc., 973 F.2d 474, 480 (6th Cir.1992)) (additional citations omitted). The United States Supreme Court has explained that “the whole premise of collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no further factfinding function to be performed.” Parklane Hosiery Co. v. Shore, 439 U.S. 322, 336 n. 23, 99 S.Ct. 645, 654, 58 L.Ed.2d 552 (1979). When the requirements of collateral estoppel are met, application of the doctrine “encourage[s] the parties to present their best arguments on the issues in question in the first instance and thereby save[s] judicial time.” Spil-man v. Harley, 656 F.2d 224, 228 (6th Cir.1981), overruled on other grounds, Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 319 (6th Cir.1997). If a party decides not to present facts or their best arguments at trial, adverse collateral estoppel consequences may result in subsequent bankruptcy litigation.
When considering the preclusive effect of a prior federal judgment, this court applies the federal law of preclusion.7 See J.Z.G. Resources, Inc. v. Shelby Ins. Co., 84 F.3d 211, 213-14 (6th Cir.1996) (applying federal res judicata principles to determine preclusive effect of prior federal judgment and noting that res judicata comprises two doctrines, claim preclusion and issue preclusion); In re John Richards Homes Bldg. Co., LLC, 404 B.R. 220, 237 (E.D.Mich.2009) (“A federal court applies federal law in determining the preclu-sive effect of a prior federal judgment.”); Restatement (Second) of Judgments § 87 (“Federal law determines the effects under the rules of res judicata of a judgment of a federal court.”). The Sixth Circuit Court of Appeals has stated that issue preclusion under federal law “requires that the precise issue in the later proceedings have been raised in the prior proceeding, that the issue was actually litigated, and that the determination was necessary to the outcome.”8 Spilman, 656 F.2d at 228 (ci*151tations omitted). When these requirements are met, “there is no reason to allow relitigation of facts previously litigated which were necessary to the outcome of the prior litigation.” Id.
In this adversary proceeding, there is no question whatsoever that the Plaintiffs conversion claim, and the factual issues related thereto, were actually litigated. The jury in the District Court action entered a verdict in favor of the Plaintiff on her common law conversion claim. That verdict was upheld by the district court in its Order Granting in Part and Denying in Part Defendants’ Motion for Judgment as a Matter of Law. The district court’s order was, in turn, affirmed by the Sixth Circuit Court of Appeals. The Plaintiffs conversion claim has been thoroughly — perhaps more than exhaustively — litigated.9
The Defendants argue, however, that the precise factual issues required to establish nondischargeability under § 523(a)(6) were neither raised, nor necessary to the outcome, in the District Court action for common law conversion. The Defendants base their argument primarily on the differing legal standards that apply to “willful and malicious injury” under § 523(a)(6) and conversion under Michigan law.
Under Michigan law, “conversion is defined as any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.”10 Foremost Ins. Co. v. Allstate Ins. Co., 486 N.W.2d 600, 606, 439 Mich. 378, 391 (1992) (citations omitted). It is generally “viewed as an intentional tort in the sense that the converter’s actions are willful.” Id. However, common law conversion can also “be committed unwittingly if [the converter is] unaware of the plaintiffs outstanding property interest.” Id.
By contrast, a finding of “willfulness” under § 523(a)(6) requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998) (emphasis in original). Thus, the Defendants are correct that the legal standard for common law conversion differs slightly from the “willfulness” standard under § 523(a)(6). In some instances, conversion under Michigan law may be committed unwittingly, whereas § 523(a)(6) requires evidence that the debtor intended to cause *152injury, i.e., that he either “desire[d] to cause [the] consequences of his act, or ... believe[d] that the consequences [were] substantially certain to result from it.” In re Markowitz, 190 F.3d at 464 (citation omitted and emphasis added).
Despite this technical distinction, collateral estoppel precludes relitigation of factual issues that were actually and necessarily determined in the prior action. Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979) (Under the doctrine of collateral estoppel, a “right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction ... cannot by disputed in a subsequent suit between the same parties or their privies.”) (emphasis added); In re Markowitz, 190 F.3d at 461. In this case, nothing in the factual record suggests that the Defendants were unaware of the Plaintiffs interest in the property or that their conversion of the Plaintiffs property was merely “unwitting.” To the contrary, the factual findings that were necessary to the prior determination that the Defendants converted the Plaintiffs property convincingly establish that the Defendants’ actions were also willful and malicious under § 523(a)(6).
Specifically, the facts established at trial in the District Court action, and affirmed on appeal, proved that Sherry Trost acquired ownership of the videotapes and show memorabilia after Fred Trost’s death. The parties stipulated that Sherry Trost and JoAnn Cribley generally “took ownership of the show and its assets” after Fred Trost encountered financial difficulties. At trial, Sherry Trost and JoAnn Cribley also testified about how and when Sherry Trost purchased the videotapes and other assets from ZNT, the entity owned by Cribley and Zachary Trost. The Sixth Circuit held that this evidence was “more than sufficient” to support the conclusion that the Plaintiff owned the property at issue. Trost v. Trost, 525 Fed.Appx. 335, 342 (6th Cir. May 7, 2013).
The evidence in the District Court action also conclusively established that Zachary and Kim Trost were aware that Sherry Trost owned the assets. Several witnesses testified at trial that Sherry and Zachary Trost entered into an agreement whereby Zachary would pay off the debts from Fred Trost’s television show in exchange for the tapes and other memorabilia. Trost, 525 FedAppx. at 339. Although Zachary and Kim Trost took possession of the property, they reneged on their promise to pay the show’s outstanding debt. Id. at 339-40. Thereafter, several emails from Zachary Trost documented his offers to either return the property to Sherry Trost, to purchase the property from her, or to sell the assets to “help the cause.” Id. The facts also established that Kim Trost “knew that she and Zachary had property for which Sherry expected payment.” Id. at 343. As the District Court succinctly stated, “everyone involved” — including Zachary and Kim — “believed Sherry owned the video library and memorabilia.” Order Granting in Part and Denying in Part Defendants’ Motion for Judgment as a Matter of Law, USDC Dkt. No. 88 at 18.
Finally, the uncontroverted evidence established that Zachary and Kim Trost took possession of the videotapes and other assets, and continued to exercise dominion and control over the assets, despite their awareness of the Plaintiffs ownership interest in the property and her repeated demands for its return. The Defendants took the property, initially with the Plaintiffs permission, from the Plaintiffs home and a storage unit, and moved it to their home. Trost, 525 Fed.Appx. at 339, 342. Thereafter, Zachary Trost continued to hold and exercise control over the assets, *153ignoring the Plaintiffs requests for payment and demands for the property’s return. Id. at 339-40. Kim Trost also “participated in taking [the] property, equally possessed it in her home, knew that Sherry demanded its return, and aided in the refusal to comply.” Id. at 343.
This factual record, viewed in its entirety, mandates the factual and legal conclusion that the Defendants’ conversion of the Plaintiffs property was “willful” for purposes of § 523(a)(6). See Spilman, 656 F.2d at 228 (When determining the preclu-sive effect of a prior judgment “the bankruptcy court should look at the entire record of the state [or federal] proceeding.”). The Plaintiff owned the videotapes and other assets. The Defendants knew that the Plaintiff owned the assets. Despite this knowledge, and the Plaintiffs demands for return of the property, the Defendants continued to possess the property in derogation of the Plaintiffs rights. This was not in any sense an “unwitting” conversion. The Defendants’ conversion of the property was substantially certain to cause injury to the Plaintiff. The conversion was also malicious, because the Defendants retained the Plaintiffs property “without just cause or excuse.”11
To the extent the Defendants may have believed they had an ownership interest in the videotapes and memorabilia that was superior to the Plaintiffs interest, or were otherwise “unaware” of the Plaintiffs interest in the property, they had a full and fair opportunity to present evidence of that belief in the District Court action. They did not do so, despite the fact that the parties’ competing interests in the assets were directly at issue in the conversion claim. Instead, they stipulated before trial that Sherry Trost and JoAnn Cribley took “ownership” of Fred Trost’s television show, and all of its assets and liabilities. When Sherry Trost and JoAnn Cribley offered more detailed testimony at trial about how Sherry Trost acquired the tapes and other assets from ZNT, the Defendants offered no evidence to contradict that testimony. If they were truly not aware that Sherry Trost owned the property, the Defendants offered no explanation why Zachary Trost offered to return or purchase the property in his email correspondence.12 Likewise, the Defendants offered not one whiff of “just cause or excuse” to explain why they failed to return the property to the Plaintiff, even after her repeated demands culminated in the filing of the District Court action, a three day jury trial, and a subsequent appeal. The facts were conclusively established in the District Court action, and collateral estoppel precludes the Defendants from relitigating these issues in this adversary proceeding.
V. CONCLUSION.
For the foregoing reasons, the Plaintiffs motion for summary judgment on Count II *154of her complaint in this adversary proceeding is GRANTED, and the Defendants’ cross motion for summary judgment on Count II of the complaint is DENIED. The Plaintiffs judgment for common law conversion, in the amount of $108,797.06, that was entered in the District Court action is nondischargeable under § 523(a)(6).13 A separate judgment shall be entered accordingly.
. Fred Trost was previously a debtor in this court. A creditor, Buckstop Lure Company, sued Fred and obtained a judgment revoking his chapter 7 discharge. See Buckstop Lure Co. v. Trost (In re Trost), 164 B.R. 740 (Bankr. W.D.Mich.1994). This judgment caused many transfers to be made among and between Fred and the parties in this adversary proceeding.
. The Bankruptcy Code is set forth in 11 U.S.C. §§ 101-1532 inclusive. Specific provisions of the Bankruptcy Code are referred to in this opinion as "§ ._.."
. The District Court action is still pending in the United States District Court for the Western District of Michigan under Case No. 1:09-cv-580. Relevant portions of the record in the District Court action, and the subsequent appeal to the Sixth Circuit Court of Appeals, were submitted as exhibits to the Plaintiff’s motion for summary judgment in this adversary proceeding. (See AP Dkt. No. 21, 22 & 23.) However, for ease of reference, citations herein shall be directly to the district court’s docket, e.g., “USDC Dkt. No. _” or to the written opinion entered by the Sixth Circuit Court of Appeals, Trost v. Trost, 525 Fed.Appx. 335 (6th Cir.2013).
The ''Uncontroverted Facts” were set forth by the parties in their proposed Final Pretrial Order. (USDC Dkt. No. 69.) The stipulated facts were adopted by the district court in its Order Adopting Final Pretrial Order. (USDC Dkt. No. 81.) The stipulated facts were also quoted in the Sixth Circuit’s opinion, see Trost, 525 Fed.Appx. at 337-38.
. In its subsequent written opinion affirming the conversion judgment, the Sixth Circuit provided a detailed analysis and explanation of the factual findings from the trial. (See Trost, 525 Fed.Appx. at 337-41.) The Sixth Circuit’s factual summary is binding on this court and is entirely consistent with the findings of the trial court. (See Order Granting in Part and Denying in Part Defendants’ Motion for Judgment as a Matter of Law, USDC Dkt. No. 88, at 16-19.) Accordingly, citations herein are to the facts as recited in the Sixth Circuit’s opinion.
. The Jury Verdict is also attached as Exhibit B to the Defendants' cross motion for summary judgment in this adversary proceeding. (AP Dkt. No. 11.)
. This court’s review of the district court’s docket disclosed that the Plaintiff has filed an election of remedies and has sought entry of a judgment on remand, notwithstanding the Defendants’ bankruptcy case and the applicability of the automatic stay. The Sixth Circuit held that a conversion occurred, and that conclusion is binding on this court. Neither the remand for a determination of damages, nor the Plaintiff's attempts to have a judgment entered, affect this court’s analysis of the preclusive effect of the prior judgment. See note 9, infra. That being said, all parties are cautioned not to violate the automatic stay.
. The court notes that the result in this adversary proceeding would be the same, even if Michigan law were applied to determine the preclusive effect of the prior judgment. See McCurdie v. Strozewski (In re Strozewski), 458 B.R. 397, 404 (Bankr.W.D.Mich.2011) (“Under Michigan law, collateral estoppel precludes re-litigation of an issue in a subsequent, different cause of action between the same parties where the prior proceeding resulted in a valid, final judgment and the issue was (1) actually litigated and (2) necessarily determined.”) (citing People v. Gates, 452 N.W.2d 627, 630, 434 Mich. 146, 154-55 (1990)).
. Mutuality of parties to the two proceedings was formerly a requirement, but “is no longer necessary in some circumstances.” Spilman, *151656 F.2d at 228 (citations omitted). The Plaintiff and the Defendants in this adversary proceeding were also the parties to the District Court action. There is no question that the mutuality requirement is satisfied.
. Although the issue was not raised by the parties in this adversary proceeding, the court notes that the Sixth Circuit opinion remanded the case to the district court for reinstatement of the jury verdict on the Plaintiff's breach of contract claim. On remand, the Sixth Circuit instructed the Plaintiff to elect her remedy between the breach of contract and conversion claim, to avoid an impermissible double recovery. As of the time the Defendants’ bankruptcy case was filed, the district court had not yet entered a judgment on remand. However, this court finds that the remand to the district court does not defeat the finality of the judgment on the Plaintiff’s conversion claim for preclusion purposes. See generally 18A Charles Alan Wright & Arthur R. Miller et al., Federal Practice & Procedure § 4434 (2d ed.) (explaining that issue preclusion may apply to “determinations of liability that have not yet been completed by an award of damages or other relief”).
. This was the legal standard applied to the Plaintiff's common law conversion claim by both the district court, see Order Granting in Part and Denying in Part Defendants' Motion for Judgment as a Matter of Law, USDC Dkt. No. 88 at 16, and the Sixth Circuit Court of Appeals, see Trost v. Trost, 525 Fed.Appx. 335, 341 (6th Cir.2013).
. Although the Defendants now raise some new asserted facts in their paperwork to attempt to justify relitigation, none of those asserted facts were placed before the jury in the federal trial; it appears that the Defendants chose not to assert the facts to the jury or only now belatedly seek to avoid the consequences of the jury’s findings of fact.
. Even in this adversary proceeding, the Defendants have offered little asserted evidence that their conversion of the Plaintiff's property was unintentional or unwitting. In fact, the only evidence cited by the Defendants in support of their assertion that they lacked the requisite intent under § 523(a)(6) is an excerpt of testimony in the District Court action, suggesting Zachary Trost suffered mental issues around the time of his father’s death. See Defendants’ Motion for Summary Judgment and Memorandum in Support of Motion for Summary Judgment, AP Dkt. No. 11, Exh. C. This evidence is insufficient to create a genuine issue of material fact on the issue of intent or to overcome the jury’s findings.
. As everyone knows, the conversion judgment in the District Court action was affirmed on appeal by the Sixth Circuit. The Sixth Circuit also remanded the case for entry of a judgment on the Plaintiff's breach of contract claims, instructing the Plaintiff to elect her remedies as between the two causes of action to avoid an impermissible double recovery. Although the Defendants filed their bankruptcy case prior to the district court entering a judgment on remand, this court notes that the damages for breach of contract are discharge-able in the Defendants’ bankruptcy case. Entry of a new judgment in the District Court action is not necessary because this court has jurisdiction to enter a money judgment for the Defendants' conversion in conjunction with determining the dischargeability of the debt. See Longo v. McLaren, 3 F.3d 958, 965 (6th Cir.1993) (The "bankruptcy court has jurisdiction to adjudge the validity and amount of a claim together with its dischargeability.”). The conversion judgment damages are non-dischargeable; the duplicative breach of contract damages are dischargeable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497063/ | MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT
C. KATHRYN PRESTON, Bankruptcy Judge.
This matter is before the Court upon the Motion for Summary Judgment (Doc. 29) *156(“Motion”) filed by Clyde Hardesty, Trustee (hereinafter “Plaintiff’), the response (Doc. 34) to Plaintiffs Motion filed by Litton Loan Servicing LP and Mortgage Electronic Registration Systems, Inc. (hereinafter collectively referred to as “Defendant”), the Motion for Summary Judgment (Doc. 30) (“Defendant’s Motion”) filed by Defendant and the response (Doc. 33) to Defendant’s Motion filed by Plaintiff. Plaintiff filed this adversary proceeding on August 5, 2011, naming Defendant and CIT Group Consumer Finance Inc.1 (“CIT Group”) as defendants.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and General Order No. 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (F), (K) and (O). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
This adversary proceeding stems from the Chapter 7 bankruptcy ease of David Allen Boothe and Rebecca Sue Boothe (hereinafter “Debtors”). Plaintiff asserted five causes of action in his complaint (Doc. 1) (hereinafter “Complaint”) including: 1) Declaratory judgment to determine the extent and validity of Defendant’s lien; 2) Avoidance of Defendant’s mortgage pursuant to 11 U.S.C. § 544 and Ohio Rev.Code §§ 5301.01, et seq.; 3) Avoidance of Defendant’s mortgage as a preference under 11 U.S.C. § 547; 4) Preservation of Defendant’s mortgage for the benefit of the bankruptcy estate pursuant to 11 U.S.C. § 551; and 5) Recovery of property pursuant to 11 U.S.C. § 550. Although the Motion does not specifically so state, it appears to be requesting judgment only as to Count Two of the Complaint.
Plaintiff seeks to avoid Defendant’s mortgage on the grounds that the mortgage contains a defective certificate of ac-knowledgement which is not in substantial compliance with the requirements of Ohio law and that Defendant’s mortgage is, therefore, not properly recorded. Primarily, Plaintiff argues that the certificate of acknowledgment clause (hereinafter “Certificate of Acknowledgment”) in the mortgage failed to properly acknowledge who executed the instrument and that recordation of a defective mortgage is ineffective *157against a subsequent bona fide purchaser of real estate. Thus, Plaintiff, clothed with the status of a bona fide purchaser without notice of the lien, has the authority to avoid the mortgage.
Defendant counters that the mortgage is in substantial compliance with Ohio law. Defendant argues that the Certificate of Acknowledgment, taken together with the rest of the mortgage and the deposition testimony of Debtors, provides sufficient clarification to cure any ambiguities in the Certificate of Acknowledgment. Thus, according to Defendant, Plaintiff has constructive notice of the mortgage.
For the reasons stated below, the Court concludes that Plaintiff is entitled to summary judgment in the instant adversary proceeding.
I. Standard of Review for Motions for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Bankruptcy Rule 7056, provides that a court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.Civ.P. 56(a). The party seeking summary judgment bears the initial burden of “informing the ... court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
If the movant satisfies this burden, the nonmoving party must then assert that a fact is genuinely disputed and must support the assertion by citing to particular parts of the record. Fed.R.Civ.P. 56(c)(1). The mere allegation of a factual dispute is not sufficient to defeat a motion for summary judgment; to prevail, the non-moving party must show that there exists some genuine issue of material fact. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When deciding a motion for summary judgment, all justifiable inferences must be viewed in a light most favorable to the non-moving party. Matsushita Elec Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Anderson, 477 U.S. at 255, 106 S.Ct. 2505.
The Sixth Circuit Court of Appeals has articulated the following standard to apply when evaluating a motion for summary judgment:
[T]he moving [party] may discharge its burden by “pointing out to the ... court ... that there is an absence of evidence to support the nonmoving party’s case.” The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its complaint. “The mere existence of a scintilla of evidence in support of the [nonmoving party’s] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party].”
Hall v. Tollett, 128 F.3d 418, 422 (6th Cir.1997) (internal citations omitted). A material fact is one whose resolution will affect the determination of the underlying action. Tenn. Dep’t of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir.1996). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. Schaffer v. A.O. Smith Harvestore Prods., *158Inc., 74 F.3d 722, 727 (6th Cir.1996) (citation omitted). “The substantive law determines which facts are ‘material’ for summary judgment purposes.” Hanover Ins. Co. v. American Eng’g Co., 33 F.3d 727, 730 (6th Cir.1994) (citations omitted). However, determination of credibility, weight of the evidence, and legitimate inferences from the facts remain the province of the jury. Anderson, 477 U.S. at 255, 106 S.Ct. 2505.
In the instant ease, Plaintiff and Defendant agree that the material facts are not in dispute, and the only issues are those of law.
II. Findings of Fact
The facts upon which this matter may be decided are without dispute: David Allen Boothe and Rebecca Sue Boothe (“Debtors”) filed a voluntary petition under chapter 7 of the Bankruptcy Code on May 24, 2011 (the “Petition Date”). Plaintiff is the duly qualified and acting case Trustee in Debtors’ bankruptcy case. Debtors jointly own a parcel of real property located at 6540 Lookout Drive, Nashport, Ohio 43830 (the “Real Property”) by virtue of a deed recorded December 17, 1985. On or about December 29, 2003, to secure a promissory note in the amount of $102,400, Debtors granted a mortgage on the Real Property (the “Mortgage”). The Mortgage was recorded January 7, 2004. Debtors’ Schedule D reflects that Defendant Mortgage Electronic Registration Systems, Inc. holds the Mortgage as nominee for the lender, and that the outstanding balance under the promissory note is $96,406.
The primary dispute in this case is whether the Certificate of Acknowledgment in the Mortgage substantially complies with Ohio law. At the top of the Mortgage, a text box reads as follows:
Name and Address of Mortgagor(s):
David A. Boothe
&2
Rebecca Sue Boothe, husband + wife 6540 Lookout Dr.
Nashport, OH 43830
Marital Status: Husband and Wife
Stipulations of Fact (Doc. 26) (hereinafter “Stipulations”), Ex. 2 at 1. Near the bottom of the first page, Debtors signed the Mortgage. The signature block appears as follows:
/s/ David A. Boothe3 (seal)
DAVID A. BOOTHE
(Type name of Mortgagor)
/s/ Rebecca S. Boothe4 (seal)
REBECCA SUE BOOTHE
(Type name of Mortgagor)
Stipulations, Ex. 2 at 1. In the Certificate of Acknowledgment, the notary public did not identify by name the person(s) signing the Mortgage, but rather utilized the singular term “MORTGAGOR”:
ACKNOWLEDGEMENT
State of Ohio
County of MUSKINGUM
Before me, a notary public in and for the above County, personally appeared the above named MORTGAGOR who ac*159knowledged that (he-she-they) did sign the foregoing instrument, and that the same is (his-her-their) free act and deed. In testimony whereof, I have hereunto subscribed my name at
[Notary Public Seal]5 6797 N HIGH ST STE 223 WORTHINGTON. OH
43085 on the 29th day of December, 2003_
/s/ Rebekah A. Church6_
(Notary Public)
Stipulations, Ex. 2 at 1. The appropriate pronouns were not circled, boldened, underlined, italicized, or otherwise designated by the notary.
III. Analysis
Pursuant to the Bankruptcy Code, “[t]he trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor ... that is voidable by a bona fide purchaser of real property ... from the debtor....” 11 U.S.C. § 544(a)(3). Courts have uniformly interpreted 11 U.S.C. § 544 to allow the Trustee to “enjoy the status of a hypothetical bona fide purchaser, without regard to any actual knowledge of the Trustee.” First Southern Bank v. Stanphill (In re Stanphill), 312 B.R. 691, 694 (Bankr.N.D.Ala.2004) (citations omitted). However, if the Mortgage substantially complies with Ohio law and is properly recorded, then Plaintiff, as Trustee, cannot attain the status of a hypothetical bona fide purchaser because Plaintiff would have constructive notice of Defendant’s interest in the Real Property. Id. In determining a trustee’s rights under § 544(a)(3), it is well established that state law determines the extent of the trustee’s rights in the property. Simon v. Chase Manhattan Bank (In re Zaptocky), 232 B.R. 76, 79 (6th Cir. BAP 1999) affirmed, 250 F.3d 1020 (6th Cir.2001) rehearing denied, 2001 U.S.App. LEXIS (6th Cir. Aug 9, 2001).
A. The Mortgage is Improperly Executed.
1. Ohio Law Imposes Four Requirements for Proper Execution of a Mortgage.
Plaintiff contends that by virtue of using the singular term “MORTGAGOR” in the Certificate of Acknowledgment, the Mortgage is defective under Ohio law. Whether the Certificate of Acknowledgment complies with Ohio law is a question of law. Drown v. GreenPoint Mortgage Funding, Inc. (In re Leahy), 376 B.R. 826, 828 (Bankr.S.D.Ohio 2007). The requirements for a properly executed mortgage under Ohio law are set by statute:
A deed, mortgage, land contract ... or lease of any interest in real property ... shall be signed by the grantor, mortgagor, vendor, or lessor in the case of a deed, mortgage, land contract, or lease.... The signing shall be acknowledged by the grantor, mortgagor, vendor, or lessor ... before a ... notary public ... who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.
Ohio Rev.Code § 5301.01(A). Therefore, a properly executed mortgage “(1) must be *160signed by the mortgagor; (2) the signing of the mortgage must be acknowledged before a notary public; (3) the notary public must certify that acknowledgment; and (4) the notary public must subscribe his name to the certificate of acknowledgement.” Leahy, 376 B.R. at 832. Furthermore, Ohio law “clearly require[s] some identification of the person whose signature is being acknowledged.” Geygan v. World Sav. Bank, FSB (In re Nolan), 383 B.R. 391, 396 (6th Cir. BAP 2008); Ohio Rev.Code Ann. §§ 147.53, 147.54, 147.55. The execution of a mortgage must comply with these statutorily required formalities to be considered valid. Zaptocky, 250 F.3d at 1024. Under Ohio law, a mortgage that is improperly executed is not entitled to be recorded. Porter Drywall Co., Inc. v. Haven, Inc. (In re Haven, Inc.), 2005 WL 927666, at *7, 2005 Bankr.LEXIS 541, at *11 (6th Cir. BAP 2005); see also Ohio Rev.Code § 5301.25(A). If an invalid mortgage is recorded, the mortgage is treated as though it had not been recorded. Mortgage Elec. Registration Sys. v. Odita, 159 Ohio App.3d 1, 5, 822 N.E.2d 821 (2004). As a result, a bona fide purchaser, even one who has knowledge of the existence of the prior mortgage, can avoid it. See Ohio Rev.Code § 5301.25; See also Zaptocky, 250 F.3d at 1024.
When a party challenges a mortgage document on the grounds that it fails to meet the requirements of Ohio Rev. Code § 5301.01, the court must review the entire document to determine whether the document substantially complies with the statutory requirements. Logan v. Universal 1 Credit Union, Inc. (In re Bozman), 365 B.R. 824, 829 (Bankr.S.D.Ohio 2007). In order to determine whether a mortgage substantially complies with Ohio law, this Court should “review the nature of the error and the balance of the document to determine whether or not the ‘instrument supplies within itself the means of making the correction.’ ” Menninger v. First Franklin Fin. Corp. (In re Fryman), 314 B.R. 137, 138 (Bankr.S.D.Ohio 2004) (quoting Dodd v. Bartholomew, 44 Ohio St. 171, 5 N.E. 866 (1886)).
2. The Mortgage Does Not Substantially Comply With Ohio Law.
“An acknowledgement clause containing nothing relative to the mortgagor’s identity is insufficient; ... an acknowledgment clause must identify the mortgagor by name or contain information that permits the mortgagor to be identified by reference to the mortgage.” Terlecky v. Countrywide Home Loans, Inc. (In re Baruch), 2009 WL 9124374, at *7, 2009 Bankr.LEXIS 608, at *22 (Bankr.S.D.Ohio Feb. 23, 2009) (emphasis added). Moreover, “courts in this district consistently have held that a certificate of acknowledgment does not satisfy the substantial-compliance standard if it completely fails to identify the mortgagor.” Rhiel v. Huntington Nat’l Bank (In re Phalen), 445 B.R. 830, 848 (Bankr.S.D.Ohio 2011). Such cases are generally referred to as “blank acknowledgment” cases. However, “[t]he execution of a mortgage may be in substantial compliance with Ohio law and thus not defective even where the mortgagor’s name itself is not set forth in the certificate of acknowledgment so long as the certificate effectively identifies the mortgagor.” Id. (citing Drown v. Kondaur Capital Corp. (In re Amadu), 443 B.R. 145 (Bankr.S.D.Ohio 2010)).
Here, the documents demonstrate that both Debtors signed the Mortgage and that Rebekah A. Church subscribed her name as notary public to the Certificate of Acknowledgment. Those facts satisfy the first and fourth requirements set forth in Ohio Rev.Code § 5301.01(A). The Court must determine whether the Mortgage, or more specifically the Certificate of Ac*161knowledgment, complies with the third requirement of Ohio Rev.Code § 5301.01(A). Plaintiff contends that the Certificate of Acknowledgment contains a fatal defect in that the notary public failed to effectively certify the acknowledgment of Debtors because the use of the term “Mortgagor” does not clearly identify which Debtor, if any, or whether both of the Debtors acknowledged their signature in the presence of the notary. Conversely, relying upon Fryman, Defendant insists that the Certificate of Acknowledgment substantially complies with Ohio law.
In Fryman, the debtors Phyllis and Ronald Fryman signed the mortgage at issue, but the certificate of acknowledgment only contained the name of Mrs. Fryman. However, the acknowledgment recited that “‘they’ examined, read, and signed the instrument of ‘their’ free act and deed.” Fryman, 314 B.R. at 138. In determining that the mortgage substantially complied with Ohio Rev.Code § 5301.01, the court found “especially compelling” the use of the plural pronouns they and their, which led the court to find that the notary certified the acknowledgment of both Mr. and Mrs. Fryman. Fryman, 314 B.R. at 139. The Fryman court also looked at other indicators in the mortgage such as the signatures of both debtors on the mortgage and their initials on every page of the mortgage. Fryman, 314 B.R. at 139.
This Court finds that Fryman is distinguishable from the instant case. As noted in the Fryman court’s findings, the compelling reason that that court upheld the validity of the notary certification was due to the use of the plural pronouns which were handwritten by the notary in the certificate of acknowledgment. The Certificate of Acknowledgment in this case did not make use of any of the preprinted pronouns, nor were any handwritten into the Certificate of Acknowledgment. While the Mortgage in the instant case did contain some of the other indicators that the Fryman court observed, such as the signatures of both Debtors on the mortgage and their initials on page 2 of the Mortgage, such other indicators do not assist this Court in determining which Debtor, if any, or whether both Debtors’ signatures were certified by the notary public. Thus, the Certificate of Acknowledgment failed to effectively identify whose signature was acknowledged.
Defendant also contends that the use of the term “MORTGAGOR” is less confusing than listing one but not both of Debtors in the Certificate of Acknowledgment. This Court disagrees. At the very least, when listing one name in a certificate of acknowledgment, it is certain that that person’s signature is being certified. In the instant case, the Mortgage defines the term “Mortgagor(s)” as both Debtors. The Mortgage does not specify whether the term “Mortgagor” means one or both Debtors, but the parenthetical “(s)” implies that when there exists more than one mortgagor, the plural will be used when referring to both mortgagors. In fact, the Mortgage does utilize the term “Mortgagors” in the first line of the first paragraph of the Mortgage which further supports the proposition that any references to both mortgagors in the document would be through use of the plural term “Mortgagors”. Because the Certificate of Acknowledgment uses the term “MORTGAGOR”, the Court cannot determine which Debtor’s acknowledgment was being certified, if any, or whether both Debtors’ acknowledgments were being certified.
Defendant also cites Amadu for the proposition that the Certificate of Acknowledgment is in substantial compliance with Ohio law because the Mortgage supplies the means of correcting the delicien-*162cies in the document. In Amadu, the certificate of acknowledgment referred to the debtor as “Mortgagor” instead of using the debtor’s name. This Court found in Amadu that the debtor was defined and identified as the “Mortgagor” within the mortgage document itself and that
... where the acknowledgment within each Mortgage clearly states that the mortgagor appeared before the notary, and the same documents clearly define who the mortgagor is, the instruments are not vitiated by the failure to insert the name of the signer in the certificates of acknowledgment.
Amadu, 443 B.R. at 152. This Court further held in Amadu that the certificate of acknowledgment was properly executed because the debtor was the sole mortgagor and anyone reading the mortgage would conclude that the term “Mortgagor” referenced the debtor. Amadu, 443 B.R. at 152.
The instant case is distinguishable from Amadu. The decision in Amadu hinged on the definition of the term “Mortgagor”. The debtor in Amadu was the sole mortgagor and the term “mortgagor” was defined in the mortgage as the debtor. Therefore, the use of the term “mortgagor” in the singular would not be ambiguous as there is only one mortgagor referenced in the mortgage. In the instant case, the Mortgage defined the term “Mortgagor(s)” as both Debtors implying that any references to multiple mortgagors would be indicated by the use of the plural term “Mortgagors”. The term “MORTGAGOR” was inserted into the Certificate of Acknowledgment, which, based upon the definition supplied by the Mortgage, indicates that only one of Debtors’ acknowledgments was certified. However, because there are two mortgagors, a reference to “MORTGAGOR” in the Certificate of Acknowledgment does not assist the Court in determining which Debtor’s acknowledgment was certified. Thus, the Mortgage fails to supply the Court with a means of making a correction to the Certificate of Acknowledgment, and, therefore, the Mortgage is not in substantial compliance with Ohio law.
Defendant also argues that deposition testimony of Debtors supports the fact that both Debtors signed the Mortgage at the same time and that someone from the title company was present during the signing. Citing Leahy, Plaintiff posits that the physical presence of the Debtors before the notary would not be enough to cure the defects in the Certificate of Acknowledgment. Alternatively, Plaintiff asserts that Debtors’ deposition testimony creates more ambiguities in the Mortgage, and at a minimum, Debtors’ deposition testimony illustrates that a genuine issue of material fact exists regarding whether the Debtors’ signatures were in fact acknowledged.
In Leahy, the certificate of acknowledgment was blank and did not reference the debtor in any fashion. The court concluded that “the fact that the Debtor appeared before the notary when she signed the Mortgage does not alter the Court’s conclusion that the Mortgage does not substantially comply with Ohio [law].... ” Leahy, 376 B.R. at 832. In the instant matter, it is unnecessary for the Court to take into consideration the Debtors’ deposition testimony. Even if Defendant can prove by way of Debtors’ testimony that Debtors acknowledged their signatures in the presence of a notary public, such evidence only satisfies the second prong of Ohio Rev.Code § 5301.01. In order for the Certificate of Acknowledgment to be in substantial compliance with Ohio law, the third prong of Ohio Rev.Code § 5301.01 must also be satisfied, specifically, the notary public must certify the acknowledgment. As discussed above, the notary in *163this case failed to properly certify the acknowledgment and, therefore, the Certifí-cate of Acknowledgment and the Mortgage are not in substantial compliance with Ohio law.
Upon a review of the Mortgage in this case, this Court concludes that the Mortgage does not substantially comply with Ohio law as it fails to comply with the statutory formalities of Ohio Rev.Code § 5301.01. The Mortgage therefore is not entitled to be recorded and shall be treated as though it had not been recorded. As a result, Plaintiff, with the status of a bona fide purchaser, does not have constructive notice of the Mortgage and, therefore, may avoid the Mortgage pursuant to 11 U.S.C. § 544.
The Court need not address the other issues presented in the Motions and Responses regarding Counts One and Three. In light of the foregoing, Counts One and Three of Plaintiffs Complaint are moot and the Court will not address the Defendant’s arguments with respect to same.
B. The Mortgage Lien Shall be Preserved for the Benefit of the Estate.
Plaintiff did not move for summary judgment on Count Four of his Complaint. In Count Four, Plaintiff seeks to preserve the Mortgage for the benefit of Debtors’ estate pursuant to § 551, under which “[a]ny transfer avoided under section ... 544 ... is preserved for the benefit of the estate but only with respect to property of the estate.” 11 U.S.C. § 551. While Plaintiff did not move for summary judgment on Count Four of his Complaint, preservation automatically follows avoidance of a transfer. Castle Nursing Homes, Inc. v. Ransier (In re Sullivan), 359 B.R. 357 (table), 2007 WL 1018763 at *6 (6th Cir. BAP Apr. 4, 2007) (“Any transfer avoided under § 544 is automati-colly ‘preserved for the benefit of the estate.” (quoting § 551) (emphasis added)); Rhiel v. Cent. Mortg. Co. (In re Kebe), 469 B.R. 778, 794 (Bankr.S.D.Ohio 2012) (same); Terlecky v. Chase Home Fin., LLC (In re Sauer), 417 B.R. 523, 541 (Bankr.S.D.Ohio 2009) (same). Because the Court has concluded that the Mortgage is avoidable, Plaintiff is entitled to preservation of the lien represented by the Mortgage, for the benefit of Debtors’ estate. The Court, therefore, concludes that Plaintiff is entitled to summary judgment on Count Four.
IV. Conclusion
For the foregoing reasons, the Court finds that Plaintiffs Motion for Summary Judgment (Doc. 29) is hereby GRANTED. Summary Judgment shall be granted to Plaintiff upon Counts Two and Four. The Court’s ruling upon Counts Two and Four render Counts One and Three of the Complaint moot. Plaintiff did not request Summary Judgment upon Count Five of the Complaint and the Court shall set a status conference as to Count Five by separate notice. Defendant’s Motion for Summary Judgment (Doc. 30) is not well-taken and is DENIED. The Court will enter a separate final judgment consistent with the foregoing.
IT IS SO ORDERED.
. CIT Group is named as a defendant in this matter but has not been served with summons or entered an appearance. Defendant's Motion to Dismiss (Doc. 4) asserts that CIT Group may have been a previous servicer of the mortgage loan whose service obligations have been transferred to Litton Loan Servicing LP. The Court directed Plaintiff and Defendant to file supplemental memoranda of law (Doc. 37) regarding the Court’s authority to enter judgment in this matter inasmuch as the holder of the note has not been served with summons. Plaintiff filed a supplemental memorandum; Defendant failed to do so. The Court believes that Defendants are proper parties in interest in this matter and the Court may enter a judgment notwithstanding the failure to join the holder of the note. The Mortgage (as hereinafter defined) states that
MERS holds only legal title to the interests granted by Borrower in the Mortgage, 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 Premises....
Based on the above language, courts have consistently held that MERS has standing to foreclose as the nominee for the lender. See In re Mtge. Electronic Reg. Sys., Inc. v. Mosley, 2010 WL 2541245, *4 (Ohio Ct.App.2010). It logically follows that if MERS can act on behalf of the note holder, it is a proper party in interest to defend the note holder’s interest. Similarly, as a loan servicer, Litton Loan Servicing LP is also a proper party in interest with respect to matters relating to the debt it services. ( See Greer v. O’Dell, 305 F.3d 1297, 1302 (11th Cir.2002) (Loan Servicer is a real party in interest and has standing to conduct the legal affairs for the debt it services.)
. Words that are underlined were handwritten in the Mortgage.
. /s/ indicates the signature of the signatory.
. /s/ indicates the signature of the signatory,
. Court’s recreation of the seal of the notary public.
. /s/ indicates the signature of the signatory. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497064/ | MEMORANDUM OPINION AND ORDER DENYING MOTION FOR DEFAULT JUDGMENT
JOHN E. HOFFMAN JR., Bankruptcy Judge.
I.Introduction
Layne C. Smith and Nancy A. Diley-Smith, the plaintiffs and the debtors in the Chapter 13 bankruptcy case associated with this adversary proceeding, own a home in Canal Winchester, Ohio that is subject to a junior mortgage lien in favor of Vista Hill Partners, LLC. Before they commenced their bankruptcy case, the debtors were defendants in a foreclosure action brought by the holder of the senior mortgage lien; the senior lien holder also named as a defendant in the foreclosure action the holder of the junior mortgage lien, GMAC Mortgage Corporation, which subsequently assigned its lien to Vista Hill. Although the state court entered a default judgment against the debtors and GMAC, a foreclosure sale never took place.
By the complaint commencing this adversary proceeding, the debtors seek to extinguish the junior lien held by Vista Hill on the bases that (1) the state court judgment extinguished the junior mortgage lien and (2) the judgment should be given preclusive effect. Vista Hill has not answered the complaint, so the debtors have filed a motion for default judgment. But they failed to serve the complaint and summons properly. In addition to this procedural lapse, there is a merits-based reason not to enter a default judgment in favor of the debtors: Given that no foreclosure sale occurred, the state court judgment does not have the preclusive effect that the debtors ask the Court to give it. The motion for default judgment accordingly is denied.
II. Jurisdiction
The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(K).
III. Background
The complaint (Doc. 1) alleges that Smith and Diley-Smith (“Debtors”) own the real property located at 93 E. Columbus Street, Canal Winchester, Ohio *166(“Property”); that the Property is subject to a first mortgage lien in favor of The Bank of New York and a junior mortgage lien in favor of Vista Hill; that before the commencement of the Debtors’ bankruptcy case on April 16, 2010 The Bank of New York brought a foreclosure action against the Debtors in the Court of Common Pleas of Franklin County, Ohio (“State Court”), naming GMAC as a defendant; and that the State Court entered a default judgment against the Debtors and GMAC in October 2003 (“State Court Judgment”). See Compl. ¶¶ 2, 8-10; 13-14; 19. A copy of the State Court Judgment is attached as Exhibit G to the complaint.
Before the Court is the motion for default judgment (“Motion”) (Doc. 3) filed by the Debtors against Vista Hill.
IV. Legal Analysis
A. Defective Service
As an initial matter, the Motion must be denied because the complaint (Doc. 1) and summons (Doc. 2) were not served in accordance with Rule 7004 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rule(s)”). See PNC Mortg. v. Rhiel, No. 2.-10-CV-578, 2011 WL 1043949, at *6 (S.D.Ohio Mar. 18, 2011) (reversing default judgment entered in adversary proceeding in which the complaint and summons were not served in accordance with the requirements of Bankruptcy Rule 7004). See also Walton v. Rogers, No. 88-3307, 1988 WL 109859, at *1 (6th Cir. Oct. 19, 1988) (“[Pjlaintiff was not entitled to a default judgment against defendant Sheffield, as he failed to comply with Fed.R.Civ.P. 4.”).
The Debtors’ certificate of service (Doc. 2) states that the summons and complaint were served in two ways:
Mail service: Regular, first class United States mail, postage fully pre-paid, addressed to: Vista Hill Partners, LLC, 12 Carlyle Drive, Glen Cove, N.Y. 11542; and
State Law: The defendant was served pursuant to the laws of the State of Ohio, as follows: Via regular, first class, U.S. Mail, postage pre-paid, upon Vista Hill Partners, LLC, P.O. Box 331, Glen Head, N.Y. 11545-0331.
Neither method resulted in proper service.
The first approach appears to be an attempt to effectuate service by mail pursuant to Bankruptcy Rule 7004(b)(3). But service under this rule is proper only if it is made by
mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant.
Fed. R. Bankr.P. 7004(b)(3).
The Debtors did not mail copies of the summons and complaint to the attention of an officer or a managing or general agent. Nor did the Debtors serve copies on the agent authorized by appointment or by law to receive service of process. “The Secretary of State is the statutory agent for service of process on most business corporations, not-for-profit corporations, limited liability companies, limited partnerships, and limited liability partnerships formed in [New York],...” Instructions for Service of Process on the Secretary of State as Agent of Domestic and Authorized Foreign Entities (“Instructions”), Department of State, Division of Corporations, State Records & UCC, http://www.dos.ny.gov/ corps/servinstr.html (last visited Apr. 28, 2014). This appears to be true of Vista Hill; a search of the relevant database *167maintained by the New York Department of State, Division of Corporations (“Department of State”) reveals that Vista Hill does not have a registered agent. A search of the database also confirms that one of the addresses used by the Debtors for Vista Hill — 12 Carlyle Drive, Glen Cove, N.Y. 11542 — is the address that the Department of State would use if the New York Secretary of State were acting as the statutory agent for service of process on Vista Hill. See Department of State, http:// appext20.dos.ny.gov/corp_public (last visited Apr. 28, 2014). Companies, however, do not serve as their own statutory agents. Instead, parties serving process on a company through the New York Secretary of State as statutory agent must follow certain procedures:
Service of process on the secretary of state as agent of a domestic limited liability company or authorized foreign limited liability company shall be made by personally delivering to and leaving with the secretary of state or his or her deputy, or with any person authorized by the secretary of state to receive such service, at the office of the department of state in the city of Albany, duplicate copies of such process together with the statutory fee, which fee shall be a taxable disbursement. Service of process on such limited liability company shall be complete when the secretary of state is so^ served. The secretary of state shall promptly send one of such copies by certified mail, return receipt requested, to such limited liability company at the post office address on file in the department of state specified for that purpose.
N.Y. Limited Liability Company Law § 303(a) (McKinney 2014). See also Instructions; Trini Realty Corp. v. Fulton Center LLC, 53 A.D.3d 479, 861 N.Y.S.2d 743, 744 (2008) (“[T]he plaintiff presented a process server’s affidavit that was sufficient to create a presumption that service upon the defendant was effected by delivery of the summons and the verified complaint to the Secretary of State[.]”).
The certificate of service does not reflect that the Debtors served Vista Hill’s statutory agent — the New York Secretary of State — with copies of the summons and complaint. Nor is there any indication in the certificate of service that the other procedures mandated by New York law— service of duplicate copies on the New York Secretary of State by personal delivery and payment of the required fee— were followed.
The Debtors also attempted service “pursuant to the laws of the State of Ohio” and Bankruptcy Rule 7004(b)(7), which states:
Upon a defendant of any class referred to in paragraph (1) or (3) of this subdivision of this rule, it is also sufficient if a copy of the summons and complaint is mailed to the entity upon whom service is prescribed to be served by any statute of the United States or by the law of the state in which service is made when an action is brought against such a defendant in the court of general jurisdiction of that state.
Fed. R. Bankr.P. 7004(b)(7) (emphasis added). If applicable state law specifies how service is to be made (e.g., certified mail), then the service must be effectuated in the specified manner. See French v. Butler (In re Brady), No. 13-3063, 2013 WL 4453039, at *1 (Bankr.N.D.Ohio Aug. 16, 2013) (“The court finds that notice, including the service of the summons and Complaint pursuant to Fed. R. Bankr.P. 7004(b)(7) and Ohio Civ. R. 4.2(A), has properly been served upon Defendant by certified mail, postage prepaid, as evidenced by the signed ‘green card’ receipt.”).
*168Here, the Debtors purported to make service on Vista Hill, a limited liability company, under Ohio law. Rule 4.2(G) of the Ohio Rules of Civil Procedure (“Ohio Civil Rule(s)”) provides that “[sjervice of process ... shall be made ... [u]pon a limited liability company by serving the agent authorized by appointment or by law to receive service of process; or by serving the limited liability company at any of its usual places of business by a method authorized under Civ. R. 4.1(A)(1); or by serving a manager or member[.]” Ohio Civ. R. 4.2(G). The Debtors did not serve a manager or member of Vista Hill. Instead, they purported to serve Vista Hill at one “of its usual places of business.” Id. But Ohio Civil Rule 4.1(A)(1) authorizes service only by United States certified or express mail, Ohio R. Civ. P. 4.1(A)(1)(a) or, alternatively, by “a commercial carrier service utilizing any form of delivery requiring a signed receipt.” Ohio R. Civ. P. 4.1(A)(1)(b). Yet the Debtors served Vista Hill only by regular first class mail. Because the summons and complaint were not properly served, the Motion must be denied.
B. Entitlement to Relief
Further, the Motion must be denied because the Debtors are not entitled to the relief they request in the Complaint and, therefore, the Court cannot award them a default judgment. While Bankruptcy Rule 7055 permits a court to enter default judgment against a defendant who has failed to answer a properly served complaint, “it is incumbent upon the [trial] court to ensure that the unchallenged facts constitute a legitimate cause of action prior to entering final judgment.” Marshall v. Baggett, 616 F.3d 849, 852-53 (8th Cir.2010) (internal quotation marks omitted). In Marshall, the Eighth Circuit vacated a default judgment because the plaintiffs were not entitled to relief requested in the complaint. See id. See also City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 n. 23 (2d Cir.2011) (“Most of our sister circuits appear to have held expressly that a district court may not enter a default judgment unless the plaintiffs complaint states a valid facial claim for relief.” (citing Gen. Conference Corp. of Seventh-Day Adventists v. McGill, 617 F.3d 402, 407 (6th Cir.2010))); Stegeman v. Georgia, 290 Fed.Appx. 320, 323 (11th Cir.2008) (“[T]he district court did not abuse its discretion in denying Stegeman’s motion for default judgment. Although the State Court of Georgia and the DeKalb County Solicitor’s Office did not file an answer or other responsive pleading, Stegeman’s complaint did not present a sufficient basis for a default judgment against them.”) (footnote omitted).
The State Court Judgment provided three days for amounts owed to The Bank of New York to be paid, or else “the equity of redemption of all Defendants in the premises described herein be foreclosed, and that an Order of Sale shall issue to the Franklin County Sheriff ordering him to sell the same at public auction ... free and clear of all interest of all parties to this action,” State Court J. at 3, with the proceeds of the sale to be paid first to cover costs of the foreclosure action, second to the Franklin County Treasurer for real estate taxes and third to The Bank of New York, which was determined to be the “first and best lienholder” (other than the Franklin County Treasurer). Id. at 4.
The Debtors contend that “[t]he effect of the judgment was to forever bar [Vista Hill’s] assignor [GMAC] from asserting any secured interest, right, or title in [the Debtors’] residence.” Compl. ¶ 19. Although they do not say so explicitly, the Debtors apparently are relying on the second paragraph of the State Court Judgment. In that paragraph, after finding *169that the Debtors, GMAC and certain other defendants had not answered the foreclosure complaint, the State Court Judgment stated that the defaulting defendants “are forever barred from asserting any right, title or interest in the premises described herein.” State Court J. at 1. But an argument based on that phrase proves too much. The Debtors also failed to answer the foreclosure complaint. So if the phrase quoted above means what the Debtors say it means, they too would be barred from asserting any right, title or interest in the Property. Yet they continue to assert their right, title and interest in the Property, scheduling it as an asset on Schedule A and providing in their Chapter 13 plan (“Plan”) (Doc. 35 in Case No. 10-54453) for mortgage payments relating to the Property to be paid to the holder of the senior lien.1 They cannot have it both ways. If Vista Hill is barred from asserting an interest in the Property, then so are the Debtors.
Furthermore, the general rule in Ohio is that “liens are extinguished when a foreclosure sale of the underlying real property is completed and confirmed.” Deutsche Bank Nat’l Trust Co. v. Richardson, Case No. 2010-CA-3, 2011 WL 900790, at *4 (Ohio Ct.App. Mar. 11, 2011). There is nothing in the State Court Judgment indicating an intent to override that rule. The State Court Judgment itself makes this clear in its final paragraph, which provides that “upon distribution of the proceeds of sale as aforesaid, the Clerk of this Court shall issue his certificate to the County Recorder directing him to enter the same on the margin of the records of said mortgages and liens, releasing the same from the premises.” State Court J. at 4. Another bankruptcy court has held that, where “the Judgment provides that Defendant’s lien is not extinguished until the filing of a certificate of [sale] on Plaintiffs’ homestead ... [t]he Defendant’s junior mortgage cannot be extinguished at judgment if the Judgment itself provides for the mortgage to be extinguished upon the filing of a certificate of [sale] subsequent to foreclosure sale.” Neely v. Firstplus Fin., Inc. (In re Neely), 256 B.R. 322, 324 (Bankr.M.D.Fla.2000) (footnote omitted). Just so here. Quite simply, no provision of the State Court Judgment purported to extinguish liens on the property prior to confirmation of a sale. And the Property in fact was never sold at a foreclosure sale. See Compl. ¶ 20.
Despite the fact that a foreclosure sale did not occur, the Debtors request that the Court
make findings that any claim or interest [Vista Hill] had in [the Property] was extinguished in the state court proceeding, and declare that [Vista Hill’s] interest in that realty is not a secured interest as that concept is understood in this judicial district; that the lien be avoided, and paid as an unsecured claim; and that the lien be forthwith released of record. In re Mullins, 449 B.R. 299 (Bankr.S.D.Ohio 2011).
More specifically, it is requested that [the Court] give the [State Court Judgment] the same preclusive effect as to *170[Vista Hill’s] claim or interest, and make a declaration to that effect.
[The Debtors] state that the extent and validity of [Vista Hill’s] secured interest or claim in [the Property] has already been finally determined by a court of competent jurisdiction. [The Debtors] request that the Court determine, find, and decree that [Vista Hill’s] mortgage interest was extinguished in the state court proceeding. Mullins, supra.
Compl. ¶¶ 25-26, 28. For the reasons explained below, the Debtors’ reliance on preclusion principles and Mullins is misplaced.
Although the Debtors do not state whether they are relying on issue preclusion or claim preclusion, they cite a case— Rally Hill Prods., Inc. v. Bursack, 65 F.3d 51 (6th Cir.1995) — that applied the doctrine of issue preclusion (also known as collateral estoppel). Under Ohio law, the doctrine of issue preclusion applies when four elements are established. There must be (1) a final judgment on the merits in the previous case after a full and fair opportunity to litigate the issue; (2) the issue determined by the final judgment must have been actually and directly litigated in the prior proceeding and must have been necessary to the final judgment; (3) the issue in the current action must have been identical to the issue in the prior proceeding; and (4) the party against whom estoppel is sought was a party or in privity with a party to the prior proceeding. See Wagner v. Schulte (In re Schulte), 385 B.R. 181, 189-90 (Bankr. S.D.Ohio 2008).
Because an issue must have been actually and directly litigated in the prior proceeding in order for issue preclusion to apply, the issue-preclusive effect of a default judgment is “restricted to those instances where the plaintiff has actually submitted to the state court admissible evidence, apart from the pleadings, and the state court, based upon the evidence submitted, has actually made findings of fact and conclusions of law sufficiently detailed to support the application of the collateral estoppel doctrine.” Id. at 190. See also Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 193 (6th Cir. BAP 2002); Daneman v. Fed. Home Loan Mortg. Corp. (In re Hoff), 187 B.R. 190, 195 n. 2 (Bankr.S.D.Ohio 1995) (“[A] default judgment does not invoke ... issue preclusion. Issue preclusion can only apply to those issues actually litigated and necessary to the decision of the court.”). It does not appear that the State Court received evidence apart from the pleadings. The doctrine of issue preclusion, therefore, does not apply to the State Court Judgment.
The doctrine of claim preclusion, though, may apply to default judgments even under circumstances where issue preclusion would not apply. See Stand Energy Corp. v. Ruyan, 2005 WL 2249107, at *2 (Ohio Ct.App. Sept. 16, 2005) (“A default judgment is a valid and final judgment upon the merits, and it can be, therefore, a proper bar to later claims for purposes of claim preclusion.”). This is because, under Ohio law, claim preclusion has four elements, one of which is that the claim in the prior proceeding was or could have been litigated. The four elements of claim preclusion are: (1) entry of a final judgment on the merits by a court of competent jurisdiction in a prior proceeding; (2) a second action involving the same parties, or their privies, as the first; (3) a second action raising claims that were or could have been litigated in the first action; and (4) a second action arising out of the transaction or occurrence that was the subject matter of the previous action. See State of Ohio, Bureau of Workers’ Comp, v. Foster (In re Foster), 280 B.R. 193, 200 (Bankr.S.D.Ohio 2002). “A federal court *171must give the same preclusive effect to the prior judgment as would a court of the state in which the judgment was rendered.” Hoff, 187 B.R. at 194.
Ohio courts, however, would not accord the State Court Judgment the effect that the Debtors ask the Court to give it. In short, the third element of claim preclusion — that the adversary proceeding raises claims that were or could have been litigated in the State Court — has not been satisfied. The claims that were litigated or that could have been litigated in the State Court are not the same as the claim asserted by the Debtors in this adversary proceeding. The State Court Judgment adjudicated the amount the Debtors owed The Bank of New York, determined the priority of The Bank of New York’s lien, provided for the distribution of the proceeds of a foreclosure sale of the Property and ordered the release of liens after confirmation of the sale and the distribution of the proceeds. The State Court Judgment likely would have claim-preclusive effect to the extent a party was seeking a determination of the Debtors’ liability to The Bank of New York and the priority of its lien. But here the Debtors are seeking entirely different relief — an order that the lien of GMAC (now held by Vista Hill) was released despite the fact that no foreclosure sale occurred. In the context of the foreclosure action commenced by The Bank of New York, the parties did not litigate— and the State Court did not adjudicate— the issue of whether GMAC’s lien should be released in the absence of a foreclosure sale. Nor would it have been proper for the State Court to adjudicate that issue. See Deutsche Bank, 2011 WL 900790, at *4 (“[T]he mortgage and liens are extinguished when a foreclosure sale of the underlying real property is completed and confirmed. Therefore, the trial court erred in extinguishing Deutsche Bank’s lien interest in the November 20, 2009 judgment entry of foreclosure.”).
As another bankruptcy court in this district has made clear in a decision not cited by the Debtors, the doctrine of claim preclusion does not apply under these circumstances. See Hoff, 187 B.R. at 195-96. In Hoff, prior to the commencement of the debtor’s bankruptcy case, the North American Specialty Insurance Company filed a foreclosure action naming the debtor, the Federal Home Loan Mortgage Corporation (“FHLM”) and American Express Centurion as defendants. American Express filed an answer. The debtor and FHLM did not, and North American obtained a default judgment against both the debtor and FHLM. The debtor then filed a Chapter 7 petition, staying the foreclosure sale. The bankruptcy court authorized the Chapter 7 trustee to sell the property that was the subject of the foreclosure action, and the Chapter 7 trustee did so. The trustee then commenced an adversary proceeding to determine the priority of the liens on the property for the purpose of distributing the sale proceeds. See id. at 192. In the adversary proceeding, “FHLM argue[d] that its rights were not determined by the Foreclosure Judgment, and it has the first and best lien inasmuch as a foreclosure sale never took place.” Id. In response, North American and American Express asserted that “FHLM’s lien was extinguished by the Foreclosure Judgment, and [that their] liens take priority over FHLM.” Id.
The bankruptcy court, though, held that FHLM’s lien, while second in priority to North American’s, was not extinguished by the foreclosure judgment:
This court must respect the ruling of the state court that [North American’s] lien takes priority over the mortgage of FHLM. But the FHLM debt and mortgage were not canceled. Confirmation of the foreclosure sale, required under Ohio law to extinguish prior liens, never took place. Further, the validity of the FHLM mortgage was not before the *172state court and its determination was not necessary to that court’s ruling.... The Property was not, and will never be sold under the auspices of the State Court Foreclosure Judgment. The Foreclosure Judgment therefore has limited preclusive effect.
[North American’s] judgment is entitled to first priority based on the preclusive effect of the Foreclosure Judgment. FHLM still holds a valid mortgage that was perfected before the interests of American [Express].... FHLM’s mortgage is entitled to second priority. American [Express] will take third in priority behind [North American] and FHLM.
Hoff, 187 B.R. at 196-97. See also Barnes v. Cady, 232 F. 318, 319 (6th Cir.1916) (holding that, despite foreclosure judgment providing that the holder of a junior mortgage had “no interest in or lien on or claim to said premises[,]” the lack of foreclosure sale meant that the junior mortgage was not extinguished). Likewise, in the absence of a foreclosure sale, the State Court Judgment did not extinguish the lien now held by Vista Hill.
Mullins is inapposite and offers no support for the relief the Debtors request. In Mullins, the dispute was between two lien-holders — Key Bank and TPI Asset Management, LLC (“TAM”) — over confirmation of the debtors’ Chapter 13 plan. TAM had commenced a foreclosure action against the debtors and, prior to their bankruptcy, had obtained a state court default judgment providing that TAM’s lien had priority over the lien held by Key Bank’s predecessor in interest. See Mullins, 449 B.R. at 302. Despite this, the debtors’ Chapter 13 plan treated TAM as though it did not have a lien against the debtors’ real property while treating Key Bank as though it did. The bankruptcy court gave the state court judgment pre-clusive effect, holding that the TAM’s lien had priority over Key Bank’s and denying confirmation of the debtors’ plan. Id. at 305. That was the correct result in a case where the bankruptcy court was adjudicating a priority dispute between two lien-holders that were parties to a foreclosure action; just as the Hoff court held, a state court judgment establishing the relative priority of the liens must be given preclu-sive effect.
By contrast, there is no priority dispute between lienholders here. Rather, the Debtors request that the Court declare that the lien now held by Vista Hill was extinguished by the State Court Judgment. As explained above, application of the doctrine of claim preclusion to the State Court Judgment does not permit that result.
V. Conclusion
For the reasons stated above, the Motion is DENIED.
IT IS SO ORDERED.
. The Debtors contend that the Plan "provided that [Vista Hill’s] mortgage interest in [the Debtors'] residence would be avoided, and paid as a general, unsecured, non-priority claim in this case.” Compl. ¶ 12. That overstates the effect of the Plan. The Plan did provide that the claim of Vista Hill “will be paid as [an] unsecured claim[].” Plan 11 B(3). It did not, however, provide that Vista Hill’s mortgage "would be avoided,” only that the Debtors must file an adversary proceeding to determine whether the mortgage may be avoided. See id. In addition, the Plan provided that confirmation of the Plan "shall not be dispositive of ... the secured status of the claim[ ] [of Vista Hill].” Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497065/ | MEMORANDUM OPINION
DONALD R. CASSLING, Bankruptcy Judge.
The Debtors are husband and wife and also co-owners of a general contracting business. They refinanced a short-term half-million dollar loan they had used for the purchase of raw land and the construction of a house thereon. Telling the refinancing lender that the newly-constructed house was to be their primary residence, they were able to obtain a thirty-year mortgage (the “Mortgage”) to secure repayment of a new promissory note (the “Note”). At the closing of the refinancing (the “Refi Closing”), the title insurance company failed to record the Mortgage.
Three months later, never having lived in the home themselves, the Debtors sold the property to another couple for almost $800,000. At the closing of that transaction (the “Sale Closing”), the unrecorded Mortgage did not appear on the title insurance commitment, and the settlement *178statement listed no amounts due and owing from the sellers to any lender. The only parties to or participants in the Sale Closing who were aware of the existence of the Note and unrecorded Mortgage were the Debtors themselves. As a result, they not only walked away from the Sale Closing with a sellers’ proceeds check for almost $800,000, they kept walking. For more than three years, they failed to inform their lender that its collateral had been sold to a bona fide purchaser without notice of the Mortgage. Indeed, they actively concealed that fact from the lender by continuing to make monthly payments on a Note secured by a Mortgage on property they no longer owned. These facts only came to light when the Debtors suffered severe financial setbacks and defaulted on the Note and Mortgage.
In this adversary proceeding, the Plaintiff — the lender’s assignee1 — correctly points out that the bankruptcy discharge is reserved for honest but unfortunate debtors. It argues that the Debtors are not honest and that their misfortune is entirely of their own making. The Plaintiff therefore seeks to have the debt owed to it held nondischargeable on grounds of false representation or false pretenses (11 U.S.C. § 523(a)(2)(A)) and willful and malicious conversion (11 U.S.C. § 523(a)(6)).
In response, the Debtors point the finger at everyone but themselves, arguing that: (1) the title insurance company’s failure to record the Mortgage rendered it utterly invalid; (2) only their wholly-owned company, Nevelco, Inc., should be bound by the Note and Mortgage that the Debtors both signed individually; (3) the Debtors are immune from liability for their actions because they were only following the alleged advice of their attorney that the sale proceeds were theirs to keep because the Mortgage was unrecorded; (4) they never bothered to read any of the loan documents they signed, because that is what attorneys are for; and (5) as a result, they should not be bound by all the legal mumbo jumbo contained in those documents, such as the “due-on-sale” clause requiring repayment of the loan upon sale or transfer of the collateral.
At trial, the Court had the opportunity to hear the testimony of both Debtors, as well as that of the attorney who represented them at the Sale Closing. The Court finds the Debtors’ explanations and excuses implausible and their testimony belied by the contemporaneous documents they executed and by their actions prior to, during, and after the Sale Closing. The Court also concludes that their legal arguments are unconvincing and contrary to settled Illinois law. For the reasons set forth below, the Court concludes that the Plaintiff has met its burden and that the debt owed to the Plaintiff is nondischargeable under both § 523(a)(2)(A) and (a)(6).
FACTS AND BACKGROUND
Operating through their wholly-owned company, Nevelco, Inc. (“Nevelco”), the *179Debtors conducted a general contracting business.2 The Debtor Timothy D. Krause (“Mr. Krause”) was president of Nevelco, and the Debtor Cecilia S. Krause (“Mrs. Krause”) was its secretary. Husband and wife each owned a 50% interest in Nevelco. Mrs. Krause testified that she was responsible for Nevelco’s bookkeeping, which included paying bills and balancing the books.
On September 10, 2004, Nevelco purchased a vacant lot at 205 S. Maple, Itasca, Illinois (Pl.Ex. No. 6) (the “Property”) for $205,000, using financing from Itasca Bank & Trust. In 2004, Nevelco conveyed title to the Property into Land Trust No. 12022. Although there was no testimony at trial that there was additional financing from Itasca Bank & Trust,3 Plaintiff’s Exhibit No. 9 is a November 5, 2009, HUD Settlement Statement listing additional sums lent to the Debtors, presumably for the construction of a house on the Property. That settlement statement indicates that the Debtors used the proceeds of a refinancing loan from Washington Mutual (described below) to pay off a balance of $570,506.28 owed to Itasca Bank & Trust.
The Debtors testified that, because the loan from Itasca Bank & Trust was a “construction” loan, it had a short term and needed to be refinanced. To that end, on November 9, 2005, the Debtors submitted a “Uniform Residential Loan Application” to Washington Mutual. (Pl.Ex. No. 8.) In that application, the Debtors sought a thirty-year “conventional loan” in the amount of $662,500 to be secured by a new mortgage on the Property. (Id.) Although the Debtors checked the box declaring the purpose of the loan to be a “Refinance,” they never identified the borrower as Nev-elco. (Id.) Instead, they signed the application only in their individual capacities, checking a box on the first page indicating the Property would be an “Investment” and checking a box on the second page representing that they “intend[ed] to occupy the property as [their] primary residence.” (Id.) At trial, both Debtors testified that they listed both personal and business assets in the statement of assets and liabilities required by the application.
On November 8, 2005, the Debtors closed on the refinancing loan with Washington Mutual in the amount of $562,500 (the “Refi Loan”). (Pl.Ex. Nos. 9-14.) At the Refi Closing, the Debtors each executed the Note both individually and as “trustee,” even though neither Debtor was a trustee of Trust No. 12022 (Pl.Ex. No. 10.) Nevelco did not execute the Note, which, in fact, makes no reference at all to Nevel-co. (Id.) The Debtors also executed the Mortgage both individually and “as trustee of a trust agreement date 7/16/03 known as Trust # 12022.” (Pl.Ex. No. 11.) As was the case with the Note, Nevelco did not execute the Mortgage, which also makes no reference at all to Nevelco. (Id.)
Also at the Refi Closing on November 8, 2005, the Debtors each executed two riders to the Mortgage, once again executing them both individually and “as trustee of a trust agreement known as Trust No. 12022.” (Pl.Ex. Nos. 12 & 13.) And once again, Nevelco did not execute either rider *180and neither rider made any reference to Nevelco. (Id.) In addition, on November 9, 2005, the Debtors each individually signed a Truth-In-Lending disclosure statement. (Pl.Ex. No. 14.) Finally, on November 15, 2005, the Debtors each individually signed off on a payoff letter for Itasca Bank and Trust, loan no. 106313851, the construction loan which was being paid off from the proceeds of the Refi Loan. (Pl.Ex. No. 15.)
It is both significant to this case and undisputed that neither Washington Mutual nor Stewart Title recorded the Mortgage after the Refi Closing.
On February 14, 2006, just three months after the Refi Closing, and despite the Debtors’ representations to Washington Mutual that they intended to reside permanently on the Property, Mr. Krause executed a Real Estate Sales Contract for the sale of the Property to Scott and Colleen Becker (the “Beckers”). (Pl.Ex. No. 16.) He executed the contract in his capacity as president of Nevelco, thereby representing it to be the owner and seller of the Property. The Sale Closing took place on March 13, 2006. Mr. Krause attended with his attorney, Christopher Galloway (“Mr. Galloway”). Mrs. Krause did not attend.
From the date of the execution of the sale contract with the Beckers and continuing for over three years, the Debtors clammed up. The Debtors neither requested nor obtained Washington Mutual’s prior consent to the sale, as required by the Note and Mortgage. (Pl.Ex. Nos. 10 & 11.) Indeed, they neglected even to notify Washington Mutual of their intent to sell the Property. Nor did the Debtors inform the title insurance company of the existence of the Mortgage on the property or of the underlying Note. Prior to the Sale Closing, the Debtors did not even inform their attorney, Mr. Galloway, of the existence of the Note and Mortgage held by Washington Mutual.
Mr. Krause did testify that, immediately after the closing, he told Mr. Galloway about the outstanding Note and Mortgage held by Washington Mutual and that Mr. Galloway advised him that because the Mortgage was unrecorded, it was okay for the Debtors to retain all the proceeds of the sale and use them to pay other loans. By contrast, Mr. Galloway testified that he could not recall ever having such a conversation with Mr. Krause and, moreover, that it would have been contrary to his normal practice and custom to give a client such advice under these circumstances because it could lead to charges of fraud and other liabilities for the client.
In any event, on March 14, 2006, the day after the Sale Closing, Mr. Krause deposited the title insurance company’s check for the entire sales proceeds, $790,367.71, into Nevelco’s account at Itasca Bank & Trust. (Pl.Ex. No. 22.) Two days thereafter, on March 16, 2006, the Debtors transferred $460,000 from the Nevelco account (see Pl.Ex. No. 42) to an AG Edwards account then titled in Mr. Krause’s name. Despite the fact that the depository account bore his name individually at the time of the deposit, Mr. Krause testified that the AG Edwards account was really a business investment account, and that he subsequently changed the name on that account to Nevelco to make that clear. However, the fact remains, and was not refuted by anything other than Mr. Krause’s testimony described above, that within days of the Sale Closing, $460,000 of the sale proceeds were deposited into an account at AG Edwards titled in Mr. Krause’s name individually.
For three years after the sale of the Property to the Beckers, the Debtors never breathed a word of it to Washington Mutual and certainly never used the pro*181ceeds of the sale to pay off the Refi Loan. Instead, for those three years, they dealt with Washington Mutual as if the sale had never taken place, by continuing to make monthly payments to Washington Mutual. (Pl.Ex. No. 40.) The last payment made to Washington Mutual on account of the Note was dated February 27, 2009, and was signed by Mrs. Krause in her capacity as an officer of Nevelco. (Id.)
Eventually, the Debtors were unable to continue making payments on the Washington Mutual loan, they defaulted on the Note in March 2009, and received a letter from Washington Mutual confirming that fact on May 6, 2009. (Pl.Ex. No. 24.) The parties agree that the current outstanding amount due under the note is $714,822.25.
APPLICABLE STANDARDS
The bankruptcy discharge is the means by which the Bankruptcy Code provides a “fresh start” to debtors. Vill. of San Jose v. McWilliams, 284 F.3d 785, 790 (7th Cir.2002). The party seeking to establish an exception to the discharge of a debt bears the burden of proof. Goldberg Secs., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir.1992). The standard of proof required to establish an exception to the discharge of a debt is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re McFarland, 84 F.3d 943, 946 (7th Cir.1996). Exceptions to the discharge of a debt are to be construed strictly against a creditor and liberally in favor of a debtor. In re Morris, 223 F.3d 548, 552 (7th Cir.2000).
Section 523(a)(2)(A)
Section 523(a)(2)(A) of the Code enumerates the following specific, limited exceptions to the dischargeability of debts:
(a) A discharge under section 727 ... 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[.]
11 U.S.C. § 523(a)(2)(A).
Section 523(a)(2)(A) thus provides for three separate grounds for dis-chargeability: false pretenses, false representation, and actual fraud. Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr.N.D.Ill.2001). False pretenses or a false representation are the two on which the Plaintiff bases its objection to the dis-chargeability of the debt in the present case. To except a debt from discharge-ability on the grounds of false pretenses or a false representation, the Plaintiff must establish the following elements: (1) the Debtors made a false representation or omission of material fact; (2) that the Debtors (a) either knew to be false or made with reckless disregard for its truth and (b) made with an intent to deceive; and (3) the Plaintiff justifiably relied on the false representation. See Reeves v. Davis (In re Davis), 638 F.3d 549, 553 (7th Cir.2011); Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir.2010); Wallner v. Liebl (In re Liebl), 434 B.R. 529, 538 (Bankr.N.D.Ill.2010).
Any cause of action under § 523(a)(2)(A) — whether based upon false pretenses, false representation, or actual fraud — requires proof that the debtor acted with intent to deceive. Pearson v. Howard (In re Howard), 339 B.R. 913, 919 (Bankr.N.D.Ill.2006). Proof of intent is measured by the debtor’s subjective intent at the time the representation was made. *182CFC Wireforms, Inc. v. Monroe (In re Monroe), 304 B.R. 349, 356 (Bankr.N.D.Ill. 2004). Deciding whether a debtor had the requisite intent under § 523(a)(2)(A) is, therefore, a factual, subjective inquiry determined by examining all of the relevant circumstances, including those that took place after the debt was incurred. 6050 Grant, LLC v. Hanson (In re Hanson), 437 B.R. 322, 328 (Bankr.N.D.Ill.2010); see also Sears, Roebuck & Co. v. Green (In re Green), 296 B.R. 173, 179 (Bankr.C.D.Ill.2003). “Where a person knowingly or recklessly makes false representations which the person knows or should know will induce another to act, the finder of fact may logically infer an intent to deceive.” Jairath, 259 B.R. at 315.
Section 523(a)(6)
For a finding of nondischargeability of a debt under § 523(a)(6), the Plaintiff must prove three elements by a preponderance of the evidence: (1) the Debtors caused an injury to the Plaintiffs person or property interest; (2) the Debtors’ actions were willful; and (3) the Debtors’ actions were malicious. See First Weber Group, Inc. v. Horsfall, 738 F.3d 767, 774 (7th Cir.2013); Zamora v. Jacobs (In re Jacobs), 448 B.R. 453, 480 (Bankr.N.D.Ill.2011).
The Seventh Circuit has held that a willful and malicious 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.” Jendusa-Nicolai v. Larsen, 677 F.3d 320, 324 (7th Cir.2012). The term “injury” is “understood to mean a ‘violation of another’s legal right, for which the law provides a remedy.’ ” Horsfall, 738 F.3d at 774 (quoting In re Lymberopoulos, 453 B.R. 340, 343 (Bankr.N.D.Ill.2011)). “The word ‘willful’ in [§ 523](a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).
The test for malice under § 523(a)(6) is (1) a wrongful act, (2) done intentionally, (3) which causes injury to the creditor, and (4) is done without just cause or excuse. Park Nat’l Bank & Trust of Chi. v. Paul (In re Paul), 266 B.R. 686, 696 (Bankr.N.D.Ill.2001) (citing In re Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994)). As to the malice element, conduct is “malicious” if it is taken “in conscious disregard of one’s duties or without just cause or excuse; it does not require ill-will or specific intent to do harm.” Horsfall, 738 F.3d at 774 (citing Thirtyacre, 36 F.3d at 700); see also Jendusa-Nicolai, 677 F.3d at 323.
To state a claim under § 523(a)(6), a creditor must allege conduct that amounts to an independent tort. Oakland Ridge Homeowners Ass’n v. Braverman (In re Braverman), 463 B.R. 115, 119 (Bankr.N.D.Ill.2011). A mere breach of contract is outside the scope of § 523(a)(6). Id.; WISH Acquisition, LLC v. Salvino (In re Salvino), 373 B.R. 578, 589 (Bankr.N.D.Ill.2007), aff'd, No. 07 C 4756, 2008 WL 182241 (N.D.Ill. Jan. 18, 2008).
DISCUSSION
A. Section 523(a)(2)(A)
The Plaintiff argues that the Debtors made false representations under § 523(a)(2)(A) that caused Washington Mutual to give them a three-year “extension of credit” in the form of not accelerating its rights under the Note and Mortgage from the date of the sale to the Beckers in March 2006 until March of *1832009. The Plaintiff further contends that the Debtors used false pretenses under § 523(a)(2)(A) when they concealed the sale of the Property to the Beckers, which enabled the Debtors to continue the financing arrangement with Washington Mutual and keep the sale proceeds for their own use.
The Court agrees that Washington Mutual granted the Debtors an “extension of credit” when it forbore from calling the loan upon the sale of the Property to the Beckers. An “extension of credit” has been defined to include “‘an indulgence by a creditor giving his debtor further time to pay an existing debt.’ ” Bednarsz v. Brzakala (In re Brzakala), 305 B.R. 705, 711 (Bankr.N.D.Ill.2004) (quoting John Deere Co. v. Gerlach (In re Gerlach), 897 F.2d 1048, 1050 (10th Cir.1990)). In order to establish a claim of forbearance induced by a false representation, a creditor “must demonstrate that it had valuable collection remedies at the time of the misrepresentation, that it did not exercise those remedies based upon the misrepresentation, and that those remedies lost value during the extension period.” Goldberg v. Ojeda, 417 B.R. 59, 65 (N.D.Ill.2009), aff'd sub nom. Ojeda v. Goldberg, 599 F.3d 712 (7th Cir.2010) (quoting Bremer Bank v. Wyss (In re Wyss), 355 B.R. 130, 136 (Bankr.W.D.Wis. 2006)). Accordingly, § 523(a)(2) protects creditors who have been deceived into forbearing from pursuing collection efforts. Id.
Under similar facts, the Court of Appeals for the First Circuit found an extension of credit took place when the creditor was induced not to accelerate a mortgage based on a debtor’s misrepresentations. See Field v. Mans, 157 F.3d 35 (1st Cir. 1998). “While [a] concealed sale was not technically a new ‘agreement’ concerning the existing credit, it triggered legal rights under the existing credit agreement which markedly altered the credit relationship between the parties.” Id. at 43. By deceiving the creditor into continuing a credit arrangement it had the right to terminate, the debtor in that case tricked the lender into making “an extension of credit.” See id. Similarly, in this case, because Washington Mutual could have called the Note had it known the truth, the Debtors’ failure to disclose the sale of the Property to the Beckers for three years after the Sale Closing led Washington Mutual to extend credit that it otherwise would or could have stopped.
The parties do not dispute that the Note and Mortgage provide for acceleration of the loan upon transfer of the encumbered Property. (Pl.Ex. Nos. 10 & 11.) Nor do they dispute that Washington Mutual did not exercise its right to accelerate the loan because it was unaware that the Property had been sold. The Court therefore finds that the sale of the Property triggered legal rights under the existing credit agreement, altering Washington Mutual’s rights thereunder and constituting an extension of credit to the Debtors under § 523(a)(2)(A).
In order to except a debt from discharge under § 523(a)(2)(A), the Plaintiff must also prove that the Debtors made a false representation that led to the extension of credit. An omission to state a material fact may constitute a false representation. See Health Benefit Plan v. Westfall (In re Westfall), 379 B.R. 798, 803 (Bankr.C.D.Ill.2007) (stating that “[a] debtor’s silence regarding a material fact can constitute a false representation under § 523(a)(2)(A).”) There is no dispute that the Debtors did not inform Washington Mutual, the Beckers, Mr. Galloway, or the title insurance company’s closing agent that there was an outstanding Mortgage on the Property at the time it was sold in *184March 2006. Nor is there any dispute that the reason Washington Mutual did not exercise its acceleration rights under the Mortgage in March of 2006 was that the Debtors did not inform it that the Property had been sold.
The Debtors argue there was no false representation because they legitimately believed they were not required to inform Washington Mutual of the sale and they were entitled to keep the sale proceeds. They testified that they believed these things because they considered the Note and Mortgage to have been improperly executed, and therefore invalid, and also because the Mortgage was nullified by not having been timely recorded. In support of this argument, the Debtors both testified that Nevelco was the actual borrower from Washington Mutual, that they executed the loan documents merely in their capacities as officers of Nevelco, and that they never intended this to be a loan for their personal use.
On their faces, the Note and Mortgage both contradict the Debtors’ testimony. The signature pages of these instruments identify Mr. Krause and Mrs. Krause individually as the borrowers and mortgagors: Conspicuous by its absence on the signature pages, or anywhere else in the Note and Mortgage, is the name Nevelco, Inc. Likewise, the Debtors’ signatures are unaccompanied by phrases such as “by its President: ...” or “by its Secretary: ...,” or any other wording that would indicate that the Debtors were acting in their capacities as corporate officers when they executed these instruments.4 The inescapable conclusion is that the Debtors executed these instruments, and assumed all the attendant obligations thereunder, in their capacities as individuals. The same analysis applies to the execution of the two riders to the Mortgage, (Pl.Ex. Nos. 12 & 13) and to the truth-in-lending statement (Pl.Ex. No. 14). All were executed by the Debtors individually without any hint that they were acting as agents of Nevelco.
The Debtors’ attempt to deflect liability under the Note and Mortgage solely to Nevelco is further undermined by their representation in the loan application that they intended to reside in the house that they had constructed on the lot. No business purpose for the purchase of the home was asserted.
The Court therefore rejects as totally lacking in credibility the Debtors’ testimony that they executed the loan documents solely in their capacity as officers of Nevel-co and not in their individual capacities. Instead, the Court finds that the Debtors executed the Note and related loan documents in their individual capacities, represented to Washington Mutual that they intended to reside in the home located on the Property and, on the strength of that representation, obtained a thirty-year term for the loan. (Pl.Ex. No. 8.)
Further, the Court finds that the Mortgage itself conclusively establishes that the Debtors certainly intended, at the time they obtained the financing from Washington Mutual, that the Property would serve as collateral for repayment of the Note under the terms of the Mortgage. *185Under the Illinois Supreme Court’s decision in Haas v. Sternbach, 156 Ill. 44, 41 N.E. 51 (1894), the lender’s failure to record a mortgage does not render the mortgage or the underlying note invalid or unenforceable, at least as between the original parties to the loan:
“We are aware of no principle, outside of self-interest and prudence in business, that requires the holder of a mortgage to put it on record at any particular time. By not doing so promptly, he runs the risk of having it postponed to junior liens, and even of losing the benefit of it altogether. As to subsequent purchasers and creditors without notice, such securities take effect from the time of filing for record only.” The correctness of this statement of the law in view of our statute cannot be seriously questioned. No one will contend that the recording of a mortgage is, in this state, necessary to its validity. Recording such instruments serves but one purpose, and that is to make them valid as against creditors and subsequent purchasers without notice. Section 31, c. 30, Rev. St. provides that they shall take effect as to such persons from the time of filing for record, and not before. No time is fixed within which the filing for record must take place in order to give such an instrument validity.
156 Ill. at 54, 41 N.E. 51 (quoting Field v. Ridgely, 116 Ill. 424, 431, 6 N.E. 156 (1886)).
In this case, no rights of third parties are adversely affected by a decision finding this debt nondischargeable.5 Instead, the only parties affected are the parties to the loan itself (or their successors or assigns). Accordingly, the principles set forth in Haas clearly apply, and the Court rejects as a matter of law the Debtors’ contention that it was not obligated under the due-on-sale clause of the Mortgage because it was not timely recorded. No other evidence adduced at trial demonstrates that the underlying loan documents were otherwise invalid.
The Court therefore finds that the Debtors made false representations (in part, in the form of an omission to state a material fact) under § 523(a)(2)(A) by: (1) telling Washington Mutual that they intended to use the loan proceeds to build a house in which they would live; (2) failing to inform Washington Mutual when the Property was thereafter sold; and (3) failing to disclose to the title insurance company the existence of the outstanding Note and Mortgage affecting the subject Property.
Next, the Plaintiff must establish that the Debtors knew the representation to be false or that they made it with reckless disregard for its truth, and that it was made with the intent to deceive. At trial, Mr. Krause testified that he did not understand that he was required to inform Washington Mutual when the Property was sold. He testified that with respect to the four or five other homes that Nevelco had built and sold, there were two that were sold without the mortgage loan being paid off. But as to those two properties, he testified that Nevelco secured lines of credit the terms of which did not include a due-on-sale clause. By contrast, the loan documents in this case do not indicate that the Washington Mutual loan was in the form of a line of credit for Nevelco’s general business use.
For her part, Mrs. Krause testified that every prior loan obtained by Nevelco had been paid off when the property was sold. *186When asked whether the loan from Washington Mutual was an exception to this uniform practice, Mrs. Krause simply chose not to respond to the question. The Court infers from Mrs. Krause’s failure or refusal to respond to this question that, like Mr. Krause, she was aware of the Debtors’ obligation to pay off the loan at the Sale Closing or, at a minimum, that the sale should have been disclosed to the lender, Washington Mutual.
Mr. Krause also testified that even though he had not reviewed either the seller’s closing statement prepared by Mr. Galloway or the settlement statement, he had a definite expectation as to the amount of his proceeds. He anticipated receiving sale proceeds of about $230,000, well short of the more than $790,000 that he actually received. Mr. Krause testified that, in the parking lot immediately after the Sale Closing, he told Mr. Galloway that there was an outstanding loan from Washington Mutual with a Mortgage on the Property. He claimed that Mr. Galloway informed him that, because there were no liens on the property, Washington Mutual was just a general creditor and that “we [the Debtors] should pay our loans.” According to Mr. Krause, Mr. Galloway told him that “the money was ours.” By contrast, Mr. Galloway testified that he could not recall ever having such a conversation with Mr. Krause and, moreover, that it would have been contrary to his normal practice and custom to give a client such advice under these circumstances because it could lead to charges of fraud and other liabilities for the client.
Based on its observation of both witnesses and consideration of the many other instances in which Mr. Krause’s testimony was belied by contemporaneous documents and by his own actions, the Court finds Mr. Galloway’s testimony to be credible on this point and finds Mr. Krause’s testimony to the contrary not to be credible. Specifically, the Court rejects as not believable Mr. Krause’s testimony that Mr. Galloway informed him that he could keep all of the proceeds from the sale without using them to pay off the Refi Loan.
The Court’s credibility determination on this issue is further supported by Mr. Krause’s reaction to receiving this windfall. At trial, he did not express surprise, or guilt, or a desire to return the windfall, even though he knew or should have known that he owed over half a million dollars to Washington Mutual. Instead, he testified his reaction upon receiving the windfall was merely that this was “a business day for us.” Nor did the passage of time change either Debtor’s attitude. Despite having received a windfall of over half a million dollars more than they had anticipated, the Debtors did not inform Washington Mutual of the sale for over three years, nor did they ever make any effort to remit the windfall to Washington Mutual. Instead, the Debtors actively concealed the fact of the sale by continuing to make monthly payments on the Note for over three years after the Sale Closing. The Debtors offered only a tautological explanation in support of this pattern of concealment — Mrs. Krause testified that she continued to make payments for Nev-elco on the loan because they were bills for Nevelco that she had paid and continued to pay.
Moreover, even if Mr. Galloway had given this advice to the Debtors, the Court would reject the Debtors’ defense that they should be shielded from liability because of their reliance upon advice of counsel: “This defense undermines the basic principle that the law should generally be adhered to despite any bad advice not to comply with it.” Crawley v. United States (In re Crawley), 244 B.R. 121, 130 *187(Bankr.N.D.I11.2000). As the Seventh Circuit has stated: “[P]eople who sign tax returns omitting income or overstating deductions often blame their accountant or tax preparer. But these arguments never go anywhere. People are free to sign legal documents without reading them, but the documents are binding whether read or not.” Novitsky v. Am. Consulting Eng’rs, LLC, 196 F.3d 699, 702 (7th Cir. 1999). Therefore, the Court rejects the Debtors’ defenses that they are shielded by the alleged advice of their counsel and that they did not in fact read the loan documents they signed.
The Plaintiff suggests that the only reasonable inference from the Debtors’ overall pattern of conduct is that they wished to conceal from Washington Mutual the fact that they had pocketed the proceeds of the sale of the Property without retiring the Washington Mutual debt. The Court agrees that this is the most logical and reasonable inference from a review of the Debtors’ entire course of conduct and therefore finds that the Debtors intentionally continued to make these payments in order to conceal the sale of the Property, prevent Washington Mutual from accelerating the terms of the Note and Mortgage, and retain the entire amount of the sale proceeds for their own use.
The record supports the conclusion that, at the time of the Sale Closing, the Debtors had enough experience with the kind of financing necessary to conduct their general contracting business to understand their obligations under the due-on-sale clause in their Mortgage and therefore knew that they were required to disclose the sale to Washington Mutual. The Court finds that they purposely did not do so in order to retain the full amount of the sale proceeds and that these actions establish an intent to deceive as contemplated by § 523(a)(2)(A).6
Finally, for a finding of nondis-chargeability of a debt under § 523(a)(2)(A), the Plaintiff must establish that it justifiably relied on the false representation. Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). Justifiable reliance requires only that the creditor did not “blindly [rely] upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Id. at 71, 116 S.Ct. 437 (internal quotation omitted). Whether a party justifiably relies on a misrepresentation is determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff, not by using an objective standard. Id.; Bombardier Capital, Inc. v. Dobek (In re Dobek), 278 B.R. 496, 508 (Bankr.N.D.Ill.2002). To satisfy the reliance element of § 523(a)(2)(A), the creditor must establish that the debtor made a material misrepresentation that was the cause-in-fact of the debt that the creditor seeks to have excepted from discharge. Mayer v. Spanel Int’l Ltd. (In re Mayer), 51 F.3d 670, 676 (7th Cir.1995).
The Court finds that the Debtors’ failure to disclose the sale of the Property was a material misrepresentation and the cause in fact of Washington Mutual’s extension of credit and continuance of the financing arrangement with the Debtors. *188In examining the circumstances of the instant matter, the Court finds that because the Debtors continued to make payments on the Mortgage for three years after selling the property to the Beckers, Washington Mutual was justified in relying on the misrepresentation that its loan was still secured by the Property. The Court further finds that, without notice of the sale, Washington Mutual would have had no reason to exercise its right under the Mortgage to accelerate the loan before the Debtors’ conduct came to light in 2009. The Court therefore finds that Washington Mutual’s reliance on the Debtors’ false representation in failing to disclose the sale of the Property was justifiable as required by § 523(a)(2)(A).
In short, the Court finds that the Plaintiff has met its burden of establishing that (1) the Debtors made a false representation, (2) they knew it was false at the time it was made, (3) they made it with the intent to deceive, and (4) the Plaintiff justifiably relied on the misrepresentation. Accordingly, the Court finds that the debt to the Plaintiff is nondischargeable under § 523(a)(2)(A).
B. Section 523(a)(6)
In this case, the Plaintiff has alleged willful and malicious conversion of its property. In order to establish conversion, the Plaintiff must show that the Debtors exercised intentional control or taking of property belonging to another, without the other’s consent, which resulted in the serious interference with the other’s right to possess its property. See Horsfall, 738 F.3d at 773.
In order to except a debt from discharge under § 523(a)(6), the Plaintiff must establish that the Debtors caused an injury to the Plaintiffs property interest and that the Debtors’ actions were willful and malicious. As previously stated, in order to state a claim under § 523(a)(6), the Plaintiff must allege conduct that amounts to an independent tort. See Braverman, 463 B.R. at 119. Here, to assert a claim under § 523(a)(6), the Plaintiff has alleged a willful and malicious conversion of property.
Under Illinois law, a claim for conversion is established when the Plaintiff proves: “(1) an unauthorized and wrongful assumption of control, dominion, or ownership by a person over the property of another; (2) plaintiffs right in the property; (3) plaintiffs right to immediate possession of the property; and (4) a demand by plaintiff of possession thereof.” Schaul v. Ludwig (In re Ludwig), 508 B.R. 48, 57 (Bankr.N.D.Ill.2014) (citing Eggert v. Weisz, 839 F.2d 1261, 1264 (7th Cir.1988)); see also Van Diest Supply Co. v. Shelby Cnty. State Bank, 425 F.3d 437, 439 (7th Cir.2005).
The Mortgage defined Washington Mutual’s rights in the Property, and the due-on-sale clause gave Washington Mutual an immediate right to the proceeds (to the extent of the balance due under the Note) of any sale of the Property. (Pl.Ex. Nos. 10 & 11.) It is undisputed that, instead of remitting the proceeds of the Becker sale to Washington Mutual, Mr. Krause deposited those funds into a Nevel-co account and thereafter caused Nevelco to transfer $460,000 of that amount into an AG Edwards account titled in Mr. Krause’s name. The Court finds that by retaining the full amount of the sale proceeds, the Debtors exercised an unauthorized and wrongful assumption of control, dominion, or ownership of Washington Mutual’s property.
After the Debtors failed to make three consecutive mortgage payments, Washington Mutual notified the Debtors by letter dated May 6, 2009 (PLEx. No. 24) that they were in default, and that Washington *189Mutual was exercising its right to accelerate payment of the Note. The Court finds that this notification constitutes an explicit “demand” and that the Plaintiff has therefore proven all the elements of a conversion action under Illinois law.
A finding of nondischargeability under § 523(a)(6) also requires the Court to determine that the conversion was willful and malicious: “Willfulness requires ‘a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.’ ” Horsfall, 738 F.3d at 774 (quoting Kawaauhau v. Geiger, 523 U.S. at 61, 118 S.Ct. 974). Geiger did not hold that all state law intentional torts, like conversion, are willful for purposes of § 523(a)(6). Id. Rather, “ ‘[willfulness’ can be found either if the debtor’s motive was to inflict the injury, or the debtor’s act was substantially certain to result in injury.” Id. (quoting Bukowski v. Patel, 266 B.R. 838, 844 (E.D.Wis.2001)).
In this case, the Court finds that the Debtors’ injury to Washington Mutual—the conversion of its property—was accomplished through a series of deliberate and purposeful acts: failing to notify Washington Mutual of the sale of the Property; failing to reveal the existence of Washington Mutual’s Mortgage to anyone involved in the sale; retaining the full amount of the sale proceeds rather than paying off the Note; depositing the funds into the Nevelco account; transferring a substantial portion to a personal account in Mr. Krause’s name; and concealing from Washington Mutual the disposition of the Property by continuing to make monthly mortgage payments. As previously discussed, the Court rejects Mr. Krause’s testimony that he did not know that he was required to inform Washington Mutual of the sale of the Property. The Debtors’ actions over a period of more than three years were, at the very least, substantially certain to result in the conversion of Washington Mutual’s property, and, more likely, intended to inflict that injury. The Court therefore finds that these actions were willful under § 523(a)(6).
Finally, the Court finds that the Debtors’ actions were malicious and committed without just cause or excuse. Maliciousness does not require specific intent to do harm, but it does require that the debtor’s actions were taken in conscious disregard of one’s duties or without just cause or excuse. Horsfall, 738 F.3d at 775. The Debtors’ duties pursuant to the due-on-sale clause of the Mortgage were to notify the mortgagee upon sale or transfer of the Property and to pay off the Note on demand. The Debtors’ disregard of those duties was blatant. Far from notifying Washington Mutual of the sale, they actively concealed it by maintaining the pre-sale status quo of making monthly payments for three years. The proceeds of the Becker sale were more than sufficient to pay off the Note at the Sale Closing. Indeed, Mr. Krause testified that Nevelco still had sufficient funds in its accounts in 2006 and 2007 to retire the debt in full. Yet far from discharging this duty, the Debtors simply pocketed the cash. The excuses offered by the Debtors for their conduct—that the unrecorded Mortgage did not bind them, that Nevelco was the true borrower and mortgagor, that their attorney gave them bad advice, that they did not read or understand the documents they signed—have already been addressed and rejected by the Court. As for any just cause for their actions, the Court finds none. The Court finds that the Debtors’ actions were malicious under § 523(a)(6).
The Court therefore finds that the Debtors deliberately converted Washington Mutual’s property in order to use the funds for their own purposes. The Court *190finds that these actions were both willful and malicious under § 523(a)(6). Accordingly, the Court finds that the debt to the Plaintiff is nondischargeable under § 523(a)(6).
CONCLUSION
For these reasons, the Court finds that the debt owed to the Plaintiff in the amount of $714,822.75 is nondischargeable under § 523(a)(2)(A) and (a)(6).
. The original lender and holder of the Note and Mortgage was Washington Mutual Bank, F.A. (“Washington Mutual”). The original title company, which was responsible for recording the Mortgage, was Stewart Title Company ("Stewart Title”). When Washington Mutual discovered that Stewart Title had failed in its obligation to record the Mortgage, it apparently made a claim against Stewart Title, which Stewart Title honored and paid. In return, Washington Mutual transferred ti-tie to the Note and Mortgage to Stewart Title. Stewart Title then asserted a claim against its own insurer. Specialty Title Services, Inc., which Specialty Title honored in turn. In return, Stewart Title conveyed title to the Note and Mortgage to Specialty Title. Specialty Title is thus the current assignee and holder in due course of the Note and Mortgage which are the subject of this adversary proceeding.
. Title to at least some of the homes Nevelco constructed was apparently held in a land trust at Itasca Bank & Trust Company (“Itasca Bank & Trust”), known as Trust No. 12022, which was formed on July 16, 2003. The beneficiary of Trust No. 12022 was Nevel-co, and the trustee of Trust No. 12022 was Itasca Bank & Trust. (Pl.Ex. No. 5.)
. Even after the November 8, 2005 Refi Closing, the Debtors continued to sign documents relating to the loan from Washington Mutual in which they acknowledged that they had borrowed the money from Washington Mutual as individuals, rather than as officers of Nevelco. For example, on November 15, 2005, the Debtors each individually executed a payoff letter for Itasca Bank & Trust, which used the proceeds of the Washington Mutual loan to pay off the prior construction loan of Itasca Bank & Trust. (Pl.Ex. No. 15.) Therefore, the Court finds that the Mortgage was valid and binding between the Debtors in their individual capacities and Washington Mutual.
. By contrast, this Court’s decision in In re Arnold, 483 B.R. 515 (Bankr.N.D.Ill.2012) also followed Haas but reached the opposite conclusion on the merits because the rights of subsequent third-party creditors were squarely affected by the decision in that case.
. At trial, Mrs. Krause testified she was responsible for raising four sons and that she was ill while conducting the bookkeeping work for Nevelco. The Court has considered this testimony but finds that it does not negate the overwhelming evidence establishing the intent to deceive on both Debtors’ parts, including particularly her execution of monthly mortgage checks to Washington Mutual for three years after the Becker Sale had taken place. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497066/ | MEMORANDUM OPINION
CAROL A. DOYLE, Bankruptcy Judge.
The plaintiffs in this adversary proceeding were customers of Peregrine Financial Group, Inc. who traded in foreign currencies and over-the-counter metals through accounts with Peregrine. They allege four counts in their complaint, each seeking return of money they deposited with Peregrine under a different legal theory. In Count IV, plaintiffs seek a declaration that their transactions in foreign currency and metals are “commodity contracts” under § 761(4) of the Bankruptcy Code. The funds they deposited with Peregrine would then be treated as “customer property,” which is given high priority for distribution under the commodity broker liquidation provisions of the Bankruptcy Code.
The trustee has moved for summary judgment on Count IV, arguing that the plaintiffs’ foreign exchange and metals trading does not fall within the definition of a “commodity contract.” He therefore contends that the funds they deposited with Peregrine are not “customer property” entitled to high priority under the Bankruptcy Code. The plaintiffs respond that their transactions fall within the definition of “commodity contract,” which specifically describes a number of types of transactions and also includes transactions that are “similar to” those specified types of transactions. 11 U.S.C. § 761(4). The plaintiffs argue that their transactions are “similar to” those specifically described in the definition. The court disagrees and *192concludes that the plaintiffs’ foreign exchange and metals transactions do not fit within any of the specifically described transactions in the definition and are not “similar to” any of those transactions for purposes of § 761(4)(F)(i). The funds they deposited with Peregrine, therefore, are not “customer property,” and the trustee is entitled to judgment as a matter of law on Count IV.
I. Background
This adversary proceeding arises from the chapter 7 liquidation of Peregrine, a registered “Futures Commission Merchant” (“FCM”) and a registered “Forex Dealer Member” of the National Futures Association (“NFA”). Before Peregrine filed for bankruptcy, the plaintiffs opened accounts with it for the purpose of trading in retail foreign currency (“retail forex”) and over-the-counter spot metals (“OTC metals”).
Each plaintiff executed a standard customer agreement (“Agreement”) with Peregrine. The Agreement covered all types of potential trading through Peregrine, not just retail forex and OTC metals, including cash commodities, security futures products, commodities futures contracts, commodity swaps, currency swap transactions, and various options and derivatives. Some types of trading covered by the Agreement took place on regulated exchanges while some types, including retail forex and OTC metals, did not. Peregrine maintained an online trading system that allowed customers to place trade orders electronically, which Peregrine would then execute for them. The plaintiffs allege that they deposited funds into specific accounts designated by Peregrine for retail forex and OTC metals trading.
Peregrine filed for bankruptcy in July 2012, after theft of customer funds was disclosed. In September 2012, the trustee filed a motion seeking authority to make interim distributions of “customer property” under § 766(h) of the Bankruptcy Code, 11 U.S.C. § 766(h), to Peregrine’s customers who traded “commodity contracts,” as defined in § 761(4) of the Bankruptcy Code. The trustee excluded Peregrine’s retail forex and OTC metals customers, including the plaintiffs, from the partial distribution. The plaintiffs objected to the trustee’s motion, arguing that they too traded commodities contracts and should be included in the interim distribution. The court overruled their objections and granted the trustee’s motion. The plaintiffs then filed a motion seeking the same treatment as the customers who received interim distributions, but they withdrew that motion and filed this adversary proceeding against the trustee seeking the same relief. The Commodities Futures Trading Commission (“CFTC”) moved to intervene, and is now a party.
Count IV alleges that the trustee’s determination that the plaintiffs are not entitled to the interim distributions because retail forex and metals transactions are not “commodity contracts” was erroneous. It states that these transactions fall within the “similar to” clause in § 761(4)(F)(i) in the definition of “commodity contract,” which includes transactions that are “similar to” the types of transactions specifically identified in the definition. 11 U.S.C. § 761(4)(F)(i). They seek a declaration to that effect, and that the money in their accounts with Peregrine must therefore be treated as “customer property” and distributed to them with the same priority given to customers to whom the trustee has already made interim distributions.
The trustee has moved for summary judgment on Count IV. He argues that there are no genuine issues of material fact and that the court can decide as a *193matter of law that the plaintiffs’ retail forex and OTC metals trading does not fall within the definition of “commodity contract” in § 761(4). The CFTC filed briefs in support of the trustee’s motion.
II. Standard for Summary Judgment
Summary judgment “should be rendered 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.” Fed.R.Civ.P. 56(c); see Fed. R. Bankr.P. 7056 (applying Rule 56 of the Federal Rules of Civil Procedure to adversary proceedings); Bellaver v. Quanex Corp., 200 F.3d 485, 491 (7th Cir.2000). A genuine issue of material fact exists when “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).
III. Commodity Contracts
The bankruptcy and liquidation of a commodity broker is governed by subchap-ter IV of chapter 7 of the Bankruptcy Code, 11 U.S.C. § 761-784, and the CFTC’s Part 190 regulations, 17 C.F.R. § 190. Under the Bankruptcy Code and the Part 190 regulations, “customer property” is afforded high priority for distributions from the bankruptcy estate of an FCM. “Customer property” is defined as “property received, acquired or held to margin, guarantee, secure, purchase, or sell a commodity contract.” 11 U.S.C. § 761(10)(A)(i); 17 C.F.R. § 190.08(a)(i)(A). “Commodity contract” is defined in 11 U.S.C. § 761(4), which lists various specific types of contracts or transactions, and any contract or transaction that is “similar to” the listed contracts and transactions. The plaintiffs seek a determination that their retail forex and OTC metals transactions fall within the definition of a “commodity contract” so that they can share in the distributions of “customer property” that the trustee has made in this case. Thus, the definition of “commodity contract” in § 761(4) is at the center of this dispute.
Section 761(4) contains nine subpara-graphs describing specific types of contracts and transactions that are “commodity contracts.” Subparagraph (F) also includes “any other contract, option, agreement, or transaction that is similar to a contract, option, agreement or transaction referred to in this paragraph.” 11 U.S.C. § 761(4)(F)(i). Count IV of the complaint alleges that the plaintiffs’ retail forex and OTC metals transactions are “similar to” those described in § 761(4)(A)-(E).1 Subparagraphs (A) through (E) describe the following transactions:
(A) with respect to an FCM, futures traded on a contract market or board of trade (domestic futures);
(B) with respect to a foreign futures commission merchant, foreign futures (traded on a foreign contract market or board of trade);
(C) with respect to a leverage transaction merchant, leverage transactions (long term contracts for the purchase or sale of certain precious metal bullion or coins);
(D) with respect to a clearing organization, cleared futures and options;
(E) with respect to a commodity options dealer, commodity options.
*194A. Futures
The parties’ arguments focus primarily on the first category of commodity contracts listed in § 761(4) — futures The trustee contends that In re Zelener, 373 F.3d 861 (7th Cir.2004), is controlling and compels the conclusion that plaintiffs retail forex and OTC metals transactions are not “similar to” futures contracts. In Zelener, the court held that retail forex transactions are not futures. In their response, the plaintiffs argue that Zelener is no longer good law and that, in any event, the retail forex transactions in this case should be considered futures under Zelener, or at least “similar to” the categories listed in § 761(A)-(E), which includes futures.2 Zelener is thus central to the analysis in this case.
1. Zelener
In Zelener, the Seventh Circuit considered whether “speculative transactions in foreign currency are ‘contracts of sale of a commodity for future delivery’ regulated by the Commodity Futures Trading Com-mission_” Id. at 862. The issue arose in the context of determining whether contracts for sale of foreign currency were within the CFTC’s regulatory authority in 2004. The court was interpreting § 2(a)(1)(A) of the CEA, 7 U.S.C. § 2(a)(1)(A), which describes the CFTC’s jurisdiction as including “contracts of sale of a commodity for future delivery,” the same language used in the definition of a “commodity contract” in 11 U.S.C. § 761(4)(A). The court explained that “future delivery” must have a technical meaning or else it would encompass all executo-ry contracts, leading to an absurd result. That technical meaning reflects the important distinctions between a futures contract and a forward or spot contract.3 As the Seventh Circuit explained:
In organized futures markets, people buy and sell contracts, not commodities. Terms are standardized, and each party’s obligation runs to an intermediary, the clearing corporation. Clearing houses eliminate counterparty credit risk. Standard terms and an absence of coun-terparty-specific risk make the contracts fungible, which in turn makes it possible to close a position by buying an offsetting contract. All contracts that expire in a given month are identical; each calls for delivery of the same commodity in the same place at the same time. Forward and spot contracts, by contrast, call for sale of the commodity; no one deals “in the contract”; it is not possible to close a position by buying a traded offset, because promises are not fungible; delivery is idiosyncratic rather than centralized.
Id. at 865-866.
Other circuits have adopted a similar standard for distinguishing between a spot or forward sale of a commodity and a *195futures transaction “in the contract” involving fungible contracts with standardized terms that are traded on an exchange that bears the risk of a counter-party not performing. See e.g., CFTC v. Erskine, 512 F.3d 309 (6th Cir.2008) (adopted Zel-ener test in concluding that forex trading is not futures and rejecting an approach focusing on intent to make actual delivery); In re Olympic Natural Gas Co., 294 F.3d 737 (5th Cir.2002); CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573 (9th Cir.1982).
In Zelener, defendant AlaronFX dealt in retail foreign currency. The customer agreement provided that AlaronFX was the counterparty to its customers. A customer would place the order to buy or sell a particular currency in a quantity chosen by the customer. The contract called for settlement within 48 hours. The customers rarely made payment within that time and none took delivery of the currency. AlaronFX could have reversed the transaction within the 48 hours and charged or credited the customer with any change in price over the course of those two days. Instead, AlaronFX rolled them forward two days at a time. Successive rollovers meant that a customer could keep an open position in the currency. If the currency appreciated during that time, the customer could close the position and reap the profit by taking delivery or selling an equal amount of currency back to AlaronFX. If the currency fell, then the customer suffered a loss when the position was closed by selling currency back to AlaronFX. The profit or loss was determined by the difference in the prices offered when the customer opened the position with the initial transaction and when it closed the position by entering into an opposing transaction.
The Zelener court distinguished these retail forex transactions from futures contracts because the “customer buys foreign currency immediately rather than as of a defined future date, and because the deals lack standard terms. AlaronFX buys and sells as a principal; transactions differ in size, price, and settlement date. The contracts are not fungible and thus could not be traded on an exchange.” Zelener, 373 F.3d at 864. The court therefore concluded that the forex trades were spot sales for delivery within 48 hours.
The retail forex trading at Peregrine worked in essentially the same way as in Zelener. The plaintiffs do not dispute that the retail forex trades involved transactions in the currencies themselves, there was no trading in “the contract,” there were no standardized terms so the contracts were not fungible, each transaction was unique in the amount of the currency and price, delivery for each transaction was idiosyncratic rather than centralized, the transactions were not made on an exchange, and there was no clearinghouse so no third party took on the risk of nonperformance by a counterparty.
The Agreement in this case is also remarkably similar to the customer agreement in Zelener. Section 7 of the Agreement contains most of the provisions governing forex trading. This section begins by explaining that foreign currency transactions (referred to as “Currency Forex”) “are traded on the ‘interbank’ system, and not on regulated exchanges like commodities. The interbank system consists of counterparties that exchange currency positions with each other.” Peregrine Customer Account Agreement, para. 7 (Ex. B to Plaintiffs’ Statement). The Agreement also provides that Peregrine “shall act as a principal and is the counter-party in each Currency Forex contract or transaction with Customer.” Para. 7(a). “Prices and valuations for Currency Fo-*196rex are set by [Peregrine] and may be different from prices reported elsewhere.” Para. 7(b). The customer agreed “to instruct [Peregrine] as to the offset or rollover of a foreign currency position.” Para. 7(c). In the absence of timely instructions from the customer, Peregrine “is authorized, at [Peregrine’s] sole and absolute discretion, to deliver, roll over or offset all or any portion of the Currency Forex positions in the Customer’s Account and at Customer’s risk.” Para. 7(c). The Agreement also specifies that each transaction is a separate transaction but that Peregrine, in its discretion, could elect to treat two or more open, opposite transactions as a single transaction and net the difference. Para. 7(f) and (g). Thus, the essential and undisputed facts in this case are almost identical to those in Zelener. As in Zel-ener, the retail forex transactions in this case were spot transactions, not futures.4 Indeed, the plaintiffs themselves admitted as much in depositions. They testified that their forex transactions were spot transactions at an “immediate” price, not a future price, that they were transactions in the actual currency, not in a contract, and that the forex market was “the spot market, the cash market.” Trustee Stmt. Par. 20.5
2. Plaintiffs’ Attempts to Avoid Zelener
Plaintiffs argue that Zelener is not controlling for several reason, including that it is no longer good law and does not apply in any event. These arguments are not persuasive.
First, plaintiffs argue that Zelener is no longer good law because it was “explicitly overturned” by a statutory amendment to the CEA enacted in 2008. This is not correct. Zelener concluded that the CFTC did not have jurisdiction under the CEA to regulate retail forex transactions because they were not futures. Congress then chose to expand the anti-fraud jurisdiction of the CFTC in 2008, in what is sometimes referred to as “the Zelener fix,” to give the CFTC jurisdiction over retail forex. 7 U.S.C. § 2(c)(2)(C)(iv). In doing so, Congress did not reject the holding in Zelener that retail forex transactions are spot contracts, not futures contracts. Instead, as discussed more fully below, although Congress was specifically aware of the Zelener and Erskine holdings, it chose not to include retail forex in the definition of “commodity contract” when it amended *197the definition in 2005 and 2010, or when it amended the CEA to include forex in the CFTC’s anti-fraud jurisdiction in 2008. So, rather than overturning Zelener, Congress left intact the court’s determination that retail forex transactions are spot contracts, not futures. Zelener is still controlling in this circuit regarding the distinction between futures contracts and spot and forward contracts generally, and specifically that retail forex transactions are not futures.6 See U.S. v. Walsh, 723 F.3d 802, 811 (7th Cir.2013) (noting the continuing validity of Zelener, stating that “Zelener held that rollovers of foreign currency sales were not contracts of sale of a commodity for future delivery but were instead spot sales.”).
Plaintiffs next argue that Zelener does not apply because their retail forex transactions fall within an exception discussed in Zelener. The Zelener court noted that it had previously recognized an exception to the general rule that off-exchange transactions in a commodity itself may not be futures when “the seller of the contract promises to sell another contract against which the buyer can offset the first contract ... That promise could create a futures contract.” Id. at 868. The court explained that a “promise to create offsets makes a given setup work as if fungible: although the customer can’t go into a market to buy an equal and opposite position, the dealer’s promise to match the idiosyncratic terms in order to close the position without delivery means that the customer can disregard the absence of a formal exchange.” Id. For this potential exception to apply, the dealer must have “promised to sell the offsetting position, and thus allow netting on demand.” Id. The court found no such promise in the AlaronFX customer agreement. It contained a provision stating that, if the customer failed to give timely instructions for the disposition of a position, then AlaronFX was authorized, in its sole discretion, to deliver, roll over or offset all or any portion of the open position at the customer’s risk. AlaronFX also agreed to attempt to execute, in its sole discretion, all orders from the customer in accordance with the customer’s instructions. The court concluded that neither of these provisions was a promise to provide an offsetting trade so that the customer could net out its position upon demand.
The Agreement in this case contains two provisions that are very similar to those described in Zelener regarding rollover of contracts, which did not transform the fo-rex transactions into futures. The plaintiffs nonetheless attempt to shoehorn this case into this exception recognized in Zel-ener. First, they argue that, unlike Alar-onFX, Peregrine made the requisite unconditional promise to sell the customer an offsetting position to close out any open forex position. The only provision they cite, however, is Paragraph 7(b) of the Agreement. It provides:
Prices and Valuations for Currency Fo-rex. Prices and valuations for Currency Forex are set by PFGBEST [Peregrine] and may be different from prices reported elsewhere. PFGBEST will provide prices to be used in trading, valuations of Customer positions and determination of margin requirements. Although PFGBEST expects that these prices will be reasonably related to prices available in the interbank market, prices reported by PFGBEST may vary from prices *198available to banks and other counterparties in what is known at the interbank market.
Agreement, Para 7(b) (emphasis added). Plaintiffs contend that the statement that “PFGBEST will provide prices to be used in trading” constitutes an unambiguous promise to provide an offsetting contract for any open forex position and permit netting upon demand by the customer. It requires no such thing. Instead, it gives Peregrine alone the power to set all prices to be used in trading, in determining the value of a customer’s positions, and in determining margin requirements, making it clear that prices available on the interbank system would not control for these purposes. This provision does not create the unconditional right to buy an offsetting contract from or through Peregrine upon demand by the customer.
Second, Plaintiffs contend that, in any event, a NFA rule requires “the offset of all matching retail forex positions.” Plaintiff Brief at p. 13. They argue that the NFA rule requires forex dealers to offer offsetting transactions upon demand of the customer. The NFA Rule in question, however, does not require this. Instead, it provides that forex dealers “may not carry offsetting positions in a customer account, but must offset them on a first-in, first-out basis.” NFA Compliance Rule 2-43(b). Thus, the rule requires that if there are two offsetting transactions in a customer’s account, then the dealer must offset them on a first-in, first-out basis. The rule does not impose the obligation to provide an offsetting transaction for every open retail forex position to allow netting upon demand by the customer. This NFA Rule was quickly followed by a CFTC regulation issued in 2010,17 C.F.R. § 1.46, which makes it clear that a setoff must occur only when an opposing transaction already exists in the customer’s account. See IKON Global Markets, Inc. v. CFTC, [2012 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 32, 208, n. 3 (D.D.C. May 15, 2012). Neither the NFA rule nor the CFTC regulation bring the Peregrine retail forex transactions within the exception recognized in Zelener.7
Finally, the plaintiffs argue that the court cannot determine the nature of the retail forex transactions on summary judgment because there are issues of fact regarding the Agreement and how the trading actually worked at Peregrine. They contend that the court must admit parole evidence, which requires a trial. None of their arguments is persuasive. First, the plaintiffs argue that the contract is ambiguous and contradictory regarding the time for giving instructions regarding settlement or rollover and the consequences of failure to give instructions. Even if the plaintiffs were correct, this potential issue has no impact on the analysis-the essential features of the transactions discussed above are undisputed and dispositive. Next, they argue that settlement by delivery was never intended and could not occur because they never provided foreign bank information for the delivery of foreign currencies. This, too, makes no dif*199ference. Zelener rejected the argument that intent to accept delivery matters in the analysis of whether a transaction is a future, or a spot or forward. The court noted that “[I]t is essential to know beforehand whether a contract is a futures or a forward,” and that “[njothing is worse than an approach that asks what the parties ‘intended’ or that scrutinizes the percentage of contracts that lead to delivery ex post.” 373 F.3d at 866. Thus, the actual intention of the parties regarding delivery does not matter. Finally, the plaintiffs argue that, because the Agreement dealt with many types of trading, there is a theoretical risk that a customer’s funds could be “misclassified” for purposes of § 761(4). They do not allege that any misclassification has occurred or present any evidence of a misclassification.
Thus, there are no genuine issues of fact that matter, and the court can determine as a matter of law that the plaintiffs’ retail forex trades were spot contracts, not futures, based on Zelener and the undisputed facts.
B. Similarity Clause
Concluding that retail forex transactions conducted through Peregrine were not futures does not, however, end the inquiry. As noted above, a transaction can be a “commodity contract” if it fits within one of the types of transactions specifically described in § 761(4), or if it is “similar to” one of those transactions for purposes of 761(4)(F)(i).
The trustee argues that Zelener is controlling on this issue-that retail forex transactions are not “similar to” futures for the same reasons that they are not actually futures. He also contends that various amendments to the Bankruptcy Code and the CEA demonstrate that Congress chose to exclude retail forex customers from the definition of commodity contract. The court agrees on both points.
1. Zelener and the Similarity Clause
Although Zelener interpreted the definition of a futures contract under the CEA and did not address the similarity clause, its analysis is nonetheless directly relevant and compels the conclusion that retail fo-rex transactions are not “similar to” futures. There are no written judicial opinions construing the similarity clause, and the legislative history provides little guidance. Merriam Webster defines “similar” as “alike in substance or essentials.” Webster’s Third New International Dictionary (2000). Applying this ordinary meaning, under Zelener, these two types of transactions are not alike in substance or essentials. As discussed above, futures involves trading “in the contract” with fungible contracts containing standardized terms traded on regulated exchanges where a clearinghouse accepts the risk of counterparty default. Futures trading has been highly regulated for many decades. Retail forex is at the opposite end of the trading spectrum. It involves private, off-exchange transactions, each of which is unique in terms of currency pair, quantity, and settlement date. No clearinghouse bears the risk of default by a counterparty, and it was virtually unregulated until 2000. The primary similarity between retail fo-rex and futures is that both are used for speculation by parties who have no intention of actually taking delivery. This similarity, as Zelener held, is not significant and does not outweigh the many crucial differences between these two types of transactions. Zelener, 373 F.3d at 865-66. Thus, applying the ordinary meaning of “similar,” retail forex is not “similar to” futures.
2. History of Commodities Regulation
This conclusion is supported by the history of commodities regulation and the *200amendments to both the Bankruptcy Code and the CEA, which make it clear that Congress did not intend to include spot retail forex (or OTC metals) in the definition of commodity contract. When the CEA was enacted in 1936, it governed only futures transactions, not spot or forward transactions. As the Fourth Circuit explained:
Because the [CEA] was aimed at manipulation and speculation, and other abuses that could arise from the trading in futures contacts and options, as distinguished from the commodity itself, Congress never purported to regulate “spot” transactions (transactions for the immediate sale and delivery of a commodity) or “cash forward” transactions (in which the commodity is presently sold but its delivery is, by agreement, delayed or deferred).... Transactions in the commodity itself which anticipate actual delivery did not present the same opportunities for speculation, manipulations, and outright wagering that trading in futures and options presented. From the beginning, the CEA thus regulated transactions involving the purchase and sale of a commodity “for future delivery” but excluded transactions involving “any sale of any cash commodity for deferred shipment or delivery.” 7 U.S.C. § 2. The distinction, though semantically subtle, is what the trade refers to as the difference between “futures,” which generally are regulated, and “cash forwards” or “forwards,” which are not.
Salomon Forex, Inc. v. Tauber, 8 F.3d 966 (4th Cir.1993), cert. denied, 511 U.S. 1031, 114 S.Ct. 1540, 128 L.Ed.2d 192 (1994). See also Lachmund v. ADM Investor Services, Inc., 191 F.3d 777, 786 (7th Cir.1999) (quoting Salomon). Since its enactment, the CEA required trading in futures to be conducted only on regulated exchanges through FCMs. FCMs were also required to hold all funds from futures customers in segregated accounts and treat them as solely the property of the futures customer pursuant to a statutory trust. 7 U.S.C. §§ 6d(a)(2) and 6d(b).
Over time, as off-exchange markets emerged in which retail customers could engage in purely speculative trading, Congress gradually expanded the reach of the CEA and the CFTC to cover these markets. Congress enacted the first law affecting retail forex in 2000, when it adopted some limitations on the types of firms that could enter into forex transactions with retail customers. See Erskine, 512 F.3d at 313 and CFTC v. UForex Consulting, LLC, 551 F.Supp.2d 513, 532 (W.D.La.2008). In 2008, after Zelener and Erskine, Congress expanded the anti-fraud jurisdiction of the CFTC to include retail forex, see 7 U.S.C. 2(c)(2)(C)(iv), and it authorized the CFTC to establish standards for counterparties to retail forex transactions. See 7 U.S.C. § 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v); 2(c)(2)(C)(iii)(III). When Congress made those amendments, it was specifically aware that Zelener and Erskine held that retail forex transactions were not futures and therefore would not fall within the definition of “commodity contract,” yet it chose not to add retail forex to the definition.
In 2010, Congress again expanded the CTFC’s power, giving it specified authority over off-exchange retail transactions in all commodities, even transactions construed as spot or forward contracts. See 7 U.S.C. § 2(c)(2)(D)(iii). It also amended the definition of “commodity contract” again, this time to add a broad array of cleared transactions. 11 U.S.C. § 761(4)(F)(ii) (adding, with respect to an FCM or clearing organization, “any other contract, option, agreement or transaction, in each case, that is cleared by a clearing organization.”) Once again, though, un*201cleared transactions like retail forex were not included in the definition of “commodity contract.” Under the age-old rule of statutory construction that expressio uni-us est exclusio alterius (to express one thing implies the exclusion of the other), by choosing to include only cleared transactions, Congress implicitly excluded all uncleared transactions not specifically described in other subparagraphs of the definition. See In re Globe Building Materials, Inc., 463 F.3d 631, 635 (7th Cir.2006). These amendments thus reflect Congressional intent to exclude retail forex from the definition of “commodity contract” and therefore from the protections afforded to “customer property” under the Bankruptcy Code.
3. CFTC Regulations
This conclusion is consistent with the CFTC’s regulations and its interpretation of the CEA and the Part IV provisions of the Bankruptcy Code. Congress created the CFTC in 1974 to regulate commodity futures in the U.S. In 1978, Congress first enacted the Part IV provisions of chapter 7 governing the bankruptcy of a commodity broker in an effort to “maintain consistency with the Commodity Exchange Act.” See S.Rep. No. 95-989, at 7-8 & fn 1, 1978 U.S.C.C.A.N. 5787, 5793-94. At the same time, Congress authorized the CFTC to promulgate rules or regulations dealing with various aspects of bankruptcies of commodity brokers. 7 U.S.C. § 2. In 1983, the CFTC promulgated the Part 190 regulations governing commodity broker bankruptcies. The Part IV provisions of the Bankruptcy Code, the CEA, and the Part 190 regulations operate together to govern bankruptcies of commodity brokers.
The Part 190 regulations generally attempt to align the definitions of “commodity contract” and “customer property” in the Bankruptcy Code with the segregation requirements of the CEA and CFTC regulations. Segregation of customer funds is the highest level of customer protection provided under the CEA and CFTC regulations. FCMs must treat customer funds as the property of the customer, not the FCM. See, e.g., 7 U.S.C. § 6d(a)(2), (b). Section 766(h) of the Bankruptcy Code and the Part 190 regulations then give customer property the highest priority for distribution in bankruptcy, with the exception of certain administrative expenses, consistent with their treatment as property of the customer under the CEA and CFTC regulations.
When Congress enacted the Part IV provisions governing commodity broker bankruptcies in 1978, it also granted the CFTC the power, “notwithstanding Title 11” (the Bankruptcy Code), to determine by rule or regulation that certain cash, securities, other property or commodity contracts are to be included or excluded from customer property.” 7 U.S.C. § 24(a)(1). The CFTC and the trustee contend that this provision permits the CFTC, in effect, to alter the definitions of “customer property” and “commodity contract” in § 761 of the Bankruptcy Code. The plaintiffs dispute that the CFTC’s authority is so broad, but whatever the full extent of authority granted to the CFTC, it has promulgated regulations defining classes of “customer property” that get priority in bankruptcy. These classes do not include retail forex or OTC metals because the CEA and CFTC regulations do not require segregation of customer funds for these types of trading.
Regulation 190.08 provides that “customer property” is to be ratably distributed to customers from the applicable pools of customer property in separate customer “account classes.” 17 C.F.R. § 190.08. Part 190 identifies five such account classes: futures accounts, foreign futures *202accounts, leverage accounts, cleared swap accounts, and “delivery accounts.” 17 C.F.R. § 190.01(a)(1). With the exception of delivery accounts, which deal with specifically identifiable property associated with delivery, these account classes correspond directly to the classes of transactions protected by segregation requirements. Segregation is required under the CEA and CFTC regulations for customers trading in domestic futures, foreign futures, leverage contracts, and cleared swaps.8 All of these transactions are defined as commodity contracts in § 761(4). 11 U.S.C. § 761(4)(A), (B), (C), and (F)(ii).9 As plaintiffs concede, nothing in the CEA or CFTC regulations requires segregation of funds from customers trading in retail forex or OTC metals. Thus, by design, the CFTC did not include classes for retail forex or OTC metals because FCMs are not required to segregate the funds of these customers.
In fact, instead of including retail forex in the classes of “customer property,” the CFTC issued a regulation requiring forex dealers to provide a notice to all retail forex customers specifically informing them that any money they deposit with their dealer has “no regulatory protections.” It warns customers that:
Funds deposited by you with a futures commission merchant or retail foreign exchange dealer for trading off-exchange foreign currency transactions are not subject to the customer funds protections provided to customers trading on a contract market that is designated by the Commodity Futures Trading Commission. Your dealer may commingle your funds with its own operating funds or use them for other purposes. In the event your dealer becomes bankrupt, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor’s claim.
Forex Risk Disclosure Statement, 17 C.F.R. § 5.5(b) (emphasis added). Thus, under the CFTC’s regulations and its interpretation of the Part TV provisions of the Bankruptcy Code, funds of customers trading retail forex are not “customer property” and do not get any special priority in bankruptcy.
While the CFTC’s views are not controlling regarding the interpretation of the definition of “commodity contract” in § 761(4), see Zelener, 373 F.3d at 867, it presents a compelling explanation of the overall statutory and regulatory scheme that supports the conclusion that retail forex does not fall within the definition of “commodity contract.”
4. Plaintiffs’ Arguments
Plaintiffs argue that retail forex fits within the similarity clause for a number of reasons, none of which has merit,
a. Common Denominator Approach
First, instead of trying to demonstrate that retail forex has the same essential features as any of the transactions specifically listed in § 761(4)(A)-(E), plaintiffs argue that the court should determine what each of the specific categories listed in § 761(4) have in common and then conclude that all transactions with those common characteristics fall within the similari*203ty clause. Under the plaintiffs’ theory, the only factor common to all the transactions specifically listed in § 761(4) is that they are regulated in some way by the CFTC.10 Since retail forex is now regulated by the CFTC, they contend that it falls within the similarity clause. Plaintiffs point to no statutory language, legislative history, or other support for this “common denominator” approach, which would sweep into the definition of “commodity contract” every type of transaction within the current regulatory authority of the CFTC. If Congress intended the definition of “commodity contract” to be so broad, it would have defined it simply as all transactions regulated by the CFTC. Instead, Congress crafted the more complex and limited definition in § 761(4) that specifically includes certain transactions and by implication excludes others.
b. Legislative History
The plaintiffs also argue that the legislative history of § 761(4) supports their broad interpretation of the similarity clause. The similarity clause was added through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Plaintiffs cite a report of the House Judiciary Committee on BAPC-PA that discussed changes made in BAPC-PA to the definitions in the Federal Deposit Insurance Act (FDIA) and Federal Credit Union Act (FCUA) to make them consistent with the definitions of the Bankruptcy Code and to reflect the enactment of the Commodity Futures Modernization Act of 2000. In discussing the definition of “swap agreement” in the FDIA, the House report states:
[T]the definition of a swap agreement was originally intended to provide sufficient flexibility to avoid the need to amend the definition as the nature and uses of swap transactions matured. To that end, the phrase for any other similar agreement was included in the definition. (The phrase for any similar agreement has been added to the definition of forward contract, commodity contract, repurchase agreement and securities contract for the same reason.)
H.R. REP. NO. 109-31 at 121 (2005).
Plaintiffs assert that the statement about flexibility applies to the similarity clause in § 761, and that retail forex should somehow fall into this “flexible” definition of “commodity contract.” To the extent the sentence in parentheses was intended to explain the addition of the similarity clause to the definition of “commodity contract” in the Bankruptcy Code, it does not assist the plaintiffs.
First, the discussion in the House report had nothing to do with whether retail forex should be included in the definition of “commodity contract.” Instead, the BAPCPA amendments regarding commodities trading were designed to expand the “safe harbor” for financial contracts — insulation from the automatic stay and limitations on preferential and fraudulent transfer proceedings to protect the financial markets on which derivatives are traded. See Edward R. Morrison and Joerg Riegel, Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges, 13 Am. Bankr.Inst. L.Rev. 641 *204(2005). Second, the language quoted by plaintiffs suggests that Congress wanted to include transactions similar to those specifically identified in § 761(4) as they evolved in the marketplace in the future, not to include categorically different types of transactions that were occurring at the time of the amendment of which Congress was fully aware, like retail forex. The legislative history cited by the plaintiff thus supports the court’s conclusion that Congress did not intend to bring transactions like retail forex into the definition of commodity contract through the similarity clause, not the plaintiffs’ contentions,
c. Segregation Requirements
Plaintiffs also challenge the CFTC’s contention that the “customer property” protections under the Bankruptcy Code are intended to be consistent with the segregation requirements under the CEA and CFTC regulations. First, they argue that “trade options” are not subject to segregation requirements but fall within subparagraph (E) of definition of “commodity contract.” Plaintiffs neither define “trade options” nor explain how they are similar to or different from the options covered by § 761(4)(E). The CFTC responds that “trade options” are not synonymous with the commodity options included in § 761(4)(E), and do not necessarily fall within subparagraph (E). The court need not resolve this issue to conclude that the CFTC has promulgated regulations to create consistency between the segregation requirements and the treatment of “customer property” under the Bankruptcy Code. Even if the plaintiffs’ position was correct, a lack of perfect correlation between the segregation requirements and the specifically listed transactions in § 761(4) would not undermine the CFTC’s central position, and would have no impact on the court’s analysis based on Zelener and the history of the Congressional regulation of commodities trading.
Second, plaintiffs argue that, even though segregation of retail forex customer funds is not required by the CEA or CFTC regulations, the requirements imposed on forex dealers are “not substantially different in structure and effect” from the segregation requirements. Plaintiffs’ Response at p. 19. This is not correct. The regulations on which plaintiffs rely require forex dealers to maintain assets equal to their total aggregate forex obligations. 17 C.F.R. § 5.8. They do not require the require forex dealers to hold the funds in trust for the customer or prohibit the commingling of customer funds with the dealer’s own assets. They are not the functional equivalent of the segregation requirements.
C. OTC Metals
Most of the plaintiffs’ arguments focused on retail forex, not OTC metals, for good reason. The plaintiffs admit that their OTC metals transactions are spot contracts, not futures. These transactions are not “retail” trades but instead can be conducted only by Eligible Contract Participants (“ECP”), who are sophisticated investors with a high net worth. Only one of the plaintiffs, Treasure Island Coins (“TIC”), traded in OTC metals. It is an ECP. The transactions are principal-to-principal, do not occur on an exchange, and are not cleared. In fact, OTC metals transactions conducted through Peregrine were not regulated at all under the CEA because of a statutory exemption that was in effect until after the petition date. 7 U.S.C. § 2(g); 77 Fed.Reg. 41260 (July 13, 2012). Plaintiffs present no basis for concluding that TIC’s OTC metals trading is similar to any of the categories of commodity contracts specified in § 761(4). Even their general argument that the similarity clause should bring within the definition of “commodity contract” all types of transac*205tions regulated by the CFTC would not sweep in OTC metals transactions, because they were not regulated by the CFTC until after Peregrine filed for bankruptcy. TIC’s OTC metals trades were unregulated and uncleared spot transactions that are not “similar to” any type of transaction listed in § 761(4).
IV. CONCLUSION
For all of these reasons, there is no genuine issue of material fact and the trustee is entitled to judgment as a matter of law on Count IV of the complaint. The plaintiffs’ retail forex and OTC metals transactions are not commodity contracts for purposes of § 761(4) of the Bankruptcy Code.
. No party argues that the transactions described in subparagraphs (G) through (J) of § 761(4) are potentially similar to retail forex or OTC metals so the court will not address them.
. As an FCM, only subparagraph (A) could apply to transactions conducted through Peregrine. Subparagraphs (B)-(E) could not apply directly in this case because they are limited to transactions with respect to the other types of entities noted above: foreign futures commission merchant (B); leverage transaction merchant (C); clearing organization (D); and commodity options dealer (E). Plaintiffs allege only that Peregrine was an FCM.
. A futures contract is an agreement to purchase or sell a particular commodity at a fixed date in the future. See CFTC v. Erskine, 512 F.3d 309, 323 (6th Cir.2008). A spot contract is one for the immediate sale and delivery of a commodity or for delivery within 48 hours. See Lachmund v. ADM Inv. Servs., Inc., 191 F.3d 777, 786 (7th Cir.1999). A forward contract is for the present purchase or sale of a commodity that provides for delivery at some future date, more than 48 hours after the date the contract is entered. See 11 U.S.C. § 101(25).
. The trustee contends the forex transactions in this case are spot contracts — for delivery immediately or within 48 hours, not forward contracts for delivery more than 48 hours after they are entered. The plaintiffs never challenge this contention directly; they argue instead that rollover provisions discussed below make this term irrelevant in practice. In fact, plaintiffs quote repeatedly from the trustee’s motion to approve the interim distribution stating that forex contracts had an initial expiration date two trade dates following the date on which the transaction occurred. Thus, the parties appear to agree that the retail forex contracts called for settlement within 48 hours, thus falling into the definition of a spot contract, not a forward contract. Under Zelener, the result would be the same whether the forex transactions were spot or forward contracts — in either case they would not be futures.
. Paragraph 20 of the trustee’s statement of undisputed facts states that the plaintiffs’ retail forex transactions were spot transactions. He supports this statement with various documents, including the deposition testimony of four of the plaintiffs acknowledging that their retail forex trades were spot transactions. In their response to the trustee’s statement of facts, the plaintiffs say this statement is "controverted because the statement is conclusory and incomplete,” but they cite only a two-sentence quote from the trustee’s motion for authority to make interim distributions. The quote does not in any way refute the evidence cited by the trustee so the plaintiffs’ attempted denial of the statement is ineffective.
. Plaintiffs attempt to make much of the fact that the CFTC took the position in Zelener and other cases that it had jurisdiction to regulate retail forex and that it is taking a contrary position in this case. Positions taken on these issues by the CFTC in previous cases have no bearing on this case. Zelener is the law in this circuit.
. A CFTC regulation requires forex dealers to give each customer a Forex Risk Disclosure. It provides:
Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions.... The terms of your account agreement alone govern the obligations your dealer has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you.
15 C.F.R. § 5.5(b). Thus, the CTFC does not view the NFA rule or its own regulation regarding the offset of opposing currency transactions on a first-in first-out basis to require a dealer to offer offsetting transactions.
. See 7 U.S.C. § 6d(a)(2) (segregation requirements for domestic futures); 17 C.F.R. § 30.7(b), (e)(2) (foreign futures); 17 C.F.R. § 31.12(a) (leverage transactions); 7 U.S.C. § 6d(f) (cleared swaps).
. Section 761(4)(F)(ii) appears to describe the functional equivalent of cleared swaps. “Swap agreement” is expansively defined in 11 U.S.C. § 101(53B).
. Plaintiffs submitted the affidavit of an attorney they propose as an expert who offers legal opinions on various topics, including on this issue regarding similarity. The plaintiffs do not discuss any specific testimony he would give in their response brief, but his testimony is inadmissible in any event because it consists of legal opinions. See United States v. Sinclair, 74 F.3d 753, 757 n. 1 (7th Cir.1996); see also Sunstar, Inc. v. Alberto-Culver Co., 586 F.3d 487, 496 (7th Cir.2009). His affidavit, therefore, cannot be considered on summary judgment and does not create a genuine issue of material fact. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497069/ | SCHERMER, Bankruptcy Judge.
Robert L. Fields (the “Debtor”) appeals from the judgment of the bankruptcy court1 excepting a debt owed to Communi*230ty Finance Group, Inc. (“CFG”) from the Debtor’s discharge under 11 U.S.C. § 523(a)(2)(A). We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). We affirm.
ISSUES
The issues in this appeal are whether the bankruptcy court clearly erred when it found that: (1) the Debtor made a misrepresentation to CFG regarding how the proceeds of the loan would be used; and (2) CFG justifiably relied on the misrepresentation. We also examine whether the bankruptcy court appropriately determined that the Debtor’s misrepresentation was made with the requisite knowledge and intent to deceive. We see no clear error in the bankruptcy court’s decision.
BACKGROUND
On February 15, 2010, the Debtor filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”). At that time, Main Street Otsego, LLC (“MSO”), a company formed by the Debtor to pursue a commercial real estate project, was in default on its loan obligations to CFG. The dispute in this case arises from that default.
The Debtor was the Chief Executive Officer and Chief Manager of MSO. He had considerable experience in the construction and real estate industries, as he was involved in the development of real estate and construction of buildings for a significant period of time, and owned and operated numerous entities involved in those businesses. The Debtor formed LandCor Construction, Inc. (“LCCI”) and LandCor, Inc. (“LandCor”) to handle construction and property management.
The bankruptcy court found that throughout his many years in the commercial real estate industry, the Debtor had worked with lenders to obtain loans, and he was familiar with the requirements of lenders. The Debtor knew that a material consideration for lenders was the borrower’s intended use for the funds. He also knew that lenders expected, and relied upon, a potential borrower’s representations being accurate and complete. In the past, the Debtor acted as an investor in and board member of a bank. In that capacity, he reviewed applications for credit.
MSO held two buildings on a parcel of property that was part of the Debtor’s larger development of a multi-parcel real estate project, commenced before 2005, and known casually as “the Waterfront development” or “Main Street Otsego.” Each parcel for the project was owned by a separate entity and had its own financing.
GCI Capital, Inc. (“GCI”) provided the initial financing for MSO’s project, through the grant of a $7,500,000 line of credit.2 Although MSO was permitted to draw on the line of credit as needed, GCI had the power to suspend MSO’s right to make draws. The line of credit was secured by a first mortgage on the property. In addition, the Debtor personally guaranteed MSO’s obligations to GCI.
By April, 2008, a time when MSO had drawn approximately $5,800,000 on the line of credit, MSO experienced difficulty satisfying its obligation to pay interest to GCI, and GCI froze MSO’s ability to make *231draws. In April, 2008, GCI and MSO entered into a forbearance agreement. Part of the forbearance agreement required MSO to pay remaining accrued interest when the full principal amount of the note came due four months later, on August 15, 2008, under the original terms of the loan.
Notwithstanding the Debtor’s persistent requests for GCI to renegotiate the terms of the loan, to allow MSO to make an additional draw on the line of credit, and to change the arrangement into a “permanent loan with a long-term amortization,” GCI was not willing to do so. GCI would not discuss the situation with MSO absent a full cure of MSO’s interest arrearages. And, as the bankruptcy court stated, “[mjore crucially, [GCI] would promise to discuss no more than an extension of the due date for a fixed period of a few months beyond that reset under the forbearance.”
During the summer and early fall of 2008, MSO had difficulty securing tenants for its property. It had two or three signed leases, and none of the other possibilities for tenants moved toward a signed lease that summer.
Aside from revenue from the two or three leases, MSO had little or no other capital during the summer and early fall of 2008. The prospects for accommodation to MSO from GCI did not improve during that time. And, on October 6, 2008, GCI issued a notice of default and demand for payment from MSO of the full debt. In the meantime, the Debtor was experiencing similar problems satisfying the obligations for several of his other real estate entities. In September, 2008, the Debtor was desperate.
Andrew Vilenchik was CFG’s General Manager. Vilenchik described CFG at trial as “ ‘mainly a residential mortgage originator,’ that also ‘conducted some commercial transactions.’ ” The parties stipulated that CFG “is a Minnesota finance company that provides a wide range of real estate based financial services to residential and commercial clients with all types of income and credit backgrounds.”
In mid-October, 2008, the Debtor and Vilenchik first met. After their first encounter, the two met later in October, 2008 to discuss the possibility of CFG providing commercial financing for the Debtor’s projects. The bankruptcy court found that the Debtor told Vilenchik that his personal funds had been frozen due to an investigation by the FDIC of a bank in which the Debtor was an owner and principal. After describing CFG’s lending guidelines and the circumstances under which CFG would provide a loan, Vilenchik indicated the Debtor could submit a loan application. Three days later, the Debtor and Vilenchik met again, at which time the Debtor submitted to Vilenchik what he called a “bank book,” a compilation of documents including information he submitted to support MSO’s request for a loan. The bank book included various documents such as a “rent roll” for MSO’s properties. In response to Vilenchik’s inquiry as to why the bank book included financial documents for LCCI and LandCor, but not for MSO, the Debtor stated the LCCI and LandCor fi-nancials were relevant since MSO was “just a shell company.” The Debtor did not submit a written loan application to CFG.
Prior to a meeting between the Debtor and Vilenchik four days later, Vilenchik had a real estate service company that he owned conduct a search of the public records with respect to the MSO property. The GCI mortgage was the only lien or encumbrance that appeared of record, but outstanding real estate taxes owed by MSO were noted. Vilenchik performed an external inspection of the MSO properties and determined that the properties were “well-managed.” During the site visit, the *232Debtor told Vilenchik that GCI froze MSO’s line of credit.
A third-party, Duane Kropuenske, accompanied the Debtor and Vilenchik on the site visit. Kropuenske testified that he attended the site visit “as a friend to ride along with [the Debtor].” At the time, Kropuenske worked with the Debtor on a commission basis. In the past, Kro-puenske had been the president of a bank for which the Debtor was an investor and a fellow board member.
CFG agreed to loan MSO funds and, on November 6, 2008, the closing took place for a single disbursement of a $500,000 loan to MSO, even though Vilenchik had originally proposed that the loan be structured as a construction loan. The loan was meant to be short-term; its maturity date was 60 days from closing. Although CFG did not normally lend on the strength of a second mortgage, it did so this time.
One of the documents presented as an exhibit at trial from the CFG loan closing, which has received attention in this appeal, but was not discussed in the bankruptcy court’s opinion, is a Written Action of the Governor of Main Street Otsego, LLC (the “Written Action of Governor”). This document was signed by the Debtor as Governor of MSO, and it states that MSO entered into the loan transaction with CFG “pursuant to which [MSO] will borrow from [CFG] the amount of $500,000.00 to help refinance the Property.”
Of the $500,000.00 in loan proceeds, the net amount disbursed to MSO was only $393,810.27. The balance of the loan proceeds were used to pay outstanding real estate taxes, and the rest were used for a loan origination fee, plus other fees and charges. Shortly after disbursement of loan proceeds, MSO paid approximately $335,000.00 to GCI, which cured MSO’s interest arrearage default to GCI, and allowed MSO to secure a 90 day extension of the due date of its GCI loan to March 1, 2009. None of the loan proceeds were used for tenant improvements.
The bankruptcy court characterized Vi-lenchik as less experienced than the Debt- or in the type of lending requested for the MSO project. The court noted that Vilen-chik’s testimony about his experience with commercial leasing and finance was “tersely and broadly” phrased. Although, as the bankruptcy court noted, Vilenchik had conducted evaluations for sizeable loans, had overseen tenant improvements for commercial projects, and was the “decision maker for a privately-capitalized residential and commercial lender for several years,” Vilenchik did not provide detailed testimony regarding his experience reviewing applications for commercial loans of the type and for the purposes requested by MSO. The bankruptcy court found that Vilenchik “did not testify to the length, breadth, frequency, or magnitude of his experience in the commercial sector, for [CFG] or otherwise.”
Ultimately, MSO defaulted on its obligations to both CFG and GCI. GCI foreclosed on its mortgage and took ownership of the property. CFG did not participate in the foreclosure as a junior lender.
After the Debtor’s bankruptcy filing, CFG commenced an adversary proceeding, seeking both a money judgment and asserting that the debt was nondischargeable under Bankruptcy Code §§ 523(a)(2)(A) and (B). During the course of the adversary proceeding, the Debtor was granted summary judgment on certain theories advanced by CFG regarding why the Debtor should be held personally liable for MSO’s debt. The bankruptcy court reserved for trial the issue of whether the Debtor was personally liable based on his commission of common law fraud in inducing CFG to lend to MSO. The bankruptcy court held *233the Debtor liable for the debt of MSO in a sum certain, and excepted such debt from the Debtor’s discharge pursuant to Bankruptcy Code § 523(a)(2)(A). This appeal concerns only the issue of dischargeability under § 523(a)(2)(A).3
STANDARD OF REVIEW
The bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. First Nat’l Bank of Olathe v. Pontow, 111 F.3d 604, 609 (8th Cir.1997); Merchants Nat’l Bank of Winona v. Moen (In re Moen), 238 B.R. 785, 790 (8th Cir. BAP 1999). Whether the elements of a claim under § 523(a)(2)(A) have been shown is a factual determination that is reviewed for clear error. R & R Ready Mix v. Freier (In re Freier), 604 F.3d 583, 587 (8th Cir.2010) (citing Pontow, 111 F.3d at 609). “A finding is ‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting U.S. v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). We give due regard to the bankruptcy court’s opportunity to judge the credibility of witnesses. Fed. R.BankR.P. 8013.
DISCUSSION
A. 11 U.S.C. § 523(a)(2)(A)
Exceptions to discharge are usually “narrowly construed against the creditor and liberally against the debtor, thus effectuating the fresh start policy of the Code.” Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1287 (8th Cir.1987), abrogated on other grounds, Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “The Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an ‘honest but unfortunate debtor.’ ” Cohen v. de la Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (internal citation omitted).
Bankruptcy Code § 523(a)(2)(A) excepts from a debtor’s discharge “any debt ... 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_”11 U.S.C. § 523(a)(2)(A). A ruling that a debt is non-dischargeable under § 523(a)(2)(A) requires proof, by a preponderance of the evidence, that:
1. The debtor made a representation.
2. The debtor knew the representation was false at the time it was made.
3. The representation was deliberately made for the purpose of deceiving the creditor.
4. The creditor justifiably relied on the representation.
5. The creditor sustained the alleged loss as the proximate result of the representation having been made.
Freier, 604 F.3d at 587 (citing Burt v. Maurer (In re Maurer), 256 B.R. 495, 500 (8th Cir. BAP 2000), and In re Ophaug, 827 F.2d 340, 343 (8th Cir.1987), as modified by Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (requiring justifiable reliance)).
*234B. Misrepresentation
The bankruptcy court focused on one misrepresentation by the Debtor: “the nature of MSO’s need for a loan from [CFG] and the uses to which the [Debtor] would put the proceeds to satisfy that need.”
Viewing the evidence in light of the surrounding circumstances, the court found that the Debtor told Vilenchik he needed the funds to complete tenant improvements at MSO’s property to get prospective tenants to commit to occupy the property. Contrary to the Debtor’s version, the bankruptcy court found the Debtor only hoped that GCI would extend additional credit to MSO if MSO could secure the occupancy of additional tenants. The court did not accept the Debtor’s claim that he told Vilenchik the purpose of the loan was to pay past-due interest to GCI so MSO could “get an extension” on the debt to GCI. The bankruptcy court found that Vilenchik testified he would not have had CFG make the loan to MSO if the representation to him had been the one the Debtor claims to have made. We see no clear error with the bankruptcy court’s finding.
The bankruptcy court specifically said it found the existence of a misrepresentation by the Debtor based on its assessment of the credibility of the witnesses in light of the surrounding circumstances, and that it found the content of Vilenchik’s testimony to be the most credible. We will not second guess the bankruptcy court’s assessment of credibility. See Fed.R.BanKR.P. 8013. The court provided a thorough explanation of how it arrived at its decision regarding credibility, and the court’s decision is supported by the record.
The bankruptcy court found that CFG would not have made the loan, as the Debtor claims CFG did, to repay past due interest owed to GCI, a senior lender, simply on the Debtor’s assurance that the Debtor would try to work with GCI for additional funds under the senior loan. The Debtor claimed that he told Vilenchik that, earlier in 2008, he had threatened to file a bankruptcy petition on behalf of MSO. It was not credible to the bankruptcy court that CFG would make such a loan after the Debtor made such a disclosure regarding how it was willing to treat GCI. According to the bankruptcy court “[g]oing ahead as [Vilenchik] did is not rationally consistent with receiving a statement like the [Debtor] says he made.” We see no error with this analysis.
The bankruptcy court also supported its decision with a finding that it was more likely that the Debtor, given his level of experience, and in a dire position, would not have disclosed to a potential lender that it had threatened filing a bankruptcy case. The Debtor would have known that such a disclosure would not have helped MSO obtain a loan it so desperately needed.
Moreover, even if the Debtor made the representation he claims to have made (that the funds were for payment of interest arrearage to GCI), the evidence did not show the Debtor had an understanding with GCI that if MSO paid the outstanding interest owed he could likely renegotiate with GCI and obtain funding so MSO could repay CFG’s loan.
The Debtor advanced various arguments before us regarding why he believes the bankruptcy court’s decision was made in clear error. The Debtor has not convinced us.
According to the Debtor, the bankruptcy court should not have disregarded testimony of Kropuenske because the facts as presented by Vilenchik could not have been true based on Kropuenske’s testimony. The Debtor complains the bankruptcy *235court improperly stated that Kropuenske testified that Vilenchik was present when the Debtor told Kropuenske the purpose for the loan was to pay unpaid interest, but Kropuenske had actually testified that Kropuenske heard the Debtor tell Vilen-chik that he needed the loan for that purpose. Regardless of whether Kropuenske in fact testified about hearing the Debtor tell Vilenchik the purpose for the loan, the bankruptcy court noted that Kropuenske “repeatedly qualified what he was saying was ‘to the best of [his] recollection.’ ” The bankruptcy court reasonably decided that Kropuenske’s testimony should be afforded no weight. And the bankruptcy court reasonably determined that Kropuenske’s testimony could not corroborate that of the Debtor in light of his involvements with the Debtor. The bankruptcy court was in the best position to judge the credibility of Kropuenske’s testimony.
The Debtor also maintains the evidence does not support the finding that the Debt- or told Vilenchik the loan was needed for tenant improvements. The Debtor posits it was illogical that Vilenchik would have the impression that the loan was for tenant improvements since the Debtor supposedly told Vilenchik MSO needed $500,000 for tenant improvements, but the final loan disbursement was significantly less than that amount after payment of outstanding real estate taxes, fees and costs. The bankruptcy court’s finding is not clearly erroneous.
Next, the Debtor points to the Written Action of Governor of MSO as support for his argument that the Debtor could not have told Vilenchik that the funds were for tenant improvements because the Written Action of Governor states that MSO borrowed the funds from CFG “to help refinance the [p]roperty.” We disagree with the Debtor. Vilenchik understood MSO needed the tenant improvements to advance a further goal of obtaining more money. The mention of refinancing the property in the Written Action of Governor proves nothing.
The balance of the Debtor’s arguments regarding why the bankruptcy court was wrong to find the misrepresentation by the Debtor are unpersuasive. The Debtor argues that the statements the bankruptcy court found to be made by the Debtor are not actionable because they relate to future conduct or constitute an oral statement regarding the financial condition of the Debtor or MSO.
The controversial statement, however, was that MSO needed the loan for tenant improvements, and would use the funds for that purpose. The bankruptcy court did not clearly err by treating the misrepresentation as actionable. The statement is either one regarding a present fact (the need and present intent regarding use of funds), or a statement by the Debtor regarding his intended use of the funds in the future when, accepting the findings of the bankruptcy court, the Debtor never intended to use the loan proceeds to make tenant improvements. Freier, 604 F.3d at 588 (“A material promise to perform in the future ‘made with the intent to defraud and without the intent to perform.... constitutes actionable fraud.’ ”) (quoting McDonald v. Johnson & Johnson, 722 F.2d 1370, 1379 (8th Cir.1983)).
The Debtor claims the representation concerns how CFG would be repaid in the future, maintaining that this is not actionable because it is a future promise to perform, or a statement of opinion or prediction, and not a statement of past or present fact. Contrary to the Debtor’s argument, the misrepresentation found by the bankruptcy court to be the basis for the fraud was not that GCI would release funds in the future. Rather, the representation was that the funds borrowed from CFG were needed for, and the Debtor’s intent was to use them for, tenant im*236provements. The Debtor merely hoped that there would be additional financing from GCI down the road if MSO was successful in its effort to make tenant improvements and sign more lessees.
The Debtor claims the representation was an oral statement “respecting the [D]ebtor’s or an insider’s financial condition,” that is excepted from the purview of § 523(a)(2)(A). 11 U.S.C. § 523(a)(2)(A). As support for his argument, the Debtor cites to the bankruptcy court’s statement that the representation “went to both post and contemporaneous fact, the specific financial stresses on the MSO development that required near-term remediation if the project was to stay whole under MSO and a prospective short-term lender were to be repaid by MSO in its own right.” Read in the context of the bankruptcy court’s opinion, we do not see how this quote demonstrates that the representation regarding the need for, and the intended use of, the loan proceeds for tenant improvements concerned the Debtor’s, or an insider of the Debtor’s, financial condition.
C. Knowledge and intent
We will not second guess the bankruptcy court’s finding that the Debtor knew the representation was false. We see nothing in the record to suggest otherwise.
We see no error with the bankruptcy court’s decision that the intent requirement was met. A creditor may introduce circumstantial evidence to infer a fraudulent intent. Universal Bank, N.A. v. Grause (In re Grause), 245 B.R. 95, 99 (8th Cir. BAP 2000). The court determined that, given the Debtor’s experience, he knew what lenders needed to evaluate a request for financing, and that the intended use for the funds was a material consideration. Therefore, the court found the Debtor knew he needed to report to CFG a plan for the use of the funds that would show a supportable means of repaying CFG. The court assessed that the Debtor understood Vilenchik was less experienced in the relevant type of transaction and, therefore, made the misrepresentation to Vilenchik as part of a “fully-structured story” about the need for the loan, the use of the funds, and what would happen as a result, with the intent that Vilenchik would rely on the Debtor’s misrepresentation and cause CFG to extend the loan to MSO.
D. Justifiable reliance
“Justifiable reliance is an intermediate standard between actual reliance and reasonable reliance.” Freier, 604 F.3d at 588 (citing Field, 516 U.S. at 70-73, 116 S.Ct. 437). A determination of justifiable reliance depends on the creditor and the facts of the particular case. Islamov v. Ungar (In re Ungar), 633 F.3d 675, 679 (8th Cir.2011) (citing Field, 516 U.S. at 71, 116 S.Ct. 437 (quoting Restatement (Second) of Torts (1976) § 545A, Cmt. b)). Reliance may be justifiable even when an investigation would have revealed the representation’s falsity. Freier, 604 F.3d at 588 (citing Field, 516 U.S. at 74-75, 116 S.Ct. 437). Reliance is not justified when a creditor “blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Id. (citing Field, 516 U.S. at 71, 116 S.Ct. 437) (quoting Restatement (Second) of Torts (1976) § 541, Cmt. a).
The bankruptcy court’s finding of justifiable reliance was made in the context of a whole proposal for a specific business strategy that the Debtor made to CFG (through Vilenchik), which the court reasonably determined to make sense as long as Vilenchik accepted the representation made by the Debtor. The Debtor painted a picture whereby CFG would provide funding to MSO, to hopefully allow the loosening of other credit to MSO, and CFG would be able to exit quickly. As repre*237sented, the funds were needed for, and would be used for, tenant improvements, which would, if everything went according to plan, allow this all to happen.
We see no error with the bankruptcy court’s determination that Vilenchik (and thus CFG) justifiably relied on the Debtor’s misrepresentation. We disagree with the Debtor’s allegation that CFG relied on the financial condition of MSO, rather than on the misrepresentation found by the bankruptcy court. The court appropriately found that CFG looked to asset strength only as a second resort and that, in deciding to give the loan to MSO, CFG’s primary reliance was on the representation made by the Debtor which supported the Debtor’s whole proposal. The court noted that the arrangement for the extension and repayment of the loan made facial sense provided CFG accepted the Debtor’s misrepresentation.
Contrary to the arguments by the Debt- or, we see no error in the bankruptcy court’s determination that CFG performed sufficient due diligence prior to extending the loan to MSO. Vilenchik did background work, such as credit checks for the Debtor and his wife and obtaining a title report for the property, before CFG extended the loan. From that, Vilenchik concluded the personal credit of the Debtor and his wife was good, and he did not find defaults on the GCI loan or other liens of record. In addition, Vilenchik did an exterior inspection of the property and decided that it was well-managed.
The bankruptcy court noted the Debtor argued Vilenchik should have taken additional measures. As that court recognized, although Vilenchik could have done and required more before CFG made the loan, his failure to do so under the circumstances of this case does not defeat the justifiability of his rebanee. We see no error in the bankruptcy court’s determination that Vilenchik took sufficient steps.
The Debtor sets forth a litany of qualifications for Vilenchik that the Debtor believes prove the reliance was not justifiable; for example, Vilenchik has a college degree and has his own title company. None of Vilenchik’s qualifications as listed by the Debtor or shown through the record defeat the justifiability of Vilenchik’s (thus CFG’s) reliance. The record supports the bankruptcy court’s finding that Vilenchik’s review of MSO’s request for credit was consistent with his level of experience in the area. It appropriately found that, based on the record, the Debt- or was more sophisticated in terms of obtaining this type of financing than Vilen-chik was at determining whether to extend it. It was not error for the court to find that “there is no doubt that the [Debtor] parlayed his greater experience against Vi-lenchik’s lesser, through a short process of vetting, and got pretty much what he wanted.”
The Debtor demonstrated the existence of no “red flags” that would show that the bankruptcy court erred by finding justifiable reliance. The record supported the bankruptcy court’s statement that Vilen-chik’s diligence did not disprove the scenario the Debtor had presented. And the bankruptcy court appropriately found “[t]here was nothing in the representation’s content; nothing in the [Debtor’s] other submissions to [CFG]; nothing from the pro forma, standard credit investigation that Vilenchik performed; and nothing from Vilenchik’s experience with the [Debtor] in the very brief relationship that they had had, that raised any question about the truth of what the [Debtor] said.”
The bankruptcy court noted things that the Debtor had alleged and proposed to be “red flags” to Vilenchik: “all of the [Debt- or’s] businesses were closely-held, somehow casting doubt on their stated values ...; any conclusions of substantial future income from the [Debtor’s] full enterprise *238had to be considered bogus ...; and the [Debtor] had large problems with taxing authorities evidenced by the returns submitted .... ” We see no error in the court’s determination that Yilenchik’s (and thus CFG’s) justifiable reliance was not defeated.
The Debtor refers to the Written Action of Governor and its statement that MSO would borrow $500,000 from CFG “to help refinance the [property,” as an indication that the representation was false. We disagree. As explained in our discussion of the Debtor’s misrepresentation, Vilenchik was aware that the purpose of obtaining the money to make tenant improvements was part of a larger effort to obtain additional funding. Likewise, as we also stated in our discussion of the Debtor’s misrepresentation, the fact that MSO would only receive a portion of the loan proceeds after payment of outstanding property taxes, fees and costs proves nothing. The statement in the Written Action of Governor was not a red flag.
Additional red flags suggested by the Debtor, for example, that the Debtor begged that the loan not be structured as a construction loan, that the GCI loan and unpaid real estate taxes showed up on CFG’s title search, or that failure to pay real estate taxes and the expiration of the maturity date of the mortgage would have been defaults under the terms of that document and apparent from the face of the document, are not red flags at all. Nothing argued by the Debtor would have required the bankruptcy court to find that a lender like CFG, under the circumstances present in this case, should have known the Debtor lacked the intent to use the funds for the stated purpose of tenant improvements.
E. Damages
The Debtor makes no argument on appeal regarding whether CFG sustained loss as a proximate result of the Debtor’s representation, and we do not second guess the bankruptcy court’s determination that this element of § 523(a)(2)(A) was met.
CONCLUSION
For the reasons stated, we affirm the decision of the bankruptcy court.
. The Honorable Gregory F. Kishel, Chief Judge, United States Bankruptcy Court for the District of Minnesota.
. The bankruptcy court found that "[ajfter originating the credit to MSO, GCI [ ] sold it out on participation to a group of small banking institutions. GCI [ ] continued to service the account.”
. The bankruptcy court based its decision on a single representation by the Debtor. CFG did not file a cross appeal from the bankruptcy court’s rejection of other alleged misrepresentations by the Debtor as bases for a ruling under § 523(a)(2)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497070/ | ORDER DENYING TRUSTEE’S MOTION TO DEFER FILING FEES IN APs 5:13-ap-7103 AND 5:13-ap-7106 and ORDER TO PAY FILING FEES IN APs 5:12-ap-7079 AND 5:12-ap-7106
BEN BARRY, Bankruptcy Judge.
Before the Court is the Trustee’s Application to Defer Filing Fee for Adversary Proceeding filed in adversary proceeding 5:13-ap-7103 on December 13, 2013, and Trustee’s Application to Defer Filing Fee for Adversary Proceeding filed in adversary proceeding 5:13-ap-7106 on December 16, 2013. The Court held a hearing on both applications on January 8, 2014. These are not the first applications to defer filing fees the trustee has filed in the debtor’s case. On July 16, 2012, and August 31, 2012, the trustee filed two additional applications to defer filing fees for two earlier adversary proceedings.
BACKGROUND
On December 13, 2011, the debtor filed his voluntary petition for relief under chapter 7. Seven months later the trustee *240filed two adversary proceedings against the debtor.1 Shortly after filing the adversary proceedings, the trustee filed applications to defer the filing fee in both proceedings, stating in each application that “the [t]rustee has obtained inadequate funds to be able to pay the entire filing fee for the initiation of the ... adversary proceeding.” On September 6, 2012, the Court granted both of the trustee’s applications, stating in its order that the filing fee is deferred but will be paid “if and when funds become available.” Between the Court’s September 6, 2012 order granting deferral of the filing fees and the trustee’s current applications to defer filing fees, the trustee entered into a settlement agreement with another party. The agreement provided for the sale of approximately 19 taxidermy mounts for $10,000.00, payable to the estate. The Court entered its order approving the sale on May 22, 2013.
The trustee filed the two most recent adversary proceedings on December 10, 2013, and December 12, 2013, respectively, and filed her applications to defer filing fees for both adversary proceedings shortly after. The trustee stated in her applications to defer filing fees that her reason for deferral was that “the [tjrustee may have inadequate funds to be able to pay the entire filing fee.” (Emphasis added.) The Court set the applications for hearing on January 8, 2014. At the hearing, the trustee appeared as a witness and testified that the estate presently has on hand $10,000.00 less bank fees of approximately $150.00.
LAW AND ANALYSIS
The trustee relies on only one case in support of her application to defer filing fees: United States v. Phoenix Group., Inc. (In re Phoenix Group.), 64 B.R. 527 (9th Cir. BAP 1986).2 The trustee cites the case for the proposition that the filing fee is an administrative expense and must be paid “only if there is an estate realized.” Id. at 529. The trustee argues that she will not know if there is an estate realized until the conclusion of all matters pending within the case. She also expressed concern that she may need some of the funds currently on hand to pay *241expenses as the litigation progresses.3
Guidance for issues related to bankruptcy fees and the fee schedule comes from 28 U.S.C. § 1930 and the Bankruptcy Court Miscellaneous Fee Schedule. Section 1930 addresses the fees that must be filed in a bankruptcy case. The Bankruptcy Court Miscellaneous Fee Schedule acts as a companion to 28 U.S.C. § 1930 and provides a list of fees that parties must pay to the bankruptcy court. Paragraph (6) of the Fee Schedule sets forth the fee to file a complaint:
For filing a complaint, $293, except:
• If the trustee or debtor-in-possession files the complaint, the fee must be paid only by the estate, to the extent there is an estate.
• This fee must not be charged if—
• the debtor is the plaintiff; or
• a child support creditor or representative files the complaint and submits the form required by § 304(g) of the Bankruptcy Reform Act of 1994.
The Court makes its decision today based on this unequivocal language. Under this section, the trustee must pay the filing fee “to the extent there is an estate.” In this instance, the trustee testified that the estate has approximately $10,000.00. Thus, deferral of the filing fee is not warranted and the Court denies the trustee’s applications filed in adversary proceedings 5:13— ap-7103 and 5:13-ap-7106. The Court orders the trustee to pay the filing fees in adversary proceedings 5:13-ap-7103 and 5:13-ap-7106 within seven days from the entry of this order.
Further, based on the trustee’s testimony that the debtor’s estate contained approximately $10,000.00, the Court finds that the previous deferrals of filing fees in adversary proceedings 5:12-ap-07079 and 5:12-ap-7106 are likewise no longer warranted. The Court’s order deferring the filing fees directed the trustee to pay the filing fee “if and when funds become available.” Funds are now available and the previously deferred filing fees must be paid. Accordingly, the Court also orders the trustee to pay the filing fees in adversary proceedings 5:12-ap-7079 and 5:12-ap-7106 within seven days from the entry of this order.
IT IS SO ORDERED
. On July 13, 2012, the trustee filed her first adversary proceeding — Complaint Objecting to the Discharge of the Debtor (AP No. 5:12-ap-7079) — against the debtor. On August 29, 2012, the trustee filed her second adversary proceeding — Complaint for Turnover, to Avoid Fraudulent Transfers, to Disregard Entity Structure, and to Recover Fraudulently Transferred Property (AP No. 5:12-ap-7106) — also against the debtor.
. In its opinion, the In re Phoenix Group court referred to the Bankruptcy Manual, which was promulgated by the Administrative Office to interpret the bankruptcy fee schedule. In re Phoenix Group, 64 B.R. at 529. According to the Manual, deferral of filing fees is appropriate when there are insufficient funds in the debtor's estate. Id. Today the Bankruptcy Manual has been replaced with the Bankruptcy Fee Compendium, which addresses bankruptcy fees and provides guidance for the Bankruptcy Court Clerk. Part G of the Compendium addresses the fees for filing an adversary proceeding. According to this section, the court clerk must collect a filing fee in an adversary proceeding unless "the estate has no liquid funds to pay the [filing] fee.” Bankruptcy Compendium G(1)(B)(3). Although the Bankruptcy Compendium is not a source of authority itself, the Court believes at least some deference should be given to this resource, as did In re Phoenix Group with its reference to the Bankruptcy Manual. 28 U.S.C. § 1930 and the Bankruptcy Court Miscellaneous Fee Schedule. Section 1930 addresses the fees that must be filed in a bankruptcy case. The Bankruptcy Court Miscellaneous Fee Schedule acts as a companion to 28 U.S.C. § 1930 and provides a list of fees that parties must pay to the bankruptcy court. Paragraph (6) of the Fee Schedule sets forth the fee to file a complaint:
. The Court acknowledges the trustee’s attempt to have the best of both worlds. On one hand, the trustee does not want to pay administrative fees until the end of the case so that all administrative fees may be paid pro-rata if there are insufficient funds in the estate. On the other hand, the trustee wants to use these same funds to pay litigation expenses during the pendency of the proceedings. 'There may be some authority for the trustee’s position. In In re St. Joseph Cleaners, Inc., 346 B.R. 430 (Bankr.W.D.Mich. 2006), the court distinguished payments to professionals under §§ 330 and 331, which allow for the recovery of a previously made distribution, from the "ordinary course of business” payments — e.g., non-professional administrative claims — which are excepted from the § 726 distribution scheme and not subject to recovery. Id. at 439. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497071/ | MEMORANDUM OPINION
BARRY S. SCHERMER, Bankruptcy Judge.
This matter comes before me on the Trustee’s Motion to Dismiss Case With Bar to Refiling, filed by the Chapter 13 trustee, John V. LaBarge, Jr. (the “Trustee”). I dismiss the bankruptcy case of Antonio R. Rotellini (the “Debtor”), and enjoin the Debtor from filing another case under Title 11 of the United States Code (the “Bankruptcy Code”) within 365 days of the dismissal.
BACKGROUND
On September 16, 2013, the Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code, commencing this bankruptcy case. This is the Debtor’s seventh bankruptcy filing since 2009. Each of his six prior cases was dismissed.
On January 2, 2014, the Trustee received from the Debtor copies of the Debt- or’s federal tax returns for the years 2009 through 2012. Those tax returns were provided to the Trustee after the Debtor testified at his October 28, 2013 first meeting of creditors that he had not filed tax returns for those years.1 The tax returns were also provided to the Trustee after the Trustee objected to confirmation of the Debtor’s plan. The tax returns all indicate that they are self-prepared and each lists the Debtor’s status as “[mjarried filing separately.” The 2010 and 2012 tax returns are dated in November, 2013. It is difficult to decipher the date of the 2009 and 2011 tax returns, but both appear to be dated in November or December, 2013. The 2009 though 2011 tax returns show income of $0 for the Debtor. In the Debt- or’s amended Statement of Financial Affairs, which was also filed after the time of the Debtor’s first meeting of creditors and after the Trustee objected to confirmation of the Debtor’s plan, the Debtor lists his income from employment or operation of a business from 2011 through 2013 as: (1) $0 for 2011, (2) $6,300 for 2012, and (3) $51,000 for 2013.
Unfortunately, the information provided by the Debtor in his tax returns and Statement of Financial Affairs was not consistent with his representations in previous cases. And, the Debtor failed to comply with the requirements necessary to avoid dismissal of his previous cases.
In a Chapter 13 case filed on May 11, 2009 (Case No. 09-44350), the Debtor reported on his Schedule I that he earned gross income each month of $11,870 from operation of his business, and $4,150 per month in rental income, and that the Debt- or’s Schedule J showed $6,890 in monthly business expenses. In the Debtor’s Statement of Financial Affairs, the Debtor stated that he earned income of $50,249 for the year as of May 11, 2009. The Debtor’s Form B22C showed an average net business income of $2,751 for the period November 2008 through April 2009. The 2009 case was dismissed less than six months after it was filed for failure by the Debtor to make plan payments.
In July 30, 2010, the Debtor filed another Chapter 13 case (Case No. 10-48660). On a Schedule I (filed after the case was dismissed), Debtor listed a total of $5,500 of monthly income ($4,500 of earned income and $1,000 of rental income). According to the Debtor’s Form B22C (also *244filed after the case was dismissed), he had an average of $4,500 in gross wages and $100 of net rental income per month from January through June, 2010. This case was dismissed less than a month after it was filed for failure to the Debtor to file required documents.
The Debtor filed two cases in 2011 (a Chapter 13 case (Case No. 11-49557) filed in September, 2011, and a Chapter 7 ease (Case No. 11-53058) filed in December, 2011). Each of the Debtor’s 2011 bankruptcy filings was dismissed within a month of filing for failure of the Debtor to file required documents.
In addition, a Chapter 13 case filed by the Debtor in June, 2012 (Case No. 12-46146), was dismissed within a few weeks of filing because the Debtor failed to file required documents. During the course of that case, the Debtor provided the Chapter 13 trustee with a partial 2009 federal tax return. That partial tax return indicated that the Debtor was filing it as a married person filing separately from his spouse. Although the tax return was not complete, substantial business income is listed for the Debtor on line 12.
In July, 2013, the Debtor filed yet another Chapter 13 case (Case No. 13-46506), which was dismissed shortly after filing for failure by the Debtor to file required documents.
Finally, the Debtor filed this case (Case No. 13-48522) almost immediately after his previous ease was closed. The Trustee filed his Trustee’s Motion to Dismiss Case With Bar to Refiling, arguing that the Debtor’s actions are an abuse of the bankruptcy process, and asking me to “dismiss this case and imposte] a bar to refiling of future cases.” The Debtor filed a response to the Trustee’s motion, and the parties filed with this Court a Stipulation of Facts. At a hearing on the Trustee’s motion scheduled for April 9, 2014, the parties requested to submit this matter to me on the record.2
DISCUSSION
“[T]he purpose of the bankruptcy code is to afford the honest but unfortunate debtor a fresh start, not to shield those who abuse the bankruptcy process in order to avoid paying their debts.” Molitor v. Eidson (In re Molitor), 76 F.3d 218, 220 (8th Cir.1996) (citing Graven v. Fink (In re Graven), 936 F.2d 378, 385 (8th Cir.1991)).
A. Dismissal
Bankruptcy Code § 1307(c) permits a bankruptcy court to dismiss a Chapter 13 case for cause. It states that:
[O]n request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a ease under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause....
11 U.S.C. § 1307(c). Included as “cause” under § 1307(c) is a debtor’s bad faith. See Molitor, 76 F.3d at 220 (“[A] Chapter 13 petition filed in bad faith may be dismissed or converted ‘for cause’ under 11 U.S.C. § 1307(c).”).
A determination of good faith requires consideration of the totality of the circumstances: “(1) whether the debtor has stated his debts and expenses accurately; (2) whether he has made any *245fraudulent representation to mislead the bankruptcy court; or (3) whether he has unfairly manipulated the bankruptcy code.” Id. at 220 (citing Handeen v. Le-Maire (In re LeMaire), 898 F.2d 1346, 1349 (8th Cir.1990); see also Ladika v. I.R.S. (In re Ladika), 215 B.R. 720, 725 (8th Cir. BAP 1998)) (“ ‘[G]ood faith should be evaluated on a case-by-case basis in light of the structure and general purpose of Chapter 13.’ ”) (quoting LeMaire, 898 F.2d at 1353) (quotation mark omitted). “[Fjactors such as the type of debt sought to be discharged and whether the debt is nondischargeable in Chapter 7, and the debtor’s motivation and sincerity in seeking Chapter 13 relief, are particularly relevant.” Tina Livestock Sales, Inc. v. Schachtele (In re Schachtele), 343 B.R. 661, 668 (8th Cir. BAP 2006) (citing LeMaire, 898 F.2d at 1349). However, “[t]here are no ‘precise formulae or measurements to be deployed in a mechanical good faith equation.’ ” LeMaire, 898 F.2d at 1353 (quoting Metro Emps. Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030, 1033 (6th Cir.1988)). A finding of actual fraud is not required for a determination of bad faith. Id. at 1352 n. 8. Rather, the requirement is that “the bankruptcy court preserve the integrity of the bankruptcy process by refusing to condone its abuse.” Id. (alternation in original) (quoting Shell Oil Co. v. Waldron (In re Waldron), 785 F.2d 936, 941 (11th Cir.1986)). To constitute bad faith, “the debt- or’s conduct must, in fact, be atypical.” Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 n. 11, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).
Dismissal for cause is appropriate in this case. During the course of his many bankruptcy cases, the Debtor failed to comply with the requirements for filing a bankruptcy petition and failed to state his affairs consistently. He has exhibited a pattern of deliberately misleading the bankruptcy court and the Trustee, and has demonstrated a total disregard for the sanctity of the bankruptcy process.
As of the Debtor’s October 28, 2014 meeting of creditors in this case, the Debt- or represented he still had not filed tax returns for the years 2009 through 2012. It was only after the meeting of creditors, and after the Trustee objected to confirmation of the Debtor’s plan, that the Debt- or submitted to the Trustee his federal tax returns and amended his Statement of Financial Affairs to include his income from the missing years. Now, given inconsistencies between the information on the tax returns (as discussed below), the Trustee is left to wonder whether the information on the tax returns is accurate.
When the Debtor actually provided documents in his cases, the Debtor submitted conflicting information in different cases. In this case, the Debtor’s 2009 tax return provided to the Trustee shows $0 of income for 2009, but the information submitted by the Debtor in the documents filed in his 2009 case (the Debtor’s Schedules I and J, Statement of Financial Affairs and Form B22C), paint quite a different picture of the Debtor’s situation. They show significant income for the same year. The tax returns submitted to the Trustee in this case also conflict with the partial 2009 tax return submitted by the Debtor to the Trustee in a 2012 filing (Case No. 12-46146), which showed on line 12 significant business income for the Debtor. Likewise, the Debtor’s Schedule I and Form B22C filed in the Debtor’s 2010 case (Case No. 10-48660), which show significant income, conflict with the 2010 tax return submitted to the Trustee in this case, which shows income of $0.
Moreover, the Debtor filed his Chapter 13 petitions individually, i.e. he did not file jointly with a spouse. By filing his Chap*246ter 13 petitions, the Debtor represented that he met the eligibility requirements for a Chapter 13 debtor. Bankruptcy Code § 109(e) requires that a Chapter 13 debtor have regular income. 11 U.S.C. § 109(e) (“Only an individual with regular income ... or an individual with regular income and such individual’s spouse,.... may be a debtor under chapter 13 of this title.”) However, the tax returns submitted by the Debtor to the Trustee in this case show $0 of income for 2009-2011, and the Statement of Financial Affairs shows $0 of income for the Debtor in 2011. Nevertheless, the Debtor filed multiple Chapter 13 petitions from 2009 through 2011.
The Debtor has exhibited a disregard for, and abuse of, the bankruptcy process through his pattern of filing multiple bankruptcy cases that were involuntarily dismissed due to his failure to comply with his obligations. The Debtor’s first case was dismissed after he failed to comply with his obligation to make plan payments, followed by the dismissal of several of the Debtor’s cases based on his failure to file required documents. Then, in this case, the Debtor filed his tax returns and completed his Statement of Financial Affairs only after he was faced with possible denial of confirmation of his plan. Now, given the inconsistencies in the documents presented by the Debtor, the Trustee and the court are left to wonder whether the information provided by the Debtor is accurate. It is clear that the Debtor has, and continues to, proceed with a lack of sincerity for the bankruptcy process, and Chapter 13 in particular.
As his response to the Trustee’s Motion to Dismiss Case With Bar to Refiling, the Debtor claims that he filed this case in good faith. He states that during the time of his previous filings, the Debtor “was suffering from mental health and substance abuse problems.” According to the Debtor, he has recovered. He blames the incomplete filings, inaccuracies and inconsistencies in his documents on the fact that his previous filings were made both pro se and with different attorneys while he suffered from a substance abuse problem. The Debtor also states that “the information in the present case is accurate to the best of his knowledge with the information he has available,” and that he “has made all plan payments in the present case and is current.”3
I acknowledge that the Debtor’s previous problems are unfortunate, and I sincerely hope that the Debtor has recovered from any such conditions. However, this does not excuse the pattern of behavior shown by the Debtor throughout his eases. It is not fair to require the Debtor’s creditors to suffer the consequences and inconvenience of his inaccurate and incomplete filings. Moreover, the pattern of behavior exhibited by the Debtor has required the Trustee and the court to unnecessarily expend significant time and resources. And, based on the Debtor’s conduct, there remains uncertainty regarding the accuracy of his current submissions. It is the duty of a debtor to proceed with full and complete candor, and the bankruptcy system depends on it.
B. Refiling by Debtor
In addition to dismissing the Debtor’s bankruptcy case, I see cause, for the same reasons, to also grant the Trus*247tee’s request that I impose a bar on the Debtor’s refiling of a bankruptcy petition. Bankruptcy Code § 349(a) states that:
[u]nless the court, for cause, orders otherwise, the dismissal of a case under this title does not bar the discharge, in a later case under this title, of debts that were dischargeable in the case dismissed; nor does the dismissal of a case under this title prejudice the debtor with regard to the filing of a subsequent petition under this title, except as provided in section 109(g) of this title.
11 U.S.C. § 349(a) (emphasis added).4 Bankruptcy Code § 105(a) provides that:
[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provision 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). “Bankruptcy courts ‘invariably derive from § 105(a) or § 349(a) of the Code ... the power to sanction bad-faith serial filers ... by prohibiting further bankruptcy filings for [over] 180 days.’ ” Marshall v. McCarty (In re Marshall), 407 B.R. 359, 363 (8th Cir. BAP 2009) (quoting Casse v. Key Bank Nat’l Assn. (In re Casse), 198 F.3d 327, 337, 338 (2d Cir.1999)); but see Frieouf v. U.S. (In re Frieouf), 938 F.2d 1099 (10th Cir.1991) (limit is 180 days in § 109(g)). However, “a dismissal order that bars subsequent litigation is a severe sanction warranted only by egregious misconduct.” Id. (quoting Colonial Auto Ctr. v. Tomlin (In re Tomlin), 105 F.3d 933, 937 (4th Cir.1997)) (quotation marks omitted). Here, the Debtor is a serial filer whose actions abuse and insult the integrity of the bankruptcy process. I believe that the only way to stress the importance of the reason for dismissal of this case and to prevent further abuse by the Debtor is to dismiss this case and enjoin the Debtor from refiling a bankruptcy petition for 365 days after the entry of the Pre-Confirmation Order and Notice of Dismissal accompanying this Memorandum Opinion.
CONCLUSION
For the reasons stated, the Trustee’s Motion to Dismiss Case With Bar to Refiling, shall be granted in that, by separate order, the bankruptcy case of Antonio R. Rotellini, Case No. 13-48522-399, shall be dismissed and Antonio R. Rotellini shall be enjoined from filing a petition under Title 11 of the United States Code for 365 days after entry of the Pre-Confirmation Order and Notice of Dismissal accompanying this Memorandum Opinion.
. The meeting of creditors was continued to November 19, 2013, and concluded on that date.
. In the Stipulation of Facts, the parties agreed to various facts, many of which I repeat here. The facts recited here also reflect the submissions in this case, information in the documents filed in the Debtor’s various bankruptcy cases, and Exhibits presented to me with the Stipulation of Facts filed by the parties.
. In his Response to Trustee’s Motion to Dismiss, filed in February, 2014, the Debtor staled that he could not confirm or deny the statements made by the Trustee in his motion because the Debtor's records were lost. However, in April, 2014, the Debtor signed a Stipulation of Facts, which set forth many of the facts as agreed facts and attached relevant documents as exhibits.
. Section 109(g) does not apply here. It sets forth a bar on eligibility for bankruptcy filing in certain circumstances. It states:
(g) Notwithstanding any other provision in this section, no individual ... may be a debtor under this title who has been a debt- or 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; or
(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.
11 U.S.C. § 109(g). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497072/ | MEMORANDUM DECISION REGARDING DEBTOR’S MOTION TO DISMISS
W. RICHARD LEE, Bankruptcy Judge.
Before the court is a motion filed by the debtor Gursev Kaur (the “Debtor”) to dismiss her chapter 7 case under 11 U.S.C. § 707(a)1 (the “Motion”). The Debtor contends that there is cause to dismiss the *283case because all of the unsecured claims have been either paid outside of the bankruptcy case or settled and withdrawn. The trustee Jeffrey Vetter (the “Trustee”) objects to the Motion on the grounds, inter alia, that the estate has incurred substantial administrative expenses which it cannot pay without the successful prosecution of a pending adversary proceeding.2 For the reasons set forth below, the Debtor’s Motion will be denied, and the case will remain active, provided the case may hereafter be dismissed at any time, without a further hearing, upon a showing that the Debtor and the Trustee have reached an agreement to provide for payment of the reasonable and necessary chapter 7 administrative expenses.3
This memorandum decision contains the court’s findings of fact and conclusions of law required by Federal Rule of Civil Procedure 52(a), made applicable to this contested matter by Federal Rules of Bankruptcy Procedure 7052 and 9014(c). The court has jurisdiction over this matter under 28 U.S.C. § 1384, 11 U.S.C. § 707, and General Order Nos. 182 and 330 of the U.S. District Court for the Eastern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
Background and Findings of Fact.
Prior to commencement of this bankruptcy, the Debtor owned and operated a restaurant in Buttonwillow, California, called Taste of India (the “Restaurant”). In June 2012, two of the Restaurant’s former employees filed claims against the Debtor with the California Labor Commissioner seeking $30,400 in unpaid overtime wages (the “Wage Claims”). On July 10, 2012, the Labor Commissioner issued notices setting an initial conference for both of the Wage Claims to be held at the Labor Commissioner’s office on July 24. After the conference, on July 31, the Labor Commissioner issued notices setting both Wage Claims for an evidentiary hearing on August 22, 2012. The Debtor filed her chapter 7 petition on August 21, one day before the scheduled hearings. With the bankruptcy filing, the Wage Claim proceedings were stayed.
With the petition, the Debtor also filed all of the schedules and the statement of financial affairs (the “SOFA”) required by the Bankruptcy Code and Rules. The Debtor’s schedules report that she resides in a house located on Prosperity Rose Avenue in Bakersfield, California (the “Residence”). The Debtor’s schedules also show that she had no nonexempt assets to liquidate for the benefit of creditors. On the SOFA, the Debtor disclosed that the Residence had been transferred as a “gift” to the Debtor’s daughter Jasvir Kaur (“Jasvir”) on July 24, 2012, the same day as the initial conference before the Labor Commissioner.4 The Residence was val*284ued in the SOFA at $229,000, and based on Schedule D, it was unencumbered. The Debtor’s SOFA explains the “gift” to Jas-vir as follows: “Debtor gifted the real property to Debtor’s Daughter as a dowry in accordance with Indian and religious custom.” Debtor’s SOFA, at 3, Aug. 21, 2012, EOF No. 1.
Presumably, the Trustee questioned the Debtor at the initial meeting of creditors about the Residence and the transfer to Jasvir. After that meeting, the court authorized the Trustee to employ the law firm Lang, Richert & Patch (“LRP”) as general counsel for the estate. After the continued meeting of creditors, on November 8, 2012, the Trustee instructed the clerk of court to issue a notice to creditors to file proofs of claim based on his contention that assets (presumably the Residence) were potentially available for distribution. Ultimately, five creditors, including the two Wage Claim employees, filed five proofs of claim, asserting a total of approximately $42,000 in unsecured claims against the Debtor.5 The Debtor’s discharge was entered, without objection, on January 7, 2013.
On November 15, 2012, the Trustee filed an adversary proceeding against Jasvir to avoid the “gift” as a fraudulent transfer and recover the Residence for the benefit of the estate (Adv. No. 12-1188, the “Adversary Proceeding”). If successful, the value of the Residence would have been sufficient to pay all of the unsecured claims in full, plus all of the administrative expenses, and still return a substantial amount of surplus funds to the Debtor. Although the Debtor is not a named defendant in the Adversary Proceeding, she appeared through counsel at status conferences and strongly voiced her opposition to the Trustee’s efforts to recover the Residence from her daughter.6
In response to the Trustee’s Adversary Proceeding, the Debtor embarked upon a plan to eliminate all of the unsecured claims. On September 30, 2013, she filed objections to both of the Wage Claims. Jasvir had argued in defense of the Adversary Proceeding that the Wage Claims were invalid. Without the Wage Claims, it appears that the Debtor may not have been insolvent at the time she transferred the Residence. The claim objections were originally filed to be tried in conjunction with the Adversary Proceeding. However, the Debtor subsequently settled the Wage Claims outside of the bankruptcy, on terms that were not disclosed, and on January 23, 2014, the Wage Claim creditors requested that their claims be withdrawn.7
*285The Debtor filed this Motion to dismiss the entire chapter 7 case on February 12, 2014. The Motion was first set for hearing on March 6 but was continued for lack of admissible evidence regarding the Debt- or’s payment of the three remaining unsecured claims, which totaled less than $5,000. On March 26, the Debtor offered additional evidence in support of her contention that those claims had also been paid, again, outside of the bankruptcy.8 The Motion was argued on April 3. The parties were given an opportunity to file supplemental briefs and the matter was taken under submission.
Issue Presented.
After months of litigation over the “gift” to Jasvir, the Debtor now asks that the case be dismissed because she made arrangements to resolve all of the unsecured claims outside of the bankruptcy case. It is no secret that the Debtor is really trying to stop the Adversary Proceeding and prevent the Trustee from recovering the Residence from Jasvir. The Trustee objects to dismissal because it would be prejudicial to administrative claimants (i.e., the Trustee and LRP) who will remain unpaid for the work they have done if the Residence is not recovered and liquidated. Again, it is no secret that the Trustee would not oppose dismissal of both the bankruptcy case and the Adversary Proceeding if there was some provision, other than liquidating the Residence, for payment of the accrued administrative expenses. The issue here is whether “cause” exists for dismissal of the chapter 7 case under § 707(a) when the estate’s only remaining obligation is the unpaid administrative expenses that can yet be satisfied from potentially recoverable assets.
Discussion and Conclusions of Law.
Dismissal for Cause under § 707(a). Dismissal of a chapter 7 case is governed by § 707 of the Bankruptcy Code, which provides, in relevant part, that the bankruptcy court “may dismiss [the case] only after notice and a hearing and only for cause.”9 § 707(a) (emphasis added). The determination of “cause” under § 707(a) will typically depend on the totality of the circumstances. See Sherman v. SEC (In re Sherman), 491 F.3d 948, 970 (9th Cir.2007) (setting forth the two-step analysis for determining “cause” under § 707(a)); Hickman v. Hana (In re Hickman), 384 B.R. 832, 840 (9th Cir. BAP 2008).
The debtor may have the right to voluntarily dismiss her chapter 7 case under § 707(a), but that right is not absolute. Bartee v. Ainsworth (In re Bartee), 317 *286B.R. 362, 366 (9th Cir. BAP 2004). Instead, the “debtor must [still] establish cause to obtain dismissal.” Id. On this issue of cause, “[t]he law in the Ninth Circuit is clear: a voluntary Chapter 7 debtor is entitled to dismissal of his [or her] case so long as such dismissal will cause no ‘legal prejudice’ to interested parties.” Leach v. United States (In re Leach), 130 B.R. 855, 857 (9th Cir. BAP 1991) (citing Schroeder v. Int’l Airport Inn P’ship (In re Int’l Airport Inn P’ship), 517 F.2d 510, 512 (9th Cir.1975) (per curiam) (Bankruptcy Act case); Gill v. Hall (In re Hall), 15 B.R. 913, 917 (9th Cir. BAP 1981)). Legal prejudice means “prejudice to some legal interest, some legal claim, some legal argument,” Westlands Water Dist. v. United States, 100 F.3d 94, 97 (9th Cir.1996), but the issue of prejudice “may be evaluated using both legal and equitable considerations,” Hickman, 384 B.R. at 840.
The Debtor, as the moving party, bears the burden of showing “that there would be no legal prejudice resulting from the dismissal.” Id. at 841. Ultimately, the decision to dismiss a chapter 7 case for cause rests within the sound discretion of the bankruptcy court. Id. at 840.
Prejudice to Administrative Claimants and the Estate. Here, the Debtor argues that dismissal would cause no prejudice because all filed claims have been provided for outside of the bankruptcy and/or withdrawn. Since the Trustee no longer has any general unsecured claims to pay with estate assets, the Debt- or contends that dismissal of her case is now appropriate.
While the Debtor’s argument may apply to those who initially filed general unsecured claims, the inquiry under § 707(a) requires the court to consider the prejudice to all parties in interest, not just one creditor constituency. See Leach, 130 B.R. at 857; Schwartz v. Geltzer (In re Smith), 507 F.3d 64, 72 (2d Cir.2007). In this case, the pool of interested parties includes administrative claimants, who, unlike the other unsecured (lower-priority) creditors, have not been paid. Cf. Hall, 15 B.R. at 915 (providing that trustee “has standing to object [to debtor’s motion to dismiss] on the grounds that his fees, costs or expenses must be paid before the case may be dismissed”). The pool of interested parties must also include the estate itself. See Stalnaker v. DLC, Ltd., 376 F.3d 819, 823-24 (8th Cir.2004). Here, the Debtor cannot show that administrative claimants and the estate would not be prejudiced by an outright dismissal of her case.
Indeed, the administrative claimants would clearly suffer prejudice by a dismissal of the Debtor’s case since dismissal will necessarily terminate their ability to get paid for rendering services to the estate. The Debtor argues that since there are currently no nonexempt estate assets from which to pay administrative expenses, those claimants would get paid nothing whether or not the case gets dismissed. With regard to the Trustee’s pending Adversary Proceeding against Jasvir, the Debtor argues that the Residence has not yet been recovered and liquidated and therefore cannot be used to pay administrative expenses at this time. However, simply because the Trustee has not yet recovered the Residence does not mean that the Trustee will never recover the Residence.10 It still remains a possible *287source of payment. If dismissal is ordered now, that necessarily puts an end to the Trustee’s Adversary Proceeding and to any opportunity he may have to pay the administrative expenses. See In re Hopper, 404 B.R. 302, 307 (Bankr.N.D.Ill.2009) (“Legal prejudice is found to exist where assets which would otherwise be available to creditors are lost because of the dismissal.”). Therefore, the Trustee and LRP, as administrative claimants, would suffer prejudice from a dismissal, especially when their outstanding fees are the result of reasonable and diligent efforts to administer the estate.
On a similar note, the bankruptcy court must also consider the potential for prejudice to the bankruptcy estate itself. As one court has stated, “[T]he bankruptcy ‘estate’ is not synonymous with the concept of a pool of assets to be gathered for the sole benefit of unsecured creditors.” Stalnaker, 376 F.3d at 823. And “[f]he fact that [all] unsecured creditors settle [with a debtor] on the eve of trial [on a trustee’s avoidance action] does not extinguish the bankruptcy estate as a legal entity....” Id. at 824.
Once the Debtor filed bankruptcy and the bankruptcy estate was created, the Trustee was appointed to perform various tasks on behalf of the estate, including “eollectfing] and redue[ing] to money the property of the estate for which such trustee serves, and clos[ing] such estate as expeditiously as is compatible with the best interests of parties in interest.” § 704(a)(1). There is no question that the Trustee in this case, along with his counsel LRP, properly carried out this duty by initiating the Adversary Proceeding very soon after the meeting of creditors.
Yet, allowing the Debtor to dismiss her case outright at this time effectively punishes the Trustee for diligently performing his statutory duties and acting in the best interests of the estate. Until the case is closed, the estate still exists, even after all prepetition unsecured claims have been paid. So long as nonexempt assets are available, the estate has not been fully administered until its administrative obligations have also been paid. Under these circumstances, dismissal before the estate can be fully administered would do violence to the bankruptcy process, creating a disincentive for trustees to work expeditiously in augmenting the estate so that creditors can receive the maximum recovery on their claims. Thus, the estate would also be prejudiced by an early dismissal of this case.
Benefit to Only Administrative Claimants. The Debtor next contends that the Trustee and LRP should not be permitted to continue litigating the Adversary Proceeding when they will be the only parties to benefit from any recovery. In essence, the Debtor’s argument is that dismissal is appropriate now because even if the Trustee and LRP’s fees can be paid from an estate asset, those fees, incurred for only their benefit, do not represent actual and necessary services entitled to allowance under § 330.
On this issue, the court appreciates the policy in the Ninth Circuit of disallowing the fees of a trustee and his or her professionals when their administrative efforts will only benefit themselves. See Estes & Hoyt v. Crake (In re Riverside-Linden Inv. Co.), 925 F.2d 320, 322 (9th Cir.1991) (per curiam) (finding no abuse of discretion in bankruptcy court’s denial of attorney’s fees “[w]hen a cost benefit analysis indicates that the only parties who will likely benefit from an investigation of a claim are the trustee and his professionals” (alteration in original) (internal quotation marks omitted)); Roberts, Sheridan & Hotel, P.C. v. Bergen Brunswig Drug Co. (In re Mednet), 251 B.R. 103, 108-09 (9th Cir. *288BAP2000). However, that policy requires an assessment of the circumstances existing at the time that the trustee and his or her professionals incurred their fees. See Mednet, 251 B.R. at 108 (stating that “the applicant must demonstrate only that the services were ‘reasonably likely’ to benefit the estate at the time the services were rendered”).
Here, at the time of LRP’s employment and commencement of the Adversary Proceeding, it was clear that LRP’s legal services were both necessary and potentially beneficial to the estate. The fact that the Trustee’s actions ultimately forced the Debtor to settle and pay her unsecured creditors in full (which she could have done without filing bankruptcy at all) further supports a finding that LRP’s services were beneficial to the estate. For more than a year after filing the Adversary Proceeding, the Trustee performed his statutory duty under the belief that he needed to recover the Residence for the benefit of the five unsecured creditors who had filed claims. The Debtor never informed the Trustee until late in the case that she intended to settle all unsecured claims on her own and that he, as a result, would no longer need to prosecute the Adversary Proceeding. Thus, the services rendered so far by the Trustee and LRP cannot be summarily rejected as only benefitting themselves.
No Prejudice to the Debtor. Finally, the Debtor overstates how adversely affected she will be if her chapter 7 case and the Trustee’s Adversary Proceeding are permitted to continue. She argues that her Motion “should be granted in order to facilitate her ‘fresh start.’ ” Debtor’s Mem. P. & A. 4:25-26, Feb. 12, 2014, ECF No. 103. However, the Debtor has already received her discharge, and nobody has objected to her exemptions. Therefore, it is unclear what the Debtor believes is now interfering with her fresh start.
Essentially only the Adversary Proceeding stands in the way of concluding this case, but that does not directly impact the Debtor’s fresh start. The Debtor suffers no prejudice with the continuation of the Adversary Proceeding because she is not a defendant in the action and the Residence is not even her property — she gave it to Jasvir.11 If the Trustee does not prevail in the Adversary Proceeding, then only the Trustee and his professionals are adversely affected because there will be no funds from which to pay the administrative expenses. Conversely, if the Trustee succeeds and the Residence is recovered and liquidated, the Debtor will actually benefit, given that any proceeds remaining after payment of the allowed administrative expenses will be returned to her. See § 726(a)(6). The party that is most adversely affected by the continuation of the bankruptcy case and the Adversary Proceeding is Jasvir, so the Debtor’s desire to have her case dismissed now suggests that the Debtor is actually acting in the interest of Jasvir. However, the interests of a transferee of an alleged fraudulent transfer should not be considered in deciding whether to dismiss a case under § 707(a).
For these reasons, the Debtor has not met her burden to establish that immediate dismissal of her case would not prejudice the estate and all interested parties, particularly administrative claimants. Therefore, she has not established cause under § 707(a) to dismiss the ease before the Adversary Proceeding is completed *289and the administrative expenses are paid, if possible.
Dismissal Conditioned on Payment of Administrative Expenses. Although an outright dismissal of the chapter 7 case would be inappropriate, the court can conditionally grant the Debtor’s Motion while also sustaining the Trustee’s objection to the Motion. Under similar circumstances, some bankruptcy courts have dismissed chapter 7 cases conditioned on the debtor paying the outstanding administrative expenses. See, e.g., In re Aupperle, 352 B.R. 43, 48 (Bankr.D.N.J.2005); In re Jackson, 7 B.R. 616, 617-18 (Bankr.E.D.Tenn.1980); In re Gallman, 6 B.R. 1, 2 (Bankr.N.D.Ga. 1980). The court agrees with the approach taken by those courts. The Debtor essentially created the problem which she now seeks to avoid. She could have settled the Wage Claims and paid the other few unsecured claims without ever seeking bankruptcy protection. At a minimum, she could have taken care of the claims as soon as she learned that the Trustee intended to recover the Residence. Instead, she waited until the Trustee and LRP had prepared the Adversary Proceeding for trial. The Trustee and LRP acted properly in prosecuting the Adversary Proceeding and otherwise administering the estate, and they should not now be compelled to absorb the unpaid cost of that administration. If the Debtor sincerely desires to see this case dismissed and preserve Jas-vir’s peaceful possession of the Residence, then the Debtor should pay the reasonable and necessary administrative expenses that could have been avoided, but which have now been incurred.
Conclusion,
Based on the foregoing, the court finds and concludes that dismissal under § 707(a) is not appropriate, and the Motion will be denied. However, the court appreciates that the ultimate goal is to achieve some finality with regard to the proceedings in this court and to end the accrual of legal fees, on both sides, without unduly burdening the Trustee and his professionals who have worked to administer the estate. Therefore, the case may hereafter be dismissed at any time, without a further hearing, upon a showing that the Debtor and the Trustee have reached an agreement to provide for payment of the reasonable and necessary chapter 7 administrative expenses. In that event, the terms of such agreement need only be disclosed to and approved by the United States Trustee and need not be approved by this court. The court will issue a separate order.
. Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated after October 17, 2005, the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub.L. No. 109-8, 119 Stat 23.
. The Trustee also challenges the Debtor's contention that the general unsecured claims have all been satisfied. For purposes of this ruling, the court does not need to decide that issue and will assume that there are no remaining unsecured claims to be paid by the Trustee.
. The primary administrative expense is the bill for attorney’s fees and costs which the estate has incurred in prosecution of the Trustee’s adversary proceeding against the Debt- or’s daughter. The court has not yet made any award of attorney’s fees or approved payment of any administrative expense. Unless the Debtor and the Trustee can reach an agreement regarding dismissal of the case, the court will ultimately determine the amount of “reasonable and necessary” attorney's fees in a noticed motion. It is not clear that attorney’s fees incurred by the Trustee after the Debtor filed this Motion will be compensable, but that is not grounds to deny approval of appropriate fees already incurred.
.The schedules also show that Jasvir paid $3,500 to the Debtor’s bankruptcy counsel to file the petition for her mother. Schedule B *284reveals that all of the Debtor's household goods and wearing apparel were still located at the Residence.
. The Wage Claim creditors filed proofs of claim totaling $36,808 which was substantially more than they requested in the complaint filed with the Labor Commissioner.
. The record shows that Debtor’s counsel, Cynthia Scully, Esq., appeared at a status conference in the Adversary Proceeding on August 29, 2013. On September 3, 2013, Ms. Scully tried to file a Notice of Substitution of Counsel to represent the Debtor in the Adversary Proceeding (which the court denied on procedural grounds). Ms. Scully appeared again with Jasvir's counsel at the final pretrial conference on January 10, 2014. Together, they announced for the first time that the Wage Claims had been settled and that the Debtor was in the process of paying the remaining unsecured claims. Ms. Scully appeared at a rescheduled status conference on February 6, 2014, and informed the court that she was going to file this Motion seeking a dismissal of the main case. Ms. Scully appeared again at a continued status conference on April 3, 2014, at which time the parties argued the Motion and the status conference was dropped from calendar pending a ruling on the dismissal issue.
.Although the court granted the two creditors’ motions to withdraw the Wage Claims, there are no corresponding orders on the *285docket to effectuate the withdrawals as required by Bankruptcy Rule 3006.
. One of the three creditors filed a notice of withdrawal of its claim pursuant to Bankruptcy Rule 3006. However, neither the Debtor nor the Trustee has filed claim objections to disallow the other two claims, and neither of the two remaining creditors has yet filed a notice of withdrawal.
. In its entirety, § 707(a) provides,
(a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—
(1)unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees or charges required under chapter 123 of title 28; and
(3) failure of the debtor in a voluntary case to file, within fifteen days or such additional time as the court may allow after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a), but only on a motion by the United States trustee.
The Debtor does not contend that any of the three enumerated grounds for "cause” under § .707(a) is applicable here.
. It is appropriate to affirm here that Jasvir may yet have a meritorious defense to the Adversary Proceeding, in which case the estate will be administratively insolvent. In that event, the administrative claimants will have no further remedy, and dismissal might be an appropriate step if the Trustee does not expeditiously close the case.
. The Debtor may be called as a witness in the Adversary Proceeding, but being a witness can hardly amount to prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497073/ | MEMORANDUM OF DECISION
JIM D. PAPPAS, Bankruptcy Judge.
Introduction
On February 4, 2014, chapter 71 debtors Lome and Crystal Dickerson (“Debtors”) filed a Motion for Contempt (the “Motion”) alleging that creditor Collection Bureau, Inc. (“Collection”) had violated the § 362(a) automatic stay and the § 524(a) discharge injunction in their bankruptcy case. Dkt. No. 32. Collection filed an objection to the Motion on February 18, 2014, generally denying that it should be found to be in contempt. Dkt. No. 37.
On March 4, 2014, the Court conducted an evidentiary hearing concerning the Motion at which the parties appeared, presented evidence and testimony, and argued their respective positions. Dkt. No. 49. At the conclusion of the hearing, the Court took the issues under advisement.
The Court has considered the evidence, testimony, and arguments of the parties. This Memorandum of Decision constitutes the Court’s findings of fact and conclusions of law,2 and disposes of the Motion.
Facts
Prior to Debtors’ bankruptcy filing, several creditors assigned their claims against Debtors to Collection. See Collection’s State Court Complaint, Exh. 104. After purportedly making a demand on Debtors to pay the amounts it claimed were due, Collection filed a complaint against Debtors in Idaho’s Fourth District Court on October 14, 2010, (the “Complaint”), seeking a money judgment for each of the assigned debts. Id. at 1. The Complaint contained six counts: Count 1-for $32.79 plus interest, alleged to be owed to Saltzer Medical; Count 2-for $661.87 plus interest, alleged to be owed to Anytime Fitness; Count 3-for $3,111. 19 plus interest, alleged to be owed to St. Luke’s Woman’s Clinic; Count 4 — for $54.45 alleged to be owed to Canyon County (the “County”) for case number 6549-N; Count 5 — for $71.10 alleged to be owed to the County for case number 6549-N; and Count 6 — for $166.60 alleged to be owed to the County for case number 7554-C. Id.
The amounts sought by Collection, as the assignee of the County, were purportedly for fines associated with criminal charges against Mr. Dickerson. Notwithstanding the amounts alleged by Collection in the Complaint to be owed by Mr. Dickerson for fines (ie., Counts 4-6), based upon the documentary evidence admitted at the hearing, see Exhs. 101 and 102, and the testimony of Anna Hernandez, a Court Financing Supervisor for the County, all of these fines appear to have been paid by Debtors directly to the County before Collection filed the Complaint, except for $150.00. However, that amount was paid by Debtors directly to the County on May 4, 2012.
Debtors did not respond to the Complaint, and on June 21, 2011, Collection obtained a default judgment against Debtors for eight different debts, not six, in the total amount of $8,635.61. See Exhs. 106 and 107.3 Shortly after the default judg*293ment was entered, on July 8, 2011, Collection caused a writ of garnishment to be issued by the clerk, which directed the Ada County Sheriff (the “Sheriff’) to garnish Mr. Dickerson’s wages. Exh. 108.
In response to the garnishment, on July 14, 2011, Debtors filed their chapter 7 petition. Dkt. No. 1. They listed Collection as a creditor in their schedules, Exh. 109, and Collection was sent a notice informing it of the bankruptcy filing by the Bankruptcy Noticing Center. Dkt. No. 12. Without opposition from Collection, Debtors received a discharge on October 17, 2011. Dkt. No. 26. Notice of the entry of the discharge was also sent to Collection. Dkt. No. 28. The bankruptcy case was closed on October 19, 2011. Dkt. No. 27.
When Debtors’ bankruptcy case was filed, the Sheriff released the outstanding writ of garnishment on August 10, 2011. Exh. 110. It appears no other action was taken by Collection against Debtors during the pendency of the bankruptcy case.
However, on November 2, 2011, after Debtors’ discharge was entered and the bankruptcy case was closed, Collection obtained a second writ of garnishment from the state court to collect a “Balance Now Due” on the default judgment of “$8,849.98.” Exh. 111. The Sheriff served this writ of execution on Mr. Dickerson’s employer on November 17, 2011, but later received instructions from Collection on November 21, 2011, “to withhold further action ... due to bankruptcy.” Exhs. 112 and 113. On that same date, Debtors’ bankruptcy counsel sent a faxed a copy of the discharge order to the Sheriff, to counsel for Collection, Mark L. Clark, PLLC (“Clark PLLC”), and to Mr. Dickerson’s employer, requesting that they all “please cease the garnishment ordered ... for debts [discharged in [Debtors’] bankrupt-cy_” Exh. 114.
Undeterred, on December 2, 2011, Collection obtained yet another writ of garnishment, this time in the reduced amount of $656.81 reflecting what it characterized as an “amount credited [of] $8,193.17” against the judgment debt.4 The Sheriff served this writ on Mr. Dickerson’s employer, Exh. 116, and on December 23, 2011, Debtors’ bankruptcy counsel sent another letter to Clark PLLC warning that this second attempt to collect the judgment debt was “a violation of [Debtors’] rights under 11 U.S.C. § 727(b).” Exh. 117. Along with this letter, Debtors’ counsel included copies of Debtors’ bankruptcy petition and the discharge order. Id. On January 5, 2012, Clark PLLC responded to the letter, and for the first time advised Debtors’ counsel that, in counsel’s opinion, “[t]he amount that [Collection] is pursuing through garnishment of your client’s wages is for Canyon County fines. As you know, these fines are not dischargeable through bankruptcy.” Exh. 119.
The record does not reflect that Debtors answered, or took any action, in response to Collection’s letter. On April 17, 2012, Collection obtained another writ of garnishment, this one for $734.55, that was again served on Mr. Dickerson’s employer. Exh. 121. However, on May 9, 2012, the *294Sheriff received notice from Collection’s attorneys to withhold further action on this writ. Exh. 126.
After this garnishment attempt, on May 9, 2012, Debtors’ attorneys sent Clark PLLC a letter which conceded that, under § 523(a)(7), any “fines” Mr. Dickerson might owe to the County were not discharged in Debtors’ bankruptcy.5 However, in the letter, Debtors’ counsel advised Collection’s lawyers that Mr. Dickerson had paid any fines due to the County for case number 7554-C (ie., Count 6 of the Complaint) on May 4, 2012, with a cash payment of $150. Exh. 125. The letter insisted that any additional interest and costs that had been added to the fine amounts, which Collection was apparently trying to recover via the garnishments, were discharged in the bankruptcy case. Finally, the letter asked Collection to provide an accounting to Debtors of how it had calculated the undischarged amounts remaining due on the judgment. Exh. 122.
There is nothing in the record to show that Collection responded to the letter requesting an accounting or to Debtors’ attorney’s contention that the additional amounts for fees and costs had been discharged in Debtors’ bankruptcy, for over a year. Then, on July 26, 2013, a Clark PLLC attorney sent an email to Debtors’ counsel stating that the firm had “asked outside bankruptcy counsel for authority supporting our position that we are entitled to recover attorney fees and court costs attached to a nondischargeable debt,” and that Clark PLLC expected to have that authority in hand within a week. Exh. 135. No proof was offered that Clark PLLC ever provided any “authority” for its position to Debtors. Even later, on September 9, 2013, the same attorney for Clark PLLC calculated the amounts Debtors allegedly owed on account of the fine interests and collection fees. Exh. 136. The attorney asserted that, at that time, the amounts due were “Interest: 81.91[,] Other Charges: 16.60 (Statutory 1/3 fee)[,] Court Costs: 449.50[,] Attorney Fees: 200.00[,] Total Due: $748.01.” Id. While the Court has endeavored to understand them, it can not understand how these numbers were calculated.
In the meantime, on July 1, 2013, Collection had obtained another writ of garnishment, now for $683.75, which was served on Mr. Dickerson’s employer. Exh. 128. This writ was released by the Sheriff after receiving written notice from Collection to withhold further action. Exh. 131. A total of $490.58 was withheld from Mr. Dickerson’s wages for the garnishments in July, but all of these sums were eventually returned by the Sheriff to Debtors when the writ was released by Collection. Exhs. 133-34.
Though the garnished funds were refunded to Debtors, Ms. Dickerson testified that Collection’s garnishment seriously impaired Debtors’ ability to pay their rent on time, which caused late fees to accrue, although Debtors did not provide proof of the amount of those late fees. In addition, Ms. Dickerson testified about her attempts to rectify what she viewed as the inappropriate garnishments of her husband’s wages. Without contradiction by Collection, she testified that she missed several hours of work at her job to consult with Debtors’ attorneys, and to communicate with Mr. Dickerson’s employer about the offensive garnishments. In Exh. 144, Ms. Dickerson calculates that she lost wages for approximately 28 hours, totaling $259. In addition to the time off work, Ms. Dickerson testified that these garnishments *295caused her severe anxiety, and that the emotional toll from dealing with the garnishments exacerbated her preexisting medical condition. Ms. Dickerson also testified the continuous garnishments caused Debtors significant embarrassment.
On September 26, 2013, Collection obtained the last writ of garnishment, this time for $752.66, which was served on Mr. Dickerson’s employer. Exh. 137. This garnishment netted $7.17 from Mr. Dickerson’s wages, which, with Collection’s later permission, was also returned to Debtors by the Sheriff. Exh. 140-41.
In December 2013, Debtors engaged new counsel to prevent further garnishments by Collection, and if necessary, to take legal action if a resolution could not be achieved. Ms. Dickerson testified that Debtors had paid their previous bankruptcy counsel $400 to resolve these issues, and that they paid a $1,500 retainer to new counsel. In February 2014, Debtors filed the Motion in this Court.6
In summary, based on the evidence, it appears that, after Debtors’ bankruptcy case was closed, Collection had five garnishment writs served by the Sheriff on Mr. Dickerson’s employer to satisfy all or part the judgment debt. Although issued after entry of the discharge in Debtors’ bankruptcy, the first writ sought recovery of the full amount of the default judgment, plus interest; the remaining four garnishment writs sought to seize a reduced amount based on Collection’s calculations of the amounts due for interest, fees, and costs associated with the fines previously owed to the County. In pursuing these later writs, Collection had unilaterally determined that, despite the bankruptcy discharge, and despite the evidence given to them by Debtors that they had paid all of the fines directly to the County, it could nonetheless use state court process to collect the interest and fees attributable to the fines, and the costs of collection of the judgment, all of which it concluded were debts excepted from discharge in Debtors’ bankruptcy case under § 523(a)(7).
As explained below, the Court concludes that Collection’s decision to aggressively pursue recovery of these amounts, despite the intervention of Debtors’ bankruptcy and discharge, was ill-considered, and it actions are attended by significant consequences.
Analysis and Disposition
Debtors argue that they directly paid the County for all of the fines that were assigned to Collection. Even if some amounts remained due on the fines, Debtors argue that they never owed the amounts Collection sought to recover under the garnishments. Instead, Debtors contend, all the amounts Collection sought to recover from Debtors were attributable to interest, fees, and collection costs, all of which were discharged in their bankruptcy case. As a result, Debtors contend that Collection violated the § 524(a) discharge injunction each time it obtained, and had the Sheriff serve, a writ of garnishment on Mr. Dickerson’s wages.7
Collection, of course, does not dispute that it sought and obtained writs of garnishment on Mr. Dickerson’s wages post-discharge. Further, Collection does not *296dispute that its first writ of garnishment, served in November 2011, which sought to collect the full amount of the default judgment plus interest, was a clear violation of the discharge injunction. However, Collection claims, Debtors incurred no compensable damages as a result of this discharge violation because Collection released the writ soon after it was served.
As to the remaining four writs obtained and served post-discharge, Collection does not dispute that Debtors paid all of the amounts due on the fines directly to the County. Even so, Collection argues that, under Idaho Code § 19-4708, it was entitled to recover an additional “surcharge” that was added to the original fines imposed by the County because they were also excepted from discharge in bankruptcy pursuant to § 528(a)(7). Thus, Collection asserts, its repeated attempts to garnish Mr. Dickerson’s wages were justified, and did not violate the discharge injunction.
Analysis and Disposition
I. Applicable Law
A. The Discharge and an Exception
Debtors file bankruptcy cases to stop collection activities by their creditors, and to obtain debt relief. The § 362(a) automatic stay, which arises when a bankruptcy case is commenced, stops creditors, and the Code’s discharge provision gives debtors their “fresh start.” See Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (citing Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)).
Section 524 describes the “[ejffect of discharge” in a bankruptcy case; its provisions of import in this case specify that:
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 ... of this title, whether or not discharge of such debt is waived;
(2) 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[.]
The scope of the discharge in bankruptcy case differs depending upon the chapter under which a debtor seeks relief. Debtors here sought relief under chapter 7, and § 727 describes the contours of a discharge under that chapter: “[ejxcept as provided in section 523 of this title, a discharge under [§ 727(a) ] discharges the debtor from all debts that arose before the date of the order for relief under this chapter_” § 727(b). Simply put, then, a chapter 7 discharge will prohibit the collection of all of a debtor’s pre-bankrupt-cy debts, except those debts expressly excepted from discharge under § 523(a).
In this case, Collection argues it acted properly because there is an exception to discharge that applies to the debts it sought to collect from Debtors. It relies on § 523(a)(7), which provides:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt... (7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss....
As used in § 523(a)(7), the Code elsewhere provides that “[t]he term ‘governmental unit’ means United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, *297or instrumentality of the United States ..., a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.” § 101(27).
According to § 524(a), the discharge in Debtors’ bankruptcy case enjoined their creditors from any attempt to collect prebankruptcy debts, and voided any prebankruptcy judgment for such debts. Under § 727(a), whether Collection violated the discharge in this case depends upon whether Collection was pursuing recovery of debts that, for purposes of § 523(a)(7), were “fíne[s] ... payable to and for the benefit of a governmental unit, and ... not compensation for actual pecuniary loss.... ”
B. Discharge Injunction Violations
What are the implications of a creditor’s violation of the discharge injunction? The answer to this question requires the interpretation and application of several Code provisions, and any analysis of the Bankruptcy Code begins with the text of the statute. Ransom v. FIA Card Servs., N.A., — U.S. -, 131 S.Ct. 716, 723-24, 178 L.Ed.2d 603 (2011); Danielson v. Flores (In re Flores), 735 F.3d 855, 859 (9th Cir.2013) (en banc) (citing Miranda v. Anchondo, 684 F.3d 844, 849 (9th Cir.2011), cert. denied, — U.S. -, 133 S.Ct. 256, 184 L.Ed.2d 137 (2012)); see also Huntley v. Vessey (In re Vessey), 03.1 IBCR 62, 64, 2003 WL 1533445 (Bankr.D.Idaho 2003); Fry v. Hough (In re Hough), 98.4 IBCR 132, 133, 228 B.R. 264 (Bankr.D.Idaho 1998). “Furthermore, ‘the words of [the Code] must be read in their context and with a view to their place in the overall statutory scheme.’” In re Flores, 735 F.3d at 859 (quoting Gale v. First Franklin Loan Servs., 701 F.3d 1240, 1244 (9th Cir.2012)). “If the statutory language is unambiguous and the statutory scheme is coherent and consistent, judicial inquiry must cease.” Fireman’s Fund Ins. Co. v. Plant Insulation Co. (In re Plant Insulation Co.), 734 F.3d 900, 910 (9th Cir.2013) (citations and internal quotation marks omitted).
The bankruptcy discharge is no toothless tiger. “A party who knowingly violates the discharge injunction [of § 524(a)(2) ] can be held in contempt under [§ ] 105(a) of the [B]ankruptcy [C]ode.” ZiLOG, Inc. v. Corning (In re ZiLOG), 450 F.3d 996, 1007 (9th Cir.2006) (citing Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir.2002); Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir.2002)). Put another way, a “willful” violation of the discharge injunction can be the basis for a finding of civil contempt, and the imposition of appropriate sanctions, under § 105(a). Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir.2003).
“To prove that a sanctionable violation of the discharge injunction has occurred, the debtor must show that the creditor: ‘(1) knew the discharge injunction was applicable and (2) intended the actions which violated the injunction.’ ” Nash v. Clark Cnty. Dist. Attorney’s Office (In re Nash), 464 B.R. 874, 880 (9th Cir. BAP 2012) (quoting Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1205 n. 7 (9th Cir.2008)). To establish contempt, the debtor must show that the target creditor was aware of the discharge injunction and its applicability to its claim. In re Nash, 464 B.R. at 880 (citing In re Zilog, 450 F.3d at 1007-09). However, in applying this standard, “the focus ‘is not on the subjective beliefs or intent of the [creditor] in complying with the order, but whether in fact [its] conduct complied with the order at issue.’ ” In re Dyer, 322 F.3d at 1191 (quoting Hardy v. United States *298(In re Hardy), 97 F.3d 1384, 1390 (11th Cir.1996)).
Clear and convincing evidence must be presented to show that a creditor has violated the discharge injunction, and that sanctions are justified. In re Zilog, 450 F.3d at 1007 (citing In re Bennett, 298 F.3d at 1059); see also In re Nash, 464 B.R. 874, 880 (9th Cir. BAP 2012). Upon such a showing, the burden then shifts to the creditor to demonstrate why it was not able to comply with the discharge order. In re Bennett, 298 F.3d at 1069.
If a knowing, willful violation of the discharge injunction is established, a bankruptcy court may award the debtor the actual damages suffered as a result of that conduct, together with any attorney fees and costs the debtor incurred to remedy the violation. In re Nash, 464 B.R. at 880 (quoting Espinosa, 553 F.3d at 1205 n. 7). However, in general, “punitive damages are not an appropriate remedy for § 105(a) contempt proceedings, [but] ‘relatively mild’ noncompensatory fines may be acceptable in some circumstances.” In re 1601 W. Sunnyside Dr. #106, LLC, 10.4 IBCR 110, 113, 2010 WL 5481080 (Bankr.D.Idaho 2010) (quoting In re Dyer, 344 F.3d at 1193-94). Such “relatively mild” fines must be narrowly tailored “to the amount necessary for rule enforcement.” Id. (citing Zambrano v. City of Tustin, 885 F.2d 1473, 1479-80 (9th Cir.1989)); see also In re Dyer, 322 F.3d at 1193-94 (reciting this standard, but leaving the question of what constitutes “serious” punitive sanctions for another day).
II. Application of Law to Facts
A. Collection Violated the Discharge Injunction
As explained above, the Court begins its review of the issues by reference to the text of the relevant Bankruptcy Code provisions, reading them in context with one another, with an eye to implementation of the essential themes of the Code. If the language of the Code provisions is clear, the Court need not inquire further about the statute’s meaning.
Here, Debtors received a chapter 7 discharge on October 17, 2011. That discharge voided any prebankruptcy judgments their creditors held, and enjoined those creditors from acting to collect any prebankruptcy debts from them unless the debt was excepted from discharge under § 523(a). See §§ 524(a)(1), (2); 727(b).
Of course, there is no dispute that Collection’s actions in pursuing the first writ of garnishment, seeking to collect the entire balance due on the judgment plus interest, the bulk of which represented debts that Collections concedes were discharged, violated the discharge injunction. Indeed, as provided in § 524(a)(1), the judgment Collection relied upon was void as to the discharged debts, and obtaining and instructing the Sheriff to serve that writ were acts that violated the § 524(a)(2) injunction. Of course, Collection attempts to justify its actions by claiming that the writ amount was an oversight, and that it acted promptly to release it. Still, even if this is true, there can be no doubt that Collection was aware of the discharge, and knowingly acted to collect discharged debts.
Of course, Collection has a different explanation for its attempts to collect from Debtors via the four subsequent writs for the “reduced” amounts. Collection argues that the debts represented by those writs were all excepted from discharge under § 523(a)(7), because, according to Collection, those debts were each for “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and [ ] not compensation for actual pecuniary loss....” If Collection is correct, it did not *299violate the discharge injunction with the last four writs of garnishment, but under these facts, that is a big “if.”
Given the remedial purposes of the Code, the Court is constrained to interpret discharge exceptions under § 523(a) to those plainly expressed. See Bullock v. BankChampaign, N.A., — U.S. -, 133 S.Ct. 1754, 1760-61, 185 L.Ed.2d 922 (2013) (construing § 523(a)(4) narrowly because such a reading “is consistent with the long-standing principle that exceptions to discharge should be confined to those plainly expressed. It is also consistent with a set of statutory exceptions that Congress normally confines to circumstances where strong, special policy considerations, such as the presence of fault, argue for preserving the debt, thereby benefitting, for example, a more honest creditor. See, e.g., ... § 523(a)(7).”) (internal quotation marks and citations omitted); see also Sachan v. Huh (In re Huh), 506 B.R. 257, 263 (9th Cir. BAP 2014) (en banc) (explaining that “the exception to discharge provisions of the Bankruptcy Code are interpreted strictly in favor of debtors”) (citing Bugna v. McArthur (In re Bugna), 33 F.3d 1054, 1059 (9th Cir. 1994)).
More particularly, as explained by the Supreme Court, while the plain language of § 523(a)(7) “creates a broad exception for all penal sanctions, whether they denominated fines, penalties, or forfeitures ... Congress included two qualifying phrases; the fines must be both ‘[payable] to and for the benefit of a governmental unit,’ and ‘not compensation for actual pecuniary loss.’ ” Kelly v. Robinson, 479 U.S. 36, 51, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986).
As to the first qualifier, as a leading bankruptcy treatise notes, the Code defines “governmental unit” in § 101(27) “broadly to include domestic and foreign governments at all levels and their constituent units. It does not, however, include ‘entities that operate through State action, such as through a grant of a charter or a license, and have no further connection with that State or Federal government.’ The department, agency[,] or instrumentality in question should actually be carrying out governmental rather than private objectives.” 2 Collier on Bankruptcy ¶ 101.27 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (quoting H.R.Rep. No. 595, 95th Cong., 1st Sess. 311 (1977), 1978 U.S.C.C.A.N. 5963; S.Rep. No. 989, 95th Cong., 2d Sess. 24 (1978), 1978 U.S.C.C.A.N. 5787; Revere Copper Prods., Inc. v. Hudson River Sloop Clearwater, Inc. (In re Revere Copper & Brass, Inc.), 29 B.R. 584, 587 (Bankr.S.D.N.Y.1983), aff'd, 32 B.R. 725 (S.D.N.Y.1983)). Despite this broad definition, though, Collection obviously is not a governmental unit.
Recall, Collection was the only plaintiff named in the Complaint it filed against Debtors, and in paragraph 3, that complaint explains that Collection’s standing to collect from Debtors based on its status as the contractual assignee of the various creditors holding the claims against Debtors thereafter described. See Exh. 104. Importantly, then, under the terms of its own complaint, as assignee, Collection was not seeking to recover the debts from Debtors on the County’s behalf, but rather, it was asserting its own legal right to collect from them. Consistent with this position, the state court awarded a default judgment on all counts (and a couple of extras) to Collection, not to or for the benefit of the assignor creditors. Clearly, then, as an assignee and the named judgment creditor, the debts created by the judgment on account of any fines and fees are “payable to” Collection, not to the County. See Exh. 107 at 2. Therefore, the state court judgment did not represents *300debts “payable to a governmental unit” for purposes of § 523(a)(7).
The Court also concludes that the debts were not “for the benefit of a governmental unit,” another reason why § 523(a)(7) will not protect Collection. Again, without dispute, the evidence submitted at the hearing established that Debtors had paid all but $150 of the fines Mr. Dickerson owed to the County well before Collection even instituted the state court action against Debtors. Presumably, then, in those counts of the Complaint based upon paid fines, the amounts Collection sought to collect in state court were for its own benefit, not that of a “governmental unit.” Any additional amounts Collection was pursuing for interest, fees, or collection costs were not “for the benefit of a governmental unit.” See In re Towers, 162 F.3d 952, 954-56 (7th Cir.1998), cert. denied, 527 U.S. 1004, 119 S.Ct. 2340, 144 L.Ed.2d 237 (1999) (holding that a restitution order payable to a state attorney general but for the benefit of the criminal defendant’s victims was dischargeable under § 523(a)(7)); Kish v. Farmer (In re Kish), 238 B.R. 271, 286 (Bankr.D.N.J.1999) (holding that surcharges added to motor vehicle fines were not “for the benefit of a governmental unit”).
But even if Collection could establish that these debts were “payable to and for the benefit of’ the County, there is another problem with its legal position evident in this record. Because Debtors paid the fines to the County, any additional amounts Mr. Dickerson arguably owed to Collection for interest or fees would constitute “compensation [to Collection or the County] for actual pecuniary loss.” This is another, distinct reason that those debts do not qualify for an exception to discharge under § 523(a)(7) as noted in Kelly.
Neither the parties nor the Court could locate binding case law concerning whether a debt that would qualify for an exception to discharge under § 523(a)(7) retains this status upon an assignment to a nongovernmental unit; although Stevens v. Comm. Collection Serv., Inc. (In re Stevens), 184 B.R. 584 (Bankr.W.D.Wash. 1995) is squarely on point. In that case, the assignee creditor garnished the wages of the debtor post-discharge attempting to collect traffic fines owed to a county district court. The debtor prosecuted an adversary proceeding against the creditor arguing that the creditor was in contempt for violation of the discharge injunction. The bankruptcy court first determined that traffic fines were excepted from discharge under § 523(a)(7). Id. at 586. The court noted that, as argued by the debtor, the debts the creditor sought to collect were not “payable to a governmental unit,” but rather, were payable to the creditor, a private company. Id. Even so, the court declined to endorse debtor’s argument that the creditor was guilty of contempt explaining that:
The “assignment” from the County to the [creditor] was not a transfer of ownership of the claim. Rather, pursuant to its contract with the County, the [creditor] is the County’s agent for purposes of collection, and the County receives 100% of sums the defendant collects. Where there has been an assignment for collection purposes, the assignor remains the real party in interest. The debtor would have the [c]ourt conclude that a debt payable to an agent for the benefit of its principal is no longer payable to the principle and is hence dis-chargeable. This interpretation is contrary to general agency principles and creates no legally meaningful distinction for purposes of § 523(a)(7).
Id.
The Court respectfully disagrees with the bankruptcy court’s conclusion in Ste*301vens. It cited no authority for its conclusion that a collection company pursuing recovery of nondischargeable fines may also take advantage of the § 523(a)(7) exception to discharge. The court also did not address the language in the § 101(27) definition of “governmental unit,” which does not include an assignee, or agent, of a governmental unit.
Beyond this, the Court notes that the facts in Stevens are likely distinguishable from the present case. Although the Stevens court did not discuss the contract between the parties in detail, it apparently did review that contract and it found that the assignee-creditor was obliged to turn over “100% of the sums” the creditor collected to the county. Id. In this case, most of what Collection was attempting to recover from Debtors represented fees and statutory costs associated with the original fines, or in other words, amounts that would be paid to Collection, not to the County.
Finally, in reaching its conclusion, the Stevens court reads § 523(a)(7) broadly to include agents and assignees, an inappropriate interpretive approach in this context. See Bullock, 133 S.Ct. at 1760-61; In re Huh, 506 B.R. at 263. The Court therefore declines to follow the reasoning of In re Stevens here.
Because the debts at issue in this case were not excepted from discharge under § 523(a)(7), Collection’s default judgment was voided, and it was thereby enjoined from collecting any prebankruptcy debts from Debtors.
Collection also relies on an Idaho statute to support its argument that the debts are excepted from discharge. However, that statute, Idaho Code § 19-4708, does not compel that result. It provides:
Collection of Debts Owed to Courts—
Contracts for Collection
(1) The supreme court, or the clerks of the district court with the approval of the administrative district judge, may enter into contracts in accordance with this section for collection services for debts owed to courts. The cost of collection shall be paid by the defendant as an administrative surcharge when the defendant fails to pay any amount ordered by the court and the court utilizes the services of a contracting agent pursuant to this section
(2) As used in this section: ...
(c) “Debts owed to courts” means any assessment of fines, court costs, surcharges, penalties, fees, restitution, moneys expended in providing counsel ... or other charges which a court judgment has ordered to be paid to the court in criminal cases....
(4) Each contract entered into pursuant to this section shall specify the scope of work to be performed and provide for a fee to be paid or retained by the contracting agent for collection services. Such fee shall be designated as the costs of collection, and shall not exceed thirty-three percent (33%) of the amount collected. The cost of collection shall be deducted from the amount collected but shall not be deducted from the debts owed to courts.
(5) Contracts entered into shall provide for the payment of any amounts collected to the clerk of the district court for the court in which the debt being collected originated after first deducting the collection fee....
Idaho Code § 19-4708.
Collection argues that this statutes shows the “surcharges” it added to the amounts of the fines for collection costs were proper per state law. However, Collection did not submit in evidence its contract with the County for collection of *302these debts, so the Court is left to wonder whether its deal with the County comported with the statute. Moreover, though the statute adds “surcharges” and other costs to the amount an offender is required to pay to satisfy the debt, and requires the offender to pay the fines to the district court clerk, the statute does not deputize a county’s debt collectors as a “governmental unit,” as defined by the Bankruptcy Code. Even if the statute attempted to accomplish this, it would likely not be sufficient under § 101(27). The statute also makes clear that the collection costs will be deducted by the collector, not paid to the county, and so these amounts are not “payable to and for the benefit of’ the county, either. And finally, unlike the underlying fines, the statute makes clear that the surcharges are designed to pay for the county’s “collection services,” and thus, they represent compensation to a county for an actual “pecuniary loss.”
The Court’s conclusion that these costs and fees are not excepted from discharge under § 528(a)(7) is in accord with the decision of the Ninth Circuit Bankruptcy Appellate Panel in Searcy v. Ada Cnty. Prosecuting Attorney’s Office (In re Sear-cy), 463 B.R. 888 (9th Cir. BAP 2012). There, the Panel affirmed the bankruptcy court’s determination that attorney fees and costs a criminal defendant debtor was ordered to pay by a state court were excepted from discharge under § 523(a)(7). The Panel looked to Idaho state law to determine if the attorney fees and costs the state court ordered the debtor to pay were in the nature of a “fine, penalty or forfeiture,” but noted that the determination of whether a debt under § 523(a)(7) is excepted from discharge is a question of federal law. Id. at 892. The Panel was forced to look to state law to determine whether the attorney fees and costs at issue were a “fine, penalty or forfeiture” because those are not defined terms in the Bankruptcy Code. However, “governmental unit” is defined by the Bankruptcy Code, and this Court is bound to follow this federal law in resolving the issue.
In conclusion, based upon the plain language of the applicable Bankruptcy Code provisions, all of the debts Debtors owed to Collection, with the exception of the $150 fine balance Debtors paid to the County in May of 2012, were discharged in their bankruptcy case. Because the discharge exception was inapplicable to most of the amounts Collection was attempting to collect from Debtors, the Court will now address whether Debtors have shown that Collection should be held in contempt for its violations of the § 524(a) discharge injunction.
B. Collection’s Actions Constituted Contempt
As explained below, the Court concludes that Debtors have proven by the requisite clear and convincing evidence that Collection knowingly and willfully violated the discharge injunction. It did so because (1) Collection knew the discharge injunction was applicable to its claims; and (2) while it erroneously assumed its claims against Debtors were not discharged, Collection no doubt intended the actions it took that violated the discharge injunction. Debtors have further shown that sanctions are appropriate under these facts, and Collection has failed to demonstrate why it was unable to comply with the Court’s order.
1. Collection Knew the Discharge Injunction Applied to its Claims Against Debtors.
In order for a creditor to be held in contempt for its violation of the discharge injunction, a debtor must show by clear and convincing evidence that the creditor *303was aware of the discharge injunction, and was aware that the injunction applied to its claims. In re Zilog, Inc., 450 F.3d at 1009 n. 14; In re Nash, 464 B.R. at 880. However, the creditor’s “subjective beliefs” or “intent” in complying with the discharge injunction is not dispositive to the inquiry of whether its actions violated the injunction. In re Dyer, 322 F.3d at 1191. In other words, a creditor may not hide its eyes to the discharge injunction to avoid its reach.
The Ninth Circuit Bankruptcy Appellate Panel addressed facts similar to this case in a recent unpublished decision, which this Court considers persuasive. Chionis v. Starkus (In re Chionis), BAP No. CC-12-1501-KuBaPa, 2013 WL 6840485, at *1 (9th Cir. BAP Dec. 27, 2013) (stating the decision “may be cited for whatever persuasive value it may have”). In that case, the Panel reversed a bankruptcy court’s determination that a creditor’s subjective knowledge about the extent of the discharge injunction prevented the court from determining that the creditor was in contempt for violation of the discharge injunction.
In Chionis, the creditor was listed in the debtor’s schedules, and after entry of a § 727 discharge, acting pro se, the creditor sued the debtor in state court to collect a loan made to the debtor before the bankruptcy case was filed. The creditor purportedly filed the suit despite the discharge because he believed the loan agreement in question, signed by the debtor, contained an effective “no discharge” provision. Upon learning of the suit, the debtor’s bankruptcy counsel sent the creditor a letter explaining that contract provisions attempting to skirt the bankruptcy discharge were ineffective under the Code, and warning the creditor that it would be a violation of the discharge injunction to proceed with the state court action. When the creditor declined to discontinue the action, the debtor filed an adversary proceeding against the creditor, asking the bankruptcy court to hold the creditor in contempt for violation of the discharge injunction. The bankruptcy court, based upon the Ninth Circuit’s decision in In re Zilog, Inc., decided that, while the creditor obviously knew about the existence of the discharge in debtor’s bankruptcy case, because the creditor subjectively believed (albeit incorrectly) that the “no discharge” provision excepted the debt from discharge in bankruptcy, the creditor could not be found in contempt. Id. at *3.
The Panel reversed the bankruptcy court’s decision. While acknowledging that In re Zilog, Inc.
is broad and arguably could be interpreted as precluding a finding of willfulness and hence precluding the imposition of contempt sanctions whenever the alleged contemnor testifies that, for whatever reason, he or she did not subjectively believe that the discharge applied to his or her claim, no matter how misguided or unreasonable that belief might have been. However, we do not believe that In re Zilog, Inc. intended such an expansive reading of its comments, given that such a reading seemingly would render the bankruptcy discharge all but toothless.
Id. at *8.
In this case, Collection was listed in Debtors’ schedules, received notice of Debtors’ bankruptcy filing, and later, notice of the entry of Debtors’ discharge. Dkt. No. 1 at 21-22; Exh. 109; Dkt. No. 28; Exh. 117. Collection does not dispute this. After the discharge was entered, Collection knowingly undertook a series of *304garnishments of Mr. Dickerson’s wages, although Debtor, though counsel, repeatedly advised Collection of their belief, and citing authorities to support that, in doing so, Collection was violating the discharge order. See Exhs. 114,117,122, and 125. Collection’s response to Debtors’ admonishments advised that, in its view, any amounts attributable to the County fines were excepted from discharge per § 528(a)(7). Debtors again warned Collection that its collection efforts would constitute discharge violations because the amounts Collection sought were not fines, but were instead the collection costs and fees added to the fines. Exh. 122. Collection, a professional debt collector, ignored Debtors’ objections and continued its attempt to collect from Mr. Dickerson’s wages, apparently undertaking a calculated risk that Debtors’ view of the law was correct.
Collection lost this bet. As the Court explained above, the debts Collection sought to collect were not excepted from discharge. Because of this, under § 524(a), Collection was enjoined from seeking to collect those debts from Debtors, and its state court judgment against Debtors was void. On this record, the Court concludes that Debtors have shown, through clear and convincing evidence, that Collection was aware of the discharge injunction and that Collection knew it applied to its claims against Debtors. Collection’s subjective, but incorrect, belief that the debts it was assigned from the County were excepted from discharge does not save it from this conclusion.
2. Collection Intended the Actions which Violated the Discharge Injunction.
The Court also concludes that Debtors have shown through clear and convincing evidence that Collection intended the actions it took which violated the discharge injunction, thus satisfying the second prong of the test set forth in In re Zilog, Inc. and In re Nash.
After receiving notice of the entry of the discharge order, over the course of many months, Collection caused five writs of garnishment to be served on Mr. Dickerson’s employer. The first writ was for the full amount of the default judgment plus interest. This action was a clear violation of the discharge injunction, which Collection does not dispute. Then, after being advised of the breadth of the discharge injunction by Debtors, Collection caused four more writs of garnishment to be issued and served on Mr. Dickerson’s employer. After these writs were served, Debtors advised Collection that its action was a violation of the discharge injunction. Each of these acts to collect the discharged debts were, therefore, knowing, willful, and intentional violations of the discharge injunction.
Given these facts, the Court concludes that Collection should be held in contempt for repeatedly violating the discharge injunction in this case.
S. Debtors Suffered Compensable Damages on Account of Collection’s Actions.
While the Court concludes that Collection knowingly violated the discharge order, as noted at the conclusion of the evidentiary hearing, under these facts, the Court is not persuaded it should impose any punitive sanctions against Collection. Though it violated the discharge, Collection’s efforts were founded upon a misunderstanding of the bankruptcy law, compounded by flawed advice it received from counsel. Moreover, while the repeated garnishments caused Debtors con*305siderable financial stress and inconvenience, Collections did not actually receive any significant funds from Debtors via its activities. Further, although the Court heard testimony from Mrs. Dickerson as to her anxiety, embarrassment, and an exacerbation of a preexisting medical condition this situation allegedly caused her, the Court did not receive any further evidence of these damages, and therefore, it will not impose punitive damages on account of these alleged injuries.8
That said, however, as the Ninth Circuit instructs, “[i]f the bankruptcy court finds that the creditor [ ] willfully violated the injunction, it shall, at the very least, impose sanctions to the extent necessary to make [the debtor] whole.” Espi-nosa, 553 F.3d at 1205 n. 7. To that end, pursuant to § 105(a), the Court finds that Collection should be ordered to compensate Debtors for the following amounts as damages, all incurred as a direct result of Collection’s discharge violations: $400, the amount Debtors paid their former bankruptcy counsel to attempt, unsuccessfully as it turned out, to rectify Collection’s discharge injunction violations; and $259 for the wages lost by Mrs. Dickerson to meet with counsel to discuss and plan a response to Collection’s actions.
In addition, Debtors are entitled to recover reasonable attorneys fees and costs incurred in prosecuting this motion. Based upon the submissions of the parties, the Court determines this amount to be a total of $8,500.00.9
Conclusion
For these reasons, Debtors’ motion for an order finding Collection in contempt for its actions violating the discharge injunc*306tion in this case will be granted by separate order. That order will also require that Collection pay compensatory damages to Debtors as discussed above.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
. Rules 9014; 7052.
.No explanation has been provided to the Court by Collection concerning why two extra debts were added to the six debts described in the Complaint when Collection sought entry of the default judgment against Debtors. To the Court, this irregularity evidences that Col*293lection's calculations concerning the amounts Debtors allegedly owed on the assigned debts are unreliable.
. Of course, Debtors had not paid any amounts on the default judgment debt to Collections. Through this “credit,” Collection apparently acknowledges that most, but not all, of the debts included in the judgment were discharged in Debtors' bankruptcy. The Court is at a total loss as to how Collection computed the amounts alleged to be due on the judgment in this, and the subsequent garnishment writs discussed below. As a result, the Court declines to assign any credibility to Collection's calculations.
. As noted above, based upon the evidence presented to the Court, it appears that, by this time, Debtors had paid all outstanding fines to the County.
. On January 9, 2014, Debtors’ attorneys filed an abuse of process and unjust enrichment complaint in state court against Collection based upon its activities in pursuing Debtors to recover debts discharged in their bankruptcy. The Court is unaware of the status or disposition of this action.
. At the evidentiary hearing, and based upon the timing of Collection’s actions, Debtors withdrew the argument in the Motion that Collection also violated the § 362(a) automatic stay.
. Collection should be aware, though, that it is chargeable with the knowledge that its attempts to collect under these facts were gravely inappropriate. Were it to repeat its offense in other cases, that would be strong evidence that punitive sanctions should be imposed. If Collection is in doubt as to the status of any debts it hopes to collect after discharge, it need not guess or gamble, but instead may commence an adversary proceeding in this Court to obtain a formal determination of dischargeability as to those debts. See Rules 4007, 7001(6).
. On March 28, 2014, Debtors filed a Motion and Memorandum for Attorneys Fees and Costs, together with their attorney’s supporting affidavit, detailing the services provided to Debtors and the amount charged for this representation, Dkt. Nos. 51, 52. Collection has objected to this Motion, Dkt. Nos. 53 and 55, and Debtors have filed a response to the objection, Dkt. No. 54. Because these submissions adequately set forth the positions of the parties, no further hearing is required, and by this Memorandum, the Court has determined the appropriate amount to be included for Debtors’ attorneys fees and costs as part of the compensatory damages for Collection’s contempt in violating the discharge injunction. See Walls v. Wells Fargo Bank, N.A., 276 F.3d at 507 (noting that the compensatory civil contempt damages that may be recovered by an aggrieved debtor for a creditor’s discharge violation includes attorneys fees); In re Nash, 464 B.R. at 880 (same).
Moreover, the parties’ suggestion that Debtors’ right to recover, and the amount of any attorneys fees and costs that should be awarded, is somehow governed by the Idaho Rules of Civil Procedure is misplaced.
Finally, Collection’s objections to the amount requested for Debtors’ attorneys fees and costs based upon the limitations placed on recoveries for automatic stay violations under § 362(k) by the Ninth Circuit in Sternberg v. Johnston, 595 F.3d 937 (9th Cir.2009) are overruled; those limitations do not apply to damage awards made under § 105(a) for a creditor’s contemptuous violation of the discharge injunction. Rediger Inv. Corp. v. H Granados Commc’ns, Inc. (In re H Granados Commc’ns, Inc.), 503 B.R. 726, 734 (9th Cir. BAP 2013) (citing Sternberg, 595 F.3d at 946 n. 3). Collection’s objections to the amounts requested for Debtors' attorneys fees have been addressed by the Court’s decision to award less than the total they requested. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497076/ | Michael E. Romero, United States Bankruptcy Judge
ORDER
The Court previously entered a judgment against the Defendants in this proceeding. After notice and a hearing, the Court stayed execution of the judgment pending Defendants’ appeal pursuant to Fed. R. BaNKR. P. 8005 (“Rule 8005”). The United States Bankruptcy Appellate Panel of the Tenth Circuit (“BAP”) affirmed this Court’s trial order and judgment, and Defendants timely appealed the matter to the United States Court of Appeals for the Tenth Circuit (“Tenth Circuit”). There are no disputed facts concerning this matter, and the sole issue is whether the stay pending appeal imposed by this Court under Rule 8005 terminated at the conclusion of the BAP appeal, or whether the stay continues through the entire appeal process, including a subsequent appeal from the BAP to the Tenth Circuit.
BACKGROUND
Debtor Mark A. Kendall (“Debtor”) filed for relief under Chapter 7 of Title 11 of the United States Code on August 2, 2010. On September 30, 2010, the former Chapter 7 trustee commenced this adversary proceeding by filing a Complaint against Defendants Janet K. Kendall (“Ms. Kendall”) and The J.K. Family Trust (collectively with Ms. Kendall, the “Defendants”) for the avoidance and recovery of certain assets transferred by the Debtor. Following a trial on the merits, the Court entered its Order dated August 6, 2012 (“Trial Order”) with a judgment in favor of the former trustee (“Judgment”),1 avoiding three fraudulent conveyances. Further, the Trial Order authorized the former Chapter 7 trustee to pursue recovery of assets within the limitations of 11 U.S.C. § 550(d), including but not limited to certain real property located at 5436 West 7th Street Road in Greeley, Colorado (“Property”).
On August 20, 2012, Defendants appealed the Trial Order and Judgment to the BAP,2 primarily asserting this Court erred in 1) determining the value of the Debtor’s business based on a liquidation rather than “going concern” basis, and 2) using the lower liquidation value to conclude the Debtor was insolvent at the time he made the subject transfers. Three days later, the Defendants filed their Motion to Stay *358Judgment, requesting a stay pending appeal pursuant to Rule 8005, or in the alternative, to stay the judgment for a reasonable time — between 90 and 180 days — to allow Ms. Kendall to obtain another residence.3 The former Chapter 7 trustee opposed the Motion to Stay Judgment. Following a hearing on the matter, the Court entered a Minute Order dated September 7, 2012, providing, inter alia, as follows:
Based upon the representations and arguments of counsel, and for the reasons stated on the record, the Court shall stay execution of the Judgment (Docket No. 75) pending appeal, on the following conditions:
With respect to the house and surrounding real property, the Court will stay execution of the Judgment pending the appeal provided: (1) the Defendants maintain the property; (2) the Defendants maintain all insurance coverage against the property; (3) the Defendants maintain the current condition of the property, as may be supervised by the Trustee; (4) the Defendants cure any and all outstanding real property taxes against the property by October 1, 2012; and (5) so long as the Defendants are in possession of the property as a result of the stay, the Defendants must pay any and all real property taxes timely going forward. If Defendants fail to comply with any of these conditions, the stay of execution with respect to the property shall be lifted.4
The parties do not dispute Defendants have complied with the above enumerated conditions with respect to the Property. The parties further agree that during the pendency of the appeal to the BAP, Rule 8005 stayed the Trial Order and execution of the Judgment and the parties never requested a modification or termination of the stay from either this Court or the BAP as provided for in Rule 8005.
During the BAP appeal, Joli A. Lofstedt (“Trustee”) was substituted for Charles Schlosser as Chapter 7 trustee. On May 7, 2013, the BAP issued a written opinion affirming the Trial Order (“BAP Order ”)5 and the BAP issued the mandate on May 22, 2013. In the interim, on May 20, 2013, Defendants filed a Notice of Appeal to the Tenth Circuit.6 The Tenth Circuit appeal is still pending.
DISCUSSION
Other than the stay pending appeal granted by this Court under Rule 8005, the Defendants failed to seek any further stay of the Trial Order and Judgment, despite several opportunities to do so. Specifically, Defendants never sought a stay pending appeal of the BAP Order with the BAP pursuant to Fed. R. Bankr. P. 8017 (“Rule 8017”). Defendants did not seek a stay of the BAP mandate from the BAP pursuant to 10th Cm. BAP L.R. 8016-6(b).7 Further, Defendants never re*359quested a stay pending appeal of the BAP Order from the BAP or the Tenth Circuit pursuant to Federal Rule of Appellate Procedure 8(a).8
About three months into the Tenth Circuit appeal, counsel for the Trustee conferred with counsel for the Defendants, seeking to conduct an orderly sale of the Property. The Trustee asserts the Rule 8005 stay pending appeal regarding the Property terminated when the BAP issued its mandate. Defendants, opposing any sale of the Property, argue the stay pending appeal issued by this Court continues throughout the entire appellate process, including the Tenth Circuit appeal. The failure to seek any additional stay was a heavy gamble for the Defendants given the Property — where the Debtor and Ms. Kendall currently reside — -hangs in the balance. If this Court’s stay pending appeal terminated, the Trustee may proceed with the sale of the Property, orderly or not. Such a sale would create potential problems if Defendants prevail in their Tenth Circuit appeal. However, if the stay pending appeal continues through the Tenth Circuit appeal, the Debtor and Ms. Kendall may continue to reside at the Property until the Tenth Circuit appeal concludes (or the stay is modified or terminated).
Thus, the parties’ dispute regarding the proposed sale of the Property was the catalyst for the Trustee’s Motion for Determination of Law Regarding Continuation of Fed. R. BankR. P. 8005 Stay of Execution or, in the Alternative, to Vacate Stay (“Motion to Determine Stay”). The Court reviewed the record from the hearing regarding Defendants’ Motion to Stay Judgment, and there was no discussion of whether the stay pending appeal would continue after conclusion of the BAP appeal. As a matter of first impression, the Court must determine just how long a bankruptcy court’s Rule 8005 “stay pending appeal” remains in effect.
A. Bankruptcy Rules Governing Stays Pending Appeal
A stay pending appeal temporarily suspends proceedings or the effect of a judgment. The Court begins its analysis with the applicable Federal Rules of Bankruptcy Procedure.9
Fed. R. Bankr. P. 8005 applies to appeals of a bankruptcy court order to a district court or bankruptcy appellate panel. Rule 8005, titled “Stay Pending Appeal,” provides as follows:
A motion for a stay of the judgment, order, or decree of a bankruptcy judge, for approval of a supersedeas bond, or for other relief pending appeal must ordinarily be presented to the bankruptcy judge in the first instance. Notwithstanding Rule 7062 but subject to the power of the district court and the bankruptcy appellate panel reserved hereinafter, the bankruptcy judge may suspend or order the continuation of *360other proceedings in the case under the Code or make any other appropriate order during the pendency of an appeal on such terms as will protect the rights of all parties in interest. A motion for such relief, or for modification or termination of relief granted by a bankruptcy judge, may be made to the district court or the bankruptcy appellate panel, but the motion shall show why the relief, modification, or termination was not obtained from the bankruptcy judge. The district court or the bankruptcy appellate panel may condition the relief it grants under this rule on the filing of a bond or other appropriate security with the bankruptcy court. When an appeal is taken by a trustee, a bond or other appropriate security may be required, but when an appeal is taken by the United States or an officer or agency thereof or by direction of any department of the Government of the United States a bond or other security shall not be required.10
Rule 8005 provides no indication of whether a stay pending appeal terminates following the immediate appeal to the bankruptcy appellate panel or district court. In the absence of any direction in the rule itself, this Court must press on.
The second relevant rule provides a mechanism to stay a bankruptcy appellate panel or district court order during a subsequent appeal to the court of appeals. Rule 8017 applies to appeals from the district court or bankruptcy appellate panel, whichever renders an order and judgment on an appeal of a bankruptcy court order. Fed. R. BankR. P. 8017, captioned “Stay of Judgment of District Court or Bankruptcy Appellate Panel,” provides as follows:
(a) Automatic stay of judgment on appeal. Judgments of the district court or the bankruptcy appellate panel are stayed until the expiration of 14 days after entry, unless otherwise ordered by the district court or the bankruptcy appellate panel.
(b) Stay pending appeal to the court of appeals. On motion and notice to the parties to the appeal, the district court or the bankruptcy appellate panel may stay its judgment pending an appeal to the court of appeals. The stay shall not extend beyond 80 days after the entry of the judgment of the district court or the bankruptcy appellate panel unless the period is extended for cause shown. If before the expiration of a stay entered pursuant to this subdivision there is an appeal to the court of appeals by the party who obtained the stay, the stay shall continue until final disposition by the court of appeals. A bond or other security may be required as a condition to the grant or continuation of a stay of the judgment. A bond or other security may be required if a trustee obtains a stay but a bond or security shall not be required if a stay is obtained by the United States or an officer or agency thereof or at the direction of any department of the Government of the United States.11
Unlike Rule 8005, Rule 8017 expressly provides a stay pending appeal terminates at the latest upon final determination of the Tenth Circuit.
It therefore appears axiomatic that, in order to obtain a stay of a district court or bankruptcy appellate panel order or judgment pending appeal to a court of appeals, a party should seek such a stay under Rule 8017. At a minimum, it is just good practice to request a stay pending appeal under Rule 8017 if the losing party appeals *361the judgment of the district court or bankruptcy appellate panel. Here, however, Defendants did not seek a stay of the BAP Order under Rule 8017, leaving this Court to determine whether its own stay pending appeal under Rule 8005 continues through the Tenth Circuit appeal.
B. Does a Stay Pending Appeal Under Rule 8005 Terminate or Continue Through the Entire Appeal Process?
The parties agree Rule 8005 controls the stay pending appeal issued by this Court. The Court considered the sparse number of cases addressing whether a Rule 8005 stay pending appeal terminates. The common thread is a comparison of Rule 8005 with Rule 8017.
The United States Bankruptcy Court for the District of Columbia was the first to examine and distinguish these rules in detail, ultimately holding a bankruptcy court’s stay pending appeal terminated upon final determination by the district court or the bankruptcy appellate panel.12
F.R.Bankr.P. 8017 should be viewed as the rule controlling the stay of an affirmed bankruptcy court judgment. Two other rules, F.R.Bankr.P. 7062 and F.R.Bankr.P. 8005, authorize stays pending “an appeal” without any distinction drawn between an appeal to the district court or a further appeal to the court of appeals. Unlike F.R.Bankr.P. 8017, however, these rules fail expressly to deal with a stay pending an appeal to the court of appeals. So Rules 7062 and 8005 ought not be viewed as addressed to a stay pending an appeal to the court of appeals.13
In conjunction with comparing these rules, the Richards court also considered the importance of deference to the district court (and bankruptcy appellate panel) to maintain “sound relations” between courts, and the intermediate appellate court’s ability to assess more accurately the probable costs incurred during the appeal and the costs of a subsequent appeal to the court of appeals.14 As Judge Teel explained in Richards, this interpretation satisfies “the need for a clear-cut rule applicable to all cases,”15 and affords maximum deference to the district court and bankruptcy appellate panel. Nine years after Richards, Judge Teel reiterated “[tjhere is no reason to stay the effectiveness of the affirmed order unless the [moving party] is entitled to a stay of the District Court’s order.... [A]ny stay of the District Court’s order must be sought from the District Court or the Court of Appeals.”16
This Court agrees. A Rule 8005 stay pending appeal should not extend to an appeal of the district court or bankruptcy appellate panel to the court of appeals. The very existence of Rule 8017 negates *362the need for a bankruptcy court to issue a open ended stay pending appeal that would continue through a subsequent appeal to the Tenth Circuit. The genesis of Rule 8005 is Fed. R. App. P. 8,17 and Rule 8017 is derived from Fed. R. Crv. P. 62 and Fed. R. App. P. 41.18 The Bankruptcy Rules should be applied in accord with the rules upon which they are based. Stated differently, just as Rule 8005 confers authority with the bankruptcy court to enter a stay pending appeal of its judgment, Rule 8017 authorizes the district court or bankruptcy appellate panel to stay its judgment pending appeal to the court of appeals. District courts and bankruptcy appellate panels should be free to exercise such authority without interference from the bankruptcy court.
Furthermore, the Tenth Circuit recognizes the distinct functions of Rule 8005 and Rule 8017. Two months before the Richards decision, the Tenth Circuit determined a request to stay pending appeal from the BAP to the Tenth Circuit under Rule 8017, and stated:
The rules governing appeals to and from intermediate tribunals (i.e., the BAP or the district court acting in its appellate capacity) are contained in Part VIII of the Bankruptcy Rules. Bankruptcy Rule 8005 governs stays pending appeal to an intermediate appellate tribunal. Like Fed.R.App.P. 8, relating to stays pending appeal to a circuit court, Bankruptcy Rule 8005 contemplates that the trial court will be the primary court to stay a matter pending appeal. Bankruptcy Rule 8005 expressly recognizes the trial court’s power to enter a stay pursuant to Bankruptcy Rule 7062, and it gives the intermediate appellate tribunal power to enter a stay or to terminate or modify one entered by the bankruptcy court.
Stays pending appeal from an intermediate appellate tribunal are governed by Bankruptcy Rule 8017. It provides that the judgment of the intermediate appellate tribunal shall automatically be stayed for ten days after entry, unless otherwise ordered by the court. Fed. R. BaNKR. P. 8017(a). This gives a party time in which to decide whether to pursue an appeal, akin to Fed.R.Civ.P. 62(a), which automatically stays enforcement of district court judgments in civil cases for ten days, and Fed. R.App. P. 41(a), which provides that the mandate of the circuit court shall not issue for a certain period of time. See Fed. R. Banxr. P. 8017 advisory committee’s note. Bankruptcy Rule 8017(b) empowers the intermediate appellate tribunal to enter a further stay of its judgment pending appeal to a higher court. The advisory committee note explains that subdivision (b) gives the district courts and the BAPs the same authority that Fed. R.App. P. 41(b) gives *363the circuit courts to stay their judgments pending appeal, thereby indicating that the stay provisions of Bankruptcy Rule 8017(b) are modeled after those governing circuit courts, rather than those governing district courts.19
Although the Tenth Circuit in Sunset Sales did not address the precise issue before this Court, whether a stay pending appeal under Rule 8005 terminates, the Tenth Circuit expressed its view that Rule 8005 controls stays pending appeal from the bankruptcy court to an intermediate appellate tribunal, not an appeal from an intermediate appellate tribunal to the Tenth Circuit. The Tenth Circuit recognized the authority to stay a district court or bankruptcy appellate panel judgment pending appeal is a power reserved for the “intermediate appellate tribunal” under Rule 8017.
The Richards interpretation has garnered additional support, and is the growing majority position.20 For example, the United States Bankruptcy Court for the Eastern District of North Carolina reasoned as follows:
This Court is persuaded to limit the “appeal” language in Bankruptcy Rule 8005 to include only the appeal from the bankruptcy court to the district court or bankruptcy appellate panel. Bankruptcy Rule 8017 would apply where the district court judgment has been appealed to the court of appeals, regardless of whether or not a stay was sought in the appeal from the bankruptcy court order or judgment to the district court. Rule 8005 specifically provides that the motion to stay applies to a judgment, order, or decree of a bankruptcy court and such rule makes no reference to a decision of the district court. In contrast, Rule 8017 includes language as to the district court decision. The caption of Rule 8017 is even entitled: STAY OF JUDGMENT OF DISTRICT COURT OR BANKRUPTCY APPELLATE PANEL. Therefore, it is clear to this court that any stay of a district court judgment must be ordered by the district court under Rule 8017.21
After distinguishing these rules, the Fountain Powerboat court held “Rule 8005 limits the stay pending appeal entered by the bankruptcy court until entry of judgment by the district court on an appeal of the *364bankruptcy court order, judgment or decree.” 22 Judge Doub further explained:
By holding otherwise, this Court would be expanding the meaning of Bankruptcy Rule 8005 beyond its intended scope and encroaching upon the powers to stay a judgment of the district court which is specifically reserved to the district court under Rule 8017(b). The bankruptcy court retains the ability to modify or terminate its stay pending appeal at the request of a party prior to the entry of judgment in the district court. Once the district court has entered its judgment, the stay pending appeal granted by the bankruptcy court and pursuant to Bankruptcy Rule 8005, no longer applies. An appellant must then employ Bankruptcy Rule 8017(b) in order to seek the imposition of a stay pending appeal to the circuit court if the appellant desires the stay to extend beyond the fourteen(14) day stay provided under Bankruptcy Rule 8017(a).23
This Court is persuaded by such reasoning, and aligns itself with the conclusions of Richards and its progeny.
Defendants provide only one case on point supporting a continuous Rule 8005 stay pending the entire appeal process. In In re RMAA Real Estate Holdings, LLC, the United States Bankruptcy Court for the Eastern District of Virginia compared three cases which discussed a stay pending appeal, but recognized none of those three cases actually addressed the issue of whether a stay pending appeal under Rule 8005 terminates.24 In determining how long a Rule 8005 stay pending appeal would remain in effect, the RMAA court took an expansive view of Rule 8005 and reasoned:
The proposition enunciated in Gleasman v. Jones, Day, Reaves & Pogue that a stay pending appeal from a bankruptcy court order should have sufficient flexibility to meet differing and unique circumstances that may be present in a particular bankruptcy case seems widely accepted. While that does not directly address the question of the termination of a stay pending appeal after a district court’s resolution of an appeal but before a court of appeals’ resolution, it suggests that a stay pending appeal from a bankruptcy court’s order should stay in effect until the appeal has fully run its course. The bankruptcy court, if it is the court granting the stay, may modify this and make it effective only until the entry of the district court’s order and the amount of the bond may be subject to review if a further appeal is taken to the court of appeals. In any event, either the bankruptcy court or the district court may terminate the stay pending appeal or modify the bond in light of developments on appeal in the district court.25
*365In RMAA, the bankruptcy court concluded “the stay pending appeal will be effective until the appeal is finally determined, unless it is earlier terminated by this court or the district court.”26 The RMAA court also stated “[i]f there is a further appeal to the Court of Appeals, the amount of the bond should be re-examined in light of the circumstances then existing.”27
While this Court agrees Rule 8005 is a flexible tool for a bankruptcy court to determine whether a stay pending appeal is appropriate given the facts of a specific case, the Court finds a Rule 8005 stay should not continue through a subsequent appeal of a BAP or district court judgment to the Tenth Circuit. Unless otherwise certified for direct appeal to the Tenth Circuit,28 an appeal of a final order and judgment of this Court must be heard by either the District Court or the BAP.29 The Tenth Circuit has jurisdiction over subsequent appeals from all final decisions, judgments, orders, and decrees entered by the District Court and the BAP.30 It is well established a district court or bankruptcy appellate panel cannot grant a stay pending resolution of a petition for certiorari.31 Thus, Rule 8005 should not be interpreted as transcending the boundaries of jurisdiction to allow a bankruptcy court to issue a stay pending appeal continuing through an appeal to the Tenth Circuit. Such a result would invite interference with the entire appellate process, and trample the authority vested in the district court and the BAP to enter a stay pending appeal of its orders to the court of appeals, and the authority of the Tenth Circuit to enter a stay pending resolution of a petition for certiorari.
Here, Defendants did not seek or obtain a certification for direct appeal, and voluntarily appealed the Trial Order and Judgment to the BAP. On May 22, 2013, the BAP entered its mandate. At that moment, the stay imposed by this Court under Rule 8005 expired. The Court’s Minute Order dated September 7, 2012, stayed “execution of the Judgment pending the appeal”32 and did not contemplate a subsequent appeal to the Tenth Circuit.
Unfortunately, Defendants did not seek a stay pending appeal of the BAP Order from the BAP under Rule 8017. Although Rule 8005 authorizes this Court to adjust the stay during an appeal to the BAP,33 the stay pending appeal granted by this Court was neither modified nor terminated during the course of the BAP appeal. This is an important distinction because this Court retained jurisdiction over the stay pending appeal to the BAP per the express language of Rule 8005, and the *366BAP had jurisdiction over the actual BAP appeal. However, the moment the BAP issued a mandate, the BAP’s jurisdiction over the appeal ceased.34 The Defendants’ subsequent appeal of the BAP Order to the Tenth Circuit vested jurisdiction over the appeal to the Tenth Circuit.35 As set forth above, the Court cannot interpret Rule 8005 as granting more authority to a bankruptcy court than the authority of a district court or bankruptcy appellate panel to grant a stay pending appeal. Therefore, the Court concludes its stay pending appeal under Rule 8005 has terminated, and the Court need not reach the Trustee’s alternative request to vacate the stay pending appeal.
In each of the previous cases examining this issue, there was still time for the appropriate party to seek a stay pending appeal (or stay of mandate) from the appropriate intermediate appellate court. What makes the instant matter unique is the Trustee filed the Motion to Determine Stay after the deadlines expired to request an appellate stay pending appeal under Rule 8017, or a stay of the BAP mandate under 10th Cir. BAP L.R. 8016-6(b). Thus, it appears Defendants have waived any right to seek a stay pending appeal under Rule 8017 from the BAP.
CONCLUSION
Based on the foregoing,
IT IS THEREFORE ORDERED the stay pending appeal imposed by this Court under Fed. R. Bankr. P. 8005 terminated on May 7, 2013, and the Trustee is authorized to proceed with execution of the Trial Order and judgment with respect to the Property. As a result of this ruling, the Trustee’s request in the alternative to vacate the stay is denied as moot.
. Docket Nos. 73 and 75.
. Notice of Appeal, at Docket No. 81.
. See Docket No. 97.
. Minute Order dated September 7, 2012, at Docket No. 137 (emphasis added). The Court also ordered the Defendants to post a superse-deas bond to cover the avoided cash transfers in the total amount of $418,750. The Court received no information on whether a bond was posted. However, a review of the docket indicates the Trustee has engaged in post-judgment collection regarding the avoided cash transfers. Thus, it appears Defendants did not post the supersedeas bond and the stay with respect to the cash transfers was lifted by operation of the Minute Order.
. See BAP Order, at Docket Nos. 202 and 203.
. Docket No. 206.
. A "stay of mandate" pursuant to local rules of the BAP is different than a "stay pending appeal” under the Federal Rules of Bankrupt*359cy Procedure; a stay of mandate maintains the appellate court’s jurisdiction over case, but it does not stay operation and enforcement of an appealed judgment. In re Sunset Sales, Inc., 222 B.R. 914 (10th Cir. BAP 1998), judgment aff'd, 195 F.3d 568 (10th Cir.1999).
. Fed. R. App. P. 8(a)(1) provides a party may file a motion to stay pending appeal of a District Court (or BAP) judgment or order by filing an initial motion with the District Court (or BAP). Sunset Sales, 222 B.R. at 918. If filing the initial motion is impractical or if the initial motion is denied by the District Court (or BAP), the party may file a motion directly with the Tenth Circuit. Fed. R. App. P. 8(a)(2).
. The Court acknowledges a third rule governing a stay of a proceedings to enforce a judgment, but the rule does not apply to the parties’ dispute. See Fed. R. Civ. P. 62, incorporated by Fed. R. Bankr. P. 7062.
. Fed. R. Bankr. P. 8005 (emphasis added).
. Fed. R. Bankr. P. 8017 (emphasis added).
. Lindner & Associates, P.C. v. Richards (In re Richards), 241 B.R. 769 (Bankr.D.D.C.1999), abrogated on other grounds, In re Capitol Hill Grp., 330 B.R. 1 (Bankr.D.D.C.2005). In Capitol Hill, Judge Teel stated “in Richards, this court erred in assuming that a district court is to issue a mandate to give effect to its ruling disposing of a bankruptcy appeal, and erred in concluding, based on that assumption, that a lack of the issuance of a mandate is a bar to the bankruptcy court’s enforcement of the ruling.” Capitol Hill, 330 B.R. at 1. "The failure of the District Court’s clerk’s office to comply with Rule 8016(b) does not serve to stay the District Court’s Orders: only a stay under Rule 8017 would stay the effectiveness of the Orders.” Id. at 4.
. Richards, 241 B.R. at 775.
. Id.
. Richards, 241 B.R. at 776.
. In re Howell-Robinson, 05-00184, 2008 WL 5076975 (Bankr.D.D.C. July 30, 2008) (citing Richards, 241 B.R. at 775-76; In re Texas Equip. Co., 283 B.R. 222, 230-31 (Bankr.N.D.Tex.2002)).
. The Rule 8005 Advisory Committee Note addresses a bankruptcy court’s jurisdiction over a stay pending appeal under Rule 8005 to the District Court or BAP. "The second sentence of the rule is derived from § 39(c) of the Bankruptcy Act [former § 67(c) of this title] and confers on the bankruptcy judge discretion respecting the stay or continuation of other proceedings in the case while an appeal is pending.” Fed. R. Bankr. P. 8005 advisory committee's note (emphasis added).
. The Rule 8017 Advisory Committee Note states subsection 8017(b) "vests in the district courts and bankruptcy appellate panels the same authority the courts of appeals have under Rule 41(b) F.R.App.P. to stay their judgments pending appeal. Perfection of an appeal to the court of appeals while a stay entered by the district court or bankruptcy appellate panel is in effect results in the automatic continuation of that stay during the course of the appeal in the court of appeals.” Fed. R. Bankr. P. 8017 advisory committee's note (emphasis added).
.Payne v. Clarendon Nat’l Ins. Co. (In re Sunset Sales, Inc.), 195 F.3d 568, 571 (10th Cir.1999) (concluding the BAP did not have the authority to grant a stay pending appeal to the Tenth Circuit after it had issued its mandate, unless it recalled its mandate) (emphasis added). The United States District Court for the District of Kansas also embraced this distinction:
Both sides have cited Fed R. Bank». P. 8005 as the basis for the court's authority to grant a stay pending appeal. Rule 8005, however, addresses appeals of bankruptcy court decisions to a district court. The relevant rule governing stays pending appeal of a district court judgments in bankruptcy cases is Fed. R. Bankr. P. 8017.
City of Olathe v. KAR Dev. Assocs. (In re KAR Dev. Assocs., L.P.), 182 B.R. 870, 872 (Bankr.D.Kan.1995). See also, In re Winslow, 123 B.R. 647, 648 (D.Colo.1991) ("Bankruptcy Rule 8017 governs stays pending appeal of district court or bankruptcy appellate panel judgments in bankruptcy cases”); In re Fross, 258 B.R. 26, 28 (10th Cir. BAP 2001) ("A motion to stay a judgment of this Court pending appeal is governed by Federal Rule of Bankruptcy Procedure 8017(b)[.]”).
. Richards, 241 B.R. 769 (Bankr.D.D.C.1999); see also In re Fountain Powerboat Indus., No. 09-07132-8-RDD, 2011 WL 5909465 (Bankr.E.D.N.C.2011); In re Howell-Robinson, No. 05-00184, 2008 WL 5076975 (Bankr.D.D.C. July 30, 2008); In re Capitol Hill Grp., 330 B.R. 1, 2 (Bankr.D.D.C. 2005); In re Texas Equip. Co., Inc., 283 B.R. 222, 231 (Bankr.N.D.Tex.2002).
. Fountain Powerboat, 2011 WL 5909465, at * 7 (internal citation omitted).
. Id. at *8.
. Id.
. In re RMAA Real Estate Holdings, LLC, No. 10-16505, 2010 WL 3632706, at *2 (Bankr. E.D.Va. Sept. 10, 2010) (comparing In re James River Assoc., 148 B.R. 790, 798 (E.D.Va. 1992) (finding "a stay pending appeal dissolves when the appeal is decided.”); In re Henderson, 57 B.R. 660, 662 (Bankr.W.D.Va.l986)(finding the supersedeas bond posted for the district court appeal did not continue after the district court appeal); and Gleasman v. Jones, Day, Reavis & Pogue (In re Gleasman), 111 B.R. 595, 599 (Bankr.W.D.Tex.1990) (stating "Rule 8005 is by its design a flexible tool which permits a bankruptcy court to uniquely tailor relief to the circumstances of the case, so that the appellate process will neither undo nor overwhelm the administration of the bankruptcy case.”)).
.Id. at *2-3 (emphasis added).
. Id. at *3.
. Id.
. 28 U.S.C. § 158(d)(2).
. See 28 U.S.C. § 158(a)-(c).
. 28 U.S.C. § 158(d)(1).
. See 28 U.S.C. § 2101(f). See also United States v. Lentz, 352 F.Supp.2d 718, 726 (E.D.Va.2005) (“[T]he great weight of recent, reasoned authority has concluded that § 2101(f) does not permit a district court to exercise jurisdiction to stay a circuit court’s final judgment pending filing or resolution of a certiorari petition.”) (citing cases).
. Minute Order dated September 7, 2012, at Docket No. 137.
. The Rule 8005 Advisory Committee Note addresses a bankruptcy court’s jurisdiction over a stay pending appeal under Rule 8005 to the District Court or BAP. “The second sentence of the rule is derived from § 39(c) of the Bankruptcy Act [former § 67(c) of this title] and confers on the bankruptcy judge discretion respecting the stay or continuation of other proceedings in the case while an appeal is pending.” Fed. R. Bankr. P. 8005 advisory committee’s note (emphasis added).
. Sunset Sales, 222 B.R. at 917 (citing e.g., United States v. Salameh, 84 F.3d 47, 50-51 (2d Cir.1996) (the effect of the mandate is to remove a case from the jurisdiction of the appellate court, and jurisdiction may only be restored by recalling the mandate); United States v. Rivera, 844 F.2d 916, 920 (2d Cir.1988) (jurisdiction follows the mandate); Deering Milliken, Inc. v. Federal Trade Comm., 647 F.2d 1124, 1129 (D.C.Cir.1980) (appellate court retains jurisdiction until mandate is issued); 20 Moore's Fed. P. §§ 341.02 & 341.12[2] (3rd ed.1997) (mandate returns jurisdiction to the trial court) (citing numerous cases); see also James Barlow Family Ltd. Partnership v. Munson, 132 F.3d 1316 (10th Cir.1997) (the court treated a motion to clarify an order and opinion as a motion to recall the mandate because the mandate had been issued prior to the filing of the motion to clarify), cert. denied, 523 U.S. 1048, 118 S.Ct. 1364, 140 L.Ed.2d 513 (1998)).
. 28 U.S.C. § 158(d)(1). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497077/ | MEMORANDUM OPINION REGARDING MOTION TO ABANDON REAL PROPERTY
R. KIMBALL MOSIER, Bankruptcy Judge.
The matter before the Court is the Debtor’s motion seeking an order of this Court directing the Trustee to abandon certain real property. There is no material dispute that the real property has no equity for the benefit of unsecured creditors and the Trustee is not administering the real property for the benefit of unsecured creditors so the Court will order the Trustee to abandon the real property.
JURISDICTION
This Court has jurisdiction under 28 U.S.C. §§ 1334 and 157(a), and venue is appropriate under 28 U.S.C. §§ 1408 and 1409. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and the Court may enter a final order.
FACTUAL FINDINGS
On February 15, 2010, Doug Rich (Debt- or) commenced this bankruptcy proceeding by fifing a voluntary petition under chapter 11 of the Bankruptcy Code.1 On October 12, 2011, the Court granted the Debt- or’s voluntary motion to convert the case to one under chapter 7 and Stephen W. Rupp (Trustee) was appointed as the trustee. On April 19, 2012, the Debtor was issued a discharge. On May 10, 2012, the Court entered an order approving a settlement agreement between the Debtor and the Trustee. The settlement agreement resolved several disputes between the Debtor and the Trustee, including the Trustee’s claim that the Debtor had made unauthorized post petition transfers. The settlement agreement resolved and released all claims between the Trustee and the Debtor.
On February 12, 2013, U.S. Bank National Association (Bank) filed a motion *368seeking relief from the automatic stay with respect to real property located at 263 N 3050 West, Layton, Utah 84041 (Real Property). Notice of the Bank’s relief from stay motion and hearing was given to the Debtor, Debtor’s counsel and to the Trustee. There were no objections filed in response to the Bank’s motion for relief from the automatic stay and the Court granted the Bank’s motion, thereby terminating the automatic stay as to the Real Property.
On April 3, 2014, the Debtor filed his Motion to Abandon Real Property. Notice of the Debtor’s Motion to Abandon was sent to all creditors and parties-in-interest. The Debtor’s Motion to Abandon states that the Debtor has negotiated a short sale of the Real Property with the consent of the secured creditor. The motion states that the debt secured by the Real Property totals $520,451.38, that the Real Property is scheduled to be sold at a trustee’s foreclosure sale on April 17, 2014, that the proposed short sale is between the Debtor and Nelson Hansen, the proposed purchase price at the short sale is $335,000, and that the Debtor will not receive any proceeds from the sale. The Debtor argues that the Real Property has no equity and therefore has no value to the estate.
The Debtor’s Motion to Abandon was met with two objections. The first objection, filed by Michael W. and Gayle R. Allred questions the reliability of the Debt- or’s representations and questions whether the Debtor has been candid with the Court at all times. The Allreds failed to appear at the hearing on the Debtor’s Motion to Abandon and their objection does not address the merits of the Debtor’s motion and the Court will therefore overrule the Allred’s objection.
The second objection was filed by the Trustee arguing that the Debtor’s motion for abandonment is the equivalent of a motion for approval of sale of the Real Property by the Debtor-something that is beyond the standing or authority of the Debtor. The Trustee trivializes his failure to object to the Bank’s motion for relief from stay and argues that the Debtor’s failure to provide an appraisal or valuation of the property should be fatal to the Debtor’s motion. The Trustee also argues that the Debtor has, both before and after the filing of his Chapter 11 bankruptcy petition, engaged in a pattern of fraudulently transferring, or transferring without authority, the value, possession and enjoyment of the Real Property to another. The Trustee argues that the Debtor’s motion fails to explain how he will compensate the estate for his participation in the fraudulent and unauthorized transfer of the value of this property both prior to and during the pendency of his bankruptcy case, and that the request for abandonment is an attempt to curtail or deter the rights and claims of the bankruptcy estate, and in particular those rights and claims arising from the continuing fraudulent and unauthorized post-petition transfer of the Real Property. The Trustee also argues that the Debtor should have negotiated harder in an effort to increase the purchase price and provide a carve out for the benefit of the bankruptcy estate.
DISCUSSION
The only motion before the Court is a motion for abandonment under § 554(b). Section 554(b) provides:
On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.
The Debtor’s stated purpose for seeking abandonment of the Real Property is to effectuate a short sale of the Real *369Property prior to a scheduled foreclosure sale. The Court finds that a party in interest’s motivation for seeking abandonment is irrelevant. The only question the Court should properly address under § 554(b) is whether the property is burdensome or of inconsequential value to the estate.
Property abandoned under § 554 ceases to be part of the estate, and it reverts to the debtor and stands as if no bankruptcy petition was filed. In re Dewsnup, 908 F.2d 588, 590 (10th Cir.1990). Once the Real Property ceases to be a part of the bankruptcy estate, this Court lacks jurisdiction over the property, In re Gardner, 913 F.2d 1515 (10th Cir.1990), and the Debtor is free to deal with the Real Property without concern for the bankruptcy laws. The Court does not view the Debtor’s stated intention to sell the abandoned Real Property at a short sale as a motion for approval of a sale under § 363, and for that reason will not address the Trustee’s objections which raise standing issues under § 363. Similarly, the Debtor’s lack of authority to negotiate the short sale is irrelevant.
The Trustee’s objection refers, without citing to specific facts,2 to a pattern on the part of the Debtor of fraudulently transferring property to another. The Trustee has not commenced an adversary proceeding to address the alleged fraudulent transfers3 and the Trustee provides no details concerning the pattern of alleged fraudulent transfers. In the Court approved settlement, the Trustee granted the Debtor a broad release which broad release may render the Trustee’s arguments about pre and post petition transfers moot.4 But even if the Trustee’s allegations are true, and if not moot, the Trustee’s allegations of fraudulent transfers does not address the issue the Court must focus on when considering a debtor’s motion for abandonment. That question is whether the property is burdensome to the estate or of inconsequential value and benefit to the estate. In re C.W. Min. Co., 465 B.R. 226, 241 (Bankr.D.Utah 2011).
The Debtor argues that there is no equity in the Real Property and that it is of no value to the estate. The Trustee does not seriously challenge the Debtor’s assertion that the encumbrances against the Real Property total $520,451.38, nor does the Trustee allege that the value of the Real Property exceeds $520,451.5 Without arguing there is equity, and having failed to oppose the creditor’s motion for relief from *370the stay, the Trustee’s objection to abandonment seemingly concedes the Debtor’s argument that there is no equity in the Real Property.
When faced with a § 554(b) motion a Trustee has two options: He may concede that the property is burdensome or of inconsequential value and abandon the property or he may demonstrate to the court that his administration of the property will result in a benefit to the estate and he should be allowed to administer the property. Failure to administer property that is of value and benefit to the estate is not an acceptable option and failure to abandon property that is burdensome is not an acceptable option.
The Trustee has had since November of 2011 to administer the Real Property which is an asset of this estate. There is no evidence in the docket that the Trustee has attempted to market the Real Property by employing the services of a real estate professional or appraiser, nor does the Trustee allege in his objection that he is attempting to sell, or intends to sell the Real Property sometime in the future.6 Importantly, the Trustee does not allege that there is equity or even the possibility of equity in the Real Property. Accordingly, the Court finds that the Real Property is burdensome to the estate and is of inconsequential value to the estate and the Debtor’s motion to abandon the Real Property shall be granted.
. Unless otherwise specified, all references to statutes refer to Title 11 of the United States Code.
. It is not clear from the Trustee’s objection whether the Trustee is referring to the Debt- or’s proposed short sale of the Real Property once it is abandoned, or whether the Trustee is referring to other property and other transfers.
. The Trustee is armed with a panalopy of remedies to deal with a debtor’s pattern of fraudulent transfers including relief under §§ 523, 544, 548, 549, 550, and 727.
. The Court notes that on March 21, 2012, the Court entered an order granting the Trustee’s motion for turnover of property and that the Trustee and the Debtor entered into a settlement agreement providing for releases of all claims, demands and liabilities, whether known or unknown. Although a number of assets were specifically dealt with in the settlement agreement, the Real Property was not mentioned or dealt with in the settlement agreement. The settlement agreement was approved by court order entered May 10, 2012.
.Typically, a chapter 7 trustee will abandon real property of the estate unless there is sufficient equity in the real property to pay all encumbrances on the real property in full and cover realty fees which range from 3% to 6% of the sale price. In this case, if realty fees of 3% were incurred in connection of the Real Property, then the Real Property would have to sell for more than $536,064 in order for the sale to benefit the estate.
. Section 704(a)(1) provides that the trustee shall collect and reduce to money the property of the estate as expeditiously as is compatible with the best interests of parties in Ínter-est. The Trustee has had over 2'k years to file a motion to sell the Real Property and has not yet done so. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497078/ | MEMORANDUM OPINION
TAMARA O. MITCHELL, Bankruptcy Judge.
This adversary proceeding came before the Court for trial on January 22, 2014, and February 3, 2014. Appearing before the Court were Lee R. Benton and Jamie Alisa Wilson, counsel for the Defendant/Debtor; Gail Lindley Andrews, pro se Plaintiff; Cheryl Ann Chamblee, the Defendant/Debtor; Jodi Ketchersid, witness for the Plaintiff; and George Andrews, witness for the Plaintiff. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151, and 157(a) and the District Court’s General Order Of Reference Dated July 16,1984, As Amended July 17,-1984.1 This is a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(I).2 This Court has considered the pleadings, arguments, the testimony of the Debtor, Plaintiff, and witnesses, and the law, and finds and concludes as follows.3
*374FINDINGS OF FACT4
This adversary proceeding concerns a mortgage debt owed by Ms. Chamblee to Ms. Andrews. Ms. Amdrews asserts that but for misrepresentations made by Ms. Chamblee she would not have loaned Ms. Chamblee money, and therefore the debt should be held nondischargeable. The trial of this adversary proceeding spanned one and one-half days and the parties introduced hundreds of pages of exhibits. The parties’ accounts of the factual background differ in material respects.
According to the testimony of both parties, Ms. Chamblee and Ms. Andrews first became acquainted with each other in June 2007. Ms. Chamblee testified that she was looking at houses for sale in Ms. Andrews’s neighborhood when she was approached by George Andrews, Ms. Andrews’s husband, who asked if she would like to view the Andrews’s home. She testified that she later contacted Ms. Andrews to set up an appointment, and at the time she viewed the house she and Ms. Andrews discussed Ms. Chamblee’s desire to move from Destín, Florida, where she worked as a realtor, to Birmingham so that her son could attend Altamont School. According to Ms. Chamblee she informed Ms. Andrews that she would work in Birmingham as a realtor and also continue to work in Destín as a realtor.
Ms. Chamblee testified that she does not recall speaking with Ms. Andrews about the selling price of the house at that time, but that Ms. Andrews had that discussion with Ms. Chamblee’s ex-husband when he came to see the house. At some point the parties agreed that Ms. Andrews would sell the house to Ms. Chamblee for $950,000.00. See Joint Exh. 6, Real Estate Sales Contract. Ms. Andrews testified that when Ms. Chamblee’s ex-husband asked if she would hold the mortgage she declined; however, she did agree to Mr. Chamblee’s request that she hold a smaller second mortgage. According to Ms. Andrews he represented that he was developing a condominium project, and further, that when the development was ready in a couple of years Ms. Chamblee would sell the units and the second mortgage loan owed to Ms. Andrews could be repaid. Ms. Andrews stated that Mr. Chamblee asked that a no-prepayment-penalty clause be added to the contract so that Ms. Chamblee would not be penalized if the loan could be paid off more quickly. Ms. Andrews, a licensed attorney who serves as a law clerk to a state court judge presiding over civil cases, and who has a private law practice doing some family and/or domestic relations work on her own, drafted the Real Estate Sales Contract (“Sales Contract”) at the request of Mr. Chamblee. The Sales Contract, which incorporated her agreement to hold a second mortgage, provided that $700,0005 of the purchase price would be paid at closing, and Ms. Andrews would hold a second mortgage securing a Promissory Note (the “Note”) in the amount of $250,000 to be repaid with $50,000 interest on or before August 10, 2009. See Joint Exh. 6, Real Estate Sales Contract. Ms. Andrews testified that she wanted the Sales Contract to contain a requirement that Ms. Cham-blee provide either a “letter of credit” or *375“affirmation of loan approval” within 10 days of the Sales Contract being signed. According to Ms. Andrews, her husband had been diagnosed with Parkinson’s disease and they had a lot of belongings to move; thus she needed proof that Ms. Chamblee would be getting a first mortgage loan before they undertook the effort to move within 30 days as Ms. Chamblee requested.
Ms. Chamblee testified that after signing the Sales Contract she went to the beach for the Fourth of July holiday, and upon returning, she informed Ms. Andrews that she was unable to obtain a letter of credit or affirmation of loan. Each of the parties has a different version of what happened next. According to Ms. Cham-blee she offered to Ms. Andrews the good faith estimate prepared by her first mortgage lender, Countrywide Bank (“Countrywide”), reflecting the interest rate, loan charges, and other information that would indicate to Ms. Andrews she was working to obtain a loan. In contrast, Ms. Andrews testified that Ms. Chamblee offered and she agreed to accept Ms. Chamblee’s loan application prepared for Countrywide (“Loan Application” or “Application”) in lieu of a letter of credit and affirmation of loan. Although the Sales Contract specified that Ms. Chamblee was to provide both a letter of credit and an affirmation of loan, Ms. Andrews apparently proceeded as if Ms. Chamblee was required to produce only one or the other because, according to Ms. Andrews’s testimony, she closed the sale and loan despite having received only the Loan Application. Ms. Andrews claimed that she received a copy of the Loan Application via email although she could not remember if Ms. Chamblee or a Countrywide representative emailed it to her.6 Ms. Andrews could not establish with certainty how she obtained the Loan Application because, she asserted, the computer that she used at the time had since “crashed” and she lost all of its contents. Ms. Chamblee disputes that she provided the Loan Application to Ms. Andrews. She testified that she received the Loan Application along with other loan documents through some form of express mail and not email, that she did not recall emailing Ms. Andrews a copy of the Loan Application, and further, that the Loan Application contained personal information that she would not have provided to someone she barely knew. Nonetheless, Ms. Andrews either accepted something in place of the letter of credit and affirmation of loan, which were called for in the Contract, or waived or ignored the requirement, because her mortgage loan to Ms. Chamblee and the sale of the house closed June 26, 2007.7
Ms. Andrews testified that because she financed a portion of the purchase price for Ms. Chamblee, she likewise financed a portion of the purchase price of her new home with the sellers. Ms. Andrews contends that when Ms. Chamblee did not pay off the second mortgage loan from Ms. Andrews when due, Ms. Andrews had to *376arrange alternative financing to pay off her own mortgage loan.
Ms. Chamblee testified that she made all of the payments due on her first mortgage loan from Countrywide for the first two years of owning the home and during that time spent approximately $100,000 on home improvements. She further testified that she could not continue to pay the first mortgage payments after the first two years; accordingly, she listed the house for sale in September 2009 and it remained on the market until November 2011. It was her testimony that during this time she continued to maintain and repair the home, showed the house to prospective purchasers every Sunday, and attempted to keep Ms. Andrews informed of her efforts to sell the house. Ms. Chamblee also stated that she was able to stave off a foreclosure sale by Countrywide while she worked to obtain a short sale, and that she was finally able to sell the home via short sale within a day of the foreclosure sale set pursuant to Countrywide’s second foreclosure notice. To close the short sale, Ms. Andrews agreed to accept $44,000 from the purchaser of the home toward the second mortgage debt owed to Ms. Andrews. Ms. Chamblee noted that the short sale allowed Ms. Andrews to be paid the $44,000, and that had the short sale not occurred and Countrywide’s foreclosure sale taken place instead, that Ms. Andrews would have likely received nothing.
Ms. Andrews contends that she would not have made the loan to Ms. Chamblee in the first place had Ms. Chamblee not made false representations about her financial condition. According to Ms. Andrews, she had been told by both Ms. Chamblee and her ex-husband that Ms. Chamblee would be selling condominiums in a project in Florida that Mr. Chamblee was developing. She claims that Mr. Chamblee represented to her that the condominiums would be sold by Ms. Chamblee within a couple of years and that the loan she extended would be paid at that time. Ms. Andrews called Jodi Ketchersid, owner of Real Joy Properties in Destín, as a witness. Ms. Ketchersid testified that Ms. Chamblee had worked as a realtor at Real Joy Properties. Ms. Ketchersid further testified that she too was told that Ms. Chamblee would sell condominiums being developed by Mr. Chamblee but she later discovered that the condominium project in Florida did not actually exist. The bulk of allegedly false statements that Ms. Andrews testified she relied on were contained in the Loan Application. Ms. Chamblee testified that the Loan Application did in fact contain errors, namely (1) that she had $300,000 in a bank account at the time the Loan Application was completed; (2) that she had employment income in the amount of $15,000 per month; (3) that she received $8,437 in child support and alimony per month; and (4) that there was an outstanding judgment against her. Ms. Chamblee also noted that the Loan Application incorrectly reflected that she had no dependents and that the house she was purchasing was built in 2002. Ms. Chamblee testified that in actuality her bank account at the time contained over $3,000, not $300,000.8 She further testified that between $10,000 and $15,000 was deposited into her bank account every month, including not only employment income but also child support and other monies that she received from her ex-husband.9 The bank statements of*377fered into evidence at trial reflect these deposits into her account. She explained that she was awarded $5,500 child support per month in her divorce decree but her ex-husband sometimes gave her funds in excess of that amount. She also explained that although a judgment had been entered against her some time ago, it incorrectly appeared on the Loan Application as it had been resolved and was no longer outstanding.
According to Ms. Chamblee, she had provided the information for the Loan Application to Countrywide loan officer, Jennifer Fiske, over the telephone, then received the completed Loan Application in a package of other loan documents that were mailed to her. She stated that she corrected by hand the part of the Application regarding the judgment then called Jennifer Fiske to inform her of all of the errors. Ms. Chamblee further stated that Ms. Fiske made her feel as if she had done something wrong by marking on the Loan Application; thus she made no other corrections by hand but simply initialed the one change she had made, signed the Application, and sent it back to Countrywide as instructed. She asserts Ms. Fiske informed her she would have a corrected Loan Application to sign at closing. Ms. Andrews testified that she was not aware a corrected Loan Application existed until she obtained it in discovery during this litigation. Ms. Chamblee admitted that she did not provide the corrected Loan Application to Ms. Andrews, but also pointed out that neither Ms. Andrews nor the Contract requested or required a loan application. Ms. Andrews, who testified that she had bought and sold other houses before her transaction with Ms. Chamblee, also testified that she did not seek any financial documents from Ms. Chamblee other than the “letter of credit” and “affirmation of loan” required in the Sales Contract. She admitted she did not perform a credit check and did not ask Ms. Chamblee about her monthly bills and other obligations.
Upon questioning by Ms. Andrews, Ms. Chamblee testified that she was aware Ms. Andrews could have voided the Contract since Ms. Chamblee did not provide the “letter of credit” and “affirmation of loan” as required. Ms. Chamblee also testified that she did not believe that a “letter of credit” would have given Ms. Andrews information as to what Ms. Chamblee was worth.
George Andrews, Ms. Andrews’s husband and a retired attorney, testified on her behalf. According to Mr. Andrews, he and Ms. Andrews agreed that before they uprooted their own lives they wanted assurance that Ms. Chamblee and her ex-husband, Mr. Chamblee, were solvent, credit-worthy people who would be able to obtain a first mortgage loan and to also repay the money being loaned by Ms. Andrews. Mr. Andrews admitted that he relied in some respects on Countrywide to investigate Ms. Chamblee’s financial condition, as he believed that a bank would investigate prior to making a $700,000 loan. Mr. Andrews acknowledged that Ms. Andrews could have included a provision in the sales contract requiring Ms. Chamblee to produce a financial statement, but he thought Ms. Andrews believed that she was asking for a financial statement in the Contract. He testified that it was his understanding that a “letter of credit” was an affirmation from a bank that the potential borrowers were solvent and he could do business with them, and was basically the same as an “affirmation of loan” required by the Sales Contract.
*378Mr. Andrews stated that he had seen Ms. Chamblee’s Loan Application for the first time in early July 2007, and after reviewing it formed the opinion that Ms. Chamblee had a good income, had assets, and it was fine to proceed with the loan transaction; he therefore supported his wife’s decision to go forward with the Sales Contract. He testified that he knew that some information on the loan application was incorrect, such as the year the house was built and that Ms. Chamblee did have a dependent son. He also testified that, although the Loan Application provided that the Application could be amended if any information changed, he could not remember if the possibility of an amendment crossed his mind at the time. He stated that neither he nor Ms. Andrews followed up with anyone to make sure the Loan Application was correct because they believed Ms. Chamblee. Mr. Andrews testified that he and Ms. Andrews did not require a credit check, tax returns, bank records or a Social Security number, and did not investigate whether Ms. Chamblee had any judgments against her in Florida, her state of residence.
Ms. Andrews testified she brought suit against Ms. Chamblee in the Circuit Court of Jefferson County, Alabama, and obtained a judgment against her in September 2011, for the balance owed on the Note secured by the second mortgage. Ms. Chamblee filed her chapter 7 bankruptcy petition on November 19, 2012, and Ms. Andrews filed this adversary proceeding on February 14, 2013.
CONCLUSIONS OF LAW
Ms. Andrews seeks to have the debt owed to her declared nondischargeable under 11 U.S.C. sections 523(a)(2)(A), 523(a)(2)(B), and/or 523(a)(6). A plaintiff has the burden to prove by a preponderance of the evidence that a debt should not be discharged under each of these sections. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991) (“[T]he preponderance-of-the-evidence standard results in a roughly equal allocation of the risk of error between litigants.”).
11 U.S.C. § 523(a)(2)(A)
According to the Eleventh Circuit Court of Appeals, “the fraud exceptions to discharge exist to punish the debt- or for committing fraud.” St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 680 (11th Cir.1993) (citation omitted). Section 523(a)(2)(A), one of the fraud exceptions to discharge, provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money ...
(A) false pretenses, a false representation, actual fraud ...
11 U.S.C. § 523(a)(2)(A). To obtain a determination that section 523(a)(2)(A) bars a specific debt from discharge, the creditor must prove 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.’ ” Sears v. United States, 533 Fed.Appx. 941, 945 (11th Cir.2013) (quoting In re Bilzerian, 153 F.3d 1278, 1281 (11th Cir.1998)).
It has been explained that:
The concept of “false pretenses” is especially broad. It includes any intentional fraud or deceit practiced by whatever method in whatever manner. False pretenses “may be implied from conduct or may consist of concealment or non-disclosure where there is duty to speak, *379and may consist of any acts, work, symbol or token calculated and intended to deceive.” Black’s Law Dictionary 602 (6th ed. 1990). It is a series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, or a false and misleading understanding of a transaction, by which a creditor is wrongfully induced by a debt- or to transfer property or extend credit to the debtor. Silence or concealment as to a material fact can constitute false pretenses. In short, false pretenses can be made in any of the ways in which ideas can be communicated. It is, therefore, essentially impossible to conceive of a set of circumstances that would constitute “actual fraud” under the Black’s Law Dictionary definition, but which would not also constitute “false pretenses,” as that term has historically been defined.
FCC National Bank v. Gilmore (In re Gilmore), 221 B.R. 864, 872 (Bankr. N.D.Ala.1998) (Cohen, J.) (some citations omitted).
In the case Schweig v. Hunter, the creditor sought a determination of nondis-chargeability of a debt owed to him because the debtor, an account executive for a securities broker, never disclosed his affinity for gambling or his past embezzlement of funds from his customers. Schweig v. Hunter, 780 F.2d 1577, 1578-79 (11th Cir.1986) (abrogated on other grounds by Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991))10. Before loaning the debtor $168,000, the creditor did not ask the debt- or about his financial condition, did not request a financial statement, and did not perform a credit check. Id. at 1578. When prosecuting his case the creditor did not identify any “express, affirmative misrepresentations,” relying solely on the debtor’s failure to disclose his financial circumstances. Id. at 1579. The bankruptcy court determined that the debtor was entitled to discharge the debt and that decision was affirmed by the district court. Id. at 1579. The Court of Appeals agreed with the bankruptcy court’s determination that a debtor is not required to voluntarily disclose “personal habits, tendencies, welfare and life style” unless the creditor sought the information. Id. at 1580. The Court of Appeals opined:
[The facts of the case] “reveal[ed] an example of misplaced trust and failure to investigate creditworthiness or to ferret out ordinary credit information. This court does not believe the circumstances surrounding the failure to use ordinary precautionary measures prior to making a sizable loan warrant finding that the debtor was bound to volunteer or confess his transgressions.... ”
Id. Thus, the failure of the debtor to disclose unfavorable facts before obtaining a loan did not equal false pretenses, false representation, or actual fraud.
Ms. Andrews testified that during one of their conversations Ms. Chamblee told her that her ex-husband was a condominium developer and that she would be selling condominiums in Florida for him. She also testified that Mr. Chamblee, the ex-husband, asked her to hold a mortgage on a portion of the purchase price for a couple of years at which time the Florida condo*380miniums would have been sold and the second mortgage loan could be repaid. Ms. Ketchersid, who worked with Ms. Chamblee in Destín, testified that the condominium development Mr. Chamblee was purportedly developing did not exist. There was no testimony or other evidence presented at trial that Ms. Chamblee represented that the second mortgage loan would be repaid from the Florida condominium proceeds. Thus, whether or not Ms. Andrews relied on Mr. Chamblee’s alleged representation is immaterial, as it was not a statement made by the debtor.11
Ms. Andrews’s argument that the debt should be excepted from discharge under section 523(a)(2)(A) is based less on express misrepresentations allegedly made by Ms. Chamblee than on what Ms. Cham-blee did not say.12 Ms. Andrews made clear through her testimony and through her examination of Ms. Chamblee that Ms. Chamblee did not provide her with financial information. However, Ms. Andrews never asked for the information. Ms. Andrews and Mr. Andrews each testified that Ms. Andrews wanted proof that Ms. Chamblee’s first mortgage loan would close. Ms. Chamblee testified that she had understood Ms. Andrews wanted to know whether or not she could obtain a first mortgage loan; thus she provided Ms. Andrews with a good faith estimate from Countrywide to show she was fulfilling her part of the contract by making a good faith effort to obtain a loan. Significantly, upon being asked by Ms. Andrews if she thought that Ms. Andrews would have the right to her financial information, Ms. Chamblee answered that Ms. Andrews did not ask for it in the Sales Contract.
Through their testimony at trial it became apparent that Ms. Andrews and Mr. Andrews were looking for assurance that Ms. Chamblee was “creditworthy” in the sense that she would have the financial means to obtain a first mortgage loan and be able to repay the second mortgage loan. The fact that Ms. Andrews asked if Ms. Chamblee believed a “letter of credit” would have given her financial information further reinforces this conclusion. Ms. Andrews testified that at the time she asked for a “letter of credit” in the Sales Contract she was looking for evidence that Ms. Chamblee could pay, and did not understand at the time that “letter of credit” had a different meaning.13 While it may be unfortunate that neither Ms. Andrews nor her husband, both attorneys, knew or were familiar with the definition of a “let*381ter of credit,” they could have ascertained the meaning had they checked Black’s Law Dictionary or another resource, as the information was readily available. Ms. Andrews drafted the Sales Contract, the words and phrases used were of her own choosing, and if she chose a phrase or terminology different from what she intended, she is responsible. This Court believes that Ms. Andrews thought she was asking for something that would show Ms. Chamblee had good credit and could obtain a first mortgage loan of $700,000, and would demonstrate her ability to repay the second mortgage. In any case, the closing of the sale leads this Court to conclude that Ms. Andrews was satisfied she had received what the Sales Contract required.
The testimony of both Ms. Andrews and her husband indicated that at least to some extent they were relying on Countrywide to undertake the analysis of Ms. Chamblee’s financial condition. Ms. Andrews testified that she did not ask Ms. Chamblee for tax returns or bank statements, that she never performed a credit check, and that she did not ask Ms. Cham-blee about her bills and other obligations. Like the creditor in Hunter, Ms. Andrews did not conduct any investigation of her own into Ms. Chamblee’s financial circumstances and never asked for any financial information from Ms. Chamblee, and thus could not expect that Ms. Chamblee would voluntarily divulge information she was not asked to provide. While this Court is sympathetic that Ms. Andrews has lost money, this Court is often faced with sympathetic creditors. When individuals agree to become lenders, they often unknowingly assume a risk without fully appreciating that risk. However, Ms. Andrews clearly understood that she was agreeing to loan money and that her security was a second mortgage on the real estate. Presumably, she assumed real estate values would remain level at worst. Any time loans are made a risk is included, and it is the lender’s responsibility to take steps to ensure it is a risk worth taking. There is no clear evidence as to how Ms. Andrews came into possession of the Loan Application, but it is clear the Loan Application was not a requirement of the Sales Contract. Further, it is clear that Ms. Chamblee provided a good faith estimate regarding the loan from Countrywide which reflected she was obtaining the first mortgage for $700,000. It appears to this Court that Ms. Andrews relied on the extension of credit by Countrywide in agreeing to close the sale and the second mortgage loan, and considered Countrywide’s approval of Ms. Chamblee’s first mortgage loan to be evidence of Ms. Chamblee’s ability to repay the additional loan of $250,000 with interest. Ms. Andrews has not established by a preponderance of the evidence that Ms. Chamblee engaged in false pretenses, false representations, or actual fraud in obtaining the second mortgage for purposes of section 523(a)(2)(A).
Even if Ms. Andrews established the first element under section 523(a)(2)(A), her reliance would not have been justifiable. “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.” Sears, 533 Fed.Appx. at 945 (citation omitted). “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.” Santa Ana Unified School District v. Montgomery (In re Montgomery), 489 B.R. 609, 625 (Bankr.N.D.Ga.2013). From the testimony, it is clear that Ms. Andrews *382relied on the terms of the second mortgage from Ms. Chamblee because Ms. Andrews made a similar financing arrangement when she purchased a home. However, the standard is not solely that a plaintiff relied on a contract or arrangement, but that the plaintiff justifiably relied on a misrepresentation. In this case, Ms. Andrews advanced a loan of $250,000 to Ms. Chamblee without seeking any proof that Ms. Chamblee could repay the loan. She asked only for a “letter of credit” or “affirmation of loan,” neither of which would have given Ms. Andrews any financial information.
Ms. Andrews admitted that she drafted the Sales Contract without obtaining any assistance. However, Ms. Andrews, as an attorney, had the capacity to determine what she should ask for in the Sales Contract, or at least, to obtain the assistance of someone versed in loan transactions to draft the Sales Contract. This was not Ms. Andrews’s first real estate transaction or experience with mortgage loans, so she would have had some idea of the complexity involved. Ms. Andrews, and her attorney husband, knew, could have known, or should have known the meaning of the terms used in the Sales Contract drafted by Ms. Andrews, and the importance of investigating the financial information and facts about Ms. Chamblee before undertaking a significant loan transaction. To the extent that Ms. Andrews was seeking financial information, it is clear from her questioning of Ms. Chamblee that Ms. Andrews knew that the Contract could have been voided because the documentation she wanted was not provided by Ms. Chamblee, yet Ms. Andrews nonetheless chose to close the loan anyway. It is unfortunate that Ms. Andrews was not more clear in the Sales Contract about the information she wanted, but she is the person who drafted the Contract and could have ensured that it asked for exactly what she wanted, and perhaps refused to close the sale and loan when she did not get what she wanted. Therefore, any reliance Ms. Andrews had on Ms. Chamblee’s silence was not justifiable.
11 U.S.C. § 523(a)(2)(B)
Ms. Andrews also seeks to have the debt excepted from discharge under section 523(a)(2)(B) which addresses fraud involving a writing. Section 523(a)(2)(B) of the Bankruptcy Code provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(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, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceived]
Ms. Andrews contends that Ms. Chamblee made false statements on the Loan Application, on which she relied in deciding to make a loan to Ms. Chamblee. In this case, the first two elements are easily established. “A statement is materially false for purposes of section 523(a)(2)(B) if it paints a substantially untruthful picture of financial conditions by misrepresenting information of the type that would normally affect the decision to grant credit.” Delta Community Credit Union v. Greene (In re Greene), BK No. *38313-65956-MGD, AP No. 13-05326, 2013 WL 6911376, at *2 (Bankr.N.D.Ga.2013) (citation omitted). Writings that concern “the debtor’s or an insider’s financial condition” are “financial-type statements including balance sheets, income statements, statements of changes in financial position, or income and debt statements that proved what may be described as the debtor or insider’s net worth, overall financial health or equation of assets and liabilities.” Knotts v. Williams (In re Wiliams), AP No. 02-00263, BK No. 02-05988 (Bankr. N.D.Ala. Sept. 11, 2003) (Mitchell, J.) (quoting Skull Valley Band of Goshute Indians v. Chivers (In Re Chivers), 275 B.R. 606, 615 (Bankr.D.Utah 2002)).
Ms. Chamblee’s original Loan Application contained information regarding her income and assets as well as her liabilities. Undisputably some of the information that would be of particular interest to a potential creditor, such as her income and bank balance, was inaccurate. Whether the information on the Loan Application rose to the level of false representations made with the intent to deceive Ms. Andrews,14 and whether Ms. Andrews reasonably relied on that incorrect information or those representations, are the more difficult questions.
The fact that the Loan Application contained inaccurate information does not by itself equate to an intent to deceive. Ms. Chamblee testified that she did not complete the Loan Application herself, but provided the information to Countrywide loan officer Jennifer Fiske over the telephone. Ms. Chamblee explained that her bank account contained $3,000 instead of $300,000, and that she did not have employment income of $15,000 per month but did have deposits into her account totaling between $10,000 and $15,000 per month. It is plausible that Ms. Chamblee provided incorrect information but it is also plausible that the inaccuracies were the result of mistake. Ms. Chamblee’s testimony that after she received the Loan Application in the mail she contacted Ms. Fiske to inform her of the problems, and on Ms. Fiske’s instruction signed and returned the Application, strongly suggests to this Court that Ms. Chamblee did not create the inaccuracies with the intent to deceive but that somehow in the transmittal of information via telephone and the information having been input onto a form by someone else, mistakes were made and inaccurate data was reported. Further, the Sales Contract with Ms. Andrews did not require that Ms. Chamblee provide a loan application, so even if the Loan Application for Countrywide made its way to Ms. Andrews she was not the intended recipient. Thus, since Ms. Andrews was an unintended recipient there could not have been an intent to deceive her with the information on the Loan Application. Ms. Andrews has not met her burden as to this element.
Even if this Court had concluded that Ms. Chamblee had made materially false statements with the intent to deceive, any reliance that Ms. Andrews had on the false statements must have been reasonable. According to Ms. Andrews she relied on the information contained in the Loan Application because Ms. Chamblee did not provide her with a “letter of credit” or *384“affirmation of loan” that the Contract required. Taken literally, the demand in the Sales Contract for an “affirmation of loan” meant an affirmation that Ms. Chamblee could get a first mortgage loan. Ms. Andrews received what she asked for in the Sales Contract, as Ms. Chamblee’s first mortgage loan from Countrywide did close. Although Ms. Andrews got what she asked for, she may not have gotten what she was really seeking but did not ask for; i.e., information relating to Ms. Chamblee’s creditworthiness. Thus, any rebanee by Ms. Andrews on the Loan Application was misplaced since she received an “affirmation of loan” as requested.
Assuming, for purposes of this Opinion, that Ms. Andrews permissibly relied on the Loan Application, she must establish that her reliance was reasonable. Reasonable reliance required under this section is a higher standard than the justifiable reliance required under section 523(a)(2)(A). Field v. Mans, 516 U.S. 59, 72-75, 116 S.Ct. 437, 445-46, 133 L.Ed.2d 351 (1995). Whether the creditor’s reliance on a writing is reasonable will depend on the particular circumstances of a case, with relevant considerations being, among other things, “whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; ... whether there were any ‘red flags’ that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and ... whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations.” Davenport v. Frontier Bank (In re Davenport), 508 Fed.Appx. 937, 938 (11th Cir.2013) (aff'g 2012 WL 2590828 (M.DAla. July 5, 2012)).
Ms. Andrews and Ms. Chamblee met each other as a result of Ms. Cham-blee searching for a new home; thus there were no prior business dealings between the two that would have given Ms. Andrews reasons to either trust or distrust any representation made by Ms. Cham-blee. However, there were “red flags” that should have signaled to Ms. Andrews the need to further investigate the accuracy of the information on the Loan Application. For instance, Ms. Andrews knew the home was not constructed in 2002 as reported on the Application. Furthermore, Ms. Andrews testified that she knew from speaking with Ms. Chamblee that she had a son, and therefore should have recognized another error on the Loan Application. According to the Loan Application Ms. Chamblee had $300,000 in a bank account yet she sought to borrow $250,000 from Ms. Andrews at a cost of $50,000 in interest. The Andrews did not question why Ms. Chamblee would incur a debt to Ms. Andrews despite having the means to pay the remainder of the purchase price and avoid paying interest. The idea that Ms. Chamblee would keep in one bank account a sum exceeding the FDIC insurance limits should have also been a red flag. Furthermore, the Loan Application reflects substantial credit card debt of roughly $40,000. Ms. Andrews should have questioned why someone would keep $300,000 in a bank account while carrying credit card balances with high interest rates. Even though the Loan Application clearly stated that it could be amended, Ms. Andrews never asked Ms. Chamblee if any information had changed or asked if the Application had been amended before closing on the sale and loan. Despite the red flags noted, the Andrews did not attempt to further investigate Ms. Cham-blee’s finances. If Ms. Andrews had performed only minimal investigation, she would have discovered Ms. Chamblee’s financial condition was not as it appeared on the Loan Application. Therefore, based on the red flags noted, any reliance Ms. *385Andrews placed on the statements in Ms. Chamblee’s Loan Application was not reasonable.
Ms. Andrews has not established by a preponderance of the evidence that Ms. Chamblee made false statements on the loan application with the intent to deceive, nor has she established that her reliance on the loan application was reasonable. The debt Ms. Chamblee owes to Ms. Andrews is not excepted from discharge under section 523(a)(2)(B).
11 U.S.C. § 523(a)(6)
Ms. Andrews finally contends that she suffered a willful and malicious injury by Ms. Chamblee and therefore the debt owed by Ms. Chamblee is nondis-chargeable pursuant to section 523(a)(6). That section provides:
(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[.]
According to the Eleventh Circuit:
Section 523(a)(6) of the Bankruptcy Code excepts from discharge in bankruptcy “any debt ... for willful and mahcious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). We have interpreted “willful” to require “a showing of an intentional or deliberate act, which is not done merely in reckless disregard of the rights of another.” Lee v. Ikner (In re Ikner), 883 F.2d 986, 991 (11th Cir.1989); Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1263 (11th Cir.1988). 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.’” In re Ikner, 883 F.2d at 991 (quoting Sunco Sales, Inc. v. Latch (In re Latch), 820 F.2d 1163, 1166 n. 4 (11th Cir.1987)). Malice may be implied or constructive. Id. (“Constructive or implied malice can be found if the nature of the act itself implies a sufficient degree of malice”). In other words, “a showing of specific intent to harm another is not necessary.” Id.
Hope v. Walker (In re Walker), 48 F.3d 1161, 1163-64 (11th Cir.1995) (footnote omitted). To have a debt declared nondis-chargeable pursuant to section 526(a)(6) a creditor must prove the injury was both willful and malicious. Anglin v. Wallis (In re Wallis), AP No. 10-00010, 2011 WL 2357365, at *9-*10 (Bankr.N.D.Ala. Mar. 31, 2011) (citing Vickers v. Home Indemnity Co. (In re Vickers), 546 F.2d 1149, 1150 (5th Cir.1977)). Like many other circuits, the Eleventh Circuit Court of Appeals has adopted the approach that “willful” for purposes of section 523(a)(6) means the actor must have intended the actual injury, not just have intended the act that causes the injury. Walker, 48 F.3d at 1164.
There is no question that Ms. Andrews suffered an injury as a result of her loan transaction with Ms. Chamblee.15 Ms. An*386drews financed for Ms. Chamblee $250,000 of the home’s purchase price and expected to be repaid the financed amount with $50,000 interest within two years of the loan. Instead, Ms. Andrews has been repaid only $44,000. It is Ms. Andrews’s contention that Ms. Chamblee obtained the loan through fraudulent means; therefore, her failure to repay the loan equals a willful and malicious injury under section 523(a)(6). However, under the Eleventh Circuit’s interpretation of this section Ms. Andrews must establish that Ms. Cham-blee intended that Ms. Andrews would never recover on the Note and mortgage; the means by which she obtained the loan are irrelevant.
Ms. Chamblee testified that she made payments on the first mortgage loan for the first two years of owning the home and further that she spent approximately $100,000 in making home improvements. She attempted to sell the home when she could no longer make payments and staved off Countrywide’s foreclosure of the first mortgage for a substantial period of time. She testified that she tried to keep Ms. Andrews informed of her efforts to sell the house. It seems unlikely that Ms. Cham-blee would have made payments on the first mortgage and built up the equity in the home if she never intended to pay Ms. Andrews and thus risk losing the home in foreclosure. It is also unlikely that, if she had not intended to pay, that she would have worked to sell the house when she instead could have stopped making payments and used successive chapter 13 bankruptcy cases to hold off her mortgage creditors. She could have just prolonged and postponed foreclosure for as long as possible then let Countrywide foreclose, at which point Ms. Andrews would have received nothing. Ms. Andrews has not proven that Ms. Chamblee never intended to pay the debt owed to her, and therefore has not established that Ms. Chamblee willfully injured Ms. Andrews. The debt should not be excepted from discharge under section 523(a)(6).
CONCLUSION
Ms. Andrews contends that Ms. Cham-blee made false representations, particularly on the Loan Application prepared for Countrywide, and if not for those false representations Ms. Andrews would not have made the loan to Ms. Chamblee. Furthermore, Ms. Andrews contends that she suffered a willful and malicious injury as a result of Ms. Chamblee’s false representations. Ms. Andrews asserts as a result that the debt owed to her by Ms. Chamblee should be excepted from discharge under sections 523(a)(2)(A), 523(a)(2)(B), and/or 523(a)(6). However, Ms. Andrews has not established by a preponderance of the evidence that the debt should be excepted from discharge under any of these subsections. There is insufficient evidence that Ms. Chamblee had an obligation to provide unsolicited financial information to Ms. Andrews, that Ms. Chamblee made materially false representations on the Loan Application with the intent to deceive, that any reliance by Ms. Andrews on the Loan Application was reasonable, or that Ms. Chanblee willfully injured Ms. Andrews. There is no evidence of any ill intent by Ms. Chamblee. This Court cannot conclude that Ms. Chamblee intended to defraud Ms. Andrews by falling upon hard times.
This Court finds that the Ms. Andrews has failed to prove that any debt owed to her should be declared nondischargeable under sections 523(a)(2)(A), 523(a)(2)(B), or 523(a)(6). Accordingly, it is hereby
ORDERED, ADJUDGED, AND DECREED that the relief sought by the *387Plaintiff, Gail Andrews, to declare certain indebtedness of the Debtor, Cheryl Cham-blee, nondischargeable in accordance with 11 U.S.C. § 523(a)(2)(A) is DENIED. It is further
ORDERED, ADJUDGED, AND DECREED that the relief sought by the Plaintiff, Gail Andrews, to declare certain indebtedness of the Debtor, Cheryl Cham-blee, nondischargeable in accordance with 11 U.S.C. § 523(a)(2)(B) is DENIED. It is further
ORDERED, ADJUDGED, AND DECREED that the relief sought by the Plaintiff, Gail Andrews, to declare certain indebtedness of the Debtor, Cheryl Cham-blee, nondischargeable in accordance with 11 U.S.C. § 523(a)(6) is DENIED. It is further
ORDERED, ADJUDGED, AND DECREED that the indebtedness of the Debtor, Cheryl Chamblee, to the Plaintiff, Gail Andrews, is DISCHARGEABLE and shall be included in the discharge of the Debtor to be entered in this case by order of this Court.
. The General Order of Reference Dated July 16, 1984, As Amended July 17, 1984 issued by the United States District Court for the Northern District of Alabama provides:
The general order of reference entered July 16, 1984 is hereby amended to add that there be hereby referred to the Bankruptcy Judges for this district all cases, and matters and proceedings in cases, under the Bankruptcy Act.
. 28 U.S.C. § 157(b)(2)(I) provides as follows:
(b)(2)Core proceedings include, but are not limited to—
(I) determinations as to the dischargeability of particular debts[.]
.This Memorandum Opinion constitutes findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, applicable to adversary proceedings in bankruptcy pursuant to Federal Rule of Bankruptcy Procedure 7052.
. Pursuant to Rule 201 of the Federal Rules of Evidence, the Court may take judicial notice of the contents of its own files. See ITT Rayonier, Inc. v. U.S., 651 F.2d 343 (5th Cir. Unit B July 1981); Florida v. Charley Toppino & Sons, Inc., 514 F.2d 700, 704 (5th Cir.1975).
. Ms. Andrews testified that she owed approximately $350,000 on a note secured by a mortgage on the property.
. Jennifer Fiske (now Jennifer Parsons), the Countrywide loan officer working with Ms. Chamblee, testified in her deposition that Countrywide employees could at no time provide customer information to third parties. See Joint Exh. 10, Deposition of Jennifer Parsons.
. The Note from Ms. Chamblee to Ms. Andrews, as amended, provided that Ms. Cham-blee would make 23 payments of principal and interest in the amount of $804.10 per month prior to July 25, 2009, and that Ms. Chamblee would make one final balloon payment in the amount of $284,635.86 due on July 25, 2009. It is not clear from the testimony and evidence presented at trial how much, if any, that Ms. Chamblee paid pursuant to the terms of the Note prior to its maturity.
. A bank statement introduced into evidence reflected a balance of 3,683.40 in Ms. Cham-blee’s account as of June 26, 2007. See Plaintiff’s Exh. 45, Wachovia Bank statement for June 27, 2007 through July 27, 2007.
. Ms. Chamblee testified that her income as reported in her 2007 tax return totaled *377$45,357.00. See Plaintiff's Exh. 33, 2007 Federal Tax Return of Cheiyl Chamblee.
. In Hunter, the Eleventh Circuit Court of Appeals stated that the creditor must establish the elements to except a debt from discharge by the “clear and convincing evidence” standard. Hunter, 780 F.2d at 1579. However in Grogan v. Garner the United States Supreme Court, resolving a circuit split, held that the "preponderance of the evidence” standard was applicable to the section 523(a) dis-chargeability exceptions. Grogan, 498 U.S. at 291, 111 S.Ct. at 661. The remainder of Hunter has not been abrogated or overturned.
. It is not clear that Mr. Chamblee intended to deceive Ms. Andrews either. If he had such an intention there would have been no reason for him to negotiate a provision in the Contract providing that the loan could be repaid early with no penalty. Furthermore, to the extent that Mr. Chamblee’s statement could be considered a promise to repay Ms. Andrews from the sale of the Florida condominiums, the promise was not memorialized in the subsequent Sales Contract. Regardless, it was a statement made by Mr. Cham-blee, not Ms. Chamblee.
. Section 523(a)(2)(A) does not include "deception carried out by means of a statement relating to the debtor’s or an insider’s financial condition” as that type of deception is addressed by section 523(a)(2)(B). 4 Collier on Bankruptcy, ¶ 523.08[1] (16th ed.); 11 U.S.C. § 523(a)(2)(B). Evidence presented by Ms. Andrews that relates to false representations concerning the Loan Application will be discussed later in this Opinion.
.According to Black's Law Dictionary, a "letter of credit” is "[a]n instrument under which the issuer (usu. a bank), at a customer’s request, agrees to honor a draft or other demand for payment made by a third party (the beneficiary), as long as the draft or demand complies with specified conditions, and regardless of whether any underlying agreement between the customer and the beneficiary is satisfied.” Blades Law Dictionary, 8th Edition.
. The Loan Application was prepared for Countrywide for the purpose of Ms. Chamblee obtaining a first mortgage loan. While Ms. Andrews claims to have received the Loan Application via email from either Ms. Cham-blee or from Countrywide there is no evidence that she received it from either source. If Ms. Chamblee did not give, or cause Countrywide to give, the Application to Ms. Andrews then there can be no intent to deceive Ms. Andrews at all. The Court does not make a finding regarding how or when Ms. Andrews received the Application.
. The Court also notes that Ms. Andrews did not elect to mitigate or minimize her loss, although she could have attempted to do so in several ways: she could have purchased the house back from Ms. Chamblee with some creative, interest-only financing or by borrowing money using other property she owned as collateral; she could have approached Countrywide about assuming the loan; or she could have refused to agree to the short sale and instead bid on the property at a foreclosure sale on the “courthouse steps.” She could have then marketed the property herself or held it until real estate values began to rise then sold it and recouped her money. However, it is understandable that Ms. Andrews agreed to a short sale hoping that if she *386obtained a civil judgment against Ms. Cham-blee it would be collectible. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497081/ | MEMORANDUM OPINION
JAMES P. SMITH, Bankruptcy Judge.
This matter comes to the Court on the motion to dismiss by the United States of America, Department of Treasury, d/b/a Internal Revenue Service (“IRS”). For the reasons stated herein, the motion is granted.
FACTS AND PROCEDURAL POSTURE
The facts in this case are not in dispute and are established by the record. Debtors filed their voluntary Chapter 13 petition on November 5, 2007. Their plan was confirmed by order dated February 27, 2008. The confirmed plan provided that all priority claims under 11 U.S.C. § 507 would be paid in full.
Initially, the IRS filed a proof of claim in the amount of $59,509.33, asserting a priority claim of $20, 846.23 (for income taxes for the years 2002, 2003 and 2006), a secured claim of $3,488.61 (for income taxes for the year 1998) and an unsecured claim of $35,174.49 (for income taxes for the years 1999, 2000 and 2001). Debtors objected to the claim, contending that the tax lien of the IRS had been improperly filed and asked that the secured portion of the claim be re-designated as unsecured. In response, the IRS amended its claim to reclassify the secured claim as unsecured. As a result, Debtors withdrew their claim objection.
After completing payments under their plan, Debtors received a discharge pursuant to 11 U.S.C. § 1328(a) on March 4, 2013, and the Chapter 13 case was subsequently closed. However, on motion by Debtors, the ease was reopened on October 7, 2013, to allow Debtors to file the complaint herein.
On November 6, 2013, Debtors filed their complaint seeking damages against the IRS, alleging that the IRS had attempted to collect certain taxes in violation of the discharge order. After issuance of summons and service upon the IRS, the IRS timely filed a motion to dismiss 1 alleging that Debtors had failed to exhaust their administrative remedies, as required by 26 U.S.C. § 7433, before filing this adversary proceeding.
Analysis
The IRS contends that, pursuant to section 7433(d)(1), a plaintiff is required to exhaust its administrative remedies before it can bring a complaint for damages under section 7433. 26 U.S.C. § 7433 provides:
(a) In general. — If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or em*435ployee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.
(b) Damages. — In any action brought under subsection (a) or petition filed under subsection (e), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000 ($100,000, in the case of negligence) or the sum of—
(1) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent actions of the officer or employee, and
(2) the costs of the action.
(c) Payment authority. — Claims pursuant to this section shall be payable out of funds appropriated under section 1304 of Title 31, United States Code.
(d) Limitations.—
(1) Requirement that administrative remedies be exhausted. — A judgment for damages shall not be awarded under subsection (b) unless the court determines that the plaintiff has exhausted the administrative remedies available to such plaintiff within the Internal Revenue Service.
(2) Mitigation of damages. — The amount of damages awarded under subsection (b)(1) shall be reduced by the amount of such damages which could have reasonably been mitigated by the plaintiff.
(3)Period for bringing action.— Notwithstanding any other provision of law, an action to enforce liability created under this section may be brought without regard to the amount in controversy and may be brought only within 2 years after the date the right of action accrues.
(e) Actions for violations of certain bankruptcy procedures.—
(1) In general. — If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service willfully violates any provision of section 362 (relating to automatic stay) or 524 (relating to effect of discharge) of Title 11, United States Code (or any successor provision), or any regulation promulgated under such provision, such taxpayer may petition the bankruptcy court to recover damages against the United States.
(2) Remedy to be exclusive.—
(A) In general. — Except as provided in subparagraph (B), notwithstanding section 105 of such Title 11, such petition shall be the exclusive remedy for recovering damages resulting from such actions.
(B) Certain other actions permitted. — Subparagraph (A) shall not apply to an action under section 362(h) of such Title 11 for a violation of a stay provided by section 362 of such title; except that—
(i) administrative and litigation costs in connection with such an action may only be awarded under section 7430; and
(ii) administrative costs may be awarded only if incurred on or after the date that the bankruptcy petition is filed.
Debtors do not dispute that they had not exhausted their administrative remedies *436prior to filing this adversary proceeding. Rather, they assert two arguments on why the exhaustion of remedies defense is not applicable.
First, relying on the case of Hoogerheide v. IRS, 637 F.3d 634 (6th Cir.2011), Debtors argue that the requirements of section 7433(d) are not jurisdictional and thus do not prevent them from filing the instant complaint. While it is true that the court in Hoogerheide concluded that section 7433(d) was not jurisdictional, it nevertheless held:
That the district court should not have dismissed this case for lack of jurisdiction does not end the matter. It is quite possible that “nothing in the analysis ... below turned on the mistake [and] a remand would only require a new ... label for the same ... conclusion.” Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 2877, 177 L.Ed.2d 535 (2010). This is just such a case.
Hoogerheide did not exhaust his administrative remedies, and the United States timely raised the failure to exhaust as a defense in a motion to dismiss. For that reason, his claim must be dismissed.
Id. at 639.
Further, in the case of Galvez v. IRS, 448 Fed.Appx. 880 (11th Cir.2011), the court similarly held that exhaustion of remedies under section 7433(d) was not jurisdictional. Nevertheless, the court held that the failure to exhaust administrative remedies resulted in a failure to state a claim upon which relief could be granted and accordingly dismissed the complaint pursuant to Rule 12(b)(6). Id. at 887.
Debtors also argue that the exhaustion of remedies requirement of section 7433(d) does not apply to actions for damages for violating the discharge order under 11 U.S.C. § 524. In the case of In re Moore, 2013 WL 4017936 (Bankr.M.D.Ga., Aug. 6, 2013), Judge Laney considered and rejected a similar argument, reasoning:
Subsection (b) describes the amount of damages allowed in any action under subsection (a) or petition under (e). See 26 U.S.C. § 7433(b)(1)-(b)(2). Section 7433(d)(1) states, “A judgment for damages shall not be awarded under subsection (b) unless the court determines that the plaintiff has exhausted the administrative remedies available to such plaintiff within the Internal Revenue Service.” As noted, subsection (b) refers to petitions under subsection (e), so subsection (d)(l)’s required exhaustion of administrative remedies appears to apply to petitions under subsection (e).
Some courts, however, have concluded that petitions under subsection (e) do not require exhaustion of administrative remedies. Those courts point to § 7433(e)(2)(A), which states, “Except as provided in subparagraph (B), notwithstanding section 105 of such title 11, such petition shall be the exclusive remedy for recovering damages resulting from such action.” If petitions under subsection (e) are the exclusive remedy, these courts state, then there are no other remedies to exhaust. The opinion that appears to be the first to use this reasoning is In re Graham, 2003 WL 21224773 (Bankr.E.D.Va.2003), which stated,
[T]here is a provision specifically for bankruptcy violations within § 7433 that does not require that the debtors exhaust administrative remedies. 26 U.S.C. § 7433(e)(2)(A) states that the exclusive remedy for recovering damages for violations of the Bankruptcy Code is to petition the bankruptcy court. There is no mention in 26 *437U.S.C. § 7438(e), the section devoted exclusively to bankruptcy violations, of the need to exhaust administrative remedies. The language is in fact quite clear[:] a petition to the bankruptcy court is the exclusive, remedy for the violation of Bankruptcy Code provisions.”
Id. at *2; see also In re Jha, 461 B.R. 611, 625 (Bankr.N.D.Cal.2011) (adopting Graham’s reasoning); Johnston v. IRS (In re Johnston), 2010 WL 1254882, at *5 (Bankr.D.Ariz.2010) (“The Court also concludes that because of the exclusive remedy language of Section 7433(e)(2)(A), Section 7433(d), which purports to require that no judgment for damages may be obtained in any court for unauthorized collection actions by the IRS against a taxpayer unless the debtor/taxpayer has exhausted his or her remedies, does not apply to a debtor seeking relief under Section 7433(e)(2)(A).”).
The weight of authority, however, has held that a debtor must first exhaust administrative remedies. See, e.g., Kuhl v. U.S., 467 F.3d 145, 147 (2nd Cir.2006) (“[A]fter exhausting administrative remedies, the taxpayer may petition the bankruptcy court for damages.”); Jacoway v. IRS (In re Graycarr, Inc.), 330 B.R. 741, 747 (Bankr.W.D.Ark.2005) (Graham “ignores the precise wording of subsection (b).... ‘Exclusive,’ in this instance, can only mean that once the administrative remedies have been exhausted.”); Kight v. IRS (In re Kight), 460 B.R. 555, 565 (Bankr.M.D.Fla.2011) (“While § 7433(e) is the exclusive remedy available to a debtor to redress violations of the discharge injunction by the IRS, such remedy is not available to taxpayers unless they first exhaust their administrative remedies within the IRS.”); In re Cooper, 2011 WL 165830, at *2 (Bankr.M.D.N.C.2011).
The reasoning of Graham and its progeny has an intuitive appeal in that it seems nonsensical to refer to an exclusive remedy in addition to other remedies. But that intuitive appeal is superficial. The majority is correct that on a close reading, there is no way to separate the exhaustion requirement of subsection (d) from petitions under subsection (e). Subsection (d)(1) refers to subsection (b), which refers both to actions under subsection (a) and petitions under subsection (e). Moreover, adopting the minority interpretation of the exclusive-remedy language would render subsection (d)(l)’s exhaustion requirement surplusage. Subsection (a), which allows a taxpayer to bring an action for damages in district court, also contains an exclusive remedy requirement: “... such civil action shall be the exclusive remedy for recovering damages resulting from such actions.” 26 U.S.C. § 7433(a). Both subsections (a) and (e) contain exclusive-remedy language. If actions in district court and petitions in bankruptcy court are exclusive in the sense that exhaustion of administrative remedies is unnecessary, subsection (d)(l)’s exhaustion requirement would be meaningless — it would apply to nothing. Because the majority view is more in line with the statute’s text and because the minority view renders the exhaustion requirement sur-plusage, the Court concludes that a debtor must first exhaust administrative remedies before petitioning this Court under § 7433(e).
Id. at *2-3. (footnotes omitted).
This Court agrees with and adopts the reasoning of the court in Moore and holds *438that Debtors must exhaust their administrative remedies before bringing suit in this Court.2 Accordingly, the motion to dismiss by the IRS is granted. A separate order consistent with this memorandum opinion will be entered.
. Bankruptcy Rule 7012(b) incorporates and makes applicable to adversary proceedings the provisions of Fed.R.Civ.P. 12(b). A motion to dismiss for failure to exhaust administrative remedies is treated as a motion to dismiss under Rule 12(b). Bryant v. Rich, 530 F.3d 1368, 1375 (11th Cir.2008).
. Debtors’ reliance on 11 U.S.C. § 106 to support their right to seek damages against the IRS without exhausting their administrative remedies is misplaced. Section 106(a)(4) provides that, "... enforcement of any such order, process, or judgment against any governmental unit shall be consistent with appropriate nonbankruptcy law applicable to such governmental unit ...”. 26 U.S.C. § 7433, the nonbankruptcy law applicable to Debtors’ claim for damages, requires exhaustion of remedies. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497083/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the First and Final Application Seeking Approval of Compensation for Fees and Reimbursement of Expenses filed by Attorney Thomas O. Bean (“Attorney Bean”) and his firm Verrill Dana LLP (the “Firm”). Michael E. Jenoski (“Jenoski”), the former principal of Duplication Management Incorporated (the “Debtor”) filed an Objection. The Court heard the Application and the Objection on March 25, 2014 and took the matter under advisement.
The issues presented include: 1) whether, despite authorization to employ the Firm on a contingency basis, the Court should award the Firm compensation different from the compensation provided in the employment application because the Firm has established that the “terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions,” see 11 U.S.C. § 328(a); and 2) whether the Court should add to the amount subject to the 33]é% contingency the amounts that the Trustee potentially could have recovered from the Jenoski and others, or the value of the waiver of any claims under 11 U.S.C. 502(h) of certain defendants in an adversary proceeding commenced by the Chapter 7 Trustee.
The material facts necessary to resolve the issues are not in dispute and none of the parties requested an evidentiary hearing. Accordingly, the Court finds and rules as follows.
II. BACKGROUND AND POSITIONS OF THE PARTIES
On June 28, 2010, an involuntary Chapter 7 petition was filed against the Debtor. An order for relief was entered on September 3, 2010, and Lynne F. Riley, Esq. was appointed the Chapter 7 Trustee (the “Trustee”).
The Court established January 19, 2011 as a bar date for filing proofs of claims. Over one year later, on March 22, 2012, the Trustee filed an Application for Order Authorizing Chapter 7 Trustee to Employ Special Counsel. Through her Application, the Trustee sought permission to retain Attorney Bean and the Firm pursuant to 11 U.S.C. §§ 328(a), 330 and 331 as special counsel to represent the bankruptcy estate in certain avoidance and recovery actions against Countrywide Financial Services and any of its successors and/or assigns, and against Jenoski, DMI, Inc. *448and/or Goodway Graphics, Inc. The Trustee represented that the Firm was qualified to perform services for the bankruptcy estate, that its employment would be in the best interest of this bankruptcy estate, and that neither Attorney Bean nor the Firm represented any interests adverse to the estate. The Trustee sought authority to employ the Firm on a contingency basis, such that the Firm would receive “33 $% of any recovery, plus all costs and expenses,” adding that “[t]he Firm will seek compensation based upon such agreement and this Application, subject to the approval of this court upon appropriate application therefore.”
Following its retention, the Firm filed three adversary complaints on behalf of the Trustee: 1) Lynne F. Riley, Trustee v. Countrywide Home Loans, Inc., Adv. Pro. No. 12-1149 (the “Bank Proceeding”), 2) Lynne F. Riley, Trustee v. DMI, Inc., Michael E. Jenoski, Anna Jenoski, and Goodway Graphics of Massachusetts, Inc., Adv. Pro. No. 12-1144 (the “Jenoski Proceeding”), and 3) Lynne F. Riley v. BAC Home Loan Servicing, LLP., Adv. Pro. No. 12-01223. The Firm on behalf of the Trustee dismissed the adversary proceeding against BAC Home Loan Servicing, LLP, without prejudice, and caused the Trustee’s claims against BAC Home Loan Servicing, LLP to be consolidated with the Trustee’s claims against Countrywide Home Loans, Inc., at the Banks’ request, such that the defendants in the Bank Proceeding ultimately were Countrywide Home Loans, Inc., and Bank of America, N.A. (collectively, the “Bank defendants”). Through her complaints against the Bank defendants, the Trustee sought to recover, under federal and state fraudulent conveyance law, and under state common law, hundreds of thousands of dollars in mortgage payments made by the Debtor to the defendant Banks with respect to a loan granted to the Debtor’s President and sole shareholder, Jenoski, and his wife Anna, secured by a mortgage on their vacation home in Meredith, New Hampshire.
On November 4, 2013, this Court issued a Memorandum indicating its intent to enter judgment in favor of the Trustee and against the Bank defendants as follows:
[T]he Court shall enter summary judgment in favor of the Trustee on all counts of her Second Amended Complaint. The Court determines that the Plaintiff is entitled to prejudgment interest as requested in Counts I and II pursuant to Mass. Gen. Laws ch. 231, § 6C and prejudgment interest as requested for Counts IV and VI pursuant to Mass. Gen. Laws ch. 231, § 6B. Entitlement to postjudgment interest for Counts III and V are subsumed in the award of postjudgment interest under Counts IV and VI.
Riley v. Countrywide Home Loans, Inc. (In re Duplication Mgmt., Inc.), 501 B.R. 462, 491 (Bankr.D.Mass.2013).1 On No*449vember 19, 2013, the Court entered final judgment in favor of the Trustee.2
The Bank defendants filed notices of appeal as did the Trustee.
On January 2, 2014, the Trustee filed a Motion to Approve Settlement Agreement with the Bank defendants setting forth the Bank defendants’ agreement to pay the Trustee $800,000.00 within twenty days after approval of the settlement, as well as the parties’ agreement to provide releases to each other. Following expiration of the applicable notice period, the Court, on January 24, 2014, granted the Trustee’s Motion and approved the settlement. On March 24, 2014, the Trustee and the Bank defendants stipulated to the dismissal of the appeals in the consolidated adversary proceeding.
On February 21, 2014, the Firm filed a First and Final Application Seeking Approval of Compensation for Fees and Reimbursement of Expenses in which it stated that it was seeking approval of compensation, not based on the contingency agreement percentage, but “based on the lodestar.” Thus, the Firm sought compensation for attorneys’ fees in the amount of $381,164 and for reimbursement of expenses in the amount of $9,600, for a total final award of $390,764.
In the alternative to compensation based upon the lodestar, the Firm requested the following:
[an] award ... [of] ... a contingent fee based on the recoveries by the Firm “for the benefit of the estate” — including the benefit realized from the Banks’ waiver of its section 502(h) claims — for total compensation of $365,860.09, plus reimbursement for actual and necessary costs and disbursements of $9,500 [sic], for a total award of $375,360.09.3
As another alternative, the Firm requested compensation based upon 33]é% of an amount that included, not only the settlement amount of $800,000 from the Bank defendants and the settlement amount of $6,345 received from Goodway Graphics of Massachusetts, Inc., but the projected recovery from the Jenoskis in the adversary proceeding she commenced against them, DMI, Inc. and Goodway Graphics of Massachusetts, Inc., although the Trustee informally abandoned the claims against DMI, Inc. and the Jenoskis.
The Firm contended that the abandonment of the claims against the Jenoskis,4 *450as well as the outcome of the litigations against the Bank defendants which will enable the Trustee to pay creditors in full with interest, were circumstances not capable of being anticipated when the engagement was agreed upon and approved by this Court. The Firm sought total compensation under its second alternative to the lodestar of $385,450, plus reimbursement for actual and necessary costs and disbursements of $9,600, for a total award of $395,050 under that approach.
Jenoski filed a Limited Objection to the Firm’s First and Final Application in which he stated that settlement of the litigation generated $806,345, a sum sufficient to pay all administrative expenses and all claims of all creditors in full with interest, with money left over and that the 33/6% contingency would compensate the Firm for its services in the sum of $268,781.66.
The Petitioning Creditors filed a Statement in Support of the Firm’s First and Final Application, observing that “[i]t is an exception — rather than the norm — that an involuntary case that started out as a purported no-asset case ended in the result attained by Mr. Bean and his colleagues at the Verrill Dana firm,” adding that the Jenoskis were able to finance their lifestyle on “the backs of DMI’s creditors.”5 They pointed out that they were not compensated in full as they remained liable for attorneys’ fees and costs of collection prior to the bankruptcy.
At the March 5, 2014 hearing, Attorney Bean explained his contention that the Firm should be compensated due to the Bank defendants’ waiver of their claims under 11 U.S.C. § 502(h), stating:
we calculated if the banks had filed that claim for $469,000 this would have been a 63-cent case rather than a 100-eent case. So we believe we’re entitled to — if we’re going under the first sentence of 328(a), one-third of 63 percent of $469,000.
In addition, at the hearing, counsel to the U.S. trustee indicated that the U.S. trustee did not support of a transition from a contingency fee agreement to application of the lodestar or hourly rates “because this is a contingency fee agreement,” adding that the U.S. trustee was not opposed to the inclusion of a potential recovery from the Jenoskis in the contingent fee calculation. Counsel to the U.S. trustee also observed that the reason the U.S. trustee asks trustees and attorneys who enter into contingency fee agreements to include a reference to 11 U.S.C. §§ 330 and 331 in employment applications is to protect the estate in the event that the contingent fee award is out of proportion to the time expended — the opposite of what happened in the instant case. She indicated that the U.S. trustee always wishes to reserve the right to argue that fees are excessive.
Following the hearing, the Trustee filed an affidavit in which she stated:
Based upon Mr. Bean’s extraordinary efforts, exceptional results, and surplus status of this estate — resulting in the termination of the pursuit of claims against DMI and Mr. and Mrs. Jenoski, I support allowance of the Fee Application based on his and his firm’s hourly fees. Alternatively, the unusual and unanticipated situation whereby the pursuit of legitimate claims were terminated, resulting in no recovery or corre*451sponding contingency fee to compensate Attorney Bean for those efforts, were not anticipated at the time this Court approved Attorney Bean’s retention.
The Trustee also stated that counsel to the U.S. trustee requested that the Employment Application “specifically provide that Attorney Bean was being retained pursuant to sections 330 and 331, in addition to section 328.”
The Firm argues that, because the Trustee in her Application for Order Authorizing Trustee to Employ Special Counsel sought “to retain ... [the Firm] ... pursuant to sections 328, 330 and 331 of the Bankruptcy Code,” the Court approved its retention expressly subject to a section 330 review for reasonableness and that “the reference in the retention application to the Firm being paid one-third of any recovery pursuant to section 328(a) is immaterial to this Court’s award of fees.” In the alternative, the Firm posits that because the Court can award compensation less than what would result under a contingent fee agreement, the Court has authority to award more that what would result under such an agreement, adding that the Court can consider circumstances that could not have been anticipated at the time of retention. The Firm also states its belief that when it was retained Xerox Corporation might have filed a late proof of claim in an amount of more than $1.3 million, which would have vastly increased the total of unsecured claims, thus reducing the potential dividend,6 that it believed at the time it was retained that it was going to be required to prosecute the proceeding against the Bank defendants, as well as the proceeding against the Jenosk-is, DMI, Inc. and Goodway Graphics of Massachusetts, Inc., to conclusion, to provide the greatest possible dividend to unsecured creditors, and that it undertook the engagement based on that expectation.
Jenoski, while admitting that the Firm did an excellent job and noting the absence of controlling authority in the First Circuit, relies upon ASARCO, L.L.C. v. Barclays Capital Inc. (In re ASARCO, L.L.C.), 702 F.3d 250, 258 (5th Cir.2012), to the effect that § 328 creates a “high hurdle.” It rejects the Firm’s contentions that the contingency fee agreement should be altered.
III. DISCUSSION
Section 328(a) provides in pertinent part the following:
The trustee ... with the court’s approval, may employ or authorize the employment of a professional person under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis. Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.
11 U.S.C. § 328(a) (emphasis supplied). Section 330 provides in pertinent part the following:
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 ... a
*452professional 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(a)(1). Based upon the foregoing sections of the Bankruptcy Code, the Firm must establish that it could not have foreseen that it would be as successful as it was against the Bank defendants because the Trustee’s decision to abandon her claims against the Jenoskis and DMI, Inc. was directly tied to the unanticipated success of the litigation in which the Trustee avoided the mortgage payments made by the Debtor to the Bank defendants. In other words, due to the successful outcome of the litigation with the Bank defendants, the Trustee, recognizing the futility of pursuing claims against the Jenoskis when it became apparent that all creditors will be paid in full with interest, instructed the Firm to cease its pursuit of the estate’s claims against other defendants in the adversary proceedings commenced by the Firm.
Based upon the arguments presented, as well as the legal standards applicable to awards of compensation under § 328 in this Court’s decision in In re High Voltage Eng’g Corp., 311 B.R. 320 (Bankr.D.Mass.2004), the Court rejects the Firm’s arguments. See also ASARCO, L.L.C. v. Barclays Capital, Inc. (In re ASARCO, L.L.C.), 702 F.3d 250, 257-58 (5th Cir.2012) (citing, inter alia In re Smart World Techs., LLC, 552 F.3d 228, 234-35 (2d Cir.2009); Daniels v. Barron (In re Barron), 325 F.3d 690, 693 (5th Cir.2003)). This Court finds persuasive the decision in ASARCO in which the Fifth Circuit determined that “Congress enacted § 328(a) to eliminate the previous uncertainty associated with professional compensation in bankruptcy proceedings, even at the risk of potentially underpaying, or, conversely, providing a windfall to, professionals retained by the estate under § 328(a).” 702 F.3d at 258.
With respect to the Firm’s argument that the Bank defendants’ § 502(h) claims should be considered as part of any recovery subject to the contingent fee, the court in In re Best Products Co., Inc., 168 B.R. 35 (Bankr.S.D.N.Y.1994), appeal dismissed, 177 B.R. 791 (S.D.N.Y.1995), aff'd, 68 F.3d 26 (2nd Cir.1995), examined section 502(h) in detail, stating the following:
Section 502(h) of the Bankruptcy Code provides that the claim of a creditor arising from the recovery of property under section 550, among others, shall be allowed or disallowed the same as if the claim had arisen prepetition. And section 502(d), much like section 57(g) of the former Bankruptcy Act, disallows the claim of any recipient of a fraudulent transfer unless the recipient has paid the amount or turned over any property for which it is liable under section 550. Thus, there is an implication in section 550 that a transferee of a fraudulent transfer will have a claim when the transfer is disgorged.
This is not to say that every person who is the recipient of a fraudulent transfer is entitled to a claim against the estate. For if the transferee gave no consideration for the transfer, there is no underlying debt.
Id. at 56 (emphasis supplied). The court added that § 502(h) is predicated on the principle “that when a fraudulent transfer is avoided, the parties are restored to their previous positions.” Id. at 57 (citations omitted). See also Tronox, Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. *453239 (Bankr.S.D.N.Y.2013) (“§ 502(h) does not create a ‘claim arising from the recovery of property’ under § 550 and merely provides that any such claim is a prepetition claim entitled to a share of recovery from the estate on the same basis as all other prepetition claims”). When the parties are restored to their previous positions, it is clear that the Bank defendants have no claim against the Debtor.
In view of the decisions referenced above, the Court concludes that the waiver by the Bank defendants of their § 502(h) claims had no value. The Bank defendants simply were not, and cannot be by virtue of § 502(h), creditors of the Debt- or’s bankruptcy estate where they provided no consideration to the Debtor for the mortgage or the payments.
The Court also concludes that the Firm’s contention with respect to the Trustee’s claims against the Jenoskis and DMI, Inc. also fails. The assertion that the Trustee could recover $350,000 from DMI, the Banks and the Jenoskis is without sufficient credible evidentiary support. Although the Trustee could have obtained judgment against them, and, although she maintains that they had sufficient monies to make a significant payment to the Trustee, the Court concludes that any recovery is speculative. In view of the Xerox Corporation claim against Jenoski and the likelihood that the Bank defendants will continue to pursue the Jenoskis with respect to their third party claims against them in Adv. P. No. 12-1149, the Court concludes that any theoretical recovery against the Jenoskis or DMI, Inc. cannot form the basis of an increased contingency claim for compensation as it is not a “recovery” within the meaning of the Application for Order Authorizing Chapter 7 Trustee to Employ Special Counsel. The Firm submitted no persuasive authority for such an approach.
IV. CONCLUSION
In view of the foregoing, the Court shall enter an order allowing the Firm compensation in the sum of $268,781.66 plus costs in the sum of $9,284.25.
. The counts were as follows:
Count I against Countrywide Home Loans, Inc., for unjust enrichment in the amount of $397,361.11, plus prejudgment interest at the rate of 12% per annum from and after the date of the filing of the Complaint commencing this action, i.e., June 13, 2012, to the date of entry of judgment, pursuant to Mass. Gen. Laws ch. 231, § 6C;
Count II against Countrywide Home Loans, Inc., for money had and received in the amount of $397,361.11, plus prejudgment interest at the rate of 12% per annum from and after June 13, 2012, to the date of entry of judgment, pursuant to Mass. Gen. Laws ch. 231, § 6C;
Count III against Countrywide Home Loans, Inc., for fraudulent conveyances under 11 U.S.C. § 548, in the amount of $85,205.73, plus prejudgment interest under 28 U.S.C. § 1961(a) from and after June 13, 2012 to the date of entry of judgment;
*449Count IV against Countrywide Home Loans, Inc., for fraudulent conveyances under 11 U.S.C. § 544(a)(1) and Mass. Gen. Laws ch. 109A, § 6, in the amount of $287,040.50, plus prejudgment interest at the rate of 12% per annum from June 12, 2012 to the date of entry of judgment pursuant to Mass. Gen. Laws ch. 231, § 6C; Count V, for fraudulent conveyances under 11 U.S.C. § 548(a)(1), against Bank of America, N.A., in the amount of $105,221.18, plus prejudgment interest from June 13, 2012 under 28 U.S.C. § 1961(a) from June 13, 2012 to the date of entry of judgment; and
Count VI, for fraudulent conveyances under 11 U.S.C. § 544(a)(1) and Mass. Gen. Laws ch. 109A, § 6, against Bank of America, N.A., in the amount of $105,221.18, plus prejudgment interest at the rate of 12% per annum from June 12, 2012 to the date of entry of judgment pursuant to Mass. Gen. Laws ch. 231, § 6C.
Id. at 464-65.
. Default judgments were entered against the Jenoskis, and the Trustee settled her claims against Goodway Graphics of Massachusetts, Inc. for $6,345.
. The First and Final Application contains a discrepancy as to the amount of fees sought. In some instances the amount is set forth as $9,500 and in others as $9,600.
. The Trustee has not filed a Notice of Abandonment, although the Firm represented that it had been instructed by the Trustee not to pursue claims against the Jenoskis.
. At the hearing, Attorney Bean characterized Jenoski's argument as follows:
[It] is like that old saw, the child who kills his parents and then asks for mercy because he's an orphan. Mr. Jenoski created the problems here. He’s the one — he and his wife are the ones living beyond their means on the backs of the debtor....
. The Firm notes that Xerox Corporation entered into a confidential settlement with the Jenoskis in which it agreed not to file a proof of claim in the Debtor’s case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497084/ | MEMORANDUM OF DECISION ON REQUEST OF DEBTOR TO PROHIBIT CREDIT BIDDING
FRANK J. BAILEY, Bankruptcy Judge.
In conjunction with its proposed sale of certain real property, the debtor and debt- *455or-in-possession, Charles Street African Methodist Episcopal Church of Boston (“CSAME”), has moved for an order prohibiting OneUnited Bank (“OneUnited”), which holds mortgages on the properties in question, from credit bidding at the sale. CSAME would have the Court deny the option of credit bidding “for cause” within the meaning of 11 U.S.C. § 363(k), the cause being that OneUnited’s secured claims are subject to bona fide dispute by virtue of CSAME’s assertion of counterclaims that, by setoff, would reduce the amount of those claims to zero. OneUnit-ed and the United States Trustee have objected to the request. For the reasons set forth below, the Court will deny the request except as to the first $50,000 of the sale price, which is needed to fund payment of the break-up fee that would be payable were OneUnited the successful bidder. As to the balance of the purchase price, the Court holds that OneUnited has not established cause to limit or deny OneUnited’s prerogative under § 363(k).
FACTS AND PROCEDURAL HISTORY
a. The Sale Motion
CSAME owns two contiguous parcels of real property known as the RRC Property and the Storefronts (collectively, the “Assets”) and has moved for authority to sell them together to its stalking-horse bidder, Action for Boston Community Development, Inc., (“ABCD”), a Massachusetts nonprofit corporation, or the high bidder at a proposed auction. The proposed sale would be free and clear of all liens, claims, and encumbrances. Under an agreement with ABCD (the “Stalking Horse Purchase Agreement”), CSAME will be obligated to pay to ABCD a $50,000 break-up fee if ABCD is not ultimately the successful bidder. ABCD’s stalking horse bid is in the amount of $2,000,000. Other prospective purchasers may bid for the Assets at a final auction provided they satisfy certain requirements, including the timely submission of a counteroffer of at least $2,100,000 with a cash deposit of $210,000. Another nonprofit corporation, Horizons for Homeless Children, Inc. (“Horizons”), has indicated its intent to bid for the Assets.
CSAME’s motion to approve the sale (the “Sale Motion”) included a request for a preliminary order to, among other things, (i) approve the break-up fee, (ii) approve proposed bidding procedures, and (iii) prohibit OneUnited from credit bidding for the Assets. By a separate memorandum of decision, the Court has indicated that it will approve the break-up fee and bidding procedures and schedule a final hearing on the Sale Motion in time to close the sale by the end of June 2014. The Court indicated in that memorandum of decision that it would address the credit bidding issue separately.
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,” under which CSAME borrowed $1,115,000, with principal and unpaid interest 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 “default/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 *456the defauli/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; a further appeal to the Court of Appeals was dismissed by agreement.
The OneUnited Claims are also subject to other counterclaims in state court litigation between CSAME and OneUnited, which litigation was automatically stayed upon CSAME’s bankruptcy filing. In the plans of reorganization it has filed to date, including one recently filed and still pending, CSAME proposed that it would retain and litigate these counterclaims after confirmation of the plan. Proceeds from the prepetition sale of the properties securing OneUnited’s claim would be held in escrow until the state court litigation was completed.
The Loans are secured by CSAME’s real property. The Church Loan is secured by mortgages on the Storefronts and two other properties. The Construction Loan is secured by mortgages on the RRC Property and two other properties. The properties that secure the Construction Loan do not also secure the Church Loan, and the properties that secure the Church Loan do not also secure the Construction Loan.
c. CSAME’s Second Objection to Proof of Claim of OneUnited
Eight days after filing the Sale Motion, CSAME filed a second objection to OneUnited’s Proof of Claim (the “Second Objection”). The Second Objection was filed in conjunction with the Sale Motion for the express purpose of demonstrating that OneUnited’s claim is in bona fide dispute. The Second Objection essentially interposes, by way of setoff, three counterclaims against OneUnited that, if successful, would wholly eliminate OneUnited’s claim. Each counterclaim is asserted under Mass. Gen. Laws ch. 93A; one is also asserted under contract law. The first two counterclaims are reiterations of counterclaims that CSAME asserted in the state court litigation between CSAME and OneUnited. As most-concisely articulated by CSAME, the counterclaims are as follows:
• “OneUnited willfully and knowingly structured the Construction Loan so that the RRC construction project was substantially underfunded from the beginning, leading predictably to the Church’s [CSAME’s] inability to finish the project and default on the Loan. The Church thus seeks damages under ch. 93A against the Bank for unfair and deceptive origination of the Construction Loan.”
• “[CSAME] further seeks damages, under contract law and ch. 93A, for the Bank’s refusal to fund the tenth draw request to Thomas [CSAME’s general contractor] under the Construction Loan, which led to a failure to complete construction on the RRC.”
• “[OneUnited] acted in an unfair and deceptive manner, entitling the Church to damages under ch. 93A, by prosecuting the state court action against the Church to collect on the Construction Loan and by initiating a foreclosure action on the Church Loan collateral with no intent to pursue those actions to completion.” “OneUnited’s commercially unreasonable foreclosure action, along with the Bank’s prior collection activities, led directly to the filing of this Chapter 11 case and very substantial diminishment in the financial stability of [CSAME], which had previously been raising funds from the congregation at a significantly higher level. It also caused a very significant delay in the *457construction of the RRC, with attendant diminishment in value.”
CSAME filed the Second Objection only on April 30, 2014. It has not been scheduled for adjudication and cannot reasonably be adjudicated in advance of the proposed sale, which at present must occur before the end of June. CSAME does not seek to have the Second Objection decided before the sale. OneUnited states that, if the Court is inclined to deny it leave to credit bid, the Second Objection should be adjudicated before the sale.
d. Arguments of the Parties
CSAME seeks a prohibition of credit bidding on a single, narrow basis: that OneUnited’s claim is subject to bona fide dispute, which bona fide dispute constitutes “cause” under 11 U.S.C. § 363(k) to prohibit credit bidding. CSAME does not advance, as cause to prohibit credit bidding, that OneUnited’s claim is not an “allowed” claim within the meaning of § 363(k). CSAME does contend that other grounds exist on which a prohibition on credit bidding might be predicated here: (i) concern that OneUnited’s ability to credit bid would chill the bidding or depress interest in the Assets and (ii) concern that OneUnited may be interested in bidding for improper, ulterior motives. But CSAME hastens to add that, for tactical reasons — especially a desire to avoid the need for a long evidentiary hearing and to present the issue in such a way as the Court can make an up or down decision simply as a matter of law, on undisputed facts — it is not relying on these alternate grounds. CSAME expressly disavows any reliance on In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr.D.Del.2014) and its rationale, and therefore this motion presents no occasion to address Fisher’s rationale and the types of “cause” at issue there.
OneUnited objects, arguing that the right to credit bid is too important to be taken from a creditor by the filing of a last-minute objection that cannot be adjudicated before the sale. OneUnited disputes the merits of the counterclaims on which the Second Objection is based and suggests that if the counterclaims had merit, they would have been asserted and litigated earlier in the case, and that this is nothing but a cynical ploy to disenfranchise OneUnited by underhanded means. The United States Trustee — whose purpose in weighing in on this issue is unclear — argues that the existence of a bona fide dispute as to a secured claim is not necessarily “cause” within the meaning of § 363(k) and, for a host of reasons, does not here amount to cause to prohibit credit bidding by OneUnited.
DISCUSSION
Section 363(k) of the Bankruptcy Code states:
At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.
11 U.S.C. § 363(k). Under this subsection, the holder of an allowed claim that is secured by a lien on property being sold in bankruptcy may, if it is the purchaser of the property at sale and “unless the court for cause orders otherwise,” pay the purchase price by offset against its claim.1 *458That is, the claim holder may pay the purchase price with its claim, which is what is meant by the non-statutory term “credit bid.” This right of a secured creditor to credit bid is subject to two express limitations: it applies only where the creditor’s lien secures an “allowed” claim; and even where the claim is allowed, the court “for cause” may order otherwise. The statute does not define cause for denying leave to credit bid.
Notwithstanding the filing of its Second Objection, CSAME does not contend (either in its brief or in its oral arguments), as a basis for disallowing credit bidding, that OneUnited’s secured claims are, by virtue of the pending objection, not “allowed” within the meaning of this subsection. Accordingly, for purposes of the present motion, I need not and do not decide that issue. CSAME instead argues only that the counterclaims articulated in the Second Objection are “cause” within the meaning of § 363(k) to disallow credit bidding.
I agree with the United States Trustee that the standard here is the existence or not of “cause,” and that the existence of a bona fide dispute as to the secured claim is not necessarily cause. In many cases, the existence of a bona fide dispute as to the secured claim is cause. Here, however, I conclude that the counterclaims do not amount to cause to prohibit credit bidding.
I rest this decision primarily on the nature of the objections articulated in the Second Objection. They do not challenge OneUnited’s underlying claims2 but instead interpose counterclaims as the basis of a defense of setoff. Of course, setoff is a valid defense, but it is an affirmative defense. The burden of proving it rests on CSAME. And the defense is not one that undercuts the existence of the primary claim; CSAME does not dispute the validity of the underlying loan agreements, the validity, perfection, or priority of OneUnit-ed’s mortgages, the amounts claimed to be due, or anything intrinsic to either of OneUnited’s claims. Nor does CSAME allege that the mortgages or loan agreements may be avoided. Rather, CSAME asserts claims of its own that it would satisfy by setoff against OneUnited’s otherwise valid claims. In short, there is no dispute about the validity or extent of OneUnited’s secured claims.
CSAME expresses a concern that, if OneUnited is permitted to credit bid, then any judgment that CSAME may ultimately obtain on the counterclaims will or may be uncollectible; credit bidding would create a credit risk. The claim against which the counterclaim would be satisfied would already have been expended, at least in part.
While I agree that credit risk is sometimes cause to disallow credit bidding, I disagree that it is a valid basis here. Credit risk is cause for disallowance of credit bidding when the creditor’s own claim is in dispute. As a general rule, a secured creditor should not receive payment on its claim before objections to the claim are resolved; otherwise, estate assets may be distributed in satisfaction of a claim that may later be deemed invalid, at which point the “creditor” may be unable or unwilling to return the distribution to *459the estate, and the estate may have to expend scarce funds to recover it — if it is able to mount such an effort at all. Here, there is no risk of a distribution on an invalid claim; instead there is a risk that an untested counterclaim will go unsatisfied. CSAME would be using a denial of credit bidding as, in essence, a form of prejudgment security, a purpose that I doubt it was intended to serve.
Insofar as CSAME may be concerned about credit risk and prejudgment security, it may yet seek security by the usual means, such as an attachment of free assets to secure the counterclaims.3 Moreover, it is unlikely that, even if OneUnited is the successful bidder, it will expend all of both of its claims in acquiring the Assets. CSAME will have the balance of these claims to look to for satisfaction of its counterclaims. For these reasons, I conclude that, except to the limited extent set forth in the following paragraph, CSAME has not established cause to prohibit credit bidding for the Assets.
In the alternative, CSAME has asked for a narrower limitation on credit bidding. CSAME points out that, under bid procedures that the Court has indicated it will approve, bids at the Auction must include at least $210,000 in cash as a deposit, to be used in part to pay the breakup fee to ABCD, if triggered. Therefore, to the extent the Court permits OneUnited to credit bid, CSAME requests that the Court require OneUnited, in any credit bid, to submit at least $210,000 in cash as a deposit, and to order that such deposit will be used in part to pay the break-up fee to ABCD if OneUnited should prevail at the Auction with its credit bid. OneUnited has not opposed this request and has not disputed that the need to fund the breakup fee is cause to limit the right to credit bid. I agree that the need to fund the breakup fee is cause to limit the right to credit bid. However, I see no reason to require that the cash portion of any bid by OneUnited exceed the $50,000 needed to fund the break-up fee should OneUnited prevail at the auction. Accordingly, I will limit the right to credit bid by requiring that the deposit that OneUnited must submit in order to participate in the auction must include cash of $50,000. The balance of the deposit and, if OneUnited is the successful bidder, of the purchase price may be paid by credit bid.
To avoid later confusion, I add one final word about credit bidding. The properties being sold include one that secures the Church Loan and another that secures the Construction Loan. They are being sold as a unit. Section 363(k) permits a secured creditor to credit bid for an asset with the claim for which the asset serves as collateral — and only with that claim. If OneUn-ited elects to credit bid, it will have to do so with a portion of each of its secured claims, and it will have to specify in its bid the amount of each claim that makes up the total bid.
A separate order will enter consistent with the above rulings.
. The right in question is only a right to pay a successful bid by offsetting the creditor’s claim against the purchase price. The credit bidder does not otherwise enjoy special con*458sideration in the bidding process. If, for example, the final round of bidding is by sealed bids, the creditor may submit a final sealed bid but is not entitled to a special opportunity to top a higher bid than its own.
. OneUnited has filed only one proof of claim, but the proof of claim in fact asserts two separate secured claims, one arising from the Church Loan, the other from the Construction Loan, each being secured by its own separate set of assets. It is therefore more accurate to speak of OneUnited as having two claims.
. I make no findings as to OneUnited’s creditworthiness or solvency or the extent of its unencumbered assets. The present motion raises the issue of credit risk in only a general way, as the reason why a bona fide dispute as to a secured claim creates cause to deny leave to credit bid.
I do not suggest that an attachment is available in conjunction with a simple objection to claim. An attachment could be sought in the pending state court litigation or, if CSAME would convert its counterclaims from defenses to affirmative demands for relief in this court, in an adversary proceeding under Fed. R. Bankr.P. 7001 et seq. See Fed. R. Bankr.P. 3007(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497085/ | OPINION AND ORDER
BRIAN K. TESTER, Bankruptcy Judge.
On April 1, 2014, this Court entered an order affording all parties in interest the opportunity to state their position as to whether the captioned case should be converted or dismissed as a result of Debtors’ Juan Carlos Simons Burgos and Michelle Diaz Pinero (collectively “Debtors”) failure to timely file a disclosure statement and plan. [Dkt. No. 116]. Pursuant to that Order, Debtors filed a Motion in Compliance with Court Order at Docket 116 [Dkt. No. 118], the United States Trustee’s Position [Dkt. No. 120] (“Trustee”), Motion in Compliance of Order and Requesting Extension of Time [Dkt. No. 119] filed by Creditor, Oriental Bank (“Oriental” or “Creditor”), and Supplement to Oriental’s Motion to Inform its Position, as to Dismissal or Conversion of the Case, and in Compliance with Court Order Entered at Docket No. 116 [Dkt. No. 126] filed by Oriental. For the reasons set forth below, this case is DISMISSED.
I. Factual Background
On May 28, 2013, Debtors filed for relief under Chapter 11 of the Bankruptcy Code as a small business. A few months later, Debtors’ case was dismissed for failure to comply with the court’s order to file monthly operating reports. The Debtors then submitted a motion for reconsideration, and on October 24, 2013, the court granted the same.
As of April 1, 2014, three hundred and eight (308) days after the filing of the voluntary petition, the Debtors had yet to file a disclosure statement and plan pursuant to 11 U.S.C. § 1121(e)(2) & (3). On said date, the court entered an order affording all interested parties ten days to state their positions as to whether the case should be dismissed or converted to Chapter 7. Thereafter, the court received positions from the Debtors, the Trustee, and Oriental.
The Debtors argue that the 300-day period to file their plan has not lapsed. They contend that the fifty seven days between the August 29, 2013 dismissal and the October 24, 2013 order granting reconsideration should not be considered in the 300-day period’s calculation. Debtors’ further argue that their filing of monthly operating reports and negotiations with creditors demonstrates good cause to not dismiss the case. The Trustee and Oriental disagree.
The Trustee believes that the case should be dismissed, and Oriental agrees. Oriental notes that Debtors have demonstrated a trend of tardiness and unreasonable delay in complying with the Bankruptcy Code and the court’s orders. Oriental argues that a discharge is a privilege, and Debtors’ lack of statutory compliance is sufficient to justify their case’s dismissal.
*462II. Legal Analysis and Discussion
The issue before the court is whether Debtors’ case should be dismissed for failure to file a plan within Section 1121’s allotted 300-day time period. See 11 U.S.C. § 1121(e). Pursuant to 11 U.S.C. § 1121(e), in a small business case “the plan and a disclosure statement (if any) shall be filed not later than 300 days after the date of the order for relief” See 11 U.S.C. § 1121(e) (emphasis added). “This section establishes mechanisms for small business debtors to comply with the intent of Congress to provide an expedited, supervised procedure in which the rights of all parties in interest are protected throughout the reorganization process.” In re Sanchez, 429 B.R. 393, 397 (Bankr. D.P.R., 2010). The statutorily prescribed term is effectively a “drop dead” period that is calculated from the date of order for relief.1
Debtors first argue that this case should not be dismissed as the statutorily prescribed period to file their plan has not expired. They reason that because the case was dismissed on October 24, 2013, the fifty seven days between dismissal and the granting of reconsideration should not be included in the 300-day period’s calculation. This Court disagrees.
When interpreting a statute, the court must start with the statute’s plain text. In re BankVest Capital Corp., 360 F.3d 291, 296 (1st Cir.2004). “In this case it is also where the inquiry should end, for where, as here, the statute’s language is plain, the sole function of the courts 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) (citing Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442, (1917)). The statutory language before us expresses Congress’ intent to require all small business plans be filed 300 days from the order for relief.2 Congress had intended to provide an exception to the 300-day period’s calculation, it could have easily done so. Likewise, Congress could have delineated tolling events for that 300-day period. However, the fact that no such language was included allows this Court to conclude none were intended. It is undisputed that the Debtors did not file then-plan within 300-days after their order for relief. Therefore, Debtors have failed to comply with 11 U.S.C. § 1121(e)(2).
The Debtors may have prevented their case’s dismissal or conversion by complying with 11 U.S.C. § 1121(e)(3). Section 1121(e)(3) makes clear that the only way to file a plan outside of the 300-day “drop dead” period is to comply with the following requirements:
(3) the time periods specified in paragraphs (1) and (2), and the time fixed in section 1129(e) within which the plan shall be confirmed, may be extended only if—
(A) the debtor, after providing notice to parties in interest (including the United States trustee), demonstrates by a preponderance of the evidence that it is *463more likely than not that the court will confirm a plan within a reasonable period of time;
(B) a new deadline is imposed at the time the extension is granted; and
(C) the order extending time is signed before the existing deadline has expired.
See 11 U.S.C. § 1121(e)(3) (emphasis added). The Debtors argue that that their filing of monthly operating reports and negotiations with creditors demonstrates good cause to not dismiss the case. This in no way covers the aforementioned extension requirements. “Judges are not mind-readers, so parties must spell out their issues clearly, highlighting the relevant facts and analyzing on-point authority.” Rodriguez v. Municipality of San Juan, 659 F.3d 168, 175 (1st Cir.2011). Even if Debtors had made a Section 1121(e)(3) argument, the existing 300-day period has expired, making any Section 1121(e)(3) argument moot. As a result, Debtors have failed to file a disclosure statement and plan under statutorily prescribed period, making their case’s dismissal appropriate.
III. Conclusion
WHEREFORE, IT IS ORDERED that the Debtors’ case shall be, and it hereby is, DISMISSED.
. "The words 'order for relief refer to the commencement of a voluntary petition for bankruptcy.” In re Martinson, 731 F.2d 543, 544 n. 3 (8th Cir.1984).
. This interpretation is further supported by the legislative history to Section 437 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which amended 11 U.S.C. § 1121(e), and specifically states that: “a small business debtor must file a plan and any disclosure statement not later than 300 days after the order for relief." See H.R. REP. 109-31(1), 92, 2005 U.S.C.C.A.N. 88, 158 (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497087/ | Opinion
STEPHEN RASLAVICH, Bankruptcy Judge.
Introduction
Terry Dershaw, Trustee of the above-captioned estate, has filed separate adversary proceedings against Albert A. Ciardi, III (Ciardi) and the law firm of which he is a principal, Ciardi, Ciardi & Astin, P.C. (hereinafter the “Law Firm”). The complaints seek to recover property and ask for other relief. Both Defendants have *477filed motions to dismiss the respective complaints. A hearing on the matters was held on March 19, 2014. The Court thereafter took the matter under advisement. For the reasons which follow, the Motions will be granted and the Complaints will be dismissed.1
The Complaints
The Trustee’s two complaints seek affirmative and injunctive relief. First and foremost, the Trustee seeks to recover property transferred by the Debtor to Defendants before and after the bankruptcy filing. Both actions seek to avoid the transfers under express Bankruptcy Code provisions. In addition, the complaints also plead state common law causes of action to recover the same property. Aside from affirmative recovery, the Trustee asks the Court to require the Defendants to explain the circumstances surrounding the transfers of property mentioned above.2
Grounds for Dismissal
The Defendants have moved to dismiss all counts of the Complaints for failure to state a claim upon which relief may be granted. Where the Trustee has alleged fraud, the Defendants also maintain that his allegations lack the requisite heightened specificity applicable to such claims.
Pleading Standard
To state a claim under Rule 8 of the Federal Rules of Civil Procedure, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” F.R.C.P. 8(a)(2) (made applicable by B.R. 7008(a)). However, “recitals of the elements of a cause of action, supported by mere conclu-sory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Rather, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Id. at 678, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). Where fraud is alleged, the rules require the complaint to include specificity as to the “circumstances constituting fraud” such as the “who, what, when, where, and how.” In re Dulgerian, 388 B.R. 142, 147 (Bankr.E.D.Pa.2008) (citing In re Rockefeller Center Properties, Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir.2002)).
Analysis
Typically, the Court would analyze the Complaints separately. However, because the two actions plead common counts, because they are based on a common core of facts, and because they involve related defendants, it will be more efficient to analyze them together. To that end, the Court begins with an analysis of the common causes of action which seek affirmative relief. For those counts, it will set forth the applicable standard and test the allegations against Ciardi first and the law firm second. Thereafter, the Court will review the remaining counts which request *478affirmative relief as to a single defendant, again in the same order. The Court has reserved until the end its disposition of the Trustee’s requests for injunctive relief based on Code § 329, because the Court has certain concerns of its own over the minimal inquiries the Trustee apparently made before arriving at the decision to commence these adversary proceedings. In this regard, an analysis of the Trustee’s request for relief under § 329 will further elaborate on this and on why dismissal of the two complaints is warranted.
Preferential Transfers
Each complaint alleges that the Defendant is the recipient of a preferential transfer. Compare Ciardi Complaint, Count IV with Law Firm Complaint, Count II. Section 547(b) of the Bankruptcy Code authorizes a trustee in bankruptcy to avoid certain payments made within ninety days before the debtor files for bankruptcy as “preferential transfers.” This section states, in pertinent part:
[A]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;
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b) (emphasis added). The purpose of this provision is “to ensure that creditors are treated equitably, both by deterring the failing debtor from treating preferentially its most obstreperous or demanding creditors in an effort to stave off a hard ride into bankruptcy, and by discouraging the creditors from racing to dismember the debtor.” Fiber Lite Corporation v. Molded Acoustical Products, Inc. (.In re Molded Acoustical Products, Inc.), 18 F.3d 217, 219 (3d Cir.1994). A complaint to avoid preferential transfers must include the following information in order to survive a motion to dismiss:
(a) an identification of the nature and amount of each antecedent debt; and
(b) an identification of each alleged preference transfer by
(i) date,
(ii) name of debtor/transferor,
(iii) name of transferee and
(iv) the amount of the transfer.
In re Universal Marketing Inc., 460 B.R. 828, 835-836 (Bkrtcy.E.D.Pa.2011).
Preference Claim Against Mr. Ciardi
The claim of a preference as to Mr. Ciardi is not based on a direct transfer of money. Rather, it is alleged that he owed the Debtor money for services rendered to him personally and that the Debtor forgave that debt. Specifically, it is alleged that for work performed on his homes, he owed the Debtor upwards of $68,000. The Debtor, however, is alleged to have can-celled or written off that debt entirely. See generally Ciardi Complaint, ¶¶ 46-55.
Transfer
Beginning with the first element, the Court analyzes the Complaint to determine if a “transfer” to Ciardi is alleged. The term transfer is broadly defined in the Code. See 11 U.S.C. § 101(54). Forgive*479ness of debt has been recognized to constitute a transfer for purposes of the Code’s avoidance provisions. See Horan v. Baer, 2011 WL 601652, at *1 (D.Md., Feb. 11, 2011). Accordingly, the Court finds that a transfer is alleged.
To Or For The Benefit Of A Creditor
Next, the Complaint alleges that the “Transfer was made to or for the benefit of Defendant who was a creditor of the Debt- or.” Ciardi Complaint, ¶ 50. This assertion is at odds with the thrust of the Complaint, which is that it is Ciardi who owed the Debtor for work performed for him personally. The Law Firm is alleged to have been a creditor of the Debtor because it rendered legal services to it. The Court, however, finds that the complaint fails to allege that individual Defendant Ciardi was a creditor who received the transfer in question or the benefit of it.
Antecedent Debt
The Complaint next alleges that the “Transfer was made for or an account of an antecedent debt owed by the Defendant to Debtor before such Transfer was made.” Id., ¶ 51. The Complaint again reverses the required obligation: whereas the statute requires the antecedent debt to be owed by the debtor, the complaint alleges that it is here owed by the Defendant (i.e., Ciardi). The Complaint thus fails to plead this element of a preference claim as well.
For these reasons, Count IV of the Ciar-di Complaint will be dismissed.
Preference Claim Against Law Firm
The preference count against the Law Firm pleads two direct transfers which total $100,000. Law Firm Complaint, ¶ 40. The first transfer to the Law Firm (in the amount of $50,000) is alleged to have been made by John and Lucille Parks on November 17, 2011. ¶27. The second transfer is alleged to have been made by the Debtor to the Law Firm on November 18, 2011 in the amount of $50,000. ¶ 24.
At the outset, and as to the first transfer, the Court does not read the Complaint to assert the “transfer of an interest of the Debtor in property.” The first transfer came not from the Debtor but from one of its principals (John Parks) and his wife. There is no allegation that the money which came out of the Parks’ account was the Debtor’s money, or property in which the Debtor had an interest. There is only a vague allusion to such possibility when the Trustee states that he has “not been able to determine the origin of the funds in the joint account of the Parks to allow [sic] the above-referenced payments to the Defendant Law Firm ...” ¶ 29.
As to the second transfer, the allegation is that the Debtor wrote a check to the Law Firm but then voided it. The funds received by the Law Firm from the second transfer came via a cashier’s check but there is no allegation that these were the Debtor’s funds. With respect to each of the Law Firm transfers the Trustee’s complaint rests on speculation.
For these reasons the preference count against the Law Firm will be dismissed.
Bankruptcy Code Fraud Provisions
Both Complaints allege fraud under § 548 of the Bankruptcy Code. Each proceeding alleges the Defendant received transfers that were the product of actual fraud, as well as constructive fraud on the Debtor’s part. The Bankruptcy Code’s express provision regarding such forms of fraud provides:
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 debtor in property, or any obligation (including *480any 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) 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; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(H)(1) 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;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1) (emphasis added).
As stated, supra, fraud claims must be plead with heightened specificity. See Federal Rule of Civil Procedure 9(b) (requiring that allegations of fraud be pleaded with specificity); see also Saporito v. Combustion Engineering, 843 F.2d 666, 673 (3d Cir.1988) rev’d on other grounds 489 U.S. 1049, 109 S.Ct. 1306, 103 L.Ed.2d 576 (1989). In order to satisfy Rule 9(b), plaintiffs must plead with particularity “the ‘circumstances’ of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior.” Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984). Plaintiffs may satisfy this requirement by pleading the “date, place or time” of the fraud, or through “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.” Id. (holding that a plaintiff satisfied Rule 9(b) by pleading which machines were the subject of alleged fraudulent transactions and the nature and subject of the alleged misrepresentations).
Context and circumstances will define the level of specificity. As a leading commentator explains, the degree of particularity required under Rule 9(b) rests on the nature of the underlying fraud claim. 5A Fed. Prac. & Proc. Civ. § 1298 (3d ed.). While a simple allegation of fraud may not suffice under the Bankruptcy Code, this standard is relaxed where the plaintiff is a trustee in bankruptcy, because “of the trustee’s ‘inevitable lack of knowledge concerning acts of fraud previously committed against the debtor, a third party.’ ” In re Harry Levin, Inc., 175 B.R. 560, 567 (Bkrtcy.E.D.Pa.1994). Nonetheless, even under the more relaxed Rule 8(a) standard, the plaintiff must provide more than mere legal conclusions and cannot simply repeat the elements of the cause of action. Mervyn’s LLC v. Lubert-Adler Grp. IV (In re Mervyn’s Holdings, Inc.), 426 B.R. 488, 494 (Bankr.D.Del.2010)
Actual Fraud Under The Bankruptcy Code
Subparagraph (A) of § 548(a)(1) codifies a claim of “actual *481fraud.” It is identical to the description of actual fraud found in the Uniform Fraudulent Transfer Act which Pennsylvania has adopted.3 See 12 Pa.C.S. § 5104(a)(1) (the “PUFTA”). Both statutory provisions provide for the avoidance of transfers made with actual intent to hinder, delay, or defraud creditors. See In re Valley Bldg. & Const. Corp., 435 B.R. 276, 285 (Bankr.E.D.Pa.2010). To state a claim for avoidance of a transfer based upon actual fraud under both the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(A), and PUFTA, 12 Pa. C.S. §§ 5104(a)(1), a plaintiff must allege that the debtor made the transfer with the actual intent to hinder, delay or defraud a creditor. Image Masters, Inc. v. Chase Home Finance, 489 B.R. 375, 393 (E.D.Pa.2013). The pleading requirements for such claims are set out by Rule 9(b), which requires a trustee to “plead the circumstances constituting the alleged fraudulent conveyances with particularity.” Id. quoting Bratek v. Beyond Juice, LLC, 2005 WL 3071750, at *6 (E.D.Pa. Nov. 14, 2005). Nevertheless, a trustee may plead intent generally under the second sentence of the rule. Id. citing River Road Dev. Corp. v. Carlson Corp.-Ne., 1990 WL 69085, at *10 (E.D.Pa. May 23, 1990).
The PUFTA lists certain “badges of fraud” to assist courts in determining whether actual fraud is present. This nonexclusive list includes whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
12 Pa.C.S. § 5104(b). These same factors are used by courts when determining actual intent under 11 U.S.C. § 548(a)(1)(A). See In re Valley Bldg. & Const. Corp., 435 B.R. at 285-86.
Constructive Fraud
In addition to actual fraud, § 548 also allows a trustee to recover transfers which are rendered fraudulent as a result of the circumstances under which they were made:
(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, ... if the debtor voluntarily or involuntarily—
* * *
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
*482(h)(1) 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;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B). In order to state a claim for avoidance of a transfer based upon constructive fraud under subsection (B) of § 548(a)(1), a plaintiff must allege, among other things, facts demonstrating that the debtor received less than a reasonably equivalent value in exchange for such transfer or obligation. Image Masters, Inc. v. Chase Home Finance, 489 B.R. 375, 386-387 (E.D.Pa.2013) Like a claim alleging actual fraud, a claim for constructive fraud is also subject to the higher standard of specificity. See In re The Harris Agency, LLC, 465 B.R. 410, 417 n. 12 (Bkrtcy.E.D.Pa.2011) (noting the split of authority within this District, that the Third Circuit has not yet ruled on the questions, and concluding that requiring the higher pleading standard is within the court’s discretion).
Actual Fraud Against Ciardi
In reviewing the actual fraud count against Ciardi, the Court finds but one badge of fraud alleged therein; to wit, the Debtor’s failure to have disclosed the forgiveness of the receivable. Other than that, no other indicia of fraud are plead.4 When the Trustee is alleged to have demanded that Ciardi pay the receivable, Ciardi is said to have responded that the Debtor’s principals indicated that nothing was due. ¶ 33. That does not standing alone suggest a wrongful motive on Ciar-di’s part. Which is to say that the Court does not discern an intent to defraud in the inconclusive statement the Trustee relies so heavily upon. In short, this count fails to sufficiently allege actual fraud on the part of Ciardi.
Constructive Fraud Against Ciardi
Count VIII alleges that the Debtor was either insolvent when the receivable was written off, was rendered insolvent as a result, or was otherwise financially impaired at the time. See Ciardi Complaint, ¶ 85. The allegation of insolvency, however, does not allege how the Trustee came to that conclusion. Neither is it discussed anywhere else in the Complaint. This matters given that unlike in a preference action, insolvency in a fraudulent transfer action is not presumed. See In re The Brown Publishing Company, 2014 WL 1338102, at *5 (Bkrtcy.E.D.N.Y., April 3, 2014). There being plead no facts in support of the claim of insolvency, Count VIII simply does not meet the level of specificity for constructive fraud. See Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir.2008) (explaining that the factual allegations must be more than speculation)
The same also can be said for the next element alleged; to wit, that reasonably equivalent value in exchange for the receivable write-off was not received. Specifically, it is alleged that the “Debtor received no value in exchange for the *483Account Receivable and/or Transfer of the Account Receivable.” ¶ 86. This allegation, too, is not supported by any allegation which would reflect that. The closest that Count VIII comes to that conclusion is the failure of the Debtor to have disclosed the receivable in either the Schedules or Statement of Financial Affairs. That omission, however, does not necessarily imply that the receivable should not have been written off. Again, it is elsewhere alleged that when the Trustee demanded that Ciardi pay the invoices, Ciardi replied that the Debtor’s principals indicated that nothing was owing. ¶ 33. Taken at face value, that explanation could indicate that the receivable had no value. This possibility might, indeed it should, have prompted the Trustee to inquire of the Debtor’s principals as to whether the Defendant’s explanation was true. There is no indication, however, that this was done. As a result, the Court is left in the dark as to why the receivable was written off. This vagueness compels dismissal of the constructive fraud claim against Ciardi.
Fraudulent Transfers To the Law Firm
The fraudulent transfer counts (V and VI) in the Law Firm complaint seek to recover the same two transfers which the Trustee characterized as preferential transfers in Count II. There, the Court concluded that the second of the two transfers; to wit, the transfer dated November 17, 2011 from the Parks to the Law Firm was not avoidable because it was not a transfer of an interest of the Debtor in property. For the same reason, the same transfer is not sufficiently plead as fraudulent. To the extent that the fraud counts might plead viable causes of action, they might do so as against the first of the prepetition transfers to the Debtor, the November 18, 2011 transfer from the Debtor to the Law Firm in the amount of $50,000. ¶24. That is the subject of the following analysis.
Actual Fraud Against the Firm
In support of the claim that the prepetition payment from the Debtor to the Law Firm is the result of actual fraud, the complaint pleads a single badge of fraud. That is, neither the Schedules nor the Statement of Financial Affairs disclose the prepetition payment to the Law Firm. But nowhere in the complaint is it suggested that such an omission occurred by design. Neither is it alleged that the Trustee inquired of the Debtor’s counsel or its principals as to the circumstances of the payments. Nothing alleged therein implies a scheme to defraud. Like the actual fraud claim against Mr. Ciardi, the claim against the law firm will be dismissed.
Constructive Fraud Against the Law Firm
The allegations in the constructive fraud claim against the Law Firm are equally thin. As with the same claim against Ciardi, insolvency or other financial impairment is alleged but without supporting facts. As to allegations of reasonably equivalent value (or lack thereof), the Trustee relies on the Debtor’s failure to disclose the transfers in the Schedules or Statement of Financial Affairs. See Law Firm Complaint, ¶¶ 24-30. But it does not follow from non-disclosure that the transfer must have been either gratuitous or disproportionate. Cf. Universal Marketing, supra, 460 B.R. at 838 (finding that the allegation that there is no record of a transaction bears no logical relationship to the issue of reasonably equivalent value) Accordingly, the constructive fraud claim against the law firm will be dismissed.
Turnover
The Trustee has demanded that Ciardi turnover to him the value of the *484unpaid receivable. See Ciardi Complaint, Count II. This claim is based on Bankruptcy Code § 542 which provides, in pertinent part, that “an entity ... in possession, custody or control, during the case of property that the trustee may use, sell, or lease under § 363 of this title ... shall deliver to the trustee, and account for, such property or the value of such property ...” 11 U.S.C. § 542(a). “Turnover under 11 U.S.C. § 542 is a remedy available to debtors to obtain what is acknowledged to be property of the bankruptcy estate.” In re Asousa Partnership, 264 B.R. 376, 384 (Bankr.E.D.Pa.2001); see also Creative Data Forms, Inc. v. Pennsylvania Minority Business Development Authority (In re Creative Data Forms, Inc.), 41 B.R. 334, 336 (Bankr.E.D.Pa.1984) (“[I]f the debtor does not have the right to possess or use the property at the commencement of the case, a turnover action cannot be a tool to acquire such rights.”), aff'd, 72 B.R. 619 (E.DJPa.1986), aff'd, 800 F.2d 1132 (3d Cir.1986) (table).
Numerous courts have held that a turnover is not proper where a bona fide dispute exists. See In re Allegheny Health Education and Research Foundation, 233 B.R. 671, 677 (Bankr.W.D.Pa.1999) citing U.S. v. Inslaw, Inc., 932 F.2d 1467, 1472 (D.C.Cir.1991) (“ ‘It is settled law1 that turnover actions under § 542 cannot be used ‘to demand assets whose title is in dispute’ ”) see also In re 2045 Wheatsheaf Associates, 1998 WL 910228, at *10 (Bankr.E.D.Pa.) (quoting In re Johnson, 215 B.R. 381, 386 (Bankr.N.D.Ill.1997), to the effect that “[t]urnover under § 542 of the Code ‘is not intended as a remedy to determine disputed rights of parties to property. Rather, it is intended as a remedy to obtain what is acknowledged to be property of the bankruptcy estate.’ ”); In re LiTenda Mortgage Corp., 246 B.R. 185, 195 (Bankr.D.N.J.2000) citing In re CIS Corp., 172 B.R. 748, 760 (S.D.N.Y.1994) (“The terms ‘matured, payable on demand, or payable on order’ create a strong textual inference that an action should be regarded as a turnover only when there is no legitimate dispute over what is owed to the debtor.”); In re F & L Plumbing & Heating Co., 114 B.R. 370, 376-77 (E.D.N.Y.1990) (explaining that where no set fund exists and other parties may have legal rights to the monies sought, no turnover action lies); In re Ven-Mar Intern., Inc., 166 B.R. 191, 192-93 (Bankr.S.D.Fla.1994) (holding that § 542 does not provide a means to recover property where a dispute exists between the parties); In re Matheney, 138 B.R. 541, 546 (Bankr.S.D.Ohio 1992) (stating that an action is properly characterized as one for turnover when the trustee or debtor in possession is seeking to obtain property of the debtor, not property owed to the debtor); In re Kenston Management Co., 137 B.R. 100, 107 (Bankr.E.D.N.Y.1992) (holding that an action for turnover only exists if the debt has matured and is “specific in its terms as to the amount due and payable”); In re FLR Company, Inc., 58 B.R. 632, 634 (Bankr. W.D.Pa.1985) (“Implicit in the bankruptcy context of turnover is the idea that the property being sought is clearly the property of the Debtor but not in the Debtor’s possession. Turnover, 11 U.S.C. § 542, is not the provision of the Code to determine the rights of the parties in legitimate contract disputes.”)
The Third Circuit has explained that a “bona fide dispute” exists only when there is “a genuine issue of material fact that bears upon the debtor’s liability, or a meritorious contention as to the application of law to undisputed facts.” B.D.W. Associates v. Busy Beaver Bldg. Ctrs., 865 F.2d 65, 66 (3d Cir.1989) (adopting standard enunciated in In re Busick, 831 F.2d 745, 746 (7th Cir.1987) which, in turn adopted In re Lough, 57 B.R. 993, 997 *485(Bankr.E.D.Mich.1986) with gloss: requiring that the fact or legal issue in dispute be “substantial”). Applying this definition to Count II, the Court notes that the Trustee claims an interest in an asset which, by his own words, the Debtor had essentially abandoned and which Ciardi maintains does not exist. By definition there is a dispute over the ownership of that asset. Without belaboring the merits of the question the Court holds simply that no turnover claim is stated on these facts.
Common Law Fraud Against Ciardi
A claim of common law fraud is directly solely at Ciardi. See Ciardi Complaint, Count V. The Bankruptcy Code affords a trustee the power to recover a transfer avoidable under applicable non-bankruptcy law. See 11 U.S.C. § 544(b). Pennsylvania common law defines a prima facie case of fraud as: (1) a representation; (2) that is material; (3) that is made with knowledge or reckless indifference of its falsity; (4) with intent to mislead another; (5) justifiable reliance; and (6) injury. Borough of Morrisville v. Kliesh, 2014 WL 346589, at *9 (Pa.Cmwlth., Jan. 30, 2014); Blumenstock v. Gibson, 811 A.2d 1029, 1034 (Pa.Super.2002).
Representation
The Court fails to see where a representation made by Ciardi is alleged. In that regard, the Complaint alleges that the misrepresentation was the failure to disclose the existence of the account receivable on the Schedules or Statement of Financial Affairs. Complaint, ¶ 62. Yet the very same paragraph alleges that it is not Mr. Ciardi who made that representation but the Debtor, by and through the Debtor’s law firm. Id. So assuming that a representation was made, it is not attributed to Mr. Ciardi.
Reliance
Equally, and even assuming the misrepresentation could be attributed to Ciardi, the Court does not read the Complaint to allege reliance, justified or otherwise. The filing of a bankruptcy schedule containing a material omission is alleged; however, there is no resulting allegation. In other words, there is no allegation that the misrepresentation prompted any conduct that resulted in harm. Fraud claims, by their nature, are based in cause and effect. See In re Adler, Coleman Clearing Corp., 263 B.R. 406, 489 (S.D.N.Y.2001) quoting Restatement (Second) Torts § 546 (“Reliance is to fraud what proximate cause is to negligence; that is to say fraud and injury must bear the relation of cause and effect.”) Nothing like that is alleged here: therefore, the common law fraud claim in Count V of the Ciardi Complaint must be dismissed.
Unjust Enrichment
Count VI against Ciardi is based in equity. Specifically, it attempts to plead a case of unjust enrichment. Pennsylvania courts have held that “ ‘[u]n-just enrichment’ is essentially an equitable doctrine.” Styer v. Hugo, 422 Pa.Super. 262, 267, 619 A.2d 347, 350 (Pa.Super.Ct.1993). In Pennsylvania, a party seeking to plead unjust enrichment must allege the following elements: “(1) a benefit conferred on the defendant by the plaintiff; (2) appreciation of the benefit by the defendant; and (3) the defendant’s acceptance and retention of the benefit ‘under such circumstances that it would be inequitable for defendant to retain the benefit without payment of value.’ ” Giordano v. Claudio, 714 F.Supp.2d 508, 530 (E.D.Pa.2010) (quoting Filippi v. City of Erie, 968 A.2d 239, 242 (Pa.Cmwlth.Ct. 2009)). Under these circumstances, “the law implies a contract between the parties pursuant to which the plaintiff must be *486compensated for the benefits unjustly received by the defendant.” Styer, 619 A.2d at 350. The existence of such a contract “requires that the defendant pay the plaintiff the value of the benefits conferred. ...” AmeriPro Search Inc. v. Fleming Steel Company, 787 A.2d 988, 991 (Pa.Super.2001).
While the complaint pleads both a benefit conferred and accepted, it does not allege that Defendant’s retention of such benefit would be an injustice. It is alleged that “upon discovery of the missing Account Receivable, the Trustee requested payment thereof from the Defendant and that ‘in response, Defendant insisted that the Principals of Debtor indicated that “no amount is due and owing.” ’ ” Ciardi Complaint, ¶¶ 32, 33. To the Trustee, the fact that the Defendant’s firm had a confidential relationship with the Debtor (or its principals) and that Defendant has not provided proof of payment is enough to infer some wrongful conduct on his part. Id. ¶ 34.
The Court does not read the allegations that broadly. Significant here is how Defendant is alleged to have responded to Trustee’s demand for payment. He did not ignore the demand or merely say that it did not owe the money. Instead, Defendant responded that the Debtor’s principals indicated that nothing was owed. There is nothing wrongful to necessarily be inferred from that explanation. If the Trustee believed otherwise, certainly then it was incumbent upon him to do something to either confirm or discredit the explanation. There is no indication that the Trustee did anything. For that reason, the Court cannot say that the complaint against Ciardi pleads unjust enrichment in its present form.
Postr-Petition Transfers
The Trustee also seeks to recover from the Law Firm what it describes as unauthorized post-petition transfers. See Law Firm Complaint, Count III. Section 549 of the Bankruptcy Code allows a trustee to avoid certain transfers of property made after a bankruptcy filing. The section provides, in pertinent part:
(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.
(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.
11 U.S.C. § 549(a),(b). It is alleged that the Law Firm received transfers from the Debtor after the commencement of the case, which transfers were not authorized under the Bankruptcy Code or by the court. See Law Firm Complaint, ¶¶ 50, 51. That, however, might suffice for purposes of alleging a postpetition transfer under subsection (a) of § 549. In this case, however, the transfers in question were made in an involuntary bankruptcy case. Specifically, they were made between the date of the filing of the involuntary petition and the date that the Court entered an order for relief. The petition was filed on December 20, 2011 and the *487order for relief was entered on February 9, 2012. The Complaint alleges that the postpetition transfers were made on February 3, 2012. According to subsection (b) above such transfers may only be recovered to the extent no value was given in exchange for such transfers. The count does not allege a lack of value given in exchange; therefore, Count III against the Law Firm for the avoidance of post-petition transfers will be dismissed.5
Breach of Fiduciary Duty
Count VIII of the complaint against the law firm alleges a breach of fiduciary duty. Fiduciary status is defined by statute as well as common law. Pennsylvania’s Corporations and Unincorporated Associations law establishes a fiduciary duty owed by directors and officers to their corporation. See 15 Pa.C.S. § 512; see also Miller v. Dutil (In re Total Containment, Inc.), 335 B.R. 589, 602 (Bankr. E.D.Pa.2005) (stating that officers and directors of a corporation are considered fiduciaries under the Pennsylvania law of corporations). Case law expands the scope of fiduciary responsibility to dominant or controlling shareholders. See Pepper v. Litton, 308 U.S. 295, 306, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939). When a corporation is insolvent, the fiduciary duty of the controlling shareholders arises in favor of corporate creditors. See Travelers Casualty and Surety Co. v. Irex Corp., 2002 WL 32351176, at *3 (E.D.Pa., May 31, 2002) (“Cases interpreting Pennsylvania law hold that a controlling shareholder is a fiduciary of the corporation as are corporate officers; eases further hold that a fiduciary relationship develops between a controlling shareholder and creditors of the corporation, as it does between officers of the corporation and creditors of the eorporation, at the point the corporation becomes insolvent.”)
A confidential relationship will also give rise to a fiduciary duty. Basile v. H & R Block, Inc., 777 A.2d 95, 101-02 (Pa.Super.Ct.2001). “The essence of [a confidential] relationship is trust and reliance on one side, and a corresponding opportunity to abuse that trust for personal gain on the other.” Id. at 101 (quoting In re Estate of Scott, 455 Pa. 429, 432, 316 A.2d 883, 885 (1974)). A confidential relationship thus exists where the parties do not deal on equal terms, “but, on the one side there is an overmastering influence, or on the other, weakness, dependence or trust, justifiably reposed.” Id. (quoting Frowen v. Blank, 493 Pa. 137, 145-46, 425 A.2d 412, 416-17 (1981)).
The Complaint alleges that “the Defendant Law Firm, as legal counselor to the Debtor owes a fiduciary duty to its creditors.” ¶ 79. The Law Firm maintains that an attorney for a prepetition debtor owes a duty of fiduciary care solely to its client. Law Firm’s Motion to Dismiss, ¶ 57. In Chapter 11, an attorney representing a debtor in possession “owe[s] a broad-based duty of care, candor, and undivided loyalty to the chapter 11 debtor.” In re Mushroom Transportation Company, Inc., 366 B.R. 414, 440 (Bkrtcy.E.D.Pa.2007); see also ICM Notes, Ltd. v. Andrews & Kurth, LLP, 278 B.R. 117, 123 (S.D.Tex.2002) (“it is undisputed that counsel of a debtor in possession owes certain fiduciary duties to both the client debtor in possession and the bankruptcy court.”); In re Harp, 166 B.R. 740, 748 (Bankr.N.D.Ala.1993); In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 840 (Bankr.C.D.Cal.1991) (“[C]ounsel for a cor*488porate Chapter 11 debtor in possession owes a fiduciary duty to the corporate entity estate — the client — and represents its interests, not those of the entity’s principals.”). This case, however, began as an involuntary proceeding and an order for relief was entered under Chapter 7. As such, the Debtor was never in possession of the estate. In re Morey, 416 B.R. 364, 367 (Bkrtcy.D.Mass.2009) (explaining that debtor’s counsel’s duty is to the client). To the extent that a confidential relationship necessarily existed, it did so as between the firm and the Debtor. Accordingly, the claim for breach of fiduciary duty will be dismissed.6
Section 329 Request
Having disposed of the affirmative requests for relief, the Court turns to the Trustee’s injunctive demands. As to Ciar-di, it is requested that the “Court analyze the improper write-off [or set off] of the Account Receivable due Debtor for services performed for Ciardi and compel him to explain why the receivable was not disclosed and paid to the estate. See Ciardi Complaint, ¶ 36-37. As to the Law Firm, the same relief is requested as to the pre- and post-petition transfers from the Debt- or. See Law Firm Complaint ¶ 38. The Trustee bases these requests on Bankruptcy Code § 329 which provides:
(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.
(b) If such 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—
(1) the estate, if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11,12, or 13 of this title; or
(2) the entity that made such payment.
11 U.S.C. § 329. There is a duty to disclose all compensation paid or agreed to be paid by the debtor. In re Berg, 356 B.R. 378, 380 (Bkrtcy.E.D.Pa.2006). The Third Circuit has explained that “the purposes of § 329, is to review payments made by debtors to attorneys, even when those payments are made prior to the fifing of a bankruptcy petition. The Revision Notes and Legislative Reports to § 329 explain that ‘Payments to a debtor’s attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.’ ” In re Engel, 124 F.3d 567, 572-573 (3d Cir.1997); see also In re the Harris Agency, 468 B.R. 702, 707 (Bkrtcy.E.D.Pa.2010) (explaining that “under section 329 and Bankruptcy Rule 2016(b) [an attorney’s disclosure statement] must disclose the source of ... compensation, even if the source is not the debtor but a third party entity.”); and see also 3 Collier on Bank-*489rwptcy ¶ 329.02 (16th ed. 2014) (further noting that “disclosure under Rule 2016(b) must be clear, direct, candid and complete.”)
There is no doubt that § 329 requires the Law Firm to disclose the amount of all compensation which it received from the Debtor in the year prior to bankruptcy. Despite the Law Firm’s claim to the contrary (see Law Firm’s Brief, 8), it represented the Debtor in contesting the involuntary petition and after the Order for Relief in preparing the Schedules and Statement of Financial Affairs. See Case No. 11-19633, Docket, ## 10, 73-82. So the Law Firm will be required to file a statement of compensation as required by § 329 and its corresponding Rule 2016(b).
However, § 329 is not intended for the type of use envisioned by the Trustee here. The “analysis” which the Trustee would have the Court undertake for him is to assist him determining the extent of avoidable transfers from the Debtor to the Defendants. Yet this is already among the responsibilities of a trustee under Chapter 7. See 11 U.S.C. § 704(a)(1), (4) (listing among the trustee’s duties “the collection] of and reduction] to money the property of the estate” and “the investigation] of the financial affairs of the debt- or.”) To aid the Trustee in fulfilling this duty, the Bankruptcy Rules empower the Trustee to examine any entity with regard to the “acts, conduct or property or to the liabilities and financial condition of the debtor, or to any matter which may affect administration of the estate ...” B.R. 2004(b). The Court is puzzled as to why this was not done. It cannot be put down to time pressure. The docket reflects that the present Trustee was appointed on April 26, 2013, yet this action was not filed until January 22, 2014, less than one month before the expiration of the statute of limitations. The Trustee had a full 8 months to investigate the instant claims before bringing suit. In that interval the docket reflects that he retained an accountant and filed avoidance actions against other defendants, but there is no indication that he sought to examine either Ciardi or his law firm. When the Court asked Trustee’s counsel why the Trustee waited so long to file suit, counsel had no explanation. N.T. 3/19/2014, at 37. Under the circumstances, the Court finds that answer unsatisfactory. Had the Trustee attempted to examine the defendants and been rebuffed, the picture might be different, and the Court certainly would have compelled their examination.
At the hearing on March 19, 2014 the Trustee’s counsel dismissed any significance attached to the apparent lack of any meaningful prepetition investigation on the Trustee’s part, arguing that the Trustee is not required to take a Rule 2004 examination prior to commencing litigation. This is correct as a purely technical matter. However, the Trustee nevertheless is required to make a “reasonable inquiry.” See B.R. 9011(b)(2) (requiring that allegations and other factual contentions in a pleading have evidentiary support or be likely to have evidentiary support “formed after reasonable inquiry under the circumstances.”) The Trustee’s Complaints in this respect state as follows:
19. On April 26, 2013, Terry P. Der-shaw, Plaintiff herein, was appointed Successor Trustee of the above-captioned Estate and is so acting.
20. During the time and subsequent to the date on which the Motion to Compel Debtor to File Schedules and Statement of Financial Affairs was withdrawn by the Trustee, the Successor Trustee, Plaintiff herein, by and through his professionals, has investigated the acts and conduct of Debtor, its principals and *490others and has found various transactions involving Defendant and his Law Firm which were troublesome to Trustee.
Ciardi Complaint, ¶¶ 19-20, and
19. On April 26, 2013, Terry P. Der-shaw, Plaintiff herein, was appointed Successor Trustee of the above-captioned Estate and is so acting.
20. During the time and subsequent to the date on which the Motion to Compel Debtor to File Schedules and Statement of Financial Affairs was withdrawn by the Trastee, the Successor Trustee/Plaintiff herein, by and through his professionals, has investigated the acts and conduct of Debtor, Principals and others, including a partnership known as Kirk/Parks Enterprises (the “Partnership”), which owns the building in which Debtor operated and in which Debtors’ sole Principals are the sole partners, and has found various transactions involving Ciardi and Defendant Law Firm which were troublesome to Trustee.
Law Firm Complaint, ¶¶ 19-20
In the opinion of the Court the Trustee’s foregoing averments imply a degree of inquiry by himself and/or others which never took place. The Successor Trustee apparently took notice of certain acts and conduct of which he here complains, decided he found them “troublesome” and on the strength of that filed a complaint containing a multitude of highly serious and potentially damaging charges against the Defendants. The supporting information he claims to lack seems quite straightforward. It is “troublesome” to the Court that, rather than pursue what should have been elementary efforts to obtain basic information to support his suspicions, the Trustee with token effort adopted the proverbial “shoot first and ask questions later” approach to these weighty lawsuits. The Trustee’s Complaints were obviously hastily put together. As noted, for example, he included counts objecting to Proofs of Claim which were never even filed. A cursory review of the claims register would have yielded that information.7 All of this is particularly disturbing given the fact that the Trustee seemingly had adequate time and resources available to him to make a reasonable inquiry into the damaging claims he asserts. Accusing a member of the bar and his law firm of bankruptcy fraud is a serious matter. Certainly it must be predicated on more than a troublesome feeling and conjecture. Here it is not.
Summary
For the foregoing reasons, the Motions of the Defendants to Dismiss the respective Complaints will be granted. The Complaints are dismissed, without prejudice. The law firm of Ciardi, Ciardi & Astin, P.C. shall file a Rule 2016(b) statement within 20 days of the date of the attached Order.
An appropriate Order follows.
Order
And Now, upon consideration of the Defendants’ Motions to Dismiss the Complaints, the Plaintiffs Response thereto, after hearing held, it is hereby:
Ordered, that for the reasons contained in the within Opinion, the Motions to Dismiss are Granted; the above Complaints are dismissed without prejudice; and it is
Further Ordered that the law firm of Ciardi, Ciardi & Astin, P.C. shall filed a *491Statement under Rule 2016(b) within 20 days of the date of this Order.
. Because these matters involve a demand for turnover of property, requests for disallowance of a claim, the avoidance and recovery of preferential and fraudulent transfers, they are within this Court’s "core” jurisdiction. See 28 U.S.C. § 157(b)(2)(A), (E), (F), and (H) (including among core proceedings such causes of action)
. Both Complaints sought disallowance of Proofs of Claim filed by the defendants. As it turns out, neither Defendant has filed a claim. In his response to both Motions to Dismiss, the Trustee acknowledges that fact and will withdraw the counts which seek disallowance of Proofs of Claim. See Brief in Response to Ciardi’s Motion to Dismiss, 11 and Brief in Response to Law Firm's Motion to Dismiss, 14-15. These counts are thus moot.
. 12 Pa.C.S. § 5101 etseq.
. Insolvency is mentioned but only in the next count, constructive fraud.
. Having determined that each of the avoidance counts against the Law Firm fails to state a cognizable claim, the count for recovery of avoidable transfers in Count IV is rendered moot.
. At the hearing, the Trustee’s counsel acknowledged that the factual premises of this count might better support a claim of aiding and abetting a breach of fiduciary duty. N.T. 3/19/2014, at 34. Nothing in this ruling would have a bearing on such a cause of action if later plead.
. The carelessness evident in the turnover counts and preference counts also buttresses this conclusion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497088/ | MEMORANDUM OPINION
LENA MANSORI JAMES, Bankruptcy Judge.
THIS MATTER came before the Court for hearing on March 20, 2014, after due and proper notice, upon the Motion to Dismiss (the “Motion to Dismiss”) filed by Defendant Wells Fargo Bank, N.A. (“Wells Fargo”) to dismiss this adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7012 and Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Appearing before the Court were John Lawson and Keith Clayton, counsel for Pamela C. Rutledge (the “Debtor”), and Christopher Jones and Julie Pape, counsel for Wells Fargo. Following the hearing, and upon consideration of the Motion to Dismiss, the memoranda of law in support thereof and in response thereto, and the arguments of counsel, and for the reasons that follow, the Court will grant the Motion to Dismiss in part and deny the Motion to Dismiss in part.
I. FACTS
The Debtor initiated an adversary proceeding by filing a Complaint Seeking Damages in Core Adversary Proceeding, Objecting to Proof of Claim, and to Determine the Secured Status and Validity or Amount of Secured Claim (the “Complaint”) on May 22, 2013. The following facts are as alleged in the Complaint and taken as true for the purposes of this motion:
The Debtor purchased residential property located at 5761 Davis Road, Walker-town, North Carolina, in January 2002. In April 2004, the Debtor refinanced her property, executing a promissory note (the “Note”) in the amount of $91,164.00 in favor of Greater Atlantic Mortgage Corporation. The Note provided for interest at the rate of 6.0% per annum, with principal and interest payments of $546.57 per month. The deed of trust securing the indebtedness (the “Deed of Trust”) is recorded in Book 2470, Page 3611 in the Office of the Register of Deeds of Forsyth County. The loan evidenced by the Note and Deed of Trust is insured by the Federal Housing Administration (“FHA”).
Wells Fargo was the servicer and/or holder of the loan for the relevant time periods set forth in the Complaint. After *495health issues, the Debtor fell behind on her mortgage payments. She paid Wells Fargo $4,108.92 in June 2009 in reliance on the representation by Wells Fargo that her loan would then be current. Despite this payment, the Debtor’s next billing statement showed an amount due of $2,054.46. Following the tender of this payment, the Debtor had two emergency cardiac surgeries, one in July 2009 and one in September 2009. In March 2010, the Debtor entered into a loan modification agreement with Wells Fargo that reduced her monthly principal and interest payment, lowered her interest rate, and extended the maturity date of the loan to April 1, 2040. The modification agreement provided that the unpaid principal balance owed to Wells Fargo was $84,167.06. The modification stated that except as specifically provided, all other terms of the original Note and Deed of Trust remained unchanged.1
In November 2010, in response to a request by the Debtor for assistance with her mortgage, Wells Fargo verbally offered the Debtor a special forbearance agreement (the “Special Forbearance Agreement”) to make six reduced payments of $372.00 from December 1, 2010 to May 1, 2011. The Debtor did not receive a copy of the Special Forbearance Agreement until her counsel requested a copy from Wells Fargo.2 At the time the forbearance agreement was offered, the Debtor was four months in arrears and $2,023.81 past due on her mortgage. According to paragraph 2 of the Special Forbearance Agreement, the Debtor owed an estimated amount of $3,356.77 at the end of its term; however, the Debtor assumed any remaining delinquent balance would be added to the end of the term of her loan as a balloon payment. She asserts that if she had realized her loan would not be current at the end of the six months of the Special Forbearance Agreement, she would not have entered into the agreement.
In May 2011, a Wells Fargo Home Preservation Specialist, Scott Horton, led the Debtor to believe that she would be offered another loan modification. In reliance on Horton’s statements, the Debtor made two payments of $594.15 for principal, interest, escrow of taxes, and insurance premiums, and then two payments of $594.00 from June 2011 through September 2011. During this four-month period, the Debtor was awaiting anticipated information on loss mitigation options to lower her monthly payment and allow her to remain in her home.
In October 2011, the Debtor’s home sustained soot damage, and she subsequently received a check from Farm Bureau, her insurance carrier, in the amount of $3,578.16. Prior to receiving the check, the Debtor paid for and made all the repairs herself. Because the check from *496Farm Bureau was made payable to both the Debtor and Wells Fargo, the Debtor endorsed the check and sent it to Wells Fargo. Wells Fargo deposited the check in a special escrow account. Wells Fargo confirmed in a letter dated October 3, 2012, that Wells Fargo’s representative completed the inspection of the home on January 16, 2012, and all repairs were made at that time. Yet, in a letter dated March 22, 2012, Wells Fargo asked the Debtor for an update on the repairs. The Debtor stated in the Complaint that she asked Wells Fargo numerous times to apply the insurance proceeds to her delinquency. The applicable section of the Deed of Trust, Uniform Covenant 4, provides:
All or any part of the insurance proceeds may be applied by Lender, at its option, either (a) to the reduction of the indebtedness under the Note and this Security Instrument, first to any delinquent amounts applied in the order in paragraph 3, and then to the prepayment of principal, or (b) to the restoration or repair of the damaged Property.
A letter from Anita Goff, Written Customer Contact for Wells Fargo, dated September 27, 2012, informed the Debtor’s counsel that proceeds from a property loss check “cannot be used to bring an account current.” [Pl.’s Compl. Ex. 11.] Wells Fargo personnel repeatedly told both the Debtor and her counsel that the proceeds from the property loss check could not be used to bring the Debtor’s account current. However, on October 3, 2012, Debt- or’s counsel received a letter from Sara Esser, Executive Mortgage Specialist, Office of Executive Complaints for Wells Fargo, stating that the proceeds could in fact be applied to her account. According to Ms. Esser:
Since Wells Fargo Home Mortgage confirmed the repairs on the property were complete[sic] Ms. Rutledge may request that the insurance proceeds are applied toward bringing her loan current. Please be advised that she would need to provide any additional funds needed to bring the loan current. Wells Fargo Home Mortgage is also willing to release the funds to Ms. Rutledge once she signs and returns the enclosed Hold Harmless Agreement.
Pl.’s Compl. Ex. 15.
The Debtor spoke with someone at Wells Fargo in May 2011 regarding a request for additional payment assistance. The letter from Sara Esser stated that on May 25, 2011, Wells Fargo received portions of the necessary financial documentation. Ms. Esser’s letter also stated that Wells Fargo “had not received a complete financial package” from the Debtor despite numerous requests, and therefore, on January 25, 2012, “the loan was removed from review and the enclosed letter confirming this decision was sent to Ms. Rutledge.”
In the January 25, 2012 letter, Wells Fargo informed the Debtor that after review and exploration of a number of mortgage assistance options, she did not qualify for “the program” because the bank had been unable to reach her to discuss the situation, and could therefore not review her application for mortgage assistance. The Debtor alleges in her Complaint that she had been providing Wells Fargo with information related to her finances as early as May 16, 2011.
The last payment from the Debtor to Wells Fargo was $594.00 in September 2011. By December 2011, the Debtor was approximately nine months past due on her mortgage payments according to Wells Fargo’s loan activity statement. Wells Fargo began the foreclosure process on the Debtor’s home in late May 2012. The Notice of Hearing on Foreclosure Deed of Trust was filed on June 4, 2012, and the *497Debtor retained counsel shortly thereafter to “defend the foreclosure action and obtain a home retention solution” from Wells Fargo. The Notice of Hearing on Foreclosure Deed of Trust stated the holder of the note secured by the deed of trust as ‘Wells Fargo Bank, N.A.”
Paragraph 9(d) of the Deed of Trust is relevant to the foreclosure process for an FHA-insured mortgage. It provides:
(d) Regulations of HUD Secretary. In many circumstances regulations issued by the Secretary will limit Lender’s rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary.
Debtor’s counsel contacted Wells Fargo in August 2012 to consider the Debtor for a loss mitigation option under HUD Mortgagee Letter 2009-23, applicable to FHA insured mortgages, commonly known as the “FHA-Home Affordable Modification Program” or “FHA-HAMP.” Wells Fargo denied the request with regard to a FHA-HAMP modification because the Debtor was more than twelve months past due on her mortgage. If insurance proceeds had been applied to the loan, the Debtor’s loan would have been approximately nine months past due.
The Debtor states that Wells Fargo then improperly discounted the rental income from her tenant in its calculations to determine eligibility for other loss mitigation programs. In the letter dated October 3, 2012, Sara Esser explained that the guidelines for a retention review (other than HAMP) resulted in a discount of the monthly rental income the Debtor received from her tenant from $400.00 to $147.46. This discount had the effect of showing a cash flow deficit of $110.36 in the Debtor’s monthly budgeted income and expenses, and therefore resulted in a rejection of other loan modification programs by Wells Fargo.
The Complaint also states that Wells Fargo failed to set up a face-to-face meeting with the Debtor prior to initiating foreclosure proceedings in contravention of HUD guidelines.
The Debtor suffered damages proximately caused by the conduct of Wells Fargo during the period from June 2009 to November 2012, including but not limited to, collection charges, inspection fees, late fees, foreclosure fees, other fees charged to her loan account, damage to her credit rating, damages for her inconvenience, and mental anguish.
On November 1, 2012, Debtor’s counsel filed a written complaint with HUD’s FHA Resource Center alleging that Wells Fargo did not follow the FHA servicing guidelines in servicing her FHA loan and evaluating her for a potential loan modification. A HUD representative responded on November 5, 2012, stating that the Debtor needed to work directly with Wells Fargo to resolve the issues.
The Debtor filed her Chapter 13 petition on November 14, 2012. Seven days later, the Resignation of Substitute Trustee in the foreclosure proceeding was filed with the Office of the Register of Deeds of Forsyth County.
Wells Fargo filed a Proof of Claim (the “Claim”) in the Debtor’s bankruptcy case on March 1, 2013, with a total amount of $94,521.88 claimed as of the petition date. This included an arrearage and other charges totaling $15,710.52. The amount of prepetition fees, expenses, and charges in the mortgage proof of claim attachment totaled $2,138.55. Part 3 of the Proof of Claim attachment, Statement of Amount Necessary to Cure Default as of the Petition Date, included three payments due *498from December 1, 2012 to February 1, 2013, which were due post-petition. In addition, it reflects that the date the last payment was received by the Creditor was September 15, 2012. The Loan Activity Statement attached to the Complaint as Exhibit 9 shows the last payment date as September 15, 2011. There is no mention in the Proof of Claim of the $3,578.16 in insurance loss proceeds held in a special escrow account, although there is a place on part 3 of the Proof of Claim attachment to “Subtract amounts for which debtor is entitled to a refund.”
The Debtor initiated the adversary proceeding on May 22, 2013. In the Complaint, the Debtor alleges the following ten causes of action against Wells Fargo: (1) Objection to Proof of Claim against Wells Fargo; (2) Breach of Contract; (3) Breach of the Duty of Good Faith and Fair Dealing; (4) Breach of Fiduciary Duty; (5) Constructive Fraud; (6) Violation of N.C. Gen.Stat. § 75-1.1 Unfair and Deceptive Acts and Practices; (7) Fraud; (8) Negligent Misrepresentation; (9) Violation of N.C. GemStat. § 75-50 et seq. Unfair Debt Collection; and (10) Alternative Claims in Defense and Recoupment Against any and all Defendants.
II. LEGAL ANALYSIS
Standard of Review
Rule 7012 of the Rules of Bankruptcy Procedure incorporates Federal Rule of Civil Procedure 12(b) — (i). Rule 12(b)(6) of the Federal Rules of Civil Procedure requires dismissal of all or part of a complaint if it “fail[s] to state a claim upon which relief can be granted.” Fed. R.Civ.P. 12(b)(6). Plaintiffs may proceed into the litigation process only when their complaints are “justified by both law and fact.” Francis v. Giacomelli 588 F.3d 186, 192-93 (4th Cir.2009).
The standards set forth in Bell Atlantic Corporation 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) with regard to a motion to dismiss pursuant to Rule 12(b)(6) guide the Court in determining whether or not to dismiss the counts of the Debtor’s Complaint. Thus, each count of the Complaint will survive the Motion to Dismiss only if the Complaint contains “sufficient factual matter, accepted as true, ‘to state a claim for relief that is plausible on its face.’ ” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). The United States Supreme Court set forth this plausibility standard as follows:
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 between possibility and plausibility of ‘entitlement to relief.’ ”
Id. (citations omitted).
To determine plausibility, all facts set forth in the Complaint are taken as true. However, “legal conclusions, elements of a cause of action, and bare assertions devoid of further factual enhancement” will not constitute well-pled facts necessary to withstand a motion to dismiss. Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.8d 250, 255 (4th Cir.2009).
In analyzing the counts of the Complaint in light of the Motion to Dismiss, the Court will determine if the Debtor has “nudged [her] claims across the line from conceivable to plausible.” Twombly, 550 *499U.S. at 570, 127 S.Ct. 1955. The Court will also consider 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).
Discussion
In the Complaint, the Debtor asserts a broad range of state law claims stemming from Wells Fargo’s conduct as it relates to the Note and Deed of Trust. Wells Fargo contends that all of the Debtor’s claims are wholly reliant on various federal regulations, including the FHA-HAMP program, and because those regulations do not provide for a private right of action, all claims must necessarily be dismissed. The interplay between state law causes of action and federal regulations related to the providing and servicing of mortgages has been the subject of numerous opinions within the last few years.
In Wigod v. Wells Fargo Bank, N.A., the Seventh Circuit affirmed in part and reversed in part a district court dismissal of a complaint alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), and Illinois common-law contract and tort law in relation to her mortgage servicer’s refusal to modify her loan under the federal Home Affordable Mortgage Program (“HAMP”). 673 F.3d 547 (7th Cir.2012).3 The district court dismissed the complaint in its entirety under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Seventh Circuit examined the allegations in the complaint in light of Illinois state law, reversed the district court on four counts including breach of contract, promissory estoppel, fraudulent misrepresentation, and violation of the ICFA, and allowed the claims to survive the defendant’s motion to dismiss. After an extensive analysis of more than eighty federal cases in which mortgagors brought HAMP-related claims, Wigod divided the legal theories relied on by the plaintiffs in those cases into three groups.
First, with regard to the homeowners seeking to assert rights arising under HAMP itself, courts have rejected these claims “because HAMP does not create a private federal right of action for borrowers against servicers.” Id. at 559 n. 4. In the second group of cases, plaintiffs claimed to be third-party beneficiaries of their loan servicers’ Servicer Participation Agreements (“SPAs”) with the United States to refinance mortgages and help their mortgagors avoid foreclosure under the HAMP guidelines. As the Seventh Circuit noted, after the Supreme Court decision in Astra USA, Inc. v. Santa Clara County, — U.S. -, 131 S.Ct. 1342, 179 L.Ed.2d 457 (2011),4 district courts have correctly applied the Astra decision to dismiss claims by homeowners seeking HAMP modifications as third-party beneficiaries of SPAs. Id. The third group of cases analyzes claims based on contract, tort, and state consumer fraud statutes. In Wigod, the Circuit Court found the case to be included in the third group, basing the plaintiffs claims on the trial period plan she entered into with Wells Fargo as a prerequisite to a formal loan modification *500under HAMP as a state law breach of contract. Id.
Similarly, in Spaulding v. Wells Fargo Bank, N.A., the Fourth Circuit analyzed the claims of the plaintiffs’ complaint alleging breach of an implied in fact agreement, negligence, violations of the Maryland Consumer Protection Act, negligent misrepresentation, and common law fraud based on the failure of Wells Fargo to follow through with a loan modification agreement under HAMP guidelines. 714 F.3d 769 (4th Cir.2013). In Spaulding, the plaintiffs had not reached a point of entering into a trial period plan with Wells Fargo. The Fourth Circuit looked at Maryland state law in affirming the district court’s dismissal of all counts of the plaintiffs’ complaint. Id.
Two recent district court decisions involving state law claims in connection with FHA-insured mortgages with FHA-HAMP 5 aspects have declined to keep the case for its federal law questions and remanded the cases to state court. In Sutherland v. Wells Fargo Bank, N.A., the court, in granting the motion to remand, stated that “[ajlthough plaintiffs complaint is replete with references to various federal regulations, mortgagee letters, and the like, when one examines the legal theories pertaining to each claim, exclusive resort to federal law is not required.” No. 7:13— CV-00072-BR, 2013 WL 5817386, at *4 (E.D.N.C. Oct. 29, 2013). Thus, Wells Fargo’s motion to dismiss the complaint in Sutherland, with substantially the same counts as the Debtor’s complaint, was denied as moot. In Simpkins v. SunTrust Mortgage, Inc., the court also granted the plaintiffs motion to remand for lack of federal question jurisdiction, when the plaintiffs state law claims referenced HAMP procedures and guidelines. No. 2:12cv264, 2013 WL 1966904 (E.D.Va. May 7, 2013).
The Court evaluates all remaining counts of the Complaint with reference to applicable North Carolina law to determine if they will survive the Motion to Dismiss. In this case, the conduct of Wells Fargo in servicing the Debtor’s loan is at issue in the Complaint, as well as allegations of a failure to follow FHA-HAMP guidelines to allow the Debtor to obtain a loan modification.
Breach of Contract (Count II)
A breach of contract action under North Carolina law involves the existence of a valid contract and breach of the terms of that contract. Sanders v. State Pers. Comm’n, 197 N.CApp. 314, 677 S.E.2d 182, 187-88 (2009); Poor v. Hill, 138 N.C.App. 19, 530 S.E.2d 838, 843 (2000). The Note and Deed of Trust executed by the Debtor in this case constitute contracts pursuant to North Carolina law. The question for the Court is whether Wells Fargo, in its dealings with the Debtor with respect to the loan evidenced by the Note and Deed of Trust, committed any breach or misperformance of any of the provisions of those contracts.
The Debtor alleges in the Complaint that Wells Fargo held the insurance proceeds in an escrow account for ten months without applying the proceeds to the indebtedness, after the repairs had been inspected and signed off as complete, in violation of the terms of the Deed of *501Trust.6 In addition, Wells Fargo gave the Debtor no explanation of a procedure for applying the proceeds to the indebtedness secured by the Deed of Trust during that time. In December 2011, the insurance proceeds check was endorsed and sent to Wells Fargo; on January 16, 2012, Wells Fargo’s vendor finished his inspection, confirming the completion of the repairs.7 It wasn’t until Sara Esser’s letter of October 3, 2012, that the Debtor found out how to apply or access the insurance proceeds. During this almost ten-month period, employees of Wells Fargo told the Debtor and her counsel that such insurance proceeds could not be applied to the loan. If the insurance proceeds check had been applied to the loan balance in January 2012, the possibilities for the Debtor with regard to the loss mitigation options in August 2012 in connection with her loan may well have been expanded. Whether Wells Fargo breached its contract with the Debtor when it failed to apply the insurance proceeds to the indebtedness is a well-pled breach of contract issue; therefore, the Motion to Dismiss as to Count II is denied.
Other breach of contract allegations in the Complaint involve issues with regard to the failure of Wells Fargo and its personnel to follow through with loss mitigation programs during the time the Debtor was in default with her loan as well as the initiation of a foreclosure action before pursuing loss mitigation options. There are a number of cases that address a motion to dismiss a breach of contract claim in connection with the failure to provide a loan modification in connection with FHA-HAMP or HAMP, with varying results.
Some cases, such as the Debtor’s, allege that a lender has breached the terms of a mortgage by starting on a foreclosure process without pursuing loss mitigation options as required by paragraph 9(d) of the FHA-insured mortgage loan. In Dixon v. Wells Fargo Bank, N.A., the court granted the motion to dismiss the breach of contract claim, explaining that “[t]his Court is not inclined to permit Plaintiffs to merely restate or redress their claim based on a violation of HUD regulations, which otherwise is clearly foreclosed, as a breach of contract claim based on paragraph 9(d) of the mortgage agreement.” No. 12-10174, 2012 WL 4450502, at *8 (E.D.Mich. Sept. 25, 2012). In the Dixon case, the plaintiffs filed their lawsuit on the last day of the redemption period following the foreclosure sale of their home. Under Michigan law, filing a lawsuit does not toll the redemption period and, therefore, Wells Fargo became vested in the property absent a clear showing of fraud or irregularity in the foreclosure proceedings. Id.
In Christenson v. Citimortgage, Inc., the district court discussed the “minority position” that HUD regulations become “enforceable by a private cause of action if they are incorporated into a mortgagor’s loan documents.” No. 12-cv-02600-CMA-KLM, 2013 WL 5291947, at *1 (D.Colo. Sept. 18, 2013). The court, however, then *502took the “majority position” that “compliance with the HUD regulations is a condition which must occur prior to the lender being able to accelerate and foreclose the debt and that the borrower may use any failure to comply with the regulations ‘as a shield in the subsequent foreclosure case.’” Id. at *7 (quoting BAG Home Loans Servicing, LP v. Taylor, 986 N.E.2d 1028, 1035 (Ohio Ct.App.2013)). The court dismissed the breach of contract claim against Citimortgage, stating the failure to follow HUD regulations could only be used as an affirmative defense to the foreclosure, and not as a basis for a breach of contract claim. Id.
The case of Shelton v. Wells Fargo Bank, N.A., is often cited for the opposite view that the violations of HUD regulations could be a breach of the deed of trust and a violation of the duty of good faith and fair dealing in the contract between the borrower and lender due to the language in paragraph 9(d) of the FHA-insured deed of trust. 481 B.R. 22 (Bankr.W.D.Mo.2012). In Shelton, the bankruptcy court found that while HUD regulations do not create a private cause of action, the debtor sufficiently pled the elements for breach of contract with regard to Wells Fargo’s failure to perform the obligation in paragraph 9 of the deed of trust to withstand a motion to dismiss. Id. at 30.
Similarly, in Silveira v. Wells Fargo Bank, N.A. (In re Silveira), a breach of contract claim survived Wells Fargo’s motion to dismiss where the debtors alleged failure by the lender to follow HUD regulations prior to accelerating their loan, also in accordance with paragraph 9 of the FHA-insured mortgage. Ch. 13 Case No. 11-Í4812-MSH, Adv. No. 12-4036, 2013 WL 1867472 (Bankr.D.Mass. May 3, 2013). In addition, the propriety of incorporating government regulations in a federally insured mortgage document is not limited to HUD regulations.8 Therefore, it is appropriate for the Court to look at HUD regulations in dealing with FHA-insured mortgage loans.9
Many of the cases which dismiss a debt- or’s breach of contract claim against a lender for failure to follow HUD loss mitigation program guidelines in the process of foreclosing on a residence do not have a fact pattern like the Debtor’s case where Wells Fargo has failed to credit funds to the balance of the loan in dispute. The factual allegations supporting the breach of contract claim in this case are sufficient to survive the Motion to Dismiss. The Motion to Dismiss with respect to Count II is denied.
Breach of the Duty of Good Faith and Fair Dealing (Count III)
With regard to the Debtor’s claim for breach of the duty of good faith and fair dealing, under North Carolina law, “ ‘[i]n every contract there is an implied *503covenant of good faith and fair dealing that neither party will do anything which injures the right of the other to receive the benefits of the agreement.’ ” Sunset Beach Dev., LLC v. AMEC, Inc., 196 N.C.App. 202, 675 S.E.2d 46, 57 (2009) (quoting Bicycle Transit Auth., Inc. v. Bell, 314 N.C. 219, 333 S.E.2d 299, 305 (1985)). Wells Fargo’s contractual obligations with the Debtor as a result of the Note and Deed of Trust include a duty to service the loan responsibly and with competent personnel. Wigod, 673 F.3d at 568. The Debtor alleges, in addition to the common law breach of the duty of good faith and fair dealing, violation of three North Carolina statutes: (1) N.C. Gen.Stat. § 25-1-304, Obligation of Good Faith; (2) N.C. GemStat. § 53-244.110 Mortgagor servicer duties (act with reasonable skill, care, and diligence); and (3) N.C. Gen.Stat. § 53-244.111 Prohibited Acts (... To engage in any transaction, practice, or course of business that is not in good faith or fair dealing ... in connection with the ... servicing of ... any mortgage loan.).
Both Robinson v. Deutsche Bank Nat’l Trust Co., and Hinson v. Countrywide Home Loan, Inc. (In re Hinson), dealt with HAMP issues with regard to loan modifications. No. 5:12-CV-590-F, 2013 WL 1452933 (E.D.N.C. Apr. 9, 2013); 481 B.R. 364 (Bankr.E.D.N.C.2012). These courts each found plausible sets of facts to show that an implied duty of good faith and fair dealing existed in connection with the original deed of trust and that duty was breached in the actions of the lender leading up to foreclosure. Robinson, 2013 WL 1452933 (holding that plaintiff had sufficiently alleged facts that defendant did not act in a commercially reasonable manner and declining to rule as to whether evidence of HAMP violations were relevant to plaintiffs breach of duty of good faith and fair dealing claim); Hinson, 481 B.R. 364 (finding duties imposed by HAMP servicer participation agreement applied during the time period when the plaintiffs were seeking a HAMP modification and served as further evidence of the defendants’ lack of good faith and fair dealing under their existing contract with the plaintiffs); see also Koontz v. Wells Fargo, N.A., No. 2:10-cv-00864, 2011 WL 1297519 (S.D.W.Va. Mar. 31, 2011).
Without reaching any of the Debt- or’s allegations with regard to her treatment by Wells Fargo personnel in connection with loan modification programs under FHA-HAMP, other allegations with regard to a lack of reasonable care in the original mortgage loan servicing have been set forth in the Complaint. These allegations include: (1) the wrong amount to bring the Debtor’s loan current in June 2009; (2) lack of full information about the Special Forbearance Agreement in November 2010; (3) miscommunication over the completion of repairs to the Debtor’s home (January 2012 signed off by Wells Fargo’s representative; letter of March 22, 2012, asking Debtor for repair update); and (4) conflicting communication from Wells Fargo employees regarding the application of insurance proceeds to the indebtedness. These factual allegations, taken as true, allow the Debtor’s claim for breach of the duty of good faith and fair dealing to withstand the Motion to Dismiss. The Court denies the Motion to Dismiss with respect to Count III.
Breach of Fiduciary Duty and Constructive Fraud (Counts IV and V)
In the Debtor’s fourth and fifth claims, she alleges that Wells Fargo is liable for breach of fiduciary duty and constructive fraud. Each cause of action is a separate claim under North Carolina law, although the elements of existence of a fiduciary duty and breach of that duty *504are the same in both causes of action. In addition, “the primary difference between pleading a claim for constructive fraud and one for breach of fiduciary duty is the constructive fraud requirement that the defendant benefit himself.” White v. Con-sol. Planning, Inc., 166 N.C.App. 283, 603 S.E.2d 147, 156 (2004). The issue for the Debtor with regard to these two causes of action is whether a fiduciary relationship existed between the Debtor and Wells Fargo in connection with their borrower/lender or mortgagor/mortgagee relationship. A fiduciary relationship under North Carolina law exists when:
[Confidence on one side results in superiority and influence on the other side; where a special confidence is reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing the confidence.
Id. at 155 (quoting Vail v. Vail, 233 N.C. 109, 63 S.E.2d 202, 206 (1951)) (internal quotation marks omitted).
Although the circumstances under which a fiduciary relationship can be created are broad, North Carolina courts have generally precluded ordinary debtor-creditor relationships from rising to this level. See Branch Banking and Trust Co. v. Thompson, 107 N.C.App. 53, 418 S.E.2d 694, 699 (1992); see also Synovus Bank v. Coleman, 887 F.Supp.2d 659, 671 (W.D.N.C.2012); Frizzell Constr. Co., Inc. v. First Citizens Bank & Trust Co., 759 F.Supp. 286, 291 (E.D.N.C.1991) (stating that “[i]n North Carolina, a debtor-creditor relationship does not give rise to a fiduciary relationship”).
In Robinson, the district court extensively analyzed the facts of that case for the constructive fraud claim at issue on the defendant’s motion to dismiss. 2013 WL 1452933, at *13-17. In that situation, a mortgagor alleged breach of fiduciary duty by the mortgagee in connection with a failed loan modification pursuant to HAMP and a subsequent foreclosure. Id. The court noted that there was no indication in the facts presented that the defendant lender undertook to provide the plaintiff with a service beyond that inherent in the creditor-debtor relationship, and that the “loan modification process is ‘an arm’s length transaction between service[r] and borrower....’” Id. at *16 (quoting Wigod, 673 F.3d at 573).
In Dallaire v. Bank of America, N.A., the Court of Appeals recognized that, “while uncommon,” North Carolina law may give rise to the recognition of a fiduciary relationship between lender and borrower. — N.C.App. -, 738 S.E.2d 731, 735 (2012). In the Dallaire case, the borrowers asserted that they were misled regarding the priority of their refinanced loan by Bank of America personnel; they did not receive outside advice concerning their refinancing. The court reversed summary judgment and held that in these unusual circumstances there was a question of fact as to whether or not the parties’ interaction prior to signing the loan, specifically whether or not defendant sought to give legal advice to plaintiffs, gave rise to a fiduciary relationship. Id.
The Debtor’s allegations in the Complaint in Counts IV and V relate to her interaction with Wells Fargo in the loan modification process. These allegations do not show any relationship between the Debtor and Wells Fargo different from a typical debtor-creditor relationship as the Debtor attempted to work out a loan modification. Therefore, the element of fiduciary relationship is not met under North Carolina law for breach of fiduciary duty and constructive fraud. The Motion to Dismiss is granted with respect to Counts IV and V of the Complaint.
*505
Fraud, (Count VII)
Count VII of the Complaint asserts that Wells Fargo personnel engaged in fraudulent conduct. Federal Rule of Bankruptcy Procedure 7009 incorporates Federal Rule of Civil Procedure 9(b), which imposes a heightened pleading standard for the fraudulent conduct claim, requiring that a party “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b); see N.C. Gen.Stat. § 1A-1, Rule 9(b) (describing the heightened pleading requirement for fraud). This “particularity requirement is met by alleging time, place, and content of the fraudulent representation, identity of the person making the representation and what was obtained as a result of the fraudulent acts or representations.” Terry v. Terry, 802 N.C. 77, 273 S.E.2d 674, 678 (1981). Intent and knowledge can be averred generally. Carver v. Roberts, 78 N.C.App. 511, 337 S.E.2d 126, 128 (1985).
The elements of a civil cause of action for fraud in North Carolina are (1) a false representation or concealment of a material fact (2) that is reasonably calculated to deceive (3) made with intent to deceive (4) which does in fact deceive and (5) results in damage to the injured party. Charlotte Motor Speedway, LLC v. County of Cabarrus, — N.C.App. -, 748 S.E.2d 171, 178 (2013).
The element of “intent to deceive” is the most difficult to elucidate when pleading fraud. The required scien-ter for fraud is not present without both knowledge and an intent to deceive, manipulate, or defraud. While a reckless disregard as to the truth of a statement may be sufficient to satisfy the element of “false representation,” such reckless disregard is insufficient to meet the “intent to deceive” requirement of actual fraud. RD & J Prop. v. Lauralea-Dilton Enter., LLC, 165 N.C.App. 737, 600 S.E.2d 492, 498-99 (2004). Fraudulent intent may be shown by presenting evidence of motive on the part of the perpetrator.10 Latta v. Rainey, 202 N.C.App. 587, 689 S.E.2d 898, 909 (2010). The requirement of “does in fact deceive” means a complaint claiming fraud pursuant to North Carolina law must allege reliance on the misrepresentation to the plaintiffs detriment and damages proximately flowing from such reliance, with particularity. Frank M. McDermott, Ltd. v. Moretz, 898 F.2d 418, 421 (4th Cir.1990). The reliance must be reasonable. John v. Robbins, 764 F.Supp. 379, 384 (M.D.N.C.1991). In Hudson-Cole Development Corporation v. Beemer, the North Carolina Court of Appeals stated:
... [W]hen a party relying on the false or misleading representation could have discovered the truth upon inquiry, the complaint must allege that he was denied the opportunity to investigate or that he could not have learned the true facts by exercise of reasonable diligence. Moreover, where the facts are insufficient as a matter of law to constitute reasonable reliance on the part of the complaining party, the complaint is properly dismissed under Rule 129(b)(6).
132 N.C.App. 341, 511 S.E.2d 309 (1999) (citations omitted).
While the facts generally alleged in the Complaint span over a large time period and relate to numerous communica*506tions between the Debtor and Wells Fargo, the misrepresentations that the Debtor specifically points to in Count VII as fraudulent are limited. The first misrepresentation set forth in Count VII is “During communications in or about August 2012, Wells Fargo misrepresented to Plaintiff, through counsel, material facts concerning Wells Fargo’s basis for denying assistance to Plaintiff under FHA-HAMP and other FHA loss mitigation programs.” The issue with this misrepresentation, when considered in light of the elements of actual fraud under North Carolina law, is the lack of reliance by the Debtor to her detriment. At this point, August 2012, the Debtor and her counsel were in the process of working on a loan modification, but she was not relying on misrepresentations by Wells Fargo personnel and damages were not proximately flowing from such reliance. This same lack of reliance is applicable to the allegation set forth in ¶ 195(d) of the Complaint, “selective and discriminatory altering of Plaintiffs income and expense information,” and results in the failure of these allegations to plead all elements of actual fraud.
With regard to the concealment of a material fact from the Debtor in June 2009 of the true and correct amount necessary to bring her loan current, this misrepresentation is outside the three year statute of limitation period for the actual fraud claim.11
The last two allegations in the actual fraud count of the Complaint involve the Special Forbearance Agreement and the qualification and eligibility of the Debtor for a loan modification under FHA-HAMP. With regard to these allegations, the Court cannot find that the facts pled are sufficient to nudge a count of actual fraud from possible to plausible. Taking the facts surrounding the Special Forbearance Agreement, for example, the Court cannot find the allegation that Wells Fargo personnel acted with the necessary scien-ter as plausible. It is necessary for the Court to find more than a “sheer possibility” that Wells Fargo personnel acted with actual intent to defraud to allow Count VII to remain in the Complaint. The “sheer possibility” alone is not sufficient for a claim to survive a motion to dismiss. See Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (describing this standard). Therefore, Count VII is dismissed.
Negligent Misrepresentation (Count VIII)
Under North Carolina law, the tort of negligent misrepresentation requires that the plaintiff: (1) justifiably rely; (2) to his/her detriment; (8) on information prepared without reasonable care; (4) by an individual owing the plaintiff a duty of care. Angell v. Kelly, 336 F.Supp.2d 540, 549 (M.D.N.C.2004) (internal quotation marks omitted). The term “duty of care” is defined as a legal obligation that requires a party to conform his conduct with a specific standard of reasonableness. Oberlin Capital, L.P. v. Slavin, 147 N.C.App. 52, 554 S.E.2d 840, 846 (2001). As discussed above, there is no support for an allegation that the Debtor and Wells Fargo had anything greater than a typical debtor-creditor, borrower-lender relationship. Therefore, the duty of care owing the Debtor by Wells Fargo *507is one owed by a lender or mortgage servi-cer to a borrower, arising out of their contractual relationship, nothing more. See Wagner v. Branch Banking and Trust Co., No. COA05-1334, 2006 WL 2528495, at *2 (N.C.Ct.App. Sept. 5, 2006). The law imposes upon the parties an obligation to perform the contract with ordinary care. Dallaire, 738 S.E.2d at 736. A claim alleging negligent misrepresentation must be brought within three years of discovery of the facts constituting the negligence. N.C. Gen.Stat. § 1-52.
The Debtor alleges that she relied on Wells Fargo’s representations and information when she tendered $4,108.92 in June 2009 to bring her loan current at that time. This allegation is outside the statute of limitations for negligent misrepresentation. The Debtor further alleges that she accepted the six-month Special Forbearance Agreement only because she assumed that her loan would be current at the end of the six months. [Pl.’s Compl. ¶ 67], A claim for negligent misrepresentation requires an affirmative misrepresentation under North Carolina law, not just a negligent omission of information. See Breeden v. Richmond Cmty. College, 171 F.R.D. 189, 202-03 (M.D.N.C.1997); Harrold v. Dowd, 149 N.C.App. 777, 561 S.E.2d 914, 919 (2002) (stating that “fail[ure] to provide,” “fail[ure] to advise,” and “fail[ure] to investigate” are insufficient actions to support a claim for negligent misrepresentation). Therefore, Wells Fargo’s failure to inform the Debtor that her loan would not be current at the end of the forbearance agreement period is not a basis for a negligent misrepresentation claim.
Lastly, the Debtor alleges that Wells Fargo’s representations led “Plaintiff to believe that Wells Fargo would be offering her another modification in or about May 2011,” [Pl.’s Compl. ¶ 212(c).] and, therefore, to provide “personal and financial information to Wells Fargo on numerous occasions.” [Pl.’s Compl. ¶ 212(d).] As the court stated in Robinson:
In this case, there was no contract to process the loan modification application, and Plaintiff does not allege that Defendants failed to perform any duty specified in the loan documents. Accordingly, despite Plaintiffs arguments to the contrary, the allegations do not support the claim that Defendant Homeward undertook to render some service that is not inherent in the creditor-debt- or relationship. To the extent Plaintiff argues that Defendants owed her an extra-contractual legal duty to process, manage, or monitor the loan modification applications or foreclosure, the court finds that Defendants owed Plaintiff no such legal duty to be held liable for negligence under North Carolina law.
2013 WL 1452933, at *18. Similarly, in the present case, there was no extra-contractual legal duty of care with regard to the loan modification process.
Analyzing the Complaint to determine the possible negligent misrepresentations to the Debtor by Wells Fargo from June 2009 to November 2012 in connection with the Note and Deed of Trust, various elements of the negligent misrepresentation claim are missing. The elements for a cause of action for negligent misrepresentation within the statute of limitations period do not exist in the Debtor’s situation. Therefore, the Motion to Dismiss with respect to Count VIII is granted.
Violation of N.C. General Statute § 75-1.1 (Count VI)
North Carolina’s “unfair trade practices” statute, section 75-1.1 of the General Statutes, declares “unfair methods of competition” and “unfair or deceptive acts or practices” unlawful; the business tort of unfair or deceptive acts pursuant to this *508section is the relevant focus of Count VI of the Complaint. In accordance with N.C. Gen.Stat. § 75-16.2, the statute of limitation for a violation of Title 75 is four years. Count VI contains sixteen allegations of violation of § 75-1.1; eleven allegations relate to the wrongful conduct of Wells Fargo personnel in connection with the Debtor’s eligibility for a loan modification under FHA-HAMP or other loss mitigation efforts, and the remainder of the allegations are contractual in nature, relating to wrongful conduct in connection with the Note and Deed of Trust. Four of the sixteen allegations relate to misrepresentations.
To state a claim under § 75-1.1, the Debtor must allege sufficient facts to show (1) an unfair or deceptive act or practice, or an unfair method of competition, (2) in or affecting commerce, (3) which proximately caused actual injury to the plaintiff or to his business. Spartan Leasing Inc. v. Pollard, 101 N.C.App. 450, 400 S.E.2d 476, 481-82 (1991). The Debt- or need not show “fraud, bad faith, deliberate acts of deception or actual deception, but must show that the acts had a tendency or capacity to mislead or created the likelihood of deception.” Id. at 482; see Lawyers Title Ins. Co. v. Chesson (In re Chesson), Ch. 7 Case No. B-09-81328C-7, Adv. No. 09-09064, 2012 WL 4794148, at *6 (Bankr.M.D.N.C. Oct. 9, 2012) (“Unlike the common law fraud claim ... intent in making these false statements is irrelevant.”). A breach of contract claim, such as a disagreement with a loan servicer over terms and payments of a mortgage, must also allege egregious or aggravating circumstances to constitute an unfair or deceptive act under § 75-1.1. See Harty v. Underhill, 211 N.CApp. 546, 710 S.E.2d 327, 332 (2011) (finding that plaintiffs’ claim against loan servicer in connection with a forbearance agreement was a basic breach of contract claim which, standing alone, could not form the basis of an UDP claim).
In the Debtor’s case, the misrepresentation allegations of violation of § 75-1.1 falter with the element of “detrimental reliance,” as analyzed recently by the North Carolina Supreme Court. See Bumpers v. Cmty. Bank of N.Va., — N.C. -, 747 S.E.2d 220, 224 (2013). Explaining the two components of detrimental reliance, actual reliance and reasonable rebanee, the Court stated:
In the context of a misrepresentation claim brought under section 75-1.1, actual reliance requires that the plaintiff have affirmatively incorporated the alleged misrepresentation into his or her decision-making process: if it were not for the misrepresentation, the plaintiff would likely have avoided the injury altogether. The second element, reasonableness, is most succinctly defined in the negative: “Reliance is not reasonable where the plaintiff could have discovered the truth of the matter through reasonable diligence, but failed to investigate.”
Id. at 227 (citations omitted).
After careful review of the Complaint, the Court finds that the Debtor does not meet the “actual reliance causing injury” component of her unfair or deceptive act or practice claim with regard to the insurance proceeds or loan modification misrepresentations. In addition, the Debtor does not meet the reasonable reliance component of such claim with the June 2009 payment or the Special Forbearance Agreement misrepresentations.
The allegations of violation of § 75-1.1 that do not refer to misrepresentations, refer to the actions of Wells Fargo personnel in dealing with the Debtor with regard to a loan modification agreement or other loss mitigation efforts. The definition of *509“unfair” for purposes of § 75-1.1 has been established for many years. The North Carolina Supreme Court, interpreting this statute in 1981, held:
Whether a trade practice is unfair or deceptive usually depends upon the facts of each case and the impact the practice has in the marketplace. A practice is unfair when it offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.
Marshall v. Miller, 302 N.C. 539, 276 S.E.2d 397, 403 (1981) (citations omitted); see Patterson v. Flagstar Bank, FSB, No. 3:12-cv-00707-MOC-DCK, 2013 WL 5217616, at *8 (W.D.N.C. Sept. 17, 2013) (stating that it is unlikely that an independent tort can arise from a contract such as to constitute unfair and deceptive practices); Metro. Group, Inc. v. Meridian Indus., Inc., 869 F.Supp.2d 692 (W.D.N.C.2012) (reiterating the Marshall standard); Branch Banking & Trust Co., 418 S.E.2d at 700 (distinguishing between the definitions of “unfair” and “deceptive,” and holding that a mere breach of contract is insufficient to sustain an action under § 75-1.1).
The facts of the Complaint and the exhibits attached thereto are replete with instances of poor communication between servicer and borrower, confusion of Wells Fargo personnel with regard to the application of insurance proceeds to the debt, and the supply of erroneous information to the Debtor. These instances do not rise to the level of “unfair” acts as defined by North Carolina law or constitute egregious or aggravating circumstances with regard to the breach of contract claims. As previously stated, the Debtor did not show detrimental reliance on the misrepresentations in accordance with the standards set forth recently in Bumpers. Accordingly, the Court cannot find that the actions of Wells Fargo personnel are sufficient to constitute a plausible claim upon which relief may be granted under § 75-1.1. The Motion to Dismiss is granted with respect to Count VI.
Violation of N.C. General Statute § 75-50 etseq. (Count IX)
Pursuant to the North Carolina Debt Collect Act (“NCDCA”), a plaintiff must plausibly allege three threshold requirements. See N.C. Gen.Stat. §§ 75-50 to 75-56; see also Glenn v. FNF Servicing, Inc., No. 5:12-CV-703-D, 2013 WL 4095524 (E.D.N.C. Aug. 13, 2013) (reviewing claims for violations of the North Carolina Unfair and Deceptive Acts and Practices Act and the NCDCA by the mortgage lender in light of a Rule 12(b)(6) motion to dismiss). The first requirement is a consumer who incurred a debt or alleged debt for personal, family, household, or agricultural purposes. N.C. GemStat. § 75-50(1). When the Debtor acquired a mortgage with Wells Fargo’s predecessor, she became a consumer incurring a debt for family or household purposes in accordance with the NCDCA. Glenn, 2013 WL 4095524, at *3. The Wells Fargo mortgage qualifies as a debt for the purposes of N.C. GemStat. § 75-50(2). As a mortgage servicer or lender seeking to collect on a debt, Wells Fargo qualifies as a debt collector pursuant to N.C. Gen.Stat. § 75-50(3). The initial requirements of the NCDCA are met in this instance. In addition, the three standard elements of the § 75-1.1 claim must be met: an unfair or deceptive act, in or affecting commerce, proximately causing the injury that has been alleged. As previously discussed in connection with Count VT, the Section 75-1.1 claim, the Debtor has not plausibly pled detrimental reliance with regard to deceptive acts by Wells Fargo or “unfair” acts (as defined by North Carolina common law) in her *510Complaint. See N.C. GemStat. § 75-54. The Motion to Dismiss with respect to Count IX is granted.
Objection to Claim of Wells Fargo (Count I)
Pursuant to Federal Rule of Bankruptcy Procedure 3007(b), a plaintiff may include an objection to claim in an adversary proceeding. The Debtor objects to the Claim of Wells Fargo in her Complaint. The Debtor alleges in the Complaint that Wells Fargo failed to comply with Federal Rule of Bankruptcy Procedure 3001(c)(2)(A) and (B) in that the Claim (1) does not address the $3,578.16 in insurance proceeds; (2) states the Debtor owes more than is actually due; and (3) includes fees assessed against the Debtor for the foreclosure action that was improperly commenced. Taking the factual allegations of the Complaint as true, the Complaint states sufficient facts to make a plausible showing of entitlement to relief in the Debtor’s objection to the Claim. Therefore, the Motion to Dismiss is denied as to Count I of the Complaint.
Alternative Claims in Defense and Re-coupment (Count X)
The claim of equitable recoupment, a defensive claim, has been held to be available to a debtor who is objecting to a proof of claim, along with seeking additional relief, in an adversary proceeding. See McClendon v. Walter Home Mortg. (In re McClendon), Ch. 13 Case No. 10-04226-8-RDD, Adv. No. 10-00305-8-RDD, 2012 WL 5387677, at *3-4 (Bankr. E.D.N.C. Nov. 2, 2012) (allowing the debtors to proceed under the theory of recoupment as part of their objection to creditor’s proof of claim for relief of usury, even though the applicable statute of limitations bars the forfeiture of all interest for usury and a penalty of twice the interest paid outside the limitation period); Salazar v. First Residential Mortg. Servs. Corp. (In re Salazar), Ch. 13 Case No. 10-10165, Adv. No. 10-00101, 2011 WL 1237648, at *7-8 (Bankr.D.Md. Mar. 30, 2011) (permitting the debtors to assert recoupment for time-barred Truth in Lending Act rescission and damages claims in their objection to Wells Fargo’s proof of claim). For purposes of the Motion to Dismiss, the Debtor has asserted sufficient facts and circumstances to state a recoupment claim related to the underlying transaction, including the loan modification in March 2010, which forms the basis for Wells Fargo’s Claim. It is appropriate to allow the Debtor to assert her recoupment claim in the ongoing litigation process as a defense and objection to Wells Fargo’s Claim. Therefore, with respect to Count X, the Motion to Dismiss is denied.
III. CONCLUSION
Based on the foregoing, an order will be entered contemporaneously with this Memorandum Opinion.
SO ORDERED.
. The terms "Note” and "Deed of Trust” as used herein refer to the original note and deed of trust as modified by this loan modification agreement dated March 16, 2010.
. The Complaint states that the Debtor received the Special Forbearance Agreement on or about July 24, 2012, in response to a Qualified Written Request that Debtor’s counsel sent to Wells Fargo on July 2, 2012. A letter from Sara Esser, Executive Mortgage Specialist, Office of Executive Complaints for Wells Fargo, dated October 3, 2012, stated:
Our records indicate we received correspondence from your [Debtor's counsel's] office on July 6, 2012. We can confirm the correspondence requested "all copies of forbearance agreements and loan modifications executed by or offered to Ms. Pamela Rutledge during the course of the loan.” Due to an inadvertent oversight, a copy of the aforementioned [forbearance] Agreement was not provided in our July 24, 2012, response sent to your office.
Pl.’s Compl. Ex. 15.
. The Wigod opinion provides a comprehensive review of case law on the subject of whether a mortgagee's refusal to modify a loan constitutes a HAMP violation.
. The Supreme Court held that health care facilities covered by § 340B of the Public Health Services Act could not sue as third-party beneficiaries of drug price-ceiling contracts between pharmaceutical manufacturers and the government because Congress did not create a private right of action under such Act.
. A distinction should be made between FHA-HAMP and HAMP loan modifications, both of which were promulgated as a result of the Emergency Economic Stabilization Act in October 2008. FHA-HAMP applies to mortgages insured by the FHA, like the Debtor’s, whereas HAMP applies to mortgages serviced by participating companies. Sutherland v. Wells Fargo Bank, N.A., No. 7:13-CV-00072-BR, 2013 WL 5817386, at *4 n. 5 (E.D.N.C. Oct. 29, 2013).
. The language in Uniform Covenant 4 of the Deed of Trust states that the insurance proceeds may be applied by the Lender, at its option, either (a) to the reduction of the indebtedness .... or (b) to the restoration or repair of the damaged Property. Here, since the Debtor had made and Wells Fargo’s vendor had signed off on the repairs, only option (a) remained applicable: to apply the insur-anee proceeds to the reduction of the indebtedness.
. Despite the January 16, 2012 confirmation to Wells Fargo that repairs were complete, the Debtor received a letter dated March 22, 2012 from Wells Fargo asking for an update as to the status and progress of the repairs. Pl.'s Compl. Ex. 16.
. In Ranson v. Bank of America, N.A., the court allowed a breach of contract claim to survive a motion to dismiss; this claim was based on the lender's failure to follow VA regulations regarding loss mitigation procedures for a mortgage loan in default, thus incorporating limitations set by VA regulations into the mortgage. No. 3:12-5616, 2013 WL 1077093 (S.D.W.Va. Mar. 14, 2013).
. In In re Ruiz, the court, in determining allowable charges in a lender's proof of claim, stated:
Because the claim involves an FHA-insured mortgage, the question of what fees and costs may be charged is not limited to the parties' agreement or otherwise applicable state law. The Secretary (of HUD) is authorized and directed to make rules and regulations dealing with federally-insured mortgages. See 12 U.S.C. § 1715b. Where HUD rules or regulations are incorporated into an insured mortgage, they are binding upon both the mortgagor and mortgagee.
501 B.R. 76, 79 (Bankr.E.D.Pa.2013).
. The Debtor alleges in the Complaint that because her loan is an FHA-insured loan, Wells Fargo stands to receive full or near-full reimbursement from the federal government for the fees, expenses, accrued interest, and unpaid principal balance remaining upon the completion of the foreclosure of her home. This pecuniary benefit provides the motivation to avoid a loan modification with the Debtor under FHA-HAMP or other HUD-FHA loss mitigation options.
. This misrepresentation by Wells Fargo personnel in June 2009 does not constitute a “continuing violation” for statute of limitations purposes; the misrepresentation resulted in continual ill effects from an original violation, but not continual unlawful acts. Landmar, LLC v. Wells Fargo Bank, N.A., No. 5:11-cv-00097-MOC, 978 F.Supp.2d 552, 561-62, 2013 WL 5674880, at *7 (W.D.N.C. Oct. 17, 2013) (finding that continual monthly invoices cannot be considered as anything other than "an ill effect of the original wrong” and will not toll the statute of limitations for fraud). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497089/ | Chapter 7
ORDER
David R. Duncan, Chief US Bankruptcy Judge
This adversary proceeding is before the Court on allegations of a violation of the 11 U.S.C. § 362(a) stay and the 11 U.S.C. § 524(a) discharge injunction by the plaintiff and debtor, Benjamin Charles Gecy (“Gecy” or “Plaintiff’). Jurisdiction for this proceeding is premised upon 28 U.S.C. §§ 1334 and 157(a). Venue is proper under 28 U.S.C. § 1409. This adversary pro*514ceeding is a core proceeding. 28 U.S.C. § 157(b)(2)(0).
The defendants, Bank of the Ozarks (“BOTO”) and Michael Cerrati (collectively, “Defendants”) answered and were granted leave to file amended answers. A trial was held on the 26th and 27th of March 2014. After careful consideration of the applicable law, arguments of counsel, and evidence submitted, the Court issues the following findings of fact and conclusions of law under Federal Rule of Civil Procedure 52(a), made applicable by Federal Rule of Bankruptcy Procedure 7052.1
FINDINGS OF FACT
1. Plaintiff is the sole owner of River City Real Estate, LLC (“River City”).
2. River City borrowed $569,000 from Woodlands Bank in February of 2008. Joint ex. 19. The note had a maturity date of November 20, 2008. Id. The note was secured by mortgages River City gave to Woodlands on the following properties: a first mortgage on 13 acres of land in Beaufort County, South Carolina; a first mortgage on a lot in Jasper County, South Carolina; and a second mortgage on 1857 Ribaut Road in Beaufort County, South Carolina. Id. River City owned the 13 acres. Gecy individually owned the Ribaut Road property, which was his office building. Gecy also gave Woodlands a personal guaranty on the loan. Id. The note was renewed in April of 2009 with a maturity date of April 20, 2010, and renewed again in May of 2010 with a maturity date of July 20, 2010. Id. BOTO acquired the note and mortgage after Woodlands was closed and the Federal Deposit Insurance Corporation (“FDIC”) was named as receiver.
3. River City went into default on the note, and on June 27, 2011, BOTO filed suit against River City and Gecy in the Court of Common Pleas for Beaufort County, South Carolina (“Beaufort County action”). Joint ex. 4. Cerrati represented BOTO in the Beaufort County action. In the complaint filed in the Beaufort County action, BOTO sought foreclosure of the 13 acres but not the Ribaut Road property. Id. BOTO also alleged a cause of action for breach of Plaintiffs guaranty and sought a judgment against Gecy. Id.
4. In their answer in the Beaufort County action, Gecy and River City asserted affirmative defenses of unclean hands and breach of the duty of good faith and fair dealing. Joint ex. 8. They also alleged a counterclaim for violation of the South Carolina Unfair Trade Practices Act. Id.
5. Gecy filed a petition under chapter 7 of the Bankruptcy Code on July 2, 2012. Joint ex. 1.
6. On October 16, 2012, an order was entered in the Beaufort County action removing the case from the active roster because of Gecy’s bankruptcy filing. Joint ex. 5.
7. On October 26, 2012, Gecy received a discharge under 11 U.S.C. § 727. Joint ex. 2.
8. On March 7, 2013, Gecy moved pro se to relieve Phil Fairbanks as his attorney in his bankruptcy case. The Court scheduled the hearing on the motion for April 23, 2013. On March 13, 2013, Gecy moved pro se for an expedited hearing on his motion. The Court held a hearing on the motion on March 15, 2013, and entered an order relieving Fairbanks as counsel.
*5159. Gecy retained substitute counsel for his bankruptcy who is also his attorney in this adversary proceeding. His substitute counsel entered his appearance on the record in the bankruptcy case on March 21, 2013.
10. On April 1, 2013, the chapter 7 trustee’s attorney, Michael Conrady, sent Cerrati the following email regarding the 13 acres:
Although the Trustee has the 13 acres listed for sale, it would be considered a short sale situation. As the property is owned by a single member LLC, although the Trustee can sell that interest as the sole member of the LLC, the underlying property is not subject to the automatic stay. We will continue to try to obtain an offer on the property while you proceed with foreclosure. If we obtain an offer prior to the completion of foreclosure, we would like to present that to you and your client for consideration.2
Joint ex. 22.
11. That same day, Cerrati forwarded Conrady’s email to Fairbanks with the following message:
I received the below email from the Trustee’s office concerning the 13 acres at issue[] in our foreclosure case. In light of these comments, please confirm if Gecy is willing to dismiss or roll over on River City’s counterclaims so that we can have a final hearing and proceed with a sale. The Bank has a Motion for Summary Judgment ready to go, which we can argue or not based on Gecy’s willingness to cooperate.
Id. Fairbanks responded that he was preparing an order relieving him as counsel for Gecy and River City and that Gecy said he was “fine with you talking to him directly and you have my authorization to do so.” Id. Fairbanks also forwarded Cer-rati’s email to Gecy. Cerrati replied indicating he would contact Gecy directly but would “also likely get the motion filed so [he] [could] get a hearing date scheduled and keep this moving along.” Id.
12. Gecy emailed Cerrati on April 5, 2013, requesting a meeting sometime the following week in his office to discuss a letter of intent he allegedly had on the 13 acres and to discuss how to resolve the litigation associated with the 13 acres. Joint ex. 23. Gecy testified Cerrati’s indication a motion for summary judgment might be filed contributed to him requesting a meeting. Cerrati responded that given his schedule, BOTO would prefer Gecy forward the letter of intent and any settlement proposal to him so he could review it with BOTO. Id. Gecy replied “[y]ou have made a fortune off these people ... At least take the trip.” Id. Cerrati responded that he believed Gecy had a misconception of how he practiced law and that he was glad to meet with Gecy if Gecy wanted to come to his office. Id. Gecy then stated he would not be traveling to Cerrati’s office in Bluffton, South Carolina because of his calendar of events in Beaufort and requested that Cerrati “[l]et [him] know when [Cerrati] [could] make it to [his] office to discuss the settlement of [their] differences.” Id.
13. On April 8, 2013, Cerrati emailed Gecy, stating:
Please note that the Bank mailed a Motion for Summary Judgment on Friday, *516which should be filed today. Thus, it appears to be in everyone’s best interest to exhaust any settlement options in the near future. However, given our scheduling conflicts, I would encourage you to forward the [letter of intent] to me for the Bank’s review. We can then schedule a phone call to discuss any aspects that you feel require additional explanation.
Joint ex. 23. Gecy responded: “Now you have asked for trouble on this. I told you I was trying to help you guys and I see that does not mean anything to you or the bank.” Id.
14.The motion for summary judgment was filed in the Beaufort County action on April 9, 2013. Joint ex. 3. The first page of the motion states that BOTO is seeking “Summary Judgment against River City Real Estate, LLC and Benjamin C. Gecy ... with respect to Bank’s claims and for an Order dismissing the counterclaim and all affirmative defenses asserted by [River City and Gecy].” Id On the next page, the motion states “Defendant Gecy executed a Guaranty in favor of Woodlands Bank, its successors and assigns on or about February 18, 2008, which obligates Gecy to reimburse Bank for all indebtedness of River City arising out of the Note, including any extensions and renewals thereof.” Id. Page 4 of the motion provides that “[o]n July 2, 2012, Defendant Benjamin C. Gecy filed for relief under Chapter 7 of the Bankruptcy Code. Though Gecy was discharged in the bankruptcy proceeding on October 26, 2012, the bankruptcy case remains open.” Id. Almost immediately following this sentence is the first argument heading, which states “Summary judgment for Bank on its Claims for Mortgage Foreclosure and Breach of Guaranty Is Necessary Because Defendants Responses to the Requests for Admissions Have Been Deemed Admitted.” Id. The conclusion of this section states BOTO “is entitled to judgment on all of its causes of action against River City.” Id. In the conclusion to the motion, Cerrati indicated BOTO sought dismissal of the affirmative defenses raised by River City and Gecy, summary judgment on the counterclaim, and summary judgment on its claims against River City. Id. Consequently, the motion for summary judgment is contradictory in that it indicates BOTO is seeking summary judgment on the breach of guaranty cause of action in some places but then states in the conclusion that BOTO is seeking dismissal of the affirmative defenses and summary judgment on the counterclaim and claims against River City with no mention of the guaranty.
15. The parties met to discuss settlement on April 17, 2013. The day before this meeting Fairbanks emailed Cerrati: “I understand you are meeting with Ben Gecy tomorrow. I just wanted to reiterate my authorization for you to discuss any matters with him without limitation in light of my not having been formally relieved as counsel for him or River City.” Joint ex. 22.
16. Gecy emailed Cerrati on April 19, 2013: “I did receive your [motion for summary judgment] ... Looks like you did a nice job ... I will let you know if I have any questions.” Joint ex. 24. Gecy admitted in his testimony there was some sarcasm in this email.
17. The state court informed Cerrati that the motion for summary judgment could not move forward without the case being restored to the active roster. Cerra-ti prepared an order and submitted it to the court on April 17, 2013. Joint ex. 6. A state circuit court judge signed the order, which was entered on April 23, 2013. Id. The order provided that because the stay in Gecy’s bankruptcy “does not encumber the subject property owned by River City *517Real Estate, LLC,” BOTO could “proceed with its foreclosure action solely with respect to the claims against River City.” Id. Along these lines, the order directed the case be restored to the active roster solely with respect to the claims and defenses relating to River City and concluded by directing that “[a]ll claims and defenses with respect to Defendant Benjamin C. Gecy shall remain stayed.” Id.
18. Gecy retained substitute counsel in his bankruptcy case and moved, on April 18, 2013, to compel the chapter 7 trustee to abandon three properties Gecy owned: 10 Chloes Way, 10 Meredith Lane, and 1857 Ribaut Road. He also requested the trustee be compelled to abandon Gecy’s interest in River City. The trustee objected to the motion to the extent Gecy sought abandonment of the three pieces of real property but did not object to the abandonment of River City. The Court entered an Order on April 23, 2013, compelling the abandonment of Gecy’s interest in River City.
19. On April 23, 2013, Gecy emailed Cerrati: “I would really like to resolve this matter and I am in hopes the bank can see the value in me dropping the case.” Joint ex. 29. Cerrati responded that BOTO would agree to accept a deed in lieu for the 13 acres without seeking a deficiency against River City. Id. Gecy replied that the proposal did “not sound out of the question.” Id.
20. On April 25, 2013, Cerrati sent an email to Gecy and Fairbanks informing them that the motion for summary judgment was scheduled for hearing on May 30, 2013. Joint ex. 29. Gecy responded “OK ... sounds like I will see you there.” Id.
21. On April 26, 2013, Gecy emailed Cerrati requesting to review the proposed release for River City. Joint ex. 29. Cer-rati responded that the settlement documents were not usually drafted until a deal was in place but provided an example of what the release generally said. Id. Gecy responded: “Got it. I will review next week and email if I have any questions.” Id.
22. This Court held a hearing on the motion to compel abandonment on May 21, 2013, and entered an Order granting the motion on June 4, 2013, noting the trustee consented to the abandonment of 10 Meredith Lane and River City.
23. Gecy emailed Cerrati on May 24, 2013: “I am agreeable to all of your requests in settling this case and giving back the property. My only request is that the property be listed with [Hjarbor Island Realty for a 6 month period from the date of deed in lieu. If you do not accept this final offer please contact Rob Mathison as he will represent me next week [at the hearing on the motion for summary judgment].” Joint ex. 30.
24. When Cerrati and Philip Hartman arrived at the scheduled hearing on May 30, 2013, which was before the Master in Equity for Beaufort County, Gecy was without counsel. Cerrati expressed some frustration that Gecy did not have an attorney because a limited liability company such as River City has to be represented by counsel. Fairbanks had given the order relieving him as counsel to Gecy to file with the state court. However, the order had not been filed, and Fairbanks remained listed as counsel of record. Upon learning that Fairbanks was still the attorney of record, the Master in Equity directed that Fairbanks be called, and Fairbanks participated by phone. Fairbanks had not read the motion for summary judgment at the time of the hearing/meeting. At some point either Fairbanks or Gecy or both suggested the automatic stay as a result of Gecy’s bankruptcy was still in place. Also *518at some point during the hearing/meeting, Cerrati produced the order restoring the Beaufort County action to the active roster as to River City only.3 Gecy testified that when Cerrati handed the order to the Master in Equity, Cerrati stated he was not pursuing Gecy personally but rather only the 13 acres and River City. Gecy then told the Master in Equity the motion for summary judgment was against him also. No hearing on the merits of the summary judgment motion took place, although the parties and the Master in Equity spent some time discussing settlement, including a possible consent order. Gecy testified he felt pressured by the Master in Equity to agree to allow the foreclosure of the 13 acres to proceed while reserving his rights with respect to his personal counterclaims and affirmative defenses.
25. Gecy testified the May 30, 2013 hearing/meeting was the first time he had seen the order restoring the case to the active roster, that he did not receive a copy of the order at the hearing/meeting, and that there was not copy of the order in Fairbanks’ file for Gecy.4 At some point, Gecy obtained a copy of the record in the Beaufort County action, which included this order.
26. On May 31, 2013, Cerrati emailed Conrady and asked him the following question: “While the Bank is not proceeding on any claims against Mr. Gecy resulting from his personal guarantee of River City’s debt, can you please confirm whether Mr. Gecy has retained ownership of a portion of this counterclaim or whether it is still part of the bankruptcy estate? Please note that the counterclaim, which was identified on Mr. Gecy’s Voluntary Petition, was filed jointly on behalf of both River City Real Estate (the borrower) and Mr. Gecy (as the guarantor).” Joint ex. 35. Conrady responded: “The counterclaim (both the individual and LLC’s rights) are property of the estate. If you would like to settle any rights the estate may have in the counterclaim, so that it does not revert back to the Debtor (individually or th[ro]ugh the LLC) as part of the Final Report, the Trustee would entertain any reasonable offer.”5 Id.
27.Also on May 31, 2013, Fairbanks emailed Cerrati on Gecy’s behalf with Gecy copied on the email:
Ben asked me to communicate to you that his previously stated offer, to wit: settlement foreclosure lawsuit with consensual transfer of title to the 13 acres from Ben to the Bank, release of the lien on Ben’s office building, mutual releases, and no 1099c issuance, with an exclusive listing agreement of Harbor Island Realty for the 13 acres, is still on the table.
He also asked me to advise that he intends to instruct his current bankruptcy attorney, Mike Matthews, to file a motion for sanctions for violations of the automatic stay as a result of the continu*519ation of the prosecution of the foreclosure action.
Joint ex. 9. Cerrati responded on June 3, 2013:
Thanks for the email. I have spoken with the Bank and, like your client, it’s [sic] settlement position has not changed. The Bank will agree to a consensual transfer of title to the 13 acres from River City to the Bank, to release the hen on Ben’s office building, to waive any deficiency against River City Real Estate and to execute mutual releases, but it will not agree to the non-issuance of a 1099c or any exclusive listing agreement with respect to the 13 acres.
In light of the apparent impasse, please confirm who will be representing Ben so that we can schedule a conference call with [the Master in Equity] this week per [the Master in Equity]’s comments at Thursday’s hearing. We hope to circulate the Consent Order of Foreclosure shortly.
As for your client’s threat of sanctions, I believe you are also in possession of the correspondence I received from [the chapter 7 trustee]’s office indicating that the collateral at issue here is not subject to the automatic stay. However, we would be interested to obtain some information as to the bankruptcy court’s position with respect to the ownership interest Mr. Gecy alleges to have in the counterclaim (separate and apart from River City Real Estate’s ownership of the claim). At your earliest convenience, please provide us with any documentation from the bankruptcy court regarding this claim.
Id. Fairbanks replied to Cerrati with Gecy copied on June 4, 2013:
Attached please find a filed Order signed by [the Master in Equity] relieving me as counsel for both Benjamin Gecy and River City Real Estate, LLC in C/A No.: 2011-CP-07-2679. The Order gives Mr. Gecy fifteen (15) days to find substitute counsel. As you know, I do not represent Mr. Gecy in his bankruptcy any longer.
I am familiar with Mr. Conrady’s opinion regarding the effect of the automatic stay in Mr. Gecy’s Chapter 7 on the 13 acres titled in River City Real Estate, LLC. However, I was not referring to that property when I expressed my opinion in last week’s hearing about the application of the stay to the Bank’s continuation of its prosecution of the foreclosure suit absent stay relief.
Additionally, as I previously mentioned to you, the addition of the provision that the Bank not issue a 1099c in connection with a resolution of the foreclosure suit was my addition, not Mr. Gecy’s. You may delete it from the terms contained in my e-mail of May 31, 2013.
Id.
28. On June 17, 2013, Cerrati sent Gecy and Fairbanks an email with the proposed consent order from the May 30th meetingdiearing attached. Joint ex. 31. Gecy decided to not sign the consent order and was concerned BOTO might pursue him for contempt of court. BOTO has not pursued a contempt motion against Gecy. The only action in the Beaufort County action since the May 30, 2013 hearing/meeting has been a motion for contempt filed pro se by Gecy.
29. Gecy filed this adversary proceeding on June 18, 2013.
30. The chapter 7 trustee filed the final report in Gecy’s bankruptcy on July 15, 2013.
31. With respect to actual damages, Gecy testified he had two houses his construction company was finishing around the time of the May 30, 2013 meeting/hear*520ing. After this meeting/hearing, Gecy spent some time gathering documents for his attorney in this adversary proceeding to review in making a determination whether to bring a lawsuit against BOTO and Cerrati. While he was gathering these documents and away from work, Gecy testified the person helping him with the two houses painted a deck the wrong color and installed the wrong screened-in porch on another house. It cost between $1,000 and $1,400 to repair the porch and between $2,000 and $2,200 to repair the deck. Gecy also testified that, with respect to his mortgage company, there were some interest rate increases and his company lost customers while he was away gathering documents and speaking with his attorney because he was not there to lock his customers into rates. Gecy testified he lost between $15,000 and $20,000 as a result of what occurred with his mortgage company. He indicated he has paid the costs associated with this adversary proceeding, which he believes are between $2,000 and $3,000. He also stated he paid about $100 for copying the record in the Beaufort County action. However, no accounting of the costs was provided. Gecy drove thirty to thirty-five miles each way for both the April 17th meeting and May 30th hearing/meeting.
32.As for attorney fees, Gecy did not know how much he owed Fairbanks for his services in connection with the motion for summary judgment. With respect to his attorney in this adversary proceeding, Gecy paid him a $5,000 retainer for representation in this adversary proceeding. Gecy also agreed to a forty percent contingency fee. The actual fee agreement was not introduced into evidence. Finally, Gecy paid his substitute attorney in the state court action a $5,000 retainer of which $3,500 has been used so far.
33. Gecy testified he suffered emotional distress during the time period in question. However, he also indicated his primary focus prior to May 21, 2013, was on compelling the trustee to abandon the bankruptcy estate’s control over certain assets, and a good portion of his asserted emotional breakdowns with family and friends were after the May 30, 2013 meeting/hearing. Gecy’s testimony was more to the effect that the motion for summary judgment was an annoyance in April and May of 2013 because he was focused on the motion to compel abandonment. Gecy went to a wellness practitioner and coach named Martha O’Regan during his bankruptcy for treatment of his alleged emotional symptoms. She does not hold any medical degrees but is a licensed massage therapist. O’Regan taught Gecy breathing and meditation techniques. Gecy began seeing her for his symptoms in September of 2012. Gecy did not have any office visits with O’Regan between March 7, 2013, and September 4, 2013. Joint ex. 25. However, there were phone consults on April 11, 2013, and May 23, 2013. O’Re-gan did not recall Gecy talking with her about BOTO’s motion for summary judgment but remembered Gecy was having financial issues. Gecy improved initially with treatment but regressed in spring 2013. O’Regan indicated Gecy owes her approximately $700.
34. Gecy knew when he filed bankruptcy that if he received a discharge, he would be relieved of his personal liability for his debts, including his guaranty of the loan made to River City. Fairbanks told Gecy he would be relieved of his personal liability on the guaranty if he received a discharge. When Cerrati’s attorney asked Gecy whether he knew his discharge wiped out his guaranty, Gecy responded:
I guess that’s the million dollar question Mr. Robinson: why would they pursue *521that.6 I also know you’re not supposed to lie under oath. But I don’t know; I was confused. I mean why would they be pursuing that. Maybe they were. Maybe they weren’t. It was my opinion that they were, and did I understand that the personal guaranty was eliminated in the discharge? That’s the way I understood it. That’s not the way I interpreted the motion for summary judgment.
35. In a financial statement provided to BOTO, dated October 25, 2010, Gecy listed guns valued at $15,000 and jewelry valued at $22,000. Joint ex. 34. In his amended schedules filed in his bankruptcy on November 15, 2012, Gecy listed $500 in jewelry and $2,550 in guns and golf clubs. Joint ex. 1. There was an appraisal on Gecy’s personal property after he filed bankruptcy, and the figures in his schedules were consistent with the appraisal. Gecy testified he did not sell any jewelry or guns between October 2010 and November 2012 but did donate some guns to a hunting club in North Dakota of which he used to be a member. Gecy’s wife testified she did not sell any jewelry during this time period, she did not know of any jewelry that her husband sold during this time period, and she did not remember him buying any jewelry during this time period. As for the guns, she was not aware of him selling or buying any guns during this time period and was not aware of him donating any guns to a hunting club.
CONCLUSIONS OF LAW
A. Violation of the Automatic Stay
Gecy asserts Defendants violated the automatic stay by moving for summary judgment in the Beaufort County action on April 9, 2013. Gecy received a discharge under 11 U.S.C. § 727 on October 26, 2012, and the automatic stay as to all acts except acts against property of the estate terminated on this date. 11 U.S.C. § 362(c)(1), (2). The parties agree the 13 acres upon which BOTO sought to foreclose was owned by River City; thus, it was not part of Gecy’s bankruptcy estate and not subject to the automatic stay. See 11 U.S.C. § 541 (defining property of the estate). Similarly, to the extent River City asserted affirmative defenses and a counterclaim for violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”) in the Beaufort County action, this counterclaim and those affirmative defenses are River City’s and not subject to the automatic stay. See id. Moreover, to the extent the motion for summary judgment can be construed as seeking to hold Gecy personally liable on the guaranty, it was not a violation of the stay because the stay had terminated except with respect to acts against property of the estate. As for Gecy’s SCUTPA counterclaim, the chapter 7 trustee had not abandoned it on April 9, 2013. Therefore, this counterclaim was still property of the estate at the time BOTO moved for summary judgment with respect to the counterclaim. See 11 U.S.C. 362(c)(1). However, this fact does not resolve the issue of whether seeking summary judgment on the counterclaim was an act proscribed by 11 U.S.C. § 362(a), which defines what acts are stayed by a bankruptcy petition.
Under 11 U.S.C. § 362(a)(1), the stay applies to “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 commence*522ment of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.” The Fourth Circuit has not ruled directly on whether section 362(a)(1) stays further proceedings in connection with a counterclaim a debtor filed pre-petition but has indicated in an unpublished opinion that an action initiated by a debtor to seek redetermination of tax deficiencies owed to the Internal Revenue Service was not stayed by a bankruptcy petition because the action was not “ ‘against the debtor’ ” but initiated by the debtor. See Reid v. Comm’r of Internal Revenue, 878 F.2d 1430, 1989 WL 74867, at *1 (4th Cir.1989) (per curiam) (quoting 11 U.S.C. § 362(a)(1)). The Third Circuit has ruled on the issue and held that a pre-petition counterclaim by a debtor is not subject to the automatic stay. Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir.1992); see also First Wis. Nat'l Bank of Milwaukee v. Grandlich Dev. Corp., 565 F.2d 879, 880 (5th Cir.1978) (per curiam) (holding a federal district court had jurisdiction to dismiss a defendant-debtors’ counterclaim “because the counterclaim was not a proceeding against the debtors.”); In re Regal Constr. Co., 28 B.R. 413, 416 (Bankr.D.Md.1983) (concluding automatic stay did not preclude chapter 11 debtor from proceeding on its counterclaim). The Seventh Circuit has held that “the automatic stay is inapplicable to suits by the [debtor],” referencing section 362(a)(1) and (3) and the policy behind the stay. Martin-Trigona v. Champion Fed. Sav. & Loan Ass’n, 892 F.2d 575, 577 (7th Cir.1989); see also Parker v. Bain, 68 F.3d 1131, 1138 (9th Cir.1995) (holding a claim originally brought by a person who subsequently filed bankruptcy under chapter 11 was not subject to the automatic stay); Carlson v. Norman (In re Duncan), 987 F.2d 490, 491 n. 2 (8th Cir.1993) (noting a third-party action instigated by two debtors against a third party was not subject to the automatic stay); Carley Capital Group v. Fireman’s Fund Ins. Co., 889 F.2d 1126, 1127 (D.C.Cir.1989) (per cu-riam) (holding section 362(a)(1) “by its terms only stays proceedings against the debtor, and does not address actions brought by the debtor which would inure to the benefit of the bankruptcy estate” (citations and internal quotation marks omitted)). This Court finds these decisions persuasive. Additionally, in determining what constitutes a “proceeding” subject to the automatic stay under section 362(a)(1), the Court finds the Third Circuit’s approach persuasive:
Whether a specific judicial proceeding falls within the scope of the automatic stay must be determined by looking at the proceeding “at its inception.” “That determination should not change depending on the particular stage of the litigation at which the filing of the petition in bankruptcy occurs.” Thus, the dispositive question is whether a proceeding was “originally brought against the debtor.”
All proceedings in a single case are not lumped together for purposes of automatic stay analysis. Even if the first claim filed in a case was originally brought against the debtor, section 362 does not necessarily stay all other claims in the case. Within a single case, some actions may be stayed, others not. Multiple claim and multiple party litigation must be disaggregated so that particular claims, counterclaims, crossclaims and third-party claims are treated independently when determining which of their respective proceedings are subject to the bankruptcy stay.
Maritime Elec. Co., 959 F.2d at 1204-05 (citations omitted); see also Parker, 68 F.3d at 1137 (applying Third Circuit’s reasoning); Duncan, 987 F.2d at 491 n. 2 *523(same). Applying the Third Circuit’s reasoning, the counterclaim Gecy asserted in the Beaufort County action was a separate proceeding by him against BOTO not subject to the automatic stay under section 362(a)(1). As for section 362(a)(3), the Court concludes it stretches the language of that section too far to find that BOTO’s motion for summary judgment on the counterclaim “constituted an act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
As for Gecy’s affirmative defenses, the Court finds they do not constitute property of the estate for the simple reason that they are defenses, not claims based upon which a court can accord a person some type of recovery. If Gecy were successful in asserting an affirmative defense, all that would happen is he would defeat the opponent’s claim; he would not recover anything on account of the defense. Moreover, Gecy appears to agree because the affirmative defenses are not listed as personal property on his bankruptcy schedules signed under penalty of perjury. See joint ex. 1.
In sum, the Court concludes Gecy has not proven Defendants violated the automatic stay.
B. Violation of Discharge Injunction
“Section 524(a)(2) of the Bankruptcy Code provides that a discharge in bankruptcy ‘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....’” Bradley v. Fina (In re Fina), 550 Fed.Appx. 150, 154 (4th Cir. 2014) (per curiam). “Section 105 authorizes a bankruptcy court to hold a party in civil contempt for violating an order of the court, including a discharge order.” Id. A two-part test applies when determining whether a party is subject to contempt sanctions for violating the discharge injunction: “(1) whether the creditor violated the injunction, and (2) whether he or she did so willfully.” Id. “The willfulness prong requires only that the acts taken in violation of the injunction be intentional. In other words, a good faith mistake is generally not a valid defense.” Id. at 154.
The Court concludes that Defendants violated the discharge injunction. The first page of the motion for summary judgment states that BOTO is seeking “Summary Judgment against River City Real Estate, LLC and Benjamin C. Gecy ... with respect to Bank’s claims and for an Order dismissing the counterclaim and all affirmative defenses asserted by [River City and Gecy].” Joint ex. 3. Additionally, the first argument heading in the motion states: “Summary judgment for Bank on its Claims for Mortgage Foreclosure and Breach of Guaranty Is Necessary Because Defendants Responses to the Requests for Admissions Have Been Deemed Admitted.” This language suggests that BOTO is seeking summary judgment on its breach of guaranty cause of action against Gecy and thus violates section 524(a)(2).7 Furthermore, Defendants intended to file the motion for summary judgment, and thus their acts were willful.
Having found a violation of the discharge injunction, the remaining issue is damages. Gecy seeks to recover damages related to some mistakes made on *524two houses he or one of his companies was constructing. However, Gecy’s testimony was that a person who works for him made these mistakes after the May 30, 2013 hearing/meeting while he was away from the jobsite collecting documents to give to his attorney so they could decide whether to file this adversary proceeding. Gecy cites no authority for the proposition that Defendants’ actions should be considered the cause of the mistakes made on the two houses under these circumstances, and the Court finds that Gecy has not met his burden of proving Defendants’ violation of the discharge injunction caused these damages. Similarly, the Court finds that Gecy has not met his burden of proving Defendants’ discharge injunction violation was the cause of the losses he suffered at his mortgage company during the weeks following the May 30th hearing/meeting. Gecy’s testimony again was that he was away from the mortgage company collecting documents to use in evaluating potential claims against Defendants. He testified he lost customers because he was not there to lock them into rates prior to interest rates increasing. However, he provided no explanation as to how his not being at the mortgage company prevented customers from being locked into particular interest rates. In addition, aside from his testimony, he provided no other evidence to support the $15,000 to $20,000 loss he alleges he suffered at his mortgage company.
Gecy testified he drove thirty to thirty-five miles for both April 17th meeting and May 30th meeting/hearing. With respect to the April 17th meeting, the emails in the record show that Gecy was requesting a meeting with Cerrati and BOTO even before he saw the motion for summary judgment or could have known that it addressed BOTO’s breach of guaranty cause of action. Therefore, the Court does not find that Defendants’ discharge injunction violation caused the April 17th meeting. However, the Court will award damages to Gecy for his mileage driving to the May 30th meeting/hearing with the Master in Equity. Gecy had seen the motion for summary judgment at that point, and the evidence in the record suggests that he was not aware of the order restoring the Beaufort County action to the active roster. This order provided that “[a]ll claims and defenses with respect to Defendant Benjamin C. Gecy shall remain stayed.” Joint ex. 6. The Court deems $100.00 to be an appropriate amount for mileage incurred traveling to the hearing/meeting. Gecy testified he incurred other mileage driving to and from meetings related to this adversary proceeding but gave no specifics or even an estimate as to the number of miles.
Gecy also testified he suffered emotional distress. However, this Court and the Fourth Circuit have concluded that emotional distress is not an appropriate item of damages for civil contempt. See Burd v. Walters (In re Walters), 868 F.2d 665, 670 (4th Cir.1989); Workman v. GMAC Mortgage LLC (In re Workman), 392 B.R. 189, 195 (Bankr.D.S.C.2007). Gecy’s counsel conceded this point in his closing argument.
Closely related to the issue of emotional distress, the Court declines to award any damages for Gecy’s visits with O’Regan. Gecy did not have any office visits with O’Regan between March 7, 2013, and September 4, 2013. Joint ex. 25. With respect to the visits on September 4th and 17th of 2013 reflected in the record, there is insufficient evidence for the Court to find that Defendants’ discharge injunction violation caused these visits. As for the two telephone consults in April and May of 2013, there is no evidence regarding what O’Regan charged for these phone consults. *525The only information in the record is what she charged for an in-person meeting.
Although punitive damages have been awarded at times for discharge injunction violations, such damages generally are only appropriate when a creditor engages in “egregious or vindictive conduct,” more akin to “conduct beyond willfulness or deliberation and more closely resembling a specific intent to violate the discharge injunction.” Cherry v. Arendall (In re Cherry), 247 B.R. 176, 190 (Bankr. E.D.Ya.2000). The Court finds no egregious or vindictive conduct in this case. Rather, the record reflects that eight days after BOTO moved for summary judgment, Cerrati filed a proposed order with the state court stating “[a]ll claims and defenses with respect to Defendant Benjamin C. Gecy shall remain stayed.” Joint ex. 6. The state court entered this order on April 23, 2013. Moreover, Gecy’s own testimony was that at the hearing/meeting on May 30, 2013, Cerrati handed this order to the Master in Equity and stated he and his client were not pursuing Gecy personally but rather only the 13 acres and River City. Additionally, the motion for summary judgment acknowledged Gecy had received a discharge in his bankruptcy, and in the conclusion, the motion indicated BOTO sought dismissal of the affirmative defenses raised by River City and Gecy, summary judgment on the counterclaim, and summary judgment on its claims against River City. The conclusion did not state that BOTO wanted a judgment against Gecy personally. While Cerrati and BOTO should have been more careful in their drafting of the motion, the Court does not find that they engaged in conduct warranting an award of punitive damages.
Finally, bankruptcy courts in the Fourth Circuit have “awarded attorney’s fees against a party that violates the permanent discharge injunction upon a finding of contempt.” Thomas v. Resolution Trust Corp. (In re Thomas), 184 B.R. 237, 242 (Bankr.M.D.N.C.1995). Gecy’s fee agreement with his attorney representing him in this adversary proceeding consisted of a $5,000 retainer and a forty percent contingency fee. At trial, Gecy’s attorney provided an affidavit indicating he seeks in excess of $22,000 for time spent on this case at a rate of $175 per hour. Plaintiffs ex. 39. This affidavit did not include the one and a half days spent actually trying this case. Gecy’s complaint initiating this adversary proceeding included causes of action for stay violation and willful stay violation under 11 U.S.C. § 362(k). If the Court were to conclude there was a stay violation and award attorney fees based solely on section 362(k), Gecy arguably might be limited to only recovering the attorney fees he is obligated to pay his attorney, as the language of section 362(k) suggests attorney fees are awarded as a part of actual damages. See 11 U.S.C. § 362(k) (“[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees .... ” (emphasis added)).
However, at the hearing on the parties’ motions for summary judgment, the Court indicated it would view the pleadings in such a fashion as to encompass a claim for civil contempt based on a violation of the discharge injunction. Having found a violation of the discharge injunction, the Court is determining damages for that violation, not a violation of the automatic stay. Nonetheless, the Supreme Court has held that “results obtained” is an important factor in determining an award of attorney fees. See Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983). In this case, Gecy was unsuccessful in his pursuit of the claim asserted in his complaint, a stay violation. While the Court *526concludes Defendants violated the discharge injunction, Gecy has only proven $100 in damages. Such limited success does not support an attorney fees award in excess of $22,000. Rather the Court concludes that an appropriate fee award in this case is the $5,000 retainer Gecy paid his attorney.8
As for costs, Gecy and his attorney indicate Gecy agreed to pay the costs associated with this action. The affidavit of Gecy’s attorney sets the amount of costs at $2,401.34, which is consistent with Gecy’s testimony he had paid costs of between $2,000 and $3,000. However, no accounting has been provided of these costs, thus making it impossible for the Court or Defendants to evaluate them. Therefore, the Court will award no costs.9
CONCLUSION
For the reasons set forth herein, the Court concludes Defendants are in civil contempt for violating the discharge injunction of 11 U.S.C. § 524(a). The Court awards Plaintiff one hundred and 00/100 ($100.00) dollars in actual damages and five thousand and 00/100 ($5,000.00) dollars in attorney fees. Defendants shall be jointly and severally liable for these amounts.
AND IT IS SO ORDERED.
. To the extent any of the following findings of fact constitute conclusions of law, they are adopted as such, and to the extent any of the following conclusions of law constitute findings of fact, they are adopted as such.
. In March of 2013, Cerrati sent two letters to the trustee seeking clarification as to whether the 13 acres was part of the bankruptcy estate. Joint ex. 26. This email appears to be in response to those letters. It is not clear to the Court what authority the trustee had to attempt to sell the 13 acres, as it was owned by River City and is not part of the bankruptcy estate.
.At a hearing prior to trial, Gecy’s counsel conceded that what took place in front of the Master in Equity on May 30, 2013 was not a "hearing.” At trial, Gecy stated his attorney was wrong for making such a concession and insisted that what took place was a hearing. Regardless of whether what occurred was a meeting, hearing, status conference, or something else, it does not affect the Court’s ruling in this case, as the Court does not find that a hearing on the merits of the summary judgment motion occurred once the Master in Equity was told the automatic stay might still be in place.
. Cerrati testified it was common practice for orders restoring and removing cases from the active roster in South Carolina state court to be done ex parte.
. Similar to the 13 acres, it is not clear to the Court how River City’s rights in connection with the counterclaim would be property of the bankruptcy estate.
. The Court is not sure why this is a "million dollar question.” It seems as if the question is one for which a simple yes or no answer is sufficient.
. Conversely, BOTO’s efforts to obtain summary judgment with respect to Gecy's counterclaim were not a violation of the discharge injunction. Gecy, through that counterclaim, was seeking to recover against BOTO, and the discharge injunction does not bar BOTO from defending itself.
. Part of the problem with assessing attorney fees in this case is the Court does not know the nature of the settlement discussions between the parties, if any, including whether Defendants offered Gecy a reasonable amount early in the case to settle it. The issue of whether offering such evidence in connection with arguing what constitutes an appropriate fee award would run afoul of Federal Rule of Evidence 408 is not before the Court because such evidence was not offered.
. There is no evidence in the record of fees Fairbanks charged Gecy for representation caused by Defendants’ discharge injunction violation. There is also insufficient evidence for the Court to award damages for any fees charged by Mathison, as Gecy has not proven Defendants' discharge injunction violation caused the work resulting in the fees he has charged. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497090/ | MEMORANDUM OPINION
(Docket No. 13)
DAVID R. JONES, Bankruptcy Judge.
Before the Court is the Application to Employ Counsel under 11 U.S.C. § 327 filed by Allison Byman in her capacity as the chapter 7 trustee in this case. After considering the evidence and arguments presented, the Court orally approved the application during a hearing on March 28, 2014. At the hearing, the Court indicated to all parties that it intended to issue a written opinion explaining the Court’s analysis. The Court hopes this opinion will provide some practical guidance to trustees filing employment applications in this district. A separate order consistent with this opinion will issue.
Factual Background
Venezia Edwards (the “debtor”) filed a voluntary chapter 7 petition on July 11, 2013 [Docket No. 1]. Allison Byman was appointed as the chapter 7 trustee in the case.
On August 15, 2013, the trustee conducted a meeting of creditors pursuant to 11 U.S.C. § 341. The debtor appeared with counsel and answered the trustee’s questions. After reviewing the debtor’s schedules, the trustee requested additional documentation concerning certain items identified in the schedules. The trustee continued the creditors’ meeting until September 3, 2013 to allow the debtor an opportunity to provide the requested documentation.
The debtor provided the trustee with the requested documentation prior to the continued creditors’ meeting. After reviewing the additional documentation, the trustee concluded the meeting of creditors on September 3, 2013 and noted, “[tjrustee to further investigate value of potential claim scheduled by Debtor.” [Unnumbered docket entry entered September 5, 2013].
On February 21, 2014, the trustee filed an application to employ Hughes Watters Askanase, L.L.P. (“HWA”) as her counsel on an hourly fee basis [Docket No. 13]. In the application, the trustee states that the employment of HWA is needed to perform a variety of legal services including (i) representing the estate/trustee in litigation; (ii) negotiating and closing asset sales; (iii) prosecuting claim objections; (iv) coordinating with the Office of the United States Trustee; (v) providing tax advice; (vi) collecting judgments; and (vii) handling miscellaneous problems that arise in the normal course of administering a bankruptcy case [Docket No. 13]. The application goes on to disclose in detail the types of bankruptcy representations rou*557tinely undertaken by HWA [Docket No. 13]. The application concludes with the representations that (i) HWA is disinterested as that term is defined under the Bankruptcy Code; (ii) HWA holds no interest adverse to the estate; and (iii) HWA will charge its customary hourly rates ranging from $175 to $450 [Docket No. 18].
Attached to the application is the affidavit of Rhonda Chandler, an attorney with HWA. Ms. Chandler is designated as the proposed attorney-in-charge for the representation by HWA of the trustee in this case [Docket No. 13]. The affidavit sets forth in detail the process undertaken by HWA to identify any potential conflicts as well as HWA’s general rate structure [Docket No. 13]. No party objected to the trustee’s application.
Over the past several years, courts in this district have issued a number of decisions involving trustees that attempt to hire their own firms.1 Because the trustee in this case is a licensed attorney employed by HWA, the Court scheduled an eviden-tiary hearing to better understand the trustee’s decision process in selecting HWA as her counsel in light of those decisions [Docket No. 14].
The Court conducted an evidentiary hearing on March 28, 2014. Both the trustee and Ms. Chandler appeared and testified in support of the application. During the presentation, the Court asked a number of questions. After considering the evidence and arguments of counsel, the Court orally approved the application and indicated that a written opinion would follow. To the extent that findings of fact and conclusions of law were made on the record, they are incorporated herein pursuant to Rule 7052.
Analysis
The Court has jurisdiction over this contested matter pursuant to 11 U.S.C. § 1322. This contested matter is a core proceeding arising under title 11 pursuant to 28 U.S.C. § 157(b)(2). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir.1999). The Court has constitutional authority to enter a final order in this matter under the Supreme Court’s holding in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
The trustee proposes to employ HWA pursuant to 11 U.S.C. § 327. Section 327(a) of the Code2 provides that:
[e]xcept as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
11 U.S.C. § 327. The Code further provides that a trustee (or her firm) may act as counsel for the bankruptcy estate if the retention is in the best interest of the estate. 11 U.S.C. § 327(d). As the moving party, the trustee bears the burden of proof in establishing that the retention is in the best interest of the estate. In re *558Jackson, 484 B.R. 141, 154 (Bankr.S.D.Tex.2012).
A chapter 7 trustee’s statutory-duties are set forth in § 704 of the Code. Section 704 states that a chapter 7 trustee shall:
(1) collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest;
(2) be accountable for all property received;
(3) ensure that the debtor shall perform his intention as specified in section 521(a)(2)(B) of this title;
(4) investigate the financial affairs of the debtor;
(5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper;
(6) if advisable, oppose the discharge of the debtor;
(7) unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest;
(8) if the business of the debtor is authorized to be operated, file with the court, with the United States trustee, and with any governmental unit charged with responsibility for collection or determination of any tax arising out of such operation, periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information as the United States trustee or the court requires;
(9) make a final report and file a final account of the administration of the estate with the court and with the United States trustee;
(10) if with respect to the debtor there is a claim for a domestic support obligation, provide the applicable notice specified in subsection (c);
(11) if, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator; and
(12) use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that—
(A) is in the vicinity of the health care business that is closing;
(B) provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and
(C) maintains a reasonable quality of care.
11 U.S.C. § 704. In practical terms, however, a chapter 7 trustee’s duties are far more expansive. The trustee is the foundational underpinning of the entire chapter 7 system. A qualified trustee represented by knowledgeable counsel serves as a vital component in maintaining the delicate balance between the granting of a “fresh start” for the honest but unfortunate debt- or and protecting the integrity of the bankruptcy process itself against those who seek to take advantage through deception or nondisclosure. The gravity and importance of the trustee’s role is compounded when one considers that a single trustee may be responsible for 600-800 cases at any one moment. Should the trustee fail in the performance of her duties, important issues will likely never be brought to the Court’s attention for consideration. The Court therefore be*559lieves that the process by which a trustee selects counsel should be easily understood and that form never substitutes for substance.
In addition to the requirements under § 327 regarding disinterestedness and holding no adverse interests, Rule 2014 sets forth additional requirements for a proper employment application. First, the application must state why the employment is necessary. Fed. R. Bankb. P.2014(a). This requirement can be met by a simple statement to the effect of, “I need a _ (lawyer, accountant, etc.) because _(the reason).” Exhaustive, hypothetical lists do not meet the requirement and are generally a poor substitute for direct statements.
Second, the application must identify the person to be employed. Fed. R. BaNKR. P.2014(a). In the case of a law firm, the firm should be clearly identified along with the attorney(s) that will be primarily responsible for the representation. It is not necessary to list every member of the firm. See Fed. R. BankrP. 2014(b). While not required, the Court believes that attaching a schedule to the application setting forth the specific hourly rates of the professionals that are contemplated to assist in the representation is extremely helpful to the Court as opposed to stating generally that, “[t]he firm’s rates vary between $_ and $- and are subject to future change.”
Third, the application must set forth why the selection was made. Fed. R. Bankr.P. 2014(a). Again, this Court believes that a simple, thoughtful paragraph is preferable to the attachment of voluminous firm and personal resumes. The Court suggests that one approach might be to start with, “I chose this _ (lawyer, accountant, etc.) because _ (the reasons).” The reasons may be both objective (this lawyer has previously handled this type of matter) and subjective (I trust this attorney’s advice based on prior experience over the past_years). The type and complexity of the particular case may dictate that the Court give varying weight to different considerations. An application should not contain a list of generic reasons that may or may not be applicable to the current case and are routinely repeated in multiple applications.
Fourth, the application must set forth the range of potential services to be rendered during the employment. Fed. R. Bankr.P. 2014(a). The Court believes that a straightforward listing of the services actually contemplated at the time of the retention is preferable to a laundry list that reflects little thought. Should the scope of the retention change over time, nothing in the Code prohibits the expansion of the retention with the filing of a proper pleading. To the extent that In re Bechuck is read to require a specific list of what each attorney will do during the case, additional information may be required. In re Bechuck, 472 B.R. 371, 376 (Bankr. S.D.Tex.2012). This judge, however, does not read the opinion in that manner. The requirements of § 327 and Rule 2014 are met so long as the employment application informs the Court as to the scope of the proposed employment and the professionals providing the services. With this information, the Court can meet its duty when reviewing the application. The Court envisions different levels of specificity being required depending on the type and complexity of the case.
Fifth, the application must set forth the contemplated fee arrangement. Fed. R. BankrP. 2014(a). Simplicity should continue to prevail. Examples might include: “The applicant is to be employed on an *560hourly fee basis subject to court approval. A list of the hourly rates charged by the professionals that will be involved in the representation is attached as Exhibit _or “The applicant will be retained on a 40% contingency fee basis plus the reimbursement of actual expenses. A copy of the written fee agreement is attached as Exhibit_” The Court must necessarily question the legitimacy of an application that provides for employment “on an hourly fee basis equal to a 40% contingency fee.”
Sixth, the application must set forth “to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, or any person employed in the office of the United States trustee.” FED. R. BANKR. P.2014(a). The application must also include a verified statement from the person to be employed setting forth the same information. Fed. R. BankR.P. 2014(a).
Although not required, the Court offers three additional practice tips. First, the trustee might consider adding a summary chart to the beginning of the application. A chart that sets forth the following basic information would be a tremendous aid to the Court in its review as well as to serve as a useful guide to the person drafting the application:
Summary of Proposed Employment Application
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Second, the Court discourages the habit of having a non-lawyer prepare employment applications using a “standard” form without appropriate oversight. In light of the importance of an employment application and the representations set forth within, such a practice can easily lead to unpleasant hearings, the denial of applications or worse.
Third, a trustee should personally review all application and, if possible, actually sign the application. Such a procedure provides an internal review process that will minimize errors and provide the Court with confidence that the trustee is exercising an appropriate level of control over her cases.
If a trustee seeks to hire his or her own firm, the application must also set forth why the employment of the firm is in the best interest of the estate in order to satisfy 11 U.S.C. § 327(d). The Interam-ericas court identified eight specific factors along with a ninth “catch-all” factor that it would consider in evaluating whether a trustee’s application to employ his own firm was in the best interest of the estate. In re Interamericas, Ltd., 321 B.R. 830 (Bankr.S.D.Tex.2005). These factors were adopted by the Court in In re Jackson, 484 B.R. 141 (Bankr.S.D.Tex.2012). The In-teramericas factors were not, however, intended to create a mandatory checklist or to limit a trustee’s considerations. Rather, Judge Isgur identified those factors that *561he believed were important considerations in the Interamericas case.
The Court readily acknowledges that the presence of the Interameri-cas factors may satisfy the best interest requirement in other cases. The opposite result may also be true. Accordingly, the Court is not inclined to adopt any list of specific factors. Instead, and in recognition that a trustee is given wide latitude in selecting the counsel of her choice, the Court is more concerned that the trustee give meaningful thought to the selection of counsel and that the application reflect that process. In so doing, the Court will not substitute its judgment for that of the trustee. The Court’s obligation is to ensure that the trustee give reasoned analysis to the employment issue and reach a rational conclusion within the bounds of the trustee’s duty. If, upon review of the trustee’s reasoning, the Court determines that the trustee failed to properly meet her fiduciary duty, the Court will deny the application. Judge Isgur concurs with this approach.
In this case, the trustee seeks to employ HWA on an hourly fee basis. Ms. Chandler is identified as the proposed attorney-in-charge. The trustee states that she needs to hire an attorney “to investigate and prosecute chapter 5 claims.3” The trustee states that she chose HWA because they have considerable experience in handling these types of claims. Moreover, Ms. Chandler is represented as having handled over 200 chapter 5 claims in her career. The application goes on to list a number of legal services that HWA might perform in the case. The application lists HWA’s connections not only with the parties in the case but to issues that might arise in the case. HWA’s diselo-sures establish that it is disinterested and holds no interest adverse to the estate. While the application is not perfect, the Court believes that the application is a concerted effort to address the issues raised in the Bechuck, CNC Payroll and Jackson decisions.
To the extent that the application does not sufficiently address why hiring HWA is in the best interest of the estate as required by § 327(d), the trustee’s testimony more than satisfies the requirement. Ms. Byman testified that she believes Ms. Chandler is highly qualified to represent her and that she has a high degree of confidence in the attorneys at HWA to navigate the many “traps and pitfalls” that she routinely faces. She testified that HWA provides her with unique resources due to fact that the firm employs two other trustees. Ms. Byman further testified that although Ms. Chandler’s rate is higher than some other attorneys, she believes that the overall cost to the estate will ultimately be lower due to Ms. Chandler’s experience and ability. Ms. Byman also testified that due to her relative inexperience as a chapter 7 trustee (approx. 2 years), having a good working relationship with, and a high degree of trust in, her counsel is extremely important.
After listening to the foregoing testimony, the Court is confident that the trustee has engaged in a thoughtful evaluation of her choice of counsel. The Court will not second guess each of her individual considerations. The trustee has satisfied her fiduciary duty as well as the requirements of the Code and the Rules. The application of HWA is approved.
The Court hopes that this opinion will provide practical guidance to trustees and their counsel in approaching employment *562decisions in chapter 7 cases. Given the importance of the trustee’s role, it is of the utmost importance that trustees have the best resources available to them, including counsel, when performing their jobs. The selection of counsel need not be a morass of confusion. It should be a thoughtful, reasoned process by the trustee that is free of forms and lists. Ms. Byman exemplifies the independent thought that the Court expects.
An order consistent with this opinion will issue.
. In re CNC Payroll, Inc., 491 B.R. 454 (Bankr.S.D.Tex.2013); In re Jackson, 484 B.R. 141 (Bankr.S.D.Tex.2012); In re Bechuck, 472 B.R. 371 (Bankr.S.D.Tex.2012) (employment of firm with a prior relationship to the trustee); In re Interamericas, Ltd., 321 B.R. 830 (Bankr.S.D.Tex.2005).
. All references to "the Code” refer to Title 11 of the United States Code also known as the United States Bankruptcy Code. All references to a section or “§ ” refer to a section of the Code. Further, all references to "Rule _” refer to the Federal Rules of Bankruptcy Procedure.
. The term "chapter 5 claims” generally refers to avoidance claims that may be asserted on behalf of a bankruptcy estate under 11 U.S.C. §§ 544, 547, 548 and 549. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497091/ | MEMORANDUM OPINION
GREGORY R. SCHAAF, Bankruptcy Judge.
The issue before the Court is whether the Defendant owes the Plaintiff a debt that is nondischargeable pursuant to § 523(a)(8). The Plaintiff Francis Brown (“Brown”) cosigned a student loan at the request of the Defendant Debtor Crystal Rust (“Rust”). Rust defaulted on the loan and Brown ultimately satisfied the debt with the original lender. Brown filed suit against Rust in state court and obtained a default judgment. Brown now seeks a determination that this debt is nondis-chargeable under § 523(a)(8).
Brown moved for summary judgment [Doc. 11] and, after the parties briefed the issue, a hearing was held on April 17, 2014. At the hearing, the parties agreed that no further factual development is necessary so the Court took the Motion for Summary Judgment and the allegations in the Com*565plaint under submission [Doc. 19]. Upon consideration of the parties’ briefs, testimony and exhibits, and a review of the record, it is determined that Rust owes Brown a debt of $25,337.33, plus interest, that is nondischargeable pursuant to § 523(a) (8) (A) (ii).
I. FACTS
The facts are undisputed, except as otherwise indicated. Brown testified by affidavit that in late August or early September 2002, Brown was approached by Rust and her fiancé (now husband) to assist Rust in obtaining a student loan. Brown considered Rust and her fiancé friends and agreed to assist. Brown understood Rust needed someone to cosign or she could not obtain the student loan.
Brown testified that both Rust and her fiancé represented that the loan was used for Rust’s education and that his name would come off the loan within 2 years. This is the only arguably contested fact, as Rust’s counsel contended in briefing and during oral argument that Brown knew Rust would use the loan proceeds for living expenses and not educational expenses. Brown disputes this contention, testifying that he was never told Rust would not use the student loan for educational purposes. Despite Rust’s arguments, there is no proof in the record by affidavit or otherwise supporting her argument and Brown’s testimony is therefore undisputed.
Rust, while attending the University of Southern Indiana, signed a Non-negotiable Credit Agreement dated September 5, 2002 (“Credit Agreement”), for an “Education One Undergraduate Loan” payable to Bank One, N.A. (“Bank One”) for $30,000.00 (“Bank One Loan”). The next day, Brown signed the Credit Agreement as “Cosigner.” In describing the terms of repayment, the Credit Agreement does not generally distinguish between the “Borrower” and “Cosigner” and instead refers to them generally as “I,” “me,” “my” and “mine.”
Brown testified that he received none of the proceeds of the Bank One Loan and considered Rust the “principal obligor and borrower.” See Brown Affidavit [Doc. 11, Exhibit A at ¶ 5]. Over the next few years, Brown “started receiving communications from various debt collectors regarding Ms. Rust’s student loan account” informing him that “Rust had failed to make timely payments on her student loan.” Id. at ¶ 6. Brown testified that debt collectors contacted him to demand money and threatened to damage his credit. Id. As a result, Brown made two payments totaling $837.33 on Rust’s student loan account in July 2009. Id. at ¶ 7. Brown eventually paid off the loan by payments of $9,000.00 on August 20, 2012, and $15,500.00 on September 7, 2012. Brown paid a total of $25,337.33 to the Bank One to satisfy the Credit Agreement. Id. at ¶ 8-9.
In February 2013, Brown filed suit against Rust in Franklin Circuit Court and on April 10, 2013, received a default judgment in his favor for $25,337.33, plus interest from the date of entry of the judgment. He garnished approximately $1,400.00 in Rust’s wages before Rust filed chapter 7 bankruptcy on October 8, 2013.
Rust listed Brown’s claim of $25,500.00 on Schedule F. Brown subsequently filed this adversary proceeding on January 1, 2014, seeking a determination that a debt of $25,337.33, plus interest (“Claim”), is nondischargeable pursuant to § 523(a)(8). On March 31, 2014, Brown moved for summary judgment arguing that there are no genuine issues of material fact and the debt is nondischargeable as 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). *566Rust filed a response in opposition and the matter was fully briefed.
The Court conducted a hearing on the Motion for Summary Judgment on April 17, 2014. The parties represented at the hearing that no further facts needed development and all evidence necessary to make a determination on the Motion for Summary Judgment and the allegations in the Complaint are in the record. Thus, the Court struck the pending pretrial deadlines and trial and took the matter under submission on the record. The matter is now ripe for determination.
II. DISCUSSION.
Brown moved for summary judgment pursuant to § 523(a) (8) (A) (ii). This decision also considers discharge pursuant to § 523(a)(8)(A)(i) because the parties submitted the matter on the record, and the allegations in the Complaint seek a judgment pursuant to § 523(a)(8) generally. Ultimately, the decision is made based on subsection (A)(ii) and summary judgment is warranted.
A. Section 523(a)(8) Makes Loans for an Educational Benefit Nondis-chargeable.
Section 523(a) contains a limited list of obligations that are not discharged under the various sections of the Bankruptcy Code. Statutory exceptions to discharge set forth in § 523 are considered in light of the underlying policy of the Bankruptcy Code, ie. the goal of providing a fresh start, and “are generally construed ‘narrowly against the creditor and in favor of the debtor.’ ” Boston Univ. v. Mehta (In re Mehta), 310 F.3d 308, 311 (3d Cir.2002) (quoting In re Pelkowski, 990 F.2d 737, 744 (3d Cir.1993)). “However, in the case of section 523(a)(8), Congress has revealed an intent to limit the dischargeability of educational loan debt, and we can construe the provision no more narrowly than the language and legislative history allow.” Pelkowski, 990 F.2d at 745.
Pursuant to § 523(a)(8), unless excepting a debt from discharge imposes an “undue hardship” on the debtor and the debt- or’s dependents, the student loan is not dischargeable if the debt is for:1
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship or stipend....
Section 523(a)(8) balances two competing policy objectives: (1) the insolvent debtor’s right to a fresh start; and (2) the need to protect the financial integrity of educational loan programs and to induce lenders to lend to borrowers who could not qualify for loans under traditional underwriting standards. Gorosh v. Posner (In re Posner), 434 B.R. 800, 803 (Bankr.E.D.Mich.2010). Thus, the policy considerations underlying § 523(a)(8) “necessarily limit the parties who may take advantage of the statute’s protections.” Id.
Therefore, even recognizing the expansion of § 523(a)(8) to nongovernmental and profit-making organizations through subsection (A)(ii), courts cannot lose sight of the Congressional policy behind the exception itself and must make decisions interpreting the scope of these provisions with these policies in mind. Mehta, 310 F.3d at 311 (quoting New Rock Asset Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d 1492 (3d Cir.1996) for the proposition that “plain mean*567ing is therefore 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.’ ”).
B. Brown Has the Burden to Prove the Claim Is Nondischargeable.
Brown, as the creditor seeking a judgment of nondischargeability on his Claim, bears the burden of proof by a preponderance of the evidence that a debt exists and the debt is the type excepted from discharge under § 523(a)(8). See Maas v. Northstar Education Finance, Inc. (In re Maas), 497 B.R. 863, 869 (Bankr.W.D.Mich.2013). If the creditor meets that burden, then the debt is only discharged if the debtor establishes that repayment of the debt would constitute undue hardship. Id. Rust has not raised a defense of undue hardship, so the only issues before the Court are: (1) does Rust owe Brown a debt; and (2) is that debt nondischargeable under either § 523(a)(8)(A)(i) or § 523(a)(8)(A)(ii)?
C. The Claim Is a Legitimate Obligation that Rust Owes Brown.
Brown has proven by a preponderance of the evidence that Rust owes Brown a debt. Brown is a judgment creditor pursuant to a default judgment in state court, i.e., the Claim. It is therefore not surprising that Rust’s counsel conceded the existence of an obligation at oral argument. Rust’s contention, however, is that the nature of the Claim takes it outside the limits of an educational benefit covered by § 523(a)(8).
D. The Claim Was Made for an Educational Benefit and Is Nondis-chargeable.
1. The Bank One Loan Was Made for an Educational Benefit.
Subsections 523(a)(8)(A)(i) and (A)(ii) do not refer to the general term “student loans.” Instead, both indicate they apply to loans for an “educational benefit,” a term that is not defined in the Bankruptcy Code. This case turns on whether the Claim is for a covered educational benefit, rather than a dispute over undue hardship. “Although the breadth of this term has been the subject of some debate, a majority of courts determine whether a loan qualifies as an ‘educational benefit’ by focusing on the stated purpose for the loan when it was obtained, rather than on how the loan proceeds were actually used.” See Maas, 497 B.R. at 869 (citations omitted) (emphasis in original).
It is easy to conclude the Bank One Loan was for an educational purpose. The Credit Agreement at Section L.2 specifically provides: “The proceeds of this loan will be used only for my educational expenses at the School.” The term “School” is defined in the Credit Agreement to mean the University of Indiana and that term is used numerous times in the document. Specifically, Section L.12 of the Credit Agreement, highlighted in bold, recognizes the intent of the parties to treat the financing as an educational benefit under § 523(a)(8):
I acknowledge that the requested loan may be subject to the limitations on dischargeability in bankruptcy contained in section 523(a)(8) of the United States Bankruptcy Code. Specifically, I understand that you have purchased a guaranty of this loan, and that this loan is guaranteed by the Education Resources Institute, Inc. (“TERI”), a non-profit loan guaranty agency.
Brown also testified that Rust represented the loan proceeds were for her education. During oral argument, Rust’s counsel argued that Brown knew Rust would use the proceeds of the Bank One *568Loan for living expenses, although Rust provided no proof in the record by affidavit or otherwise to back up this claim. Even if Brown knew Rust would use the Bank One Loan proceeds for living expenses, educational loans are not limited solely to tuition. See Murphy v. Pennsylvania Higher Education Assistance Agency and Educational Credit Management Corp. (In re Murphy), 282 F.3d 868, 871 (5th Cir.2002) (living or social expenses are not excluded from treatment as an educational loan).
The evidence unequivocally shows that the Bank One Loan was an “educational benefit.” The issue in this case is whether the Claim is also an educational benefit. Bank One would have the benefit of § 523(a)(8)(i) if it was pursuing a non-dischargeability action. Brown is not Bank One, however, so it is necessary to characterize the debt and the rights of Brown to decide whether the Claim is an educational benefit under either subsection of § 523(a)(8). This requires a detailed review of the document that created the obligation, the Credit Agreement.
2. Brown Was an Accommodation Party Under the Credit Agreement.
a. A Cosigner may have different connotations depending on the applicable instrument.
The characterization of Brown’s status under the Credit Agreement will control whether his Claim should receive treatment as an educational benefit under § 523(a)(8). Brown executed the Credit Agreement as “Cosigner”, although that term is not defined. A review of Ohio law, which controls under the Agreement, suggests Brown is a coborrower (also called a comaker), a guarantor (or surety) or an accommodation party under the Credit Agreement. The distinction between a guarantor and an accommodation party is not important as they share the same rights that affect this decision.
Coborrower. If Brown is a coborrower or comaker, then he is in the same position as the plaintiff in Posner, relied on by the Defendant. Posner, 434 B.R. 800 (Bankr. E.D.Mich.2010). Posner, on similar facts, determined that a cosigner on a student loan to the debtor was a coborrower, not a lender that could take advantage of § 523(a)(8). Id. at 802-03.
The coborrower in Posner had a direct obligation to the original lender, so when she paid off the student loan the creditor was paying her own debt. Id.; see also Fibreboard Corp. v. Celotex Corp. (In re Celotex Corp.), 472 F.3d 1318, 1321 (11th Cir.2006) (co-debtor could not claim sub-rogation under § 509 if it was primarily liable for the entire debt). The type of action a coborrower has against the borrower is a claim for contribution that is not based on the original debt. The original student loan debt was paid and gone, and the plaintiff could only sue the debtor for contribution.
Guarantor or Accommodation Party. An accommodation party accepts liability by signing an instrument issued for value and for the benefit of another party, but the accommodation party is not a direct beneficiary of the instrument proceeds. Ohio Rev.Code Ann. § 1303.59(A) (West 2014). The guarantor signs for the same purpose, but an accommodation party is not necessarily a guarantor. See Ohio Rev.Code Ann. § 1303.59(B).
An accommodation party may be a borrower, or a “maker,” as well as an endorser. Id. An accommodation party is obliged to pay in whatever capacity he signs. Id. Regardless of that capacity, an accommodation party has the right to en*569force the instrument. Ohio Rev.Code Ann. § 1303.59(E) (“An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party.”). See also Fed. Land Bank of Louisville v. Taggart, 31 Ohio St.3d 8, 508 N.E.2d 152, 156 (1987) (recognizing that an accommodation party has recourse to all the applicable defenses codified in the Uniform Commercial Code, including suretyship).
A guarantor and an accommodation party have different rights, but the focus here is on the shared right of subrogation. “Subrogation” means: “The substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor.” Blace’s Law Dictionaey 1563-64 (9th ed. 2009). “Subrogation simply means substitution of one person for another; that is, one person is allowed to stand in the shadows of another and assert that person’s rights against the defendant.” Id. (citing Dan B. Dobbs, Law of Remedies, § 4.3, at 404 (2d ed. 1993)).
A party that can step into the shoes of the original lender has better and different rights than a party that only has a right of contribution. If Brown is merely a coborrower, then Brown cannot subro-gate under Ohio law by stepping into the shoes of the lender to pursue the borrower with all the rights of the lender. United States v. Am. Scrap Tire Recycles, Inc., Case No. 1:07-CV-0156, 2008 WL 1696927, at *8 (N.D.Ohio April 9, 2008) (“Subrogation is allowed only in favor of one who has been obliged to pay the debt of another, and not in favor of one who pays a debt in the performance of his own primary obligation.”). A guarantor or accommodation party may step into the shoes of the lender and pursue any remedies of the lender.2 Id.
Whether someone is a guarantor or an accommodation party is a question of fact. Huron County Banking Co., N.A. v. Knallay, 22 Ohio App.3d 110, 489 N.E.2d 1049, 1054 (1984). Ohio law provides that one is presumptively an accommodation party if the contract contains “words indicating that the signer is acting as a surety or guarantor with respect to the obligation of another party to the instrument.” Ohio Rev.Code Ann. § 1303.59(C). Factors to consider in determining status are: (1) the location of the signature on the note; (2) the language of the note itself; (3) whether the comaker received any of the loan proceeds; and (4) the intent of the parties. Knallay, 489 N.E.2d at 1054.
b. Brown is at least an accommodation party on the Credit Agreement.
The Credit Agreement confirms Brown should have the status of an accommodation party. The Credit Agreement contains provisions that suggest Brown is jointly and severally liable on the Agreement, like a coborrower. The obligations *570of the Borrower are written in the first person using “I,” “me,” “my,” or “mine” and the definition in the Credit Agreement indicates these terms include the Cosigner.
There are, however, numerous sections in the Credit Agreement that refer to these terms (i.e., “I,” “me,” “my,” or “mine”) where the context only allows an interpretation that refers to the Borrower. For example, Section J.l provides: “I will send written notice to the servicer ... after any change in my ... enrollment status at the School.” The Credit Agreement only contemplates that the Borrower would attend the School, so use of “I” and “my” can only refer to the Borrower in this section. Similar examples are found in the following Sections of the Credit Agreement: C.3, G, L.2, L.8, L.9. L.10, L.13 and L.14.
The Credit Agreement also contains terms that suggest Brown is only liable if Rust fails to pay, which is typical of an accommodation party. For example, the Agreement contains the special provision in Section 0 that states “IF THE BORROWER DOES NOT PAY, THE LENDER HAS A LEGAL RIGHT TO COLLECT FROM YOU.” This section only applies to obligors cosigning in Vermont, but it creates ambiguity in the Credit Agreement where there is no clear definition of the Cosigner.
Further, Section E.2 of the Credit Agreement provides for delivery of monthly statements or a coupon book, which should have only gone to the primary obli-gor to avoid the risk of duplicate payments. The record is consistent. Brown testified without rebuttal that he was asked to sign the loan because Rust was unable to obtain the loan without his signature and he did not receive any of the loan proceeds. The parties also treated repayment of the loan as the primary obligation of Rust and debt collectors only looked to Brown after Rust failed to pay.
This is indicative of at least an accommodation party. As an accommodation party, Brown has a right of subrogation and thus steps into the shoes of the original lender and can enforce the Credit Agreement and any related security. Therefore, the original debt, which was for an educational benefit, is still enforceable by Brown. This review does not end the analysis. The educational benefit must still be one covered by § 523(a)(8)(A)(i) or (A)(ii).
c. A Subrogee Might Not Have a Right to Seek Nondischarge-abilitg under § 523(a)(8)(A)(i).
Subsections (A)(i) and (A)(ii) of § 523(A)(8) both apply to educational benefits, but they apply to different obligations. Subsection (A)(i) applies only to overpayments or loans “made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.” Subsection (A)(ii) was added by Congress in 2005 to cover loans made by nongovernmental and profit-making organizations, thereby making a broader range of student loan debt nondis-chargeable. Unlike subsection (A)(i), there is no requirement under subsection (A)(ii) that the obligation be in any way related to a government unit. See Benson v. Corbin (In re Corbin), 506 B.R. 287 (Bankr.W.D.Wash.2014).
The Plaintiff only sought summary judgment § 523(a)(8)(A)(ii) because he relies on Corbin, which shares similar facts. The bankruptcy court in Corbin ultimately found that the claim of an accommodation party for the debtor was a nondischargeable educational benefit under § 523(a)(8)(A)(ii). Id. at 296-98. But the bankruptcy court would not find the debt *571nondischargeable pursuant to § 528(a)(8)(A)(i).
The bankruptcy court determined, in part based on controlling law in the Ninth Circuit, that including debts owed to a guarantor or an accommodation party in subsection (A)(i) does not promote the collection of student loans. Id. at 295. Also, the state law rights of a guarantor or accommodation party conflict with the federal policy favoring discharge of debt. Id.
It is not clear the same result would hold in the Sixth Circuit. Compare Pazdzierz v. First Am. Title Ins. Co. (In re Pazdzierz), 718 F.3d 582 (6th Cir.2013) (allowing a subrogee to make a nondis-chargeability claim under § 523(a)(2) because there was not specific language barring assignees), with Gabel v. Olson (In re Olson), 355 B.R. 649 (Bankr.E.D.Tenn.2006) (a subrogee could not make a nondis-chargeability claim under § 523(a)(15) because § 523(a)(15) specifically lists the creditors covered — a spouse, former spouse, or child of the debtor).
These cases might support extension of the rights of Brown as a subrogee under § 523(a)(8)(A)© because there is no language in § 523(a)(8) that specifically addresses subrogation or the creditors covered. The bankruptcy court in Posner seemed to suggest, however, that the limitation might come from the policy considerations for § 523(a)(8). Posner, 434 B.R. at 803. It is not necessary to reach a final conclusion because Brown has a nondis-chargeable claim under § 523(a)(8)(A)(ii).
d. The Claim, Is Nondischargeable Under § 523(a)(8)(A)(ii).
As indicated, the bankruptcy court in Corbin determined the subrogation claim of the accommodation party was nondis-chargeable pursuant to § 523(a)(8)(A)(ii). Courts have interpreted § 523(a)(8)(A)(ii) broadly since its addition in 2005. The court in Corbin recognized that “courts have interpreted the phrase ‘obligation to repay funds received as an education benefit’ so broadly that it seems ... that Section 523(a)(8)(A)® is almost subsumed by subsection (ii).” Corbin, 506 B.R. at 296.
The focus under § 523(a)(8)(h) is not on the lender, but “whether, in the plain language of the subsection, the obligation is ‘to repay funds received as an educational benefit’ as reflected by the debtor’s agreement and intent to use the funds at the time the obligation arose.” Id. Therefore, the primary, and the cases suggest only, focus is the purpose of the loan. See Maas, 497 B.R. at 869-870.
The cases reviewed that construe the applicability of § 523(a)(8)(A)(ii) interpret this section broadly to apply to certain private and for profit institutions that have provided loans to debtors for educational purposes. See, e.g., Maas, 497 B.R. at 871 (loan provided by private institutional lender and assigned to another private institutional lender for general living expenses during law school is nondischargeable); Beesley v. Royal Bank of Canada (In re Beesley), Case No. 12-24194-CMB, Adv No. 12-2444, 2013 WL 5134404, at *5 (Bankr.W.D.Pa. Sept. 13, 2013) (line of credit provided by private lending institution for tuition, room, and board is nondis-chargeable under subsection (A)(ii)); Chicago Patrolmen’s Federal Credit Union v. Daymon (In re Dayman), 490 B.R. 331, 337 (Bankr.N.D.Ill.2013) (debt owed to judgment creditor and former employer based on an employer-sponsored tuition reimbursement program is nondischargeable); The Rabbi Harry H. Epstein School, Inc. v. Goldstein (In re Goldstein), Case No. 11-81255-MGD, Adv. No. 12-5186, 2012 WL 7009707, at *3 (Bankr. N.D.Ga. Nov. 26, 2012) (agreement with private school to pay tuition for children’s attendance is nondischargeable); Liberty *572Bay Credit Union v. Belforte (In re Belforte), Case No. 10-22742-JNF, Adv. No. 11-1008, 2012 WL 4620987, *9 (Bankr. D.Mass. Oct. 1, 2012) (an unsecured personal line of credit with credit union is nondischargeable).
But Brown is not a private, for profit institution in the business of providing loans for an educational benefit. He is a family friend and now judgment creditor that agreed to help Rust obtain an educational loan. Still, when focusing on the purpose of the loan giving rise to Brown’s Claim, there is no reason he should not receive the protections in subsection (A)(ii).
The court in Corbin did not focus its discussion of the creditor’s capacity in cosigning the loan in its analysis of § 523(a)(8)(A)(ii). The court did spend considerable time establishing the creditor’s accommodation party status and framed the issue as “whether [the Plaintiffs act of] cosigning the Loan as an accommodation party constitutes an ‘educational benefit.’ ” Corbin, 506 B.R. at 296 (emphasis supplied). The court ultimately concluded that “the provision of an accommodation, in order to secure for a student funds for the purpose of paying educational expenses, gives rise to an obligation on the part of the debtor to repay funds received as an educational benefit once the cosigner is required to honor its obligation to pay the debt.” Id. at 297-298.
Brown provided a valuable service to enable Rust to obtain the Bank One Loan. Many lenders would not provide educational loans without the backing of an accommodation party. Acting as an accommodation party, therefore, supports the policy of encouraging lenders to provide educational loans. This is particularly appropriate considering Congress added § 523(a)(8)(A)(ii) to broaden the scope of § 523(a)(8) from its previously more narrow application.
Under the plain language of § 523(a)(8)(A)(ii), the debt herein is an “obligation to repay funds received as an educational benefit....” Keeping in mind Congress’s intent to expand the scope of § 523(a)(8) under subsection (A)(ii) beyond government and nonprofit institutions, as well as the policy underlying this discharge exception, the debt owed to Rust is the type of debt that is nondischargeable pursuant to § 523(a)(8)(A)(ii). As there are no genuine issues of material fact, Brown is entitled to summary judgment on this issue.
III. CONCLUSION
Rust owes the Brown a debt of $25,337.33, plus interest from date of the entry of judgment, based on the state court judgment and Brown’s status as an accommodation party. The debt is nondis-chargeable pursuant to § 523(a)(8)(A)(ii) because the debt is an obligation to repay funds received as an educational benefit and Rust has not established that repayment of the debt is an undue hardship. Therefore, it is ORDERED that the Plaintiffs Motion for Summary Judgment [Doc. 11] is GRANTED and JUDGMENT on the allegations of the Complaint shall be entered for the Plaintiff pursuant to § 523(A)(8)(A)(ii).
The foregoing constitutes the Court’s findings of fact and conclusions of law. In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits, and arguments of counsel, regardless of whether or not they are specifically referred to in this decision. A separate Order shall be entered accordingly.
. Subsection (8)(B) is not applicable to this case.
. It could be argued that as an accommodation party, Brown would also have a right of subrogation under § 509 of the Code. See, e.g., Benson v. Corbin (In re Corbin), 506 B.R. 287 (Bankr.W.D.Wash.2014). But subrogation rights under § 509 were not pled. Further, in order for a co-obligor to exercise subrogation rights under § 509, the co-obli-gor must pay the claim of a "creditor” (i.e. an entily that has a right of payment from the debtor as of the petition date). Because Brown paid the claim pre-petition, § 509 is not applicable to this discussion. Prim Capital Corp. v. May (In re May), Case No. 05-10521, Adv. No. 05-1098, 2006 WL 4458360 (Bankr.N.D.Ohio, Aug. 14, 2006), aff'd, 368 B.R. 85 (6th Cir. BAP 2007) (Table). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497092/ | MEMORANDUM
JOHN C. COOK, Bankruptcy Judge.
The plaintiff in this adversary proceeding, C. Kenneth Still as trustee for the bankruptcy estate of debtor Steve A. McKenzie, seeks to avoid, pursuant to 11 U.S.C. § 549, an alleged transfer by the debtor to the defendant, Nelson Bowers II,1 of the debtor’s membership interest in a limited liability company. The defendant argues that the plaintiffs action is barred by the statute of limitations and denies that a transfer of the membership interest occurred. Having considered the evidence presented at the trial of all issues except the value of the property transferred2 and the arguments and briefs of the parties, the court now makes its findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable in bankruptcy adversary proceedings by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
I.
On November 20, 2008, an involuntary chapter 7 petition was filed against the debtor. On December 20, 2008, the debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On January 16, 2009, the court entered an order for relief in the involuntary case *575with the debtor’s consent, and that order also converted the chapter 7 case to a case under chapter 11 of the Code and consolidated the two cases.
At the time the involuntary petition was filed, Cleveland Auto Mall, LLC, was owned by the debtor and Mr. Bowers, each of whom held a 50% membership interest in the entity. Also at that time, the only asset owned by Cleveland Auto Mall was certain real property located near Exit 20 from 1-75 in Bradley County, Tennessee. On December 10, 2008, after the filing of the involuntary petition but before the filing of the voluntary petition and the entry of the order for relief in the involuntary case, the debtor, on behalf of Cleveland Auto Mall, signed a Sale and Purchase Agreement and a Warranty Deed for the sale of the real estate to a newly formed limited liability company called Exit 20 Auto Mall, LLC, whose members were Mr. Bowers, Steve Dillard, and DeWayne McCamish. The documents for the real estate transaction were drafted by the law firm of Grant, Konvalinka, & Harrison, P.C., which represented all parties in connection with the transaction.
The Sale and Purchase Agreement listed the purchase price for the real property as follows:
(a) Assumption of all the existing debt with SunTrust Bank secured by the Property for approximately Three Million Eight Hundred Thousand Dollars ($8,800,000);
(b) Assumption of the outstanding amounts due on the development of the road of approximately Two Hundred Fifty Thousand Dollars ($250,000); and
(c) Assumption of the amounts due for the construction of the gas line on the Property of approximately One Hundred Eighty Seven Thousand Dollars ($187,-000).
(d)Assumption of all outstanding real estate taxes on the Property.
The agreement also provided that the seller’s obligation to close was subject to the condition that the debtor’s personal guaranty of the loan secured by the property be released. No other consideration for the transfer of the real estate was listed in the agreement.
On January 26, 2009, the debtor filed his bankruptcy schedules. In Schedule B— Personal Property, the debtor reported that he held interests in numerous business entities, one of which was an interest in Cleveland Auto Mall valued at $1,926,106. In an exhibit attached to his statement of Financial Affairs, the debtor reported that Cleveland Auto Mall was “closed.”
On February 19, 2009, the plaintiff was appointed as chapter 11 trustee in the case, and, thereafter, the trustee was authorized to employ attorney F. Scott Le-Roy, who has served as one of the trustee’s bankruptcy counsel throughout the case. Also in early 2009, the trustee was authorized to employ Thomas S. Kale, Jr., as a real estate consultant. Mr. LeRoy testified that, in early 2009, possibly in April, he learned about the December 2008 real estate transfer from Cleveland Auto Mall to Exit 20 Auto Mall from Mr. Kale, and that he had a conversation with Mr. Kale about the value of land that had been transferred. Mr. LeRoy also testified that the trustee would have been involved in those discussions.
In early 2010, the debtor’s attorney, Richard Banks, complained to the trustee and his attorney about the trustee’s inaction in pursuing avoidance actions against Mr. Bowers and others. On April 7, 2010, the debtor filed a chapter 11 plan and a disclosure statement which indicated that the estate possessed possible avoidance actions against Mr. Bowers and others. It *576appears that the debtor’s counsel believed that the estate had a viable avoidance claim against Mr. Bowers based on the real estate transfer from Cleveland Auto Mall to Exit 20 Auto Mall, and that that was one of the claims that the debtor’s attorney had been urging the trustee to pursue. It also appears that the trustee was not convinced at that time that an avoidance action should be pursued, and that one of the issues apparently concerning the trustee was the difficulty of ascertaining the value of the transferred real estate.
On April 2, 2010, the debtor’s attorney filed a motion to take an examination of Mr. Bowers pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure. That motion was granted on April 12, 2010, and, according to the court record, the examination was thereafter scheduled for May 14, 2010.
On April 22, 2010, the debtor filed a motion seeking an order declaring that the trustee had abandoned, among other things, all fraudulent conveyance actions against Mr. Bowers and asking the court to permit the debtor to pursue such claims. That motion was scheduled for hearing on May 20, 2010, and was later reset for hearing on May 25, 2010.
On April 28, 2010, the trustee filed a motion to convert the debtor’s chapter 11 case to a chapter 7 case, and that motion was scheduled for hearing for June 3, 2010.
On May 14, 2010, Mr. Bowers failed to appear for the Rule 2004 examination scheduled for that date, apparently because of a scheduling conflict. Although Mr. Bowers, through his attorney, had offered to appear for the examination in early June 2010, that was not acceptable to counsel for the debtor and, on May 14, 2010, he filed a motion seeking an order of contempt against Mr. Bowers. Due to some problem relating to the service of the subpoena on Mr. Bowers, that motion was withdrawn on June 30, 2010, and no other attempt was made to reschedule Mr. Bowers’s examination pursuant to the order of April 12, 2010.
In an email exchange between the debt- or’s attorney (Mr. Banks) and the trustee’s attorney (Mr. LeRoy) on May 16, 2010, Mr. LeRoy stated, in pertinent part, that based on the trustee’s investigation it appeared that Mr. Bowers had some exposure regarding the Cleveland Auto Mall property. When asked on cross-examination what investigation the trustee had conducted concerning the transfer of the property to Exit 20 Auto Mall, Mr. LeRoy testified that there had been discussions with a number of people, including the trustee, Mr. Kale, and the debtor’s attorney, about whether there should be an attempt to set aside the transaction. Mr. LeRoy also testified that there would have been discussions with one or more representatives from the office of the United States trustee, and he testified generally that from time to time there were telephone conferences with attorneys for major creditors about potential causes of action and whether it would be beneficial to the estate to attempt to set aside certain transfers. When asked if the trustee had sought any documents regarding the real estate transaction, Mr. LeRoy testified that the trustee had the Warranty Deed conveying the real estate, which was a matter of public record, and the documents contained in Cleveland Auto Mall’s file, which would have included its operating agreement. Mr. LeRoy was asked if he had made any other inquiry of anyone as to any additional documents that might have related to the real estate transaction, and he responded that he did not recall the need for requesting more documents. It does not appear that the trustee obtained *577or was aware of the Sale and Purchase Agreement between Cleveland Auto Mall and Exit 20 Auto Mall until after the initiation of Adversary Proceeding No. 10-1407, which is discussed below.
On May 24, 2010, the debtor filed an amendment to his Schedule B stating, among other things, that the debtor possessed various causes of action against Mr. Bowers and others. On May 27, 2010, the court entered an order denying as withdrawn the debtor’s motion seeking an order declaring that the trustee had abandoned certain causes of action including all fraudulent conveyance claims against Nelson Bowers.
On June 2, 2010, the trustee filed an application to employ Mr. Banks as special counsel for the possible pursuit on behalf of the estate of various causes of action that had been listed in the amendment to Schedule B. When asked on cross-examination why the trustee decided to hire Mr. Banks to pursue the avoidance of the real estate transaction between Cleveland Auto Mall and Exit 20 Auto Mall, Mr. LeRoy testified that he believed that a telephone call took place among the trustee, Mr. LeRoy, and attorneys for several major creditors to discuss that employment. He further testified that Mr. Banks provided new information about the real estate transaction that the trustee had not heard before, including information about the debtor’s medical condition at the time he signed the Warranty Deed and the circumstances surrounding the debtor’s execution of the deed.
On June 14, 2010, the court entered an order granting the trustee’s motion to convert the debtor’s chapter 11 case to case under chapter 7. Mr. Still was thereafter appointed to serve as the chapter 7 trustee, and Mr. LeRoy continued to serve as counsel for the trustee. An order authorizing the employment of Mr. Banks as special counsel for the trustee was entered on July 1, 2010.
On August 5, 2010, the trustee filed a complaint initiating Adversary Proceeding No. 10-1407 against Mr. Bowers, Exit 20 Auto Mall, LLC, the Grant, Konvalinka & Harrison law firm, and CapitalMark Bank & Trust (the lienholder on the property at the time), seeking to avoid the transfer of the real estate from Cleveland Auto Mall to Exit 20 Auto Mall. That complaint was drafted by Mr. Banks as attorney for the trustee, and it was also signed by Mr. LeRoy as attorney for the trustee. Around the same time, Mr. Banks, on behalf of the debtor and the trustee, filed a complaint in the Chancery Court of Bradley County, Tennessee, against Mr. Bowers, Exit 20 Auto Mall, Grant, Konvalinka & Harrison, and attorney John Anderson. That complaint alleged various state-law causes of action arising out the same transaction that was the subject of Adversary Proceeding No. 10-1407.
On October 8, 2010, Jeffrey S. Norwood, counsel for Mr. Bowers and Exit 20 Auto Mall in Adversary Proceeding No. 10-1407, filed a motion to dismiss the complaint against his clients for failure to state a claim upon which relief could be granted. Two weeks later, CapitalMark filed a motion for judgment on the pleadings, and, five days after that, Grant, Konvalinka & Harrison filed a motion to dismiss the complaint.
On October 20, 2010, Mr. Norwood, as counsel for Mr. Bowers, sent an email to Mr. LeRoy, that stated it was in “follow up to our settlement discussions,” which Mr. LeRoy had initiated. The subject line of the email read: “McKenzie-Protected Settlement Communication under Rule 408,” and the email read, in pertinent part:
Regarding the consideration given by Exit 20 Auto Mall, LLC for the 41 acres acquired on 12/10/2008, from Cleveland *578Auto Mall, LLC , it consisted of the following:
1. Assumption of existing debt of approximately $3.8 million owed to Sun-Trust Bank;
2. Assumption of debt due on the development of access road of approximately $250,000;
3. Assumption of debt owed for construction of the gas line of approximately $187,000;
4. Assumption by purchaser of all real estate taxes;
5. Complete release by SunTrust of Toby McKenzie’s guaranty of the outstanding loan; and
6. Payment of $75,000 to Shasta Kaye McKenzie for the benefit of Cleveland Auto Mall....
It would be the contention of Nelson Bowers and Exit 20 Auto Mall, LLC that adequate consideration in the aggregate amount of at least $4,312,000 was provided for the transfer of the subject property.
Along with the email, Mr. Norwood sent Mr. LeRoy a copy of the $75,000 check to Shasta McKenzie (the debtor’s daughter), which was drawn on the account of Steve Dillard and Anne Dillard. The words “Cleveland Auto Mall” had been written on the check memo line. Based on an email written by Mr. LeRoy dated February 2, 2011, it appears that Mr. Norwood also furnished Mr. LeRoy with a copy of the Sale and Purchase Agreement evidencing the transfer of the real estate, which the trustee had not obtained prior to the filing of the complaint. According to Mr. Nor-wood, Mr. LeRoy intimated that he intended to amend the complaint in Adversary Proceeding No. 10-1407 based on the debt- or’s receipt of the check, but that was never done.
Prior to Mr. LeRoy receiving the email and check from Mr. Norwood, neither the trustee nor his attorneys knew about the $75,000 payment. Mr. LeRoy testified that he accepted the statements in Mr. Norwood’s email as representing the attorney’s understanding of the facts. He also testified that at some point he asked the debtor about the $75,000 check, and Mr. McKenzie said he did not remember receiving it.
In an email from Mr. Banks to Mr. LeRoy dated October 27, 2010, Mr. Banks stated that he was filing a motion to depose Steve and Anne Dillard about the $75,000 check because it had come from them. As Mr. LeRoy acknowledged, the email indicated that Mr. Banks was not relying on Mr. Norwood’s October 20 email regarding the $75,000 check but was attempting to ascertain more information about the payment. The promised motion to conduct a Rule 2004 examination of the Dillards was filed on October 27, 2010, and granted the next day. The examination was not, however, conducted during the pen-dency of Adversary Proceeding No. 10-1407.
On November 8, 2010, Grant, Konvalin-ka & Harrison took a Rule 2004 examination of Shasta McKenzie. She testified that she had no knowledge of the $75,000 check until her father arrived at her house and told her he needed her assistance getting the check cashed; that she did not know what the check was for but assisted her father in getting the check cashed; that her father took $65,000 of the $75,000 in cash and told her to hold the remaining $10,000 in cash for him; and that she later gave the remaining $10,000 to the debtor in March 2009 at his request. Ms. McKenzie testified to the same effect at the trial of the present adversary proceeding.
On December 1, 2010, Grant, Konvalinka & Harrison took a Rule 2004 examination *579of the debtor. He testified that he received the proceeds of the $75,000 check from Mr. Bowers but he believed that the check represented the repayment of debt owed to the debtor. He dismissed the notion that the $75,000 payment was a “down payment to buy my acreage.”
On or about December 9, 2010, Mr. Nor-wood sent Mr. LeRoy a redlined copy of a complaint objecting to the debtor’s discharge that Mr. LeRoy had drafted. Mr. LeRoy had sent a draft of the complaint to Mr. Norwood and asked him to make any suggested edits. Mr. Norwood made minor, non-substantive edits to the complaint before returning it to Mr. LeRoy.
On December 10, 2010, the trustee filed a complaint objecting to the debtor’s discharge. The complaint included aver-ments pertaining to the debtor’s receipt and concealment of the $75,000 check in connection with the transfer of the real estate from Cleveland Auto Mall to Exit 20 Auto Mall. It alleged that the existence of the check was not known by the trustee until approximately October 20, 2010, and that the debtor had never disclosed the existence of the check or cash to his two bankruptcy attorneys, the trustee, the trustee’s accountants, or anyone else associated with the case.3
December 10, 2010, was also the date of expiration of the limitations period for the avoidance of a postpetition transfer taking place on December 10, 2008. See 11 U.S.C. § 549(d).
On December 16, 2010, the court held a hearing on the motions pending in Adversary Proceeding No. 10-1407. During the course of the hearing, the trustee’s attorney, Mr. Banks, did not mention the $75,000 check or move for additional time to undertake discovery regarding the check or otherwise with respect to the December 2008 transactions. At the conclusion of the hearing, the court announced in an oral decision from the bench that the complaint would be dismissed on the ground that it sought to avoid a transfer of property that was not property of the debtor or his bankruptcy estate but was property of nondebtor Cleveland Auto Mall, LLC. Later that same day, the court entered an order dismissing the complaint, and the plaintiff did not file a notice of appeal of that order. The trustee did not take Mr. Bowers’s or either Dillard’s deposition before the dismissal of the proceeding.
On May 19, 2011, the trustee filed a motion to take a Rule 2004 examination of Mr. Bowers, and the motion was granted the following day. The examination was subsequently conducted on July 8, 2011. At that time, the law firm of Grant, Konva-linka, and Harrison, P.C., was attempting to obtain relief from the automatic stay in the debtor’s bankruptcy case so that it could pursue security interests in the debt- or’s ownership interests in a number of limited liability companies. The debtor had pledged the interests to the firm in October 2008, before the filing of the involuntary petition, to secure an attorney’s fee obligation that the debtor owed the firm. Among the pledged interests was the debt- or’s membership interest in Cleveland Auto Mall, LLC. The trustee opposed the law firm’s motion and challenged the validity of the pledge agreements and the transfer of the security interests. Mr. Bowers’s Rule 2004 examination was taken in connection with that stay litigation.4 *580During the examination, Mr. Bowers testified as follows regarding the $75,000 check:
Q In your mind the $75,000 that was made payable to Shasta McKenzie was for Steve A. McKenzie, correct?
A Correct.
Q And that was a payment to him for his agreement to allow Cleveland Auto Mall, LLC to convey its property to Exit 20 Auto Mall, LLC?
A Yes, sir.
Q Okay. In the questioning and answering that’s been done over the exhibits that have been introduced, the Warranty Deed, the Sale and Purchase Agreement and the check, there were a lot of things that you answered you didn’t remember or you didn’t know. Is there anything that you can think of that would refresh your recollection about the answers to the questions I’ve given you?
A This particular check was for his interest in the LLC, not for the property.
The trustee’s attorney, Mr. LeRoy, testified that this testimony was the first indication he received from any source that the $75,000 check was given in exchange for the debtor’s membership interest in Cleveland Auto Mall, rather than for the real property as stated in attorney Nor-wood’s email of October 20, 2010. Also, the trustee testified that, prior to Mr. Bowers’s Rule 2004 examination on July 8, 2011, he had no knowledge that the debt- or’s membership interest had been transferred in exchange for the check.
Mr. Bowers also testified regarding the $75,000 payment during a hearing on the law firm’s motion for stay relief conducted on October 24, 2011:
Q Prior to the time that Mr. McKenzie allowed or signed the documents that allowed Cleveland Auto Mall to convey its interest to Exit 20 Auto Mall, you and he had some negotiations about what he wanted in order to [do] that, didn’t you?
A No negotiations. Just at one time he said he wanted X amount and then came back and said — I never — there wasn’t any discussion at that time.
Q And do you remember what the X amount was?
A It was $125,000.
Q He wanted $125,000 for his interest in Cleveland Auto Mall?
A For his interest in the entity, correct.
Q And you ultimately decided on $75,000?
A Right.
Q And you agreed to pay him that $75,000, correct?
A I agreed to get him the $75,000.
Q All right. You didn’t actually pay it, somebody else paid it—
A You’re correct.
Q —which was a member of the new Exit 20 Auto Mall?
A Right.
*581Q Would you review that document, please?
A I’m reviewing it. It says here the day of December 2008.
Q What day?
A December 10th.
Q Does that refresh your recollection that that transaction took place in December of 2008?
A It does.
Q And that document you’re looking at is a buy/sell agreement between Cleveland Auto Mall and Exit 20 Auto Mall?
A That’s what it says.
Q All right. When did you inform anyone at the Grant Konvalinka & Harrison law firm that Mr. McKenzie was getting $75,000 for his interest in Cleveland Auto Mall?
A I don’t recall, but I would say prior to this.
On December 9, 2011, the court denied the law firm’s motion for relief from the automatic stay.
On December 16, 2011, the trustee filed a motion for relief from the order dismissing Adversary Proceeding No. 10-1407, pursuant to Rule 9024 of the Federal Rules of Bankruptcy Procedure and Rule 60(b) of the Federal Rules of Civil Procedure. The trustee did not seek relief from the dismissal order because it was erroneous, but only so that he could file an amended complaint seeking to avoid a transfer of the debtor’s membership interest in Cleveland Auto Mall, LLC. The court denied the motion on October 3, 2012. One of the issues addressed by the court in denying the motion concerned certain allegations set forth in the dismissed complaint. Those allegations were as follows:
22. On December 10, 2008 this fraudulent and avoidable transfer of McKenzie’s equitable interest in the sixty (60) acres of Exit 20 property was prohibited by the automatic stay imposed as of November 20, 2008....
31. McKenzie’s 50% share in Cleveland Auto Mall, LLC and that entity’s sole asset of 60 acres of valuable land amount to “property of the Estate” as described under 11 U.S.C. § 541.
32. The property was transferred as defined under 11 U.S.C. 101(54)(D)[.]
In denying the trustee’s motion, the court explained:
When the court dismissed the complaint, the court made clear that it construed the complaint as seeking to avoid a transfer of real property made by a non-debtor entity. While Paragraphs 31 and 32 of the original complaint possibly could be read as seeking the avoidance of the transfer of the debtor’s membership interest in Cleveland Auto Mall, LLC, the other allegations of the complaint made clear that the plaintiff was seeking to avoid the transfer of the real property by the limited liability company, and not the transfer of the debtor’s membership interest in the LLC. As the court noted in an order entered in this proceeding on January 10, 2012, Paragraphs 31 and 32 appeared to represent “inartful drafting by confusing ownership of the LLC with ownership of the real property — a distinction upon which the court based its decision dismissing this proceeding.” Moreover, the parties do not question the correctness of the dismissal order or the court’s interpretation of the complaint. At the pretrial conference on August 1, 2012, the defendants’ counsel apparently agreed that Paragraphs 31 and 32 represented in-artful drafting and that the original complaint did not seek to avoid the transfer of the debtor’s LLC interest. The plaintiff implicitly makes the same acknowl*582edgment, since he contends that, through no fault of his own, he did not know about the transfer at the time the proceeding was dismissed.
The trustee filed the complaint initiating this adversary proceeding on August 28, 2012. The complaint asserts that the debtor’s equity interest was secretly transferred to Mr. Bowers on or about December 10, 2008, and that the transfer of the membership interest is avoidable under § 549 of the Bankruptcy Code. Because the limitations period set forth in § 549(d) for avoiding postpetition transfers expired in December 2010, the trustee relies on equitable tolling or equitable estoppel in arguing that he should not be barred from pursuing the avoidance claim.
On January 17, 2014, the defendants filed a motion for summary judgment. On February 21, 2014, the court denied the motion, determining that there were genuine issues of material fact regarding whether the debtor transferred his membership interest and whether equitable tolling applies.5 The court also rejected the defendants’ argument that any transfer of the equity interest was ineffective due to a lack of written consent by both members of the limited liability company,6 and also rejected (for the reasons stated in the court’s oral ruling of October 3, 2012, quoted in part above) their contention that this proceeding is barred by res judicata on account of the dismissal of Adversary Proceeding No. 10-1407.
At trial, Mr. Bowers testified that in 2005 he and Mr. McKenzie formed Cleveland Auto Mall, each holding 50% interests, and that the LLC immediately thereafter acquired the real estate located near 1-75 Exit 20 in Bradley County, Tennessee. The purchase of the real estate was financed in part by a loan from SunTrust Bank, and both Mr. McKenzie and Mr. Bowers personally guaranteed that loan. Some time in late 2007 or early 2008, SunTrust became uncomfortable with the financial condition of one of Mr. McKenzie’s entities that had a relationship with the bank, and SunTrust wanted the Cleveland Auto Mall loan refinanced and Mr. McKenzie removed from the loan. To accommodate the bank’s concerns, Mr. Bowers began negotiating with Mr. McKenzie in 2008 about “getting him out of Cleveland Auto Mall.” Those discussions occurred prior to the filing of the involuntary petition against Mr. McKenzie. Previously, Mr. Bowers testified that Mr. McKenzie wanted $125,000 for his interest in Cleveland Auto Mall, but at trial Mr. Bowers testified that Mr. McKenzie wanted $125,000 to “sign documents.” Previously, Mr. Bowers testified that the $75,000 payment ultimately agreed upon was paid to the debtor for his interest in Cleveland Auto Mall, LLC, but at trial Mr. Bowers testified that the $75,000 was paid to Mr. McKenzie “to sign documents” relating to Cleveland Auto Mall, namely the Sales and Purchase Agreement with respect to the real estate and the Warranty Deed transferring the property. When asked why he previously testified under oath that the $75,000 payment to the debtor was for his interest in Cleveland Auto Mall, Mr. Bow*583ers attributed the prior testimony to confusion and a lack of legal training, and he asserted that he did not equate “interest” with “ownership.”
II.
The trustee seeks to avoid an alleged transfer by the debtor to the defendant pursuant to § 549 of the Bankruptcy Code. Specifically, the trustee seeks to avoid a transfer of the debtor’s membership interest in Cleveland Auto Mall, LLC, which he alleges was made on or about December 10, 2008. Although the trustee filed his complaint after the expiration of the two-year limitations period prescribed by § 549(d) of the Code, he contends that equitable tolling should be applied to toll the running of the limitations period so that he can pursue the avoidance of the alleged transfer. The defendant argues that equitable tolling is not available to the trustee because the trustee cannot prove that he acted with diligence in pursuing his rights or, alternatively, that the trustee cannot prove that a transfer of the debt- or’s membership interest occurred.7
Thus, the court must determine whether the doctrine of equitable tolling is applicable under the facts of this case. “Strictly defined, equitable tolling is [t]he doctrine that the statute of limitations will not bar a claim if the plaintiff, despite diligent efforts, did not discover the injury until after the limitations period had expired.” Tapia-Martinez v. Gonzales, 482 F.3d 417, 422 (6th Cir.2007) (internal quotation mark omitted) (citation omitted). The burden of proof is on the party asserting the applicability of equitable tolling. E.g., Jurado v. Burt, 337 F.3d 638, 642 (6th Cir.2003). “The doctrine is used sparingly by federal courts. Typically, equitable tolling applies only when a litigant’s failure to meet a legally-mandated deadline unavoidably arose from circumstances beyond that litigant’s control.... Absent compelling equitable considerations, a court should not extend limitations by even a single day.” Id. (citing and quoting Graham-Humphreys v. Memphis Brooks Museum of Art, Inc., 209 F.3d 552, 560 (6th Cir.2000)) (internal quotation marks omitted). The reason equitable tolling is to be narrowly applied is that statutes of limitation are “vital to the welfare of society and are favored in the law.” Hill v. U.S. Dep’t *584of Labor, 65 F.3d 1331, 1336 (6th Cir.1995) (quoting Wood v. Carpenter, 101 U.S. 135, 139, 25 L.Ed. 807 (1879)). At some point “the right to be free of stale claims ... comes to prevail over the right to prosecute them.” Id. (quoting Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538, 554, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974)).
“Generally, a litigant seeking equitable tolling bears the burden of establishing two elements: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstances stood in his way.” Credit Suisse Sec. (USA) LLC v. Simmonds, - U.S. -, 132 S.Ct. 1414, 1419, 182 L.Ed.2d 446 (2012) (emphasis omitted) (internal quotation marks omitted) (quoting Pace v. DiGuglielmo, 544 U.S. 408, 418, 125 S.Ct. 1807, 161 L.Ed.2d 669 (2005)). Such “extraordinary circumstances” may be present, for example, where the existence of the cause of action was concealed from the plaintiff. E.g., Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389, 394 (6th Cir.1975). “Three elements must be pleaded [and proved] in order to establish fraudulent concealment: (1) wrongful concealment of their actions by the defendants; (2) failure of the plaintiff to discover the operative facts that are the basis of his cause of action within the limitations period; and (3) plaintiff’s due diligence until discovery of the facts.” Id. (citing Weinberger v. Retail Credit Co., 498 F.2d 552 (4th Cir.1974)); accord, e.g., Jarrett v. Kassel, 972 F.2d 1415, 1424 n. 6 (6th Cir. 1992) (noting that federal law, unlike Tennessee law, requires “the showing of failure to discover the operative facts within the limitations period”). The Sixth Circuit has explained:
The Supreme Court ease of Wood v. Carpenter, supra, long ago established the standards for pleading fraudulent concealment. The Court said that an injured party has a positive duty to use diligence in discovering his cause of action within the limitations period. Any fact that should excite his suspicion is the same as actual knowledge of his entire claim. Indeed, “the means of knowledge are the same thing in effect as knowledge itself.” If the plaintiff has delayed beyond the limitations period, he must fully plead the facts and circumstances surrounding his belated discovery “and the delay which has occurred must be shown to be consistent with the requisite diligence.”
Dayco, 523 F.2d at 394 (quoting Wood v. Carpenter, 101 U.S. at 143). “[Tjhose plaintiffs who delay unreasonably in investigating circumstances that should put them on notice will be fore-closed from filing, once the statute has run.” Campbell v. Upjohn Co., 676 F.2d 1122, 1128 (6th Cir.1982); accord, e.g., Noble v. Chrysler Motors Corp., 32 F.3d 997, 1002 (6th Cir.1994) (rejecting application of equitable tolling because “plaintiffs have failed to allege any facts that would exhibit their due diligence in discovering the basis for their claim”). In other words, once the plaintiff becomes aware of suspicious facts that may suggest a cause of action, he must diligently investigate to determine whether he does in fact have a cause of action and, if he does, assert the cause of action by filing a complaint within the limitations period. If the plaintiff can show that he diligently investigated but was nevertheless “delayed beyond the limitations period,” he must show the circumstances that prevented him from timely filing a complaint. If the plaintiff either failed diligently to investigate or does not show why he was unable to comply with the statute of limitations despite a diligent investigation, equitable tolling will not be available.
*585A bankruptcy trustee has a statutory duty to “investigate the financial affairs of the debtor” and “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.” 11 U.S.C. § 704(4), (1). “Included within a trustee’s statutory obligations are the duty to examine the debtor’s books and records, ... and to investigate and litigate potential lawsuits that might be brought on behalf of the debtor.... The failure to perform these duties ... nullifies the trustee’s ability to invoke the doctrine of equitable tolling.” Ernst & Young v. Matsumoto (In re United Ins. Mgmt., Inc.), 14 F.3d 1380, 1386 (9th Cir.1994). Here, the trustee’s examination of the debtor’s books and records did not disclose a transfer of the debtor’s membership interest in Cleveland Auto Mall, LLC, because any such transfer was undocumented. See Blixseth v. Kirschner (In re Yellowstone Mountain Club, LLC), 436 B.R. 598, 651 (Bankr.D.Mont.2010) (when parties do not document transfers, “the facts forming the basis of the claim [are] concealed”), amended in part by Bankr. No. 08-61570-11, Adv. No. 09-00014, 2010 WL 3504210 (Bankr.D.Mont. Sept. 7, 2010), judgment amended by Bankr. No. 08-61570-11, Adv. No. 09-00014, 2012 WL 6043282 (Bankr.D.Mont. Dec. 5, 2012), aff'd, No. CV-12-83-BU-SEH, 2014 WL 1369363 (D.Mont. Apr. 7, 2014); see also Bailey v. Glover, 88 U.S. (21 Wall.) 342, 349, 22 L.Ed. 636 (1874) (holding that equitable tolling may apply when the defendant “concealed] a fraud, or ... committ[ed] a fraud in a manner that it concealed itself’). Nevertheless, the burden is on the trustee to prove that he acted with diligence in conducting an investigation of potential lawsuits, especially where the facts and circumstances warrant an investigation into particular matters that come to the trustee’s attention.
The proof presented at the trial of this proceeding revealed that, in early 2009, the trustee became aware of the postpetition transfer of the real estate from Cleveland Auto Mall, LLC, to Exit 20 Auto Mall, LLC, that was brought about by the debtor. Then, in early 2010, there were discussions among the trustee, the trustee’s attorney, and the debtor’s attorney about whether the trustee should bring an action in an attempt to avoid that transfer, as well as others, even though the transfer of the real estate appeared to be between two nondebtor parties. The debtor’s attorney even went so far as to file a motion seeking an order declaring that the trustee had abandoned that purported cause of action, among others, so that the debtor could pursue them. Although the trustee, through Mr. LeRoy as general counsel and Mr. Banks as special counsel, eventually initiated an adversary proceeding asserting the purported cause of action that Mr. Banks had been urging the trustee to prosecute, it appears, based on the evidence at trial, that little or no investigation was undertaken regarding the circumstances surrounding the sale of the real property. The trustee did not take any Rule 2004 examinations and did not request any documents before filing his complaint. All that he knew about the particular circumstances surrounding the transaction appears to have come from Mr. Banks, who was reporting what he had been told by the debtor. The court cannot say that the trustee would have learned of evidence of the transfer of the debtor’s membership interest in the entity that sold the real property had he conducted an investigation into that sale. However, an examination of the members of the entity that acquired the property *586(including the Dillards, who wrote the $75,000 check to Shasta McKenzie, and Mr. Bowers) may well have produced information about the circumstances surrounding that transaction, including the prior discussions among the parties that occurred before the filing of the involuntary petition, the consideration paid for the real estate, the consideration paid for the membership interests in Exit 20 Auto Mall, and the suspicious check that was paid directly to the debtor. If the pre-bankruptcy discussions had come to light — wherein Mr. Bowers and Mr. McKenzie had talked about a possible buyout of Mr. McKenzie’s interest in Cleveland Auto Mall and Mr. Dillard and Mr. Bowers had talked about Mr. Dillard becoming an investor in the property with Mr. Bowers — it would have been quite logical to surmise that the direct payment to Mr. McKenzie made after the involuntary petition was filed represented the consummation of those discussions. Had the complaint initiating Adversary Proceeding No. 10-1407 alleged that the direct payment to Mr. McKenzie was, in effect, a purchase of his equity interest in Cleveland Auto Mall, that complaint would have survived the motions to dismiss. The complaint, however, made no such allegation. Moreover, the trustee’s attorney did not mention the Norwood email or the $75,000 check at the hearing on dismissal of that proceeding, nor did the trustee ever file a motion for leave to amend the complaint or for additional time to conduct discovery.
While it may be debatable whether, standing alone, the trustee’s lack of discovery prior to the initiation of Adversary Proceeding No. 10-1407 precludes the application of equitable tolling, what is clear is that the October 2010 email from Mr. Bowers’s attorney to the trustee’s attorney signaled or should have signaled to the trustee that an investigation was imperative. The “red flags” represented by the email and the copy of the $75,000 check certainly should have awakened the trustee to the need to scrutinize the December 2008 transactions prior to the expiration of the limitations period.
The email stated the attorney’s contention that the check was delivered to Shasta McKenzie “for the benefit of Cleveland Auto Mall” and therefore served as part of the consideration “for the transfer of the subject property.” But, taken literally, the statement could not have been true: the check could not have been given as part of the consideration for the real property because the consideration for an asset being sold goes to the seller, not one of the seller’s two owners. Moreover, the payment was not included in the list of consideration recited in the Sale and Purchase Agreement, and the payment was made even more suspicious by the circuitous manner in which it was made to the debtor because the payment was made by a check issued by the Dillards (not the buyer of the real estate, Exit 20 Auto Mall, or even Mr. Bowers) and made payable to Shasta McKenzie (not Cleveland Auto Mall, or even the debtor). At this point, the obvious question for investigation is what the $75,000 was really given for. Given the lack of documentation in that regard, the question could only be answered by parties to the check or perhaps parties to the related real estate transaction, namely the Dillards, Shasta McKenzie, the debtor, or Nelson Bowers whose attorney first made the trustee aware of the check. If the trustee had inquired of those individuals, his cause of action might have been revealed to him. Yet the trustee did not take an examination of Mr. Dillard or Mr. Bowers until nearly nine months later in *587July 2011,8 and he has not offered an adequate explanation for that delay.
Counsel for the trustee argued at trial that the delay was of no consequence because a Rule 2004 examination of Mr. Bowers would not have provided the information that the trustee learned later from the testimony of Mr. Bowers regarding the purpose of the $75,000 check. However, the trustee and his attorneys could not have known at the time how Mr. Bowers would testify or what information he might have revealed about his negotiations with the debtor. Because the trustee has the burden of proof on the diligence question, the court simply cannot conclude that he has shown that he acted diligently in conducting an investigation after the receipt of the October email that revealed the secret $75,000 payment to the debtor. There may be facts and circumstances showing there was insufficient time to take an examination of Mr. Bowers before the expiration of the limitations period or the dismissal of the pending adversary proceeding, but the trustee has not carried his burden of showing such facts and circumstances.
The trustee also takes the position that no investigation was warranted because his attorneys were justified in relying on Mr. Norwood’s contention that the $75,000 check was part of the consideration for the real property. Again, however, that contention was contradicted by the fact that the payment was not made by the buyer to the seller of the property and was not mentioned in the listing of consideration for the real estate set forth in the Sale and Purchase Agreement. Hence, the representations made in Mr. Norwood’s email during the course of settlement negotiations regarding the $75,000 check were “red flags,” warranting scrutiny, not facts upon which the trustee and his attorneys could simply rely. See, e.g., Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 981 (6th Cir.2003) (noting the inherent questionability of statements made during settlement negotiations). Indeed, a week after the Norwood email, one of the trustee’s attorneys, Mr. Banks, sent his co-counsel, Mr. LeRoy, an email that indicated that Mr. Banks was not relying on the Norwood email regarding the $75,000 check but was attempting to ascertain more information about the payment. The Norwood email (with the accompanying copy of the $75,000 check) did not excuse the trustee from investigating but, to the contrary, was a mandate for an investigation.
The trustee had the burden of showing such “compelling equitable considerations” that the “right to be free of stale claims” embodied by the statute of limitations must give way to the right to prosecute the claims. The trustee must have shown not only wrongful concealment or other “extraordinary circumstances” that stood in the way of asserting his claim in a timely manner, but also that he pursued his rights diligently. While the trustee’s and his attorneys’ diligence prior to the October 2010 email from Mr. Bowers’s attorney is questionable at best, what the court cannot conclude is that the trustee carried his burden of proving diligence *588once he received evidence of the secret $75,000 payment to the debtor.
III.
Because the court concludes that the trustee has failed to carry his burden of showing that the statute of limitations was tolled until he filed his complaint eighteen months after the expiration of the period prescribed by 11 U.S.C. § 549(d), the court will enter judgment for the defendant, dismissing the complaint as barred by the applicable statute of limitations.
. Exit 20 Auto Mall, LLC, was originally named a defendant along with Mr. Bowers, but it was dismissed from the proceeding at the close of the plaintiff's evidence.
. By an order entered on March 14, 2013, the court severed the “value” issue, and the remaining issues were tried on March 17-18, 2014.
. The complaint was subsequently dismissed after the court entered an order on February 24, 2011, approving the debtor's waiver of discharge.
. The Rule 2004 examination of Steve Dillard also took place on July 8, 2011, also in connection with the stay-relief litigation. Mr. Dillard testified that he had several conversa*580tions with Mr. Bowers about becoming an investor in the real property located at Exit 20 in Bradley County. He further testified that eventually Mr. Bowers told him that $75,000 was needed to put the deal together and that, following Mr. Bowers's instructions, he sent Mr. Bowers a $75,000 check made payable to Shasta McKenzie, which his wife dropped off at one of Mr. Bowers's car dealerships. (Mr. Dillard testified that, to complete the purchase of his interest in Exit 20 Auto Mall, LLC, he subsequently paid Mr. Bowers an additional $500,000.)
. The court made clear that, although equitable tolling may apply, equitable estoppel does not, "because the plaintiff contends that he was not aware of the causes of action — not that he was aware of the claims but that some conduct of the defendants prevented him from asserting them.”
. The operating agreement of Cleveland Auto Mall, LLC, required the prior written consent to transfers of equity interests in the company. The order denying the motion for summary judgment held that, if there was a transfer, the contractual requirement would have been waived since both LLC members were parties to the transfer.
. The trustee takes the position that Mr. Bowers should have been precluded from opposing the application of equitable tolling at trial, because, "[a]lthough a party may plead in the alternative, it cannot proceed to trial on two fundamentally inconsistent theories if it has admitted facts which wholly negate one of those theories.” Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am., Inc. (In re TOUSA, Inc.), 408 B.R. 913, 920 (Bankr.S.D.Fla.2009); see also Langer v. Monarch Life Ins. Co., 966 F.2d 786, 802-04 (3d Cir.1992) (party may not pursue alternative theory if it has made formal admission of facts inconsistent with that theory). The trustee contends that to argue that there was no transfer of the membership interest is “fundamentally inconsistent” with an argument that the trustee should have discovered the transfer. However, Mr. Bowers has not admitted that a transfer was made. He argues that the trustee has the burden of proof on both issues and that he has not carried the burden of showing diligence in investigating whether a transfer was made, but that, if the court concludes that the trustee has met that burden, he has not carried the burden of proving that a transfer was made. The court does not believe the two approaches are inconsistent. Just as a defendant may "pursue third-party liability over claims while contesting the underlying claim,” Langer v. Monarch Life Ins. Co., 966 F.2d at 802, Mr. Bowers may resist the application of equitable tolling while contesting that there was a transfer of the membership interest. In effect, without admitting that a transfer took place, Mr. Bowers argues that the evidence the trustee is relying on to support his theory that a transfer occurred is evidence that should have been sought through a diligent investigation before the limitations period expired.
. Grant, Konvalinka & Harrison did examine Shasta McKenzie on November 8, 2010, but she did not know the purpose of the $75,000 check. She did testify, however, that her father, the debtor, received the proceeds of the check. The law firm also examined the debtor himself on December 1, 2010, but he falsely testified that the check was given in repayment of a debt, which was doubtful because the debtor had told Mr. LeRoy that he did not remember receiving the payment at all. Additionally, the testimony was inconsistent with the Norwood email’s contention that the payment was part of the consideration for the real property. Thus, the debtor’s testimony raised more questions than it answered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497093/ | MEMORANDUM OPINION RE: MOTION TO TRANSFER VENUE OR, IN THE ALTERNATIVE, TO DISMISS CASE FILED BY APPALACHIAN REALTY INVESTMENTS, LLC, AND TENNESSEE STATE BANK and the DEBTORS’ OBJECTION THERETO
JIMMY L. CROOM, Bankruptcy Judge.
This matter is before the Court on the Motion to Transfer Venue or, in the Alter*590native, to Dismiss Case filed by Appalachian Realty Investments, LLC, and Tennessee State Bank (collectively “Movants”) and the Debtors’ objection thereto. The Movants assert that the proper venue for this Chapter 11 proceeding is the Eastern District of Tennessee. As such, they seek to have the Court transfer the proceeding to that district. The Court conducted a hearing in this matter on April 3, 2014. Fed. R. Bankr.P. 9014.
This proceeding arises in a case referred to this Court by the Standing Order of Reference, Misc. Order No. 84-80 in the United States District Court for the Western District of Tennessee, Western and Eastern Divisions, and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). This Court has jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(b)(1) and 1334 and, thus, may enter a final order in this matter. This memorandum opinion shall serve as the Court’s findings of facts and conclusions of law. Fed. R. Bankr.P. 7052.
I. FACTS
The debtors in this case, David and Marcie Acor (“Acors”), filed a Chapter 11 petition for bankruptcy relief on November 13, 2013. They listed their address on page one of their petition as 42 Larkwood Drive, Jackson, Tennessee (“Jackson Property”). On Schedule C, however, they claimed a homestead exemption of $50,000 in real property at 409 Patterson, Gatlin-burg, TN (“Gatlinburg Property”). At their § 341 meeting of creditors, Marcie Acor testified that her principal residence and domicile is the Gatlinburg Property. David Acor testified that his primary residence and domicile is the Jackson Property and that he only spends 2 or 3 days a week at the Gatlinburg Property. David Acor spends the majority of his time at the Jackson Property because he operates one of the Acors’ companies, United Inventory Service, Inc. (“UIS”), out of Bells, Tennessee. David Acor earns the majority of his income from UIS.
On August 30, 2013, David Acor filed an involuntary Chapter 11 petition against Smokey Mountain Developers, LLC (“Smokey Mountain”), in the United States Bankruptcy Court for the Eastern District of Tennessee (Case Number 13-51532). Smokey Mountain owns several condominiums in the Gatlinburg area. Mountain Vista Luxury Rentals, LLC (“Mountain Vista”), manages the rentals of the condominium units owned by Smokey Mountain and cottages owned by Smoky Pines, LLC. David Acor and Marcie Acor each own a 50% interest in Mountain Vista and Marcie Acor manages the company. Marcie Acor earns the majority of her income from Mountain Vista.
According to Smokey Mountain’s Statement of Financial Affairs, David Acor owns a 2/3 interest in Smokey Mountain and is the managing member. Bobby Dickerson owns the remaining 1/3 interest in the company. Smokey Mountain’s Chapter 11 case is a Single Asset Real Estate case. See 11 U.S.C. § 101(51)(B). David Acor listed his address on Smokey Mountain’s involuntary petition as the Jackson Property. The Eastern District issued an order for relief in that case on September 30, 2013. The case is still pending before the Eastern District of Tennessee. According to David Acor’s testimony at the venue hearing, a sale of the equity interests in Smokey Mountain is scheduled for the end of April. Because Mr. Acor’s equity interest has no value, the sale will not net any proceeds to the Acors’ estate.
Prior to David Acor’s filing of the involuntary Chapter 11 case, a declaratory judgment action was brought against Smokey Mountain and Mountain Vista in the *591Chancery Court for Sevier County, Tennessee. According to the parties’ statements at the venue hearing, the Chancery Court judgment is currently on appeal to the Tennessee Court of Appeals and resolution of the appeal could result in dissolution of Marcie Acor’s ownership interest in Mountain Vista.
In their response to the motion to transfer, the Acors stated that “[biased on Mr. Acor’s calendar and receipts, Mr. Acor resided at the Jackson [Property] for 113 days out of the 180 days prior to the petition date.” (Obj. to Mot. At 2, ECF No. 121.) According to the Acors’ schedules, their secured creditors are located in Phoenix, Arizona, Germantown, Tennessee, St. Louis, Missouri, Pigeon Forge, Tennessee and Jackson, Tennessee. Five of the Acors’ fifteen unsecured creditors are located in Sevierville or Gatlinburg, Tennessee. One is located in Alamo, Tennessee. One is located in Jackson, Tennessee. The remaining creditors are located outside of Tennessee. The Acors’ CPA is based in west Tennessee.
II. ANALYSIS
The venue statute for bankruptcy cases is 28 U.S.C. § 1408. This statute 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 States, 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 (emphasis added). Pursuant to § 1408(1),
the debtor has four venue options: (1) domicile; (2) residence; (3) principal place of business in the United States; (4) principal assets in the United States, and “the court determines proper venue by reference to facts existing during the 180 days prior to the commencement of the case to determine the district of the debtor’s residence, domicile, principal place of business, or location of the person’s principal assets.”
In re Handel, 253 B.R. 308, 310 (1st Cir. BAP 2000) (citing Micci v. Bank of New Haven (In re Micci), 188 B.R. 697, 699 (S.D.Fla.1995)). Section 1408(2) provides a fifth alternative basis for venue: “the pendency of a bankruptcy case concerning the debtor’s affiliate, general partner or partnership.” In re FRG, Inc., 107 B.R. 461, 468 (Bankr.S.D.N.Y.1989). Because § 1408 “lists each of the possibilities for venue in the alternative, ... any one is sufficient to establish venue.” Broady v. Harvey (In re Broady), 247 B.R. 470, 473 (8th Cir. BAP 2000); see also In re Gurley, 215 B.R. 703, 708 (Bankr.W.D.Tenn.1997) (“Any of the ... [tests] for venue is jurisdietionally sufficient.”) (citation omitted); Bavelis v. Doukas (In re Bavelis), 453 B.R. 832, 868 (Bankr.S.D.Ohio 2011). As a result, a debtor may select from any one of the five options in selecting a venue for his bankruptcy filing. “If a joint petition is filed by the debtor and the debtor’s spouse, venue is proper if either satisfies the requirements of code § 1408.” 7 Nor*592ton Bankruptcy Law and Practice 3d § 140:1 (rev. 2014).
As recognized by the court in Gurley,
[i]n Tennessee, “domicile” is defined as the place “where a person has his principal home and enjoyment of his fortunes; which he does not expect to leave, except for a purpose; from which when absent, he seems to himself a wayfarer; to which when he returns, he ceases to travel.” A person may have two or more residences but only one domicile. For bankruptcy purposes, the term “residence” has been construed to include places where the debtor has a semi-permanent residence, even if that place is not the debtor’s domicile.
Gurley, 215 B.R. at 708 (citations omitted). Clearly under these guidelines, venue of the Acors’ case is appropriate in the Western District of Tennessee. David Acor testified that he not only resides at the Jackson Property, but also treats it as his domicile, and has done so for the majority of the 180-day period preceding the filing of the petition. The fact that the Gatlin-burg Property also serves as his residence from time to time does not alter this conclusion. Id. Because David Acor has satisfied the test for venue in the Western District of Tennessee, venue for Marcie Acor in this district is also proper.
Although venue may be appropriate in a given district, a court “may transfer a case or proceeding under title 11 to ... another district, in the interest of justice or for the convenience of the parties.” 28 U.S.C. § 1412; Fed. R. BankrJP. 1014(a)(1). “Venue is presumed to be proper in the district where a bankruptcy case is filed, and the burden of proving otherwise is on the party who has moved to transfer or dismiss the case.” In re Peachtree Lane Assocs., Ltd., 206 B.R. 913, 917-18 (N.D.Ill.1997) (citing In re Holiday Towers, Inc., 18 B.R. 183, 186 (Bankr.S.D.Ohio 1982)). The movant must carry this burden by a preponderance of the evidence. Handel, 253 B.R. at 310. “[T]he decision to transfer is subject to the broad discretion of the court.” Koken v. Reliance Grp. Holdings, Inc. (In re Reliance Grp. Holdings, Inc.), 273 B.R. 374, 406 (Bankr.E.D.Pa.2002) (citations omitted). “The court should exercise its power to transfer with caution. A debtor is presumptively entitled to file and retain his bankruptcy case in the district in which he has resided for the greater part of the required time.” Gurley, 215 B.R. at 709 (citations omitted). Accordingly, a party seeking to have a case transferred pursuant to § 1412 must “overcome the presumption that the debtor is entitled to file and maintain his case in the venue in which he filed it.” In re Ginco, Inc., 70 B.R. 2 (Bankr.D.N.M.1986) (citing In re Walter, 47 B.R. 240 (Bankr.M.D.Fla.1985)).
In determining whether a discretionary transfer of a ease is warranted under 28 U.S.C. § 1412 and Federal Rule of Bankruptcy Procedure 1014, a court should consider the following factors:
(1) The proximity to the court of:
(a) creditors
(b) debtors
(c) assets
(d) witnesses.
(2) The relative economic harm to debtors and creditors caused by a transfer.
(3) The economics of administering the estate.
(4) The effect on the parties and their willingness or ability to participate in the case or in adversary proceedings.
(5) The availability of compulsory process and the cost associated with the attendance of unwilling witnesses.
*593Gurley, 215 B.R. at 709 (citations omitted). “The most important [of these] factors is said to be the ‘economic and efficient administration of the estate.’ ” Id. (citations omitted). Use of these factors helps a court determine whether or not a transfer of the case would be “in the interest of justice” or “for the convenience of the parties....” Ginco, 70 B.R. at 2 (citing In re Commonwealth Oil Refining Co., 596 F.2d 1239 (5th Cir.1979)).
After analyzing the factors in the case at bar, the Court concludes that transfer of this case to the Eastern District of Tennessee is not warranted. Although some of the Acors’ assets are located in Gatlinburg, Tennessee, David Acor’s main source of income is generated by USI which is located and operated in the Western District of Tennessee. Additionally, the Jackson Property constitutes one of the Acors’ main assets and is squarely located within the Western District.
Turning to the proximity of the Acors’ creditors, debtors, and witnesses, the Court concludes that the Movants did not meet their burden of proof on these factors. Although several of the Acors creditors are located in the Eastern District of Tennessee, they do not constitute a majority of the creditors in this case. The Acors have creditors in West Tennessee as well as in Arizona and Missouri. The majority of witnesses who may be needed for court hearings are located in the Western District of Tennessee, including the Acors’ CPA and David Acor himself.
While it is true that David Acor filed the involuntary petition against Smokey Mountain in the Eastern District of Tennessee, that debtor is a single asset real estate debtor whose only asset is scheduled to be sold at auction sometime this spring. Because David Acor’s uncontroverted testimony established that his interest in Smokey Mountain had no value, such a sale will have no impact on the Acors’ individual Chapter 11 case.
Finally, the Court concludes that the Movants did not establish that the economic administration of the estate would be better served in the Eastern District of Tennessee. David Acor testified that his main source of income is generated by UIS in the Western District. Although the auction in Smokey Mountain’s case will terminate one of David Acor’s property interests, as stated supra, that interest has no value and will not impact the administration in the Western District. In addition, although the Tennessee Court of Appeals’ ruling could drastically impact Marcie Acor’s interest in and income from Mountain Vista, the Court concludes that this issue does not hold much weight insofar as transfer of the case is concerned. In fact, if Marcie Acor’s ownership interest in Mountain View is terminated, the Acors will have one less tie to the Eastern District of Tennessee. The issue of her income, or the lack thereof, is more appropriately considered during the confirmation process in this case.
Although venue in the Eastern District of Tennessee may have been proper, the fact that venue in the Western District is also appropriate gives the Court broad discretion in deciding whether transfer of this case would serve either the interest of justice or the convenience of the parties. In addition, because venue in the Western District of Tennessee is appropriate, the Movants had a heavy burden of proof in overcoming the presumption that venue of the Acors’ case is proper in the Western District. The Court concludes that the Movants did not meet this burden and that the factors a court must consider in ruling on a motion to transfer venue pursuant to 28 U.S.C. § 1412 do not weigh in favor of transfer. The Western District of Tennessee will retain venue of the case at bar.
*594Because the Court has concluded that venue of this case is proper in the Western District of Tennessee pursuant to 28 U.S.C. § 1408, it is unnecessary for the Court to address the Movants’ alternative motion to dismiss the case. Federal Rule of Bankruptcy Procedure 1014(a)(2) only allows for dismissal of a case “[i]f a petition is filed in an improper district....” Fed. R. Bankr.P. 1014(a)(2) (emphasis added); In re Campbell, 242 B.R. 740, 748 (Bankr.M.D.Fla.1999) (Determining that because the “Court finds venue in this district is proper ... the issue becomes whether to retain or transfer because venue is proper, rather than whether to dismiss or to transfer because venue is improper .... ”).
The Court will enter an order in accordance herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497094/ | MEMORANDUM DECISION
TIMOTHY A. BARNES, Bankruptcy Judge.
The matter before the court is the Motion for Allowance of Secured Claim and Turnover of Collateral Proceeds (the “UCB Motion”), brought by United Central Bank {“UCB ”), and the Cross Motion for Partial Turnover of Proceeds of Sales (the “IDOR Motion” and together with the UCB Motion, the “Motions ”), brought by the Illinois Department of Revenue {“IDOR ”). Upon a review of the parties’ respective filings and after holding a hearing on the matter, the court finds that UCB is entitled to a claim secured in the proceeds of the sale, in excess of the amount of the proceeds. IDOR has secured, priority unsecured and general unsecured claims, all of which are lower in priority to UCB’s secured claim. IDOR’s right to assert transferee liability is an “interest” for purposes of a section 363(f) sale, potentially entitling IDOR to adequate protection under section 363(e). As IDOR’s interest is, however, subordinate to that of UCB’s, there is no harm from which IDOR is entitled to protection.
JURISDICTION
The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “Bankruptcy Code ”). 28 U.S.C. § 1334(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bank*597ruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). Proceedings arising with respect to sales held pursuant to section 368 of the Bankruptcy Code are matters arising in a bankruptcy case, in which the bankruptcy court is empowered to enter orders. Directional Int'l, Ltd. v. Illinois Bell Telephone Co. (In re Personal Computer Network, Inc.), 97 B.R. 909, 912 (N.D.Ill.1989).
PROCEDURAL HISTORY
In considering the Motions, the court has considered the arguments of the parties at the April 30, 2014 hearing on the Motions, and has reviewed and considered the following filed documents in the bankruptcy case:
(1) Order Approving Sale of Gas Stations [Docket No. 191] (the “Sale Order ”);
(2) Motion of United Central Bank for Allowance of Secured Claim and Turnover of Collateral Proceeds [Docket No. 205];
(3) Objection of Illinois Department of Revenue to Motion of United Central Bank for Allowance of Secured Claim and Turnover of Collateral Proceeds [Docket No. 232];
(4) Cross-Motion Of Illinois Department of Revenue for Partial Turnover of Proceeds of Sales [Docket No. 233];
(5) Trusteé’s Response to Cross-Motion of Illinois Department of Revenue’s Motion for Partial Turnover of Proceeds of Sales [Docket No. 237];
(6) United Central Bank’s Response In Opposition to the Cross Motion of Illinois Department of Revenue for Partial Turnover of Proceeds of Sale and Reply in Support of Motion of United Central Bank of Allowance of Secured Claim and Turnover of Collateral Proceeds [Docket No. 239];
(7) Reply of Illinois Department of Revenue to Responses of United Central Bank and the Chapter 11 Trustee to Cross-Motion for Partial Turnover of Proceeds of Sale [Docket No. 244]; and
(8) Supplemental Exhibit to Motion of United Central Bank for Allowance of Secured Claim and Turnover of Collateral Proceeds [Docket No. 256],
The court has also taken into consideration any and all exhibits submitted in conjunction with the foregoing. Though these items do not constitute an exhaustive list of the filings in the above-captioned bankruptcy case, the court has taken judicial notice of the contents of the docket in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. Mar. 8, 1993); In re Brent, 458 B.R. 444, 455 n. 5 (Bankr.N.D.Ill.2011) (Goldgar, J.) (authorizing a bankruptcy court to take judicial notice of its own docket).
BACKGROUND
The matter before the court arises out of the post-petition sale (the “Sale”) of substantially all the assets of jointly administered chapter 11 bankruptcy estates for debtors Elk Grove Village Petroleum, LLC (“Elk Grove ”), Joliet Petroleum, LLC (“Joliet”), Oswego Petroleum, LLC (“Oswego ”) and Orland Park Petroleum, LLC ({‘Orland Park”, and collectively with Elk Grove, Joliet and Oswego, the “Debtors ”).
*598Prior to the Sale, the Debtors in these eases collectively owned and operated five gas stations in the greater Chicago area. In the course of business, the Debtors entered into various loan agreements with UCB as lender, which were secured by mortgages on the real properties upon which the gas stations operate as well as security interests in the Debtors’ personal property. The Debtors subsequently defaulted on their obligations to UCB.
UCB asserts that it is thereby owed not less than $14,077,157.67 and that the security for its claims extends to all of the assets of the Debtors and thus the proceeds of the Sale. No party challenges the nature, validity or extent of UCB’s interests or has objected to UCB’s claims.
UCB was not, however, the only creditor the Debtors failed to pay. In operating the business, the Debtors also failed to pay a variety of taxes to the State of Illinois. In that regard, IDOR has filed claims for unpaid pre-petition taxes totaling approximately $1.8 million: $1,387,418.93 as secured debt, $419,718.38 as priority unsecured debt and $74,511.29 as general unsecured debt. No party has objected to IDOR’s claims.
After commencing the bankruptcy cases, the Debtors’ performance on its monetary and other obligations did not improve. As a result of those and other failures, on request of UCB, the court appointed Eugene Crane as chapter 11 trustee (the “Trustee ”) on April 12, 2013.
On August 13, 2013, the Trustee moved for the sale of the Debtors’ gas stations free and clear of liens, claims, encumbrances and interests pursuant to section 363(f) of the Bankruptcy Code. Among the objections received was one from IDOR, wherein IDOR asserted its claims and requested adequate protection under section 363(e) of the Bankruptcy Code. In particular, IDOR claimed that, as its state law right to assess its claims against a purchaser under transferee liability was being impaired by the sale, it was entitled to protection of that interest.
On November 13, 2013, after having conducted a hearing on the matter, the court entered the Sale Order. The Sale Order authorized the sale of the Debtors’ gas stations “free and clear of liens, claims, encumbrances and interests, with all liens, claims, encumbrances and interests to attach to the proceeds.” The Sale Order further provided that the Trustee would hold the proceeds of the sale, pending further order of the court. The Trustee has since closed the Sale and is holding net proceeds totaling $4,991,736.13 with respect to the real property and $237,739.14 with respect to inventory for a total of $5,229,475.27.
The UCB Motion and the IDOR Motion renew the questions of whether IDOR has an “interest” that is affected by a sale under section 363(f), and if so, whether and to what extent IDOR is entitled to adequate protection of this interest under section 363(e).
DISCUSSION
The matter before the court is one of apparent first impression in this court, at least insofar as it posits how to adequately protect an objecting creditor whose right to assert transferee liability is being stripped in a sale under section 363.
Putting aside the question of adequate protection for the moment, however, the initial question presented in the UCB Motion is whether, to what extent and in what nature and priority UCB’s claims should be allowed. The initial question presented in the IDOR Motion is the same, except with respect to IDOR’s claims. The court will consider each of these initial questions, in turn.
*599A. The Nature, Extent and Priority of the UCB and IDOR Claims
Though never expressly stated in the Bankruptcy Code, the highest priority claim in bankruptcy—but for extraordinary relief such as that available under section 506(c)—is that afforded a secured claim. Bankruptcy is essentially an in personam mechanism, severing the individual’s liability on debts through the process of discharge. In rem rights, however, are generally unaffected. Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (a bankruptcy discharge “extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam— while leaving intact another—namely, an action against the debtor in rem.”).
Below the level of secured claims, section 507 of the Bankruptcy Code governs the priority of unsecured claims in bankruptcy.
As to secured claims of equal priority, the Bankruptcy Code provides no guidance as what relative priority such claims should be afforded as against each other. That question is answered by state law. So, for example, if two creditors both have secured claims, it is state law that will dictate which of these claims has a higher priority.
With that in mind, the court first considers UCB’s claims, then IDOR’s claims.
a. UCB’s Claims
The UCB Motion requests allowance of its claims against the Debtors (the “UCB Claims ”) as secured in the gross amount of $14,077,157.67. UCB has not asserted its claims except through the UCB Motion, but UCB, as a putatively secured creditor, is not required to assert a claim at all. See In re Strong, 203 B.R. 105, 111-12 (Bankr.N.D.Ill.1996) (Squires, J.). All affected parties appear to have received notice of the UCB Motion.
In addition, UCB was scheduled by the Debtors as holding secured claims for all listed properties and was not scheduled as having a disputed, contingent, or unliq-uidated claim. The UCB Claims do not differ materially from the amounts scheduled by the Debtors on their schedule of liabilities, and the Debtors’ schedules constitute prima facie evidence of the validity and amount of the UCB Claims. Fed. R. Bankr.P. 3003(b). Pursuant to section 502(a), a claim is deemed allowed unless a party in interest objects, 11 U.S.C. § 502(a), and no objections have been filed.1
As such, the court considers the UCB Claims as having been properly asserted.
UCB requests allowance of its claims as secured in the amount of $3,089,041.59 against Elk Grove, $2,793,967.50 against Oswego, $6,703,581.27 against Joliet, and $1,490,567.31 against Orland.
Section 506(a) of the Bankruptcy Code provides that “[a]n 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.” 11 U.S.C. § 506(a). Section 552 of the Bankruptcy Code further provides that if a security agreement entered into with debtor prior *600to the bankruptcy filing extends to property of debtor acquired before the commencement of the case and proceeds, products, offspring, or profits of such property, then the security interest extends to such proceeds, products, offspring, or profits acquired by the estate after the commencement of the case. 11 U.S.C. § 552.
In support of the allegation that its claims are secured, UCB offers a series of mortgages with respect to the real property and UCC-1 financing statements/continuation statements with respect to the personal property held by each Debtor, as well as the various agreements and documentation underlying each. In the court’s determination, these documents adequately establish that UCB had liens in all of the assets sold pursuant to the Sale.
Because the Trustee recovered proceeds less than the amounts claimed by UCB, the court concludes that the UCB Claims are secured as against all of the assets having been sold, and thereby, by operation of the Sale Order, as against all of the proceeds of the Sale.
Therefore, UCB’s secured claims against the Debtors are deemed allowed under section 502(a) in the total amount of $14,077,157.67, secured in the proceeds of the Sale. The question of which portions of the UCB Claims are secured and which are unsecured, depends however on the court’s consideration of the IDOR claims.
b. IDOR’s Claims
The IDOR Motion requests allowance of its claims against the Debtors (the “IDOR Claim ”) in the gross amount of $1,881,648.60.2 IDOR asserts that its claims are priority claims under Illinois law, specifically section 902(d) of the Illinois Income Tax Act, 35 ILCS 5/902 (the “Income Tax Act ”) and section 5j of the Retailers Occupation Tax Act, 35 ILCS 120/5j (the “Bulk Sale Act ” and collectively with the Income Tax Act, the “Acts ”).
While the Bankruptcy Code itself, as noted above, establishes the relative priorities of classes of claims, IDOR’s contention deserves consideration. If state law affords a creditor an interest in property, bankruptcy law respects that right unless a federal interest requires a separate result. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); Sullivan v. Glenn (In re Glenn), 502 B.R. 516, 542 (Bankr.N.D.Ill.2013) (Barnes, J).
The Acts are essentially the same. They each provide a mechanism by which the State of Illinois may demand payment of taxes from a seller of assets and if those taxes are not paid, assert the same claim personally against the buyer. This mechanism unquestionably constitutes a claim under Bankruptcy Code’s definition. 11 U.S.C. § 101(5) (defining “claim” as “a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured”).
The parties agree that the taxes in question were not paid as a part of the sales transaction. As such, IDOR unquestionably has at least general unsecured claims. The question, however, is whether the Acts permit IDOR to assert anything other than unsecured claims. There is no case law on point as to this question.3
*601The Acts themselves, however, answer this question. The Acts make it clear that a claim thereunder is for personal liability, and nothing in the operative provisions of the Acts affords these claims either secured status or priority over other claims.4 As such, the Acts provide IDOR nothing other than an unsecured claim, first as against the seller, and then as against both the seller and the purchaser should seller not pay.
This is not to say that IDOR is not entitled to claim a lien, however. It simply means that noncompliance with the Acts itself does not automatically afford IDOR a status as anything other than an unsecured creditor. IDOR may assert a hen pursuant to other provisions of the Acts, but only under the procedures set forth therein. 35 ILCS 5/1101; 35 ILCS 120/5a.5 The Acts confirm that a buyer will be subject to such liens. See, e.g., 35 ILCS 120/5j (“Any person who shall acquire any property or rights thereto which, at the time of such acquisition, is subject to a valid lien in favor of the Department shall be personally liable to the Department for a sum equal to the amount of taxes secured by such lien but not to exceed the reasonable value of such property acquired by him.”).
IDOR does in fact claim liens under these provisions, but only for a portion of its total claim. The IDOR Motion provides documentation of tax liens against the Debtors’ real and personal property in Will and Cook County in the amount of $1,387,418.93. IDOR has provided documentation in the IDOR Motion that certain of its claims do have recorded liens associated with them. IDOR asserts that those liens (the “Will and Cook County Tax Liens ”) extend to both the real and personal property of the Debtors, and the court has no reason to question that assertion. No party has challenged the extent or validity of the Will and Cook County Tax Liens.
As such and in accordance with the Sale Order, the court concludes that IDOR has valid liens in the amount of $1,387,418.93 as against the proceeds of the Sale. Otherwise, the IDOR claims are unsecured.
c. The Relative Priority of the UCB Claims and the IDOR Claims
As noted above, UCB has sufficiently demonstrated that it has valid liens in the assets of the Debtors in the gross amount of $14,077,157.67. Those liens were first recorded and/or filed in 2006, and UCB has sufficiently demonstrated that the liens have been continuously perfected since that time.
On the other hand, the IDOR Motion demonstrates that the Will and Cook County Tax Liens were first recorded in 2010 (and some later in 2011).
*602As noted above, with respect to like claims, state law establishes the priority of those claims. Illinois law provides no higher priority of tax liens over other types of liens. 35 ILCS 5/1103(a) (“Nothing in this Section shall be construed to give the Department a preference over the rights of any bona fide purchaser, holder of a security interest, mechanics lienholder, mortgagee, or judgment lien creditor arising prior to the filing of a regular notice of lien....”); 35 ILCS 120/5a (same). As such, Illinois law is consistent with the majority of other states, providing that liens are prioritized in relative priority of date of perfection, with the first in time being afforded the first right to the underlying assets. Cf. UCC § 9-322(a)(l) (“Conflicting perfected security interests ... rank according to priority in time of filing or perfection.”); 810 ILCS 5/9— 322(a)(1) (same). As the Will and Cook County Tax Liens were recorded after the UCB Claims were secured and perfected and the UCB Claims’ perfection have been continuously maintained, the Will and Cook County Tax Liens are second in priority with respect to the subject assets.
The information provided with respect to the Sale provides that the proceeds of the assets in Will and Cook County are insufficient to satisfy UCB’s secured claim with respect thereto. As a result, the Will and Cook County Tax Liens are not entitled to payment of proceeds from the Sale.
Further, while some if not all of IDOR’s unsecured claims, as pre-petition tax claims, are entitled to claim a priority under section 507(a)(8) of the Bankruptcy Code, 11 U.S.C. § 507(a)(8), such priority unsecured and general unsecured claims are behind secured claims in priority, and these claims fare no better than IDOR’s secured claims.
For these reasons, absent extraordinary relief under section 363(e), both the UCB Claims and the IDOR Claims will be allowed as follows:
(1) UCB’s Claims are, as noted above, allowed in the gross amount of $14,077,157.67.
(2) Of UCB’s Claims, $5,229,475.27 is secured and $8,847,682.40 is generally unsecured.
(3) IDOR’s Claims are allowed in the amount of $1,881,648.60 consisting of priority and general unsecured claims.
It is therefore the court’s determination that — absent some extraordinary intervention in the form of section 363(e) relief, the UCB Claims must be paid first out of the proceeds of the Sale.
B. Adequate Protection of IDOR’s Interest under Section 363
The foregoing begs the question that makes this matter one of first impression in this court: To what extent does the adequate protection afforded under section 363(e) apply, and what different result, if any, does such application dictate with respect to the allowance and/or priority of the parties’ claims? To consider this question, the court must first address the gating question: Whether IDOR has an “interest” for the purposes of sections 363(e) and 363(f).
The court will consider each subsection of section 363 in turn.
a. IDOR Has an “Interest” in the Sold Properties for Purposes of Section 363(f)
Section 363(f) of the Bankruptcy Code provides that “[t]he 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 *603estate....” 11 U.S.C. § 363(f) (emphasis added).6
While the Bankruptcy Code does not define the term “interest” as used in section 363(f), courts have generally concluded that the term should be applied broadly. See Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 545 (7th Cir.2003) (holding that a possesso-ry interest by a lessee is an “interest” for purposes of section 363(f)); see also In re Trans World Airlines, Inc., 322 F.3d 283, 289 (3rd Cir.2003) (concluding that employment-related claims are an “interest”); In re Leckie Smokeless Coal Co., 99 F.3d 573, 586-87 (4th Cir.1996) (holding that employer-sponsored benefit plans are an “interest”). As the Seventh Circuit has stated, “the Code itself does not suggest that ‘interest’ should be understood in a special or narrow sense; on the contrary, the use of the term ‘any1 counsels in favor of a broad interpretation.” Precision Indus., 327 F.3d at 545 (citing United States v. Gonzales, 520 U.S. 1, 5, 117 S.Ct. 1032, 137 L.Ed.2d 132 (1997)). Other courts within this circuit have also found an “interest” to include claims that flow from the ownership of property. See Pusser’s (2001) Ltd. v. HMX, LLC, No. 11-C-4659, 2012 WL 1068756, at *10 (N.D.Ill. Mar. 28, 2012) (concluding that a trademark is an “interest” under section 363(f)); Faulkner v. Bethlehem Steel Intern. Steel Group, No. 2:04-CV-34 PS, 2005 WL 1172748, at *3 (N.D.Ind. Apr. 27, 2005) (finding that an employment discrimination claim is an “interest” for purposes of section 363(f)).
Judge Lynch of this court has recently addressed this threshold question. In re Vista Marketing Group Ltd., Case No. 12-B-83168, 2014 WL 1330112, at *1-2 (Bankr.N.D.Ill. Mar. 28, 2014). He was confronted, after the sale of gasoline stations under section 363 of the Bankruptcy Code, with the question of whether IDOR’s ability under the Acts to assert liability against a purchaser is an interest. Judge Lynch analyzed many of the same cases cited by the parties here and concluded that that the liability of the purchaser for the seller’s unpaid taxes is an obligation that “flows from the ownership of property.” Id. at *6 (citation omitted). As such, Judge Lynch concluded that IDOR’s attempt to enforce liability against the purchaser was a violation of the court’s sale of assets free and clear under section 363(f). Id. at *8-9.
This court agrees.
IDOR’s ability to assert a claim against the purchaser outside of bankruptcy is, at the very least, an inchoate interest in the assets in question, as it would not be as-sertable against the purchaser had the transfer of the assets not occurred. It is therefore an interest within the meaning of section 363(f). The Sale Order thus had the effect of selling the assets free and clear of this interest, and IDOR may not pursue the buyer under the Acts. Id.; see also Fogel v. Zell, 221 F.3d 955, 965 (7th Cir.2000).
b. IDOR Has an “Interest” in the Sold Properties for Purposes of Section 363(e)
Given that IDOR’s ability to assert a claim against a purchaser of the estate’s assets is an interest for purposes of a section 363(f), the court must now consider whether that interest is entitled *604to adequate protection under section 363(e).
Section 363(e) provides that:
Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest. This subsection also applies to property that is subject to any unexpired lease of personal property (to the exclusion of such property being subject to an order to grant relief from the stay under section 362).
11 U.S.C. § 363(e) (emphasis added).
As is the case with section 363(f), section 363(e) does not define interest. Given that sections 363(f) and 363(e) appear to work hand-in-hand, and given that there appears no principled reason to define interest differently in these two subsections, it is axiomatic that IDOR’s interest is an interest for the purposes of section 363(e).
c. Adequate Protection of IDOR’s Interest under Section 363(e)
It is the court’s conclusion above that IDOR has an interest within the meaning of section 363(e) of the Bankruptcy Code. That is not, however, the end of the court’s inquiry with respect to treatment of IDOR’s interest, but the beginning. In addition to not providing a definition of interest, section 363(e) also does not define adequate protection. The court turns, therefore, to section 361 of the Bankruptcy Code, which states that:
When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by—
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity’s interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.
11 U.S.C. § 361.
“Adequate protection, as defined in the Bankruptcy Code, was intended by Congress to prevent, during the pendency of a bankruptcy case, against a loss in the value of a secured creditor’s interest in property of the bankruptcy estate.” In re Bovino, 496 B.R. 492, 502 (Bankr.N.D.Ill.2013) (Barnes, J.) (citing United Sav. Ass’n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 370-71, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988)); In re Markos Gurnee P’ship, 252 B.R. 712, 716 (Bankr.N.D.Ill.1997) (Wedoff, J.).
IDOR argues that it is entitled to the Sale proceeds as the “indubitable equivalent” of its interest in the sold assets. See In re River Road Partners, 651 F.3d 642, 650 (7th Cir.2011) (stating that although not addressed by the Code or courts, “indubitable equivalent” is the face value of the secured asset if a creditor’s claim is *605oversecured or the current value of the asset if the creditor’s claim is underse-cured). It asserts that this determination must be made under state law. Under state law, IDOR argues it has a superior interest in the proceeds as it would be able to assess a bulk sales tax if the properties were sold outside of bankruptcy.
The court does not disagree with the first two of these three contentions. For the indubitable equivalent of IDOR’s claim to have value, however, the third contention must also be true — that IDOR has a superior interest in the proceeds— but that is not the case, as was determined above.
To the contrary, the court has concluded that such a claim would be subject to the established priority scheme for security interests. As UCB possesses “first in time” mortgages and security interests in the assets sold and thus a secured interest in the proceeds of the Sale, IDOR’s interest, to the extent it is entitled to be treated as secured, would fall behind UCB’s. IDOR’s right as priority unsecured creditor and general unsecured creditor is also behind UCB’s secured claim in priority. As UCB’s Claims are, in fact, first in all of the proceeds of the Sale and for more than those proceeds, IDOR’s secured, priority unsecured and general unsecured claims are all “out of the money.”
IDOR has not alleged a decrease in the value of its “interest” and the court cannot find one. It is true that IDOR has lost something in the Sale, the ability to pursue the third party purchaser. But that is a right that all secured creditors whose liens are not released generally have. UCC § 9-201(a) (“Except as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms ... against purchasers of the collateral....”); 810 ILCS 5/9-201(a) (same); see also UCC § 9-315(a) (“Except as otherwise provided in this article and in Section 2-403(2):(l) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien....”); 810 ILCS 5/9-201(a) (same). That right is, therefore, subordinate to UCB’s secured claims both before and after the Sale.
IDOR was out of the money prior to the Sale and would remain out of the money subsequent to the Sale, whether or not section 363(f) is applied. Though IDOR has under section 363(f) lost an avenue of pursuing its claim, that avenue was without value. It has not experienced or been threatened with a loss for which adequate protection under section 363(e) must or should be afforded. Timbers of Inwood, 484 U.S. at 370-71, 108 S.Ct. 626; Bovino, 496 B.R. at 502.
IDOR is therefore not entitled to adequate protection under section 363(e), and its claim to a priority of payment out of the proceeds of the Sale must fail.
CONCLUSION
For the foregoing reasons, the court concludes that the UCB Motion should and will be GRANTED and that the IDOR Motion must and will be DENIED. Separate orders resolving each of the Motions and to that effect will be issued concurrent with this Memorandum Decision.
ORDER
This matter coming before the court on the Cross Motion for Partial Turnover of Proceeds of Sales (the “Motion ”), brought by the Illinois Department of Revenue in the above-captioned bankruptcy proceeding; the court having jurisdiction over the subject matter and the parties having ap*606peared at the hearing that occurred on April 30, 2014; the court having considered the Motion, the relevant filings, the statutory language and the arguments presented by the parties; and the court having ruled orally from the bench on May 16, 2014 and having issued a Memorandum Decision on this same date wherein the court found that the Motion is not well taken;
NOW, THEREFORE, IT IS HEREBY ORDERED:
1. The Motion is DENIED insofar as it seeks to have its claim treated as a priority claim over the claim of United Central Bank, but its claims are otherwise allowed.
. As discussed below, the court considers the IDOR Motion as an objection to the relative priority of payment of the UCB Claim. It is, nonetheless, expressly not an objection to the UCB Claims themselves, or the secured status of the UCB Claims. See IDOR’s Obj. to UCB’s Mot., 3.
. IDOR has filed claims in each of the cases which are substantially the same as those asserted in IDOR’s motion. As no party has objected to IDOR’s claims as set forth in its proof of claims or its motion, they are deemed allowed. See 11 U.S.C. § 502(a).
. With respect to the Bulk Sales Act, the Seventh Circuit has delineated the right of *601parties with respect to funds held under section 5j in response to a stop order issued thereunder in two seminal cases. See, e.g., Hoornstra v. U.S., 969 F.2d 530, 532-34 (7th Cir.1992); Bjork v. U.S., 486 F.2d 934, 937- 39 (7th Cir.1973). The funds in question here are not held in response to a stop order, however, and therefore these cases are inapplicable on the issue presented.
. To be clear, the State may issue a stop order for transactions whereby funds from a sale transaction are required to be escrowed. The Acts provide, however, that failure to escrow the funds will result in the State asserting the claim against the seller and the buyer personally. Failure to comply with the stop order appears to do nothing other than afford the State the ability to reassert the personal liability claim, a general unsecured claim.
. While these Acts provide that an interest in a tax debtor’s property arises immediately upon the assessment of the taxes, the Acts further provide that such interest is not perfected against the debtor until a tax lien is filed. 35 ILCS 5/1101; 35 ILCS 5/1103.
. Section 363(f) further provides that such a free and clear sale may only occur if one of five conditions has been met. See id. The parties do not appear to dispute that such a free and clear sale was appropriate here, and as such, no analysis of these provisions is required. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497095/ | MEMORANDUM OPINION AND ORDER
KATHLEEN H. SANBERG, Bankruptcy Judge.
The court held a hearing on cross motions for summary judgment in the above adversary proceeding on April 2, 2014.
Jacqueline Williams appeared on behalf of the plaintiff, Nauni Jo Manty, chapter 7 trustee. Michael Kreun appeared on behalf of the defendant Flagstar Bank FSB. Camissa Abbot (formerly Camissa Colas) appeared pro se. Jayme Bougie appeared pro se.
This court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 157(F) and 1334, Fed. R. Bankr.P. 7056 and 6001, and Local Rule 1070-1.
The court grants summary judgment to the plaintiff for the reasons stated below.
All parties agree there are no factual disputes. Based on the submissions of the parties, the following facts are true:
FACTS
This case concerns a single family residence located at 1289 Osceola Avenue, St. Paul, Minnesota. Camissa Abbot (formerly Camissa Colas), the debtor’s sister, and Jayme Bougie, the debtor’s brother, own the property along with the debtor. The property was conveyed to the brothers and sister on July 16, 2007, from the estate of their mother, Judith Bougie. They own it as tenants-in-common. The deed was recorded on July 30, 2007. Currently, Ms. Abbott, her family, and Jayme Bougie reside at the property; the debtor does not.
On August 10, 2007, the debtor, Ms. Abbot, and Jayme Bougie executed a mortgage in favor of Mortgage Electronic Registration Systems, Inc., encumbering the property. The mortgage was not recorded at that time.
Two months after signing the mortgage, the debtor filed his chapter 7 petition on October 17, 2007. The plaintiff was appointed chapter 7 trustee. The debtor did not disclose his interest in the 1289 Osceola Avenue property or the mortgage in the schedules, at the meeting of creditors, or at any other time. During the pendency of the bankruptcy case, the plaintiff had no knowledge of the property or mortgage. The debtor’s case was closed on February 1, 2008.
*609The mortgage was recorded on October 31, 2008, fourteen months after it was executed and a year after the debtor filed his petition. The mortgage was later assigned by MERS to Flagstar Bank, FSB, on September 22, 2010.
Currently, there are two judgment liens on the property against Ms. Abbot. First, on December 10, 2008, a judgment was docketed in Ramsey County in favor of Asset Acceptance, for $2,924.30. Second, on July 2, 2009, a judgment was docketed in Ramsey County in favor of LVNV Funding LLC, for $6,359.65.
Both Ms. Abbot and Jayme Bougie filed for chapter 7 bankruptcy and received discharges. The 1289 Osceola Avenue property was listed on both of their schedules. Ms. Abbot filed on July 15, 2009, and Jayme Bougie filed on November 12, 2012.
On February 1, 2013, Flagstar Bank filed an application to reopen the debtor’s bankruptcy case so it could move for relief from the automatic stay in order to foreclose on the property. The application was granted by court order on February 13, 2013.
The plaintiff filed this adversary proceeding on October 31, 2013, against the debtor, Ms. Abbot, Jayme Bougie, Flags-tar Bank, Asset Acceptance, and LVNV Funding. The plaintiff seeks (1) authority to avoid the mortgage lien created by recording the mortgage; (2) authority to sell the 1289 Osceola Avenue property, including the interests of Jayme Bougie and Ms. Abbot; and (3) a determination that the judgments of Asset Acceptance and LVNV Funding only attach to the one-third interest of Ms. Abbot. Flagstar Bank, Ms. Abbot, and Jayme Bougie all answered the complaint on December 2, 2013. The debtor, Asset Acceptance, and LVNV Funding failed to file answers.
The plaintiff then filed two motions. First, a motion for default judgment was filed against the debtor, Asset Acceptance, and LVNV Funding on March 17, 2014. The second motion was for summary judgment against Flagstar Bank, Ms. Abbot, and Jayme Bougie on March 17, 2014. On March 28, 2014, Flagstar Bank responded to the motion for summary judgment and filed a cross-motion for summary judgment.
At the hearing on April 2, 2014, the court granted the motion for default judgment, but stayed enforcement of the judgment until further order of the court. The court requested further briefing from Flagstar Bank and the plaintiff. On April 22, 2014, the court took the summary judgment motions under advisement.
MEMORANDUM
Summary judgment is proper if the party seeking summary judgment “shows that there is no genuine dispute as to any material fact and ... is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); Fed. R. Bankr.P. 7056 (making Fed. R.Civ.P. 56 applicable to bankruptcy proceedings).
Here, neither the plaintiff nor Flagstar Bank alleges any factual dispute. Ms. Abbot and Jayme Bougie also failed to raise any genuine issue of material fact at the hearing. As the only remaining issues involve questions of law, summary judgment is appropriate for this case. Cremona v. R.S. Bacon Veneer Co., 433 F.3d 617, 620 (8th Cir.2006).
I. AVOIDANCE OF THE RECORDING OF THE MORTGAGE
The plaintiff seeks to avoid Flagstar Bank’s mortgage lien, created by recording the mortgage, as a post-petition transfer under 11 U.S.C. § 549. Flagstar Bank contends that the avoidance of the mort*610gage lien under section 549 is time-barred by the statute of limitations found in subsection (d). If the plaintiffs action is not time-barred, however, the bank avers that the recording of the mortgage was not a post-petition transfer. Plaintiff argues that the statute of limitations was tolled because of the debtor’s failure to include the 1289 Osceola Avenue property in his schedules. She asserts that she did not know about the property or mortgage until Flagstar Bank filed its motion to reopen,
a. Statute of Limitations
Under the statute of limitations contained in § 549, a party must take action to avoid a post-petition transfer prior to either two years after the transfer sought to be avoided or the close of the bankruptcy case, whichever occurs earlier. 11 U.S.C. § 549(d). Here, the transfer to be avoided, the recording of the mortgage, occurred on October 31, 2008. The debt- or’s case was closed on February 1, 2008. The plaintiff filed its complaint on October 31, 2013, approximately five years after the close of the debtor’s case and the recording of the mortgage. On its face, it appears that the § 549 limitations period has run.
The plaintiff argues that the § 549 limitations period has not run because the doctrine of equitable tolling has extended it. Equitable tolling applies to § 549 because the doctrine “is read into every federal statute of limitation.” Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 90 L.Ed. 743 (1946). Under the doctrine, a limitations period is tolled when a party takes positive steps to conceal a fraud or when a fraud goes undiscovered without any action to conceal it. Id,.; see also Moratzka v. Pomaville (In re Pomaville), 190 B.R. 632, 637 (Bankr. D.Minn.1995) (detailing the difference between positive concealment and negligent concealment).
The plaintiff alleges that the fraud at issue here was the debtor’s failure to report his interest in the property or mortgage in his schedules, at the section 341 meeting, or at any other time during his bankruptcy case. This fraud went undiscovered until the time Flagstar Bank filed its application to reopen the case. Thus, the plaintiff argues, equitable tolling applies.
Flagstar Bank disagrees, asserting that the doctrine of equitable tolling cannot apply here because it did not commit a fraud or attempt to conceal a fraud. The fraud was the debtor’s. Flagstar Bank is confusing equitable tolling with equitable estoppel. The doctrine of equitable estop-pel requires a defendant to take active steps to prevent a plaintiff from taking timely action, but the doctrine of equitable tolling does not require misconduct on the part of a defendant. Ramette v. Range Mental Health Center, Inc. (In re Ramette), No. 4-92-0288, 1997 WL 188449, *3-4 (Bankr.D. Minn. April 18, 1997); see also In re Petters Co., Inc., 494 B.R. 413, 446 (Bankr.D.Minn.2013) (“The application of equitable tolling does not require a showing of misconduct on the part of the defendant.”).
Equitable tolling requires ignorance of a fraud and injury caused by that fraud. Dring v. McDonnell Douglas Corp., 58 F.3d 1323, 1328-29 (8th Cir.1995). Courts require a showing of due diligence as part of the proof of ignorance. Jenkins v. Mabus, 646 F.3d 1023, 1028 (8th Cir.2011); In re Bodenstein, 253 B.R. 46, 50 (8th Cir. BAP 2000); Pomaville, 190 B.R. at 637. Here, the due diligence standard is met by the trustee’s reliance on the debtor’s schedules and statement of financial affairs because the debtor had a duty to fully and accurately disclose his financial information and property interests on *611his schedules and did not do so. Pomaville, 190 B.R. at 637; Ramette, 1997 WL 188449, *3-4; Burtch v. Opus, L.L.C. (In re Opus East, L.L.C.), No. 11-52423, 2013 WL 4478914, *6 (Bankr.D.Del. August 6, 2013); In re Dec, 272 B.R. 218, 226 (Bankr.N.D.Ill.2001); In re Soost, 290 B.R. 116, 126 (Bankr.D.Minn.2003); see also In re Barrows, 399 B.R. 506, 510 (Bankr.D.Minn.2009) (“The efficiency of the bankruptcy process depends on the accuracy and reliability of the petition ... ”). The disclosures are required in order to eliminate the necessity of an independent examination for facts and ensure the successful functioning of the bankruptcy act. Mertz v. Rott, 955 F.2d 596, 598 (8th Cir.1992); In re Mascolo, 505 F.2d 274, 278 (1st Cir.1974).
Here, the debtor failed to list his interest in the 1289 Osceola Avenue property or the mortgage on his schedules, at the meeting of creditors, or at any other time during the pendency of the case. Because of the debtor’s actions, the plaintiff was unaware of the debtor’s interest in the property or the mortgage. The bankruptcy estate was injured by the debtor’s fraud because the property was not available for distribution.
In support of its argument against equitable tolling, Flagstar Bank cites Judge Kressel’s ruling from the bench in Stoebner v. Maeir (In re Rusch), Transcript at 33-34, No. 08^4153 (Bankr.D.Minn. Feb. 6, 2009), EOF No. 37. Judge Kressel did not toll the statute of limitations in § 549(d) under the doctrine of equitable tolling. He determined that the trustee did not satisfy his burden because he failed to provide any facts or law justifying equitable tolling. Id. The case is distinguishable. Here, there are sufficient facts and law to justify equitable tolling.1
The court holds that section 549’s limitations period was tolled in this case until the plaintiff discovered the fraud. The case was brought within eight months of that discovery, which is within the time period of § 549. The court now turns to the issue of whether the mortgage lien may be avoided.
b. Avoidance under 11 U.S.C. § 549
The trustee may avoid an unauthorized transfer of property of the estate that occurs after the commencement of the case pursuant to 11 U.S.C. § 549. Both parties agree that a transfer may be avoided if: (1) the property was property of the estate; (2) the property was transferred; (3) the transfer was made post-petition; and (4) the transfer was not authorized by the bankruptcy code or the court. Seaver v. New Buffalo Auto Sales, LLC, 459 B.R. 6, 11 (8th Cir. BAP 2011) (citing Nelson v. Kingsley (In re Kingsley), 208 B.R. 918, 920 (8th Cir. BAP 1997)).
1. Property of the Estate
The parties disagree as to what constitutes property of the estate. The plaintiff cites 11 U.S.C. § 541, which defines “property of the estate” to include all legal and equitable interests of the debtor. Under this definition, the plaintiff contends the 1289 Osceola Avenue property is property of the bankruptcy estate. Flagstar Bank does not dispute that the 1289 Osceola Avenue property is part of the bankruptcy estate, rather, the bank contends that the mortgage itself is not property of the estate. The bank is correct; the mortgage *612is not property of the estate, but it does not need to be for the plaintiffs action under § 549.2 The 1289 Osceola Avenue property itself is property of the estate, which satisfies the plaintiffs first burden under the statute. Schwab v. Reilly, 560 U.S. 770, 774, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010); In re OBrien, 443 B.R. 117, 131 (Bankr.W.D.Mich.2011) (holding that unscheduled property is property of the estate).
2. Transfer of Property
The term “transfer” is defined as the creation of a lien under 11 U.S.C. § 101(54)(A). According to Minnesota law, the recording of a mortgage constitutes a transfer of an interest in a debtor’s property. In re Alexander, 219 B.R. 255, 258 (Bankr.D.Minn.1998). Consequently, Flagstar Bank’s recording of the mortgage, creating a mortgage lien, constitutes a transfer of property.
3. Post-Petition Transfer
The debtor filed for chapter 7 protection on October 17, 2007. Flagstar Bank recorded its mortgage on October 31, 2008, over a year after the filing of the debtor’s case. Thus, this transfer was made post-petition.
A Unauthorized Transfer
Flagstar Bank was not authorized to transfer the mortgage post-petition, as it sought no court approval. Therefore, factor four is satisfied.
Because all four factors are met, the plaintiff has met her burden under 11 U.S.C. § 549(d) and the mortgage lien may be avoided.
II. AUTHORITY TO SELL THE PROPERTY
The final issue is whether the trustee may sell the property, including the interests of the debtor’s sister and brother.
A trustee may sell both the estate’s interest and the interest of any co-owner of property pursuant to 11 U.S.C. § 363(h). In order to do so, the trustee must demonstrate that (1) partition of the property is impractical; (2) sale of the estate’s undivided interest would realize significantly less than sale of the property free of co-owner interest; (3) the benefit to the estate of a sale outweighs the detriment to the co-owners; and (4) the property is not used in the production of electric energy or natural gas. 11 U.S.C. § 363(h).
Ms. Abbot and Jayme Bougie failed to file any response to the motion, but both appeared and objected to the sale at the hearing. Flagstar Bank did not object to this portion of the plaintiffs motion, except to reiterate its argument that it holds a secured interest in the debtor’s portion of any sale proceeds.
The court will address each element:
1. Impractical Partition
According to the Eighth Circuit in In re Van Der Heide, a single family home is incapable of partition as a matter of law. 164 F.3d 1183, 1184 (8th Cir.1999). No party disputes that the 1289 Osceola Avenue property is a single family residence. The court is satisfied that partition of the property is impractical.
2. Sale of Estate’s Interest Realizes Significantly Less Than Sale of Assets Free from Co-Owner Interest
The sale of an estate’s interest in a single family residence is also generally *613accepted to result in a lower price than if the entire property is sold. The fact that the other owners continue to reside on the property has a chilling effect on the sale price. In re Trout, 146 B.R. 823, 829 (Bankr.D.N.D.1992); In re Wright, No. 08-74863, 2009 WL 2384189, *3 (Bankr. W.D.Ark. July 31, 2009). The plaintiff argues that the sale of the sale of the estate’s interest in the 1289 Osceola Avenue property would generate substantially less than the sale of the property free from the interests of Ms. Abbot and Jayme Bougie. The court agrees. If the brother, sister, and her family continue to reside in the house, it is very unlikely that someone would purchase the estate’s one third interest in the house.
S. Benefits to the Estate v. Detriment to Co-Owners
Any analysis of the benefits to the bankruptcy estate and the detriment to the co-owners of the property is fact intensive. In re Trout, 146 B.R. 823, 829 (Bankr.D.N.D.1992). The sale of the property in its entirety would result in the estate receiving one-third of the sale proceeds. In light of the court’s ruling regarding the perfection of Flagstar Bank’s lien, the estate’s interest in the sale proceeds would be lien free and would be used to pay unsecured creditors.3
Weighed against this benefit is the detriment to Jayme Bougie and Ms. Abbot as co-owners of the property. According to their statements in court, both Jayme Bou-gie and Ms. Abbot reside at the property, with Ms. Abbot’s husband and two children, and both are in difficult financial situations. The sale of the property would force them to move out of their home. The court is sensitive to their hardship. However, Flagstar Bank is seeking relief from the automatic stay in this case in order to foreclose on the property because the debtor, Ms. Abbot, and Jayme Bougie are in default of the mortgage.4 Foreclosure by Flagstar Bank results in the same harms to Ms. Abbot and Jayme Bougie as a sale by the trustee. Moreover, Ms. Abbot and Jayme Bougie each would own a one-third interest in the sale proceeds5 and retain the right of first refusal to purchase the property. In light of these undisputed facts, the court finds that the benefit to the estate outweighs the detriment to the co-owners.
k. Production of Electric Energy or Natural Gas
Finally, it is undisputed that the property is not used for the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas.
All four of the elements of section 363(h) are met. Therefore, the court authorizes the plaintiff to sell the property, including all interests of the debtor, Ms. Abbott, and Jayme Bougie.
CONCLUSION
Summary judgment is proper in this case because there is no dispute as to any material facts. The plaintiffs cause of action is not barred by 11 U.S.C. § 549(d) because of the doctrine of equitable tolling. The plaintiff may avoid Flagstar Bank’s recording of the mortgage. The plaintiff satisfied the requirements of 11 U.S.C. § 363(h) and is authorized to sell the prop*614erty, including the interests held by Ms. Abbot and Jayme Bougie.
IT IS ORDERED:
1. The mortgage lien against Shaun Bougie’s one-third interest in the property held by Flagstar Bank, FSB is avoided.
2. Shaun Bougie, Camissa Abbot, and Jayme Bougie shall immediately surrender the property to the plaintiff.
3. The plaintiff is authorized to sell the interests of the bankruptcy estate, Camissa Abbot, and Jayme Bougie, subject to the right of first refusal granted to Jayme Bougie and Ms. Abbot.
4. The plaintiff is authorized to pay all costs associated with the sale of the property out of the proceeds of the sale.
5. The plaintiff is authorized to retain one-third of the net proceeds after sale costs and shall distribute one-third of the net proceeds available after payment of all costs associated with the transaction to Jayme Bou-gie and one-third of the proceeds to Camissa Abbot. The proceeds may be subject to liens.
6. The stay of judgment issued in the court’s order granting default judgment against the debtor, Asset Acceptance, LLC, and LVNV Funding, LLC is lifted.
. Flagstar Bank also makes a policy argument that equitable tolling would make all real property titles questionable because of Minnesota Title Standards, No. 82(2). However, No. 82(2) only contains the requirement to search for a bankruptcy in the prior two years. Minnesota State Bar Association, Minnesota Title Standards. It does not address marketability of title. The court rejects this argument.
. There is no dispute that Flagstar Bank holds a valid mortgage. Mooty v. Union Bond & Mortgage Co., 180 Minn. 550, 231 N.W. 406, 407 (1930) (holding a mortgage is valid even if it is unrecorded). The issue here is the plaintiffs ability to avoid the mortgage lien.
. Flagstar Bank’s claim would be treated as an unsecured claim in the debtor’s bankruptcy case.
. Ms. Colas and Mr. Bougie blame the debtor for the default, but the end result is still the same. Flagstar Bank is prepared to foreclose based on the default.
.Ms. Abbott’s and Jayme Bougie's interests may be subject to liens. The court makes no determination about any such liens. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497096/ | MEMORANDUM OPINION AND ORDER DIRECTING JUDGMENT IN FAVOR OF PLAINTIFFS AND DENYING THE DEBTOR’S DISCHARGE PURSUANT TO 11 U.S.C. § 727
ARTHUR B. FEDERMAN, Chief Judge.
The United States Trustee (the “UST”) and Regions Bank, N.A., filed Complaints seeking denial of Debtor Richard Thomas Gregg’s discharge pursuant to 11 U.S.C. § 727. For the reasons announced at the conclusion of the trial held on May 7, 2014, as supplemented by those that follow, judgment will be entered in favor of the Plaintiffs, the UST and Regions Bank, N.A., on Counts Six through Sixteen of the Complaints and the Debtor’s discharge will be denied pursuant to § 727 of the Bankruptcy Code.
At the outset, as the Plaintiffs point out, the Debtor did not file an Answer to the Complaints in either of the two adversary proceedings here. Because the Debtor failed to deny the factual allegations alleged in the Complaints, those facts are deemed admitted.1 In addition, as discussed more fully in prior Orders in these proceedings,2 the Debtor has refused to answer questions in these adversary proceedings based on an assertion of his Fifth Amendment privilege, and he did not personally appear at the trial. As a result, while the discharge cannot be denied solely based on a bankruptcy debtor’s assertion of his Fifth Amendment rights, the Court may draw adverse inferences from his refusal to testify in this civil action.3 Similarly, as the UST points out, the Fifth Amendment does not generally apply to documents prepared in the course of nor*618mal business activities,4 unless the person asserting the privilege shows that the production of specific documents will be incriminating.5 Despite having extensive business dealings, the Debtor has produced almost no records at all, and has not shown that production of any particular document requested by the Chapter 7 Trustee would incriminate him. Thus, the Court may draw adverse inferences from the Debtor’s refusal to produce documents and business records requested by the Chapter 7 Trustee. Finally, although the Debtor did not refute any of the Plaintiffs’ evidence with evidence of his own at trial, the Plaintiffs in fact produced substantial evidence at trial supporting the denial of the Debtor’s discharge.
GENERAL BACKGROUND
Prior to filing his bankruptcy petition, the Debtor was involved in many business activities in and around southern Missouri. Among other things, he had controlling interests in two banks and several real estate holding companies. On February 28, 2013, the Debtor was indicted by a federal grand jury in Springfield, Missouri.6 The Indictment contains seventeen counts of alleged criminal violations arising from his banking and business dealings, including bank fraud, wire fraud, and money laundering. One of the counts in the Indictment (Count 17) alleges that the Debtor committed bankruptcy fraud and made an intentionally false statement in the bankruptcy case of 1717 Market Place LLC,7 a company controlled by the Debt- or. The criminal case is currently set for trial on July 14, 2014.
Meanwhile, shortly after being indicted, the Debtor filed this individual bankruptcy case as a Chapter 11 on March 19, 2013. The Debtor filed his Schedules and Statement of Financial Affairs on May 14, 2013, both of which were signed by the Debtor and contained declarations under penalty of perjury that the Debtor had read the documents and that they were “true and correct to the best of [his] knowledge, information, and belief.”8
On the motion of the UST, and with the Debtor’s consent, the case was converted *619to Chapter 7 on May 22, 2013. The Debt- or has declined to answer questions asked by the Chapter 7 Trustee and creditors regarding his financial affairs at three scheduled § 341 meetings, each time asserting his Fifth Amendment privilege against self-incrimination. He has also failed to produce documents related to his and his companies’ financial affairs requested in the normal course by the Chapter 7 Trustee.
The UST filed this adversary proceeding on November 21, 2013, and filed an Amended Complaint on December 27, 2013. Among the sixteen counts pled by the UST against the Debtor here, Counts One through Five allege false oaths and concealment of assets in connection with the 1717 Market Place bankruptcy case. Counts Six through Eleven allege false statements and fraudulent transfers in this, the Debtor’s individual bankruptcy case. Count Twelve alleges a fraudulent post-petition transfer in the Debtor’s individual case, and Counts Thirteen through Sixteen allege that the Debtor failed to explain a loss of assets, failed to obey a court order, withheld documents from the Chapter 7 Trustee, and failed to preserve records, all in connection with this, his individual case.
Regions Bank filed a separate adversary proceeding to deny the Debtor’s discharge in this bankruptcy case. Regions Bank’s Complaint contains factual allegations similar to those in the UST’s Amended Complaint and the counts pled by Regions mirror those in the UST’s Amended Complaint.
In each of the two adversary proceedings, the Debtor requested that these proceedings be stayed pending the outcome of the criminal case. This Court denied those requests. The Debtor appealed those Orders to the United States District Court for the Western District of Missouri, and sought a stay pending appeal, which this Court also denied. The appeals remain pending, although now appear to be moot due to this ruling on the merits.
This Court conducted a trial on May 7, 2014. Although the Debtor’s attorney appeared at the trial, the Debtor did not personally appear.
At the trial, the bulk of the evidence was presented through the testimony of Fred C. Moon, the Chapter 7 Trustee in the Debtor’s individual case, as well as documentary evidence and judicial notice of court files and documents.
DENIAL OF DISCHARGE UNDER 11 U.S.C. § 727(a)
Section 727(a) provides, in relevant part, 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....
(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;
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account;
*620(B) presented or used a false claim; [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;
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraphs, any loss of assets or deficiency of assets to meet the debtor’s liabilities; [or]
(6) the debtor has refused, in the case— (A) to obey any lawful order of the court, other than an order to respond to a material question or to testify.... 9
The burden of proof in this action is on the Plaintiffs, who must prove each element for denial of discharge by a preponderance of the evidence.10 “Generally speaking, denying the debtor a discharge is a ‘harsh and drastic penalty.’”11 Nevertheless, although the provisions of § 727 are strictly construed in favor of the debtor, § 727 is intended to prevent a debtor’s abuse of the Bankruptcy Code.12
As mentioned above, Counts One through Five of the Complaints allege misrepresentations related to the 1717 Market Place case. In essence, in several instances, the information represented in the Debtor’s individual bankruptcy schedules appear to contradict what was represented by the Debtor in schedules he signed and filed on behalf of 1717 Market Place, as well as tax returns and an Examiner’s Report in the 1717 Market Place case. Although the Plaintiffs presented evidence on these counts, and omissions or misrepresentations made in the 1717 Market Place case could be a basis for denial of the Debtor’s discharge in this case under § 727(a)(7),13 I need not decide those counts now because, as will be discussed, there is ample evidence of grounds for denial of the discharge based on the Debt- or’s actions in this individual case.
Count Six: Failure to Disclose Income — § 727(a)(4)(A)
Section 727(a)(4)(A) provides an exception to discharge where the debtor knowingly and fraudulently, in or in connection with the case, makes a false oath or account.14 This provision “provides a harsh penalty for the debtor who deliberately secretes information from the court, the trustee, and other parties in interest in his case.”15 According to the Bankruptcy Appellate Panel for the Eighth Circuit:
For such a false oath or account to bar a discharge, the false statement must be both material and made with intent. Noting that the threshold to materiality is fairly low, this court recently articulated the standard for materiality: The subject matter of a false oath is “material” and thus sufficient to bar discharge, if it bears a relationship to the bank*621rupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property. The question of a debtor’s knowledge and intent under § 727(a)(4) is a matter of fact. Intent can be established by circumstantial evidence, and statements made with reckless indifference to the truth are regarded as intentionally false ...
As § 727(a)(4)(A) makes clear, the Code requires nothing less than a full and complete disclosure of any and all apparent interests of any kind. The debtor’s petition, including schedules and statements, must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get to the facts. Statements made in schedules are signed under penalties of perjury and have the force and effect of oaths, and testimony elicited at the first meeting of creditors is given under oath.16
In order to deny a discharge under this provision, the plaintiff must establish that: (1) debtor knowingly and fraudulently; (2) in or in connection with the case; (3) made a false oath or account; (4) regarding a material matter.17
The Schedules in the Debtor’s case indicate that the Debtor owns a 25% interest in G & S Holdings, LLC. The Trustee testified that he believed the Debtor is at least a 50% owner of that entity. In any event, G & S Holdings’ 2011 tax return shows that the Debtor had withdrawals and distributions from that entity totaling $1,705,300 in 2011, which was within two years prior to filing the bankruptcy case.18 Question 1 of the SOFA required the Debtor to:
State the gross amount of income the debtor has received from employment, trade, or profession, or from operation of the debtor’s business, including part-time activities either as an employee or in independent trade or business, from the beginning of this calendar year to the date this case was commenced. State also the gross amounts received during the two years immediately preceding this calendar year.”19
Question 2 of the SOFA required the Debtor to “[sjtate the amount of income received by the debtor other than from employment, trade, profession, or operation of the debtor’s business during the two years immediately preceding the commencement of this case. Give particulars.” 20
The income from G & S Holdings was not listed under either of these questions on the SOFA.
In addition, the Plaintiffs produced a deposit slip from CU Community Credit Union, signed by the Debtor, showing that 1717 Market Place transferred $1.2 million from its account to the Debtor’s personal account on August 29, 2011.21 Again, this income was received within the two years prior to the filing and was not disclosed on the SOFA.
I find that, by failing to disclose these sources of income on his Schedules and SOFA, the Debtor knowingly and fraudulently, or with reckless indifference to the truth, made a false oath in this case regarding a material matter and that his *622discharge should therefore be denied pursuant to § 727(a)(4). Judgment will be entered in favor of the Plaintiffs on Count Six of the Complaints.
Counts Seven Through Ten: The Prepetition Transfers— § 727(a)(2) and (4)
In order to prevail under § 727(a)(2), the Plaintiffs must prove: (1) that the act complained of was done within twelve months of the filing of the bankruptcy petition; (2) with intent to hinder, delay or defraud creditors; (3) that the act was done by the Debtor; and (4) that the act consisted of transferring, removing, destroying or concealing any of Debtor’s property.22 “Proving the requisite actual intent with direct evidence is difficult.”23 “Thus, such actual intent may be “inferred from the facts and circumstances of the debtor’s conduct.”24 However, the overriding principle applicable here and in virtually all eases under § 727(a) is that “a determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debt-qji a 25
On January 11, 2013, Plaintiff Regions Bank obtained a judgment of over $10 million against the Debtor; his wife, Jenny Gregg; J. Scott Schaefer; and Karen Schaefer.26 As stated, the Debtor filed this bankruptcy case on March 19, 2013.
On March 4, 2013, which was two weeks prior to the bankruptcy filing and while Regions Bank was pursuing collection on its judgment, the Debtor and Jenny D. Gregg (by Richard T. Gregg, her attorney-in-fact) transferred by Warranty Deed 6.39 acres of land in Christian County, Missouri, from themselves to GFT, LLC.27 The entity GFT, LLC was created by the Debtor on February 20, 2013.28 The Debt- or is the registered agent and named organizer of GFT, LLC. The Debtor’s schedules show that the Debtor owns a 25% interest in GFT, LLC. This Warranty Deed was recorded March 5, 2013.
In addition, nine months prior to filing, on June 29, 2012, and at a time when Regions Bank was pursuing the Greggs, the Debtor and Jenny D. Gregg (by Richard T. Gregg, her attorney-in-fact) transferred by General Warranty Deed, 110 acres on the James River in Christian County, Missouri, to NJRF, LLC.29 According to the Chapter 7 Trustee, NJRF, LLC is a limited liability company formed by attorney Mark Gardner on June 15, 2012, two weeks prior to the conveyance. According to the Debtor’s Schedules, the Debtor owns a 50% interest in NJRF, LLC. This Warranty Deed was recorded July 2, 2012.
Since both these transfers were made within two years prior to the bankruptcy, a trustee would be expected to review them to determine if the transfers could be set aside as fraudulent, pursuant to either the Bankruptcy Code or state law. For that reason, debtors are required in Question 10 of their Statement of Financial Affairs to identify any such transfers made during *623that period.30 The Debtor failed to disclose either of these prepetition transfers; rather, the Chapter 7 Trustee testified that he discovered the transfers only by running a search of the Christian County records.
Based on the evidence presented at trial, and nondisclosure on the SOFA, and drawing adverse inferences from the Debtor’s refusal to testify, I find that the Debtor transferred these two parcels of real estate to entities in which he had an interest, within two years prior to filing the bankruptcy case, and that he did so with actual intent to hinder, delay, or defraud creditors, including Regions Bank, in making the transfers. As a result, the Plaintiffs have met their burden of proving that the Debtor’s discharge should be denied under § 727(a)(2). Judgment will, therefore, be entered in favor of the Plaintiffs on Counts Eight and Ten of the Complaints.
In addition, I find that, by failing to disclose these transfers on Question 10 of his SOFA, the Debtor knowingly and fraudulently made a false oath or account in this case. The Plaintiffs have, therefore, met their burden of proving that the Debtor’s discharge should be denied under § 727(a)(4). Judgment will, therefore, be entered in favor of the Plaintiffs on Counts Seven and Nine of the Complaints.
Count Eleven: Failure to Disclose Interests in Entities— § 727(a)(4)
Question 18 of the SOFA required the Debtor to list information concerning “all businesses in which the debt- or was an officer, director, partner, or managing executive of a corporation, partner in a partnership, sole proprietor, or was self-employed in a trade, profession, or other activity either full- or part-time within six years immediately preceding the commencement of this case, or in which the debtor owned 5 percent or more of the voting or equity securities within six years immediately preceding the commencement of this case.”31
According to a Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 admitted into evidence, the Debtor and his wife owned, as of September 6, 2011, which was within the six-year prepetition period, 9.57% of the outstanding common stock of First Banc-shares, Inc., the parent company of First Home Savings Bank.32 According to the Trustee, this was a substantial controlling interest in the bank. In any event, such stock ownership was not disclosed on the Debtor’s schedules. In addition, the Trustee testified that the Debtor sold 50,000 shares of the stock to Mark Gardner at some point and has not disclosed or accounted for those funds, either.
In addition, the evidence showed that the Debtor had or has interests in G~5 Property Management, Inc.,33 GFI — Seasons Three, LLC,34 and Food Merchants, LLC,35 all within the six-year prepetition period. None of these were disclosed on the schedules, and the Chapter 7 Trustee testified that, because of the Debtor’s failure to respond to questions and document *624requests,36 he knows very little about these entities and is unable to administer the estate with what little information he does have.
I find that, by failing to disclose his interests in these entities on his Schedules and SOFA, the Debtor knowingly and fraudulently made a false oath in this case and that his discharge should therefore be denied pursuant to § 727(a)(4). Judgment will be entered in favor of the Plaintiffs on Count Eleven of the Complaints.
Count Twelve: The Postpetition Ti-ansfers — § 727(a)(2)
In April 2013, which was postpetition, documents titled “Declaration of Special Assessment Property Taxes and Lien Imposed Pursuant to Missouri Revised Statutes, § 67.1401 to 67.1571, § 238.200 to 238.275 as Amended; and the Provisions of the Munimiss Inter-Government Agreements for Munimiss Multilateral Taxation and Cross-Collateralization Instruments (MMTCI)” were filed with the Recorders’ Offices of Christian, Taney, and Greene Counties in Missouri.37 These documents, which name the Debtor as one of the grantors, and which are signed by one Ifram Mufty-Jameel, purport to place $250 million in voluntary tax liens on multiple properties owned by the Debtor and his entities in those counties, including, according to the Chapter 7 Trustee, the Debtor’s personal residence and the 1717 Market Place property. Indeed, according to the Trustee, these “liens” encumber essentially all of the real property owned by the Debtor and his companies.
Then, sometime after May 24, 2013, Debtor’s counsel sent to the Chapter 7 Trustee a “Notice, Offer, and Acceptance of Certain Acquisition by Eminent Domain Pursuant to Sections 238.200 Through 238.275 and 523.001 et seq of the Revised Missouri Statutes as Amended, and Code of Virginia Sections 56-347 and 25.1-100 et seq.”38 This document is dated May 24, 2013, and names the Chapter 7 Trustee as a respondent. It contains two exhibits (Exhibits B and C) which are signed by the Debtor, by Jenny Gregg (“by Richard Thomas Gregg POA”), and by one Abdus-Sammy Mufty-Jameel. These Exhibits are dated May 24, 2013, and titled “Written Offers for the Intended Acquisition Eminent Domain or Out of Court Settlement Thereof Pursuant to Section 523.253 RSMO Requirements.” Pursuant to these documents, the Debtor and his wife “accept” written offers for all of the property owned by FRS, LLC and 1717 Market Place LLC (entities in which they have an ownership interest) for $10 million and $30 million, respectively.
Obviously, the Debtor offered no evidence as to what the purpose of these documents was, but, as the Trustee testified, their effect was to create a complex overlay of liens on all of the Debtor’s assets (including his personal residence and the 1717 Market Place property), the result of which would, if not challenged, prevent the Trustee and creditors from liquidating any equity in those properties. Indeed, the document dated May 24, 2013, which was signed by the Debtor and names the Chapter 7 Trustee as a Respondent, states on its cover page: “PLEASE SEE THE ENCLOSED EMINENT DOMAIN PROCEEDINGS THAT SUPERSEDES YOUR FORECLOSURE OR RECEIVERSHIP PROCEEDINGS.”39 As the Trustee testified, the filing of these documents has clouded title on all the *625Debtor’s real property, further hampering the Trustee’s efforts to administer this estate. In addition, the Trustee testified that he had not been notified that any of this was occurring until after the “liens” were recorded and he received a copy of the May 24, 2013 “eminent domain” document.
I find, based on this evidence, that the Debtor voluntarily encumbered his and his entities’ assets with these “liens” after he filed this bankruptcy case with the intent to hinder, delay, and defraud his creditors, as well as the Chapter 7 Trustee, and that his discharge should be denied under § 727(a)(2). Judgment will, therefore, be entered in favor of the Plaintiffs on Count Twelve of the Complaints.
Count Thirteen: Failure to Explain Defíciency of Assets— § 727(a)(5)
The Debtor’s schedules show assets totaling $145,030,779.00. He shows liabilities totaling $325,512,798.95.40 That results in a deficiency of over $180 million. As the UST asserts, once a party objecting to discharge under § 727(a)(5) has introduced some evidence of the disappearance of substantial assets or of unusual transactions, the debtor must satisfactorily explain what happened to the assets.41 Of course, the Debtor here has made no explanation whatsoever here.
As a result, I find that the Debtor’s discharge should be denied pursuant to § 727(a)(5). Judgment will, therefore, be entered in favor of the Plaintiffs on Count Thirteen.
Count Fourteen: Refusal to Obey Lawful Order of the Court— § 727(a)(6)(A)
On May 22, 2013, with the Debt- or’s consent, this Court converted the Debtor’s case from Chapter 11 to Chapter 7.42 That same day, the Debtor was ordered to file conversion schedules and Form B22 on or before June 3, 2013.43 On June 4, 2013, this Court entered an Amended Order to Show Cause why the order for relief should not be set aside, these bankruptcy proceedings dismissed and, if applicable, the discharge be denied or revoked for failure to file the conversion schedules.44 That Order gave the Debtor until June 18, 2013 to respond. To date, the Debtor has neither filed the conversion schedules, nor responded to the Order to Show Cause.
I assume that the Debtor might attribute his refusal to respond to these Orders to his assertion of his Fifth Amendment privilege. However, as I stated in the Order denying the Debtor’s request to stay these proceedings, while the Fifth Amendment protects his right not to testify, the Fifth Amendment does not excuse a bankruptcy debtor from filing schedules in the case. And, it bears repeating that, just prior to the time the Debtor was supposed to file his conversion schedules, he had caused the “eminent domain liens” to be placed on his property.
A bankruptcy case is not like most other types of civil litigation, even the kind of civil litigation brought by a governmental agency against a party also involved in a criminal action. The Debtor himself filed this bankruptcy case and thereby invoked various protections aside from his *626Fifth Amendment privilege. Absent bankruptcy, and notwithstanding the pending criminal case, his creditors would have been free to obtain and execute judgments on his assets. By filing bankruptcy, the Debtor receives at least temporary relief from such actions. But, in exchange, he must disclose all assets and required transactions, so that the Trustee can insure that all available assets are liquidated for the benefit of those creditors. Here, the Debtor used the bankruptcy stay to transfer assets which creditors were stayed from reaching, while at the same time failed to disclose information the Trustee needed to capture those assets for the benefit of such creditors. “While a debtor is free to assert [his] fifth amendment privilege against self-incrimination during the bankruptcy proceedings, [he] may not turn the shield of the Fifth Amendment into a sword to cut [his] way to a discharge while carrying [his] property with [him].”45
As a result, I find that the Debtor has refused to obey a lawful order of the court and that his discharge should be denied under § 727(a)(6)(A). Judgment will be entered in favor of the Plaintiffs on Count Fourteen of the Complaints.
Counts Fifteen And Sixteen: Failure to Turn Over Books and Records— § 727(a)(4)(D) and (a)(3)
Section 727(a)(4)(D) provides for denial of discharge when the debtor knowingly and fraudulently, in or in connection with the case, “withheld from an officer of the estate entitled to possession under [the Bankruptcy Code], recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs.”46
In July 2013, the Chapter 7 Trustee requested by two e-mails that the Debtor provide documents relating to his interests in various companies,47 in accordance with his customary practice as a Chapter 7 Trustee. With the exception of a couple of tax returns, the Debtor has refused to produce any of the books and records requested by the Trustee. Much of what little information the Trustee has acquired came from other sources or his own research.
As a result, I find that the Debtor has knowingly and fraudulently withheld from the Trustee, as an officer of the estate entitled to possession under the Bankruptcy Code, recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs, and that his discharge should, therefore, be denied under § 727(a)(4)(D).
In addition, pursuant to § 727(a)(3), a debtor may be denied a discharge for failure to keep or preserve books from which his financial situation may be ascertained, unless the failure is justified under all the circumstances of the case.48
The Court must determine whether the debtor’s records were sufficient and, if not, whether the failure to maintain sufficient records was justified under *627all the circumstances. Intent is not an element of this ground for denial of discharge; the standard imposed is one of reasonableness. In determining the adequacy of the records maintained, the Court should consider the complexity of the debtor’s business, the customary business practices for record keeping in that type of business, the degree of accuracy of existing books, and the debt- or’s courtroom demeanor. Discharge should not be denied if the debtor’s records, though poorly organized, are reasonably sufficient to ascertain the debtor’s financial condition. Once the plaintiff establishes the records are inadequate, the burden of production shifts to the debtor to demonstrate that the failure to keep adequate records was justified under all the circumstances. In order to determine if the failure was justified, the Court must first determine what records someone in like circumstances to the debtor would keep.49
I find that the Debtor has failed to keep or preserve books from which his financial situation may be ascertained and that such failure is not justified under all the circumstances of the case under § 727(a)(3). The Debtor is a sophisticated businessman with many business interests — he should have some books and records concerning his financial situation. And, again, the refusal to produce records is particularly troubling in light of the postpetition attempt to place the “eminent domain liens” on the Debt- or’s property, and the prepetition transfers by the Debtor to entities in which he held an interest.
Judgment will, therefore, be entered in favor of the Plaintiffs on Counts Fifteen and Sixteen of the Complaints.
CONCLUSION
For the foregoing reasons, the Clerk of the Court is ORDERED to enter Judgment in favor of Plaintiffs, and against Debtor-Defendant Richard Thomas Gregg, on Counts Six through Sixteen of the United States Trustee’s Amended Complaint and Counts Six through Sixteen of Regions Bank, N.A.’s Complaint. Debt- or Richard Thomas Gregg’s discharge is DENIED pursuant to 11 U.S.C. § 727(a)(2), (4), (5), and (6).
IT IS SO ORDERED.
. Fed.R.Civ.P. 8(b)(6), made applicable here by Fed. R. Bankr.P. 7008(a) (“An allegation— other than one relating to the amount of damages — is admitted if a responsive pleading is required and the allegation is not denied.”).
. See, e.g., Order Denying Motion to Stay Action Pending Outcome of Criminal Proceedings (Doc. No. 15 in Adv. Pro. 13-6060), and Order Denying Motion to Stay Action Pending Outcome of Criminal Proceedings (Doc. No. 12 in Adv. Pro. 13-6-65).
. Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 1558, 47 L.Ed.2d 810, 821 (1976) ("[T]he Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them: the Amendment ‘does not preclude the inference where the privilege is claimed by a party to a [c]ivil cause.’”); In re Asbury, 2011 WL 44911 (Bankr.W.D.Mo. Jan. 6, 2011) (“As bankruptcy adversary proceedings are civil proceedings, an adverse inference may be drawn against a party when they refuse to testify in response to probative evidence offered against them.”) (citation omitted).
. See Fisher v. United States, 425 U.S. 391, 409-410, 96 S.Ct. 1569, 1580-81, 48 L.Ed.2d 39 (1976) ("[T]he Fifth Amendment would not be violated by the fact alone that the papers on their face might incriminate the taxpayer, for the privilege protects a person only against being incriminated by his own compelled testimonial communications.”); United States v. Doe, 465 U.S. 605, 610, 104 S.Ct. 1237, 1241, 79 L.Ed.2d 552 (1984) ("The Fifth Amendment protects the person asserting the privilege only from compelled self-incrimination. Where the preparation of business records is voluntary, no compulsion is present.”) (emphasis in original). See also Aviation Supply Corp. v. R.S. B.I. Aerospace, Inc., 999 F.2d 314, 317-18 (8th Cir.1993) ("The privilege protects against compelled testimony; it does not protect the contents of preexisting or voluntarily prepared documents and records.”).
. See Butcher v. Bailey, 753 F.2d 465, 470 (6th Cir.1985) (holding that, while a debtor need not produce personal records if that production would be incriminating, "the debt- or must, at least, classify documents and indicate something about why the act of production of each class of documents might be incriminating. ’').
. United States of America v. Richard Thomas Gregg, Case No. 13-cr-3024, filed in the United States District Court for the Western District of Missouri.
. In re 1717 Market Place LLC, Case No. 12-61339, filed July 17, 2012, in the United States Bankruptcy Court for the Western District of Missouri. The Debtor here was the co-managing member who signed the documents initiating the filing and schedules in 1717 Market Place. That case was dismissed on March 14, 2013.
. Exhibit 4.
. 11 U.S.C. §§ 727(a)(2), (3), (4), (5), and (6).
. In re Korte, 262 B.R. 464, 471 (8th Cir. BAP 2001).
. Id. (citation omitted).
. Id.
. Section 727(a)(7) provides that discharge may be denied when "the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider.”)
. 11 U.S.C. § 727(a)(4)(A).
. In re Korte, 262 B.R. at 474 (citation omitted).
. Id. (citations and internal quotation marks omitted).
. Towle v. Hendrix (In re Hendrix), 352 B.R. 200, 205 (Bankr.W.D.Mo.2006).
. Exhibit 13.
. Exhibit 4 (emphasis in original).
. Id. (emphasis in original).
. Exhibit 23.
. In re Bateman, 646 F.2d 1220, 1222 (8th Cir.1981); see also In re Grimlie, 439 B.R. 710, 716 (8th Cir. BAP 2010).
. In re Govani, 509 B.R. 675, 2014 WL 1573041 at *5 (Bankr.N.D.Iowa Apr. 17, 2014) (quoting Korte, 262 B.R. at 472-73).
. Id. (quoting Korte, 262 B.R. at 472-73).
. Id. (quoting In re Phillips, 476 Fed.Appx. 813, 816 (11th Cir.2012)).
. Regions Bank Exhibit R7.
. Exhibit 15.
. Exhibit 16.
. Exhibit 18.
. Question Number 10 on the Statement of Financial Affairs required the Debtor to "[l]ist all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.” (Emphasis in original).
. Exhibit 4 (emphasis in original).
. Exhibit 26.
. Exhibit 27.
. Exhibit 28.
. Exhibit 29.
. See Exhibits 24 and 25.
. Exhibits 20, 21, and 22.
. Exhibit 19.
. Id. (emphasis in original).
. Exhibit 4.
. Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 619-20 (11th Cir.1984).
.Exhibit 31.
. Id.
. Id.
.In re Brady, 154 B.R. 82, 86 (Bankr.W.D.Mo.1993) (citation omitted), abrogated on other grounds, Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). See also In re Lederman, 140 B.R. 49, 53 (Bankr.E.D.N.Y.1992) (“The debtor cannot use the bankruptcy court to broaden the benefits afforded to an accused by the Fifth Amendment. To do so would allow the debt- or to use the Fifth Amendment as a shield, while impermissibly using the Bankruptcy Code as a sword with which to take an unfair advantage of creditors.”).
. 11 U.S.C. § 727(a)(4)(D).
. Exhibit 24 and 25.
. Riley v. Riley (In re Riley), 305 B.R. 873, 882 (Bankr.W.D.Mo.2004).
. Id. at 882-83 (citations omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8497098/ | *650Memorandum Opinion Sustaining Washington County’s Objection to Confirmation
RANDALL L. DUNN, Bankruptcy Judge.
Cristobal Antonio Pineda-Pineda and Maria Elena Pineda filed their chapter 131 case on September 20, 2013 (“Petition Date”). The Pinedas filed their Initial Chapter 13 Plan (“Proposed Plan”) on October 7, 2013. As relevant to the matter before me, the Proposed Plan included Washington County (the “County”) as the holder of a secured claim against the Pine-das’ residence property (the “Property”). The County’s claim was based on unpaid real property taxes estimated to be in the amount of $25,350. The Pinedas proposed to pay the County’s secured claim with 16% interest during the life of the Proposed Plan at the rate of $150 per month for the first twenty months, and thereafter all available funds after their attorney’s fees had been paid.2 The duration of the Proposed Plan was 36 months. Paragraph 12 of the Proposed Plan provided that the Pinedas would sell or refinance the Property by November 30, 2016; the Pinedas projected that such sale or refinance would result in net proceeds sufficient to pay the County’s secured claim in full and to complete the Proposed Plan.
On December 2, 2013, the County objected (“Objection”) to the Proposed Plan on the basis that it had obtained a judgment and decree foreclosing its tax lien on or about October 14, 2011. In light of the foreclosure, the only remaining interest (other than bare legal title and possession) the Pinedas held in the Property on the Petition Date was a statutory redemption right which expired on October 14, 2013.
I held a hearing (“Hearing”) on the Objection on March 26, 2014, following which I denied confirmation of the Proposed Plan. This Memorandum Opinion sets forth my findings of fact and conclusions of law, made pursuant to Civil Rule 52(a), applicable in this contested matter pursuant to Rules 7052 and 9014, in support of my oral decision sustaining the Objection.
I have core jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. § 157(b)(2)(L).
The issue before me is two-fold: what is the nature of the Pinedas’ interest in the Property, and what impact does the bankruptcy case have on that interest. In deciding this matter, I start with the precept that “[pjroperty rights are created and defined by state law.” Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
The Property was Subject to the Rights of the County to Assess and Collect Ad Valorem Taxes.
The Property was subject to assessment and taxation by the County pursuant to ORS 307.030. Once assessed, real property taxes become a lien on the Property. ORS 311.405(1).
The County is mandated to mail tax statements to property owners not later than October 25th of each tax year. The *651property tax is due beginning November 15th, but may be paid in three installments which are due on November 15th, February 15th, and May 15th, respectively. ORS 311.505(1). Real property taxes become delinquent on May 16th if not paid in full. ORS 311.510.
The real property taxes which are the subject of this contested matter are as follows:
Tax Year Unpaid Tax3
2007 $2,334.69
2008 $2,397.56
2009 $2,503.69
2010 $2,538.18
Delinquency Date
May 16, 2008
May 16, 2009
May 16, 2010
May 16, 2011
ORS 312.010(1) provides: “Real property within this state is subject to foreclosure for delinquent taxes whenever three years have elapsed from the earliest date of delinquency of taxes levied and charged thereon.” In this case, the Property was subject to foreclosure because the real property taxes for the 2007 through 2010 tax years were unpaid as of May 16, 2011. On May 17, 2011, the County issued its First Foreclosure Notice, advising the Pinedas that the Property had become subject to foreclosure because of unpaid real property taxes. Declaration of Diane Belt (“Belt Declaration”), Ex. A, p. 9.
ORS 312.030(3) instructs the County’s tax collector to prepare a list (“List”) of all real properties subject to foreclosure. After the List has been prepared, the property owners are served with notice of a foreclosure proceeding by publication and by certified and first class mail. ORS 312.040. As to any property on the List with respect to which the delinquent real property taxes remain unpaid, the County’s tax collector is required to institute foreclosure proceedings by filing an application (“Application”) for foreclosure with the Circuit Court of the County. ORS 312.050 and 312.060.
ORS 312.110 provides a process for removing a property from such foreclosure proceedings. A property owner has 30 days to file an answer to the Application, after which time the Circuit Court is required to give judgment (“Default Judgment”) to the County for delinquent taxes and interest on all of the remaining properties on the List. ORS 312.090. The Default Judgment provides that each of the properties on the List “shall be sold directly to the [Cjounty for the respective amounts of taxes and interest for which the properties severally are liable.” ORS 312.100.
A Default Judgment was entered as to the Property on October 14, 2011. Declaration of Brad Anderson (“Anderson Declaration”), Ex. A. Exhibit 3 to the Default Judgment is the List. Anderson Declaration, Ex A, pp. 11-29. The Property is No. 103 on the List. Id., Ex. A, p. 10. Exhibit 2 to the Default Judgment is a list of properties (“Dismissed Properties”) dismissed from the foreclosure proceeding. Anderson Declaration, Ex. A, pp. 9-10. The Property is not among the Dismissed Properties. Thus, the Default Judgment applies to the Property.
A certified copy of the Default Judgment constitutes a certificate of sale to the county as to each of the properties described in the judgment. ORS 312.100. In their responsive memorandum, the Pinedas challenged whether the Court *652Clerk actually delivered a certified copy of the Default Judgment to the County’s tax collector. The County thereafter provided the Declaration of Lisa Argyle, an accounting assistant in the County’s tax collections unit, which stated that she had received a copy of the Default Judgment “a few days after October 14, 2011.” The Pinedas appear to concede at this time that the Default Judgment was itself a sale to the County.
The County was required to hold the properties sold to it as a result of the Default Judgment for a period of two years. ORS 312.100. During this period (“Redemption Period”) the Pinedas were entitled to redeem the Property by paying the full amount of the Default Judgment, plus interest and statutory penalties and fees, relating to the Property. ORS 312.120. As the “former owner,” the Pine-das had a statutory right to possess the Property during the Redemption Period so long as they did not commit any waste to the Property. ORS 312.180.
Finally, at least one year prior to the expiration of the Redemption Period, the County’s tax collector is required to provide notice and warning of the expiration of the Redemption Period to the property owners subject to the Default Judgment by first class and certified mail. ORS 312.125. In addition, the County’s tax collector is required to publish, twice within the 10-30 day window prior to the expiration of the Redemption Period, a general notice of that expiration. ORS 312.130. If property subject to the Default Judgment is not redeemed within the Redemption Period, the County’s tax collector “shall” execute a deed, deeding the property to the County. ORS 312.200.
There is no dispute that the County followed each of the procedures regarding notice of the expiration of the Redemption Period as to the Property.
The Pinedas’ Interest in the Property on the Petition Date
In the Proposed Plan, the Pinedas asserted the right to “cure” the default reflected by the Foreclosure Judgment through § 1322(b)(3). However, the limitations on the right to cure a default on residential real property have been the subject of numerous decisions. An excellent discussion of the application of § 1322 to the County’s interest in the Property is found in McCarn v. WyHy Fed. Credit Union (In re McCarn), 218 B.R. 154, 159-62 (10th Cir. BAP 1998). As noted in McCam, § 1322(b)(2) and (5) only authorize a chapter 13 debtor to “cure” within certain constraints a claim secured only by a security interest in real property that is the debtor’s principal residence. The fundamental problem the Pinedas face is found in § 1322(c), which provides:
Notwithstanding subsection (b)(2) and applicable nonbankruptcy law—
(1) a default with respect to, or that gave rise to, a lien on debtor’s principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.
(Emphasis added.) In this case, because Oregon law provides that the issuance by the County Clerk of a certified copy of the Default Judgment constitutes a foreclosure sale of the Property to the County, § 1322(c)(1) applies to prohibit the Pine-das’ from exercising any “cure” of their default in payment of their real property taxes.
Section 108(b) and the Redemption Period
The parties do not dispute that under Oregon law, the Redemption Period was to expire on October 14, 2013, two years after the Default Judgment was en*653tered. I am asked to consider the implication of the bankruptcy filing on the expiration of the Redemption Period.
In In re Rudolph, 166 B.R. 440 (D.Or.1994), the District Court for the District of Oregon determined that § 108(b) is available to extend the Redemption Period. Section 108(b) provides:
Except as provided in subsection (a) of this section, if applicable nonbankruptcy law, an order entered in a nonbankrupt-cy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief.
Because the Redemption Period had not expired before the Petition Date, § 108(b) operates to extend it to October 14, 2013, i.e., the end of the Redemption Period under Oregon law, or sixty days after the order for relief was entered in the Pinedas’ bankruptcy case, whichever occurred later. The order for relief was entered on September 20, 2013. Sixty days thereafter was November 19, 2013. As the later of the two dates, November 19, 2013 was the date upon which the Redemption Period expired. Having not redeemed the Property in accordance with Oregon law by this date, the Pinedas lost their right to redeem the Property.
As of the date of the hearing, the County had not yet recorded its deed as authorized by Oregon law. Under ORS 312.200 and Ninth Circuit authority, after November 19, 2013 the county was free to record without obtaining relief from the automatic stay in light of the Pinedas’ failure to redeem the Property in accordance with Oregon law. See McCarthy, Johnson & Miller v. North Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1080 (9th Cir.2000) (“Ministerial acts or automatic occurrences that entail no deliberation, discretion, or judicial involvement do not constitute continuations of [] a ‘judicial’ proceeding” for purposes of § 362.). The recording of a deed following the tax sale of real property has been recognized by the Ninth Circuit Bankruptcy Appellate Panel as such a ministerial act. See Tracht Gut, LLC v. County of Los Angeles Treasurer and Tax Collector (In re Tracht Gut, LLC), 503 B.R. 804, 812 (9th Cir. BAP 2014).
Admittedly, Judge Radcliffe arrived at a different conclusion in Roost v. Douglas County (In re Southern Or. Mort., Inc.), 143 B.R. 569 (Bankr.D.Or.1992), relying primarily on the second sentence of ORS 312.200. Id. at 573-74. ORS 312.200 reads in its entirety:
The properties not redeemed within the two-year period prescribed by ORS 312.120 shall be deeded to the county by the tax collector. All rights of redemption with respect to the real properties therein described, shall terminate on the execution of the deed to the county. No return or confirmation of the sale or deed to the county is required or necessary.
(Emphasis added.) Judge Radcliffe’s opinion in Roost was issued before the Ninth Circuit had recognized a “ministerial acts” exception to the automatic stay in its Pettit decision. Nothing in ORS 312.200 requires the tax collector to exercise discretion, deliberation or judgment before issuing a deed to the county following a tax *654foreclosure sale and the expiration of the two-year redemption period, in spite of the arguable ambiguity of timing in the second sentence of ORS 312.200. The issuance and recording of such a deed are no more than ministerial acts, excepted from operation of the automatic stay of § 362(a).
Confirmation of the Proposed Plan.
Section 1325(a)(1) provides:
Except as provided in subsection (b),4 the court shall confirm a plan if—
(1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title.
Stated inversely, I cannot confirm a plan that does not comply with the provisions of chapter 13 and with other applicable provisions of Title 11. Because the Proposed Plan violates § 1322(c)(1), I cannot confirm it. Accordingly, the Objection is sustained, and confirmation of the Proposed Plan is DENIED. I previously have entered an Order Denying Confirmation.
. Unless otherwise indicated, all chapter and section references are to the federal Bankruptcy Code, 11 U.S.C. §§ 101-1532, all "Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, and all "Civil Rule” references are to the Federal Rules of Civil Procedure.
. The total monthly plan payment amount was to be $300, and the Pinedas’ attorney was owed $2,450 at the time the Proposed Plan was filed. If month 21 arrived and the attorney’s fees had not been paid in full by that time, no funds would be available for continued monthly payments to the County until the attorney’s fees were paid.
. The amount listed includes only the assessed amount of the tax for the year. It does not include interest and other charges, if any, imposed with respect to the delinquent taxes.
. The provisions of § 1325(b) are not relevant to the current analysis. | 01-04-2023 | 11-22-2022 |
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